Thoughtful exchange on China – US

The conversation about China and the US is as polarised as the conversation between China and the US. Which is a pity, because it is the international relations problem of our time and it deserve a corresponding amount of thought and care. Both were on display in a recent episode of The Economist’s Drum Tower podcast. Here’s an excerpt from a discussion about US technology controls:

Simon Cox: One of the tragedies of course is that America has confirmed d China’s world view. America has confirmed the fact that it does want to contain China which obviously China always believed and now it feel justified in that belief. It’s a very striking thing to say to a country that we’re going to try and limit your technological development in this way. I feel very ambivalent about it, I don’t particularly want China dominating the industries of the future either. But what’s very striking about the controls as they’re conceived and as far as we understand them is that they’re not merely trying to maintain America’s edge not merely trying to say there will always be a gap between America and china. they’re trying to hold china to an absolute ceiling of technological development….

David Rennie: Look the thing about a vicious circle right and of course Chia is going to try and escape these controls but to try and explain how the Americans see this which is why would we let China make the People’s Liberation Army (PLA) stronger and more capable of doing things that we don’t want like invade Taiwan using American technology or American money. Again, I think back to my time covering the Obama administration in DC, you saw them trying these really targeted export controls… we’re going to tell an American company Intel that they cant sell the most advanced chips so the PLA can make these supercomputers but what happened was that because of civil military fusion, this big Chinese government idea of blurring all the lines between the military and civilian companies and harnessing everyone to this grand national endeavor, those chips that were supposedly never meant to go near a PLA university of supercomputer, China got them anyway. What you’re seeing from the Biden administration is now you know if you’re going to make it impossible for us to only target military end users, then you leave us with no choice but to block all of this and you’re right Simon, it’s extremely aggressive but I think the alternative from the American perspective is naively continuing to allow the PLA to build weapons that can kill Americans and invade Taiwan with American chips….

And finally, Simon again in response to a question about whether the Chinese Communist Party can be trusted

I just think that if the two economies [China and the US] do decouple, especially if China were able to decouple from Taiwan, I don’t think anyone else is safer as a result.

Please do listen to the whole thing.

US and Europe fight for electric vehicles

Europe and the United States want more of the electric vehicle supply chain at home. Car factories, battery plans and refineries create jobs and useful know-how that countries want for themselves. Factories at home are also less likely to get caught up in trade wars.

But there’s a finite number of car factories, battery plants and refineries. Everyone wants them. Not everyone can have them.

To encourage manufacturers to choose Alabama over Aalborg, the US is giving lots of money to companies who build electric vehicle factories. It’s working!

From a FT story about how Volkswagen is prioritising a new EV factory in the US:

Another executive said: “We’ve been contacted by many US states and they all highlight the IRA. When we put the figures together, the conditions they offer are much more interesting than the conditions they offer in Europe.”
VW said no decisions had been made on the locations of its plants in North America or Europe and it was committed to its plan to build more cell factories in Europe. “But for this we need the right framework conditions.

“Right framework conditions” is a fun way to say “more money please”

Industrial policy like this is full of clever rules to force companies to use subsidies wisely instead of growing fat and slow on the government teat: Half the money upfront, half on completion; government share in the profits; more money if the company exports lots and proves to be internationally competitive. There might also be rules so companies who take subsidies commit to government priorities, say paying workers fairly or offering child care.

But there’s only so many factories! Will competition cause governments to lower standards? A race to the bottom on industrial policy? At the very least governments are likely to pay up. Let’s see how many framework conditions the EU offers.

Companies Are Leaving China, It Doesn’t Mean What You Think

Here’s a popular story: After decades of outsourcing to China, many companies are having second thoughts. Trade wars with the United States, political interference from the Communist Party and the threat of war over Taiwan are making China a riskier place to do business, and companies are looking abroad.

AirPods maker Goertek is expanding its facilities in Vietnam and considering a move to India. iPhone-maker Foxconn is reportedly planning a $700 million factory in India. Volvo has committed to a new factory in Slovakia. BYD Electronic, which builds iPads in China, is opening a factory in Vietnam.

This is meant to be a story about Chinese decline. The symptom of US commercial pressure and Communist Party error.

But, is that the right conclusion to draw? Airpod maker Goertek is a Chinese company. Billionaire founder Jiang Bin was elected to China’s National People Congress last week. Volvo is owned by Chinese automaker Geely. BYD is listed on the Hong Kong stock exchange. What does it mean for Chinese power if Chinese companies are part of the exodus?

A few thoughts:

  • It (partly) reflects the success of Chinese development: Factories are moving offshore for the same reason they left Britain’s north or the US rust belt, the workers are well paid. And Chinese workers are well paid because they’re rather good at what they do. This isn’t new. Back in 2010, rising wages in coastal provinces had companies moving inland looking for cheaper labour.

    The days of low-cost manufacturing in China are probably numbered. The number of workers employed in Chinese industry peaked in 2012. “Made in China”, just like “Made in Japan” before it, is shedding a reputation for poorly crafted, cheap goods. In its place: cars, bullet trains, mobile phones. China is now the world’s largest automaker, a notoriously difficult technology to master (when did you last see a Proton?).

    So companies are leaving China, in part, because it is wealthier, more educated and more productive. The exodus is a symptom of Chinese strength. By joining the emigration, Chinese companies prove themselves globally competitive businesses. Apple still works with Goertek, it just wants the AirPods package to say “Made in Vietnam”.

    I don’t want to overstate the case. Clearly, there are companies leaving China to avoid technology theft, harsh rules or geopolitics. And many companies aren’t Chinese. Foxconn is Taiwanese. Samsung, which is cutting back it’s China footprint too, is South Korean.
  • Could it birth a new type of firm? A Chinese company building widgets for an American client across Shenzhen, Chengdu and Zhengzhou has different priorities to one building widgets in India, Vietnam and Cambodia. Networks of Chinese manufacturing plants across south and east Asia—what the Economist is calling Altasia—could create a constituency within China that is pro-China, pro-business and pro-trade. It’s a vision for the region quite at odds with the cold-war-decoupling-trade-blocks one.

    It’s also why I find the Altasia v China binary from yesterday’s otherwise excellent Economist article from yesterday insufficient. If Altasia does develop, then Chinese companies will be part of it.
  • The ambiguous impact of commercial pressure: Apple is worried worsening US-China relations put it’s factories in China at risk. Apple asks Goertek to open a factory in India. Goertek makes AirPods in India and exports them to the US. Is this a success for the US? In one sense, yes. If China invades Taiwan, the AirPods factory in India continues as normal.

    But there’s also a sense where the US attempt to stymie China’s economic power has failed. Goertek is making money. Some of that money is paid in Chinese taxes. China spends that money on missiles or advanced semiconductor plants, which the US would rather it didn’t.

There’s lots more on this to discuss!

Made In ?

Companies are considering moving out of China because of tougher politics and higher wages. The Economist looks at an alternative:

The question for Dell, Samsung, Sony and their peers is: where to make stuff instead? No single country offers China’s vast manufacturing base. Yet taken together, a patchwork of economies across Asia presents a formidable alternative. It stretches in a crescent from Hokkaido, in northern Japan, through South Korea, Taiwan, the Philippines, Indonesia, Singapore, Malaysia, Thailand, Vietnam, Cambodia and Bangladesh, all the way to Gujarat, in north-western India. Its members have distinct strengths, from Japan’s high skills and deep pockets to India’s low wages. On paper, this is an opportunity for a useful division of labour, with some countries making sophisticated components and others assembling them into finished gadgets. Whether it can work in practice is a big test of the nascent geopolitical order. This alternative Asian supply chain—call it Altasia—looks evenly matched with China in heft, or better. 

Do read the whole thing. It’s an interesting take but I don’t think a China v. alternative binary helps us understand what’s going on. But more on that tomorrow.

China’s growing cultural muscle

I tend to discuss China’s growing assertiveness with reference its economy or foreign policy. It’s a pity, because China’s increasingly muscular cultural scene is illuminating. If you want to understand the trajectory of China over the next few decades, it’s vital to observe the stories China tells about itself.

Check out this trailer for the new film ‘The Eight Hundred.’ It is a dramatization of the Battle of Shanghai, a particularly bloody siege in the Second Sino-Japanese war – part of what we would call the Pacific Theatre of World War 2.

A few points to reflect on:

  • The Second World War may be the most dramatized war in modern cinematic history. Were these films your primary source about the war, you would presume its centre of gravity lay somewhere between Omaha Beach and a blitzed out London. The Eastern front, and to an even greater extent, the Chinese theater, are rarely mentioned; I suspect there are more blockbuster films about the American civil war than both combined. One benefit of a thriving film industry in China is that new historical stories will be told.
  • These stories will increasingly be filtered through a nationalistic lens. The FT reports that China’s media regulator required changes to the film, because the troops that fought in the battle were from the Nationalist Kuomintang army. The Nationalists would later fight (and lose) a civil war against the Communists, before retreating to Taiwan.

    Nationalistic depictions of war are not unheard of in Hollywood today (American Sniper was a particularly egregious example), but more often than not, contemporary war films emphasise moral ambiguity, despair, and the senselessness of violence. Based on the trailer, ‘The Eight Hundred’ is more Horace than Owen with regard to: dulce et deocrum est pro patria mori. The trailer ends with the following line:

    “To my dear wife YuZhi, when our kids grow up, they shall join the army to avenge their father. To devote themselves to their country. So that our descendants won’t suffer anymore humiliation.

Geopolitics and the energy transition

From today’s big read in the FT:

But is the geopolitics of energy really about energy?

To link geopolitics and conflict to a particular material thing is to miss the point a little. There is not a fixed set of objects we fight over, such that the sudden super-abundance of one reduces conflict as a whole. Humans have fought wars over salt and spices, cotton and coal. Better shipping routes to the spice islands, or alternatives to coal did not eliminate conflict so much as displace it elsewhere. Tensions arise over the valuable, the scarce, the unevenly distributed (and much else). A geopolitics of carrots is possible should they meet those conditions.

Instead we should be asking, what things and places meets those conditions in a world where energy is super-abundant. What do societies with an abundance of energy make, do, and look like? What will they care about, be willing to risk lives and treasure for? One thing missing from the article is services. Geopolitical thinking is still deeply attached to the material world, but we need to understand how increasingly digital (dematerialised?) and service driven societies change traditional geopolitics (if at all)?

The article outlines some of the new(ish) commodities that will power the renewable revolution, like cobalt and copper. This in turn will shift the geography of geopolitics, perhaps the corridors of electricity transmission will replace the sea-lanes transporting oil (and perhaps I was overhasty in criticizing those who think Eurasia is the future of geopolitics).

Well worth reading!

As always, if you enjoyed this, consider subscribing or sharing