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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 …

 

ambitions

Bear with me. I’m going to kick off today’s post with a snapshot about how we organize the blog’s content week by week in order to set the stage for then revealing the slight wrinkle with today’s post. Boring. Hang in there, though … there’s a good reason.

 

The TEA Collaborative produces three blog-posts per week: on Mondays (aspirationally, at least) we put out a tech-related post which takes care of the T in our name; on Wednesdays (ditto) an energy/environment post which covers the letter E; and on Fridays (ditto) an A post for Ambitions (by which we mean the effort to chronicle the seventy-year undertaking by the government of the People’s Republic of China to leverage their huge population, along with other assets, to confront the world with a new, ambitious model of change at vast scale and speed).

So as not to get trapped into rigidity, we have also been planning all along to fold occasionally a so-called X-factor post into this T-E-A formula.  X-series posts will generally be the contribution of an invited guest blogger who is an acknowledged Xpert (sorry, couldn’t resist) in the broad field of U.S.-China relations.

Today’s post turns out to be a bit of a hybrid between A and X.  Originally, we were lining up an X-series post which I thought might appear today but, for various reasons, that expert will need to hold off her appearance until September.  Since I did not myself have anything particularly cogent prepped for Ambitions as a fall-back, I went through much of the day yesterday mentally open, in equal measure, to either inspiration or dumb luck. Dumb luck won the day.

As a result, I am able to present here both a fortuitous hybrid — content that actually does fit the A-Series perspective but happens to be delivered by a different X-series expert.  (The wrinkle is that the X-series expert is not yet aware that he is filling in this way.  I’ve written him today to explain and to get his blessing.  Having gotten to know him in a sense after listening to more than 100 hours of his podcast series, I’m pretty sure he’ll go for it.  If not, though, I’ll have to pull this from the blogsite.  So, you might want to read fast.)

OK, here we go …

In our T(ech) post from last week, Fiddling Around with U.S.-China Tech, I asserted: “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.”

Today’s post is going to put meat on the bones of that assertion.  In order to do so, I will turn to Mike Duncan — creator, author and narrator of the magisterial History of Rome podcast series.  On the occasion of the 100th episode of his series, Mike took listeners’ questions.  For the remainder of this post, I am going to take his answers to two questions from that podcast, reverse the order in which he answered them, and share his erudition here to shine a bright light on the two component parts of my assertion:  first, why would the Chinese not naturally think of themselves as heirs to something very special which pre-dated 1949 by quite a few years; and, second, why would the Chinese not naturally have some skepticism about falling in line with a new-fangled U.S.-led world order dating back to 1949.

Except for the headings, the following two points of text are entirely drawn from the 100th episode of Mike Duncan’s History of Rome podcast.

  1. China Has More Historical Continuity Than The Roman Empire (And That’s Saying Something)

Question:
What, if any, relationship existed between ancient Rome and China?

Answer:
The majority of the contact between Rome and China was indirect, but the two great bookends of the world certainly knew that the other existed. The Han Dynasty, which persists in one form or another from about 200 BC to 220 AD was rising at the same time as the Romans, and as Rome headed East, the Han headed West. And it was during this period that the links became more overt. With the stabilizing hand of the Han in place the famous Silk Road was able to knit itself together, carrying silk and other Oriental treasures from China all the way to Antioch, and from there to Rome, while, among other things, Roman glasswork made their way back to the Chinese.

In 97 AD a Chinese embassy was sent West to try to make contact with the kingdom of the Da Qin, which is what the Han called Rome. But apparently they were stopped short in Mesopotamia after the Parthians explained that the difficult crossing to Rome would take another two years at least. This bald faced lie was meant to keep the two poles of the lucrative trade routes, which Parthia controlled, from ever meeting and working out a way to bypass the Parthian middlemen.

In 166, though, a Roman embassy was sent east and was able to make contact with the Chinese emperor. Debate still swirls about how the Romans got there, whether by sea or overland, but a meeting definitely occurred and the Romans offered up all kinds of gifts from the West, including a book of Greco-Roman astronomy. Nothing concrete seems to have followed the meeting though, and thereafter the two sides continued to simply trade with one another indirectly via the Silk Road or by the sea routes around India.

For the remainder of the Empire, Chinese silk remained a highly sought after luxury item in Rome, and was a major point of contention, both for old school conservatives who found how revealing the fabric was disturbing, and proto economists who worried about how much gold was disappearing east for nothing but a few scraps of cloth.

2.   What’s the Enculturated Chinese Attitude Towards a ‘Pax Americana’ Dating Back to 1949?

Question:
“One of the earliest topics that was brought up is the purported similarities between ancient Rome and the US. What are the main similarities and differences between ancient Rome and the present and historical US?”

Answer:

Well, let’s go through the obvious list. The United States kicked out a monarch, founded a republic wildly skewed in favor of a rich aristocracy (that was self-consciously modeled on Roman institutions), dealt with violent upheavals as the lower social classes attempted to capture some power for themselves, expanded aggressively on their own continent before accidentally capturing overseas territories, and is now utterly dominant militarily, politically and economically. What else do you need to know?

Throw in the fact that if you believe the Soviet Union was Carthage and that the Cold War is our equivalent of the Punic Wars, then you can even locate us within the larger timeline right around the rise of the Gracchi brothers and, hey, look, Tea Parties.

Except that one thing that’s really been driven home to me lately is that while you can find these superficial similarities, there are much deeper differences. Every powerful nation follows its own trajectory, for its own particular reasons, towards own particular end, though usually at the height of each one’s power, they claim that they are the rebirth of the Roman empire.

For me, the biggest difference between America and Rome is that compared to Rome, the United States is a baby and could be very well proved to be merely a flash in the pan. The Roman Empire became the dominant state in the Mediterranean around 200 BC and remained as such in one form or another until the fall of Constantinople in the 1450s. I mean, we are talking about a nearly 2000 year period where you simply cannot talk about anything that occurred in North Africa, Europe, or the Middle East without talking about Rome. America, by contrast, was a pretty decent regional power for about a century, a pretty major world power for about 75 years after that, and has been living with the kind of unipolar prestige Rome enjoyed for centuries for about the last 20 years.

If the United States of America is still around in 3010, I think maybe then we can start talking about comparisons to Rome. Until then, things happen, nations rise and fall, and borders shift. I’m not saying America can’t dominate the world for a millennia. I’m just saying that it’s an awful lot to ask of anyone.

Rome was all about longevity and stability, and that is a test that no one in the West has been able to pass since.

My Personal Postscript

We live in a polarized time.  Many people who I encounter in the blogosphere will be inclined to take this post as evidence that I am somehow an apologist for the PRC.  Let me set the record straight on that possible perception:

  • My entire professional life has been dedicated to supporting U.S. Government institutions (e.g., the U.S. Foreign Service), U.S. Government programs (e.g,. the U.S.-China EcoPartnership program) and U.S.-led People-to-People cooperative programs such as The Philadelphia Orchestra’s engagement with China
  • Above and beyond my professional involvements, I personally believe that America’s multi-cultural, future-oriented perspective is the world’s best path forward, at least as far as I have so far encountered
  • I do not believe in historical determinism.  There is nothing about either Rome’s or China’s longevity which I find instructive for understanding their futures, except for the single fact that the people who grow up in that cultural tradition feel it in their bones
  • But, as I took pains to lay out in my Where I Stand post, I will never shy from seeking to understand, take into account, and respect my counterpart’s reality when grappling with a shared problem so that solutions which work for “my side” will also work for theirs.  Those are the solutions that stick.

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.

 

 

Everything that I have ever done professionally has been approached and viewed through the lens of one of two disciplines.  Eventually, I learned to combine the two.

The first was the discipline of cultural anthropology. A twelfth-grade class in 20th c. religious thought led me to major in Asian Comparative Religion at Princeton which led me (after a year of traveling overland from Europe to Taiwan via Turkey, Iran, Afghanistan, Pakistan, India and Nepal) to a joint MA/PhD program at the University of California at Berkeley.  Two and a half years living at 10,500’ in the village of Tengyi in the Manang Valley north of Annapurna (pictured below), taught me how to see the world through the eyes of people with different circumstances and values.

 

The other was the discipline of diplomacy.  I joined the U.S. Foreign Service in the spring of 1988, a little more than two years after getting my degree.  (I should mention at this point that I made very good use of the intervening time by moving to New York to court Grace, by marrying Grace, and by renovating our first house in Brooklyn.) Having cleared the various assessment hurdles of the Foreign Service test and having been given an offer to join, it wasn’t a hard decision.  My clearest career idea upon receiving my doctorate was that I did not want to stay in academics.  And my only interview in the corporate world – with SmithKline (now Glaxo) – could have made for an amusing episode of The Office.  So I took the offer. Having come in initially through the State Department, I asked for a lateral transfer into the U.S. Department of Commerce branch of the Foreign Service, because my sense was that — for the two places I really wanted to be posted, China and Japan – a lot of the Embassy action was on the business side.  I wasn’t wrong. Anyway, the point I want to make here is that the anthropological viewpoint worked well with the diplomatic viewpoint to help me see issues in three dimensions and, with that better field of vision, helped me resolve some the issues at the heart of the U.S.-Japan Auto Talks and other knotty diplomatic challenges.  I don’t think I ever told business clients, and rarely told Embassy colleagues, that I was trained as a cultural anthropologist.  I definitely never contemplated for a moment putting PhD on my business cards. But I used the anthropological perspective every day during my time in the Foreign Service.

 

With this as personal introduction, I’ll share here the three roadmaps – ‘pathmaps,’ more accurately – which have been most helpful in guiding me through both the magnificent panoramas and the minefields of modern U.S.-China relations.  In coming weeks, I will give each of these works its own dedicated post.  Today will simply list the three with brief thumbnail intros and identify the common thread I have found most useful.

 

1

Wealth and Power: China’s Long March to the Twenty-First Century

By Orville Schell and John Delury

Random House (2013)

Given to me for Christmas in 2013 by James Gibney — former Foreign Service colleague in Tokyo, editor extraordinaire, and godfather to my younger son – Wealth and Power brings to life a simple but profound insight.  Through the life stories of eleven completely different individuals — in some cases, mortal enemies – Schell and Delury show how all eleven hew to a single goal, China’s rejuvenation through the acquisition of wealth and power.  The early 19th c. scholar Wei Yuan and the activist Feng Guifen proposed completely different courses of action; the Empress Dowager Cixi, the “new citizen” Liang Qichao and the reformer Sun Yaat-sen all saw radically different pathways to modernization, Chiang Kai-shek and Mao Zedong led opposing sides of a decades-long civil war, and Zhu Rongji (whom I met as Mayor of Shanghia on several occasions during my first posting there) and Nobel Prize winner Liu Xiabo had entirely different conceptions of the moral duty of a citizen in modern China.  Nonetheless, despite differing in their ideas of the best means to reach the goal, they all shared an absolutely identical understanding of the most urgent goal in their lives – helping China acquire enough wealth and power to regain its traditional standing as a world colossus.  (This goal, incidentally, continues to be inculcated in the education of every school child in China today).

 

2

Belt and Road: A Chinese World Order

By Bruno Maçães

Hurst Publishers (2019)

 

This book is included not because it is one of the best books about China.  Far from it.  John Pomfret’s The Beautiful Country and the Middle Kingdom and countless other books would make that cut in front of Maçães.  The reason for Belt and Road’s inclusion here is that Maçães does something few too scholars and commentators on China bother to do.  He puts himself into the minds and mindset  of the Chinese government planners who are charting China’s future.  This is what an anthropologist does and the insight it provides helps minimize misunderstanding and creates more space for successful diplomatic outcomes.

Maçães is himself a former Portuguese diplomat with extensive experience in Hong Kong and China.  To give just a sense of his approach, Maçães argues that Western theories of international relations entirely miss the basic conception at the heart of the Belt and Road Initiative (BRI).  In Maçães’ view, that conception “follows Taoist logic: the single concept first divides in two — land and sea — then in several — the corridors and coutnries — then in many — the specific projects and privileged locations” in the BRI enterprise.

 

3

The U.S. and China in the 21st Century: Sub-National Sino-American Relations

Course Number IMPA 608 in the School of Liberal & Professional Studies (FY 2019 & 20)

International Masters of Public Administration, Fox Leadership International

Instructor: Terry Cooke   Co-Instructor: Liyiran (Shelly) Xia

 

This is the course I taught at Penn for two years before COVID-19 hit and the course was furloughed.  I hasten to point out that I am adding it here because of the input from students, rather than because of my syllabus.  The course is designed in two parts: the first seven weeks involves readings, lectures and classroom discussion structured on the basis of my syllabus; the second seven weeks, the most valuable part of the course, is a knowledge co-creation exercise based on original research, much of it in Chinese, which the students conduct and present.  It is through this knowledge co-creation exercise and through insights provided by the students and Co-Instructor Shelly Xia that I have been able to articulate the framework which informs the Ambitions portion of the TEA Collaborative project (T = Technology, E = Energy/Environment, A = Ambitions).  The Ambitions portion seeks to understand and systematically present the MacroDevelopment vision which Chinese government planners have been elaborating and adjusting since the birth of the People’s Republic of China in 1949 (and have been communicating clearly in their Five Year Plans).  It is an effort to apply the joint lens of anthropology and diplomacy to better understand the motivation and to better delineate the opportunities and challenges associated with China’s MacroDev trajectory.  We use three time periods (and, in the last time, period two different geographies) to organize this undertaking:

1949 – 1978:               Version 1.0 of the PRC MacroDev Model

1982 – 2009:               Version 2.0 of the PRC MacroDev Model

2012 – Current:           Version 3.0 of the PRC MacroDev Model
A) Domestic Release
B) International Release (Belt & Road Initiative

Note: the years not covered above were years of opaque, internal deliberation
within the Chinese Communist Party leadership

 

The Common Thread

 

 

I hope the point is obvious.  The common thread here is being able to understand the world as seen through the eyes of your counterpart.  As in business, you don’t always know whether your counterpart will prove to be protagonist or antagonist, friend or foe.  In order to negotiate the best possible deal, however, it is always vital to understand as well as possible that counterpart’s motivations, core values and thought processes.  Whether the climate of U.S.-China relations is chilly or warm, I choose to stand firmly on that ground.

 

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.

As the U.S. and China continue to face off daily over technology and other issues, I have been listening, as my dog Max and I walk each day, to the brilliant History of Rome podcast series by Mike Duncan (2007-12).  One thing is clear from the endless wars which Rome undertook over the course of a millennium against the Latins, the Etruscans, the Samnians and the Carthaginians during the Republic; against each other during the Civil Wars; and against the Greeks, the Syrians, the Parthians and others during the early Empire (which is as far as I’ve gotten so far) – wars were started as often as a result of misreading – or cynically exploiting– an opponents’ real intentions as they were from any meeting of minds over the actual need for conflict. (Mind you – we’re talking here about the miscalculations that get conflicts started, not the logic which takes over once military actions have been initiated).

With that in mind, I am reminded of a March 2019 article by Katherine Epstein, a member of the Princeton Institute for Advanced Study.  This article gives a clear overview of the attitudinal and behavioral parallels marking America’s 18th c. rise in a British-led world order and China’s emergence in the U.S.-led post-WWII global system.  A common structural dynamic is at play in both instances.

To Understand China, Look to America’s History

In challenging Britain’s hegemony a century ago, U.S. tactics look similar to Beijing’s today.

By Katherine C. Epstein
March 19, 2019 7:15 p.m. ET
Wall Street Journal

There’s been a good deal of hand-wringing in the U.S. over efforts by the Chinese telecommunications giant Huawei to replace U.S. suppliers of advanced equipment and wire the world with its 5G network. Most analysis of China’s strategy turns on the conviction that the Chinese are trying to challenge U.S. commercial and geopolitical hegemony—they steal U.S. technology and then sell their plagiarized equipment at a lower price. Worse, they seek to build an alternative, China-led global telecom infrastructure, positioning Beijing to spy on the users and capture yet more U.S. commerce.

As a historian, I’m struck by the incompleteness of this analysis. Two crucial pieces are missing.

The first is any sense that the threat posed by Chinese control of a global telecom infrastructure might not be limited to espionage or (that other favorite metaphor) a “cyber Pearl Harbor.” The potential danger may be wider and deeper—and the World War I era shows why.

Before that war, like today, the global economy was highly integrated. This was the first era of globalization. Advanced industrial, urbanized societies depended on international trade, requiring uninterrupted access to the infrastructure that girded the global economic commons. Interruptions to that access had the potential to cause economic derangement, rapidly leading to social and political instability. In other words, control of the infrastructure conferred commercial advantage and it could also be weaponized.

A century ago, Britain acted on this insight. In addition to eavesdropping on enemy and neutral communications, the government acted to regulate the British firms that dominated the services necessary to conduct global trade: the global communications network, the financial-services industry (including commercial credit and marine insurance) and oceanic transportation. Britain used its control over the infrastructure of global trade not simply to spy on its enemy, nor to strike enemy military assets, but to mount a systematic assault on the whole of an enemy’s economy—in 21st-century parlance, a massive denial-of-service attack against enemy society.

Returning to the present, both the espionage model, which refers to targeted state spying, and the cyber-Pearl Harbor analogy, which refers to an essentially conventional military attack, fail to capture the systemic and social qualities of a certain type of attack. In this context, reflect on Russia’s efforts to interfere with U.S. elections. Partisanship aside, Moscow has managed, at relatively low cost, to reduce the confidence that Americans have in each other and the electoral process. It waged a successful psy-op, compromising not material resources but social confidence. Its campaign showed that foreign countries can manipulate information within global networks to sow distrust within American society.

What would a scaled-up version of this attack look like? What if it were carried out over a China-dominated information network?

The second missing piece is awareness that if China is trying to challenge (or escape) U.S. hegemony by stealing American technology and building an alternative global telecommunications infrastructure, this would be analogous to what the U.S. tried to do vis-à-vis Britain, then the global hegemon, and the other great powers in the World War I era. Americans tend to forget how powerful Britain was and how weak the U.S. remained before World War I.

In its drive for world status, America routinely pilfered foreign technology well into the 20th century, and it gained considerable strategic advantage from its theft. The 1912 Supreme Court case Crozier v. Krupp, which formally extended the power of eminent domain to intellectual property, concerned a German gun-carriage design the U.S. Army had plagiarized. That same year, a U.S. naval officer walked off with the plan for the British navy’s super-secret long-range torpedo. During World War I, Washington expropriated German chemical intellectual property held in the U.S., providing an enormous boon to America’s chemical industry.

In World War II, the U.S. received huge inflows of scientific and technological knowledge from Britain, then slapped secrecy restrictions on subsequent developments to prevent any flow back to Britain. Many more examples could be adduced. Historically, it might be said, Americans are an imitative people.

The U.S. came to appreciate the significance of controlling global economic infrastructure when Britain’s campaign of economic warfare against Germany in World War I caused huge collateral damage to the American economy. Companies like RCA worked hand-in-hand with the U.S. Navy to build a global telecommunications grid—perhaps similar to the way Huawei, run by a former Chinese army officer, may be working hand-in-hand with the Chinese army.

Wall Street cooperated with the U.S. government to develop a modern financial-services industry deliberately intended to help New York displace London as the world’s financial capital—perhaps similar to the way China has developed its own Swift payment-clearing system. Woodrow Wilson’s administration attempted to build an oceangoing merchant marine so the U.S. wouldn’t have to rely on Britain’s—perhaps similar to the way China is attempting to increase its control over the global oceangoing merchant marine.

In short, a century ago, the U.S. was the China of the age: an up-and-coming revisionist nation chafing against the established powers, importing and pirating what it could, free-riding on the security provided by the existing hegemon, and legitimizing its behavior with the pious conviction that it was on the right side of history. Could it be that the Chinese understand U.S. history better than Americans do?

It’s easy to be moralistic about China, but in the quest to find a sound U.S. strategy, we need less pearl-clutching and more imagination. Rising powers have compelling strategic incentives to control the sinews of global economic activity as well as to acquire foreign technology. Americans and their allies should ask themselves whether they would rather live in a world under U.S. or Chinese hegemony—and what they can do about it.

Ms. Epstein is a member of the Institute for Advanced Study in Princeton, N.J., an associate professor of history at Rutgers University-Camden, and a director of the Naval Historical Foundation.

So, what’s the point? As  Yuval Noah Harari, author of Sapiens, would be quick to point out, the British themselves had established their naval-led Empire by upending Spain’s Armada, which had earlier navigated its way to world power status by stealing from the Portuguese the same “rudders” (mariner’s handbook of written sailing directions) which the Portuguese had stolen from the then-ascendant Arab empire.

Well, the point is that, as the U.S. and China edge ever-closer to an actual or pretextual spark of open conflict, we need to stay sharp-eyed.  Given the incalculable costs which outright conflict between the U.S. and China would exact from both countries and the world, it is a political necessity and a moral imperative to keep an accurate picture of the structural situation in our field of vision.  This is where Katherine Epstein’s article is useful.  A picture with gray-tones is always more accurate and revealing than a simple black-and-white picture.  Harder to argue in a sound-bite perhaps, but more consistent with the leadership we need.

 

 

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

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.”

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