Friday News Roundup — August 13, 2021

Beijing’s Hostages; The Moon & National Security; Betting Markets & Political Prognostication

Good morning from Washington, D.C. This week saw another moment of historic bipartisanship in the Senate, as an infrastructure package with $550 billion in new spending received 19 Republican votes and all 50 of the Democratic caucus votes. On a subsequent party line vote, the Senate also moved ahead with the $3.5 trillion reconciliation framework. Attention now turns to the House, returning early from recess on August 23rd, where Speaker Pelosi has repeatedly indicated that the House will prioritize the party-line reconciliation framework.

As we write, the situation also continues to deteriorate in Afghanistan, with provincial capitals falling to the Taliban, 3,000 U.S. troops being deployed to the Kabul airport to facilitate evacuations, and questions about when Kabul could be besieged.

Since our last roundup, Dan & James wrote about how policies related to speeding up 5G growth have focused on cutting red tape and unnecessary regulation. Ethan looked at the relationship of defense technology, climate change, and national security. Joshua reviewed The Border, chronicling Erika Flatland’s journey around Russia through its neighbors and former Soviet states.

In this week’s roundup, Dan covers China’s hostage-taking via its legal system. Ethan looks at lunar concerns for national security, and former intern Thomas Triedman lends his thoughts on how betting markets can help political prognosticators. We wrap as always with news you may have missed. As a reminder, on our late-summer publishing schedule, the next roundup will be August 27th.

Beijing’s Hostages

Dan Mahaffee

Michael Spavor and Michael Kovrig (BBC Screenshot)

As Huawei CFO Meng Wanzhou awaits word from a Vancouver court on whether she will face extradition to the United States to face charges related to Huawei’s sanction violations, Beijing has sent its own signals, via the Canadians it holds in its party-run judicial system — including one on death row. While these prominent Canadian cases are the most acute examples, other examples bring Beijing’s legal-hostage-taking methods into focus.

As the Canadian judicial system heard the Meng extradition case starting in December 2018, China quickly moved for its own leverage. Michael Kovrig and Michael Spavor, Canadian citizens with diplomatic and business experience in China, were arrested 10 days after Ms. Meng was detained. Robert Schellenberg was a Canadian arrested for drug smuggling by Chinese authorities. Originally sentenced to 15 years in prison, Schellenberg was re-sentenced to death in January 2019. Schellenberg appealed the enhanced capital sentence. Kovrig and Spavor were tried in secret, without access to Canadian consular officials, in March 2021, yet their sentences remained unknown. This week, as the Meng trial moves to its conclusion, Chinese officials upheld Schellenberg’s death penalty and announced Spavor’s sentence of 11-years in prison for espionage. Kovrig’s sentence remains unknown.

The contrast is stark between China, where the party can lean on the courts to bend to Beijing’s will, where as Canadian rule-of-law precludes such political interference. (Nor did it help when President Trump spoke as if the Meng case could be negotiated as part of a trade deal.) It is not the first time, as Canadian couple Kevin and Julia Garratt were detained on espionage charges for nearly two years during the 2014 case where Chinese cyber spy Su Bin challenged her extradition from Canada to the United States. Hostage diplomacy is just another tool to pursue the party’s interests, all while China’s legal system makes a mockery of the rule of law in Canada, the United States, and other liberal democracies.

While these Canadian cases are the ones in the headlines this week, Beijing has long used detentions like this to send signals to the west, as well as potential dissenters at home or abroad. First, there are the many cases of dual citizens, where the second citizenry is unrecognized by the Chinese government. Australian-Chinese journalist Cheng Lei and author Yang Hengjun have both been detained under espionage charges, with no recognition of their Australian nationality. Ms. Cheng remains incommunicado while Mr. Yang fears that his forced confessions under torture have been recorded for his upcoming espionage trial. These cases have come as China and Australia found themselves in dispute over China’s economic, cultural, and political influence over Australian society.

Americans Victor and Cynthia Liu have been barred from leaving China since June 2018. Their crime is simply being the children of Liu Changming, their estranged father and one of China’s most wanted financial fugitives. While the Liu siblings are unable to leave China, it’s clear that Beijing’s hostage-taking approach extends abroad. Federal prosecutors in New York unveiled a bombshell case in October 2020, outlining how Chinese agents were operating on U.S. soil to plan the kidnapping of a fugitive wanted under Xi Jinping’s corruption crackdown.

Lest we think that commerce will serve to soften China’s approach, business people and executives are also attractive targets, especially when there is no distinction between economic and national security cases under Chinese laws, and Beijing continues to crack down on the private sector to promote the party’s consolidation of power. In 2019, as trade tensions with Washington grew, the detention of a Koch executive sent signals to the American private sector — and its ties to Washington.

The breadth of these examples demonstrates how China uses detentions, its opaque and politicized legal system, and the ever-expanding definition of national security and espionage laws to carry out its hostage-taking policies. As with many areas where tensions have grown between China and the west, China has focused its most intense and provocative measures on key U.S. allies. Increasingly, we must be concerned not only about those traveling to China, but also the reach of Chinese agents overseas. When I wrote about the importance of educational exchange, travel, and other interactions for building bridges between the American and Chinese people, it’s harder to imagine such exchanges when U.S. and other foreigners are potential targets for Beijing’s hostage-takers.

“That’s no moon, It’s a Space Station”

Ethan Brown

Current strategists as Lunar Competition heats up

The iconic line from Star Wars Episode IV is forever etched into the minds of a generation, noteworthy due to the sensational notion of transforming a celestial body into the instrument of national (galactic?) security.

At least in 1977 it was sensational, but today? Well within the concerns of national security strategos in both the United States, Russia, and China alike. In recent weeks, rhetoric and piercing questions abounded as the behavior of rivals in Beijing and Moscow were addressed for their aggressive activity in the orbital domain…yes, in strategic competition, Space and the Moon are now fully absorbed into the fold of conflict and operations other than war on behalf of international influence. Gen. James Dickinson (Commander, U.S. Space Command) asserted that “the behavior of some of our adversaries in space may surprise you…if similar actions have been taken in other domains, they’d likely be considered provocative, aggressive, maybe even irresponsible. And in response, the U.S. government would take corresponding actions [to indicate] we won’t tolerate that type of behavior, but we’re not quite there yet in space policy”.

The Moon is rapidly becoming the linchpin of extraterrestrial security activity, one could say that our low-earth orbit is soon to become old-hat in favor of lunar staging of forces. If it seems too fantastic to be factual, it is worth noting that the 1967 U.N. General Assembly passed a treaty on the use of outer space that served as a guarantor of cooperation and prohibited the employment or testing of nuclear weapons, and international notification of activities was demanded in order to prevent instances of unforeseen crises. An annex to the treaty that bans military activity on the moon was never ratified by the United States, Russia, and China.

Which puts us squarely in a new race to the moon, and the potential for security influence, data and intelligence gathering, as well as resource exploitation (literal space & orbital access/maneuverability being the key resources at stake) are the impetus for who gets there ‘first’. My recent inquiries with some space industry folks (who’s roles/work/identity must remain anonymous) shared that there is a new game in town when it comes to intelligence — “LUNINT”. From my days frolicking about Afghanistan and elsewhere, we regularly referred to SIGINT [Signals Intelligence], IMINT [imagery intelligence], HUMINT [human intelligence], and COMINT [communications intelligence], all sourced from various platforms, systems, networks and components to develop the target picture before a mission. With the new norm of geospatial and galactic competition, LUNINT — lunaspatial intelligence, is the next field of intelligence gathering that will determine who is the shot-caller for our fragile globe.

The DoD is taking the race to lunar intel seriously — for a variety of reasons. Headlines this summer and before have captured the emerging private enterprise of orbital travel, Jeff Bezos, Elon Musk, and Richard Branson being the headliners of course. But those are often surface-layer exploits for publicity and stock option reactions, the real heavyweights in those space travelers panoply (specific to Bezos/Blue Origin and Musk/SpaceX) is the service of small-satellites in orbit that support both civilian and defense communications architecture. Carpet coverage of Earth from LEO (low-earth orbit) and above are critical to early warning, command and control networks, and pretty much every connected system our society relies upon. But total space-domain awareness goes much beyond orbit, and the assortment of satellites therein. It may well be in our lifetime that celestial-bound craft depart our gravitational pull and go beyond the web of satellites. Once free of the locale area, what system generates guidance solutions and highlights threatening nearby objects (debris, junked satellites)? That would be the heretofore unfounded moon base complete with sensors and arrays that directly communicate with Earth and its denizens.

Peaceably, this will be the U.S.-led Artemis coalition, with a stated goal of putting boots on the lunar ground no later than 2024. In response, the Chinese National Space Agency partnered with Roscosmos (Russia) with the same goal: location surveyance in order to pinpoint the locale for their international Lunar Research Station, aimed at 2025 for completion. Those potential bases are squarely at the ground level of cislunar space, where competition for possible water, helium-3, and rare-earth or undiscovered minerals of incalculable value could serve as the powder keg for confrontation that we can scarcely fathom today. China has a marginal lead, having landed the Change-4 Lunar Rover on the far side of the moon back in 2019 (it is unknown if any Transformers are currently lurking nearby); pundits have pointed to various Chinese behaviors as this generation’s “Sputnik moment”, but that hardly seems the case.

To date, there is no indication of China or Russia entering into an agreement of any sorts with the Artemis Accords, which paints a concerning picture for system development in the Lunar domain. Whoever gets there and gets stood up first has the distinct advantage in LUNINT, which will be critical for that trans-orbital travel, civilian or defense, but will be foundational in terms of Missile Detection, Defense, and deterrence as weapons of increasing capability begin to populate the inventories of the competitors at play.

This narrative does need to circle back to a policy track, since we are a policy institution after all. What is currently absentia consilium, is a formal declaration of the role that the U.S. Space Command, as well as the Space Force (those are two distinct entities with widely differing lanes of effort/responsibility) occupy in local galactic affairs. A Tenet’s of Responsibility, if you will, that considers the responsible engagement of the Lunar domain, and perhaps most critically, deterring, responding, and countering aggression on the Moon. Well, today it is a Moon, tomorrow it might be a space station.

Political Betting Markets: The Least Bad Option?

Thomas Triedman

The 2024 Republican Primary Betting Market at Smarkets — smarkets.com

Last month, the American Association for Public Opinion Research released a report on 2020 pre-election polling and concluded that recent polls produced the least accurate forecasts in decades. While the failure of these 2020 polls is not yet fully understood, there are countless systemic issues that often prevent pollsters from achieving ballpark accuracy. For instance, as pollsters make the survey process easier in a quest for more responses, they are more likely to collect data points from non-voters, skewing election-day projections. Other questions present themselves: Who is more likely to be home to pick up the phone? Who is more willing to engage with media outlets? It is no wonder why — ironic as this is — a Hill-HarrisX poll found that only 48 percent of Americans trust polls. Widespread frustration with polling underperformance, combined with rising distrust of media and institutions, are creating the conditions for disruption in the political forecasting industry. And political prediction markets, which have begun to receive attention from major news outlets, are well-positioned to emerge as an even greater force in this space.

Although seemingly novel, prediction markets have a long history and were, most notably, a fixture of the pre-war American political landscape. In the fifteen elections between 1884 and 1940, Wall Street correctly predicted the eventual winner in every contest except for 1916. The market participants successfully navigated choppy waters over that period, with election outcomes almost evenly split between Republican and Democrat winners and between incumbents and opposition challengers. Contemporary cultural trends likely drove the success of these political betting markets. Before there were televisions to broadcast real-time election updates into every living room, people would crowd around newspapers and brokerage houses, wagering money to back their beliefs and prove their conviction. These election-night frenzies, a cultural staple of the pre-war era, made for deep and liquid betting markets that produced results.

At first glance, betting markets seem like the obvious solution for our current polling problems. As tens of thousands of bettors with all available information exchange hundreds of thousands of contracts, supply and demand forces should theoretically converge at a fair probability for a specific political outcome. In the real world, however, political betting markets face two strong headwinds. First, most political betting markets that exist nowadays are too illiquid for efficient price discovery. The PredictIt market concerning the New York city mayoral Democratic primary, which was the most heavily traded market on the platform for weeks, largely remained under 100,000 contracts traded per day, making it susceptible to distortions that separate the contract price from its fundamental probability. Second, market participants on political platforms largely rely on polls to make their trading decisions, so it is unclear whether these platforms enhance the accuracy of forecasts or merely reproduce flawed poll numbers.

For a market to develop real depth and efficiency, there must be a large number of participants with different reasons for being in the market and different investing styles. For instance, the oil market works well because airlines and other large consumers buy oil in the future to hedge against price risk, and producers sell oil futures for the same reason. Meanwhile, hedge funds trade oil contracts to make directional bets on industry trends and global developments.

Similarly, there are a variety of participants who would benefit from a political derivatives market — and whose transactions would create sufficient liquidity for efficient pricing. Corporations could buy political derivatives to hedge against acute political risk to their operations. For instance, “Big Tech” companies could benefit from contracts that relate to the instatement of a global minimum corporate tax rate or legislation regarding Section 230. In fact, directly correlated political derivatives could become a more attractive tool for political risk management than lobbying campaigns currently are. More broadly, private equity firms could buy political derivatives contracts if they expect political risks (for example, a Biden presidency and increased corporate tax rates) to systemically impact their portfolio. Even large-scale asset managers and funds of funds could use political derivatives as a fully correlated hedge against the impact of political news and events, protecting their portfolios without taking on the basis risk that accompanies more traditional hedging techniques. And of course, with the rise of Robinhood and other apps that gamify investing, a political derivatives market could become an exciting arena for speculation.

The blueprint for a political derivatives market already exists. In October 2002, Goldman Sachs and Deutsche Bank completed the first-ever auctions of economic derivatives, effectively allowing the banks’ traders and clients to bet on the change in U.S. Nonfarm Payroll data. These derivatives would pay out if the payroll data exceeded a benchmark; if not, investors would lose their principal amount. Most political platforms copy this structure but further simplify it. At one point, the PredictIt market pegged Eric Adams’ odds of winning the Democratic mayoral primary at 35 percent. A bettor who paid 35 cents for one of those contracts would have redeemed a dollar when Adams was declared the winner, pocketing 65 cents. Alternatively, the bettor could have sold off his bet at a higher or lower market price before the outcome was even determined. While the economic derivatives market never gained much traction, the participants’ forecasts generally outperformed the economists’ forecasts, proof that these types of prediction markets can be efficient.

The discussion of these political betting markets is not entirely theoretical. Sensing some demand for developed political betting markets, the massive quantitative trading hedge fund Susquehanna International Group created their own market for 2020 election bets. Hedge funds placed bets of up to $100M on licensed U.K. platforms (to sidestep regulations in the U.S.). If the bettor could not find another party to complete their order, Susquehanna would step in, acting as a behind-the-scenes market maker. It is likely that other large quantitative trading firms would step in as market makers, too; as a general rule, these firms will trade anything as long as it poses no reputational harm and as long as they can confidently model the risk.

With a deep market for political derivatives created by a wide range of participants seeking new vehicles for risk management and speculation, onlookers and researchers would perhaps have access to better political forecasts. But what difference does that make? On the one hand, more accurate political forecasts can decrease the regularity and severity of political surprises, which can often disrupt markets and businesses. Additionally, better estimates would provide the public with more accurate information concerning their country and political developments. On the other hand, increasing the accuracy (or at least the perceived accuracy) of political forecasts would have its downsides. If voters have too much confidence in forecasts, they may not turn out to vote as often. Worse yet, if voters are overconfident in their candidate’s probability of winning, they may be more likely to question the validity of eventual election outcomes. And given the rise of complex campaigning strategies, partisans could study trends between polling results and election-day turnout and use that data to manipulate the market, better positioning their candidate for Election Day.

It is early and there are uncertainties. But it is not hard to imagine a future where a global market for political derivatives emerges as the least bad option in a forecasting industry rife with uncertainty.

Thomas Triedman is a student at Yale College.

News You May Have Missed

Sonos and Google Face Off in ITC Court, with Ramifications for Big Tech & IP

Sonos, known for its networked speakers and audiophile-focused features, awaits a verdict today from the International Trade Commission court in a case it has brought against Google. Sonos alleges that Google ripped off several features of Sonos networked speakers for its Google’s own speaker and phone technology during a period of collaboration when Sonos was integrating Google’s digital assistant technology into Sonos speakers. The case is being watched as a bellwether regarding intellectual property protections and potential legal challenges for the country’s biggest tech firms.

Libyan Prosecutors Seek Arrest of Gaddafi’s Son

Following a BBC exposé of Russian mercenaries, notably the Wagner Group, operating in Libya, Libyan prosecutors issued an arrest warrant for Seif al-Islam Gaddafi, the son of the late dictator, over his ties to the mercenary groups and the Russian government. Gaddafi has been described as “Russia’s favorite” amongst the various leaders vying for control of the fractured nation. Gaddafi had been captured by rebels during the 2011 overthrow of his father’s regime, and had been earlier sentenced to death in absentia by a Libyan court for his role in the regime’s violent crackdown.

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