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Volume 2, Number 4 in Global TECHtonics: U.S./China Fault-line series

 

The weekend’s big development in the technology arena is Beijing’s eleventh-hour move to alter the timing and trajectory of the sale of TikTok’s U.S. operation.

We touched on the Trump Administration’s August moves against TikTok’s parent Bytedance in the U.S./China De-Coupling: 4 Levels of Risk post two weeks ago.  On August 6th, President Trump signed two executive orders which started a 45-day time-clock involving two Chinese companies with hugely popular social media apps – ByteDance (owner of TikTok) and Tencent (owner of WeChat).  According to those orders, U.S. citizens and businesses would be barred, once the 45-day period expired, from any transaction involving the company and/or its products.  On August 14th, the Trump Administration modified the order as far as it affected TikTok by putting a new order in place, giving TikTok 90-days within which to complete the divestiture of its U.S. operation to an approved U.S. corporate buyer.

The widely-presumed reason for this change being made so shortly after the announcement of the original order is that U.S. potential buyers interested in acquiring the U.S. operations of TikTok had pitched their interest to the White House.  It is not surprising that U.S. potential acquirers would be focused on TikTok and not WeChat.  The number of TikTok users in the U.S. is estimated at 80 million in comparison with 19 million for WeChat.  Its growth rate in global markets is far faster and, critically, its algorithms have nearly ubiquitous applicability whereas WeChat algorithms are more geared to Chinese user behavior and are so less replicable in other world markets.

Two groups of interested buyers have emerged publicly since the August 14th announcement:

  • Microsoft/Walmart: As Instagram and other social networks edge into offering shopping features, Microsoft and Walmart are looking to establish themselves at the strategic center of this opportunity with one bold acquisition  move.   Put simply, Walmart would provide the e-commerce component for TikTok while Microsoft would manage the crucial cloud-computing infrastructure.  The deal offers competitive advantages to both firms – Walmart would become better positioned to compete with Amazon and Microsoft would gain experience with an innovative and cutting-edge set of algorithms and data-sets.
  • Oracle: According to analysis by the New York Times business reporter Mike Isaac, “Oracle could use TikTok’s data about social interactions to benefit its cloud, data and advertising businesses.” Also, like Microsoft and Walmart, Oracle is interested in the opportunity the deal would afford “to offer customers a hyper-personalized experience in both content and commerce.”

Going into the weekend, the expectation was high that Bytedance’s preferred acquisition partner would become known and that negotiations would shift to a new phase of negotiation with only that chosen partner.

So, what was the development over the weekend which changed the trajectory and pace of this deal?  The Chinese government announced late in the day on Friday that any sale of Bytedance’s assets would be subject to a brand-new set of restrictions affecting artificial intelligence exports.  As reported in still-developing coverage in the Wall Street Journal, “the new Chinese restrictions highlight the extent to which TikTok, a breakout social-media hit—especially with younger U.S. users—has been thrust into a geopolitical contest between the U.S. and China over the future of global technology.”

I’ll limit my commentary on this development to three main points – a historical observation, a key point having to do with the present-day competition in advanced technologies between the U.S. and China, and my personal handicapping of where this deal is likely to go in the weeks ahead.

 

Historical Antecedent: The U.S.-Japan Trade War

While observers sometimes invoke the U.S.-Japan Trade War as a template for understanding our current tensions with China, the contrasts between the two are probably more instructive than the similarities.  A future post will return to the broad comparison.  For our purposes here, I will single out one important point of contrast.  The U.S.-Japan Trade war became incandescently hot as a political issue in the lead-up to the 1992 U.S. Presidential election.  But while that was happening, commercial developments on the ground were already in motion to begin lowering the heat.  The industry sector in which the grass-roots transformation took root and started having great effect was the automotive sector.  The seed for that bottom-up transformation was the fact that, post-war, Japan had developed intellectual property in their domestic market  that made them more competitive than the U.S. industry in a number of vital areas of automotive manufacturing (e.g., inventory management, quality control, customer-based innovation, etc). Led by Toyota, the Japanese and U.S. industries started reaching an accommodation even before politicians in the U.S. turned up the volume on their anti-Japan megaphones.  Japan would license out its intellectual property and bring its production closer to its customers in the U.S. by building factories and supplier networks in the U.S.  In return, American companies would gain access to know-how in areas where its competitiveness was lagging and also gained greater access to the restricted Japanese market.  At a political level, investments in new state-of-the-art production facilities in the non-unionized south brought jobs into key congressional districts.  Of equal importance, auto workers, their families and their communities started having the experience of working alongside Japanese managers on U.S. soil.  In the process, real-world people-to-people experiences built on collaboration replaced the one-dimensional caricatures being amplified by politicians and the media.

The Chinese have studied this experience whereby Japan lessened the political tension of the U.S.-Japan Trade War while, simultaneously expanding access to the lucrative U.S. market and affluent U.S. consumers.  For various reasons, they have not been as successful in applying the model.  We’ll examine the broader set of reasons in a future post but, for present purposes, one salient reason is that China, generally speaking, has not developed the portfolio of intellectual property focused in high-value industries (like, for Japan, automotive and consumer electronics) and highly sought after by U.S. companies.  Except, that is, until now as China emerges with competitiveness in advanced technology fields such as artificial intelligence, robotics, and autonomous vehicles.

 

Looking at Both Sides Now:

The U.S. innovation ecosystem represented by Silicon Valley is, and is likely to remain for the foreseeable future, peerless in many important respects – depth of talent and experience, access to capital, connectivity to leading universities, basic research capability and innovation mindedness.  In three respects, however, emerging tech competitors in China enjoy advantages which U.S. firms can’t match.  First, China has been for years the biggest and fastest growing market in the world and U.S. companies can’t afford to cede that base of users entirely to their Chinese competition to monopolize.  However, the ability of U.S. firms to access those consumers is highly constrained by a whole raft of protections – many non-WTO compliant and others not yet covered by WTO ground-rules — by which the Chinese government limits foreign access to its home market and by which it supports its home-grown champion companies.  Second, China may enjoy a tactical advantage through its laser-focus on market applications (as opposed to research and academically-based innovation). Third, AI firms in China definitely enjoy a leg-up in algorithm development because they have direct access to the world’s largest user-base for smart phones and are less constrained by privacy protections for those users.  These latter two advantages for Chinese tech firms are persuasively presented by the former President of Google China, Kaifu Lee (a Taiwanese national whose computer science PhD thesis at Carnegie Mellon gave birth to the world’s first speaker-independent, continuous speech recognition system) in his book AI Superpowers: China, Silicon Valley and the New World Order.  In Lee’s view, “the United States may have been a first mover in AI but that advantage will not last forever. The AI era will reward the quantity of solid AI engineers over the quality of elite researchers. Strength will come from an army of well-trained engineers and entrepreneurs, and China is training just such an army.”

So, stepping back, there is now for the first time since normalization of U.S.-China relations a strategically-important (emerging) industry where Chinese firms hold important competititve advantages over the U.S.  Unlike democratic Japan, this high-stakes competition is associated with a Communist regime with all that that entails for public attitudes in the U.S.  And there is little in the of way local ties-that-bind being built quickly and effectively on a people-to-people basis.  Nothing that can match the stabilizing experience with Japan investment into the U.S. in the 1990s. Together, these three factors go a long way to illuminating the huge pressures that have been building up under the U.S./China technology faultline on both sides of the U.S. political aisle.

 

Where’s The TikTok Deal Likely to Go?

Despite the fact that practically nothing is known yet about the details of the PRC government restrictions announced on Friday, two things can be safely said.   First, the fact that the PRC government is invoking national security as a basis for governing the commercial activities of its leading artificial intelligence firms is hardly surprising.  The competition between the U.S. and China is, for reasons just examined, acute.  The U.S. and other countries routinely monitor and manage international commercial activity for their technologically-advanced products and services, especially those that are ‘dual-use’ in both commercial and military applications.  The second point is that the timing of the announcement tends to be viewed in the U.S. as so transparently tied to the on-going negotiation involving TikTok that it will be viewed more as a political beanball, than a fair pitch.  This despite the fact, as pointed out by an astute comment (see below), that these new regulations had been proposed prior to Trump’s August 6th announcement and were in a public comment process.

The Chinese government action raises the prospect that key algorithms and other vital data – everything that makes TikTok tick — may be stripped out of the sale by its Chinese parent corporation as a new requirement of Chinese law.  That result would fundamentally change the value proposition for both the Microsoft/Walmart and Oracle bidding teams.  It’s like the difference in value between a top-of-the-line computer and that same computer with all its electronics removed.  At the very least, the PRC government action will force all parties to slow the pace of their negotiations and delay the deal being sealed until there’s greater clarity about what will ultimately be allowed.

With Friday’s move, it’s likely that the Chinese government will be satisfied with slowing the deal and changing the trajectory of its fall-out for global technology competition.  Scuppering the deal entirely would risk dramatically escalating the issue with Trump and his Administration.  That would go against China’s temporary strategy of muted response to the Trump Administration’s recent, pre-election flurry of jabs.  The idea in Zhongnanhai in the run-up to November 3rd is to give its wolf-warriors and nationalistic netizens enough to appease their appetites but not enough to risk fanning Washington-Beijing flames out of control.

So, with the clock ticking down to 64 days before the U.S. election and with 78 days before the Trump Executive Order 90-day deadline expires on November 12th, the endgame of this global chess match is now ruled by the time-clock.

TikTok, TikTok, TikTok …

 

Volume 2, Number 3 in Global TECHtonics: U.S./China Fault-line series

A U.S.-led initiative to reach out to China and to welcome it into the community of Western nations began with President Nixon trip to Beijing in February 1972.  Orchestrated by Henry Kissinger, Nixon’s National Security Advisor at the time, the trip was a brilliant Cold War gambit to exploit the growing rift between Moscow and Beijing. The trip kicked off a seven-year process of “normalizing” relations between the West and “the sleeping dragon” of Asia and, in so doing, divided the Soviet bloc. Through almost half-a-century and a bipartisan succession of Presidents, the effort to engage with China continued as that country woke from its Cultural Revolution nightmare and began to rise up, shaking the world as it did so.

February 1972 was the Year of the Rat (Water Element) in the Chinese zodiac.  Forty-eight years later we are again in the Year of the Rat under the Metal Element.  In Chinese traditional thinking, we have gone from a time of suppleness and fluidity to a time of hardness and intransigence.  In the minds of most Western observers, we have passed from a strategic engagement with China to, under President Trump, a time of open competition on the world stage and strategic disengagement (“de-coupling”) in the technology arena.

This post will save for another time the broader discussion about how and why this shift came about other than to make three general, even obvious, points.  First, there was undoubtedly a measure of optimistic naïveté in the West in assuming China’s willingness to dutifully assume the role of a ‘responsible stakeholder’ in the post-WWII world order.  If the Chinese had conceived of their nation as only having been born in 1949, assuming the mantle of responsible Pax Americana stakeholder might have fit more comfortably. As it was, Chinese conceived the People’s Republic of China as the heir to a Chinese polity which had been the dominant economy in the world for sixteen of the previous eighteen centuries.  They weren’t predisposed to simply adopting some newcomer’s rules and norms as to how China should conduct itself on the world stage. Second, there has undoubtedly been tactical overreach and ill-advised swaggering by President Xi Jinping since his triumphalist speech at the 19th Party Congress in September 2017.  U.S.-China relations would undoubtedly be on a more stable track today had Xi Jinping played his cards differently, following suit more with Deng Xiaoping’s opening bid of “keeping a low profile (hiding one’s capacity) and biding one’s time” (韜光養晦、有所作為) rather than flashing his Made in China 2025 card so conspicuously. It can be argued that it’s better from the U.S. standpoint for this “world order competition” to be out in the open. Third, the horse is definitely out of the barn.  No U.S. Administration is going to try to get that horse back on the 1972-2017 normalization track. The world has changed and what is needed is a U.S. Administration which recognizes real challenges from China but does not exaggerate them and which marshals the resources to address those challenges in an efficient and effective way, rather than wastefully and non-productively.

The remainder of this post uses last week’s The Four Levels of Risk post as a backdrop to a quick sketch outlining just how wasteful and ineffective the Trump Administration’s policy of technology de-coupling from China is becoming.  I’ll do this sketch with three brushstrokes – the view from U.S. boardrooms, the view from the cultural sidelines and the view from history.

 

The View from U.S. Boardrooms

A CNBC.com article by Arjun Kharpal published on June 4, 2019 made no reference to the Tiananmen anniversary but did point out that the Trump Administration’s Huawei policy was quickly hoisted on its own petard  – failing to get allies to broaden the campaign but leading to a marked acceleration of China’s efforts to develop its own semiconductor industry to supplant U.S. semiconductor supply in the Chinese market and, eventually, in world markets.  “The Huawei incident has indeed stimulated the development of China’s domestic chip industry,” Gu Wenjun, analyst at China-based semiconductor research firm ICWise, told CNBC by email” wrote Kharpal at the time. Now, one year later, Trump Administration policy is digging this hole deeper and at a faster pace:

  • Qualcomm is reported to have lost current orders worth as much as $8 billion as a result of the Trump Administration’s May 2020 tightening of trade restrictions imposed against Huawei. The new regulations block all chipmakers that use U.S.-made equipment or software from producing chips for Huawei (though companies can apply for a license to continue supply)
  • Following the Trump Administration’s August 6th signing of an Executive Order banning transactions by U.S. companies with Tencent, the owner of the WeChat app, market research firms scrambled to assess the impact on Apple and its installed base of iPhones in the strategically vital Chinese market. The surveys all pointed to the same result – as many as 90% of iPhone users in China would drop the Apple product and switch to Android devices if the WeChat app were no longer available on their iPhones.
  • The same August 6th Executive Order targeted Bytedance, parent company to the massively popular TikTok app. Seasoned observers who are able to gauge the U.S.-side push-back against this action and know the sloppiness with which the Executive Order was drafted, expect an eventual climbdown by the Administration – if not before the November 3rd election, then shortly after it.

 

The View from the Cultural Sidelines

There are two culture wars raging – a partisan one in U.S. domestic politics and an international one between a suddenly tarnished U.S. model and a much-hyped “bright and shiny” new Chinese model.  The same dynamics at play with the COVID-19 pandemic are at play in the technology sphere.  Domestically, Trump works to energize his base with claims that China is the enemy and that his Administration’s COVID response and China de-coupling response are “the best” that any President could possibly do.  Front-line health workers and tech experts know that, in both cases, the claim lies far afield from the truth.

In China, the popular view cuts to the bone of Trump Administration posturing.  His new nickname is 建国 (Jiànguó), a popular name given by parents to their infants especially during the nationalistic years of the Cultural Revolution.  It means “Build the Country.”  In other words, Trump Administration policies are widely seen as accelerating the same nationalistically-driven Sputnik-type race to advanced semiconductors, artificial intelligence, robotics and the tech future which the policies ostensibly are meant to forestall.  Trump’s impulsive “Only I Can Fix It” approach playing to a grandstand of partisan supporters has made the challenge which Xi Jinping’s China presents the U.S. more acute.   An approach which takes measured and deliberate stock of that challenge and which aligns interests and works closely with the U.S. business community and international partners would be far more effective.  Pumping up nationalist sentiment in both the U.S. and China serves only to narrow options and increase risks of conflict spiraling.

 

The View from History

A pithy take on Trump’s approach to the U.S.-China technology challenge comes from a widely-respected former colleague who has decades of high-level experience with China from political, national security, economic and think-tank perspectives.  He writes “(Trump is like) King Canute trying to fight, instead of the ocean tides, the tides of technology.”

I’ll conclude with another, somewhat longer historical reference which illuminates Trump’s campaign of China-bashing as a central element of his re-election strategy.  It is drawn (almost) verbatim from Episode 66 of The History of Rome podcast series by Mike Duncan:

“Conscious that his standing with the people was taking a hit, the Emperor decided he needed to find someone to take the fall for the fire.  Someone he could point to and say it was them, not me, I didn’t have anything to do with it.  But he couldn’t just grab someone off the street because, with his popularity sinking like a stone, that would just engender the further charge that he was setting up some innocent to take all the blame.  What Nero needed was someone, some group that the people disliked even more than him, someone that the people were ready, willing and able to believe had done this horrible thing if for no other reason than that the people were looking for an excuse to round up and punish them. Enter the Christians. In the thirty odd years since the death of Christ, nascent Christian communities had begun cropping up throughout the Empire.  At first, they were primarily Jewish in character but through the missionary work of St Paul, known later as the Apostle to the Gentiles, this new religion began to spread into the Greco-Roman world.  By the Emperor’s reign, a tiny community of believers, led according to tradition by St. Peter, had established a religious beachhead in Rome itself. The problem the early Christians faced in Rome, though, was not just that their religion, in comparison to the wider pagan world, struck the average Roman as downright weird, but also that at this point most Christian adherents were non-citizen resident aliens in the city who spoke primarily Greek or Hebrew. So the Christians in Rome looked different, spoke a different language, usually came from the lower rungs of the social ladder, and belonged to a strange monotheistic cult that seemed to have cannibalistic overtones. All in all, they were capital O Other in every sense of the word. And as has been proven over and over again by history, whenever terrible things happen to a community – economic problems, floods, plagues, fires – it is the capital O Others who usually get blamed. So desperate to shift responsibility for the great fire away from himself, the Emperor looked at these Others and decided to lay it all on them.”

The only change I have made to this podcast text, recorded in August 2009, was my substitution of the central character’s title instead of his name.  Even with that switch, there’s little surprise who that Emperor was.

Nero.

 

 

The global scientific consensus, most prominently supported by the work of the United Nations Intergovernmental Panel on Climate Change (IPCC), assesses with high confidence a global warming increase of 1 °C as measured against preindustrial levels. Currently experienced effects from the 1 °C global warming which has already occurred include: loss of sea ice and glacial shrinking, accelerated sea level rises, shifting atmospheric and oceanic currents, longer and more intense heat waves and hurricane seasons. Impacts on the biosphere include the shifting of plant and animal ranges, earlier plant and tree flowering, and rapid declines in bio- diversity. All of these changes threaten the equilibrium of the planet and, more fundamentally, the continued viability of human adaptation to the planet.

The most recent comprehensive report issued by the United Nation’s Intergovernmental Panel on Climate Change (IPCC) in 2018 compares the difference in impacts on human societies (the ‘delta’) if global warming is allowed to reach 2 °C as opposed to being stabilized at 1.5 °C above preindustrial levels. These delta effects2 include: an additional 10 million people endangered by sea level rise; several hundred million more people made susceptible to poverty; 50% more people exposed to water stress; loss of 1.5 million additional tons of global annual catch for marine fisheries; the number of plant and animal species on which human life depends losing half their habitat.

Clearly, the challenge is epochal. Even assuming that all countries in the world fulfill their Nationally Determined Contributions (NDC) pledged in the Paris Agreement, the world is currently on track to exceed 1.5° C by 2050 and to remain well above that threshold into the next century.

At a national level, the challenge is no less urgent or less central to societal well-being. Even for an administration notably skeptical of climate change science and aggressively committed to deregulating and redefining environmental standards so as to lessen the severity of threat assessments, the outlook remains dire. According to the Trump Administration’s most recent Climate Assessment3, which synthesizes the data and projections from thirteen federal agencies, key risks facing the nation as a direct result of climate change include risks to communities, the economy, water quality, citizen health, ecosystems, agricultural and food supply; the nation’s infrastructure; and the nation’s defense. To quote directly several specific examples:

  • “Climate change creates new risks and exacerbates existing vulnerabilities in communities across the United States, presenting growing challenges to human health and safety, quality of life, and the rate of economic growth;”
  • “Without substantial and sustained global mitigation and regional adaptation efforts, climate change is expected to cause growing losses to American infrastructure and property and impede the rate of economic growth over this century;”
  • “The quality and quantity of water available for use by people and ecosystems across the country are being affected by climate change, increasing risks and costs to agriculture, energy production, industry, recreation and the environment;”
  • “Impacts from climate change on extreme weather and climate-related events, air quality, and the transmission of disease through insects and pests, food and water increasingly threaten the health and well-being of the American people, particularly populations that are already vulnerable;”
  • “Ecosystems and the benefits they provide to society are being altered by climate change and these impacts are projected to continue. Without substantial and sustained reductions in global greenhouse gas emissions, transformative impacts on some ecosystems will occur; some coral reef and sea ice ecosystems are already experiencing such transformational changes;”
  • “Rising temperatures, extreme heat, drought, wildfire on rangelands, and heavy downpours are expected to increasingly disrupt agricultural productivity in the United States. Expected increases in challenges to livestock health, declines in crop yields and quality, and changes in extreme events in the United States and abroad threaten rural livelihoods, sustainable food security, and price stability;”
  • “Our Nation’s aging and deteriorating infrastructure is further stressed by increases in heavy precipitation events, coastal flooding, heat, wildfire, and other extreme events, as well as changes to average precipitation and temperature. Without adaptation, climate change will continue to degrade infrastructure performance over the rest of the century, with the potential for cascading impacts that threaten our economy, national security, essential services and health and well-being.”These effects are felt most directly at the local level. This is because the costs which climate change inflicts globally and nationally – costs of community disruption, slowing economic growth, deteriorating water quality, ecosystem disequilibrium, and infrastructural decay – are mostly borne at the local level. To address this challenge, the City of Philadelphia, like most major cities in the country and many counties and townships as well, has its own Climate Action Plan. Generally, these local plans have three major components: (1) at the grassroots level, the plan serves to connect with various stakeholder groups such as businesses, educational institutions, residential associations, and engaged constituencies to raise awareness and help coordinate common effort; (2) at the local governmental level, the plan articulates the limited number of focal areas where local government has determined its scarce dollars canhave greatest, proactive impact; and (3) at the supra-local governmental level, these plans serve as the blueprints for collaboration with other cities and regions, as the justification for federal budget requests, and as the channel for consolidating and reporting local ‘carbon emissions savings’ into the Paris Agreement NDC process.

As we have learned with the COVID-19 pandemic, a straightforward scientific fact can be politically complicated.  Acknowledging and addressing human-caused climate change is politically complex in the U.S. at this moment.  So is cooperating with China on anything.  Recognizing those complexities does not, however, absolve us of the responsibility to find a way forward on both the science and the international relations.

1.5° is where the U.S. and China must meet.

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.

 

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

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.

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.

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,

This is the first of regular weekly Cooketop News blog posts (scheduled to appear each Monday).

By reviewing the previous week’s top stories involving — broadly speaking —  China clean energy, the idea is to identify and comment on a particular  emerging trend/issue which points forward and can help illuminate news-in-the-making for the week(s) ahead.

By radio analogy, the commentary is meant to cut through static in the general coverage of whatever’s the issue at hand and present a clear frequency and better ‘signal-processing’ for helping to tune in on an enduring news issue.

*     *     *     *     *     *     *     *     *    *     *     *     *     *     *     *

THIS WEEK’S COMMENTARY — HUNTSMAN, REPUBLICANS  & CHINA

Last week was the Iowa caucus and Tuesday of this week the New Hampshire primary.  The related questions which these contests have raised are what have Jon Huntsman’s China connections and qualifications done for his campaign effort and what are the implications for China given the current crop of Republican candidates.

Let’s start with the second question.  Liz Economy from the Council of Foreign Relations has done a better job than anyone at assessing the remaining field of candidates through the lens of their public positions on China.  To borrow liberally from her analysis, here’s what we’re looking at:

Mitt Romney says it’s all about the economy, stupid: Mitt Romney’s China policy is all about trade measures —keeping counterfeits out, protecting intellectual property, levying sanctions against unfair trade practices, pressing China on its currency, etc.  The question for an anti-“Big Government” candidate is who does all this work if not the government.

Ron Paul wants to make love, not war: Ron Paul appears to want to “go along to get along” with China:  stop intrusive surveillance, reconsider the Taiwan Relations Act,  drop the idea of import tariffs in retaliation for Beijing’s currency manipulation, and mute protestations over human rights issues.  As Economy has put it, there’s little doubt that “candidate Paul …would be Beijing’s pick for top dog.”

Jon Huntsman is long on experience but short on traction:  No surprise that the expertise in China policy is with former U.S. Ambassador to China Jon Huntsman. Huntsman has all his facts in line. You can agree or disagree with his specific positions — opposing a China currency bill or engaging to promote political change in China—but you have to admit he knows his stuff.

Newt Gingrich jettisons balance to keep ship afloat:  Gingrich’s initial positions in the campaign were balanced and reasonable, calling on the U.S. to do the right thing and take action on the home front in order to be more competitive.  As his electoral options have narrowed though, his positions appear to be veering in a more extreme direction.  Stay tuned for his advertising campaign in South Carolina to see if he starts demonizing China.

With Rick Santorum, the question is  ‘Where’s the beef?’:   Despite having a lengthy book and a Senatorial career in the public record, there’s almost nothing to go on to explain how Santorum would approach China if elected President.  He did make a quote about going  “to war with China” to “make America the most attractive place in the world to do business.”  Huh?.

Rick Perry talks the talk but doesn’t walk the walk:  “Communist China is destined for the ash heap of history because they are not a country of virtues. When you have 35,000 forced abortions a day…, when you have the cyber security that the PLA has been involved with, those are great major issues both morally and security-wise that we’ve got to deal with now.”  His actions?   Courting Huawei, a problematic company, to invest in Texas.

So, on to the related question, what has Jon Huntsman’s Mandarin-speaking ability and Ambassadorial command of the issues meant for his election prospects?  The answer, like a Rorschach, depends entirely on who you talk to.  His proponents invariably cite it as a positive (see NY Times article) and his detractors cite it as a liability (see story from last Thursday below).  Where’s the traction?  Answer: there’s maybe some but not much.

Fault-lines have been exposed in the body politic over these questions.  There’s no question that one of Ron Paul’s supporters went way, way over the line by insinuating Huntsman was questionably ‘American’ because he and his wife keep their adoptive children from China and India exposed to cultural traditions from those two civilizations, but nonetheless ideological conservatives generally seem to view his competence with China as itself  a cause for suspicion.

The first generation of Mandarin competent statesmen drew heavily from the offspring of Christian missionaries who grew up in China, people like the late Ambassador James Lilley.  Huntsman represents a second wave of high-level U.S. government officials who have Mandarin-competence through their two years of  Mormon service abroad.  (Tim Stratford, a former Assistant U.S. Trade Representative for China, is another example of this group of experts).  The third wave will come from younger Americans who, in step with China’s opening to the world, have been able to burrow deeper into language and cultural expertise.  They are making their way up the ladder of the U.S. government.  I can only hope that the American electorate — and the Republican Party — can find a way to value the knowledge they bring to public service.  The top rank of challenges which the U.S. faces will simply not be solved without constructive and effective engagement with China — and that requires people who understand, respect, and can operate in the sphere of Chinese language, culture and values.

(Disclosure: I have worked at various points in my career for Jim Lilley, Jon Huntsman, and Tim Stratford.)

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LAST WEEK’S COOKETOP NEWS

Here’s a listing of  some of the top stories covered in Cooketop News for Week 1 of 2012 (with hyperlinks):

Monday, January 2, 2012

Foxconn enters solar
Chinavasion’s High-capacity  Solar Charger
Protest in China – Ripple or Wave?
Bridge construction as economic development lever
10 Predictions for Cleantech in 2012

Tuesday, January 3, 2012

Top 20 Green Building Innovations of 2011
USDOC Sec. Bryson Faces a China Challenge
Cleantech Start-ups to Watch
Is China’s Solar Industry Entering Eclipse?
Public Housing Key as Export Machine Slows

Wednesday, January 4, 2012

‘Culture Campaign’ Dents Programming
Green Cars & Clean Energy: The China Angle
Cleaner Technology in Global Arctic Oil Race
Chinese Philanthropists Join to Protect Nature
China’s IPOs Top World’s Exchanges Despite Slump

Thursday, January 5, 2011

Air Pollution Hazardous for China’s Economic Health
Drought Drying out Poyang Lake in Jiangxi Province
Rustbelt Cities Go Green to Strengthen Economies
China’s Corporate Debt Issuance Soars in 2011
Huntsman’s China Cred No Boost to his Prospects 
Econ Ties to China Key Issue in Taiwan Election 

Friday, January 6, 2011

10 Emerging Sustainable Cities to Watch
Solar Turbine Makers Turn to India & China
U.S. Manufacturers of Steel Wind Towers Cite China
LDK Solar Snags $64mm from PRC  for U.S. Projects
China Announces Plan to Levy Carbon Tax by 2015 

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That’s it for this week.  I hope you find this of some value to your own pursuits.  Give me a holler — either by leaving a comment below or by email — to let me know what you think, positive or negative.  For anyone with a driving passion to get each day’s edition of Cooketop News (minus the summary listing and commentary that I provide in this weekly post), you can subscribe by going to the Cooketop News site at http://paper.li/mterrycooke/1324752421 and clicking on the upper-right Subscribe button.  There is also an Archive feature on the site (upper-center) which allows you to look up any previous edition.

Oh, before signing off, I owe you an answer to the question in the title.  Jon Huntsman’s name in Chinese? 洪博培.  (And by the way, if you try searching for the name on China’s Twitter clone — Weibo — when you’re in China, you’ll likely find the name has been blocked).

In the spirit of sharing news while it’s fresh, I’m copying verbatim a report on the gold nugget in the pile of dross that has passed for this year’s national budget process.

 For those of you who took in (in person or digitally) the Philadelphia’s 21st Century Energy Opportunity event I convened with the Academy of Natural Sciences and the T.C. Chan Center for Building Simulation & Energy Studies on October 11th,  the win is obvious — for the City and the region, for the national effort for cleaner energy jobs and investment, and for our global engagement.  For U.S./China clean energy cooperation, this budget victory also solidifies the framework of U.S./China Clean Energy Research Centers CERC) in building energy efficiency (Lawrence Berkeley Lab), electric vehicles (University of Michigan) and clean coal (University of West Virginia).

Kudos to Mark Muro and Bruce Katz for their success in keeping this ball moving down the field.  Here’s the report from late yesterday afternoon.

Mark Muro and Devashree Saha
December 19, 2011 | 4:10 pm

Notwithstanding the bleak outlook surrounding federal clean energy policy detailed in our recent report “Sizing the Clean Economy,” the FY 2012 omnibus spending compromise hammered out last week actually contains several reassuring affirmations of the value of recent institutional experiments.

One winner is the Advanced Research Projects Agency-Energy, perhaps the Department of Energy’s most popular program.

Although the program is funded at just $275 million–about half the level President Obama had requested–many will probably be relieved that the program has now survived, which hasn’t always seemed a certainty. Moreover, the deal improved on earlier bills that have circulated, suggesting that the cause of the government fomenting disruptive innovation using “outside-the-box” investments in venturesome technology ideas may be gaining traction. That’s good news.

So is another happy surprise in the deal: the authorization of two new DOE Energy Innovation Hubs, one specializing in rare earths and energy-critical materials and one for energy storage technologies. To be sure, the Obama administration had originally asked for eight of these hubs, and settled for three before this year requesting funds for three more in 2012. However, congressional appropriators weren’t convinced that there was a need for a hub focused on smart grid technologies, as reported Darius Dixon in Politico, and so the nation now has two more of them, for a total of five of these special purpose-driven, multidisciplinary centers for accelerated collaboration between corporations, universities, and government labs.

Yet we’ll take it. Having long argued that the nation has been making do with an obsolete energy research paradigm excessively oriented toward individual academic investigators, on the one hand, and the siloed and bureaucratic efforts of the DOE’s energy laboratories, on the other, it is gratifying to watch the slow but continuing rollout of a true network of well-funded, multi-sector regional innovation centers. Congress is doing the right thing by creating–hub by hub–a set of sizable new institutes charged with “winning the future” in energy technology.

More Articles On: Department of Energy

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