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Volume 2, Number 2 in Global TECHtonics: U.S./China Fault-line series
One of the most memorable moments from the two months of A-100 training I received upon entry into the U.S. Foreign Service was a leadership training film about the 1985 Bradford City Football (Soccer) Stadium fire. A small fire, sparked in a code-violation trash pile, was quickly whipped by winds into a fire engulfing substantial portions of the stadium. The raging fire trapped spectators, killing 56 and injuring at least 265.
Filmed on-site during the panic, the key point in this very graphic film involved the challenge of communications in a crisis. As described by Wikipedia, “In the mass panic …, fleeing crowds escaped on to the pitch but others at the back of the stand tried to break down locked exit doors to escape, and many were burnt to death at the turnstiles gates, which had also been locked after the match had begun.” The specific problem was that people at the front of the mass of people trying to flee from the gates quickly recognized that those gates were locked but, in the panic, could not communicate the problem back to the people pressing forward from behind. Had clear communication been possible, everyone could have found an alternative exit. As it was, scores of people ended up pinned against the gates and perished.
The lesson for the U.S.-China technology upheaval currently underway is straightforward: the implications of the upheaval appear different to different parties, depending upon their position in the field of action, and there is danger of differing reactions and poor communications compounding the danger and likewise leading to tragedy.
The goal of this post is to set out in very general terms the different industry groups affected by the Trump Administration’s efforts to date to “decouple” the U.S. and Chinese tech spheres – denying various sub-sectors of the Chinese tech industry access to the U.S. market, incentivizing U.S. firms to bring their production from China back to the U.S., and also encouraging allied governments to reinforce both approaches. There are four major technology sub-sectors that, to date, have been affected by these policy moves. In addition to providing simple, thumbnail descriptions of each of these four sub-sectors and how they have been affected by the Trump Administration policy approach, we will also rank them in terms of national security risk and look at the potential for a seismic reaction being triggered.
A simple way of assessing national security risk and gauging the related potential for a Bradford Stadium-type chain of events is to think in terms of crisis management. Crisis management experts generally identify four distinct stages as a true crisis develops. The following is drawn from the Crisis Prevention Institute’s Crisis Development Model:
- Anxiety
Anxiety prompts changes in behavior and looking at things differently. It’s a time to listen and observe, not dictate what should happen next.
- Defensive Behavior
Defensive behavior can be a natural escalation of anxiety; it’s the point where actors in crisis begins to lose rationality.
- Risk Behavior
Risk behavior is displayed as actors enter crisis and reach the point of propensity to harm themselves or others.
- Tension Crisis
Every crisis reaches a point of meltdown or tension reduction. Crisis behaviors, as they escalate, expend a tremendous amount of energy.
So here we go …
Level One
Among the earliest Trump Administration actions targeting technology products from China involved the use of tariffs. While the various rounds of tariff actions are too technical and convoluted to get into here, a few broad generalizations can be made. First, the tariff actions put into effect were more targeted to electronic components than to finished electronic consumer products. For instance, componentry for modems, routers and televisions were subject to two rounds of steep tariff increases and microelectronic chips were assessed a hefty 25% tariff while consumer products such as cellphones, laptops and video games, despite a series of threats by Trump to impose tariffs in the summer and fall of 2019, have still not been hit with any tariffs to date. The President’s advisors apparently convinced him, as the Christmas season approached, that voters would not take kindly to sudden price increases for these products. Second, there is little evidence to suggest that these tariffs inflicted enough pain on Chinese technology manufacturers and exporters to induce them to substantially change their behavior or to protest loudly to their government for relief. Tariff increases can be absorbed at any link in the supply chain stretching from the manufacturer and its supplier network (in China) to the importer, distributor and retail outlet (in the U.S.) or, alternatively, can end up simply be passed on to the consumer (in the U.S.). Preliminary analysis indicates that the U.S. side of the supply chain in technology products has likely absorbed as much pain from these rounds of tariff actions as the Chinese side has been forced to absorb. Third, tariffs are the quintessential sledgehammer used to crack open a peanut. Even if they actually hit the peanut, it tends not to yield anything worth the effort and can cause considerable damage to the surroundings.
At the same time that the Trump Admistration was rolling out waves of tariffs to target imported goods from China, they were also tightening and expanding limits on investment into the U.S. by Chinese technology companies – as well as certain other types of companies – on the grounds that they represent a risk to U.S. national security. The mechanism for achieving this was through expansion of the review powers of the Committee for Foreign Investment in the United States (CFIUS), an inter-agency body comprising nine cabinet-level departments and chaired by the U.S. Secretary of the Treasury.
As with the tariff actions, the heightened scrutiny of potential Chinese investments into the U.S. by CFIUS served primarily to send a political signal to the Chinese side that the commercial and economic climate was getting chillier for Chinese companies in the U.S. Chinese companies looked for work-arounds, adjusted their business plans, and in some cases looked to other world markets to take up the slack. These two sets of actions caused some tremors but did not cause the ground to fundamentally shift under U.S.-China relations. This represented, broadly speaking, the Anxiety Phase of the building crisis.
Level Two
The first indication of a second, potentially more consequential level of tension occurred in the spring of 2018, as President Trump was repeatedly threatening to levy tariffs on China but before the imposition of the first round of tariffs in July of that year. That second front involved Shenzhen-headquartered ZTE, one of China’s largest makers of smartphones and telecommunications equipment. In March, two ZTE affiliates agreed to a civil and criminal penalty of $1.19 billion for having illegally shipped telecommunications equipment to Iran and North Korea. Two months later, after it was found out that ZTE had failed to reprimand and had, in fact, paid bonuses to the executives involved in those illegal shipments, a seven-year ban on the export of U.S. components to supply ZTE’s manufacturing facilities in China was instituted. This ban was widely viewed as a likely ‘death sentence.’ The manufacture of ZTE smartphones would not be possible without access to U.S.-made microelectronic hardware and Android operating system software. Moreover, the fact that ZTE had been designated as a risk to U.S. national security hung like a sword of Damocles over the country’s future. But, almost immediately, the sentence was lifted without clear explanation. On May 13th, President Trump tweeted “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done.” One week later, the U.S. Commerce Department eased the restrictions and on June 7th a deal was reached whereby the Chinese company agreed to complete a $400 million escrow payment in return for the complete lifting of the seven-year export ban.
The whole sequence of events was somewhat baffling except for what it indicated about President Trump’s penchant for injecting himself personally into company-specific matters and for taking public and dramatic steps to build his rapport with President Xi. There is widespread speculation that Trump hoped, through this off-again on-again courtship of Xi, that he would get a trade deal which would allow for the lifting of the whole raft of “Level One” tariffs and give him a major trade deal to tout in the run-up to the 2020 elections.
It was not to be. U.S. and Chinese trade negotiators continued to slog through their negotiations inconclusively and an apparently frustrated Trump and the U.S. national security apparatus soon turned their attention to an even larger target than ZTE–Huawei, China’s national champion in that industry space. Founded in 1987 by Ren Zhengfei, a former army officer, and also headquartered in Shenzhen, Huawei employs 200,000 and manufactures telecommunications equipment, particularly equipment used in the infrastructural backbone of the new 5G standard for telecom, and consumer electronics, particularly smartphones. As was the case with ZTE, the Trump Administration voiced a specific legal concern and general national security concern in launching its campaign against Huawei. The legal matter concerned charges that Huawei too had created elaborate corporate structures to evade the U.S.-led “maximum pressure” sanctions regime against Iran. Specifically and most visibly, that legal issue crystallized around the detention in Canada of Ren’s daughter and Huawei CFO, Meng Wanzhou in early December 2018. The charges, unveiled publicly by the U.S. Justice Department in late January 2019, alleged a decade-long attempt by Huawei and Meng to steal trade secrets, to obstruct a criminal investigation and to evade economic sanctions on Iran. Canada was asked to extradite Meng to the U.S. to face trial on these charges.
The broader national security issue behind the campaign against Huawei centered on the charge that the Chinese government would be able to get access to the torrent of data coursing through next generation 5G telecom networks. To the extent that Huawei-supplied network components are built into the backbone of those networks, Huawei could gain access to the data. And, the thinking goes, that since Huawei is a China-based, PRC-supported champion company, Huawei would have no ability – protestations by the founder and company spokespeople to the contrary – to resist Chinese government requests for access to that data.
The two characteristics of the still on-going U.S. government-led campaign against Huawei which sharply distinguish it from the earlier actions against ZTE are its long duration and its expansion to the international field. Each one of these two characteristics presents complexity which defies easy summarization. Future posts will examine the international dimension of this campaign which has brought the Trump Administration some hard-won headway but also a sometimes stunning level of push-back and public repudiation from traditional allies.
For now, the point is simply that the initial evanescent campaign against ZTE and now the sustained campaign against Huawei can together be thought to represent the second level of effort, and risk, in forcing U.S.-China tech decoupling. Representing a natural escalation of the anxiety provoked by the various tariff rounds, these two sets of actions – and, particularly, the Huawei campaign — reveal factors of irrationality coming into play. On the Chinese side, the issue is a personal affront to Xi Jinping. It is also catnip for the millions of Chinese “netizens” who use nationalistic vitriol and memes to inflame public opinion which, in turn, further narrows the options available to Xi and his government policy makers. On the U.S. side, Trump Administration officials have tried to cajole other countries into raising their own costs and slowing their own transition to 5G by foregoing Huawei equipment without providing specific evidence of the claimed threats to help countries justify taking these steps. Domestically, the Administration has failed to provide a clear rationale and consistent messaging so that the public can assess the risks. Instead, the Administration has framed the issue in terms that are highly personalized to Trump and in a tone that is more macho than rational. It has become, in effect, a bullet point in Trump’s “I’m tougher on China than Sleepy Joe will ever be” reelection strategy.
The factor which has perhaps kept these actions from destabilizing U.S.-China relations even more is that the U.S. doesn’t have its own horse in the 5G sweepstakes. The two major competitors to Huawei are Ericsson (Sweden) and Nokia (Finland). The fact that European allies have been so reluctant to sign on to the U.S. campaign against Huawei, even though two major EU companies stand to gain competitively, underlines just how weak the national security case which Trump officials put forward has been. Over recent months, as the campaign has made some headway following an initial and embarrassing series of stalls out of the gate, Samsung (Sourth Korea) has also emerged as a potential provider of 5G telecom infrastructure components.
Level Three
A third, but more nascent, level of conflict is now beginning to take shape around social media networks and search engine companies. The players at center-stage of this now emerging drama are the tech giants: Apple, Google, Facebook, Amazon and Microsoft in the U.S. and Baidu, Alibaba, and Tencent (the so-called ‘BAT’ trio) and Bytedance in China. For U.S. readers not familiar with the commercial landscape in China, Baidu, the weakest of the trio, makes money, somewhat like Netflix, principally through advertising and content subscription services built around its Baidu search engine. Alibaba, the strongest of the trio, operates a vast Amazon-like selling site for both business (B2B) and consumer (B2C) end-users. Leveraging extraordinary global reach and profitability with this base of operations in e-commerce sales and delivery, the Alibaba family of companies is increasingly branching into business areas as diverse as cloud computing, media and entertainment, microfinance and tourism. Tencent is the owner of WeChat, a multi-purpose messaging, social media and mobile payment app which has achieved far greater penetration in the Chinese market – and has become more of an indispensable feature in the lives of its users — than any comparable app has achieved in the U.S. Bytedance is the owner of the massively popular TikTok app.
The market access picture for U.S. firms in China has been markedly less open than that traditionally enjoyed by the above Chinese firms in the U.S. Put simply, there has not been reciprocity and the U.S. Big Five Tech Giants have long faced restrictions limiting their ability to do business in China. This is a direct reflection of the Chinese government’s sensitivity, verging on paranoia, about its citizenry’s ability to access sources of information beyond the government’s control. (The three pillars of control for the Chinese Communist Party (CCP) have been, even before assuming control of the nation in 1949, the so-called Three P’s – the Party, the PLA (People’s Liberation Army) and Propaganda). Of the five U.S. companies, Apple’s iPhone and Microsoft’s personal computers and LinkedIn business networking service have enjoyed relatively freer access to the Chinese market, though that access is nonetheless significantly constrained. Microsoft, which has had a presence in China since 1992, has fared the best. Its operating system controls more than a third of the market in China and through its research center in China (its second largest in the world), Microsoft works closely with major Chinese companies on innovative product development. Apple has enjoyed some access for its iPhones, however, the iPhone’s penetration has been limited in China by its high price-point and positioning as an aspirational brand undercut in price by Huawei and Xiaomi. The other three companies have been largely shut out of the market: Google by its refusal to accede to demands, explicit and implied, to make search results and other data available to the Chinese government; Facebook has flatly failed to get government permission to operate in the Chinese market despite years of personal lobbying by Mark Zukerberg (which included Zuckerberg learning Mandarin, recommending Xi Jinping’s book to his employees and even asking Xi Jinping to suggest a name in Chinese for his baby); and Amazon, which faced stiff price competition from Alibaba and JD.com, decided in early 2019 to shut down its uphill effort to build an e-commerce marketplace business in China.
While fierce competition is an undoubted factor in explaining some of this picture of limited presence by the U.S. tech giants in China, government policy is the paramount issue. As previously mentioned, an overriding element of the government’s restrictive policy has to do with control over information. An additional element has to do with the government’s drive – also seen in the aerospace and financial sectors – to give homegrown companies a protected space to grow domestically in order to develop into global competitors and foreign exchange earners. That this is inconsistent with commitments which China made upon entry into the WTO in December 2001 is a cause of concern for the global community. That it creates an unequal playing field for U.S. firms in China is a common concern shared by both political parties in the U.S. and needs to be addressed. That there is evidence of Chinese firms using their penetration of the U.S. market to conduct unauthorized data collection from U.S. citizens is even a greater matter of concern, one that demands strong and strategic counter-measures.
On this last point, it is an established and publicized fact that WeChat has been used to collect data from the devices of U.S. citizens on U.S. soil without the individual’s or the U.S. Government knowledge and, of course , without any legal authorization. Any and all information on a compromised device is at risk in these instances. The pattern of known instances of compromise suggests strongly that there has been a directed campaign by the PRC at work rather than a series of random or accidental intrusions by Tencent. Substantially more information on this vulnerability is known within U.S. government circles than has been shared to date through public sources.
It is this type of vulnerability which is the behind the Trump Administration’s announcement on August 6th of this year of signed Presidential orders to ban commercial transactions with WeChat’s parent company, Tencent, and with Bytedance, Tiktok’s parent. The fact that 60% of users of the TikTok platform are under the age of 24 make it seem, at first blush, to be an unlikely target for PRC government-directed surveillance. But closer inspection shows that risks are not negligible. There is the established precedent from WeChat. There is the vast user base – 85 million in the U.S and 1 billion worldwide. Also, as any expert will tell you, surveillance and espionage seek to exploit any vulnerability and one’s children can be a significant vulnerability. Finally, younger people are disproportionately represented in the workforce of some of the most innovative and cutting-edge industries.
I will have occasion in the future to post on several aspects of this emerging arena of U.S.-China conflict. One topic involves the “geo-commercial” advantage which China enjoys with its population size, its unmatched number of smart-phone users, and its lax privacy laws, standards, and public expectations. As a result of these factors, Chinese companies are able to develop algorithms for new products and services more effectively and efficiently than their competitors. Bytedance’s TikTok is itself an example of this phenomenon. A second topic will be ‘balkanization’ of the Internet which will accelerate as the U.S. and China continue to de-couple and de-globalize their tech interests. A third topic will be the decisive role which India is likely to play in this contest as it balances its position as a massive market for cut-rate, Chinese-made smart-phones and as an important English-language strategic partner for Facebook and other U.S. social media and internet content and service providers.
For now, we can wrap this section with the observation that this emerging front in U.S.-China tech de-coupling involves a unique level of risk. It is so entwined in the lives of so many users and it touches on the core interest of so many behemoth companies in both the U.S. and China that it is markedly different from the risks found on the ZTE and Huawei front. While we are likely just in the early days of this new sphere of competition, it brings the U.S.-China relationship clearly into the third, risk behavior phase of the crisis development cycle. As this front continues to become a focal point, the public attitude and corporate bottom-line interests at stake are so core that entry into a mutually-destructive cycle of action and counter-action is almost foreordained unless both sides exercise great discernment and discipline.
Level Four
In last week’s post, Timing Matters, we touched on the issue of supply chains for semiconductors and advanced electronics. Because these products are the ‘brains’ behind entire emerging industries – artificial intelligence and robotics, autonomous vehicles, the commercialization of space, and others – this is where the United States’ and China’s economic competition is most fierce. Because these supply chains inextricably pass through Taiwan and Taiwan-headquartered industry leaders like TSMC – the economic risk is compounded by political risk.
The Assessing China ”Global TECHtonics: U.S./China Fault-line” series will delve much more deeply into this issue in the months ahead. Suffice it to say for now, that microelectronics and the global supply chains which help produce and distribute semiconductors and related products globally will be the fault-line which either ends up triggering a cataclysmic upheaval between the U.S. and China or, through inter-governmental negotiation, helps to settle the entire relationship on a new, more stable and sustainable basis.
Henry “Hank” Paulson — former Chairman of Goldman Sachs, former Secretary of the U.S. Treasury and creator of the U.S.-China Strategic & Economic Dialogue — was in Philadelphia last Wednesday. He came to publicize his new book Dealing With China: An Insider Unmasks the New Economic Superpower.
The media frame for the talk and Q&A which he gave to the World Affairs Council of Greater Philadelphia was: ‘Hank, you’re a real patriot. Why are you helping China?”
In response, Hank Paulson was very clear that his interest in promoting a better understanding of China is rooted in his desire to do what is best for America.
You can read the full article here but, for the purposes of this post, I’m going to focus on one small, but important, piece of the big contemporary China puzzle: Is Xi’s ongoing crackdown (on corruption but also on foreign businesses, NGOs, press freedoms, social media, connectivity to the global knowledge-pool, etc) flashing green, yellow or red for China’s paramount challenge of rebooting its economy on a more sustainable basis?
China’s ‘old software version’ of infrastructure build-out, inbound investment and export of cheap stuff is clearly no longer operating smoothly on the new global hardware system. China’s future – and Xi Jinping’s for that matter – depends on a smooth updating to a ‘new software version’ of consumer-led spending, outbound investment and innovation up the product value-chain. Under any circumstances, that’s a tall-order to pull off in just a few years. For those of us who believe that helping China matters to America’s future, the key question is whether the crackdown on political thought in China is – or is not — inimical to the desperately needed surge of commercial innovation needed to upgrade China’s economy to version 2.0.
It is perhaps not entirely a coincidence that, in the same week that Hank Paulson was wrestling with this question in Philadelphia, so were two other leading experts on the trajectory of China’s globalization elsewhere: Shaun Rein and Tom Friedman in respective articles. If Hank Paulson occupies the pivot point as a U.S. patriot committed to helping China, Shaun Rein is a self-acknowledged China booster and Tom Friedman a “color me dubious” observer of China’s steep road ahead to globalization.
Here’s what each of them has had to say over the past week on the ‘sword of Damocles’ question facing Xi and China: crackdown or start-up? (Click on the name below in order to source the original publication from which the following excerpts are taken):
“Paulson believes the Communist Party has reached a simple accord with the Chinese people: prosperity in return for continued state control. The question, of course, is whether China can have it both ways – economic freedom without cultural freedom, a subject I raised with Paulson at the World Affairs Council.
‘In today’s information economy, I don’t know how economies can innovate and do the sorts of things they do to stay on top without having a free flow of ideas and information,” Paulson replied. “I’ve run a global company, and, boy, you need to be connected. You can’t have an Internet that’s not connected. You need to know what’s going on politically, regulatory systems, economically, in terms of ideas all over the world.’
He added: ‘But understand what’s going on right now. Xi Jinping . . . is focusing on the things that the people care about the most. So, corruption. He recognizes the party won’t survive unless he curbs corruption. So he’s focused on corruption, the environment, dirty air, and water.’
“So . . . managing China, just think what it’s like because they have to deal with the kinds of issues that afflict developed countries at the same time they have to deal with issues that developing countries are dealing with because a big part of the country is still poor. It would be like, . . . looking at Europe, Germany and Slovenia. They are both European, vastly different stages of development, they need different economic policies. So think about managing both of those in a single country under one party, and I mean that’s sort of the challenge.’”
“China´s much needed anti-corruption drive has now put the country into a lock-down mode, and new projects have halted,” tells business analyst Shaun Rein at CNBC. “The cut in the reserve ratio ratio (RRR) this weekend is one way for a kickstart, although nobody know what will really work.”
China Herald: “What does the Chinese market need to stimulate the economy and if this growth continues to disappoint then would you expect an additional benchmark rate cut in the next couple of quarters, something that many experts are now talking about?”
Rein: “I think what we need to look at is not gross domestic product (GDP) growth but we need to take a look at unemployment and the second reason why I am more concerned about the economy is in the last month urban unemployment has been hovering around 5 percent – that’s really a problem. So the unemployment rate in areas of manufacturing are still fairly strong and you can easily stimulate that by forcing state owned enterprises to do heavy investment; train construction, airport construction and you can get jobs there but the issue is urban unemployment is weak and there aren’t a lot of easy remedies. The government is trying to switch from manufacturing oriented economy more towards one of technology and innovation as I outlined in my new book ‘The End of Copycat China’ but it is not easy to do that. You cannot get companies that are producing things all a sudden to become innovators, so there is definitely going to be some weakness, some problems in the economy over the next three-four months and frankly there are no easy answers on how they stimulate the economy.”
“Americans … are asking of President Xi: “What’s up with you?” Xi’s anti-corruption campaign is clearly aimed at stifling the biggest threat to any one-party system: losing its legitimacy because of rampant corruption. But he also seems to be taking out potential political rivals as well. Xi has assumed more control over the military, economic and political levers of power in China than any leader since Mao. But to what end — to reform or to stay the same?
“Xi is “amassing power to maintain the Communist Party’s supremacy,” argued Willy Wo-Lap Lam, author of “Chinese Politics in the Era of Xi Jinping: Renaissance, Reform or Retrogression?” Xi “believes one reason behind the Soviet Union’s collapse is that the party lost control of the army and the economy.” But Xi seems to be more focused on how the Soviet Union collapsed than how America succeeded, and that is not good. His crackdown has not only been on corruption, which is freezing a lot of officials from making any big decisions, but on even the mildest forms of dissent. Foreign textbooks used by universities are being censored, and blogging and searching on China’s main Internet sites have never been more controlled. Don’t even think about using Google there or reading Western newspapers online.
“But, at the same time, Xi has begun a huge push for “innovation,” for transforming China’s economy from manufacturing and assembly to more knowledge-intensive work, so this one-child generation will be able to afford to take care of two retiring parents in a country with an inadequate social-safety net.
“Alas, crackdowns don’t tend to produce start-ups.
“As Antoine van Agtmael, the investor who coined the term “emerging markets,” said to me: China is making it harder to innovate in China precisely when rising labor costs in China and rising innovation in America are spurring more companies to build their next plant in the United States, not China. The combination of cheap energy in America and more flexible, open innovation — where universities and start-ups share brainpower with companies to spin off discoveries; where manufacturers use a new generation of robots and 3-D printers that allow more production to go local; and where new products integrate wirelessly connected sensors with new materials to become smarter, faster than ever — is making America, says van Agtmael, “the next great emerging market.”
“It’s a paradigm shift,” he added. “The last 25 years was all about who could make things cheapest, and the next 25 years will be about who can make things smartest.”
President Xi seems to be betting that China is big enough and smart enough to curb the Internet and political speech just enough to prevent dissent but not enough to choke off innovation. This is the biggest bet in the world today. And if he’s wrong (and color me dubious) we’re all going to feel it.”
Philadelphia was selected today to join an economic development network created by the Global Cities Initiative (GCI) , a five-year joint project of the Brookings Institution and JPMorgan Chase. Philadelphia’s application to, and participation in, the Global Cities Initiative is being co-led by the Economy League of Greater Philadelphia and the World Trade Center of Greater Philadelphia.
Launched in 2012, the Global Cities Initiative helps business and civic leaders grow their metropolitan economies by strengthening international connections and competitiveness. GCI activities include producing data and research to guide decisions, fostering practice and policy innovations, and facilitating a peer learning network. This network, the Global Cities Initiative’s Exchange, assists metropolitan areas as they develop plans to achieve sustainable growth through increased exports and foreign direct investment.
Philadelphia is one of eight metro areas accepted to the GCI Exchange’s 2015 group, the final cohort of the full 28-metro-area network. The Brookings Institution selected metro areas for the Exchange through a competitive process based on their readiness and commitment to pursue the Exchange’s global competitiveness principles.
In addition to Philadelphia, the other 7 members of the new and final cohort include Baltimore; Fresno, Calif.; Houston; Kansas City, Mo.; Salt Lake City; Seattle; and St. Louis.
The 2015 cohort joins participating municipal regions selected during the three previous years – 4 in 2012; 8 in 2013; and 8 in 2014. Those previous participating municipal regions include: Atlanta; Charleston, S.C.; Chicago; Columbus, Ohio; Des Moines, Iowa;Indianapolis; Jacksonville, Fla.; Los Angeles; Louisville-Lexington, Ky.; Minneapolis-Saint Paul; Milwaukee;Phoenix; Portland, Ore.; Sacramento, Calif.; San Antonio; San Diego; Syracuse, N.Y.; Tampa Bay, Fla.; Upstate S.C. representing the Greenville-Spartanburg-Anderson CSA; and Wichita, Kansas.
For more information on the Global Cities Initiative please visit:
www.brookings.edu/about/projects/global-cities/exchange
Happy Year of the Snake!
I have some major catching up to do so let me begin here with a link to my book which the Wilson Center launched on September 24, 2012. (Note: if you want to download the PDF of the book, just right-click and use the Save As option).
More 2012/3 updates to follow in rapid sequence.
Thanks for hanging in there,
This is the second in the 2012 series of Cooketop News commentaries and news recaps.
By reviewing the previous week’s top stories involving — broadly speaking — U.S./China clean energy, the commentary section isolates one trend/dynamic which points forward and can help illuminate news-in-the-making for the week(s) ahead. Following the commentary is a summary of the week’s top stories.
This week? We look at the headline (Cooketop News, Friday, January 13th) that, after four years, the U.S. re-took the lead from China as the front-runner in global clean energy investment.
* * * * * * * * * * * * * * * * *
From 2008-10, the U.S. visibly lost pace – and, in some instances, lead position – to China as the world’s top investor in clean energy. In 2010, China – then just over one-third the size of the U.S. economy – invested twice the absolute amount in clean energy as the U.S. Yet, in 2011, the U.S. bounced back, reclaiming top-spot for the first time in four years: U.S. investment increased 33% to US$56 billion while Chinese investment remained flat at $47 billion, according to Bloomberg New Energy Finance. What does it mean? Less than the headlines might suggest.
Here are three key points to keep in mind while tracking current results – and handicapping future results – in the global clean energy arena:
(1) It’s not a sprint, it’s a marathon. The bragging-rights prize will ultimately go to the economy which manages the best combination of technological innovation, political support, and financial sustainability over many years. Germany and Spain have seen political support for their heavily subsidized systems erode with the euro. The U.S. is in near political grid-lock over how to set that balance. China’s position looks strong on the surface but is hobbled by lack of technology innovation, political accountability and financial transparency.
(2) How high’s the bounce? The U.S. resurgence is due to short-term programs due to expire soon, such as biofuel support programs and energy efficiency measures. Absent a broad national consensus, there is no strong reason to expect the U.S. “bounce” to remain strong throughout 2012, an election year.
(3) The bottom-line is this is a race is against time, not a Sputnik-type competition. For either nation’s efforts to pay off, investment will need to be scaled to a global level by investors, public and private. That won’t happen unless there is a clear middle-way between the extremes which tend to bedevil U.S.-China relations – zero-sum, highly-nationalistic competition on the one hand vs. unrealistic and unsustainable ideas of cooperation on the other.
While the metric of renewed investment vigor in the U.S. is encouraging, the real challenge for the future will be to define and align complementary ‘skill-sets’ in both the U.S. and China so that capital can be attracted and deployed on a global scale through these two massive markets accounting for 40% of the global GHG emissions problem. We’ll need a discerning eye for the different strengths which our two countries can bring as complementary partners in this effort as well as a realistic understanding of our enduringly different systems and values. Regardless of who has the momentary lead in investment level, we need to recognize that there is no path to a sustainable future for either country without clear-eyed, realistically-based and sustained cooperation between the two.
Monday, January 9, 2012
Africa & China: How it all Began
China to Tax Carbon Emissions by 2015
China Vows Backing for Firms Abroad
China Spring Festival Migration Begins
Tuesday, January 10, 2012
Hottest Solar Markets in Early 2012
12 Challenges for China in 2012
DoE Heads Off Cleantech Materials Shortages
Wednesday, January 12, 2012
China’s Export Engine Downshifts
China Pumps In $10bn to Water Project
Brand Make-Over for Philly Energy Hub
Thursday, January 12, 2012
Does the U.S. Prefer a Ma Victory in Taiwan?
The Perils of Cleantech Investing
China Braces for Turbulent Year
Friday, January 13, 2011
China’s Forex Reserves Decline
In the spirit of sharing news while it’s fresh, I’m copying verbatim a report on the gold nugget in the pile of dross that has passed for this year’s national budget process.
For those of you who took in (in person or digitally) the Philadelphia’s 21st Century Energy Opportunity event I convened with the Academy of Natural Sciences and the T.C. Chan Center for Building Simulation & Energy Studies on October 11th, the win is obvious — for the City and the region, for the national effort for cleaner energy jobs and investment, and for our global engagement. For U.S./China clean energy cooperation, this budget victory also solidifies the framework of U.S./China Clean Energy Research Centers CERC) in building energy efficiency (Lawrence Berkeley Lab), electric vehicles (University of Michigan) and clean coal (University of West Virginia).
Kudos to Mark Muro and Bruce Katz for their success in keeping this ball moving down the field. Here’s the report from late yesterday afternoon.
Mark Muro and Devashree Saha
December 19, 2011 | 4:10 pm
Notwithstanding the bleak outlook surrounding federal clean energy policy detailed in our recent report “Sizing the Clean Economy,” the FY 2012 omnibus spending compromise hammered out last week actually contains several reassuring affirmations of the value of recent institutional experiments.
One winner is the Advanced Research Projects Agency-Energy, perhaps the Department of Energy’s most popular program.
Although the program is funded at just $275 million–about half the level President Obama had requested–many will probably be relieved that the program has now survived, which hasn’t always seemed a certainty. Moreover, the deal improved on earlier bills that have circulated, suggesting that the cause of the government fomenting disruptive innovation using “outside-the-box” investments in venturesome technology ideas may be gaining traction. That’s good news.
So is another happy surprise in the deal: the authorization of two new DOE Energy Innovation Hubs, one specializing in rare earths and energy-critical materials and one for energy storage technologies. To be sure, the Obama administration had originally asked for eight of these hubs, and settled for three before this year requesting funds for three more in 2012. However, congressional appropriators weren’t convinced that there was a need for a hub focused on smart grid technologies, as reported Darius Dixon in Politico, and so the nation now has two more of them, for a total of five of these special purpose-driven, multidisciplinary centers for accelerated collaboration between corporations, universities, and government labs.
Yet we’ll take it. Having long argued that the nation has been making do with an obsolete energy research paradigm excessively oriented toward individual academic investigators, on the one hand, and the siloed and bureaucratic efforts of the DOE’s energy laboratories, on the other, it is gratifying to watch the slow but continuing rollout of a true network of well-funded, multi-sector regional innovation centers. Congress is doing the right thing by creating–hub by hub–a set of sizable new institutes charged with “winning the future” in energy technology.
I was asked today what accounts for China’s outsized role in solar PV , amounting currently to roughly 50% of global share of production despite having a Lilliputian share of global consumption. It comes down to three inconvenient truths. That said, the degree of inconvenience of each truth varies with the point of view (e.g., ‘panda hugger’ vs ‘dragon slayer’ in the U.S. vs ‘patriotic netizen’ in China) of who you happen to be talking with :
(1) Post-WWII, Asia (and notably China since 1982) has had clear advantages of cheaper land, cheaper labor and cheaper facilities relative to manufacturers in higher per capita income markets in the West. Since solar panel production has some basic similarities to the manufacturing process for computer memory chips (which in the 1990s were the basic ‘rice’ commodity of the IT boom in Asia), solar manufacturing has benefited from the natural ‘cluster effect’ of decades of chip manufacturing know-how of Chinese, Taiwanese and other investors on the mainland.
(2) The barriers to entry for solar manufacturers are lower than the earlier tech waves of integrated circuits and bio-technologies so national and local
government in China has seized on it to bootstrap their economies to a higher rung of the global value chain. This has meant various government subsidies (on the producer side) to the point of a casino mentality — more than 100 solar manufacturers in the single town of Dezhou in Shandong Province. (The Chinese government also rounded up and ramped up polysilicon supply when that key input for solar PV production tightened in 2010/11);
(3) There’s not yet an established market for solar products in China so almost everything is exported to Western markets — especially to those national
markets like Germany and Spain and state markets in the U.S. such as New Jersey that have been subsidizing the industry (on the consumer side). [Note: World Trade Organization rules tend to allow/encourage consumer-side subsidies and to sanction producer-side subsidies, hence the recent trade action by the 7 Western solar firms against China. However, these actions take time to work their way through the ‘python’ of WTO process).
As a wrote almost a year ago ( click here for link ), there’s a global boom/bust going on in PV solar and China is in the thick of it.
Premise
Participation in China’s fast-growing nuclear market offers promise and peril for global market-leaders. A model coupling U.S. innovation with Chinese scale and speed of deployment offers the best path forward.
Discussion
The development of China’s nuclear market has been driven by a governmental elite, many of whom were trained as engineers. Their strategic thinking appears to be motivated in part by the challenges of climate change – to adopt lower carbon sources of electricity generation. As the vice president of the China Nuclear Energy Association has pointed out, nuclear power – rather than solar, wind or biomass – is “the only energy source that can be used on a mass scale” to achieve clean, low-carbon energy.
Just as significantly, though, China’s rapid expansion of nuclear power appears motivated by a desire to upgrade the Chinese nuclear industry by enticing foreign suppliers who want to participate in China’s market growth to share their technology with Chinese partners. The profit potential is vast in China, but other big emerging economies, such as India and Brazil, will be exploring nuclear installations in coming decades. To wrest some of that business away from established incumbents –such as France’s Areva and Japan’s Westinghouse – China is leveraging its low-cost labor and deep experience with major infrastructure projects. A Western-designed reactor can be built in China for 40% less cost and 36% faster than that same installation in Europe.
For China to become globally competitive its two major nuclear power companies — China National Nuclear Corporation and China Guangdong Nuclear Power Group — will need to improve in the knowledge-intensive end of the business. Of the 13 nuclear power plants currently operating in China, only three — all at the Qinshan site — rely on an indigenously developed design. Likewise, China has only limited experience selling its reactors in export markets; Pakistan is the only known foreign buyer to date. Finally, to compete globally, China will need to manufacture specialized components, for which it is currently dependent on foreign suppliers.
As for U.S.-China strategic cooperation in the nuclear field, there have been important undertakings but, to date the governments have not attempted anything on a broad strategic basis. There are interesting opportunities on the horizon. Former U.S. Ambassador to China, Jon M. Huntsman Jr., has reported discussing with Bill Gates a new kind of reactor “that runs for decades on a single fuel load, making and destroying plutonium as it runs,” thereby reducing the hazards of reprocessing and the dangers of proliferation. According to Huntsman, strategic cooperation between the U.S. and China to develop this American-pioneered technology could bring shared benefits. The technology could, for example, be certified and brought to commercial scale faster in China. A partnership effort could be envisioned where a joint American-Chinese company leads the construction, with co-development and commercialization rights apportioned between the partners. The end-result could be a cleaner and (marginally) safer form of energy brought to consumers quickly and at scale.
(This piece has been reprinted from G+ Insights, a publication series of the Gerson Lehrman Group at www.gplus.com. The G+ piece, in turn, has been adapted from Sustaining U.S.-China Cooperation in Clean Energy, a book publication authored by Terry Cooke forthcoming from the Kissinger Institute of the Woodrow Wilson Institute in November 2011).
Premise
The Fukushima disaster in March has prompted all major nuclear powers to pause and reexamine their nuclear development programs. Germany and Italy reached decisions to phase out their nuclear programs. In the U.S., stirrings of interest in a nuclear revival were silenced. In China, however, all indications are that a national program to establish China as a global leader in nuclear power remains on track.
Discussion
The first commercial nuclear power plant in the U. S. was installed in 1958. Today, 104 commercial reactors produce almost 20% of the nation’s total electric generation. By comparison, China’s first nuclear plant, Qinshan, near Shanghai, became operational in 1991. Today, 13 plants are in operation supplying just over 1% of China’s total electricity. However, this freeze frame comparison misses the contrast in momentum for the nuclear industry in the two countries. Of the 52 nuclear power plants that were either under construction or in advanced planning in America and China in late 2010, months before the Fukushima disaster, 50 of those plants were being planned and built for the Chinese market.
source: U.S. Energy Information Administration
As the above chart from the U.S. Energy Information Administration shows, nuclear generation has plateaued in the U.S. and Europe but is rapidly growing in China, India and the rest of the developing world. While active plants in the U.S. are approaching the end of their licensed lifetime without planned replacement, new nuclear installations in China are set to increase roughly ten-fold over the next ten years.
Following 1979’s Three Mile Island incident, the experience for the U.S. nuclear industry has been new order cancellation, new construction abandonment, premature shutdown of plants or extension without plans for replacement. Although improved design and technology advances have brought about significantly improved safety performance, public opposition to nuclear power — periodically galvanized by highly publicized international incidents such as Chernobyl and Fukushima and persistently bedeviled by the nuclear waste disposal problem– has kept the U.S. market virtually off-limits to new nuclear installations for three decades. China, by contrast, is the world’s most active site for new plant installations. National planning calls for nuclear power to provide 6% of China’s total electrical generation by 2020. This will require a net increase in installed capacity of 60-70 GW, comparable to the entire 63GW of currently installed nuclear capacity in France, one of the world’s most active users. By 2030, China plans to match the nuclear output currently provided by all 104 U.S. installations.
The bottom line: Chinese authorities clearly know how to throttle back a prestige industrial development project, as shown after July’s high-speed train collision in Zhejiang Province. After the Fukushima nuclear disaster, however, no such bureaucratic braking of China’s nuclear program has been apparent. Additional safety reviews have been instituted, but the scale and speed of China’s nuclear program remains essentially unchanged.
(This piece has been reprinted from G+ Insights, a publication series of the Gerson Lehrman Group at www.gplus.com. The G+ piece, in turn, has been adapted from Sustaining U.S.-China Cooperation in Clean Energy, a book publication authored by Terry Cooke forthcoming from the Kissinger Institute of the Woodrow Wilson Institute in November 2011).
In 2008 China could be seen rapidly closing the gap with the traditional wind market leaders – the U.S., Germany and Spain. By 2009, China, riding a massive post-GFC stimulus program, became the world’s largest buyer of wind turbine equipment. In that same year, the U.S. managed to maintain its strong pace of wind installations but Spain and Germany started falling off the global pace as post-GFC austerity forced them to drop governmental price supports (so-called “feed-in-tariffs” or FiTs) for wind installations. Finally, in 2010, China surpassed the U.S. in wind-power installations (18.9GW vs. 5.6GW) and emerged as the clear global front-runner for wind-energy purchases and installations.
But three caution flags are now waving for China:
(1) For the moment, there is still a huge asymmetry in the number of installations which GE has made in the Chinese market (over 1,000 in China alone, over 14,000 worldwide ) versus the number of installations Chinese wind-power companies have made in the U.S. market (3 installations, as of December 2010). Moreover, lingering tight credit strongly favors established market leaders when it comes to wind energy projects and, for now at least, financing costs are currently prohibitive for new entrants. This is a substantial market hurdle for Chinese entrants to the lucrative U.S. market, not a government barrier.
(2) In a mid-summer 2011 settlement announced by the Office of the U.S. Trade Representative, the Chinese government agreed to stop subsidizing its wind power manufacturers. This put an end to a six-year, WTO-inconsistent effort known as Notice 1204 and led by National Development and Reform Commission, to favor Chinese suppliers in the manufacture and installation of Chinese wind-turbines.
(3) Earlier this week, China’s government adopted stricter regulations in anticipation of an expected “bloodbath among turbine producers” as reported by the Financial Times on October 24th.
It’s a marathon, not a sprint to the wind-energy future. Far too early to proclaim China the winner.
______Assessing China / The TEA Collaborative______ 