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Event:

A Chinese jet carried out a highly aggressive maneuver near a U.S. military plane over international waters in the South China Sea yesterday  (Reuters report; CNN report; Al-Jazeera report)

Insight:

Following Xi Jinping’s era-defining dictum to “Dare to Fight” (敢于斗争) on March 9th of this year, the Peoples Liberation Army has been recently putting those words into practice, as seen with yesterday’s highly-aggressive fly-by. Also yesterday, China’s Defense Minister Li Shangfu bluntly and publicly rejected U.S. Defense Secretary Lloyd Austin’s proposal to meet while both attend the Shangri La Dialogue meeting in Singapore this weekend to discuss improving military-to-military lines of communication for the purpose of keeping miscalculations from spiraling into crises. The takeaway: Xi Jinping is choosing to jettison the hard lessons learned from the 2001 Hainan Island incident in order to strike a Dare to Fight posture for both domestic and international audiences in 2023.

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Context:

The Hainan Island incident, which occurred on April 1, 2001, was a potential military flashpoint event involving a collision between a United States Navy EP-3E ARIES II signals intelligence aircraft and a Chinese J-8II interceptor jet.

During the incident, the EP-3E ARIES II aircraft was conducting a routine surveillance mission in international airspace near Hainan Island when it collided with the Chinese interceptor jet. The Chinese J-8II jet pilot, Wang Wei, tragically lost his life, while the EP-3E plane made an emergency landing on Hainan Island.  The 24 crew members were detained and interrogated by Chinese authorities over an 11 day period until the crisis was defused by diplomats with an artfully worded statement crafted to allow both sides to save face.

Following the incident, both the United States and China conducted investigations and diplomatic negotiations to address the aftermath. Some of the general lessons learned from the Hainan Island incident include:

Importance of Communication and Crisis Management: The incident highlighted the necessity for effective communication and crisis management between military forces of different nations. Improved communication channels and crisis response mechanisms can help prevent misunderstandings, manage tensions, and avoid accidents.

Need for Clear Rules of Engagement: Clarity in rules of engagement is crucial to avoid misunderstandings and prevent accidental collisions. Developing and maintaining clear guidelines for military aircraft operations in close proximity can help reduce the risk of accidents and promote safety.

Enhanced Airspace Management and International Cooperation: The incident underscored the importance of effective airspace management and international cooperation to ensure the safe and peaceful use of airspace. Better coordination mechanisms, sharing of flight information, and adherence to established international norms and protocols can help prevent incidents in shared airspace.

Diplomatic Engagement and Conflict Resolution: The Hainan Island incident emphasized the importance of diplomatic engagement and conflict resolution to de-escalate tensions and find mutually agreeable solutions. Diplomatic efforts can help facilitate the resolution of disputes and prevent further escalation of conflicts.

Airborne Collision Avoidance Systems (ACAS): The incident also highlighted the need for improved collision avoidance systems and technologies to enhance situational awareness and prevent mid-air collisions. The development and implementation of advanced ACAS can help aircraft detect and avoid potential collisions, thereby increasing overall flight safety.

Technical analysis of the collision by U.S. experts concluded that the collision was caused by unintended contact between the two aircraft as a direct result of Chinese pilot Wang Wei’s overly aggressive fly-by. While Chinese authorities claimed that the U.S. EP3E aircraft had dipped its wing to initiate the contact, computer modeling showed conclusively that the relatively slow-moving EP3E could not have maneuvered in such a way as to affect the fast-moving Chinese interceptor jet.

Perspective:

I was stationed as the chief of the U.S. Commercial Section in the American Institute in Taiwan (the de facto “U.S. Embassy”) at the time of this incident. My A.I.T. colleagues were directly involved in the reporting and post-incident analysis of this tense encounter.

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.

The Micron Technology Inc. offices in Shanghai, China, on Thursday, April 6, 2023.
© 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:

More Than Half Of Americans Lack Confidence In Biden Ability To Deal Effectively With China — Pew Research

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

@rflannerychina

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Russell Flannery

(End article)

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).

A few hours ago, Taiwan’s President Tsai Ing-wen arrived at her hotel in New York where she is transiting en route to a 10-day visit to treaty allies Guatemala and Belize followed by a return transit stop in Los Angeles on her way home. Three days ago, former Taiwan President Ma Ying-jeou arrived in Shanghai to start an 11-day, multi-city visit focused on educational exchange and paying his respects to his ancestral home. Tsai Ing-wen’s transit stops in the U.S. are hardly unprecedented — she has made six — but comes at a time of unprecedented tension in the U.S.-China relationship. Ma Ying-jeou’s visit to the mainland is flat-out unprecedented. Since the establishment of the Peoples Republic of China in 1949, no Taiwanese former President has ever set foot there. Today, and over the next week and a half, the world will be witnessing a historic split-screen.

Image #tcpinsTM

During my time as the head of the Commercial Section at the American Institute in Taiwan from 1999 to 2002, I met quite often with both Tsai Ing-wen and Ma Ying-jeou. I have a sense of their personalities and their values. What is behind their divergent itineraries right now is of course politics. Tsai Ing-wen is the incumbent President and leader of the Democratic Progressive Party (DPP). Ma Ying-jeou is a former President and the elder statesman of the Kuomintang (KMT), Chiang Kai-shek’s party which fought with the Chinese Communist Party in the mainland and then fled to Taiwan in 1949.

Taiwan’s next Presidential election — in which Tsai Ing-wen is ineligible to run having served two terms — happens next February. Ma Ying-jeou’s visit to the mainland is inextricably tied up with that upcoming election. Tsai Ing-wen’s visit is not disconnected from that upcoming election but is more entangled with steadily worsening U.S.-China relations and the continuing fall-out from then House Speaker Nancy Pelosi’s visit to Taiwan last August.

Over the next two weeks, I will have occasion to post commentary here on what transpires during these two trips and what they portend for the coming months. Today’s Historic Split-Screen post is just to set that stage.

Xi Jinping departed Moscow eight days ago following his three-day state visit. In broad brush, the trip removed some uncertainties about the basic direction of Xi’s positioning on the global stage. No, this was not a peace-broker’s mission. Xi clearly prioritized propping up a faltering “friend without limits” over any serious — or even half-hearted — effort to play the honest broker. Washington and Kyiv still want Xi to talk with Zelensky (likely) or perhaps even visit Kyiv (unlikely) but the aim is not for any mediation by Xi but rather to reinforce the messaging to Xi about not sending lethal armaments to Russia. And, no, Xi seems quite clearly to be prioritizing the recovery of his wobbly economy over the risk of sanctions from the U.S., Europe and key Asian partners should he defy the Biden Administration red-line against China supplying Russia with lethal armaments.

As the third door opens, it’s now possible to glimpse some of the finer brush-strokes of Xi’s long-term plan to counter the liberal, rules-based world order. These are revealed in the 9-point joint statement released by Putin and Xi at the conclusion of Xi’s Moscow visit as well through related moves by China on the world stage. Five of the more subtle brush-strokes to observe:

Photo courtesy of The Economist

  • Xi used his trip to signal to Washington and to NATO and its other democratic allies that China now largely has Russia under its thumb. It can draw increasingly on Russia as a plentiful supply of heavily-discounted oil and other energy resources. Similarly, it can address its own food insecurity and inflation concerns by throwing its market open to Russian food commodities at cut-rate prices. It can force Russian banks and the Russian financial system to do its bidding (see next point). And it can count on Russia to parrot its propaganda line with particular focus on Africa, South America and the Pacific region. All of this serves to prop up Putin and prolong the war, serving Xi’s interests without triggering retaliation against China.
  • Xi revealed that his weapon of choice to counter the post-WWII world order will not be lethal armament deliveries to Moscow but the Chinese yuan (RMB, renminbi). Moreover, he put the brush in Putin’s hand for this particular stroke. Towards the end of the summit, Putin pointedly stated “We (Putin and Xi) are in favor of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa and Latin America.” From a broad strategic perspective, it makes perfect sense that Xi would choose this approach. Why risk retaliation by getting involved in a hot war in Europe (where Russia is losing ground), when China can force Russia to support a Chinese-led challenge to U.S. dollar domination elsewhere throughout the world. The standing of the dollar as the world’s reserve currency is arguably the United States’ most potent, non-military asset globally. Others have tried to dislodge it and have failed. But, as the world’s second largest economy, as the de facto leader of the developing world for the past 50 years, and as a vise-grip political command structure, Xi clearly sees this approach as his best bet for now (while the Taiwan issue still hangs unresolved in the background).
  • Putin’s statement comes not as an announcement of any new undertaking by Xi but rather as an exclamation point on an ever-evolving geo-strategic campaign which Xi has been conducting in Asia, Africa and Latin America since 2012 in the form of Belt and Road Initiative (BRI). There is particular urgency to this campaign now in the wake of the COVID pandemic and the recent rapid rise in U.S. interest rates. As a result of these developments, many BRI partner/client countries now find themselves unable to service their earlier loan obligations to China. To adjust, China has been forced to dramatically increase its overall lending through loan restructurings to keep major BRI projects afloat. As a result, Chinese lending to debt-ridden countries now stands at more than $40 billion, not far off the level of the traditional, post-WWII lender of last resort, the International Monetary Fund (IMF), whose loan exposure stands at more than $65 billion. While a strain on PRC finances, this hefty lending posture gives Xi the ability to speak softly (through Putin) while carrying a big stick against the dollar-denominated international order.
  • China’s burst of Mid-East diplomacy is a further brush-stroke filling out this picture. The opportunistic stage-craft positioning PRC Foreign Minister Wang Yi as the go-between in the mid-March entente between Saudi Arabia and Iran — which was happening anyhow — was meticulously executed. Likewise, the bullhorn which the Foreign Ministry has used to welcome the possibility of rapprochement between Saudi Arabia and Syria is notable. All of this is leading up to a summit between Iran and the six-nation Gulf Cooperation Council in Beijing in the fall. Against the broad backdrop of events, it is certainly not a coincidence that Mohammed bin Salman, Saudi Arabia’s leader, has been mentioning under his breath the possiblity of settling more of his country’s oil exports with the Chinese yuan.
  • A final point is the deep planning behind what is now unfolding. None of this reflects ad hoc or reactive moves in response to the Ukraine crisis. Instead, this plan is organically tied to the development of the ten-year-old Belt and Road Initiative and signs of it became clearer with the convening of the 20th Party Congress last October, with the unveiling of the CCP’s newest Five Year Plan (FYP) and with the announcement of the country’s new ministerial line-up at the Two Sessions meetings in Beijing earlier this month. In hindsight, the strongest proof of this is in the meeting just concluded with Putin. Ukraine was just a minor, slightly discomfiting blip for Xi in Moscow last week, just as it was only a blip for Xi when Putin invaded Ukraine just days after their meeting in Beijing in February 2022 on the eve of the Olympics. Xi is extolled in China as being “unswerving.” At least as far as his plan to offer an alternative world order is concerned, this characterization is apt. No swerving from the plan just because of an unprovoked invasion of a sovereign nation by his Russian friend. As Alexander Korolev’s (University of New South Wales) observed regarding the Xi-Putin 9-point joint statement: “It looks like a strategic plan for a decade or even more. It’s not a knee-jerk reaction to the war in Ukraine.” Fits in well with the three 5-year chapters through which Xi has been telling his heroic ‘rejuvenation of China’ story. A story that can’t end well for Xi without closing the book on Taiwan.

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.

Mao’s Young Red Guards Stand Up to the American Hegemon

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.

So interesting how an existential threat — near-term: Russia/Ukraine; longer-term: China/Taiwan — helps focus the national mind.

The Biden Administration announced on Tuesday that, in rapid-fire sequence following the launch of the multi-lateral Indo-Pacific Economic Framework (IPEF) in Tokyo last week, the U.S. Government is making a decisive step, through Executive Action, in the direction of a bilateral U.S.-Taiwan Free Trade Agreement (FTA).

The economic logic in support of a U.S.-Taiwan FTA was evident 20 years ago. Here, dusted off, are two publications which make that point:

Now, finally, U.S. domestic political logic is swinging in line with the geoeconomic imperatives. If it comes to pass, it will have been worth the wait.

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.

Chinese President Xi Jinping during a show commemorating the 100th anniversary of the founding of the Communist Party of China

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.

On February 4th, at the conclusion of their day-long summit in Beijing, Vladimir Putin and Xi Jinping declared that the friendship between Russia and China “has no limits.” That same day, the Beijing Winter Olympics officially began, ending a little more than two weeks later on February 20th. On February 24th, Russia’s full-scale invasion of Ukraine began.

There has been extensive analysis of the three major miscalculations Putin has made up to this point: (1) his overestimation of the readiness and effectiveness of his military machine; (2) his underestimation of the resilience and fighting spirit of the Ukrainian people; and (3) the speed and scale with which NATO and EU countries, along with many others, have come together to sanction Russia and to support Ukraine (in all ways short of direct military involvement on, or in the air above, Ukrainian territory). It is too early to tell whether a fourth major miscalculation may have to do with Putin’s misplaced faith in the degree of economic, financial and trade support which China would provide Russia to backfill against these sanctions).

But what about Xi Jinping? What is his calculus for advancing (his interpretation of) China’s interests through this crisis? And what miscalculations has he appeared to have made so far?

Xi’s first miscalculation was immediate and damaging. He is known to have had some discussion with Putin on Feb. 4th about the imminent “special operation” in Ukraine. It is not clear whether Putin lied to him or Xi simply failed to ask the right questions to take Putin’s measure. In either case, Xi Jinping is known to have been caught by surprise and ‘perturbed’ by the scale, duration and ruthlessness of Putin’s “special operation.” As described in my February 4th post “Four Seismic U.S.-China-Russia Shifts,” Putin’s move forced Xi, unexpectedly and very publicly, to choose between his new-found friendship without limits and adherence to China’s mantra-like stated policy of non-interference in the affairs of sovereign nations, as enunciated in 1954 in Zhou Enlai’s Five Principles of Peaceful Co-existence (and championed explicitly with regard to Ukraine’s territorial integrity following Russia’s annexation of Crimea in 2014)

Evidence of Xi’s miscalculation of Putin’s intentions in Ukraine became apparent in the initially hesitant and fence-sitting response by the PRC officials during the first two weeks of the crisis. On the one hand, Chinese officials refused to refer to the invasion publicly with any term other than Putin’s Orwellian “special operation” terminology; pivoted reliably to blaming the crisis on NATO rather than Russia aggression; blocked a series of actions from being taken against Russia in the U.N. Security Council; amplified Russian disinformation about the U.S. operating bio-military labs in Ukraine (a play out of the FSK, formerly KGB, playbook which suggests that Putin is contemplating the use of bio- or chemical weapons and is ready to throw sand in the world’s eyes by blaming the U.S. and/or NATO for their eventual use); and has even embedded Chinese journalists with Russian military units on the ground in Ukraine. On the other, China says its the friend of both Ukraine and Russia; talks about the need for the cessation of violence; offers publicly to mediate between the two sides while not actually taking any steps toward a mediation effort); and repeats the mantra of its Five Principles of Peaceful Coexistence as if Putin’s actions in Ukraine were taking place in some parallel universe.

There have been other related miscalculatiions. For instance, the PRC Government has been repeatedly caught off balance by the Biden Administration’s aggressive use of classified U.S. intelligence findings, with his Administration quickly de-classifying key reports and pushing the information out into the public sphere, both domestically and internationally. This began with President Biden’s sharing in real-time with the world the U.S. intelligence community’s pre-invasion assessments that Putin had made the decision to invade. This very public use of previously hush-hush intelligence findings marks a clear break from past White House precedent and has also been aimed at China in recent weeks: first, in divulging the fact that Xi Jinping had prior knowledge of the invasion from his Feb. 4th meeting with Putin and that Xi had, in fact, asked Putin to hold off on initiating that military operation until after the conclusion of the Beijing Winter Olympics; and, second, in disclosing publicly on the eve of Secretary of State Anthony Blinken’s March 14th meeting with China’s top diplomat Yang Jiechi the fact that Beijing had received requests from Moscow for military and economic assistance to aid its war effort. These and other revelations have punctured China’s contrived public posture and shown that, behind the peaceful resolution rhetoric and thin veil of neutrality in the conflict, the reality is that China is not sitting on the fence but has indeed been coming down on Russia’s side.

The initial confusion in China’s response and now the growing evidence of China’s support, up to a point, for Russia were probably to be expected : under-the-table support for Putin was inevitable given the top-down nature of Chinese government decision-making and the personal investment which Xi had made in Putin and Russia just weeks earlier. Just as powerfully through, China wants to keep some fig-leaf semblance of its Five Principles of Peaceful Coexistence policy because its repudiation would roil China’s international relations, among others, with its Belt & Road Initiative partner countries. Equally, it does not want to run afoul of the trip wire of U.S.-led financial and economic sanctions by aiding Russia overtly with military aid, financial relief or with trade in sanctioned commodities like microchips, especially following the stern warning delivered by Secretary Blinken earlier this week.

Over the last week, there are signs that the Beijing leadership is trying to “elevate” its initial indecision and aloofness into what it believes can be a long-term winning strategy for coming out ahead of the West when flames die out and the dust settles from the Ukraine conflagration. The Zhongnanhai thesis is that it is not worldwide supporters of post-WWII liberal democracy that are rallying to support Ukraine as much as it is a “civilizational” struggle between a Russian identity promulgated by Putin and a Western identity and set of values represented primarily by the U.S. and Europe. The thinking goes that, if China stands back from this clash, it can pick up the pieces and emerge stronger than either of the two depleted civilizational antagonists. This accords with Xi Jinping’s decade-long championing of the rejuvenation, and even superiority, of Han identity and the Chinese model. In Xi’s thinking, this policy of studious and disciplined aloofness — limited to cheering on Russia with “dog-whistle” encouragement and forms of back-channel support it can get away with while seizing opportunities to denigrate the West to his domestic audience and to countries in Central Asia, the Pacific, and Africa — has two clear advantages: (1) it avoids any risk for Xi in decisively backing ‘a loser’ in Putin, an outcome already sealed in his international pariah status and increasingly likely on the battlefield even if Kiev is taken and the war shifts to an insurgency; and (2) it gives Xi space to attend to the many immediate challenges facing him in the run-up to the critical Party Congress this fall where he is bidding for a third, controversial term as President. Those challenges include: a sharp fall-off in economic performance (brought on in part by excesses of his own Common Prosperity policy introduced over the past year; rapidly rising Covid case-counts and lock-downs in Shenzhen and Donguan in the south, in Shanghai and in Jilin to the northeast; and the recent hardening of attitudes toward China throughout much of the world as ably analyzed by Elizabeth Economy in The World According to China and in her Jan/Feb 2022 article in Foreign Affairs.

The jury is out but I submit that this policy of official aloofness may well prove to be Xi Jinping’s biggest and longest-lasting miscalculation with regard to Ukraine. Xi may think in ethno-nationalist terms, but much of the world’s response is underpinned by non-Western allies such as Japan, South Korea and Singapore who have benefitted from, and are committed to upholding, the post-WWII order based on national sovereignity and the rule of law. In fact, it is Taiwan which represents and symbolizes the fullest repudiation of Xi’s thesis. Absent some mis-adventure by North Korea (which is a disturbing possibility) or a premature move by Xi to extinguish the symbol Taiwan represents (which I consider very unlikely in the near-term), Xi’s official ‘aloofness’ and sub-rosa support for Putin will be remembered by the world in the wake of the Ukraine conflict. There are times when a person, or a nation, must choose sides. Not choosing sides in such situations is, in fact, a choice that is noticed and remembered. Pretending not to choose sides while actually backing the ‘wrong side’ is morally repugnant. There is not a middle way.

On June 8th, the Biden Administration announced immediate actions it was taking to address near-term vulnerabilities in four critical supply chains as identified by a 100-day America’s Supply Chains assessment initiated in late February.  The four critical supply chains included in this announcement are: semiconductor manufacturing and advanced packaging; large capacity batteries, like those for electric vehicles; critical minerals and materials (so-called “rare earths”) used in smart phones, electric vehicles, wind turbines and other advanced technologies; and pharmaceuticals and active pharmaceutical ingredients (APIs) used in vaccines and other applications.

Today’s post takes an initial high-level view of the critical supply chain for semiconductor manufacturing and examines the shifting fault-line of vulnerability.  Subsequent posts in the Global TECHtonics series will take a much closer look at these and related issues.


Photo: barks/Adobe Stock

What is the Fault-line?

The semiconductor supply chain fault-line runs directly under Taiwan, whose chip foundries produce 92% of the world’s most advanced microchips (which have transistors less than one-thousandth the width of a human hair).  The small island is caught between the tectonic forces of the China market (which accounts for 53% of global semiconductor consumption and the U.S. market (which accounts for the vast majority of the advanced designs on which Taiwan chip production is based).  In addition to these market forces, political dynamics add to the stresses along this fault-line.  While China claims Taiwan as an inalienable part of its territory, the U.S. has been serving as the guarantor of Taiwan’s de facto independence since 1949. In more recent years, the Trump Administration’s “Tariff War” against China has given impetus to a process of technology “de-coupling” which is forcing Taiwan companies – especially its preeminent foundry manufacturer Taiwan Semiconductor Manufacturing Company (TSMC) – to choose between the fast-growing China market (34% revenue growth since 2014) and its slower growing (4% growth) but highly strategic U.S. customers, including the U.S. military. The fact, for instance, that 14 of TSMC’s 17 foundries worldwide (and all of its foundries capable of higher-end production above the 16 nanometer level) are located in Taiwan at a distance of just 90 miles from the PRC mainland adds to the tectonic friction.

What is the Trend-line?

Subsequent posts in the Global TECHtonic series (approximately two per month) will examine a broad range of dynamics in detail to include the impact of the COVID-19 pandemic on global microchip supply chains, specific dynamics within microchip subproduct categories (logic chips, analog chips, memory chips, etc), TSMC’s strategic response to the increasing global pressure and detailed analysis of trends within the U.S. semiconductor industry.  Today’s post will limit itself to two broad brush-strokes to suggest the general trend-line: (1) the twenty-year trend-line since 2001 and (2) the one-year trend-line since 2020.

  • The accession of China and Taiwan to the World Trade Organization (WTO) in 2001 led to hopes that Information and Communications Technologies (ICT) supply chain tensions might start easing but, from 2008 at least, the opposite has proved true.  Following the Global Financial Crisis, market forces and competitive tensions increased pressures on ICT supply chains markedly and these pressures further accelerated starting in 2012 following the 18th Chinese Communist Party Congress in 2012.  (Readers interested in a deeper understanding of the ICT supply chain dynamics covering the period 2001-2008 can refer to Congressional Commission testimony I provided during the 107th, 108th and 109th Sessions of Congress as well as to my article in the edited volume Economic Integration, Democratization and National Security in East Asia (Peter Chow, Elgar Publishing) and my article in The Journal of Contemporary China (Volume 13, Number 40, 2006).
  • The past year has shown some notable shifts along this fault-line. In Taiwan, policies instituted by President Tsai Ing-wen have led to a small shift in Taiwan’s trading dependence on China and to larger shifts in the pattern of outbound and inbound investment involving China.  Specifically, the Tsai Administration’s New Southbound Policy has shifted a small portion of Taiwan’s trade in consumer electronics away from China in favor of Southeast Asian markets.  More notably, the “Invest Taiwan” program has exceeded its targets and much of the reinvestment in Taiwan comes as a result of production being repatriated from the mainland. As for outbound investment from Taiwan in ICT sectors, recent trends favor the U.S. as a destination rather than China.  In March 2020, TSMC announced that it would be building a $12 billion microchip production plant in Arizona.  Meanwhile, tighter regulations by Taiwan’s Investment Commission has led to a 60% drop in outbound investment to the mainland since 2018.

It is for these and other reasons that the New York Times recently proclaimed “pound for pound, Taiwan is the most important place in the world.”  The Strait of Hormuz may have been the world’s most dangerous fault-line in the 20th century oil economy.  In the 21st century, the tectonic pressures of the global economy now converge on the Strait of Taiwan.

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