Sub plot: the AUKUS alliance

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Hello and welcome to The Intelligence from The Economist. I'm your host, Jason Palmer. Every weekday, we provide a fresh perspective on the events shaping your world. Devastating disruption in global shipping has forced people to think about how all that stuff makes its way to stores. We look at wild swings in container shipping prices, what that means at the retail end, and whether things will ever get back to normal. And after their time in office, some politicians go gently into good nights of after-dinner speeches or take up new business pursuits. Increasingly, though, they're building little media empires, spreading their messages through films and television. First up, though, a new security partnership announced this week is going to have big consequences. AUKUS, an alliance between America, Britain, and Australia, is squarely aimed at one region. Because the future of each of our nations, and indeed the world, depends on a free and open Indo-Pacific The deal will cover diplomatic and security cooperation, but most significant is the defense end of the pact, including Australia obtaining its first nuclear-powered submarines.

It is a momentous decision for any nation to acquire this formidable capability, but Australia is one of our oldest friends, a kindred nation.

For Australia, the agreement goes far beyond existing groupings with America, such as the Five Eyes security bloc, or the new Quad tie-up with India and Japan.

We must now take our partnership to a new level, a partnership that seeks to engage, not to exclude, to contribute, not take, and to enable and empower, not to control or coerce.

AUKUS is another sign of America's shift away from European concerns and toward the Pacific, and of a growing international alignment against that region's biggest worry: When the leaders announced this new pact, none of them mentioned China.

But everyone knows this is all about China. The alliance reflects a shared fear from all three countries about the consequences of China's rising power in Asia.

Shashank Joshi is The Economist's defense editor.

Australia is set to become just the seventh country in the world to operate a nuclear-powered submarine after America, Britain, China, France, India, and Russia. But this has gone down incredibly badly with European allies, particularly with France, who was completely blindsided by the pact.

And what exactly is in the pact?

Well, AUKUS is based on an Australian idea that was proposed back in the spring, and it's going to cover diplomatic security, defense cooperation in the Indo-Pacific, work on cyber capabilities, artificial intelligence, quantum technologies, undersea capabilities like underwater drones, for instance, all of the very high-tech areas of modern defense, in other words. But the most eye-catching element is undoubtedly the submarine deal. On Thursday, Britain's national security adviser described it as the most significant international collaboration on defense capability anywhere in the world for decades. I think that's probably true.

And why is it so superlative in that way?

America has never cooperated with another country on nuclear submarines apart from Britain, and it has never offered that technology even to its very closest allies in the world. Nuclear submarines are very significant military capabilities. They can travel a lot further than conventional diesel-electric submarines. They can stay submerged for far longer. They can act over much bigger distances. They can move much faster. Australia had previously signed a $90 billion contract with a French company called Naval Group that's largely owned by the French government to build a dozen advanced diesel-electric submarines, but it had been increasingly frustrated by the firm's overruns, delays, the failure to invest in local suppliers, and it now seems to be ripping up that deal completely.

And that's what you meant when you said that this whole pact has gone down badly with European allies?

Yes, I don't think we have seen French officials this angry for a long, long time, for decades. We saw the French Foreign Ministry describe it as a knife in the back. They even canceled an event in Washington. That's how angry they were. You know, they say they weren't given any notice. And from their perspective, they had a meeting with their Australian counterparts at a very senior level just a couple of weeks ago, and this didn't come up. I think more broadly, there's probably also a little bit of European concern, at least outside of the UK, on what this means for Europe, what this means for European interests in the Sahel, in North Africa, in other parts of Europe. How interested will America still be in those areas when it's surging military forces into the Pacific, partly as a result of this deal?

And you say nowhere was China mentioned, but no doubt China has noticed.

China has certainly noticed. China's embassy in Washington reacted by accusing these countries of what it calls a Cold War mentality, which is a favorite phrase of the Chinese government these days. I think that the problem is the Chinese are so angry about everything these days, Jason. They sort of react with fury to pretty much everything America does in the region, whether it's an exercise with India, whether it's a new pact with Australia, that the impact of this kind of anger is somewhat lessened. People just sort of let it wash over them. I think the interesting thing is China is increasingly realizing it just doesn't have many allies in the region, whereas America does have a number of allies. Whatever all the questions that it faces around its credibility in the aftermath of what you could say is the botched withdrawal from Afghanistan, it is still able to demonstrate these big diplomatic partnerships that ultimately seem to demonstrate just how isolated China is in many ways.

But do you think that there is an actual strategic need for this pact? I mean, there's also the Quad, another pact that involves America and Australia. What does it tell you that there's now a different grouping, a different bloc?

Well, Australia asked for this, and it asked for this because it has felt under increasing pressure from China in recent years. What we saw, for example, last year is that China imposed bans on various Australian goods, and that was in response to Australia's calls for an inquiry into the origins of the coronavirus pandemic, something that very much angered Beijing. The Quad is a little bit different. It's, it's a diplomatic grouping, but it doesn't include this kind of fundamental, far-reaching technological or defense cooperation, at least not yet. But I think there's a broader point to make here about the security architecture, if you want to call it that, of Asia, which is to say, you know, Asia's not like Europe. It doesn't have a big NATO-like alliance that sort of sits in the middle and dominates everything. It has lots of different, very fluid, very ad hoc, some of them pretty embryonic blocks coming up here and there. What we are seeing in Asia in response to the rise of China is this blossoming of all these different diplomatic groupings of different kinds.

And how do you foresee China reacting to that? A great many different groupings, each explicitly or implicitly aligned against it.

I think China's strategy is usually to divide and conquer, to pick out one member of a bloc and to put them under the cosh, to say, you think you can balance against us in this American-led strategy to 'Deny us our rightful place in the world.' Well, think again. That's why they have been singling out Australia and punishing them effectively with trade embargoes and really intense diplomatic verbal pressure on, on the international stage. What I think they haven't fully realized is that this just explains why countries like the UK and Australia want to have pacts like this in the first place.

As for, for the AUKUS grouping, uh, you say that the nuclear end of this is, is what makes it a real standout kind of pact. I mean, how do you see that playing out on the wider stage.

Australia would be the only country in the world to operate a nuclear submarine without operating a nuclear reactor. And I talked about all the military advantages of a nuclear submarine, but of course it is a nuclear submarine. The stuff runs on fuel that is essentially enriched uranium. And in the case of British and American subs, it runs on highly enriched uranium. That's the same stuff pretty much that goes into a bomb. So there are big implications for nonproliferation. The Nonproliferation Treaty, the big, the big international agreement, it doesn't allow non-nuclear armed countries to build a bomb, but it does allow them to build a submarine with this kind of fuel in it. So it essentially has a loophole. I don't think many people are worried about Australia seeking a bomb. I think what they're concerned about is other countries, maybe Iran, maybe Turkey, maybe, you know, a whole bunch of other nuclear curious states who have flirted with the idea of a nuclear weapons program. They may see a submarine as a convenient route to bomb fuel. And that's why you're going to see lots of nonproliferation advocates complain about this deal and argue that it is a bad deal from the perspective of limiting the spread of nuclear weapons.

And one last thing, Shashank, I understand you're going to be in this chair next week.

That's right, Jason. I'll be displacing you for a couple of days. Thank you for letting me keep the seat warm. It'll be an honor.

For the moment, thanks very much for your time.

Thanks, Jason.

The business of container shipping has rarely been as dramatic as it has in 2021. From a giant vessel wedged across the Suez Canal.

The global thoroughfare remains blocked by a massive cargo ship.

To COVID-induced port shutdowns and delays. The traffic jam on the high seas could be delaying your packages. Goods have been taking longer than ever to reach their destinations, and the prices to get them there have gone crazy. The average cost of shipping a 40-foot container has quadrupled in the past year to over $10,000. Getting a last-minute one from China to America's West Coast? $20,000. It's led many senders and receivers to wonder whether it's time to reshape the just-in-time shipping economy.

When COVID hit, the container shipping companies expected world trade to collapse.

Simon Wright is The Economist's industry editor.

And so they idled a great deal of the fleet because they thought it simply wouldn't be needed. This turned out to be a mistake.

In what way a mistake?

First of all, trade held up pretty well. And then trade started to climb, particularly as Americans with stimulus cash, stimulus checks, started to spend. And what we're seeing now is that spending by people in lockdown who can't spend money on services has caused this enormous spike in world trade. Which has led to shortages of capacity, particularly across trans-Pacific routes. That's had a knock-on effect because the high prices of the trans-Pacific has drawn vessels to those routes, which means that prices have gone up on all the other routes. At the same time, we've seen a sort of cascading effect in that what's happened is because every ship that can float is out there on the sea, various things have happened. For example, ships are queuing up to get goods into America because of this sort of boom. Containers are all in the wrong place, and then add in a typhoon or some wildfires that might close a port. And with a system that's running at capacity, every tiny little event like this has an outsized effect. I mean, a third of the world's container ships are now either in port or waiting outside a port to be unloaded. So the whole system stretched to capacity means that everything has been thrown into chaos.

[Speaker:GHION.AI] But if this system is so out of kilter, what about getting things around by other means, by road, by rail, by freight?

Look, there are actually very, very few alternatives to sending things halfway around the world than ships. There are some things you can do. Peloton, for example, a maker of upscale exercise bikes, has been putting those bikes onto planes rather than sending them by ships. But here too, there's a problem in that half the capacity for air freight is provided in the belly holds of passenger jets. And COVID has had a devastating effect on the number of international passenger flights that are flying. So here too, prices have risen and capacity is limited. Companies such as Home Depot and Walmart, big American retailers, have chartered ships directly. Look, that gives them capacity, but it still doesn't solve the problem of congestion at ports. So really, there's very little choice between paying up and suffering congestion or just not moving your goods at all.

But with rates going up, shipping companies must be swimming in cash. Why can't they turn that into more capacity?

You're absolutely right. The container shipping companies are absolutely flush with cash and they are ordering new ships. But these new ships will take 2 to 3 years before they arrive at sea. So this release valve won't start to operate until 2023.

And what about how all of this rings down to the prices that consumers see? Surely all of this is going to have an effect right at the retail end.

There are a couple of reasons why it might not do so immediately. One is the way that capacity and prices are negotiated between their customers and the container lines. About 40% is on spot rates, which are the rates you have to pay if you want to ship some goods immediately and you haven't sort of booked in advance. And these spot rates have skyrocketed. If you want to book a late berth, across the Pacific, it might cost you $20,000 to do so, whereas pre-pandemic, it might have cost $1,500. But with long-term contracts, those rates might be a little bit lower, and also that capacity would have been booked in advance. So some things will still be moving. But look, containers are priced on volume, not on the value of the thing you've got in there. So, you know, a sofa or bulky garden furniture, that will add a lot to the price. But if you can get, say, 8,000 pairs of trainers into your container, well, the effect of even very high prices is going to be minimal.

And so is there a wider view where this is just an unfortunate confluence of events on the industry, or is all of this mess a sign that the industry needs fixing somehow?

I spoke to the boss of a big European manufacturer about this, and he said, look, even the current high rates are bearable, and he expects everything to go back to normal. In a year. And that's fairly widespread amongst some manufacturers. But there are big questions about whether, not necessarily the price, but the disruption will have manufacturers and importers thinking about where they source their products from. And there's this idea that deglobalization may be setting in, and the idea of nearshoring and bringing manufacturing closer to home. Everyone I spoke to said there's not really any evidence of this at the moment, but Conversations are definitely being had. Look, finding new manufacturers is hard, especially for complex products. Building buffers into supply chains is costly. But with few alternatives to ships to move goods around, the only choice will be to move factories to make them. So that's the stark choice that faces companies.

Simon, thanks very much for joining us. Thank you, Jason. Stuffing goods into standardized containers sounds like a simple idea. But it aided an explosion in global trade in the 1960s, helping lift hundreds of millions of people out of poverty. It's just one of the light bulb ideas that have changed the world explored by our sister show, Game Changers. In the latest episode, one of our senior editors, Ryan Avent, explains just how revolutionary the shipping container turned out to be. In fact, it may have been more important than all the trade agreements sort of hashed out over that period combined, which is kind of a staggering thing to think about. You know, ultimately what you get is a much more globalized world, and you get the emergence of these sprawling global supply chains that stretch across countries. Find Game Changers wherever high-value podcasts are packed and shipped. The question of what to do after a life in politics has been answered lots of different ways. George Washington opened a whiskey distillery. Dwight Eisenhower raised cattle. George W. Bush turned to painting. These days, more and more ex-politicians are setting up their own production companies.

Storytelling and politics are deeply intertwined, particularly in America.

Rachel Lloyd is our deputy culture editor.

People will use stories to illuminate a policy because it's quite intangible, it's quite difficult to grasp. So they use a human example. They talk about great pasts and imagine the future and how brilliant it will be when they're in charge. Storytelling and politics are natural bedfellows, and you only need to look at the previous occupant of the White House, a reality TV star, to understand that link.

And as you say, this is particularly true in America. It's not at all the first president America had who had been seen on some kind of screen.

Not at all. Ronald Reagan is the obvious example, a Hollywood actor who made the move to the White House. He was in comedies, he was in westerns, he was in war films.

Bleaching dollar bills and reprinting them in higher denominations on those stolen plates.

He was known as the great communicator because he was so comfortable being in front of a camera, and he used ordinary language which really got through to people.

These United States are confronted with an economic affliction of great proportions.

We suffer from the longest and one of the worst sustained inflations in our national history.

Behind the camera too, Steve Mnuchin worked in film financing before he joined Donald Trump's cabinet. He was an executive producer on films including American Sniper. Steve Bannon, formerly Donald Trump's campaign chief and advisor, also considered himself a bit of a Hollywood mover and shaker. He specialized in rabble-rousing documentaries, and he said his idea was to weaponize film by creating provocative right-aligned projects.

So it's not just a connection then between political movers and shakers and, and the entertainment industry. There's a, there's an ideological push then from some of these people.

Yes, very much so. You're seeing it on the left as well. The Obamas, when they left office, set up Higher Ground, a production company, in 2018. They've made films that really reflect the sort of things that they're interested in. Michelle Obama had the Let's Move initiative, which was about reducing child obesity and encouraging exercise and healthy eating. And she's produced and starred in Waffles and Mochi, a children's show about healthy eating and a joy of fresh food.

You see these? What a beautiful basket of clown noses.

No, these aren't clown noses.

These are tomatoes.

Wait, who's toes?

They also produced American Factory, an Oscar-winning film about a Chinese firm based in Ohio. When promoting American Factory, Barack Obama explained their motivations.

We want people to be able to get outside of themselves and experience and understand the lives of somebody else, which is what a good story does.

It helps all of us feel some sort of solidarity with each other.

So you do see them championing projects that they're interested in that reflect the things that they care about.

And so there's clearly a history of this, but it sounds as if the trend is expanding.

Yes, it's very much a trend. John Kerry, the former Secretary of State who is now Joe Biden's special envoy on climate, has joined Fingerprint Content, another production company. Given his interest in the climate, a lot of the projects on their slate are about the climate. There's an eco-crime detective series and a conspiracy thriller television series which is described as a cli-fi. So that's very much reflecting his interests and his passions. But you've also got Hillary Clinton, who has set up Hidden Light Productions, which, like her campaign, which was very feminist-focused, tells the stories of women. They've just released their first YouTube series, which is interviewing prominent female celebrities about their experiences.

I'm asking amazing women this question, like, what is their just one thing?

I'd love to hear what yours is.

Um, my one bit of advice for you would be, if you don't try, you've already failed.

One of the projects on their slate is The Daughters of Kobani, a TV series adapted from a book which will follow an all-female Kurdish militia, and they fought Islamic State in Syria.

So politicians get to champion their pet causes, presumably pocket a bit of money. What about the people behind these productions? What do they get out of it?

Filmmakers are much more likely to get funding if their project is associated with a well-known figure. Politicians are celebrities as well. Streaming services also benefit because of this celebrity and because of this interest. They get more publicity, they presumably get more viewers, and they may as well get subscriptions, at least from people that are politically aligned with them.

Well, exactly. Is there no issue of backlash on people being associated with particularly ideologically aligned, politically aligned content, or is that in fact feeding the trend?

I think the emphasis across all of these projects is not simply to issue a manifesto. All of them are aware that didactic storytelling is not particularly interesting. So I think what these companies are trying to achieve is good, socially informed storytelling that champions the things that they care about at the same time as being entertaining.

Rachel, thank you very much for your time.

Thank you very much.

That's all for this episode of The Intelligence. The show's editors this week are Chris Impey and Kim Gidelson, and our sound engineers are Saul Rivers and William Roe. Our senior producers are Duncan Barber and Sam Colbert. Our producers are Stevie Hertz and William Warren, and assistant producers Jason Hoskin and Abisoye Oshindairo, with extra production help this week from John-Joe Devlin, Juliette Chabkiro, and Pete Naughton. Shashank and the team will see you back here on Monday.