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U.S./China Tech De-Coupling: 4 Levels of Risk

August 20, 2020 in Article, Author - Cooke, Blog Post, Competition, Economy, International Business, Policy, T-Series, Technology, Trade | Tags: , , , | 3 comments

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:

  1. 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.

  1. Defensive Behavior

Defensive behavior can be a natural escalation of anxiety; it’s the point where actors in crisis begins to lose rationality.

  1. Risk Behavior

Risk behavior is displayed as actors enter crisis and reach the point of propensity to harm themselves or others.

  1. 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.

 

Timing Matters (Global TECHtonics series)

August 14, 2020 in Author - Cooke, Blog Post, Economy, T-Series, Technology, Trade | Tags: , , , , | 2 comments

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.

 

Sustaining U.S.-China Cooperation in Clean Energy

May 9, 2015 in Blog Post, Energy, Innovation, Investment, Publications, Sustainability | Tags: , , , , , , , , , , , , | 4 comments

The motto of the Woodrow Wilson International Center for Scholars is ‘knowledge in the public service.’  This publication of mine from September 2012 is made available to the public free of charge here by downloadable PDF.

Book Cover

INTRODUCTION

At the time of my initial appointment to the Wilson Center, it struck me that something was missing from the general discussion in the United States concerning China’s embrace of clean energy and its implications for the United States. Much of what had been written embraced one of two polar positions. It seemed that the U.S.-China relationship in clean energy was either the best avenue for our cooperation or the measuring stick for our final competition. To a casual but concerned reader, the message was confusing. Newspaper “word-bites,” rather than informing discussion, lent anxiety to the existing confusion. The Woodrow Wilson Center provided me time and resources to examine the facts about clean technology (“cleantech”) and China. This was timely. Government agencies, think tanks and trade associations hoping to influence the policy debate began in February 2009 to release a spate of lengthy and in-depth policy reports, many of them technical in nature. We will learn in Chapter One how and why that gusher of information—which has thrown up literally shelf-feet of reports over the past year and a half— suddenly arose. However, for the purposes of this Introduction, it is simply worth noting that these policy tomes, for all that they did serve to provide data-based context to what had previously been “context-free” highly combustible reporting, did not offer much help to an interested non-specialist in making better sense of the main issues. At this “informed” end of the information spectrum, there was now almost too much information spread across too many specialized viewpoints. For a busy entrepreneur, investment manager, business professional, state or local government official, regional economic development analyst, scientific researcher, or engaged student—in fact, for any concerned “global citizen” wanting to understand the issues in a straightforward and streamlined way— it was famine or feast. A super-abundance of highly-specialized information provides not much more help in gaining an efficient grasp of the core issues than scattershot newspaper and media reporting had offered. Sustaining U.S.-China Clean Energy Cooperation 3 This book aims squarely at the “middle ground” of curiosity and interest in this broad topic. At the outset, I would like to be clear about three “operating assumptions” I have built in: Timeframe The three main chapters are concerned with the three-year period from mid-2008 to mid-2011. Except for one digression involving Five Year Plans which covers a 30-year period, this limitation on perspective actually helps bring the main subject matter into better focus. The bulk of the U.S. political effort to engage with China in the clean energy arena took shape during the 2008 Presidential Campaign and was further framed through policy initiatives of the Obama administration. For a new industrial ecosystem like “cleantech” or clean energy, what is relevant is defined by what has most recently happened. It is only in the Conclusion that the time-frame is pulled back to show that some of the dynamics described in preceding chapters are, in fact, related to deeper and more long-standing trends in the overall U.S.-China relationship. Structure As author, I have insisted on an organizational principle for presenting information which puts me at odds with the conventional approach of “Beltway” experts. In Washington, the tendency is to run all relevant information through what I will call the “policy blender” and to present the resulting product as a mix of policy recommendation, policy analysis, and policy refutation. I take a different approach. I believe that the policy process is best served when the three main aspects of business-relevant policy are broken down and viewed separately in their own right. These are: (a) the politics underlying the policy process; (b) the technology innovations which policy initiatives aim to support; and (c) the investment ultimately required to take any technology innovation to scale in the marketplace, thereby driving policy on a long-term and sustainable basis. Rather than jumble these perspectives, I treat them in Merritt t. Cooke 4 separate chapters and try to adopt the relevant “mind-set” of each in presenting material in the respective chapter. This may be nothing more than a reflection of my former training as a cultural anthropologist, but I believe it is useful—within the complex arena of China, the United States, and energy—in revealing underlying dynamics. For this reason, in the U.S. section of the opening chapter on Politics, I will rely heavily on the words of key political actors. Ours is a system where the president needs to persuade the electorate and what is said matters. In the section on Chinese Politics, the approach is different, relying instead on “structural analysis” of the ruling party and its interests. In each case, the attempt is to adopt a perspective particularly suited to its subject matter. Purpose The Woodrow Wilson Center’s motto is “knowledge in the public service.” Woodrow Wilson epitomized the ideal of the “practitioner scholar”—the part-time scholar who devotes some of his or her career to bringing scholarly research into the practical, socially-relevant domains of government or business or non-profit work. This is the spirit with which I have written this book. I am neither a career academic nor a professional policymaker. I have tried to make this book clear and concise, although it involves a complex, and fast-changing topic. Especially for technically inclined readers, I want to acknowledge that no sector domain in the U.S.-China clean energy field can be adequately reduced to a couple of pages. I believe this topic is an important one. If the United States and China find a way to realistically base and sustain their cooperation in clean energy, they will be addressing directly 40 percent of the world’s total carbon emissions. And if together they manage to create a replicable model of cooperation, they can indirectly help the world address the remaining 60 percent. At its core, this topic touches everyone—those who care deeply about America’s place in the world, those who are moved by China’s epochal reemergence, those who are environmentally-engaged, and those who are responsible global citizens. Students are a particularly important audience because the tectonic issue described in this book will ultimately be the felt experience of their generation. In short, I hope that this book may be found to present important issues in a balanced way and to offer something useful and readily comprehensible to anyone with enough interest to pick it up.

View the Wilson Center’s Book Launch Event here

Q & A with Author Mark Clifford on “The Greening of Asia”

May 5, 2015 in Blog Post, Innovation, Interview, Policy, Sustainability | Tags: , , , , , | Leave a comment

The following post comes courtesy of Sinosphere, the China blog for The New York Times.  Like a flower poking out of the cracked pavement of a concrete jungle, this is another hopeful sign that ‘The Greening of Asia” is starting to blossom.

Q & A with Author Mark Clifford on “The Greening of Asia”

By Ian Johnson from Sinosphere, May 5, 2015 3:21am

Mark Clifford & Greening of Asia post (5-5-15), photo 1

A technician at Yingli Solar checks a solar panel on a production line at the company’s headquarters in Baoding, Hebei Province. Credit Kevin Frayer/Getty Images

After 20 years in Asia as a journalist, Mark Clifford took over as executive director of the Hong Kong-based Asia Business Council in 2007. His new book, “The Greening of Asia: The Business Case for Solving Asia’s Environmental Emergency,” explores how Asian companies are making strides in providing environmental solutions. China is a special focus because of the country’s huge emissions of carbon, but also because of its potential for innovation.

Mark Clifford & Greening of Asia post (5-5-15), photo 2

Mark Clifford.Credit Courtesy of Mark Clifford

In an interview, Mr. Clifford discussed the need to link businesses, governments and nongovernmental organizations to fight climate change:

Q.:   How did you get interested in this topic?

A:     I joined the Council in 2007 and inherited an almost-finished study on green buildings. That was pretty exotic in Asia back then, and we published a book on it. It got me thinking about the topic.

Q:    Your angle is a bit more hopeful than some. Tell us how that came to be.

A:     Originally, I thought I’d do a book along the lines of “The East Is Black.” And we do have an emergency here. In China, 1.2 million a year are dying prematurely. People need to know how bad it is, but then I got to thinking that this was pretty obvious. Instead, I thought that there are these much more positive responses underway, and people should know about them. The business community, which takes challenges and solves problems, was involved. So it is unabashedly a glass-half-full book, but that’s because it’s important to know there’s a way out. We can despair, we can do nothing, or we can work to solve one of the greatest challenges of our time.

Mark Clifford & Greening of Asia post (5-5-15), photo 3

Q;   Do you see business being the main player in solving the issue?

A:    No, it’s part of the solution. There has to be a three-legged stool of government, civil society and business, and each has to bring its strengths to the table.  Only governments have the power to set rules — the laws and regulations, of course, but also the prices in the forms of taxes and subsidies as well as facilitating infrastructure developments. Media and NGOs make sure that business and government are doing what they promise.

Q:    What was most surprising is how many companies are doing this in one form or another.

A:     Yes, in the book I profile more than a dozen companies at length but also have an appendix of more than 50 companies that are involved with a variety of environmental initiatives. It was surprising to me what’s going on at the corporate level, but they’re doing things for good business reasons. Some are for the P.R. effect, but most look at it as necessary for survival.

Q:    You focused one chapter on Hong Kong’s CLP Holdings, the electric power company.

A:    Their work really sparked this project. In 2007, the then-chief executive, Andrew Brandler, announced that by mid-century, they would cut the carbon intensity of their electricity production by 75 percent. This pledge by one of Asia’s biggest private utilities — mostly coal-fired power plants — to effectively decarbonize by mid-century is unparalleled globally. I think this stems from the Kadoorie family, which owns a major stake in CLP. Michael Kadoorie challenges his top management to look at 50-year horizons. They do this for good reasons. They’re traditionally a coal-burning utility, but they think that this isn’t a good business model in 50 years.

Other companies think that water is underpriced, and in the future, it will be more realistically priced. Carbon also is underpriced, and other companies want to be ready for when it’s changed.  But not all companies have long-term visions.To reach them, you need the other two legs of the stool. You need good, strong government policy, and you need NGOs to hold people accountable.

Q:    What countries have had good policies?

A:    Singapore has done an exemplary job. They decided very early on that water is of existential threat to the nation. So they have taken very firm policies, and it gives companies a form of certainty about costs.Not every country has the capacity that Singapore’s administration has, and it’s a small place with a forward-thinking government. It’s much harder in big countries like China and India, which are more fragmented.

Q:    You have a lot on China.

A:    The good news is we have good policies coming down from the top levels of the Chinese government. Where China continues to struggle is the implementation at the ground level. There’s not always enforcement, and there’s no civil society to act as a check. The time when China decides that the environment and energy issues are as much of a threat as the color revolutions were, or the Hong Kong protests were last year, that’s when we’ll know we have serious progress. We’ve seen with Chai Jing [whose popular documentary film on the environment, “Under the Dome,” was banned] that civil society is muted.

Q:    We read a lot about air pollution, but you also think that water is crucial.

A:     Increasingly, water is a hard-stop issue. Air pollution is horrible, but most people affected by it are still living. But no one can live without water. I don’t know what people will do when the water stops. In China, projects like the South-North Water Diversion Project just delay the day of reckoning. What concerns me is that even most otherwise far-sighted governments are not facing up to the challenges.  For example, what do you do if you’re a municipal official, and you have an industry, say semi-conductors, which uses a lot of water? What do you do when you have to make a choice: water for the factory or the town? These are the kinds of choices that aren’t going to happen today or tomorrow, but governments will face this.

Q:    And yet there are signs of hope in China.

A:    China is about to overtake Germany as having the largest amount of installed solar power capability. It also has large wind turbine facilities. All of this is important because China burns half the world’s coal and accounts for 30 percent of carbon dioxide emissions. So to fix China, we need to cut coal use. Coal is supposed to peak in 2030, but it could happen a lot faster. So these are huge challenges, but China is potentially further ahead than many people realize.

China’s Sword of Damocles: Crackdown or Startup?

April 20, 2015 in Article, Blog Post, Competition, Innovations, International Business, News and politics, Policy | Tags: , , , , | 1 comment

Crackdown or Startup w border

 Henry “Hank” Paulson — former Chairman of Goldman Sachs, former Secretary of the U.S. Treasury and creator of the U.S.-China Strategic & Economic Dialogue — was in Philadelphia last Wednesday.  He came to publicize his new book Dealing With China: An Insider Unmasks the New Economic Superpower.

The media frame for the talk and Q&A which he gave to the World Affairs Council of Greater Philadelphia was:  ‘Hank, you’re a real patriot. Why are you helping China?”

In response, Hank Paulson was very clear that his interest in promoting a better understanding of China is rooted in his desire to do what is best for America.

You can read the full article here but, for the purposes of this post, I’m going to focus on one small, but important, piece of the big contemporary China puzzle:  Is Xi’s ongoing crackdown (on corruption but also on foreign businesses, NGOs, press freedoms, social media, connectivity to the global knowledge-pool, etc) flashing green, yellow or red for China’s paramount challenge of rebooting its economy on a more sustainable basis?

China’s ‘old software version’ of infrastructure build-out, inbound investment and export of cheap stuff is clearly no longer operating smoothly on the new global hardware system.  China’s future – and Xi Jinping’s for that matter – depends on a smooth updating to a ‘new software version’ of consumer-led spending, outbound investment and innovation up the product value-chain.   Under any circumstances, that’s a tall-order to pull off in just a few years.  For those of us who believe that helping China matters to America’s future, the key question is whether the crackdown on political thought in China is – or is not — inimical to the desperately needed surge of commercial innovation needed to upgrade China’s economy to version 2.0.

It is perhaps not entirely a coincidence that, in the same week that Hank Paulson was wrestling with this question in Philadelphia, so were two other leading experts on the trajectory of China’s globalization elsewhere:  Shaun Rein and Tom Friedman in respective articles.  If Hank Paulson occupies the pivot point as a U.S. patriot committed to helping China, Shaun Rein is a self-acknowledged China booster and Tom Friedman a “color me dubious” observer of China’s steep road ahead to globalization.

Here’s what each of them has had to say over the past week on the ‘sword of Damocles’ question facing Xi and China:  crackdown or start-up?  (Click on the name below in order to source the original publication from which the following excerpts are taken):

Hank Paulson

Paulson

“Paulson believes the Communist Party has reached a simple accord with the Chinese people: prosperity in return for continued state control. The question, of course, is whether China can have it both ways – economic freedom without cultural freedom, a subject I raised with Paulson at the World Affairs Council.

‘In today’s information economy, I don’t know how economies can innovate and do the sorts of things they do to stay on top without having a free flow of ideas and information,” Paulson replied. “I’ve run a global company, and, boy, you need to be connected. You can’t have an Internet that’s not connected. You need to know what’s going on politically, regulatory systems, economically, in terms of ideas all over the world.’

He added: ‘But understand what’s going on right now. Xi Jinping . . . is focusing on the things that the people care about the most. So, corruption. He recognizes the party won’t survive unless he curbs corruption. So he’s focused on corruption, the environment, dirty air, and water.’

“So . . . managing China, just think what it’s like because they have to deal with the kinds of issues that afflict developed countries at the same time they have to deal with issues that developing countries are dealing with because a big part of the country is still poor. It would be like, . . . looking at Europe, Germany and Slovenia. They are both European, vastly different stages of development, they need different economic policies. So think about managing both of those in a single country under one party, and I mean that’s sort of the challenge.’”

 Shaun Rein

rein-circular

“China´s much needed anti-corruption drive has now put the country into a lock-down mode, and new projects have halted,” tells business analyst Shaun Rein at CNBC.  “The cut in the reserve ratio ratio (RRR) this weekend is one way for a kickstart, although nobody know what will really work.”

 China Herald:  “What does the Chinese market need to stimulate the economy and if this growth continues to disappoint then would you expect an additional benchmark rate cut in the next couple of quarters, something that many experts are now talking about?”

Rein:  “I think what we need to look at is not gross domestic product (GDP) growth but we need to take a look at unemployment and the second reason why I am more concerned about the economy is in the last month urban unemployment has been hovering around 5 percent – that’s really a problem. So the unemployment rate in areas of manufacturing are still fairly strong and you can easily stimulate that by forcing state owned enterprises to do heavy investment; train construction, airport construction and you can get jobs there but the issue is urban unemployment is weak and there aren’t a lot of easy remedies. The government is trying to switch from manufacturing oriented economy more towards one of technology and innovation as I outlined in my new book ‘The End of Copycat China’ but it is not easy to do that. You cannot get companies that are producing things all a sudden to become innovators, so there is definitely going to be some weakness, some problems in the economy over the next three-four months and frankly there are no easy answers on how they stimulate the economy.”

Tom Friedman

friedman-circular-thumbLarge-v3

“Americans … are asking of President Xi: “What’s up with you?” Xi’s anti-corruption campaign is clearly aimed at stifling the biggest threat to any one-party system: losing its legitimacy because of rampant corruption. But he also seems to be taking out potential political rivals as well. Xi has assumed more control over the military, economic and political levers of power in China than any leader since Mao. But to what end — to reform or to stay the same?

“Xi is “amassing power to maintain the Communist Party’s supremacy,” argued Willy Wo-Lap Lam, author of “Chinese Politics in the Era of Xi Jinping: Renaissance, Reform or Retrogression?” Xi “believes one reason behind the Soviet Union’s collapse is that the party lost control of the army and the economy.” But Xi seems to be more focused on how the Soviet Union collapsed than how America succeeded, and that is not good. His crackdown has not only been on corruption, which is freezing a lot of officials from making any big decisions, but on even the mildest forms of dissent. Foreign textbooks used by universities are being censored, and blogging and searching on China’s main Internet sites have never been more controlled. Don’t even think about using Google there or reading Western newspapers online.

“But, at the same time, Xi has begun a huge push for “innovation,” for transforming China’s economy from manufacturing and assembly to more knowledge-intensive work, so this one-child generation will be able to afford to take care of two retiring parents in a country with an inadequate social-safety net.

“Alas, crackdowns don’t tend to produce start-ups.

“As Antoine van Agtmael, the investor who coined the term “emerging markets,” said to me: China is making it harder to innovate in China precisely when rising labor costs in China and rising innovation in America are spurring more companies to build their next plant in the United States, not China. The combination of cheap energy in America and more flexible, open innovation — where universities and start-ups share brainpower with companies to spin off discoveries; where manufacturers use a new generation of robots and 3-D printers that allow more production to go local; and where new products integrate wirelessly connected sensors with new materials to become smarter, faster than ever — is making America, says van Agtmael, “the next great emerging market.”

“It’s a paradigm shift,” he added. “The last 25 years was all about who could make things cheapest, and the next 25 years will be about who can make things smartest.”

President Xi seems to be betting that China is big enough and smart enough to curb the Internet and political speech just enough to prevent dissent but not enough to choke off innovation. This is the biggest bet in the world today. And if he’s wrong (and color me dubious) we’re all going to feel it.”

‘Tigers & Flies’ Growl and Buzz in Tianjin

April 14, 2015 in Blog Post, International Business, Law, News and politics, Philadelphia, Policy, Tianjin | Tags: , , , | 2 comments

President Xi Jinping’s anti-corruption drive — known for its signature vow to target both ‘tigers’ (top-level officials) and ‘flies’ (low-level functionaries) — shows no sign of abating.  It may even be gathering momentum with the early April announcement that former Politburo Standing Committee member (and security portfolio chief) Zhou Yongkang will be standing trial in Tianjin on charges of bribery, abusing power and disclosing state secrets,  This announcement followed a slow-motion public ensnarement of Zhou as, for almost two years, a tightening noose methodically drew in business associates from Zhou’s time with China National Petroleum Corporation, provincial associates from his time as Party Secretary in Sichuan Province, associates from the security establishment and close family members.

As a member of the PSC for five years from 2007-2012, Zhou Yongkang was one of the seven most powerful people in China.  Not since the 1976 arrest and subsequent trial of Jiang Qing and the Gang of Four at the end of the Cultural Revolution has such a high-level Chinese official been brought to public trial by the Chinese Communist Party.

The beginning of Zhou Yongkang’s fall is associated with Chongqing, a provincial-level ‘city’ (see Direct Controlled Municipalities) in China’s far west immediately adjoining Sichuan Province and erstwhile power-base for Bo Xilai, Zhou’s protégé.  Until the death of British citizen Neil Heywood followed by the failed attempt by Bo’s police chief to seek refuge in the U.S. Consulate in Chengdu (capital of Sichuan Province) followed by the conviction of Bo’s wife on charges of ordering Heywood’s poisoning, it had appeared likely that Zhou would be able to get Bo onto the Standing Committee, thereby protecting his ‘retirement flank’ after stepping down.  Bo’s candidacy faltered under the weight of these events just as Xi Jinping was consolidating power and his new Standing Committee taking final shape.

xijinping_tiger-flies_adolfo-arranz (modified)

Now that formal charges against Zhou Yongkang have been announced, attention is swinging to Tianjin, another of China’s four Direct Controlled Municipalities (直辖市) and venue for Zhou’s upcoming trial.  It is perhaps not surprising that, for months now, the mood in Tianjin —  Philadelphia’s Sister City (since original establishment of “Friendship Cities” link in 1980) — has turned decidedly grim.  As reported by my friend Tim Weckesser and his fine team of professionals at Sino-Consulting International (SCI):

(begin extract from SCI Report)

The city of Tianjin, our main base in China, recently became a focus in the news media as it fell under scrutiny by Beijing’s powerful anti-graft campaign. This happened not only because of the sudden downfall of Tianjin’s long time police chief, Wu Changshun, based on corruption charges, but also because Tianjin courts have been chosen for the trial Zhou Yongkang, the highest ranking official ever to be charged with corruption. China’s state prosecutors formally charged Zhou, the country’s former top security czar, with accepting large bribes over a long period of time. At the height of his power, Zhou controlled China’s police, spy agencies, court systems, and prosecution offices all across the country. And he wasn’t shy about using these powerful assets to crush dissent in the name of “preserving social stability.”

 And now, to add to Tianjin’s notoriety, the city’s former mayor, Dai Xianglong, is “cooperating” in an “investigation”. From 1995 to 2002, before becoming Tianjin’s mayor, Dai was already well-known as the governor of China’s central bank, the People’s Bank of China (PBoC). The investigation, so far, is focused on the vast wealth amassed by Dai’s relatives, not on Dai himself. But this may well be just a tactical move with Dai himself as the real target. This new investigation comes on the heels of the 15 year prison term meted out to Nanjing’s former mayor, Ji Jianye, for corruption. The court found Ji guilty of accepting 11.3m yuan ($1.9m) in bribes between 1999 and 2013, when he was dismissed.

 President Xi Jinping’s anti-corruption campaign aims at trying to clean up China’s graft-riddled government at every level, with examples being set at the top. And so far, we have to say it is successful. In our experience, government officials as well as executives in state-owned enterprises (SOEs) are all keeping their heads down. No big banquets, no gifts – given or received – and strictly limited international travel are basically the norm, at least for now. The question is – will this nationwide campaign eventually help China’s economic development? We hope so. Here is some very recent China market news taken from a variety of public sources.

(end extract from SCI Report)

These then are the dangerous riptides which have been tugging at our PHL-TEDA EcoPartnership‘s Chinese partner, TEDA, since the end of 2014.   Given the fathoms-deep nature of Chinese political and legal process, many of these currents have been swirling in hidden depths while the surface continued to appear placid.  The U.S. side of our PHL-TEDA EcoPartnership has unmistakably felt the power of these currents, though.

While Xi Jinping’s anti-corruption drive remains immensely popular with the general public, there is a growing concern among many close observers of Chinese politics inside and outside China that these hidden forces can as easily become uncontrollable and destructive as they can be purging and restorative.  At the heart of all this is the crucial difference between ‘rule of law’ (with due process, standards of proof, checks and balances, etc) versus ‘rule by law’ (political power plays being managed under a thin veneer of legal process).  As Liz Economy wrote in an earlier post on this blog (see “Time for Xi to Reform his Reforms” in Feb. 6, 2015 post):

“Certainly, (Xi’s) anti-corruption campaign has hit its target—hundreds of thousands of them to be exact—and shows little sign of slowing down. He has cast a wide net, leaving little doubt that no sector of society—party, military, business, or other—is completely safe. Still, Xi remains vulnerable to accusations that the campaign is at least partially politically motivated, given that almost half of the senior-most officials arrested are tied in some way to his political opponents, and none of his Fujian or Zhejiang associates have been detained. He might want to bring some transparency to the process: uncertainty and fear of running afoul of some regulation or another are driving many officials to avoid making decisions or taking action.”   

Time For Xi to Reform His Reforms

February 11, 2015 in Article, Blog Post, News and politics, Policy | Tags: , , , , | Leave a comment

by Elizabeth C. Economy

February 6, 2015

A book vendor reads a book as he waits for customer next to portraits of Chinese President Xi Jinping (L) and late Chairman Mao Zedong, at an open-air fair in Juancheng county, Shandong province January 30, 2015. REUTERS/Stringer (CHINA - Tags: SOCIETY POLITICS) CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA
 ( Photo: Stringer/Courtesy Reuters).

As Xi Jinping nears the two-year mark of his tenure as president of China, he might want to take stock of what is working on the political front and what is not. Here are some early wins and losses.

Certainly, his anti-corruption campaign has hit its target—hundreds of thousands of them to be exact—and shows little sign of slowing down. He has cast a wide net, leaving little doubt that no sector of society—party, military, business, or other—is completely safe. Still, Xi remains vulnerable to accusations that the campaign is at least partially politically motivated, given that almost half of the senior-most officials arrested are tied in some way to his political opponents, and none of his Fujian or Zhejiang associates have been detained. He might want to bring some transparency to the process: uncertainty and fear of running afoul of some regulation or another are driving many officials to avoid making decisions or taking action.

Xi’s ideological war has also taken hold far more rapidly than anyone might have imagined. The Internet as a forum for lively political discourse has virtually closed down, and his crack team of propagandists are constantly coming up with new ideas to turn back the information age for the average Chinese citizen. Banning foreign textbooks, blocking Gmail and VPNs, and putting cameras in classrooms to report on professors are just some of the initiatives underway. It is hard to reconcile Xi’s desire to support China’s most creative and innovative thinkers—much less attract back those who have made their lives abroad—to jumpstart the economy with policies designed to block communication and access to information. If he doesn’t reign in the Liu Yunshan’s and Lu Wei’s soon, he should probably expect a wave of China’s best and brightest to get their passports in order.

Xi has had less success in his efforts to reform social policy. Perhaps nothing is as surprising as the failure of the relaxation of the one-child policy to encourage young Chinese couples to have more children. In late 2013, Beijing issued new rules that permitted couples to have a second child if either parent was an only child. The government saw relaxation of the policy as a win-win—addressing both a significant source of societal discontent as well as the challenge posed by an aging population and shrinking labor force. Initially, the government estimated that with the reform, approximately eleven million additional couples would be eligible to have a second child. They anticipated that roughly two million new babies would be born each year. Instead, only one million couples applied, and as one Chinese expert estimates, there have been only 600,000 to 700,000 newborn second babies—roughly one-third of what the Family Planning Commission had anticipated. Analysts suggest that there are a number of reasons for the baby shortfall: no preschool for children under three, toxic environmental conditions, economic concerns, and even too much success in inculcating the value of a one-child policy.

Reform of the hukou, or residency permit, system is struggling as well. Launched in July 2014, hukou reform technically allows migrant workers to establish residency and receive benefits, such as education for their children, in the cities in which they work. Yet restrictions in the plan mean that only a small percentage of the more than 200 million migrant workers will likely benefit from the policy. Cities such as Beijing, Shanghai, Chongqing, and Guangzhou, which are home to the largest numbers of migrant workers, are excluded from the policy. Indeed, the new regulations only permit migrants to receive full urban residency benefits if they move to towns and cities of less than 500,000. Cities in between 500,000 and the most popular megalopolises have a range of restrictions on their residency requirements. As Chinese demography expert Kam Wing Chan has noted, it makes no sense to exclude the largest cities or set the barriers too high in other large second-tier cities—that is where most migrant workers currently live and, most importantly, where work is available. Given current restrictions in the policy, Chan estimates that to bring the migrant population to zero—the objective of the reforms—will require three to four more decades.

Policy reform is challenging under any circumstance, but all of Xi’s reforms share a common problem: a fundamental misunderstanding of social dynamics. The lack of restraint in the anti-corruption campaign and ideological war create a climate of fear that will undermine success in achieving other policy objectives over the long term, while a failure to recognize the actual needs of young Chinese couples and migrant workers means that the one-child policy and hukou system reform will continue to deliver sub-optimal results. For Xi Jinping it may well be time to reform his reforms.

What Is “The Road To Paris” in 2015 ? — and How Did You Find Yourself On It?

January 20, 2015 in Blog Post, News and politics, Policy | Tags: , , , , , , , , , , , , | 2 comments

Yes, You’re On The Road to Paris

Let’s take the second question first.  How did you find yourself on the road to Paris?  Well, that’s because you’re a human being sharing in the planet’s oxygen, foodstuffs and other resources, and because you, like your other human planetary co-habitants, have ceded some of your autonomy to governments since the dawn of civilization.  From that view, the 2015 Road to Paris is the effort being undertaken by all the nations in the world to take their first meaningful step together toward averting the risk of planetary environmental destabilization.  It’s encouraging that this first big step looks likely to happen in 2015, because the nations of the world have been talking about the step, without taking it, since 1995.

What is this step?  Essentially, it’s the world all signing on together to a insurance plan at the global level. The insurance plan hedges against the increasingly clear and present danger of climate change tipping us into a non-sustainable (for humans and most mammals, that is) future.

Before describing the Paris destination in December 2015 (and detailing the circuitous route we have been traveling since 1995 to arrive in Paris), let’s dispatch one canard forthwith: there is no certainty.  The climate change discourse is all-too-often framed in the media and our daily conversations as a dialogue of the deaf between passionate proponents and equally passionate deniers. For most, the weight of scientific data — as well as their intuitive, non-scientific “felt experience” — has been clearly elevating the possibility, if not the probability, that  self-reinforcing cycles of warming are being triggered as a result of the post-industrial patterns of carbon and other greenhouse gas (GHG) emissions.  (see the Introductory chapter of The God Species: Saving the Planet in the Age of Humans for a clear-headed discussion of our risks of overstepping nine particular boundaries that are required for maintaining human-friendly planetary balance).

Here’s the point:  None of us should be talking about certainty.  No environmentalist, no matter how committed, can say with certainty that we are headed toward human-triggered environmental disaster. No skeptic of climate change can say, at least not with credence, that there is zero risk.  The focus needs to be on the twins facts that (a) there is clearly some risk and that (b) the consequences of inattention to, or mismanagement of, this risk are so high as to be unaffordable at every level  .  No general fighting for military survival can wait until all of the pertinent facts of the battlefield are known before engaging in battle. Choices have to be made, and actions taken, in the absence of perfect knowledge.   I submit that we all should be able to agree — or, at least, enough of us for an effective consensus — to taking steps at the local, national and global level to mitigate this imperfectly understood risk while there is still time to do so.

Road to Paris

So What Is ‘The Road To Paris’ in 2015 (and how did we get here)?

The ‘Road to Paris’ refers to this year’s leg of the global journey we have been on since 1995.  This somewhat quixotic journey has been to try to address, as a community of nations, the risks of climate change.  Since this is, by definition, a supra-national effort, this journey has been undertaken under United Nations auspices (since the United States and the other leading Allied nations coming out of World War II set up the United Nations precisely as the forum to deal with this type of supra-national, global challenge).

This being the U.N., there is some mind-numbing nomenclature and an alphabet soup of acronyms to deal with.  There is also the inherent frustration embedded in dealing with the world (where, if you’re a non-diplomatically inclined person, it’s frustrating to find that people don’t latch on to what you think is the right way of doing things right away).  As to the nomenclature and acronyms, I’ll just cover the three most important ones for present purposes:  The framework which has governed this process since it got going in 1995 with “The Berlin Mandate” is known as the United Nations Framework Convention on Climate Change (or UNFCCC).  The framework is carried forward through yearly conferences, sometimes at the head of state level and sometimes at the ministerial level, which are called Conference of Party meetings (or COP).  Finally, the groundwork for the UNFCCC & COP meetings was originally prepared, and continues to be scientfically led, by the Intergovernmental Panel on Climate Change ( or IPCC).  Established by the United Nations Environment Programme and the World Meteorological Organizaiton in 1988, the IPCC acts as the leading international body for the scientific assessment of climate change to guide the poltiical work of the UNFCCC and its COP meetings.

Got that?  Good.  It gets easier to follow the roadmap from here on in.

As mentioned, The Berlin Mandate in 1995 was the starting point for the global effort to come up with some form of global response to the emerging global threat of climate change.  That led after two years of talking to high hopes at Kyoto that the world community would agree to an action plan (the so-called Kyoto Protocol). An action plan did in fact take shape but left unresolved key issues between the industrialized countries (who were being asked to underwrite most of the cost for the various action mechanisms) and developing countries (who were being asked to implement these mechanisms at possible risk to their economic growth prospects).  As a result of these tensions, the U.S. Congress refused to ratify the treaty after President Clinton signed it and the Bush Administration subsequently repudiated the treaty explicitly.

Without U.S. participation, the UNFCCC bus careened around various COP destinations (Buenos Aires, Bonn, Marrakech, New Delhi, Milan, Montreal, Nairobi, Bali, Poznan, Copenhagen, Cancun Durban, Doha and Warsaw — with repeat forays to some) for the next 17 years without any fundamental resolution to the “who pays” question and without any real semblance of  full global consensus emerging.

This changed on November 11, 2014 when Presidents Obama and Xi Jinping made surprise joint announcements on U.S.-China Cooperation on Climate Change and Clean Energy.  This breakthrough  —  involving the world’s two largest economies, two largest carbon-emitters, and de-facto leaders of the two contending blocs within the UNFCCC process  — was then further consolidated at the next scheduled COP meeting, scarcely a month later, in Lima, Peru (COP 20).

As a result of the November 11th breakthrough between the U.S. and China and the further COP20 institutionalization of this breakthrough on a global basis, the world community is finally on the threshold of a full consensus of action steps to take following the December 2015 heads of state COP meeting in Paris.  Currently, all the countries in the world are committed to preparing their voluntary plans (based on loosely-shared parameters and metrics).    Those plans are expected to be delivered in the spring of 2015 for discussion, review and fine-tuning during the remainder of the 2015 calendar year.  In December, the heads of state of the world community will convene to formally agree and commit to this set of  national action-plans representing the entire world community.

Conclusion (and Teaser for Next Installment)

It’s not perfect, but it’s a start.  As someone who rowed crew, I’m a believer in everybody pulling their oar in the same direction even if the level of output varies.  At the global level, the United Nations is far from perfect but it’s all we got (and we in the United States need to recognize that we had a disproportionate voice in making it what it is).

President Obama’s State of the Union address today will lay out some of the roadmap — past and future — which I’ve more minutely and ponderously described here.  He will do so because the risk of de-stabilizing climate change perennially jostles with global terrorism at the very top of the country’s national security threat-list.  He’ll do so for other reasons, though — reasons that go beyond U.S. national security interest.  At the individual level of morality, we each need to think about the impact of our decisions and our actions for those we live with and for those who will follow later.  At the species level (where morality does not really play a part but evolutionary survival does), it would be nice to emerge a winner — a species that figures out how to survive and, in doing so, recognizes its interdependence with the rest of the planet, sentient and non-sentient.

Having tried to do the big picture here, I’ll be back soon to focus on the U.S.-China element of this global equation.  That’s the part of this formula that I have been working with since 2006.  I hope that my broad brushstrokes in this piece help bring focus to understanding how important the U.S.-China piece of this global puzzle really is.  Later on, I’ll get into the fine brushwork of how well Philadelphia is positioned on the global stage to play a leading role in the U.S.-China clean energy story and, by extension, the bigger global climate change story.

Philadelphia Region & Tianjin Partner Win U.S.-China EcoPartnership Recognition

September 2, 2014 in Blog Post, Energy, International Business, News and politics, Philadelphia, Technology, Tianjin | Tags: , , , , , , , , , , , , , | 1 comment

The summer’s over and the new work-year has begun. No better way to kick it off than with a reprise of our summer’s big news — China Partnership of Greater Philadelphia and the City of Philadelphia were recognized at the annual high-level U.S.-China talks in Beijing this summer with one of six new U.S.-China EcoPartnerships.  Our partner is the Tianjin Economic-technological Development Area or TEDA.  Our PHL-TEDA EcoPartnership focuses on funded projects in Tianjin for smartgrid online monitoring systems (OMS), wetlands urban water management (WUWM), and green building energy efficiency (GBEE).

EcoPartnership w Kerry, Baucus & PodestaBack row: Philadelphia Delegates Terry Cooke, CPGP (4th from left) and Gary Biehn, White & Williams (2nd from left)

Front row (from right to left) China’s State Councilor Jiechi Yang , Sec of State Kerry, Amb. Baucus & Counselor to the President, John Podesta

 

In other posts to follow, I’ll share some more background on what the five-year old U.S.-China EcoPartnership program is (and why it matters), give thumbnails on the other five EcoPartnership awardees in 2014, and provide a listing of the twenty-four active EcoPartners since the inauguration of the program in 2014.

 

In the meanwhile, here are links publicizing our new three-year PHL-TEDA EcoPartnership:

U.S. State Department Press Release

Secretary Kerry remarks at July 10th EcoPartnership signing ceremony

U.S. Government website for the U.S.-China EcoPartnership program

Official photo from U.S. Department of State

City of Philadelphia Press Release (on City’s blog)

City of Philadelphia Press Release (on City Facebook page)

 

Happy Year of the Snake – Update 1

March 4, 2013 in Blog Post, Competition, Energy, Innovations, International Business, Investment, Investment, News and politics, Policy, Publications, Technology | Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Happy Year of the Snake!

I have some major catching up to do so let me begin here with a link to my book which the Wilson Center launched on September 24, 2012.  (Note: if you want to download the PDF of the book, just right-click and use the Save As option).

Book Cover

More 2012/3 updates to follow in rapid sequence.

Thanks for hanging in there,

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