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My March 30th post (Taiwan’s Historic Split Screen) was written as President Tsai Ing-wen arrived in New York in transit on her diplomatic visit to Central America. That piece promised a follow-up on the occasion of her return transit to Los Angeles — and meeting with Speaker of the House Kevin McCarthy — en route back to Taiwan. The Tsai-McCarthy meeting took place 6 days ago on April 5th but I delayed following up until today because my interview with Forbes on this topic was in the works.
That Forbes interview was published yesterday and can be found here (including 12 minute audio version). I am also reproducing that interview below to capture it in the Assessing China blog. It begins with several scene-setting paragraphs by Forbes Editor at Large Russell Flannery. The interview itself begins below the photograph of Micron headquarters in Shanghai.
(Begin article)
Micron Probe May Hurt China’s Efforts To Attract Foreign Investment
Beijing today wound down its latest large-scale military exercises in the waters around Taiwan but overall tension between the U.S. and China remains high. China’s moves followed a high-profile meeting last week between U.S. House Speaker Kevin McCarthy and Taiwan President Tsai Ing-wen in Los Angeles criticized by mainland leaders who claim sovereignty over self-governing Taiwan.
On the commercial front, the semiconductor industry remains an elevated point of stress. Beijing earlier this month announced a cybersecurity review of U.S. chipmaker Micron aimed, it said, at protecting the country’s information infrastructure and national security. The probe comes at a time when China has been seeking to boost foreign investment to accelerate its economic recovery from “zero-Covid” policies that slowed growth.
What’s next for U.S.-China ties and also for the CHIPS Act, the U.S. law enacted last year aimed at reversing the declining American share of global semiconductor production?
To learn more, I spoke on Saturday in the Philadelphia area with Terry Cooke, a senior fellow at the Foreign Policy Research Institute, a think tank focused on U.S. national security and foreign policy. Cooke, a former career U.S. senior foreign commercial service officer with postings in Shanghai, Taipei, Tokyo and Berlin, currently leads ReGen250, a non-profit that focuses on U.S.-China green energy collaboration as well as environmental regeneration initiatives in the tri-state Greater Philadelphia region.
Cooke believes China’s move against Micron will have “a chilling effect for potential foreign investors — definitely on the U.S. business community” at a time when China is trying to win new foreign investments following the end of “zero-Covid” policies at the end of last year that had harmed economic growth. Beijing high-profile efforts to pressure Taiwan militarily may also be counterproductive if Taipei successful builds itself up as “an important force” in a larger, more influential network of democracies. Edited excerpts follow.
© 2023 BLOOMBERG FINANCE LP
Flannery: What do you make of the military exercises around Taiwan this month?
Cooke: There are two ways of looking it. One is that going into the Tsai-McCarthy meeting, the decision had already been made (in Beijing) that this is the new normal, that whenever there is an uncomfortably high-level contact between the U.S. government and the Taiwanese government, we (the Chinese government) are just going to keep demonstrating our ability to militarily squeeze Taiwan through maneuvers of this sort.
There is, however, another way of thinking about it: the way the McCarthy-Tsai meeting was conducted may, in fact, have been the determinant of the maneuvers. Beijing may have been in a wait-and-see mode. They of course issued their standard and predictable verbal denunciations in advance of Tsai’s transit stops.
I think they were waiting to see how low-key the meeting in L.A. with McCarthy would prove to be. The entry through New York was very low-key. The State Department utterances for most of the trip also kept things low-key. And there was ample precedent for this given Tsai’s previous six transit visits to the U.S. so the State Department position was that there was no reason for Beijing to make an issue out of it.
But the optics of McCarthy meeting – with all the diplomatic trappings of a government-to-government meeting save for flags set up on the table – made it look very much like an official meeting. And I don’t think that went over well in Beijing. That could have triggered the decision to trot out the military.
Flannery: So what’s next?
Cooke: Just as the U.S. is maybe on its back foot with the new realities in the Middle East, I think China may be on its back foot in terms of the game of diplomatic recognition when it comes to Taiwan. Yes, Taiwan just lost Honduras on the eve of Tsai’s U.S. trip. Now, Taiwan is down from 14 to 13 countries that it has diplomatic recognition with.
But I think there’s really a more important game in town now than adding up the number of formal diplomatic allies. This new game in town probably started around February 2021 with the Biden administration moving into the White House. To many people’s and particularly Beijing’s surprise, Biden kept Trump’s tough China policy. He also introduced into his speeches and policies a clear and consistent autocracy-vs-democracy contrast.
Within the context of this U.S.-led “reframing” of the global picture, Taiwan now has the opportunity to reposition itself within the team democracy global network of supporters in a way that it’s not strictly about formal recognition and UN membership. It’s about being recognized, and in some ways, held up as an important force in this network of democracies.
Flannery: How will Taiwan’s presidential elections next year affect these three-way ties?
Cooke: From the U.S. governmental standpoint, the outcome – whether it is a victory for Tsai’s Democratic Progressive Party or the opposition KMT party – will change hardly at all. This is because the U.S. government’s official position – whether it involves the outcome of an election in Taiwan or changes to the cross-strait status quo initiated by China – is that what the 24 million people of Taiwan choose for themselves is what the U.S. government will support. I don’t think our basic diplomatic posture and our support for Taiwan would change unless there was some evidence — which I would not expect at all — of some malfeasance happening with the election.
Flannery: What do you make of China’s probe into Micron?
Cooke: We can dissect it into several elements. One is a desire for reciprocity and being seen on an equal plane. And so with Biden’s CHIPS Act, and the singling out of TikTok and a lot of different Chinese companies in U.S. security investigations, it’s to be expected that there is going to be some reciprocal action that China is going to want to take to be seen as a peer power demanding reciprocity.
That diplomatic posturing is understandable but it does have a chilling effect for potential foreign investors — definitely on the U.S. business community. Close allies in Europe and elsewhere notice it, and it doesn’t help China’s post-pandemic effort to show a welcoming face to foreign investment.
I think there is also a third element of it that is interesting: perhaps as another data-point showing a lack of coordination in Chinese policy and messaging that we see from time to time. And we’re living in a world where nobody is a paragon and the U.S. has its own challenges with coordinating its message. But in China, as we saw recently with ‘wolf-diplomacy’ and the balloon incident, people lower in the governmental hierarchy vie to please their superiors, and end up getting out in front of the intended policy and in front of what would be an optimal coordinated policy for China. And I’m wondering personally whether Micron might be an instance of that.
Flannery: Speaking about both semiconductors and Taiwan, does the U.S. rely on Taiwan too much for chips?
Cooke: It’s actually in almost everyone’s interest at this point to have a greater degree of global diversification. It’s outright dangerous to have close to 90% of production of the world’s most advanced semiconductors taking place only 90 miles away from the Chinese mainland.
Flannery: Does the CHIPS Act go far enough in striking a new balance?
Cooke: Before the CHIPS Act, Taiwan Semiconductor Manufacturing Company (TSMC) was already taking steps (to diversify from Taiwan). There are currently moves afoot in Germany for automotive chip production — not the most advanced chips in the world — but also with Japan for consumer electronics and with Arizona for an advanced generation of chips. (See related post here.) For the foreseeable future, production of ultra-advanced chips will stay in Taiwan. But I think a lot of production capacity for quite advanced chips is being pushed out of Taiwan to these other global nodes.
The CHIPS Act is to my mind pretty fascinating. As a response to China’s Made-In-China-2025 ambitions and its military upgrading, it’s a bulls-eye in my view. But, as a policy undertaking in the U.S. domestic context, it is something of a potential third rail in the sense that, as a country, we’ve never been comfortable or particularly skilled at industrial policy. And it is clearly industrial policy.
Interestingly, I think there is enough bipartisan support right now that the industrial policy-political debate on Capitol Hill is not the traditional debate of “no industrial policy” versus, let’s say, the Clinton era’s “auto industrial policy for Japan.” Nobody at this point seems to be openly challenging the need for an industrial policy response to China’s advanced technology challenge.
So the debate currently is one about “clean” industrial policy versus industrial policy with social agenda items folded into it, like childcare support for workers. (Either way) it is important as a signal to the market about U.S. government resolve.
Flannery: Is it enough? And if it’s not enough, what’s the next step?
Cooke: If, in version one, the sum had been significantly higher than $52 billion, it would have been almost setting itself up for failure, because there are so many things that can go wrong in operationalizing and implementing something like this.
By analogy in the military sphere, we have put in a very robust sanctions regime against Russia following the invasion of Ukraine. But it was kind of uncharted territory. There’s been a lot of analysis about what’s been working and what hasn’t been working. We’re groping our way forward and want to keep some powder dry.
The CHIPS Act is similar in the commercial sphere — kind of uncharted territory. One of the things it has going for is that Commerce Secretary Gina Raimondo is an astute leader of the process. In the current political environment, any sign of dropping the ball would be pounced on. What is actually more important than the amount of money is the fact that it has happened in an initial iteration. There can be subsequent iterations, but it’s important to operationalize the first iteration as well as possible and to learn from that process to inform a potential second iteration.
Flannery: There is controversy about social goals being attached to it.
Cooke: The Act was passed by Congress last year, and it went into a kind of holding period where no one knew what the process was going to be for a company to apply. When the guidelines were only recently announced, it became clear that there was quite a lot of conditionality put on the ability of a company to apply. One set of conditions has to do with an applicant limiting its China business for a 10-year period. Another quite different set has to do with an awarded company providing childcare for its employees.
I think the criticism about these conditions is a fairly predictable output from the Washington DC political meat grinder. Because these are tax-payer dollars, the back-and-forth is highly political. Placing limitations on future China business for awardees makes sense to the average American voter. However, those limitations raise serious concerns for the CEO of a sizable company that doesn’t want to decouple from the China market but does want to access CHIPS Act support. On the separate issue of childcare, this requirement is meant as an incentive to help overcome the problem of a shortage of chip production workers in the U.S but it obviously becomes a red meat talking point for politicians who position themselves as anti-woke in U.S. culture wars skirmishing.
This goes back to what we were talking about before with Micron. China is currently unable to respond in a meaningfully reciprocal way when the U.S. does things like put Chinese billionaires onto an entities list. They just don’t have a global finance tool that is anywhere near as sharp and strong as is found in the U.S. Treasury toolkit. For the U.S., putting companies on an entities list works— it catches the attention of targeted individuals and there is an important and broad public messaging dimension to it as well. Of course, to make sanctions really bite, there’s a lot of operationalization that needs to happen but doesn’t always happen.
What I personally believe is: China’s main effort now is to try to knock the dollar off its post-World War II throne. Others have tried and failed and it will be a hard thing for China to pull off. But I believe that’s this the main thrust of their effort and the primary aim of a long-term, patient strategy.
See related posts:
U.S. Businesses Look To De-Risk, Not Decouple, Their China Ties
U.S.-China Collaboration Could Cut Development Time, Cost For New Cancer Treatments
TSMC Will Triple Arizona Investment To $40 Billion, Among Largest Foreign Outlays
Taiwan’s Biggest Silicon Wafer Maker Eyes U.S. Solar Industry Investment
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I join Russell in inviting you to leave your thoughts or questions in the Comment section below. (Because of netizen ire in China, I have not always kept the Comments section open in Assessing China but it is open for this post. I would love to hear from you).
Xi Jinping arrived in Moscow yesterday for the start of a three-day state visit, his first trip overseas since securing his unprecedented third-five year term as head of the party and president of the country. Yesterday’s meeting was heavy with symbolism — the two leaders exchanged greetings and expression of friendship seated together intimately in front of a fireplace — but devoid of substance. The first solid indication of the substantive direction their talks are taking will happen in a few hours during a press event scheduled to take place prior to their formal dinner. That direction will be further mapped out at the conclusion of the state visit tomorrow immediately prior to the departure from Moscow of Xi Jinping and his delegation.
These meetings are being closely watched because they will reveal which of three starkly different paths the two leaders will choose.
Behind Door Number 1 is the possibility that Xi will show determination to be the peace-broker he postured as with the release of his PRC Position on the Political Settlement of the Ukraine Crisis 12-point plan late last month. This would mean exerting real pressure to overcome the mutually-incompatible public positions of Russia (i.e., that no negotiations are possible until Ukraine formally cedes those territories in eastern Ukraine which Russia currently occupies) and of Ukraine (i.e., that no negotiations are possible until Russia completely relinquishes all territories it has occupied since Russia’s 2022 invasion and possibly also the Crimean territories seized in 2014 though there is not clarity on that latter point). There is no question that Xi has the means to move Putin in this direction if he should choose to. It would suffice for Xi to threaten to drastically reduce purchase of Russian oil, to limit export of Chinese microchips and other vital but non-lethal supplies which prop up Putin’s war effort, and to distance himself from Putin on the world stage. The reason this door will stay closed, though, is two-fold. First, Xi has no means available to bring Kyiv along in this direction. Xi’s platitudes about the cessation of hostilities and entering into talks is an absolute non-starter for Zelensky and his committed backers in the U.S., Europe and elsewhere. It would simply freeze Russian gains in place and allow Moscow’s forces time to regroup. Nor does Xi have any realistic standing to leverage world opinion to pressure Zelensky to move in a direction he’s dead-set against. Even for Brazil, Hungary, India, Indonesia and the other influential fence-sitters, what Beijing has been doing over the past year (supporting Russia in myriad ways right up to the red-line of supplying lethal equipment) outweighs what it has recently been saying about weighing in as a mediator and potential peace-broker. Beijing had not yet even opened up a channel of communication with Kyiv until a few days ago and that only at the Foreign Minister level. Yes, the U.S. and its allies have been loudly supportive of Xi reaching out to Zelensky but that is not because they see that as a step toward a PRC-brokered ceasefire. They’re advocating this because they know how passionately persuasive Zelensky can be about Ukraine’s position on the right side of history and hope that direct communication with Zelensky would give Xi further pause in any consideration of supplying Russia with lethal armaments.
Behind Door Number 2 is the possibility that Xi and Putin will use their time behind closed doors to hammer out an agreement through which China bolsters Moscow’s faltering war effort with a meaningful level, either quantitatively or qualitatively, of lethal munitions. This represents the ‘red line’ which SecState Blinken has been publicly warning Xi to back off from in recent weeks. It would represent a watershed development for two reasons. First, it would prove beyond argument the hollowness of Beijing’s posture of neutrality. Short of such military supply, Beijing has already deployed all the tools at its disposal to help Moscow — using its manufacturing strength to supply the Russian military with dual-use technologies, using its economy to shore up the vital Russian energy sector, using its currency to help prop up the ruble, using its propaganda organs to parrot Moscow’s line on the causes of the war and even its Special Military Operation terminology, using its diplomacy to provide Putin (fresh from the International Criminal Court in the Hague issuing an arrest warrant for him) with ‘diplomatic cover.’ Second, Russia’s supply of military-use drones, ammunition, and artillery has the potential to significantly change the battlefield. Perhaps not to the degree to allow the poorly-performing Russian military to realize its maximalist territorial objectives; but definitely enough to prolong the military see-saw and reenergize Putin’s strategy of outlasting the fractious democracies supporting Ukraine. Should Xi accede to this course of action behind closed doors, it would not remain a secret for any length of time. Beyond the ability of the U.S. intelligence community to pick up on this new move through monitoring communications — both PRC internal communications and government-to-industry communications — the appearance of Chinese armaments on the battlefield would be instantly recognized and highlighted by the Ukrainian military. The consequences would be immediate and disastrous for China’s wobbly economic recovery. Sanctions from the U.S. and Europe — China’s two largest trading markets — could conceivably be enough to knock 1-2% off China’s economic growth in 2023. Under that scenario, China’s GDP growth would fall to 3% or under for three of the last four years. Such a prolonged period of low growth could well mean that China never manages the leap which Japan, Singapore, South Korea, and Taiwan have previously managed from being a manufacturing labor-led economy to being an innovation-led developed economy. Being consigned to this so-called “middle income trap” while simultaneously being trapped in demographic collapse would, quite simply, mean the end of Xi’s vision of national rejuvenation. More precariously for Xi, it would mean an end to the 100 Years Long March which Xi’s predecessors and compatriots in the Chinese Communist Party have been journeying on since 1949 (and even before). Xi understands this and Door 2 will not be flung open.
That leaves Door 3. This is the path of steady-as-she-goes with all of its inherent contradictions and all of its incremental pluses-and-minuses. Xi is determined to strike certain poses on the world stage and those may now be spotlighted and amplified: the posture of exaggerated friendship and increasing fraternization with a former Communist super-power is essential to the realization of the ‘Big Power’ role which Xi has set for China in his third term as well as for the ballast which it provides Xi in projecting himself as leader of an alternative to the liberal, U.S.-led, post-WW2 order. At a symbolic level, Xi can continue to ratchet up this image for a global audience, as he is doing currently with this visit to Moscow. At the level of practice, however, Xi cannot afford to risk further blows to China’s economy. He will refrain from taking any decisive step towards arming Moscow. In so doing, he will doubtless look for additional ways to support Putin’s war effort at the margins while forestalling any large-scale economic retaliation from the U.S. and other global Ukraine coalition countries.. This symbolism-heavy, practical-action-light approach follows the game-plan which Xi successfully ran with the militarization of the islands and reefs in the South and East China Seas. Taking a series of small steps, each of which was just below the threshold of triggering a forceful reaction from the U.S. and its allies, but which cumulatively over time secured the strategic objective he was seeking. The “boil a frog slowly’ strategy. Just as importantly, it is strongly in Xi’s interest that Russia not suffer sudden defeat and “disappear” from the global stage. Xi’s interest is for Russia’s to remain on stage but moving gradually away from center-stage to make room for China’s more prominent presence there. This shift is already well underway as China, on a daily basis, gains increasing control over Russia’s energy market, its financial sector, its diplomacy and its geopolitical positioning vis-a-vis Siberia and the Russian East.
My prediction for what will unfold later today and tomorrow — and then subsequently in the aftermath of Xi’s visit — is the gradual opening of Door Number Three. That is not to say that Xi could not ultimately surprise us. He has proven himself to be a risk-taker — and has gotten off lightly — with both the South & East China Seas militarization and with the Basic Security Law takeover of Hong Kong. Could he open Door Number 2? Yes, possibly. Alternatively, he possibly has something up his sleeve to entice Zelensky into talks with. Is Door Number 1 locked, bolted and sealed shut? No. But there’s no reason to believe that Xi wants to put in the hard work to open that door. Whatever ultimately transpires, though, the prize for Xi lies behind Door Number 3. He is shrewd enough to know that and act on it.
I received an email yesterday from a college friend who is bright, informed and engaged with world events. She is not a China specialist but over the last few years we have had an on-going exchange of views about China, both privately and in a public forum.
Her message from yesterday read,”Terry: Yikes. Do you have access to Le Monde? I can’t read the rest of the article, but the first half is alarming. R.” The article she hyperlinked is from Le Monde and that article in turn hyperlinks to a strategy document which the People’s Republic of China (PRC) has just released in conjunction with the visit by Wang Yi, Xi Jinping’s principal foreign policy advisor, to Munich for the 59th Munich Security Conference with NATO member countries and then on to Russia for meetings with Foreign Minister Sergey Lavrov and yesterday with Putin himself. The document is titled “American hegemony and its dangers.” As headlined — accurately, I might add — in the Le Monde article, the focus of Xi’s Foreign Ministry is now on “‘direct confrontation with the United States.”
Today’s brief post is both my response to her and a way of brushing off the cobwebs after a long holiday vacation — lasting from Thanksgiving through Chinese New Year — I have taken from Assessing China.
To keep it simple, there are two main reasons that this newly overt stance of direct confrontation with the U.S. comes as no surprise from Xi’s PRC in 2023.
The first goes back as far as 1921 with the founding of the Chinese Communist Party (CCP) in Shanghai. Inspired by the Bolsheviks’ gains in the October Revolution, Chen Duxiu and other founding leaders of the CCP made Leninist ideology (soon to become Leninist-Stalinist ideology after Stalin’s rise to power in 1924) the central tent-pole of the party. According to that ideology, the bases of CCP power were the Three P’s — the Party, the PLA (People’s Liberation Army) and propaganda. Since seizing the mainland and ousting Chiang Kaishek’s rival Kuomintang Party in 1949, the centrality of this ideology has only been tested twice. The first was the slow-boil Sino-Soviet split which began in 1956 and culminated in 1972 when China turned its back on its Big Brother in Communist ideology and welcomed Richard Nixon. The second came with the introduction of Deng Xiaoping’s economic reforms which started experimentally in 1978 and were formally adopted in 1982.
The effect of these reforms was monumental. For the first time since 1921, decision-making within the CCP was to be based on a predictable economic logic and not on malleable political ideology. It ushered in a 30-year period of economic growth which according to the World Bank has lifted 800 million people out of poverty. Western observers, myself included, tended to assume that this three decade burst of wealth creation under the post-WWII Pax Americana would be enough to make PRC leadership want to become a permanent “stakeholder” in this global order. In hindsight, we underestimated the strength of the CCP’s ideological ‘muscle memory,’ of its basic political motivation and of China’s civilizational pride (and resentments). What is a seventy-five year Post-WWII order measured against a four thousand year civilizational record in which the Peoples’ Republic of China is, in cultural terms, its latest dynasty. And, as Orville Schell has masterfully made the case in Wealth and Power, not even Deng Xiaoping probably ever saw wealth-creation for China in a Washington-led world order as an end in itself, but rather as a step toward global power that would enable China to challenge that world order in due course. For Xi Jinping, a true ideologue inspired by his father’s revolutionary experience, that time is now.
Secondly, the path that China has been taking to overt confrontation with the West has been revealing itself in planned and increasingly obvious stages ever since 2008. 2008 was the year of the Global Financial Crisis, which China weathered with less turmoil and damage than the advanced economies in the West and Asia. That is the year that CCP leadership started taking stock of what it had gained in capital accumulation and talent acquisition and began thinking about striking out on its own different path. There was still a need to access Western consumer and financial markets and to promote inflow of management expertise along with inbound investment but the critical need was technology. In 2008, China was in no position to compete with the West and Western-aligned countries like Japan, Taiwan and South Korea in advanced technology. For that reason, over the next fifteen years, CCP ambitions were always partially cloaked but increasingly revealed with each Five Year Plan cycle. (See Xi’s Ascension to the CCP Pantheon for a more detailed mapping of that 15-year course). In 2012, the CCP selected Xi Jinping as the horse they would ride on this epochal journey. He would break the mold which Deng Xiaoping had set limiting Chinese leaders to two five-year terms. And he would use his longer leash to bring Hong Kong and Taiwan to heel before stepping down. To usher in the next Five Year cycle of the Politburo in 2017, Xi gave a triumphalist speech telling the world what to expect in the years ahead. Now, fresh from securing an unprecedented third term of formal power last year, Xi is moving to make those stated intentions a reality. The pandemic and Putin’s invasion of Ukraine and Biden’s CHIPS Act were not part of the plan. But Xi and the CCP are ‘unswerving’ in pushing forward with this plan. It has been fifteen years in the making and, for much of it, the U.S. and its allies have been distracted in the Middle East and Ukraine. With its population now in decline, Xi knows the window is closing for him to reshape the global order to his and the CCP’s liking.
With ‘ideology in command’ and riding fifteen years of planning momentum, China’s direction under Xi is now clear for all to see. Xi’s strategic accommodation with junior partner (and client-state energy supplier) Russia last February was simply another way-station on its path. The path to open confrontation with the leaders of the post-WWII order, and the scramble for influence with less tightly aligned global players like Brazil, Hungary, Turkey, South Africa, India and Indonesia, is afoot.
Autocracy vs Democracy. Game on.
As Bob Marley said, “If you know your history, then you would know where you’re coming from.”
Wednesday’s post — My Proprietary Chipset — included hyperlinks to specific publications and websites from the 2000s. Some of these are more easily accessed than others. For instance, the link to my testimony before the U.S. China Economic and Security Review Commission in the 109th Session of Congress (2005) takes you directly to that testimony. However, the links to my testimony at the 108th (2003) and 107th (2001) sessions takes you to the full text of the Commission’s work covering the full session and it takes some perseverance to find one’s way to my testimony. In the spirit of presenting my work on these issues from the 2000s in one, easily accessed location, I will add here to the blog a few archive posts to fill in behind Wednesday’s My Proprietary Chipset post providing readier access to those harder-to-navigate publications.
2003 Testimony, 108th Session of Congress
SUMMARY:
In the information technology sector, Taiwan semiconductor and electronics manufacturing firms are major global actors, and their
expansion into China continues, but without noticeable erosion of Taiwan equity control. In testimony before the Commission, Merritt Cooke, former senior commercial officer at the American Institute in Taiwan, attributed this to the relative stability of ‘‘highly differentiated, high-value supply chains’’ as opposed to the ‘‘instability of far simpler manufacturer-retailer networks characteristic of commodity products.’’ Cooke believes this distinction helps explain the historical pattern of Taiwan investment into the mainland. While many light industry sectors that Taiwan moved to the mainland in the 1980s and 1990s ‘‘have been swallowed up by mainland competitors,’’ highly differentiated, relatively high-value consumer products such as brand-name athletic shoes and high-performance bicycles have remained largely in Taiwan equity hands. ‘‘If these product sectors, with their relatively lower levels of technology and slower product cycles, could stay in Taiwan control for decades, there is every reason to believe that the various IT [information technology] hardware sectors will stay even more firmly in Taiwan’s grip in years ahead,’’ Cooke said. Despite the large and growing Taiwan business presence in the mainland and burgeoning indirect cross-Strait trade and investment, there is a sense in the Taipei business community that Taiwan itself—as a venue for investment, manufacturing, logistics, or finance—is in danger of becoming marginalized within Asia. Kaohsiung’s container port—once the fourth busiest in the world— now ranks sixth, with the Chinese ports of Shenzhen and Shanghai jumping ahead. The American Chamber of Commerce in Taiwan reports that a number of U.S. corporations’ regional headquarters in Taiwan have been eliminated or downgraded to local offices.
2001 Testimony, 107th Session of Congress
TESTIMONY:
STATEMENT OF MERRITT TODD COOKE, JR., CHIEF, COMMERCIAL SECTION, AMERICAN INSTITUTE IN TAIWAN
Mr. COOKE. Mr. Chairman, thank you. I hope the Commission will feel free to overlook the confusion that my parents introduced
with my legal name and call me by the name that I most often respond to, Terry. [Laughter.]
I will also request that, with the consent of the Commission, some paragraphs that I delete in the interest of brevity do be entered into the record. I will spare the Commission a recap of Taiwan’s ten-year structural transformation in the 1990s.
It is an honor to be asked to testify in front of this distinguished panel of Commissioners. In the following brief statement, I will bring to bear my perspective as current Chief of the Commercial Section at the American Institute in Taiwan to address the issues
identified by the Commission in its July 24 invitation letter, specifically the growing interdependence of the U.S., Taiwan, and Chinese high-tech economies.
The strategic interdependence of the U.S. and Taiwan economies has grown steadily throughout the 1990s as Taiwan’s economy has shifted from its traditional structure as a labor-intensive export-oriented economy towards a more service-oriented investment and technology-intensive economy. While Taiwan’s industrial sector has shrunk in relative terms over this period, capital and technology-intensive industries have expanded dramatically. These industries accounted for approximately 75 percent of total manufacturing in 2000, compared to 48 percent in 1986.
Taiwan now supplies 60 percent of the world’s motherboards and is the world’s leading supplier of notebook computers, monitors,
mice, keyboards, video cards, sound cards, on/off switches, LAN cards, graphic cards, scanners, and laser disk drives. Through the
strength of its foundry model, Taiwan has emerged as a preeminent semiconductor supplier to the world.
This transition from the production of labor-intensive goods to high-tech goods has to date proceeded relatively smoothly, even
against the background turbulence of the Asian financial crisis in 1997–98 and a major earthquake occurring on September 21, 1999.
Against the broad backdrop of its structural transformation, two major dynamics have emerged: First, the growing regional partnership and global interdependence of the U.S. and Taiwan high-tech industries, and secondly, the accelerating shift of the lower end of Taiwan’s high-tech production offshore, particularly to mainland China.
One clear indicator of the degree of evolving interdependence with the U.S. was the fact that following the 9/21 earthquake in
Taiwan, the tech markets in New York dropped more in percentage terms than in Taipei.
The scale of this interdependence is likewise highlighted in other ways. For example, four of the top U.S. suppliers of PCs alone procured $20 billion of components from Taiwan to support their 1999 global sales. Additionally, Taiwan will soon have more state-of-the-art 300-millimeter chip wafer fabs in operation than the U.S., Germany, Japan, or any other world market.
The accelerating shift of high-tech production from Taiwan to mainland China has been equally pronounced over this period. The
Taiwan government’s Office of Budget, Accounting, and Statistics reported in February that government approved Taiwan investments in China for 2000 more than doubled from the 1999 levels.
The Taipei Computer Association reported in the same month that 30 percent of Taiwan’s 411 high-technology companies had established major investments in mainland China and that fully 90 percent of those 411 companies planned to be invested in China by the end of 2001.
Lastly, China edged out Taiwan in 2000 for the first time for the number three slot in world IT production value. China came in behind the U.S. and Japan, with $25.5 billion of production value, against Taiwan in fourth place with $23 billion. The key point to
note, however, is that Taiwanese companies generated fully 70 percent of that $25.5 production value in mainland China.
The impending accessions of China and Taiwan to the WTO will likely further accelerate this process of growing cross-straits commercial interdependence in high-tech, with consequent implications for the already highly interdependent U.S. and Taiwan high-tech economies. Although Taiwan’s relatively late liberalization and privatization of its fixed-line monopoly regime will limit somewhat the impact of this development in the telecom sector, the likely effect will be continued fast accelerating cross-straits interdependence in sectors such as PC and notebook assembly, motherboard and other PC component manufacture, production of chip sets for mobile telephony and other applications, scanner and computer peripheral production, and lower end IC production.
A number of important trends will reinforce WTO financial linkages and commercial disciplines and tend to produce this outcome.
First, the network of business relationships which Taiwan firms have established in China represents largely an extension into
China of preexisting product and service supply chain relationships originally established in Taiwan. This greater Taiwan phenomenon in China, localized in growth centers such as Donguan in Guangdong, Xianen in Fujian, and increasingly in the greater Shanghai area, has now reached a critical mass sufficient for greater efficiency in the global supply chain.
Second, the commoditization of IT production worldwide is increasingly pressuring production costs, forcing manufacturers to
distribute a growing number of lower end steps in their production processes to the world’s lowest-cost production centers. Under more than a decade of the KMT or Guangdong’s ‘‘Go South’’ policy, Taiwan manufacturers have quite fully exploited the advantages of relatively low-cost production centers in the Philippines, Thailand, and elsewhere in Southeast Asia, the one exception to that probably being an expected spurt of Taiwan investment in Vietnam following the ratification and implementation of the U.S.-Vietnam bilateral trade agreement.
At the same time, the KMTs, and now the new administration, the DPP’s ‘‘go slow’’ policy vis-a-vis investment in the mainland has tended to limit the degree to which Taiwan firms could take advantage of the even lower costs of production in China. However, since cost pressure started mounting sharply in March 2000, Taiwan high-tech firms have found themselves no longer able to maintain global competitiveness without relocating a greater share of their production to China, the lowest cost major production center in the Asian production platform.
A third trend really represents a number of technology trends that underlie an emerging division of labor in high-tech production
between Taiwan and the PRC. Without trying to go into any of these, I would just note the increasing specialization of national
economies in the globalized IT industry segments. For instance, fully half of Finland’s GDP is dedicated to wireless telephony.
Secondly, the migration of value away from hardware assembly and towards embedded software technologies in scanners, in peripherals, in Internet appliances, and so on.
And a third technology trend being the steep rise in investment costs and shorter product cycles in the IC semiconductor sector.
A fourth and final trend, the Taiwan and China markets are
largely complementary, creating unique opportunities for commercial cooperation between these political rivals. For instance, Taiwan firms have generally failed to establish global brand and to capture the higher valuations that accrue to brand-name products. However, the large size of the China market, the skill and cultural familiarity of Taiwan business managers, and the high regard which China’s consumers have for Taiwan’s products are now giving Taiwan firms a chance to establish brand names on a large-scale regional basis as opposed to global basis.
Each one of these trends holds important implications for U.S. interests. The establishment of Taiwan regional brands might, for
instance, tend to weaken the existing cooperative bonds between U.S. and Taiwan alliance partners and foster more direct competition in the region. Conversely, the combination of U.S. innovation, Taiwan regional management skill, and the largely untapped potential of the developing China market is already creating a set of
opportunities for enhanced commercial cooperation among traditional U.S. and Taiwan partners.
The rapid proliferation of commercial ties between Taiwan and China is of major importance to U.S. interests. There are the narrower set of commercial implications for the U.S. competitive posture in regional and global markets, to which I have just alluded. Also, as Rupert Hammond Chambers, President of the U.S. ROC Business Council suggested in his June 14 testimony to this Commission, there are equally important implications which fast-growing commercial interdependence between Taiwan and China have for traditional U.S. military and security interests in the Straits of Taiwan.
I commend the Commission for focusing attention on the extent to which commercial dynamics in the computer electronics and telecommunications sectors are affecting these interests. It is my personal observation that these market and technology-driven dynamics are not always fully captured in the dialogue regarding our key
interests in this potential flash point region of the world. Thank you very much.
[The statement follows:]
PREPARED STATEMENT OF MERRITT TODD COOKE, JR.
It is an honor to be asked to testify in front of this distinguished panel of Commissioners. It is also, personally, a distinct pleasure to see again a number of former Departmental and Embassy colleagues as well as others with whom I have had the
past pleasure of working on various overseas and stateside activities. In the following brief statement, I will bring to bear my perspective as current Chief of the Commercial Section at the American Institute in Taiwan to address the issues identified by the Commission in its July 24th invitation letter.
The strategic interdependence of the U.S. and Taiwan economies has grown steadily throughout the 1990s as Taiwan’s economy has shifted from its traditional structure as a labor-intensive, export-oriented economy towards a more services-oriented,
investment- and technology-intensive economy. While Taiwan’s industrial sector has
shrunk in relative terms over this period, capital- and technology-intensive industries have expanded dramatically. These industries accounted for approximately 75 percent of total manufacturing in 2000, compared to 48 percent in 1986. During this
structural transition, labor-intensive industries, such as toys, footwear, umbrellas,
and garments, relocated offshore. Their place was taken by petrochemicals, metal products, machinery, and ‘‘most dramatically during the 1990s’’ by technology-oriented industries, such as electronic, electric, and information products.
By 2000, more than half of the top ten manufacturing firms in Taiwan were electronic and computer manufacturing firms, compared with only two in 1993. More than half of the top ten manufactured products were in the areas of integrated circuits (ICs), personal computers, and computer peripherals, whereas in 1993, only ICs had been among the top ten. Taiwan now supplies 60% of the world’s motherboards and is the world’s leading supplier of notebook computers, monitors, mice, keyboards, video cards, sound cards, on-off switches, LAN cards, graphics cards, scanners, and laser disk drives. Through the strength of its foundry model, Taiwan has emerged as a preeminent semiconductor supplier to the world. This transition from the production of labor-intensive goods to high-tech goods has, to date, proceeded relatively smoothly, even against the background turbulence of the Asian Financial Crisis in 1997–98 and a major earthquake occurring on September 21, 1999.
Against the broad backdrop of this structural transformation, two major dynamics have emerged: (1) the growing regional partnership and global interdependence of the U.S. and Taiwan high-tech industries and (2) the accelerating shift of the lowerend of Taiwan’s high-tech production offshore, particularly to mainland China. One clear indicator of the degree of evolving interdependence with the U.S. was the fact that, following the 9–21(–99) earthquake in Taiwan, the tech markets in New York
dropped more in percentage terms than in Taipei. The scale of this interdependence is likewise highlighted in other ways. For example, four of the top U.S. suppliers of PCs alone procured $20 billion (USD) of components from Taiwan to support their
1999 global sales. Additionally, Taiwan will soon have more state-of-the-art 300mm chip-wafer fabs in operation than the U.S., Germany, Japan or any other world market.
The accelerating shift of high-tech production from Taiwan to mainland China has been equally pronounced over this period. The Taiwan Government’s Office of Budget, Accounting, and Statistics reported in February that government-approved Taiwan investments in China for 2000 more than doubled from the 1999 levels. The Taipei Computer Association reported in the same month that 30 percent of Taiwan’s 411 high technology companies had established major investments in mainland China and that fully 90 percent of those 411 companies planned to be invested in China by the end of 2001. Lastly, China edged out Taiwan in 2000 for the first time for the number three slot in world IT production value. China came in behindthe U.S. and Japan with $25.5 billion of production value against Taiwan in fourth place with $23 billion. The key point to note, however, is that Taiwanese companies generated fully 70% of that $25.5 production value in Mainland China.
The impending accessions of China and Taiwan to the WTO will likely further accelerate this process of growing cross-straits commercial interdependence in hightech, with consequent implications for the already highly interdependent U.S. and Taiwan high-tech economies. Although Taiwan’s relatively late liberalization and privatization of its fixed-line monopoly regime will limit somewhat the impact of this development in the telecoms sector, the likely effect will be continued fast-accelerating cross-straits interdependence in sectors such as PC and notebook assembly, motherboard and other PC component manufacture, production of chipsets for mobile telephony and other applications, scanner and computer peripheral production, and lower-end IC production. A number of important trends will reinforce WTO financial linkages and commercial disciplines and tend to produce this outcome:
—First, the network of business relationships which Taiwan firms have established in China represents largely an extension into China of pre-existing product and service supply-chain relationships originally established in Taiwan. This ‘‘Greater Taiwan’’ phenomenon in China, localized in growth centers such as Dongguan (Guangdong), Xiamen (Fujian) and, increasingly, the Greater
Shanghai area, has now reached a critical mass sufficient for greater efficiency in the global supply chain;
—Second, the commoditization of IT production worldwide is increasingly pressuring production costs, forcing manufacturers to distribute a growing number of lower-end steps in their production processes to the world’s lowest-cost production centers. Under more than a decade of the KMT’s ‘‘Go South’’ policy, Taiwan manufacturers have quite fully exploited the advantages of relatively low-cost production centers in the Philippines, Thailand and elsewhere in Southeast Asia. (The exception to this being an expected spurt of Taiwan investment in Vietnam following the ratification and implementation of the U.S.-Vietnam Bilateral Trade Agreement). At the same time, the KMT’s (and now the DPP’s) ‘‘Go Slow’’ policy vis-a`-vis investment in the mainland tended to limit the degree to which Taiwan firms could take advantage of the even lower costs-of-production in China. However, since cost pressures started mounting sharply in March 2000, Taiwan high-tech firms have found themselves no longer able to maintain
global competitiveness without relocating a greater share of their production to China, the lowest-cost major production center in the Asian production platform;
—Third, a number of technology trends underlie an emerging division of labor in high-tech production between Taiwan and the PRC. Among these, are (a) the increasing specialization of national economies in globalized IT industry-segments (e.g., fully half of Finland’s GDP is now generated from wireless related technologies); (b) the migration of value away from hardware assembly and towards imbedded software (e.g., scanners and other peripherals, Internet Appliances, etc.); and (c) the steep rise in investment cost and shorter product cycles in the IC/semiconductor sector; and
—Fourth, the Taiwan and China markets are largely complementary, creating
unique opportunities for commercial cooperation between these political rivals. For instance, Taiwan firms have generally failed to establish global brands and to capture the higher market valuations that accrue to brand-name products. However, the large size of the China market, the skill and cultural familiarity of Taiwan business managers with that market, and the high regard which Chinese consumers have for Taiwan products, are now giving Taiwan firms the chance to establish brand-names on a large-scale regional basis. Further, Taiwan’s proven skills in development and service-oriented management of global IT technologies, coupled with the breadth and potential of China’s basic research capabilities, create distinct opportunities for partnership in regional innovation.
Each one of these trends holds important implications for U.S. interests. The establishment of Taiwan regional brands might, for instance, tend to weaken the existing cooperative bonds between U.S. and Taiwan alliance partners and foster more direct competition in the region. Conversely, the combination of U.S. innovation, Taiwan regional management skill, and the largely-untapped potential of the developing China market is already creating a set of opportunities for enhanced commercial cooperation among traditional U.S. and Taiwan partners.
The rapid proliferation of commercial ties between Taiwan and China is of major importance to U.S. interests. There are the narrower set of commercial implications for the U.S. competitive posture in regional and global markets, to which I have just
alluded. Also, as Rupert Hammond-Chambers, President of the U.S.-R.O.C. (Taiwan) Business Council, suggested in his June 14 testimony to this Commission, there are equally important implications which fast-growing commercial interdependence between Taiwan and China have for traditional U.S. military and security interests in the Straits of Taiwan. I commend the Commission for focusing attention on the extent to which commercial dynamics in the computer electronics and telecommunications sectors are affecting these interests. It is my personal observation that these market- and technology-driven dynamics are not always fully captured in the dialogue regarding our key interests in this potential flashpoint region of the world.
Over 10 years, Xi Jinping has methodically amassed power. Beginning with an unprecedented consolidation of military support, Xi then launched his ‘Tigers and Flies’ campaign, sidelining his political rivals along with officials accused of corruption. Over many years he patiently laid the groundwork to elevate Xi Jinping Thought to match the official stature of Mao Zedong Thought, and edge out Deng Xiaoping Thought, in the CCP’s ideological pantheon. He then overturned international commitments regarding Hong Kong, and brought that free-wheeling and Westernized city to heel with the introduction of a new security law. At the last 19th Party Congress in 2017, Xi tossed aside Deng’s “hide-and-abide” (韜光養晦、有所作為) approach to international relations and gave a triumphalist speech, announcing that China had not only arrived on the world stage but that it deserved central position on that stage. With the outbreak of the Covid-19 epidemic, Xi used sharp-elbow tactics to block scientific investigation into its origins in China and ordered sweeping zero-Covid lockdowns to highlight his government’s ability to take more effective action than was possible for democratic governments in the US and the West. The Winter Olympics were meant to be Xi’s star-turn to demonstrate — more to the Chinese people than to international audiences (many of whom undertook diplomatic boycotts of the Games because of oppression of Uyghurs in Xinjiang and other issues) — that he was a flawless and unrivalled champion. He even went so far as to claim that the authoritarian system he presided over represented a superior form of democracy to Western liberal democracy.
Along this path to unrivalled power in China, Xi first jettisoned the system of collective rule by the Standing Committee of the Politburo which Deng had put in place to guard against recurrence of unbridled rule by any one individual, epitomized by the last years of Mao’s rule. Longer term, Xi’s aim in amassing power has been to discard the limit of a president to two five-year terms, another safeguard Deng put in place and which he himself observed.
The announcement of leadership for the next five-year term will happen at the CCP’s 20th Party Congress in Beijing this autumn. At that meeting, Xi is widely expected to be named for a precedent-shattering third term. This will mark a historic high-point for Xi. His systematic consolidation of power has been designed, in part, to create an air of inevitability about this outcome. While his selection is still overwhelmingly likely, a number of significant fissures have appeared in recent weeks which crack this façade of total control.
ZERO-COVID
While undoubtedly successful in limiting the number of infections, hospitalizations, and deaths in the first two years of the pandemic, Xi’s Zero-Covid policy has created a raft of problems for China more recently, most notably during the highly-transmissible omicron phase. While incidences of infection, hospitalization and death have been dropping worldwide, they have been surging in China, with the number of confirmed cases more than quadrupling from mid-February to mid-March of this year. Elderly citizens are especially at risk due to their low rates of vaccination and hospitals have already become overwhelmed, due in part to the low number of hospital beds on a per capita basis in China. While it can be argued that the Zero-Covid policy ‘bought time’ for the development of vaccines, Xi’s championing of the locally developed Sinovac vaccine and his refusal to permit the use of more clinically-effective vaccines developed in the West, has blunted that advantage somewhat since the Sinovac vaccine is notably less effective against the omicron variant. The Zero-Covid policy has also meant that there is practically zero immunity in the Chinese population as a result of exposure to the virus as it becomes endemic worldwide. If SARS-COV-2 can be compared to a flame, China’s population is like a vast field of tinder. Finally, the economic and social costs have become glaringly apparent with the lockdown of an entire province, Jilin, in the northeast and the of Shenzhen and Dongguan – China’s two largest manufacturing hubs for information and communications technology (ICT) — in the south.
While Xi will, with considerable justification, continue to claim credit for his “triumph” over the coronavirus, China is by no means out of the pandemic woods and the setbacks of the last month make his strident claims ring more hollow, both internationally and domestically.
REAL ESTATE
In September last year, Chinese real-estate development firms began to feel the severe discomfort of a massive hang-over following years of real-estate speculation partying. The problems were most evident in real-estate giant Evergrande but soon spread to a host of other significant players in the field such as Fantasia, Modern Land, China Property Group and Xinyuan Real Estate Group. At the institutional level, the problems hitting the $5 trillion sector were the result of a unique PRC nexus of aggressive real estate development, lax banking, and local government incentive structures. More simply, the problems resulted from “unrestrained borrowing, expansion as an end-in-itself, and corruption.”
While the PRC Government claimed this week that the real-estate free-fall has been “stabilized,” pricing data from real estate developers across the country continue to show sharp deterioration. Also this week, Evergrande announced a further delay in sharing its plan for restructuring and for paying back bonds and other financial obligations. The government has strong reason to put on a brave face while throwing up a curtain of opacity around the problem. Property-related industries account for more than 30% of China’s economic output. Continued problems in the sector could drag China’s growth below the optimistic, post-pandemic official target of 5% growth, a minimum level which must be maintained in the years ahead for China to escape the ‘middle income trap.’ More immediately, it risks alienating an important swath of the urban public, 80% of whose household wealth is tied up in real estate and who see their property values plummeting. (A particularly aggrieved segment of this population are buyers who have paid up front to the developers, as is common in China, for a property not yet built and for which construction has halted indefinitely while values continue to slide).
While Xi has voiced loud promises to not let the bottom fall out of this sector and to support homeowners currently caught in the fallout, there is little evidence on the ground of these promises translating into reality. Meanwhile, the situation risks alienating the public and sowing dissent among officials.
‘COMMON PROSPERITY’
As measured by the Gini coefficient, China ranked fourth in the world in 2022 for greatest wealth disparity and inequality (after South Africa, Namibia and Sri Lanka). While Deng Xiaoping had announced famously in the late 1980s that “to get rich is glorious” and to “let some get rich first,” the extreme degree of inequality persisting in China four decades later is a source of growing social and political concern. The heady days of 10% growth have long ago disappeared and Chinese who thought they would be boarding on a later rail-car in the national train of prosperity now worry that the train may have departed, stranding them on the platform.
To counter this source of social unease, Xi unveiled with great fanfare in 2021 a policy of ‘Common Prosperity.” Writ large, this policy was meant to cement Xi’s place — side-by-side with Mao and with Deng slightly in the background – in China’s pantheon of modern heroes. In this telling, Mao was the one who roused China to throw off its ‘Sick Man of Asia’ bondage to foreign imperialists and to stand up. Deng contrived a transitional stage of capitalist-style wealth-creation for enough Chinese that China could attain wealth and power (富权). It was left to Xi to complete this project of national rejuvenation, by reinstituting a Marxist “Common Prosperity’ for all Chinese and returning China to the center of the world stage.
Without getting into either the ideological weeds (such as Xi’s ‘Dual Circulation’ strategy) or deep into the tangle of economic measures (e.g., restrictions on overseas listings by Chinese companies, user-data and other controls put on Chinese Big Tech firms, clampdown on student test-prep and video game commercial sectors, etc) which Xi embraced in 2021 to advance his Common Prosperity agenda, the general effect was felt quickly and keenly in the form of abrupt economic slowdown. In the first quarter of this year, the Common Prosperity program has been ‘walked back’ by numerous party officials who have emphasized that it represents a historic project more than an immediate project. Premier Li Keqiang, in his lengthy speech to 3,000 deputies at the opening of the National People’s Congress earlier in the month, mentioned Common Prosperity only one time. For educated Chinese — who have been skillfully parsing official pronouncements closely ever since the Cultural Revolution for clues about where the country is headed — this lack of visibility and endorsement for Xi Jinping’s signature program represents a remarkable degree of push-back for Xi by top-level leaders.
UKRAINE
Chris Buckley’s report in last Friday’s New York Times traces the contours of what is potentially the most damaging crack to appear in Xi’s carefully-crafted, monolithic façade of power and control. The article details the war of words that has erupted on the Chinese internet following the warning delivered by a respected scholar and politically-connected insider, Hu Wei, to the effect that China “risked becoming a pariah if it didn’t denounce Russia’s invasion of Ukraine.” As was covered in last week’s post and as continues to play out this week, Chinese officials have contorted themselves by claiming to be neutral and wanting peace while following Putin’s lead in not calling the ‘special military operation’ either a war or an invasion, in not objecting to Russia’s violation of Ukraine’s sovereignty and territorial integrity, and in amplifying Kremlin disinformation about U.S. bio-military labs in Ukraine.
As argued last week, this has the potential to grow into a strategic blunder for China with significant geopolitical fall-out. It may affect not only Xi’s ambitions to retake Taiwan – the last territorial piece in his China Rejuvenation plan – but to bear long term costs for China as a rising power in the Indo-Pacific region and for its standing in the world at large.
None of this is to suggest that Xi will not get his third term as President this fall. It is only to say that the carefully-cultivated blooms of infallibility and inevitability are now off the XJP rose.
Xi has been in power for less than half of Putin’s tenure (18 years as President and 4 years as the power behind the throne for Medvedev) but there are doubtless people in Zhongnanhai wondering to themselves, post-Putin’s invasion, whether Deng didn’t get it right with his moves to limit the untrammeled exercise of power by an individual leader.
Volume 2, Number 4 in Global TECHtonics: U.S./China Fault-line series
The weekend’s big development in the technology arena is Beijing’s eleventh-hour move to alter the timing and trajectory of the sale of TikTok’s U.S. operation.
We touched on the Trump Administration’s August moves against TikTok’s parent Bytedance in the U.S./China De-Coupling: 4 Levels of Risk post two weeks ago. On August 6th, President Trump signed two executive orders which started a 45-day time-clock involving two Chinese companies with hugely popular social media apps – ByteDance (owner of TikTok) and Tencent (owner of WeChat). According to those orders, U.S. citizens and businesses would be barred, once the 45-day period expired, from any transaction involving the company and/or its products. On August 14th, the Trump Administration modified the order as far as it affected TikTok by putting a new order in place, giving TikTok 90-days within which to complete the divestiture of its U.S. operation to an approved U.S. corporate buyer.
The widely-presumed reason for this change being made so shortly after the announcement of the original order is that U.S. potential buyers interested in acquiring the U.S. operations of TikTok had pitched their interest to the White House. It is not surprising that U.S. potential acquirers would be focused on TikTok and not WeChat. The number of TikTok users in the U.S. is estimated at 80 million in comparison with 19 million for WeChat. Its growth rate in global markets is far faster and, critically, its algorithms have nearly ubiquitous applicability whereas WeChat algorithms are more geared to Chinese user behavior and are so less replicable in other world markets.
Two groups of interested buyers have emerged publicly since the August 14th announcement:
- Microsoft/Walmart: As Instagram and other social networks edge into offering shopping features, Microsoft and Walmart are looking to establish themselves at the strategic center of this opportunity with one bold acquisition move. Put simply, Walmart would provide the e-commerce component for TikTok while Microsoft would manage the crucial cloud-computing infrastructure. The deal offers competitive advantages to both firms – Walmart would become better positioned to compete with Amazon and Microsoft would gain experience with an innovative and cutting-edge set of algorithms and data-sets.
- Oracle: According to analysis by the New York Times business reporter Mike Isaac, “Oracle could use TikTok’s data about social interactions to benefit its cloud, data and advertising businesses.” Also, like Microsoft and Walmart, Oracle is interested in the opportunity the deal would afford “to offer customers a hyper-personalized experience in both content and commerce.”
Going into the weekend, the expectation was high that Bytedance’s preferred acquisition partner would become known and that negotiations would shift to a new phase of negotiation with only that chosen partner.
So, what was the development over the weekend which changed the trajectory and pace of this deal? The Chinese government announced late in the day on Friday that any sale of Bytedance’s assets would be subject to a brand-new set of restrictions affecting artificial intelligence exports. As reported in still-developing coverage in the Wall Street Journal, “the new Chinese restrictions highlight the extent to which TikTok, a breakout social-media hit—especially with younger U.S. users—has been thrust into a geopolitical contest between the U.S. and China over the future of global technology.”
I’ll limit my commentary on this development to three main points – a historical observation, a key point having to do with the present-day competition in advanced technologies between the U.S. and China, and my personal handicapping of where this deal is likely to go in the weeks ahead.
Historical Antecedent: The U.S.-Japan Trade War
While observers sometimes invoke the U.S.-Japan Trade War as a template for understanding our current tensions with China, the contrasts between the two are probably more instructive than the similarities. A future post will return to the broad comparison. For our purposes here, I will single out one important point of contrast. The U.S.-Japan Trade war became incandescently hot as a political issue in the lead-up to the 1992 U.S. Presidential election. But while that was happening, commercial developments on the ground were already in motion to begin lowering the heat. The industry sector in which the grass-roots transformation took root and started having great effect was the automotive sector. The seed for that bottom-up transformation was the fact that, post-war, Japan had developed intellectual property in their domestic market that made them more competitive than the U.S. industry in a number of vital areas of automotive manufacturing (e.g., inventory management, quality control, customer-based innovation, etc). Led by Toyota, the Japanese and U.S. industries started reaching an accommodation even before politicians in the U.S. turned up the volume on their anti-Japan megaphones. Japan would license out its intellectual property and bring its production closer to its customers in the U.S. by building factories and supplier networks in the U.S. In return, American companies would gain access to know-how in areas where its competitiveness was lagging and also gained greater access to the restricted Japanese market. At a political level, investments in new state-of-the-art production facilities in the non-unionized south brought jobs into key congressional districts. Of equal importance, auto workers, their families and their communities started having the experience of working alongside Japanese managers on U.S. soil. In the process, real-world people-to-people experiences built on collaboration replaced the one-dimensional caricatures being amplified by politicians and the media.
The Chinese have studied this experience whereby Japan lessened the political tension of the U.S.-Japan Trade War while, simultaneously expanding access to the lucrative U.S. market and affluent U.S. consumers. For various reasons, they have not been as successful in applying the model. We’ll examine the broader set of reasons in a future post but, for present purposes, one salient reason is that China, generally speaking, has not developed the portfolio of intellectual property focused in high-value industries (like, for Japan, automotive and consumer electronics) and highly sought after by U.S. companies. Except, that is, until now as China emerges with competitiveness in advanced technology fields such as artificial intelligence, robotics, and autonomous vehicles.
Looking at Both Sides Now:
The U.S. innovation ecosystem represented by Silicon Valley is, and is likely to remain for the foreseeable future, peerless in many important respects – depth of talent and experience, access to capital, connectivity to leading universities, basic research capability and innovation mindedness. In three respects, however, emerging tech competitors in China enjoy advantages which U.S. firms can’t match. First, China has been for years the biggest and fastest growing market in the world and U.S. companies can’t afford to cede that base of users entirely to their Chinese competition to monopolize. However, the ability of U.S. firms to access those consumers is highly constrained by a whole raft of protections – many non-WTO compliant and others not yet covered by WTO ground-rules — by which the Chinese government limits foreign access to its home market and by which it supports its home-grown champion companies. Second, China may enjoy a tactical advantage through its laser-focus on market applications (as opposed to research and academically-based innovation). Third, AI firms in China definitely enjoy a leg-up in algorithm development because they have direct access to the world’s largest user-base for smart phones and are less constrained by privacy protections for those users. These latter two advantages for Chinese tech firms are persuasively presented by the former President of Google China, Kaifu Lee (a Taiwanese national whose computer science PhD thesis at Carnegie Mellon gave birth to the world’s first speaker-independent, continuous speech recognition system) in his book AI Superpowers: China, Silicon Valley and the New World Order. In Lee’s view, “the United States may have been a first mover in AI but that advantage will not last forever. The AI era will reward the quantity of solid AI engineers over the quality of elite researchers. Strength will come from an army of well-trained engineers and entrepreneurs, and China is training just such an army.”
So, stepping back, there is now for the first time since normalization of U.S.-China relations a strategically-important (emerging) industry where Chinese firms hold important competititve advantages over the U.S. Unlike democratic Japan, this high-stakes competition is associated with a Communist regime with all that that entails for public attitudes in the U.S. And there is little in the of way local ties-that-bind being built quickly and effectively on a people-to-people basis. Nothing that can match the stabilizing experience with Japan investment into the U.S. in the 1990s. Together, these three factors go a long way to illuminating the huge pressures that have been building up under the U.S./China technology faultline on both sides of the U.S. political aisle.
Where’s The TikTok Deal Likely to Go?
Despite the fact that practically nothing is known yet about the details of the PRC government restrictions announced on Friday, two things can be safely said. First, the fact that the PRC government is invoking national security as a basis for governing the commercial activities of its leading artificial intelligence firms is hardly surprising. The competition between the U.S. and China is, for reasons just examined, acute. The U.S. and other countries routinely monitor and manage international commercial activity for their technologically-advanced products and services, especially those that are ‘dual-use’ in both commercial and military applications. The second point is that the timing of the announcement tends to be viewed in the U.S. as so transparently tied to the on-going negotiation involving TikTok that it will be viewed more as a political beanball, than a fair pitch. This despite the fact, as pointed out by an astute comment (see below), that these new regulations had been proposed prior to Trump’s August 6th announcement and were in a public comment process.
The Chinese government action raises the prospect that key algorithms and other vital data – everything that makes TikTok tick — may be stripped out of the sale by its Chinese parent corporation as a new requirement of Chinese law. That result would fundamentally change the value proposition for both the Microsoft/Walmart and Oracle bidding teams. It’s like the difference in value between a top-of-the-line computer and that same computer with all its electronics removed. At the very least, the PRC government action will force all parties to slow the pace of their negotiations and delay the deal being sealed until there’s greater clarity about what will ultimately be allowed.
With Friday’s move, it’s likely that the Chinese government will be satisfied with slowing the deal and changing the trajectory of its fall-out for global technology competition. Scuppering the deal entirely would risk dramatically escalating the issue with Trump and his Administration. That would go against China’s temporary strategy of muted response to the Trump Administration’s recent, pre-election flurry of jabs. The idea in Zhongnanhai in the run-up to November 3rd is to give its wolf-warriors and nationalistic netizens enough to appease their appetites but not enough to risk fanning Washington-Beijing flames out of control.
So, with the clock ticking down to 64 days before the U.S. election and with 78 days before the Trump Executive Order 90-day deadline expires on November 12th, the endgame of this global chess match is now ruled by the time-clock.
TikTok, TikTok, TikTok …
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.
There are a lot of things people don’t realize about Taiwan. I’ll mention three. First, it is the United States’ 11th largest trading partner worldwide, despite the island’s small population of just under 24 million. Second (and surprisingly given that China maintains iron-fisted control over its strategic industries), Taiwan “owned’ (both figuratively and in the sense of being the equity owner) most of the factories producing semiconductors, advanced information technologies and even some of the key communications equipment in China throughout the 1990s and, diminishingly but still decidedly, into the new millenium. (These Information and Communications Technologies make up the so-called ICT industry. Just think of Apple, Microsoft, Hewlett-Packard, AT&T and Verizon and all of their various competitors as comprising one vast and strategically vital sector). Third and still somewhat under-appreciated in the U.S. is the story of the growth of Taiwan’s vibrant democracy, which started taking root with reforms under Generalissimo Chiang Kai-shek’s son, Chiang Ching-kuo, in the mid-1980s and flowered under President Lee Teng-hui who was in power from 1988-2000 (and who passed away last month, on July 30th). The significance of this last point is that Taiwan’s experience has repudiated, with underlining, bolding and an exclamation mark, the self-serving claim voiced by generations of authoritarian-leaning leaders in Greater China and Asia – namely, that the Chinese (ethnic Han) people, heirs to a long tradition of imperial rule, are simply not suited to Western-style democracy.
Today’s post is a scene-setter for the “Global TECHtonics: U.S./China Faultline” series of technology-related posts which will be forthcoming on a weekly basis, usually on Mondays, starting next week. This scene-setter will draw mostly on my personal experience. It will also tug mostly on the economic and technological threads mentioned above and will only touch lightly on the political one. (In two weeks’ time, we’ll pick up the political thread more directly and weave it more visibly as the background to an examination of the current, very acute semiconductor supply chain tensions involving Taiwan, China and the United States in the run-up to the U.S. elections as well as what China’s recent imposition of a new security law in Hong Kong portends for Taiwan.)
Personally, I’ve had the good fortune to live in Taiwan for three separate periods in my life: for six months in early 1977 (trying to consolidate, in an entirely ad hoc and ultimately ineffective way, the Mandarin language I had studied for three years in college), for a full year in 1979-80 (finally succeeding at consolidating my Mandarin through the rigorous Stanford Inter-University Program for Chinese Language Studies at Taiwan National University in Taipei, the springboard I did succeed in identifying in 1977 as a way of achieving, on a deferred basis, my goal of nailing down the language ) and finally for three years 1999-2002 when I served as head of the Commercial Section of the American Institute in Taiwan (AIT operates as the de facto U.S. Embassy in Taiwan. Along with the AIT Washington Headquarters – the de facto counterpart to the U.S. Department of State for all things Taiwan – AIT was created in 1979 as part of the Taiwan Relations Act, whereby the U.S Congress spelled out the terms of continued U.S. involvement with Taiwan (the Republic of China) following President Carter’s decision earlier that year to de-recognize the Republic of China as “China” and to our recognize the Peoples Republic of China as “China” instead.
It was my three years of experience as the Senior Commercial Officer at A.I.T. which gave me a front-row seat – and sometimes got me inside the ring – of the complicated, three-way tag-team match involving the U.S., Taiwan and China in the global ICT arena. I’m going to give a few glimpses of what that entailed. Not that any of this reveals anything particular about me (except for revealing my questionable golfing skills). The experiences were all simply part and parcel of the position I was lucky enough to fill. My point in sharing these experiences is to set-up to the main point which this post is aiming for – a glimpse into how timing matters, particularly in Washington.
So, what did that three years at AIT make possible for me? For starters, I was able to forge close relationships with the trail-blazers of Taiwan’s global IT preeminence – Morris Chang, the founder and then Chairman of Taiwan Semiconductor Manufacturing Corporation (TSMC); Stan Shih, the founder and then Chairman of Acer Computer and later of the Acer Group (Stan and I were equally erratic on the golf course which made for a strong bonding experience); and, to a lesser extent with the more aloof Terry Gou, founder and Chairman of Hon Hai Precision Industries (better known by its tradename Foxconn, the electronics contract manufacturer which assembles iPhones throughout China). This level of diplomatic access is somewhat rarefied even for Ambassadors around the world but in Taiwan – like in Berlin, the post I served in prior to Taiwan – the U.S. was viewed as the guarantor of the country’s existence (for Taiwan as a current and on-going reality and for Berlin as a Cold War period reality) and important doors, even in the Presidential Office Building, were open for me.
Along the way, I was called on by American companies to help prepare for Y2K and then to clear up the debris of their local operations following the ‘Tech Wreck,’ the fallout of the sudden collapse of the dot.com bubble following its a valuation peak in March 2000. Months later, I was involved in the delicate minuet whereby China was welcomed into the World Trade Organization in December 2001, followed by Taiwan’s accession minutes later.
Along the way, I was honored to be the local host in Taiwan when then-Taipei Mayor (and later President of Taiwan) Ma Ying-jeou invited Bill Gates, Carly Fiorina and Michael Dell, along with scores of other U.S. IT industry leaders, to the World Congress on Information Technology (WCIT) in June 2000. And, again in 2006, I was asked to be the “WCIT Ambassador” responsible for organizing and bringing to Austin, TX for WCIT XV the official delegation from Taiwan, the second largest international delegation among the more than 2,000 official delegates at that event.
So, as China’s economy continued to grow by double-digits over these years and as China began to close the technology gap between Taiwan-owned ICT manufacturers operating in China and its own home-boosted technology companies, the stakes started rising for the developed economies and particularly for the U.S. The crux of the high-stakes gambit involved the global supply-chains linking U.S. brands and Taiwan OEMs (Original Equipment Manufacturers) producing the hardware for top U.S. brand-name companies, such as Foxconn’s manufacturing of Apple iPhones, previously mentioned here, or TSMC’s backstopping of production and supply of Intel’s chips. The questions in the early 2000s were many: did relocation of so many Taiwan-owned production facilities to the mainland, where labor costs were cheaper, pose risk to the integrity and sustainability of these vital supply chains? Would the increasing economic integration taking place between Taiwan and China tend to stabilize the political situation in East Asia or would it add a new dimension of instability? In the simplest formulation, could – and would — economics trump politics? Could global supply chains function as the cords to tie together the Asian region – historically fragmented and politically divided – into a more integrated polity more closely resembling stable Europe or could they get ripped out on the whim of a political leader?
With these questions in the headlines – at least in the business sections – of major newspapers and business periodicals, I was invited on three occasions to give expert testimony about these global ICT supply chain issues to a Congressional Commission, then called the China Economic Security Review Commission, during the 107th ,108th, and 109th Sessions of the U.S. Congress.
On a parallel track over this same period, I was able to get peer-reviewed articles giving my answers to these questions in several academic journals and books. In 2006, my article The Politics of Greater China’s Integration into the Global Info Tech Supply Chain was published in The Journal of Contemporary China (Vol. 13, No. 40) and in 2007 my paper Taiwan’s FTA Prospects from the Global IT Supply Chain Perspective was published in the book Economic Integration, Democratization and National Security in East Asia, edited by Peter C.Y. Chow (Edward Elgar Publishing).
If you’re reading this sentence, it means you’ve stayed patiently with me through a lengthy set-up for an ending tag-line which holds irony and hopefully some insight into how things work (sic) in Washington and what pot is close to boiling over at the moment on the world’s front burner. I’ll be able to wrap this up now. Just keep in mind the title of that last article – “Taiwan’s FTA Prospects …” which refers to the Taiwan’s prospects for finalizing a Free Trade Agreement (FTA) with the U.S. (The knot identified in that article was that a U.S.-Taiwan FTA would shore up for U.S. firms the strength and resilience of supply chains to the most advanced ICT products from Taiwan’s top tech firms but come at the risk of provoking a rageful reaction from China for throwing shade on its “One China” shibboleth.)
So what’s the finale to this set piece? In 2005, Ambassador Jim Lilley took it upon himself to introduce me to the American Enterprise Institute for a possible appointment as a fellow or scholar there. AEI trends a little to the right of my own political perspective but Jim Lilley was already established there as a Senior Fellow and, having gone through Tiananmen with him at the helm of the U.S. Mission, I had utmost respect for him and was flattered by his effort to get me on board. Also, my boarding school classmate, Nick Eberstadt, was well-established there as a demographic diviner of the harsh realities underlying North Korea’s inscrutable surface as was Arthur Waldron, another China expert I knew well from UPenn. Jim arranged for me to have a series of conversations with various experts during the course of the day and, in each conversation, we grappled with the various questions outlined above. At the end of the day, I was invited into the President’s office and was informed by senior management that, although they found the day-long discussion intellectually invigorating, they didn’t see my expertise as particularly relevant to government policy or to AEI’s mission. The essence of the message was that the free market would take care of all these questions and that government policymakers didn’t need to, and actually shouldn’t try, to think about them too much.
So that was 2005. Now in 2020, the jury is in and those questions are not only recognized as highly relevant to policy makers, they are at the incandescent center of U.S.-China relations. The global supply chain question is now at the beating heart of the Trump Administration’s moves to “decouple” the U.S. and Chinese technology universes. Just Tuesday, Apple was on the line with the White House along with a dozen other top U.S multinational companies, explaining the massive hit they project their iPhone sales in China will take if the President’s banning of WeChat takes effect.
Another example: Throughout the year, Taiwan Semiconductor Manufacturing Corporation (TSMC) has found itself ever-closer to a “impossible choice,” one forcing it to abandon its long-established strategy of serving both the U.S. (including Intel) and PRC (including Huawei) markets and instead to choose one at the expense of the other. Some military strategists fret that Xi Jinping, after having brought Hong Kong to heel with imposition of a new security law, will be tempted to take advantage of the pandemic and make its next move in the near-term on Taiwan. The rationale? Fulfillment of a “Chinese Dream” ambition for reunifying an imagined China from the past, of course, but for much more practical aims as well. Ninety-miles across the Strait of Taiwan, in the Hsinchu Science-based Technology Park (and other locations nearby) lies perhaps the world’s greatest single concentration of advanced microelectronic engineering talent and production facilities. This prowess has eluded China’s attempts, over decades, to home-grow. A quick power grab by China — while the world is distracted with COVID and the U.S. is internally riven by partisanship – may be highly unlikely but it is not at all inconceivable. We need to be anticipating, and guarding against, worst-case scenarios if we hope to effectively forestall them.
For me, the most satisfying single example of how my set of questions and provisional answers from fifteen years ago is finally getting serious traction in DC happened on Wednesday. Earlier in the week, President Tsai Ing-wen had hosted Health & Human Services Secretary Alex Azar on an official, multi-day visit to Taiwan for discussions about Taiwan’s exemplary response to the COVID-19 pandemic and the need for Taiwan to be allowed full participation, over Beijing’s objections, in the World Health Organization. The visit by Azar was the highest-level visit to Taiwan by a U.S. official, and the only Cabinet-level visit, since Taiwan’s de-recognition in 1979. Immediately after the “wheels-up” departure of Secretary Azar, President Tsai held a news conference in which she set out a single priority for U.S.-Taiwan relations in the upcoming year: to begin negotiations with the U.S. Government for a U.S.-Taiwan Free Trade Agreement (FTA) to strengthen trade flows and to safeguard supply chains.
Sweet.
As the U.S. and China continue to face off daily over technology and other issues, I have been listening, as my dog Max and I walk each day, to the brilliant History of Rome podcast series by Mike Duncan (2007-12). One thing is clear from the endless wars which Rome undertook over the course of a millennium against the Latins, the Etruscans, the Samnians and the Carthaginians during the Republic; against each other during the Civil Wars; and against the Greeks, the Syrians, the Parthians and others during the early Empire (which is as far as I’ve gotten so far) – wars were started as often as a result of misreading – or cynically exploiting– an opponents’ real intentions as they were from any meeting of minds over the actual need for conflict. (Mind you – we’re talking here about the miscalculations that get conflicts started, not the logic which takes over once military actions have been initiated).
With that in mind, I am reminded of a March 2019 article by Katherine Epstein, a member of the Princeton Institute for Advanced Study. This article gives a clear overview of the attitudinal and behavioral parallels marking America’s 18th c. rise in a British-led world order and China’s emergence in the U.S.-led post-WWII global system. A common structural dynamic is at play in both instances.
To Understand China, Look to America’s History
In challenging Britain’s hegemony a century ago, U.S. tactics look similar to Beijing’s today.
By Katherine C. Epstein
March 19, 2019 7:15 p.m. ET
Wall Street Journal
There’s been a good deal of hand-wringing in the U.S. over efforts by the Chinese telecommunications giant Huawei to replace U.S. suppliers of advanced equipment and wire the world with its 5G network. Most analysis of China’s strategy turns on the conviction that the Chinese are trying to challenge U.S. commercial and geopolitical hegemony—they steal U.S. technology and then sell their plagiarized equipment at a lower price. Worse, they seek to build an alternative, China-led global telecom infrastructure, positioning Beijing to spy on the users and capture yet more U.S. commerce.
As a historian, I’m struck by the incompleteness of this analysis. Two crucial pieces are missing.
The first is any sense that the threat posed by Chinese control of a global telecom infrastructure might not be limited to espionage or (that other favorite metaphor) a “cyber Pearl Harbor.” The potential danger may be wider and deeper—and the World War I era shows why.
Before that war, like today, the global economy was highly integrated. This was the first era of globalization. Advanced industrial, urbanized societies depended on international trade, requiring uninterrupted access to the infrastructure that girded the global economic commons. Interruptions to that access had the potential to cause economic derangement, rapidly leading to social and political instability. In other words, control of the infrastructure conferred commercial advantage and it could also be weaponized.
A century ago, Britain acted on this insight. In addition to eavesdropping on enemy and neutral communications, the government acted to regulate the British firms that dominated the services necessary to conduct global trade: the global communications network, the financial-services industry (including commercial credit and marine insurance) and oceanic transportation. Britain used its control over the infrastructure of global trade not simply to spy on its enemy, nor to strike enemy military assets, but to mount a systematic assault on the whole of an enemy’s economy—in 21st-century parlance, a massive denial-of-service attack against enemy society.
Returning to the present, both the espionage model, which refers to targeted state spying, and the cyber-Pearl Harbor analogy, which refers to an essentially conventional military attack, fail to capture the systemic and social qualities of a certain type of attack. In this context, reflect on Russia’s efforts to interfere with U.S. elections. Partisanship aside, Moscow has managed, at relatively low cost, to reduce the confidence that Americans have in each other and the electoral process. It waged a successful psy-op, compromising not material resources but social confidence. Its campaign showed that foreign countries can manipulate information within global networks to sow distrust within American society.
What would a scaled-up version of this attack look like? What if it were carried out over a China-dominated information network?
The second missing piece is awareness that if China is trying to challenge (or escape) U.S. hegemony by stealing American technology and building an alternative global telecommunications infrastructure, this would be analogous to what the U.S. tried to do vis-à-vis Britain, then the global hegemon, and the other great powers in the World War I era. Americans tend to forget how powerful Britain was and how weak the U.S. remained before World War I.
In its drive for world status, America routinely pilfered foreign technology well into the 20th century, and it gained considerable strategic advantage from its theft. The 1912 Supreme Court case Crozier v. Krupp, which formally extended the power of eminent domain to intellectual property, concerned a German gun-carriage design the U.S. Army had plagiarized. That same year, a U.S. naval officer walked off with the plan for the British navy’s super-secret long-range torpedo. During World War I, Washington expropriated German chemical intellectual property held in the U.S., providing an enormous boon to America’s chemical industry.
In World War II, the U.S. received huge inflows of scientific and technological knowledge from Britain, then slapped secrecy restrictions on subsequent developments to prevent any flow back to Britain. Many more examples could be adduced. Historically, it might be said, Americans are an imitative people.
The U.S. came to appreciate the significance of controlling global economic infrastructure when Britain’s campaign of economic warfare against Germany in World War I caused huge collateral damage to the American economy. Companies like RCA worked hand-in-hand with the U.S. Navy to build a global telecommunications grid—perhaps similar to the way Huawei, run by a former Chinese army officer, may be working hand-in-hand with the Chinese army.
Wall Street cooperated with the U.S. government to develop a modern financial-services industry deliberately intended to help New York displace London as the world’s financial capital—perhaps similar to the way China has developed its own Swift payment-clearing system. Woodrow Wilson’s administration attempted to build an oceangoing merchant marine so the U.S. wouldn’t have to rely on Britain’s—perhaps similar to the way China is attempting to increase its control over the global oceangoing merchant marine.
In short, a century ago, the U.S. was the China of the age: an up-and-coming revisionist nation chafing against the established powers, importing and pirating what it could, free-riding on the security provided by the existing hegemon, and legitimizing its behavior with the pious conviction that it was on the right side of history. Could it be that the Chinese understand U.S. history better than Americans do?
It’s easy to be moralistic about China, but in the quest to find a sound U.S. strategy, we need less pearl-clutching and more imagination. Rising powers have compelling strategic incentives to control the sinews of global economic activity as well as to acquire foreign technology. Americans and their allies should ask themselves whether they would rather live in a world under U.S. or Chinese hegemony—and what they can do about it.
Ms. Epstein is a member of the Institute for Advanced Study in Princeton, N.J., an associate professor of history at Rutgers University-Camden, and a director of the Naval Historical Foundation.
So, what’s the point? As Yuval Noah Harari, author of Sapiens, would be quick to point out, the British themselves had established their naval-led Empire by upending Spain’s Armada, which had earlier navigated its way to world power status by stealing from the Portuguese the same “rudders” (mariner’s handbook of written sailing directions) which the Portuguese had stolen from the then-ascendant Arab empire.
Well, the point is that, as the U.S. and China edge ever-closer to an actual or pretextual spark of open conflict, we need to stay sharp-eyed. Given the incalculable costs which outright conflict between the U.S. and China would exact from both countries and the world, it is a political necessity and a moral imperative to keep an accurate picture of the structural situation in our field of vision. This is where Katherine Epstein’s article is useful. A picture with gray-tones is always more accurate and revealing than a simple black-and-white picture. Harder to argue in a sound-bite perhaps, but more consistent with the leadership we need.
______Assessing China / The TEA Collaborative______ 