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Call for Submissions: “Robots & _______”

Hey all, I’ve never tried this before, but I’d like to try crowdsourcing the content on this site a bit. Specifically, I’m looking for peoples’ articles that have the title “Robots & ______”.

So far, we’ve got three articles on the topic:

Robots & NHL Expansion
Robots & the Middle East
Robots & Ontario’s Minimum Wage

Ideally, I’d like people to send in more of their own articles (any word count you want!), so I can put all of them together to create a series on how robots might impact various aspects of our world.

I look forward to reading your ideas — thanks y’all!

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North America

Upstairs, Downstairs

With the US being a 17 trillion dollar economy, it can sometimes be easy to forget that both of its neighbours, Canada and Mexico, are in the trillion dollar club as well. Canada is the 10th largest economy in the world by nominal GDP and 17th by purchasing power parity (PPP)-adjusted GDP; Mexico is the 15th in the world by nominal GDP and 11th when adjusted for purchasing power parity. Outside of the US or EU, Canada and Mexico are already the two largest economies in the world within the same trade bloc. With continued decent GDP growth—both are expected to grow 2-3 percent in 2017—they may soon overtake more EU economies in size too:

trade bloc pairing comparisons

And yet, as the NAFTA renegotitation begins its second round of formal talks this week, the trade bloc shared by Canada and Mexico may to some extent now be on the chopping block. Not surprisingly, the two countries are now attemtping, diplomaticaly, to stand shoulder to shoulder with one another; to present a unified front to the US. But this can be hard to do, especially when those shoulders are separated by a few thousand km of US territory. It may be,  then, that the US will divide and conquer them (economically speaking) and get the best deal for itself.

Read the full article: Upstairs, Downstairs

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North America

Autonomous Cars, Semi-Autonomous Cars, and Toronto’s Railways to Nowhere

The City of Toronto has two “railways to nowhere”: the Sheppard subway and the Richmond Hill GO train.

The Sheppard Subway 

The Sheppard subway is 5.5 km long, has five stations, and connects to only one other rail line, the Yonge line. By comparison, the Yonge-University subway will soon be 38.8 km long (when the Vaughn extension begins operation), will have 38 stations, and will connect to many other rail lines, including the Bloor-Danforth subway, the Sheppard subway, 7 GO train lines (all at Union), and eventually also the Eglinton Crosstown.

The Bloor-Danforth subway is 26.2 km long, has 31 stations, and has connections with other rail lines at stations like Dundas West (the Union-Pearson Express train and the Kitchener GO train), Main Street (the Stoufville GO train and Lakeshore East GO train) and Kennedy (the Scarborough RT*, Stoufville GO train, Eglinton, and, if the City’s current transit plans are realized, the Scarborough subway tunnel).

TTC ridership.png

The Richmond Hill GO Train

Before the start of this year, the Richmond Hill GO train line was 34 km long and had five stations, three of which were located within the City of Toronto. With an extension to a new station, Gormley Station, having been opened in 2017, the line is now 42 km long, with six stations—but still only three in the City of Toronto. In contrast, the other six GO lines are between 50-103 km long (for an average of 69.6), have between 9-13 stations (for an average of 11.2), and have between 2-6 stations within Toronto (an average of 4).

go train ridership.png

Read more: Toronto Crow’s Advantage   (…apologies for some of the pictures being blurry and links being broken, I’ll try to fix them soon)

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North America

Demographics, Drivers, and Dreams

On The Future of the Canadian Auto Sector 

There is a profound difference between Canadians, Americans, and Chinese, both in their demographics and in their dreams.

In the US, the largest population group is 20-35 year olds. Many of these Americans will, in the years ahead, be looking to pursue the American Dream: to buy a home and start a family. Indeed, just like the Baby Boomers before them, many of these Millennial Americans have been moving to suburbs and buying SUVs. 

In Canada, in contrast, the largest group is 50-60 year olds. In the years ahead, many of these Canadians will be looking to cut back their work hours, or retire, or transition from manual labour to less physically strenuous jobs. Many will also pursue the Canadian Dream: having a cottage to host one’s grandchildren at.

In China, the largest group is 40-55 year olds. Most of this group works in physically demanding industrial or agricultural jobs. Most of them, particularly in China’s rural areas and inland provinces, still earn between 2-10 dollars a day. The Chinese Dream is to let these aging manual labourers transition to less strenuous work, while also bringing the country’s impoverished rural areas and inland provinces out of poverty.

Ontario’s Position

These demographic trends are not alien to the auto sector in Ontario. A city like Windsor is, in a certain sense, situated in a delicate borderland, between the vast American consumer market on the one hand, and the smaller domestic market of Canada but larger global market on the other hand. This is a risky, though often rewarding, position to be in. When successful, it has allowed Ontario to attract investment from global firms seeking a way to access to the American market without investing too much in the US directly. In the wake of the recent Valiant deal, such investment is increasingly expected to come from China.

Obviously, however, global firms cannot rely for certain on continued favourable access to the American market, regardless of whether or not these firms have investments just across the US-Canada border within Ontario. It is up to Ontario to determine to what extent it wants to orient its production around markets in the United States, and to what it extent it wants to focus on Canadian or global consumers instead.

Motor Vehicle Production

A Possible Divergence

This is where trends such as demographics become relevant. As a result of such trends, it may be the case that consumer demand in the United States will diverge sharply from that of countries like Canada and China in the years ahead. While Americans continue to buy cars and SUVs, in Canada and in global markets it may be instead that auto sector demand will become increasingly dominated by busses and by trucks:

1. The Supply of Drivers 

The global Baby Boomer bulge, of 50 and 60 year olds in the West and of 40 and 50 year olds in China, is likely to create the largest labour shift in human history: manual labourers transitioning to less strenuous work. In spite of what some politicians may claim, these labourers will not often be retrained to become software engineers. Nor will they all move into retail jobs at companies like Walmart, as out-of-work labourers have often done during the past generation. Too many of these retail jobs are being automated out of existence. Rather, the single biggest job these labourers are likely to switch to is driving a motor vehicle.

Not only is driving a bus, truck, or taxi something that can be done by a person who has, say, a bad back, it is also becoming far less strenuous than ever before, as a result of technological additions to modern vehicles. Driving large busses and trucks has been somewhat difficult in the past, particularly in tasks such as parking, turning, or driving on country roads during challenging weather conditions or in the dark of night. Modern vehicles, on the other hand, equipped with cameras, sensors, and high-tech safety features, are in the process of making the job of driving relatively comfortable and safe even for 60 or 70 year olds.

If the Baby Boomers create a glut of drivers globally, the costs of using trucks, busses, mini-busses, etc., will fall.

2.  The Night Moves

Of course, there has also been plenty of discussion in the media about the possibility of self-driving vehicles. If such vehicle actually do become commonplace anytime soon, they will have the largest impact on places and at times in which there is today a scarcity of human drivers. Namely, they will the largest impact on late-night driving (when human drivers are mostly asleep) and on areas such as, for example, Canada’s far northern regions, where — particularly during long, cold winter nights, or in snow storms, or on dangerous ice roads that require almost constant maintenence  — there are few human drivers around.

Autonomous capabilities would have a much greater impact on trucks than on cars, then; and in particular, on short trucks, where labour costs per unit of cargo are much higher than for heavy trucks or transporters. They would also have a greater impact on places with challenging geographies, such as Canada. And they would be especially useful for slow-moving overnight vehicles, like plows, de-icers, and pavers.

Trucks, finally, may experience the benefits of autonomous driving earlier or more than other vehicles  will as a result of government regulation. While governments may be hesitant to allow autonomous cars in general at first, they are far more likely to allow a truck driver to turn on an autonomous cruise control system late at night, when relatively few cars are on the road, so that he or she can get some sleep.

3. More Time, Less Money 

These two trends we have discussed thus far — demographics and automation — may also lead to a phenomenon in which Canadians’ free time will increase at a much faster pace than will their income levels. This could occur because of an aging Canadian worker entering into full or partial retirement, or it could occur because of a Canadian worker losing his or her job to a software system or machine. Either way, Canadians are likely to have more time to fill up their schedules with leisure activities — say, spending more time in cottage country — but will also have to economize on costs in order to afford them.

One way to economize on leisure spending would be to forgo car ownership (or at least, to share a car with a spouse instead of owning two cars per couple) and using transit more. Busses, for example, are slower than cars — as they often make stops to pick up and drop off passengers along their routes —  but also cheaper than cars, particularly once you factor in the cost of car ownership. If the cost of bus drivers declines (which, as we have discussed above, we think it will), busses would become cheaper still. As Canadians’ free time increases faster than Canadians’ incomes, busses might therefore see greater use.

4. The Transit Revolution 

Apart from their sometimes being slow compared to cars, another major reason many people do not use transit regularly is because of the “last-mile” problem: how to get from a transit station to one’s destination, without a car. Also problematic is the “first-mile” problem: how to get to the transit station if the station’s parking lot is full, or if you do not own a car.  Yet these “first-mile/last-mile” problems are likely to be solved—or at least, made far less problematic—in the near future, as a result of technological changes.

One technology to overcome the first-mile/last-mile challenge is that of services like UberPool, wherein passengers and drivers easily co-ordinate door-to-door carpools through their smartphones. This same system could be used by busses or mini-busses too, which would make the rides cheaper but also longer—see the More Time, Less Money section above. Systems like UberPool work best in markets that are “liquid”; i.e. big-city markets, where there lots of passengers and drivers around. The US, being highly suburban, may be less suited to this than Canada (where more people live in large cities) or most global markets.

Another way to overcome the “last-mile” challenge is via car-sharing services, such as Car2Go or Zipcar. These allow people to take a car from the transit station to reach their destination. Use of car-sharing services in Canada is growing. It may eventually make it easier for some people to forego car ownership entirely.

As services like car-sharing and ride-sharing advance, then, transit’s “first-mile/last-mile” problems may be overcome.

5. The Canadian Shield 

If transit really does become more common relative to car usage, it will in many places be dominated by rail transit. Similarly, railways will continue to transport more freight than trucks. Trains are, after all, more efficient than trucks and busses. They will remain more efficient even if the cost of hiring a bus or truck driver falls.

Where trucks and busses will be utilized most, then, is in locations where it is difficult for railways to function. We have already mentioned one location where railways are difficult: Canada’s far north, where permafrost impedes rail construction and maintenance, and ice roads are sometimes the only economical option.

Another region where railway construction is expensive is the Canadian Shield, the result of the Shield’s enormous size, exposed rock shelves and over-abundance of lake (the latter being proble  matic given that trains cannot easily make sharp turns to bypass them, as trucks can). If Canadians, armed with more free time than ever before, seek the Canadian Dream in the lakeside cottages of the Shield, they will have to rely on trucks to transport bulk necessities like food (as the Shield is not suitable for agriculture) and fuel.

Canadian Shield .png

Railways networks are also under-built in mountainous areas, as trains cannot handle either sharp turns or steep inclines well. Three of Canada’s four major cities — Vancouver, Montreal, and Calgary — are located a very short distance from mountains, in contrast to US population centres which tend to be located in spatious coastal plains or the even larger Midwestern/Central Plains. It might be expected that, as a result of having more free time to spare, Canadians will spend more time pursuing leisure activities in mountains.

Meanwhile, countries like China are now actively trying to develop their impoverished inland regions, many of which are mountainous and have relatively little access to either railways or to coastal shipping—and will therefore have to rely on trucks and busses for their transportation. Many other developing economies, in South Asia, Latin America, and Africa, are also mountainous and landlocked. The largest city in NAFTA, Mexico City, is the highest-elevation in the world among cities with at least four million residents. Still, it is China which is the king of highlands. China’s Tibetan Plateau and Himalayan region occupies roughly one-fifth of China’s landmass, and is similar to the Arctic in its permafrost risks, sparse population (it has less than one half of one percent of China’s population), low rail access, and resource wealh.

Conclusion — Canada and the World 

Canada typically has one foot in the American market and one foot in the Canadian and global markets. Canadians companies often wonder what trade regulations or barriers the Americans will insist upon, either for Canadian firms or for foreign-owned firms invested in industrial facilities within Canada. But if, also, markets diverge — if Americans continue to use conventional four-seater cars and SUVs and trains, while Canadians and global market players like China increasingly look to buy busses and trucks — then Canada’s auto sector could also have to answer a more basic Canadian question: just how American are we?

As usual, there are no easy answers here, only risks and rewards.

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North America

Like Night and Day

The e-commerce vs bricks-and-mortar debate never stays out of the headlines for long, it seems. It has surfaced again this past week, prompted by the discussion of Toronto can compete to host Amazon’s planned second headquarters. This has left Canadian investors to mull yet again what the state of retailing will become in the near future.

One of the crucial questions is what the extent of retailing and e-retailing’s convergence will be. Will the line between retailers and e-retailers blur, such that there will remain few differences between them? Or, will they stay distinct?

Lately the argument for convergence has never looked stronger. Amazon’s acquisition of Whole Foods, the eighth largest grocery chain in the US by market share, will give it 470 new brick and mortar locations in North America and Britain. Walmart, meanwhile, bought Jet.com for $3.3 billion in cash and stock at the end of 2016, in what was at the time the largest ever acquisition of an e-commerce firm.

“They’re meeting in the middle right now,” says Chieh Huang, chief executive of Boxed, an e-commerce start-up. “If you think of a mountaintop, on one side you have the tech folks trying to figure out retail, while the retailers are trying to figure out technology. Amazon said screw this: we’re going to figure out physical retail faster by paying $13bn [for Whole Foods].”

Interpreting Valuations

This question of convergence can inform even how market valuations may be perceived. If, hypothetically, we knew for certain that retailing and e-retailing will converge fully, then Amazon’s position would appear dominant: its market capitilization is twice as large as Walmart’s.

If, on the other hand, we knew for certain that retailing and e-retailing will remain more distinct than similar, then it may instead be Walmart that seems the better positioned of the two. Walmart, after all, is the dominant retailer; it towers over the next largest retailer (Costco), grocer (Kroger) and brick and mortar outlet (Home Depot) in terms of market capitalization. Amazon, in contrast, lags behind four of its fellow tech giants—and is barely ahead of Alibaba—in market cap.

If, in other words, we consider Amazon a retailer, then it is the leading retailer in the world (at least, in terms of market capitalization; Amazon trades at a notoriously high price-to-earnings ratio, so its earnings trail its valuation). Yet if we consider Amazon to be “only” a tech firm, not a retailer, then Walmart would continue to be viewed as the world’s leading retailer, whereas Amazon would still not be its leading tech firm.

Strategies and Imperatives

It is extremely difficult to predict the future level of convergence between retailing and e-retailing. While it is obvious that brick and mortar retailers will continue to make their products more easily available online, the more significant and difficult to predict question is how many of their brick and mortar outlets they will get rid of—and, conversely, how many brick and mortar outlets e-retailers like Amazon will purchase. Without knowing this, we cannot answer the convergence question.

Still, we can make two statements with relative confidence. First, the recent trend towards convergence is by no means a definitive one. For one thing, they were not actually such significant purchases, once you take into account the gigantic size of Amazon and Walmart. This was particularly true in Walmart’s case, where the acquisition of Jet.com accounted for just 1.4 percent of the retailer’s current market cap. But it was also true for Amazon’s Whole Foods purchase, which, though more than four times larger than the Jet deal in absolute terms, still represented only 2.9 percent of Amazon’s current market cap of $474 billion.

The Whole Foods deal, moreover, does not even necessarily signal a strategy shift towards brick and mortar retailing. Rather, because grocery deliveries are bulky and frequent compared to deliveries of other categories of goods, groceries act in effect as “liquidity” in the goods-delivery market. In other words, the acquisition of a grocery chain does not have to indicate a desire to gain brick and mortar market share, but instead can be intended mainly to buttress e-commerce services in areas that would otherwise have low liquidity in the delivery market; i.e. in low-density suburbs where most Americans live.

Second, we can state that, if convergence does not occur, then the business imperatives of retailers and e-retailers will not merely be opposing, but opposite. The imperative of e-commerce retailers is to deliver cargo to consumers. The imperative of brick and mortar retailers, in contrast, is to deliver consumers to cargo:

Bricks, Mortar, and Pavement

The one asset that brick and mortar retailers have which their nimbler, higher-valuation e-commerce rivals lack is real estate—buildings and parking lots—located in urban and suburban areas where most people live. Walmart alone has 3522 supercentres within the US. Most, when combined with their parking lots, occupy roughly 17 acres (larger than twelve football fields). Over 90 percent of Americans live within 16 km of a Walmart-owned store.

Absent convergence, brick and mortar retailers will have to find new ways of enticing people to their stores. This will be a difficult task, given consumers will have the option of ordering from e-commerce firms instead.

One method of enticement brick and mortar retailers will attempt is likely to be via an involvement in the transportation industry. They might, in effect, use their large buildings and enormous parking lots to become modern, “liquid” transportation marketplaces, by offering bus, ride-sharing, or even autonomous parking services at their stores. In other words, to remain competitive with e-commerce, the retailers may also have to compete (or collaborate) with transportation services like Uber, Car2Go, Greyhound, or even Tesla. Only by becoming transport hubs could they continue to compete as commercial hubs.

Logical (read: Extreme) Conclusions

The goal of e-retailers, on the other hand, would remain the cheap, efficient, quick, and plentiful delivery of goods. As Amazon is not shy of saying, this will involve the automation of delivery vehicles, intended not just to save on labour costs but also to utilize all 24 hours of the day. Overnight deliveries benefit from there being little road traffic, and they are crucial if e-commerce firms are to be able to deliver goods as quickly as possible.

As a result, if retailers and e-retailers do not converge fully in the years ahead, their differing business imperatives will be likely to lead them down divergent paths. The retailers, to remain competitive, will attempt to control consumers’ transportation patterns during the daytime. But the e-retailers, to become even more efficient, will focus on dominating the transportation of goods at night.

 

 

 

 

 

 

 

 

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North America

Robots & Ontario’s Minimum Wage

Economists have long tried to identify “goldilocks wages”: ideal compromises in the tradeoff between higher minimum wages and higher rates of un(der)employment. This is, of course, far more than merely a theoretical pursuit. With an election coming up in Ontario next year, it is also one of the main issues likely to spill over from economics into politics. The province plans on raising its minimum wage, from $11.40 today to $14 in 2018 and $15 in 2019. Inevitably, this has raised questions as to whether or not it will lead to more jobs being outsourced or automated, if employers decide they cannot afford to pay the higher wages.

Thus far, most of the minimum wage studies that have been conducted have tended to ask questions such as:

  • How many jobs within the jurisdiction that is planning on raising its minimum wage are susceptible to outsourcing or automation?
  • How many workers within the jurisdiction that is planning on raising its minimum wage earn less than what the minimum wage will become?
  • How does the planned minimum wage compare to that of other nearby jurisdictions?
  • How migration-elastic are the jurisdiction’s labour markets (in other words, how likely is there to be an exodus of workers to other jurisdictions, if domestic minimum wages are not raised)?

One of the complicating factors these studies generally reveal is that conditions vary from place to place even within the same jurisdiction. In Ontario, for instance, there are obvious differences between Toronto and most of the other smaller cities and towns in the province. A smaller share of Toronto’s labour force earns less than $14 dollars per hour. A smaller share of Toronto’s labour force may have jobs susceptible to automation. Toronto’s labour force might also be more migration-elastic, given that the population of Toronto is relatively young. Young workers may be somewhat more willing to move to faraway markets like Western Canada or foreign markets like the US (or, linguistically, Quebec) if wages at home are too low.

The Night Moves 

There are many other variables that one could analyze as well when attempting to determine whether a given minimum wage is suitable. Due to current technological trends, two in particular may be worth discussing:

— the disparity between an economy’s manual labour costs and energy prices
— the disparity between an economy’s daytime energy prices and overnight energy prices

The former variable will help decide how likely an economy is to employ sophisticated machines—robots—to substitute for human labour. Robots tend to be energy-intensive, so an economy in which energy is cheap but labour is expensive will, generally speaking, be ripe for roboticization. Arguably, an example of such an economy is Quebec. Its manual labour costs are high because its population is older than the Canadian average, and much older than the US or global averages. Yet its electricity prices are among the lowest in North America. Ontario’s other neighbour, Manitoba, also has some of the cheapest electricity in North America.

The latter variable has the same implications. Because robots which replace manual labour generally consume a lot of energy, and because one of the main advantages of robots relative to human workers is that machines do not need to rest or sleep overnight, an economy in which the cost of energy overnight is cheap compared to the cost of daytime energy might be one in which roboticization will be likelier to occur.

Obviously this conversation remains a speculative one at the moment, since widespread roboticization has not yet occured. Still, it may be important to have it anyway, as it appears to have a special relevance for Ontario:

1) Energy/Labour

Ontario’s energy prices are very high by Canadian standards. They are more than double those of Quebec and Manitoba, for example. Yet Ontario’s energy remains roughly middle-of-the-pack when compared to prices in US states, and is even extremely cheap when compared to many wealthy countries in Europe and East Asia. Electricity in Ontario is only about half as expensive as in Europe’s largest economy, Germany. These lower energy costs, when combined with Canada’s relatively high labour costs, is why some have predicted that Canadian firms will experience among the highest savings from roboticization (see graph below).

For Ontario, there is therefore a risk that jobs will be lost not merely to robots working within Ontario, but also to those working within other nearby Canadian markets where energy prices are far lower than in Ontario.

Labour Cost Savings

Source: Boston Consulting Group 

2) Daytime/Overnight

While Canada in general has a high disparity between energy costs (which are relatively cheap) and labour costs (which are relatively expensive), it is Ontario in particular that has a high disparity between daytime energy costs (which are relatively expensive) and overnight energy costs (which are relatively cheap). This is because Ontario is a world leader in nuclear power generation (see graph below). Nuclear power plants, unlike natural gas or hydroelectric plants, cannot be shut off at night without wasting fuel. Ontario has such a large surplus of overnight electricity that it often has to pay its producers to turn off their power plants at night, and often sells overnight power at prices that are well below the cost of production.

Nuclear Generation

Source: US Energy Information Administration 

At the moment, this is not a situation that is unique to Ontario. Like nuclear plants, coal power plants also cannot easily be shut off at night. Economies which rely on coal therefore often have surplus overnight power as well. In recent years, however, there has begun a major shift from coal-based power to gas or renewables. The Dow Jones U.S. Coal Index has lost more than 95 percent of its value since 2011, for example.

As economies rely less on coal and more on gas plants (which can be shut off at night) and solar power (which cannot help but be shut off at night), nuclear economies like Ontario are becoming far more unique in their disparity between daytime and overnight energy prices. This is true also of Ontario’s wider region: in the US, the two largest nuclear producers by far are Pennsylvania and Illinois, both fellow Great Lake states. Ontario’s immediate neighbours, New York and Michigan, are the fourth and tenth largest producers, respectively.

Moreover, because of its geographic size, Ontario is a burgeoning player in the wind-power industry. Yet  because of its geographic location, Ontario does not produce much solar power. Wind turbines cannot be shut off overnight either without wasting “fuel” (i.e. without wasting wind), whereas solar plants only produce power in the daytime. This too is driving Ontario’s disparity between its daytime and overnight costs.

Because humans rest at night, but robots do not have to, the disparity between an economy’s daytime and overnight power costs could become a major determinant in the susceptibility of its labour force to automation.

Conclusion

These inquiries into the question of roboticization, though preliminary (and perhaps still quite premature), suggest that Ontario should be especially careful when carrying out minimum wage increases. Given the disparity between daytime and overnight energy costs in Ontario, as well as the disparity between energy and labour costs within Canada in general, it may be that employment in the region will face a high level of competition from robots. If Ontario wants to improve the standard of living of its minimum wage workers, it might be wiser to pursue alternative policies, such as reducing income taxes on its lowest tax brackets.

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East Asia

The Geopolitics of Chinese M&A

According to an article in The Economist, the value China’s outbound M&A activity rose sharply in 2016, up approximately fivefold since the summer of 2015 and eightfold above its average rate between 2010- 2015.

The article mentions that this increase could represent a troubling trend for China, of capital fleeing the country in response to its slowing economic growth rate and gradually depreciating currency in recent years.

It then largely dismisses this theory, however, saying, “rather than sparking a stampede [of money] to the exits, it is more accurate to say that these changes [in China’s economic performance] have alerted Chinese firms to the fact that they are still woefully under-invested abroad. China’s share of cross-border M&A has averaged roughly 6% over the past five years, despite the fact that it accounts for nearly 15% of global GDP”.

In other words, the article assumes that, if  a country’s share of global M&A does not exceed its share of global GDP, its M&A is less likely to be capital flight. This assumption is not justified, however. It overlooks other key factors that may determine a country’s propensity for engaging in outbound M&A. Such factors include:

1. A country’s physical proximity to other large economies

In order to have cross-border M&A, you need borders to cross. Economies with large neighbours, for example Canada or the Netherlands, tend to have a relatively high propensity for engaging in international M&A.Canada’s cross-border M&A, for example, has tended to be 25-50% as large as the US’s in recent years, in spite of the fact that Canada’s GDP is less than 10% as large as that of the US. China, unlike Canada, does not border any large economies. This impacts not just its M&A, but also trade: in China trade counts for 37% of GDP, whereas in Canada it is 64% and in the Netherlands it is 151%.

2. A country’s cultural and linguistic affinity with other large economies

Most economies in the world speak European languages; Northeast Asia remains something of a linguistic outlier. This may make Northeast Asian countries less likely than other regions to engage in global M&A.  Japan, for instance, currently accounts for 6.5 percent of global GDP, yet has accounted for less than 1 percent of global inbound M&A in recent years, and less than 4 percent of cross-border M&A in general. Arguably, China too might be expected to have a low propensity to engage in M&A.

3. Capital availability versus investment opportunity

One of the reasons that Japan’s outbound M&A far exceeded its inbound M&A is that capital in Japan has been cheap (its interest rate is below zero), yet investment opportunities in Japan have been limited (its economic growth rate is 1 percent). Thus, the Japanese borrow money cheaply at home, and often invest it abroad. In China, however, interest rates frequently top 4 percent, while economic growth is estimated to be 6-7 percent. We might, then, expect China to be less M&A-intensive, and generate more of its own investment opportunities domestically rather than seek out ones in foreign markets. Unless, of course, as many economists suspect, China’s true growth rate is much below 6-7 percent.

4. A country’s political relationship with other large economies

Outside of mainland China itself, approximately 45 percent of East Asia’s GDP is generated in Japan, China’s historic regional rival. Outside of mainland China, approximately 29 percent of global GDP is generated in the US, China’s potential global rival. Because China’s relationship with Japan and the US is sometimes a tense one, its investment relationship with Japan and the US may be less than it could otherwise be. For instance, when a territorial spat between China and Japan, over the Senkaku/Diaoyutai islands, heated up (rhetorically) around 2012, cross-border M&A between China and Japan fell sharply. Indeed, in spite of relatively close cultural connections, Japan was not even one of China’s top ten targets of outbound M&A spending in the past decade. China has tended to invest in Europe; Japan in its political ally the US. 43 percent of Japan’s outbound M&A in the past decade went to the US.

5. A country’s relationship to foreign financial hubs

Relatively independent financial hubs, like Hong Kong, Singapore, or Luxembourg, tend to be significant net providers of M&A capital. Their outbound cross-border M&A spending tends to far exceed their inbound M&A, and their global share of cross-border M&A tends to far exceed their global share of GDP. From  2011-2014, for example, Hong Kong’s outbound M&A was about 25-40% as large as mainland China’s, even though Hong Kong’s GDP is only around 2% as large as mainland China’s. (Rightly or wrongly, M&A statistics tend to treat Hong Kong as if it was an independent entity). The fact that the world’s top two financial city-states (Hong Kong and Singapore) are Chinese may suggest that mainland China’s propensity for outbound M&A should be relatively low—just as, for example, US outbound M&A would plummet if (hypothetically) Manhattan were to secede from the US.

The value of China’s outbound M&A as a share of global cross-border M&A should, perhaps, be lower than China’s share of global GDP, then. Yet in 2016 Chinese buyers accounted for an estimated 15 percent of the value of all cross-border M&A, slightly higher than the 14.5 percent of global GDP China had. The Syngenta deal alone, announced in early 2016, was roughly large enough to eclipse all outbound Chinese M&A in any year prior to 2014.  China has kept up its M&A pace thus far in 2017, not counting Syngenta.

The explanation that you often hear for why China’s M&A boom is not capital flight — namely, that Chinese firms are seeking foreign expertise and technology, as China transitions to a more knowledge-intensive economy — may have some merit, but still it ignores the fact that money has also been pouring out of China into other assets in the developed world in recent years. To take the most notorious example, Chinese capital been pushing up real estate values in Pacific cities (Vancouver, Seattle, Sydney, etc.) and hub cities (NY, London, Toronto, etc.). The M&A boom, then, may be part of the greater trend of Chinese capital seeking safe haven. China’s 2016 M&A investment in the global safe haven, the US, was roughly triple what it had been in 2015, 2014, or 2013. It was larger than in every year from 1990-2012 combined.

If much of China’s M&A boom really is a result of capital flight, it is also likely to be unsustainable. In part two of this article we will analyze China’s geopolitical structure, to see when (or whether) this boom will end.

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