Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts

Thursday, February 2, 2023

Fatal flaws with the idea of decoupling

A shorter version of this post first appeared in Asia times. Recent issue of Bloomberg/Businessweek said, “Despite the heated national security rhetoric in Washington and talk of “decoupling” in policy circles, the world’s top two economies remain firmly intertwined.” The article goes on the say that the bilateral trade for year ending 2022 is likely to be the highest ever recorded. The failure to decouple is likely good news for China but even better news for the American public. However, anyone with a dollop of common sense would realize that the talk about decoupling was just so much balderdash. For the sake of introducing clarity to what and how decoupling might actually mean, let us recruit a team of Indians to address the many facets of this “elephant” in the room. Decouple would mean the opposite of economic integration. Each would have nothing to do with the other. This means Americans would have to stop buying manufactured goods from China. But this is contrary to actual bilateral trade data, wherein despite the added import tariff to the retail price, the American public can’t buy enough products Made in China. That’s the reality to date. In order for the US not to buy from China, we would have to make these products in America. Former President Donald Trump struck on the brilliant idea of bringing manufacturing back to America. He ordered, cajoled and dangled sweet deals to entice American companies back to the US. Americans don’t know how anymore The idea basically flopped for a host of reasons. The making of widgets left the U.S. decades ago, first to the four tigers such as Taiwan and Hongkong and then to mainland China. The basic skill sets needed on the production line hasn’t been seen in America for many decades and could not be replaced overnight on demand. Some lament that Washington is at fault for not having the vision to craft an industrial policy that would encourage retention of the manufacturing of run of the mill products, such as toys, television, personal computers or mobile phones. Our political leaders, busy getting elected, did not envisiage that making widgets was a necessary precursor step to making increasingly higher valued goods, as China has done. Actually, most the blame belongs to America’s abiding faith in Capitalism as executed by Wall Street. Not for nothing that Corporate America are known as “multinationals.” Multinationals (MNCs) go to where the production costs are the lowest and sell to where the profit is highest. “National interest” does not figure in their board room discussions. As Trump’s successor, President Joe Biden lacked the courage to remove the tariffs on imports from China, which could have only benefitted the American consumer. Washington along with the compliant mainstream media has so thoroughly demonized China in the minds of American public that Biden dare not risk even an appearance of apparently acting soft on China. However, Biden apparently understands that bringing manufacturing back is not quite as simple as a Trumpian clarion call. For one thing, the American wage scale would raise the cost of production, perhaps by as much as 50% according to Morris Chang, founder of Taiwan Semiconductor, for semiconductors. In the case of highend products, production also needs a complete supply chain of parts and components, which would also need to be transplanted from somewhere. Biden wins at the expense of Europeans So, instead of counting on American MNCs to make America great again, Biden is dangling subsidies to appeal to foreign MNCs, any company except from China, to move their plants to the US. European companies find the prospects tempting. Their economy at home faces shortages and inflation thanks to the Ukrainian war and they find America’s stability and market appealing. Just like their American counterparts, European companies owe their allegiance to their shareholders. But enticing European MNCs to the US means taking jobs away from their home country, which is making the European leaders very unhappy, hardly a way to treat America’s allies. Biden’s another approach is to outright hijack Taiwan Semiconductor (TSMC) plant from Taiwan and transplant it to Phoenix Arizona. The first group of TSMC staff came willingly and accompanied the equipment disassembled from Taiwan. They were convinced by their own government that invasion from China was imminent and this was the opportunity to get out. Mere weeks later, some troubling signs are developing. The staff from Taiwan are used to working 10-12 hour shifts and they were promised that they do not have to work night shifts. Well, their American colleagues don’t want to work night shifts either and 8 hours per day is their normal stint. The difference between the Taiwan based wage scale and the US based also creates tension and resentment. Presumably, the difference would eventually be harmonized but the manufacturing cost would go up. The question will be whether the TSMC customers, such as Apple et al., would pay for this higher price chips for the sake of national interest or just keep buying from the TSMC plant remaining in Taiwan. Want to hazard a guess? When the Soviet Union sent aloft the first manmade satellite in 1957, America woke up in shock, and promptly rallied national energy and resources to respond. Twelve years later we sent man to the moon. That was America’s first Sputnik moment. When China showed that they have caught up or even surpassed the US in certain critical 21st century technogies, that was another Sputnik moment. Demonize easier than compete But this time, our leaders in Washington must have decided that rather than compete head on, it was cheaper to allocate a few hundreds of million dollars to the media and ask them to continue to mislead the American public and demonize China as a human rights violator incapable of innovation and technological advances. Of course, Pentagon has yet to explain how an undersea mountain “ran” into the nose of our most advanced nuclear submarine off southern China coast in 2021 and forcing the sub to surface and run to safety. That’s a juicy mystery still waiting for the mainstream media to investigate and report. Unconfirmed rumor is that a Chinese drone sub wreaked havoc on the USS Connecticut. When the US has been going around the world promoting armed conflicts in the name of imposing “rule based, international order,” death and destruction inevitably followed. The world witnessed the repeated scenario in Afghanistan, Iraq, Libya, Syria and Yemen to name a few hot spots set ablazed by Uncle Sam. Rather than feeling secured under the American military umbrella, the rest of the world fear and distrust American rhetoric and intentions. In the meantime, China makes the rounds offering Belt and Road Initiative to underdeveloped and developing countries. The basics of BRI is that the host country will consult with China and select the infrastructure projects that need China’s assistance and financing. Infrastructure projects, such as port, rail, highway, airport, power and others, upon completion would give the host an economic shot in the arm. Raising the gross domestic product could come from increase in export and participation of global trade, improved yield on the farm based on Chinese technical assistance and creation of new jobs in the cities. BRI becomes a form of incoming tide that raises all boats. Over 150 countries around the world have signed BRI deals with China. Over time, we can expect to see increasing number of countries grow in economical strength. As more countries manage to keep their own people employed at home, the world will see fewer refugees and migrants, an overall benefit you will not hear reported by the western media. China has friends, the US fear and loathing The success of BRI has raised alarm from the western media and American diplomats are going around Africa and Latin America warning them of China’s “debt-trap diplomacy.” China’s BRI financing is normally around half of the going rate, sometimes even at zero interest, and some loans were outright forgiven. These third world countries should be offended that the West believes they are too stupid to tell the difference between centuries of colonial exploitation they suffered in the hands of the western imperial powers and China’s straightforward business propositions. If the much talked about decoupling were to suddenly occur tomorrow, the US would pay a much dearer price than would China. China would continue to be the most important trading partner to every country except for perhaps the US. China has long term, yuan based, energy contracts with Saudi, Iran, Qatar and other Gulf states along with Russia. Furthermore, thanks to the US aggressive actions pushing China and Russia into tighter collaboration, they can roll up their sleeves and concentrate on developing and realizing the vast potential of Siberia. On the other hand, the US is suffering from a deep deficit of trust by allies and rest of the world alike. The world has seen American unilateralism at work as the US confiscated the foreign reserve of the Taliban government in Afghanistan and later the Russian holdings, national and personal. The threat of sanctions and actual sanctions imposed has been the US favorite tool of diplomacy. As many have observed, sanctions have unanticipated consequences and blowback. As one recent article concluded, “Western sanctions led Russia to greatly increase trade with Asia, while devastating Europe’s economy. The US tech war against China is damaging its own industry.” Washington can act arbitrarily, capriciously and unilaterally. That’s why Japan, even as an ally, and China being the two largest foreign holders of US debt are in a rush to divest their holdings as quickly as possible. In the case of China, they face the challenge of trade surplus accumulating faster than they can divest their dollars. Indeed, friend and foe alike, most countries’ reserve now include increasing portion of China’s yuan while lessening the portion in dollars. Russia has even announced the ultimate goal of holding 60% renminbi and 40% gold as their foreign exchange reserve. Ironically, in middle of last month, Treasury Secretary Janet Yellen flew to Europe just to intercept China’s vice premier Liu He as he was on his way to the Davos summit. Apparently, the gist of their three-hour meeting was for Yellen to pitch the importance of China holding onto the dollars and continuing to buy US debt as vital to supporting the American economy. Most likely decoupling was not part of their conversation. https://doc-00-9o-docs.googleusercontent.com/docs/securesc/5f9ml6jq1th2msvidbi71cudflhi4v1m/4kgu3qe6nc6r55m44ql0ajlh7q5pla55/1675729950000/04384644368551862567/05668267313738172040/1u-M2RJGzQXM5r4pgfYt7rO4IwdD5SdiQ?e=download&authuser=0&nonce=nt9gju73c533u&user=05668267313738172040&hash=5r60ijh8ehmhro9t3b6iv0aj8hjmic8a

Wednesday, July 13, 2022

Disintegration of unipolar world begins

The only sensible course of action for the US is to collaborate with China and find mutually beneficial outcomes First posted in Asia Times. In April, I was invited to speak about the US-China bilateral relationship. For the title of the speech, I chose, “Pushing China’s head under water won’t make American great again.” Recent developments suggest that an updated title would be, “Pushing China’s head under water will hasten America’s own demise.” There are two reasons for fine-tuning my title. First, the United States’ deliberate tactics to obstruct China’s growth and expansion have failed miserably while inflicting more hardship on Americans. The American people are paying a ghastly price for Washington’s obsession with China. Second, priorities of America’s foreign policy are not making any sense. The most recent example is the announcement by President Joe Biden that the US will contribute $200 billion to the G7 pool of funds to compete with China’s Belt and Road Initiative (BRI). It’s hard to tell where Biden is going to find the money. Even if all Group of Seven nations contribute their share of funds, it’ll be even harder to figure out to how they can implement BRI-like projects in the developing world. Most probably they would have to subcontract work to China, which knows how to implement it. On top of Biden’s dream of grandeur, he is sending billions’ worth of arms and weapons to Ukraine to prolong the conflict with Russia. Bipartisan approval is easy when it comes to making war. By contrast, to relieve the inflationary pressure on the American domestic economy, Biden is proposing to forgive 18 cents per gallon (4.76 cents per liter) of federal tax on gasoline for the three summer months. Wow. Billions to compete with China and Russia and an 18-cent discount for the American motorist. In California, a gallon of gasoline has gone over $6 ($1.59 a liter). Saving 18 cents per gallon from a fill-up will barely cover the cost of a cup of coffee. In the US, prices of everything are going up; inflation looms. Nay, inflation at 8.8% is already the highest in 40 years. Soon the American motorist won’t even get a cup of coffee from his gas-tax saving. Biden does not deny that Americans are facing inflation. He blames the inflation on Russian President Vladimir Putin and the war in Ukraine. He urges the American public to endure this “for as long as it takes” in order to defeat Putin – hardly encouraging words. Of course, most American people are not aware that it has been the US-led North Atlantic Treaty Organization that baited Putin over the decades into the war with Ukraine. Washington has since congratulated itself for successfully mounting a proxy war – getting Ukrainians to fight the Russians. Defense Secretary Lloyd Austin even explained that the war meets the objective to wear down the strength of Russia – albeit at the expense of Ukrainian casualties and property. Having successfully pushed Russia into invading Ukraine, NATO celebrated with a summit at the end of June where Sweden and Finland were formally inducted as new members. At the same time as having pushed Russia into a closer relationship with China, the organization accused China of not condemning Russia and therefore not standing with NATO. NATO is afraid of China At this NATO summit, Australia, New Zealand, Japan and South Korea were invited as observers, as a signal that NATO’s expansion plans now include the North Pacific. Just to make sure nobody misses that intention, for the first time NATO identified China as a potential adversary and a “systematic challenge.” So, what constitutes China’s threat to the security of NATO members? Apparently it is the fact that China has dominated manufacturing of goods at prices that the West cannot compete with. China’s GDP continues to grow, and that makes NATO members nervous. The West led by the US has repeatedly accused China of violating “rule-based international order.” The most recent action by the Biden White House was to impose sanctions on goods made in Xinjiang, alleging human-rights abuses there. In response, China, on the day after the conclusion of the NATO summit, announced the placement of an entire order for 292 commercial jetliners worth more than $37 billion with Airbus, the European consortium, and none to Boeing, the other major maker. This was a harsh, attention-getting message from China in response to Biden’s endless innuendos and baseless insults and a signal that China is ready to play hardball. All of Beijing’s past diplomacy seems to be misinterpreted by Antony Blinken et al as being soft. The Blinken team in the State Department seem to think they can cherry-pick issues to work with China on the one hand and otherwise castigate Beijing with a recitation of imagined violations of international rules. No more, says Beijing. Boeing recently made a market projection that China’s future demand for passenger jetliners was 8,700 planes worth $1.5 trillion over the next 20 years. If the US is determined to decouple from China, Boeing faces a bleak future in China. China offers EU partnership China’s other message is to the countries in the European Union, many of which are members of NATO. The Airbus order reaffirmed that China can be a major economic partner and poses no threat to the security of the EU. Inflation in the EU is rapidly getting out of control because of the war in Ukraine and the US-imposed sanctions on Russia. If Biden thought he was driving a stake into the heart of Russia’s economy, he miscalculated. Putin turned around and pegged Russia’s energy exports to the ruble. Consequently, the value of the ruble against the euro has reached a seven-year high. The artificial shortage in world oil caused by the US sanctions on Russian oil has not hurt Russia. It makes money selling its oil to China, India and other buyers at higher prices. Concurrently, the US and UK as oil exporters are also making money because of the shortage they created. However, major nations in the EU, especially France, Germany and Italy, are energy importers and they are beginning to question the wisdom of following the US leadership, which seems to work in favor of the US and UK at the expense of the EU. Such doubts were accentuated when Ukrainian President Volodymyr Zelensky recently announced that his country needs aid to the tune of $5 billion per month to survive and keep operating. On top of refugees, shortages of staples, and inflationary pressures, the EU leaders have to worry as to whether Uncle Sam will pick up the tab or pass it on to the EU. The world is beginning to see the difference between currencies based on assets and the American dollar based on the “full faith and credit” of the US government, in other words, the Federal Reserve’s printing press. Central banks of various countries are beginning to lighten their dollar holdings in favor of other reserve currencies, the most popular being China’s renminbi. According to the International Monetary Fund, the US dollar’s share of total global currency reserves has fallen to its lowest point in more than two decades. To take advantage of the availability of Russian oil at favorable discount, India entered a rupee-to-ruble deal and get around paying in dollars. For the first time, India also bought coal from Russia with the Chinese renminbi. BRICS as another pole While the G7 and then the NATO summit meetings took place in Europe, it was China’s turn to host the BRICS summit, which it did virtually. At the 2022 summit, Beijing invited many non-member countries as observers. Formed in 2009, BRICS consists of Brazil, Russia, India, China and South Africa. It is not a military alliance but is meant to promote collaboration for peace, security and global economic development. Compared with the G7, BRICS has three times the population but only about 70% of the G7’s GDP. At the 2022 summit, Argentina and Iran formally applied to join BRICS. Adjusted for purchasing parity, the GDP for BRICS+ would surpass the G7. And there is a proposal afoot to create a new global reserve currency based on a basket of BRICS+ currencies as an alternative to the US dollar. Rather than going around the world collecting military allies and imposing sanctions on countries that do not wish to align with the US, China invites partners to collaborate on mutually beneficial basis. Since it was initiated in 2013, China’s Belt and Road Initiative has launched more than 13,000 projects in 165 countries valued at nearly a trillion dollars. Most of the BRI projects have to do with upgrading badly needed infrastructure, which leads directly to a boost in the recipient country’s economy. There is now a high-speed rail linkage from China through Central Asia to Moscow and on to Rotterdam on the Atlantic coast. Twenty-five out of 31 Latin American countries are participants in the BRI, as is most of Africa. At the just-concluded Group of Twenty summit, the divide between the US-led Western bloc and China, Russia and the non-aligned members of the G20 became quite clear. The summit concluded without the usual group photo of smiling state leaders and no joint declarations expressing optimistic steps for the future. The Biden administration and the US Congress remain convinced that the way to suppress China from making economic progress is to deny it access to American technology and knowhow. As all nations know well from their own development history, among them Japan and the US, borrowing and copying from more advanced nations can only be a beginning. Unless they can build from there and innovate and originate their own breakthroughs, they will always be me-too laggards. Every year, China graduates eight times as many students in STEM (science, technology, engineering and math) than the US. These human resources power developments in high technology. The more pressure the US exerts to stifle China’s advance, the more determined the Chinese will be to find their own technical advances and skirt around American roadblocks. In some fields, China has caught up with and even surpassed the US. China is already the world leader in electric vehicles and the battery technology for the EVs, in fifth-generation and the future 6G in telecommunications and quantum computing, just to name a few examples. China’s latest aircraft carrier has an electromagnetic catapult system on par with the one on USS Gerald R Ford, the newest US carrier. China has demonstrated a hypersonic missile while US manufacturers are still tinkering with theirs. Despite the US-mounted trade war that “punished” Beijing with tariffs on imports, China has continued to expand exports and the trade surplus with the US has actually grown rather than lessened. The real impact was to raise the cost of living for the American public. The US has wasted a lot of energy and resources trying to suppress China’s rise. It hasn’t worked, and it won’t work in the future. With four times the population, China’s GDP exceeding that of the US is inevitable. If on the other hand the US should succeed in provoking a conflict with China, the Americans will rue that day, and most likely so will the world. Can US and China find common ground? The only sensible course of action is to collaborate with China and find mutually beneficial outcomes. As Asia Times recently urged, “there is a wide field for potential cooperation that would benefit both countries and give the United States more room to back out of the stagflation trap in which it finds itself presently.” On the sidelines of the G20 summit in Bali, Blinken held a five-hour conversation with Chinese Foreign Minister Wang Yi. The purpose was to pave the way for a future meeting between Biden and Chinese President Xi Jinping. The tone from Blinken was that US would like to restart a friendlier and more positive bilateral dialogue. China’s reply was that this is easy to do. To begin, all the US has to do is to recant all the lies, disavow the nasty rhetoric and stop blackening China. Whether Blinken and Biden will see the wisdom of non-confrontation and choose win-win outcomes in place of zero-sum results remains a question. Maybe we’ll know more after the two leaders meet.

Friday, June 4, 2021

Biden’s China obsession could be the undoing of America - Collaboration with China has been good for the US and its people in the past, and should be again

First posted in Asia Times. Abbreviated version in Putonghua can be found on YouTube and here. A translated version was posted in the Sing Tao Daily. It’s hard to tell if US President Joe Biden’s position on China is his true conviction or he’s just going along with the heavy anti-China sentiment in Washington, but his China team has made it official now: no more engagement with China, just competition from here on. The nature of competition the Biden team has in mind, mind you, is not your gentlemanly sort of sporting contest where my one-upping you will incentivize your one-upping me, and we both in the end are better for competing. No, all indications point to all-out, below-the-belt, eye-gouging, anything-goes tactics to attack the other party, namely China. Two ongoing developments point to this conclusion. Winding its way through the US Congress is the so-called Strategic Competition Act of 2021. It has not been enacted as yet, so we don’t quite know all the provisions. My understanding is that as much as $300 million has been allocated to blacken China’s image around the world. In this era of fake news, assassination of one’s character (or a country’s reputation) via innuendo, exaggeration and even outright lies is easy to do. August members of the US mainstream media, such as The New York Times or The Washington Post, are not above purveying or contributing misinformation, sometimes with malice of aforethought and sometimes simply being too lazy to authenticate questionable sources. Consistent with all this is Biden’s recent call to reopen an investigation into whether the virus that causes Covid-19 could have originated in a research lab in Wuhan, China. The task force was given 90 days to report its findings. Biden to revisit origin of Covid A definitive investigation leading to conclusive understanding of the origin of Covid-19 is a good thing, important to protecting the future health of the world. Provided, of course, that the work is above-board, science-based and conducted by a scientifically qualified team of people of impeccable honesty and integrity. A team of investigators that includes the likes of a Peter Navarro or Mike Pompeo would not pass the smell test. Furthermore, to be completely comprehensive, some of the other speculations besides the Wuhan lab theory deserve to be included in the investigation. For instance, the biological laboratories at Fort Detrick in Maryland were shut down by the US Centers for Disease Control and Prevention for violations of safe practices more than six months before the outbreak in Wuhan. Around that time there were unexplained deaths caused by respiratory failures. A full account was never made public, but the issue was swept under the carpet by blaming the fatalities on excessive vaping, that is, inhalation of fruit-flavored smoke. There were also reports in cyberspace that there was evidence of the coronavirus being found in European sewage systems, again months before the Wuhan outbreak. What happened to all those rumors? If the Biden task force is not just for the purpose of pinning the blame on China, but to perform a thorough and credible investigation, 90 days may not be enough. Secretary of State Tony Blinken’s approach to competing with China is to recruit and reorganize former allies to band together against China. These former allies were offended and turned off by former president Donald Trump and his go-it-alone approach. But what does Blinken have to offer to entice the allies to join the fray? A recent tally indicates that 165 countries now consider China their No 1 trading partner, as compared with 13 countries that regard the US as their No 1 trading partner. More than 100 countries are participants of China’s Belt and Road Initiative in more than 2,600 projects with a total value of US$3.7 trillion. As his only counter, Blinken goes around the world warning the countries to beware of debt traps. Obviously, the US does not have the ability to compete with China when it comes to doing business via trade or provide assistance in erecting infrastructure. Countries are asked to choose sides with no clear idea of the benefits of aligning with the US. The only alternative is to slander China and turn world opinion against Beijing. The US as ‘model of democracy’ Thus Blinken has to trot out the usual tropes, that China is not democratic, has no human rights etc, ad nauseam. All of the prospective allies are urged to be freedom-loving democracies like America. So how does the US stack up as a “model” democracy? Let’s count the ways. The losing candidate of the last presidential election, Donald Trump, still claims to have won. Members of his political party, the Republicans, have gone to great lengths to shield him from going to jail, even for violating the statutes of the US constitution. As part of the debacle, the Republican Party at the state level is busy devising ways to deny certain citizens the right to vote. In its view, democracy is not for everybody in America and winning by hook or crook is everything. Mass shootings in America have become a nearly daily occurrence. In America, the right to carry an assault weapon is an human right more important than a human life. The US with just 4.4% of the world’s population has 22% of world’s prison population, far and away the most of any country. China with about 4.5 times the US population has fewer people incarcerated, and yet we Americans accuse China of abusing human rights. Furthermore, the US prisons house a disproportionate share of black and brown people. Young children torn away from their refugee parents at the southern border, and still unaccounted for, is yet another blot on our human-rights record. Because of concerted efforts by the central and local governments, China has lifted all of its people out of poverty. In America, conditions in the ghettos have not changed much and they are still mostly populated by black and brown people. One out of eight Americans lives below the poverty line. Government officials in China are given rotating assignments and graded on their performance. They get promoted if they show they are capable of taking on increasing responsibility. In the US, the most important requirement for those aspiring to public office is to be able to raise a lot of money, or be already wealthy. By any objective measure, would any potential allies find the US a worthy model of democracy to follow? Blinken has a tough sell ahead of him. The Biden administration is also planning to compete with China by investing in and subsidizing the development of new technologies. The Endless Frontier Act, surprisingly enough, has bipartisan support for dedicating $120 billion to focus on artificial intelligence, superconductors and robotics. Biden bets $52 billion on semiconductors Supposedly, Biden will throw $52 billion at the American semiconductor industry to build new manufacturing facilities in the US, known as fabs. I am doubtful that this will work. The US used to be the world’s leading maker of semiconductor chips. But as the design of the chips became more complex, the cost of the fabs increased geometrically, and soon Silicon Valley companies gave up manufacturing and just concentrated on designing proprietary chips, relying largely on Taiwan Semiconductor Manufacturing Corporation to make them. Today, Intel is the only US company that still owns fabs, and it has publicly admitted that they are two to three generations behind TSMC’s. Morris Chang, founding chairman of TSMC, has openly questioned whether US companies would still have engineers with the experience and skills needed to run a state-of-the-art fab. China also does not own state-of-the-art fabs because the US will not allow the sale of advanced manufacturing equipment to China. Therefore, regardless of whether the $52 billion will be well spent, China will not catch up for some time. But if Beijing needs skilled engineers to run an advanced fab, it can always recruit from Taiwan to supplement its own staff. Many are already working in China. To attain the most advanced fab, China will need to buy lithographic machines from ASML, based in Netherlands. Already, Peter Wennink, chief executive of ASML, is fretting that the US export control measures will prevent his company from selling the most advanced machines to China, each with a $1 billion+ price tag. The loss of the China market would mean the loss of more than one-third of ASML’s revenue, and therefore funds for further research and development, necessary in order to maintain the company’s technological lead. Wennink is worried that the export restriction will force China to develop its own technology and soon not only ASML will lose a major customer but will face a new competitor. You’d have to wonder how long the European company will go along with the Washington ban on exports to China. Another aspect of disengaging China is to discourage the enrollment of STEM (science, technology, engineering and mathematics) graduates from that country in US universities. US Senator Tom Cotton, for one, thinks Chinese students are here just to steal American knowhow. But without the infusion of the best and brightest international students – and students from China make up more than one-third of them – elite schools such as the Massachusetts Institute of Technology (MIT) would wither and shrivel if they had only America’s own graduates, trained by a faltering K-12 system, to draw from. One anecdotal story will illustrate my point. At a recent international math competition among high-school students, the US team beat the team from China for first place. But the “upset” win can be attributed to the fact that every member of the US team was ethnic Chinese, students whose parents had immigrated to the US from China. The quality of China’s universities is improving; many are already among the world’s top 50 schools. China’s elite schools may not yet on par with their US counterparts but Beijing believes in investing in human capital. If its graduate students can’t come to the US, they can go elsewhere, or simply stay home and learn from the best professors recruited from around the world. The loser in the long run would be the US. Engagement has been good for America All along, we Americans have been acting like the 40+ years of engagement has been a one-way boon for China at our expense. That’s hardly the case. Collaboration enabled Apple to “design in California and assemble in China,” a strategy so successful that the company is now worth more than $2 trillion. Had Apple designed and assembled in the US, the high costs would have limited its sales and stunted the profitability and growth of the company. With much fanfare, Trump announced that Foxconn, which had been the principal assembler of Apple products, would build a big plant in Wisconsin. He chalked that win up to his “persuasive” personality. Yet the plant has not materialized because the labor rates of China are just too far apart from those of the US. Even Trump can’t wring water out of a rock. And that was at the high end. On the low end of the economy, low-cost imports filled the shelves of Walmart and American consumers continued to enjoy their standard of living and not face rising prices. As much as 60% of China’s trade surplus with the US was due to goods made by American companies in China. Because China’s economy grew at a remarkable rate, doubling every eight to 10 years, American companies that initially went there to source their products began to expand their investments in order to participate in the Asian country’s growing middle class as the size of China’s market became comparable to their home market. America’s leading technology companies soon saw the wisdom of designing in China for the world. They set up R&D centers to take advantage of the technical talents in China, which produces eight times the number of STEM university graduates as the US. Sadly, our leaders in Washington only know that might makes right and we have the strongest military in the world. They are banking on the premise that we can outcompete with China on the basis that we can wreak more death and destruction. Otherwise, disengaging and competing with China will be at best a mutually diminishing outcome. It won’t help Washington solve our deteriorating infrastructure, failing school system, deaths by random shootings, and widening gap in income between the super-rich and the have-nots. We need leaders with the vision and political courage to see and tell the American people what’s good for America and that competing with China is not the way. In fact, as we continue on the Biden trajectory, we could be on a downward spiral that spells the end of the American empire.

Friday, September 6, 2019

Trump can't afford to win any trade war with China

This was first posted on Asia Times.

The response to last week’s grand opening of Costco’s first warehouse store in China was quite a surprise. As reported in the popular media, including Asia Times, throngs waited three hours to get in and two more hours just to get through the check out line. The company had to close the doors by 1:30 PM on the first day and quickly regulated the numbers on the second day.

This customer response from ordinary, everyday folks certainly belied Trump’s assertion that China’s economy is failing and is a sad commentary of the ignorance and misjudgment of his China team.

Give Costco credit for doing their homework on the China market and hit the sweet spot for shoppers in Shanghai. The sweet spot is huge, representing the purchasing power of middle-income households of China at about three times that of the US.

How can Trump’s China team be so far off in misreading the strength of China’s economy? Because they are lulled by the complacent feeling that America remains exceptional, that China only knows how to steal and copy and further that China will grovel when faced with the threat of tariffs. They are wrong on all counts.

Trump being misled by his advisers

Trade negotiator Lighthizer, a trained lawyer, doesn’t know much about economics and believes that the only way to reduce trade deficit with China is to levy tariff on imports from China. Trump’s China advisor Navarro never knew much about China and quite willingly pretended that he doesn’t know much about economics either—just like his boss. That way he can stroke Trump’s ego with the line of nonsense that trade war with China is easy to win.

The Trump China team never bothered to find out what’s going on in China. If they had, they would realize total foreign direct investments into China in the first half of 2019 actually increased by 1.5% from previous year. In other words, companies are not backing out but continue to invest in China because, unlike Trump, they believe in China as an attractive place to do business.

China’s GDP increased by 6.5% last year, only 1.5% was due to export—and obviously export to America contributed only a fraction of that. In other words, exporting to the US wasn’t as important to China’s economy as Trump had imagined. In recent years, China’s policy was to encourage domestic consumption and Chinese consumer spending now accounts for more than 50% of its GDP.

The Trump White House simply didn’t appreciate that China’s consumer economy is already much bigger than the US. More recently Beijing has promulgated 20 new policy-related regulations designed to stimulate more consumer spending. The new regulations include such things as encouraging the opening more 24/7 convenience stores, and promoting auto sales and shopping, taking more vacations and entertainment options and the like.

Clearly, China has a plan to deal with the adverse impact of the trade war. They are counting on domestic consumption to keep China’s economy vibrant and resilient.

Trump’s only response is tariff

Trump’s only strategy to counter China is to levy more tariff and threaten to levy more. He has publicly asserted repeatedly that tariff collected is “free” money being paid by China. Someone needs to tell him that the free money is hurting the American consumer by raising the cost of goods and draining the American pocketbook. The money isn’t free and not coming from China.

Ahead of Trump imposing a new round of tariff on a range of consumer goods on September 1, American retailers such as Best Buy are already wailing in anguish. They know the import duties on Chinese made goods will cut down their margin, raise the price tag for their customer and reduce traffic to their stores. 

Costco in China does not have this problem; they carry made-in-China goods to serve their customers in China. American retail stores, on the other hand, depend on low priced, Chinese made products to stock their shelves. By lowering the tariff on imports from other countries, China can more than offset the increased tariff on American imports. Thus, the Chinese consumer is untouched by the trade war. 

In the meantime, the American farmer is hurting badly. Bankruptcy has increased by 13% in the first six months of this year. Trump’s offer to subsidize farmers out of the tariff collected is a band-aid over a gaping wound. Who from the White House can advise them on what to plant next year as bankruptcy looms for more households?

American leaders also don’t respect China’s technology

American political leaders from both sides of the aisle subscribe to the notion that China’s technology prowess comes from theft. Even Huawei’s 5G technology must be illicit and stolen from somewhere, despite the fact that nobody else has the technology for Huawei to steal from. Washington may find solace in dismissing China’s technological prowess, but America is sadly being deluded.

For example, according to the latest statistics, Samsung has kept their leading worldwide market share for smart phones. But Huawei has move into the second place with 15.8% while Apple slipped into third place with 10.5%. Significantly, in changing positions, Huawei sales increased by 16.5% while Apple sales dropped by 13.8%. No amount of badmouthing can change the actual sales results.

About ten years ago, China purchased highspeed rail technology from Siemens. At the time, some of the German experts privately thought it would take China decades to digest and absorbed all aspects of the technology. Yet in a decade, China has surpassed the German technology to become the world leader. China’s highspeed rail run faster and come cheaper than the Japanese or the Europeans. This is just one indicator of how quickly China can develop excellence in technology when they put their minds to it.

As part of China’s highspeed rail consortium, CRRC has won bids to make metro coaches for American cities. They proposed assembling the railcars in new plants in the US, that would create employment for American workers and present a state-of-the art design at a lower price than any competitive bids. By manufacturing interior components of the car in the US, the finished product would have more than 60% local, i.e., made in America, content. Needless to say, this is an all-around winning arrangement.

Yet, when CRRC delivered its first car to Boston, NY Senator Chuck Schumer’s only comment was that he’s worried about the Chinese using the cars to spy on America. More recently, Congressman Harley Rouda, D-CA, has taken a step further and sponsored legislation that would ban the use of federal money to buy rail cars from CRRC.

Rouda said that “American taxpayers’ hard-earned money (should) not support Chinese companies bent on undermining industries that are important to our national security.” He must be confused or is just being xenophobic because Americans have not made subway cars for decades. If indeed it’s an industry important to American national security, he better hurry and resuscitate the companies from the graveyard.

Or, perish the thought, Rouda knows better but he’s just grandstanding for some easy political brownie points. Everybody in Washington knows that taking cheap shots at China is the easiest way to get media attention.

We can see that China has a plan to deal with the trade war in the near term while the Trump White House is clueless. But the long-term implications are even more damaging.

Long term the trade war will hurt the US even more

Whether it’s soybean from Iowa or lobster from Maine or wine from California, once the Chinese stop buying from the American sellers, the markets won’t come back in a snap. China has found replacement sources. The longer the trade war goes on, the more entrenched it will be for the new suppliers and harder it will be for the US exporters to displace them and recover their market share. That is, if and when the trade war ever comes to an end.

On the technology sector, the situation is just as bad. Trump thought he had the upper hand when he ordered US semiconductor companies to stop selling key electronic components to China’s high-end smart phone makers such as ZTE and Huawei. But China is such a huge market that American semiconductor devices companies can’t afford to walk away.

The American companies pleaded with Trump and he has grudgingly relented and continue to allow the US companies to sell to China for a limited period, albeit the deadline keeps get extended. But the Chinese companies that depend on critical chipsets from the US can see the handwriting on the wall. Huawei, for example, has already announced their own OS for the smartphone to replace the Android OS from Google and is frantically developing their own telecommunication chip sets to replace Qualcomm and Nvidia. 

If the past performance is any indication of the future outcome, Huawei will cut loose their dependence on American technology faster than Washington expects. Then, American high-tech companies will soon lose market share and witness the erosion of their presence and influence in China. 

If the Trump White House does indeed succeed in decoupling the two economies, both countries will be losers. Neither will be able to leverage from the advances made by the other and enjoy the multiplier effect of the interconnection of the world’s two largest economies. Historians may well lament the zero-sum conflict the feckless Trump has brought about and rue the mutual gains that could have been realized had the two largest economies worked together and avoided the lose-lose confrontation.


Tuesday, May 21, 2019

Trump has started a trade war that he can’t win

The edited version first posted on Asia Times.

Anyone with a decent education and a dollop of sophistication knows: Nobody wins in a trade war. Specifically, there is no way Donald Trump can win the war he initiated with China.

He thinks tariffs levied on imports from China is “free” money going into the US Treasury. Even his closest advisers know that’s delusional thinking and wrong.

Tariffs are paid by the importer and to the best of his/her ability passes on the added tax to the ultimate buyer. In the case of daily use items, it’s the consumer that adsorbs the increased cost. The exporter of consumer goods from China also loses because at the higher effective price, less is sold.

Same goes the other way. Tariffs imposed by China on imports from the US limit the amount American exporter can sell to China. For instance, China was going to be a huge market for natural gas from Texas. With the added tariff, LNG from the US was priced out of the market.

In theory, tariffs imposed on goods from China would be more painful to China because China sells much more to the US than the other way.

However, the two-way trade is not zero sum. China is not as dependent on buying from the US the US needs to buy from China.

China can buy from alternate sources, e.g., lobsters from Canada instead of from Maine, soybeans from Brazil instead of Iowa, wine from France instead of California.

On the other hand, goods imported from China are usually at the lowest prices. By slapping import duties on these goods, the net effect is to raise the cost for the American consumer, and the cost of living goes up for the Americans. 

Free money

Furthermore, around half of the imports from China are made by American companies in China. Thus, the American company will be paying the tariff for importing their own products. So much for Trump’s free money.

In any event, both parties to the tariff war will feel the pain. It will simply be a matter of which party can withstand the pain better. So far Wall Street has not reacted strongly to the prospect of increasing tariffs, but it’s a matter of time.

Of course, there are more imports from China that Trump has yet to impose a tariff, but the Trump administration has already indicated that they have much more than trade in mind. Trump wants to stop China in every which way.

The Trump team seems to think that they can impose their will and insist that China needs to desist from stealing American intellectual property and codify their agreement in writing. 

No nation would dignify a response to such an insulting request. Did America pledge in writing not to steal industrial technology from England, or Japan from the US, or South Korea from Japan?

In Silicon Valley, companies infringe and steal from each other. It’s up to the owner to safeguard and protect its IP from theft and go after the offender as a matter of mano a mano. It has never been a matter of one nation accusing another.

Yet, in the heated trade war negotiations, the American side accuses China of practicing IP theft as a matter of national sponsorship. The presumption is that Chinese companies steal according to a national policy.

Huawei has IP that the US covets

Overlooked in all this, is that soon if not already China will own IP that American companies will wish to pilfer. High speed mobile communications readily come to mind.

It’s hard to know if anyone is looking to steal Huawei’s advance 5G technology, but the Trump approach is to suppress and deny Huawei market access. Trump may deter American companies from buying Huawei but it’s not working elsewhere.

Other than vigorously badmouthing Huawei, American emissaries such as Pompeo, Bolton et al can’t offer any hard evidence that Huawei equipment represents security risk. They simply insist that others should not buy from Huawei because the Whitehouse said so. 

What’s obvious is that Huawei offers technological advances here and now that no others can. Washington can’t even put a finger on which aspects of the Huawei package are based on stolen IP.

The rest of the world is ignoring Washington and buying Huawei because of its superior technology at an irresistibly low price. Soon the telecommunications world will be divided into the haves with Huawei technology and the pitiful few countries with slow internet speeds clinging to Uncle Sam’s trousers.

Common economic interests

Same situation is evolving geopolitically. Pompeohas been visiting national capitols warning the leaders to stay away from China’s Belt and Road Initiative, BRI. Why? Because he accuses China of practicing predatory financing when China offers to finance the infrastructures for third world countries.

Yet at the just concluded Belt and Road Forum in Beijing last month, attended by 37 heads of state and 130 some countries represented, the reaction couldn’t be more positive, a clear refutation of what Trump’s China team has been saying.

These countries love the idea that China is willing to help them build crucial infrastructure projects. Infrastructure, they know, is necessary for economic growth. Infrastructure as part of China’s trade corridor from Asia to Europe means member states sitting on the corridor will get rich from global trade.

Along with the 130+ countries with shared economic interest with China, there is also the Asian Infrastructure Investment Bank. AIIB was independently established to finance infrastructure projects in Asia.

AIIB has 70 members with 27 more waiting in line to join. Apart from some participants in the BRI, major shareholders include every major European country. Only ones conspicuous by their absence are Japan and the US—not taking part in AIIB was Obama’s missed opportunity.

While the US rings the world with military bases and asserts its leadership by projecting its might, China promotes economic collaboration with countries around the world. 

The two strategic paths need not converge leading to conflict, but if conflict breaks out, countries standing by the US would be based on fear and intimidation. Those standing by China are bound by common economic interests. As the world turns, increasing numbers will quit the former for the latter.

Shared military assets

Russia has become an important partner to China because of intertwined and complementary economic interests. The two countries are also key players in the Shanghai Cooperation Organization, established more than two decades ago. SCO includes Central Asia countries, Pakistan and India and soon to include Iran.

Aside from economic and cultural cooperation, the alliance also holds joint military exercises to combat terrorism and ensure stability. In the event of US military intervention, SCO will stand with China. The organization represents half of the world’s population and 80% of the Euro-Asia landmass.

While it’s been said in Washington circles that Bolton and Pompeo hanker for effecting regime change in Iran, Trump is not totally without common sense. Even though waging a proxy war on Iran with American lives would please his client states, Israel and Saudi Arabia, as well his super wealthy support base as home, he knows Iran is no mere Iraq.

Furthermore, as reported in Asia Times, Russia and China are on the same page in their foreign policy and stand firmly behind Iran. Enough to give any of the hot-blooded hawks in the Whitehouse pause. Even pundit Pat Buchananthinks war on Iran would be the end of Trump presidency.

Not just Iran, Russia and China’s position on Cuba, North Korea, Syria, Afghanistan and Venezuela is very different from the US, and in some cases even diametrically opposed to Washington. If Pompeo and Bolton believe they can dictate terms to these hotspots without the support of China or Russia, they are hallucinating.

A fork in the road

Thus, if Iran is unlikely to trigger a calamitous war, Trump can turn his full attention to resolving the China challenge, a dilemma sitting at the fork of the road. He can back off as he has in the past and seek a non zero-sum approach that would enable both sides to win. Or he can double down and impose tariffs on $300 billions of Chinese imports currently entering the US duty free.

If Trump decides to raise the stakes of the trade war, China will not be able to retaliate in kind since China imports much less than the US imports from China. But they have other ways to raise the stakes.

China can stop exporting rare earth minerals and compounds to the US.  Rare earths are essential to a host of industries including electronics and defense. Without access to rare earths, American industries would grind to a halt and it would take years to develop alternate supplies from known deposits within the US.

China can also greatly diminish their support for the US national debt by buying fewer treasury bills. China currently holds around $1 trillion of American IOUs. If China were to stop buying or even divesting some of the treasuries from their holding, it would shake the confidence in the dollar and create instability in the US financial market.

China has become the largest and most profitable car market for American auto makers. Profits earned from China often make up the major part of the company’s total earnings. Another retaliation in the trade war is to close the market to American companies.

Another strike with surgical precision is for Macau government to suggest to the media that the renewal of the gaming licenses in Macau for the three American operators is in doubt. Las Vegas Sands is the largest of the three and a little over 60% of its revenue and profit come from Macau.

Sheldon Adelson is the majority owner of LVS and a heavy financial contributor to Trump’s presidency. Any hint that LVS is in trouble in Macau would be a direct hit to Adelson’s net worth and sure to put a crimp on his enthusiasm for Trump’s China policy.

Retaliation would ensure both sides lose

From the inception of this trade war, Trump and his team assert that the war “was easy to win.” What I have listed above are just some of the tools China can use to ensure a lose-lose outcome. Any of the retaliatory moves would destabilize the global economy and severely erode Trump’s core supporters. 

The outcome would be a classic LOSE-LOSE and debatable as to who would lose more.

As a senior official at the State Department recently declared, the war between the US and China is between “civilizations.” Knowing that China is coming from a different culture and background, the Trump Administration should know better.

Up to now Trump’s China team has been projecting American values and thinking on to the Chinese. Just because “we lie, we cheat, we steal,” doesn’t mean China will act the same way.

Unlike the US, China does not interfere with the internal affairs of another state, does not wish to dominate and occupy someone else’s territory and does not impose their way of government on anyone else. 

If the US could stop waging an unwinnable trade war and stop demanding that China must be more like the US, it would be possible for the two sides to come to an understanding. They can reach an amicable win-win resolution wherein each party can feel that they have won.

Monday, October 8, 2018

Comment on Secretary State Pompeo's visit to Beijing (YouTube)

Pompeo made a visit to North South Korea, Japan and China. I was asked to comment on his visit to Beijing on CGTN on October 8.

https://youtu.be/BixOSI4PyBs

Less than a week later, I was asked to comment on Premier Li's trip to Tajikistan and Europe and on Shanghai Cooperation Organization.

https://youtu.be/zLQRDy15cyM

Saturday, July 7, 2018

How will the trade war started by the US end?

First posted on Quora.

It will end when Trump hears enough complaints from (1) American farmers who suddenly have all kinds of harvest ready for export but no place to sell to, (2) American consumers who find prices on everyday goods increase by 15 to 25%, and (3) American multinational corporations with locations all around the world telling him that tariff on intermediary goods they make or buy and tariff on final products they export are killing their bottom line.

At that point when the voices of discontent are sufficiently loud and because Trump is not tone deaf, he will declare, possibly with China’s complicity, that he has won the trade war and is calling an end to the war.

Wednesday, April 18, 2018

Treating China as an adversary is not in America’s interest

This blog first appeared in Asia Times
A recent Gallup Poll reveals that favorable American public opinion on China has finally climbed over 50%, albeit just barely. This is a remarkable development in light of the continued barrage of negative sentiments from American politicians and pundits.
Politicians with national ambitions seem to need to attack China as part of their résumé. US Senator Elizabeth Warren is the latest example. It’s almost as if she took a trip to China just to criticize its human-rights record – and to earn a merit ribbon for her foreign-affairs credential.

Since she is supposed to be a progressive candidate of the people, she could have spent her visit learning how China has taken hundreds of million out of poverty and see if any of their techniques could be copied to help take Americans out of poverty—a domestic challenge in serious need of solutions.

A common failing among political leaders in Washington is their being quick to criticize China while oblivious to gross human-rights violations at home.
Then there are those pundits who make a living by demonizing China. A glaring case in point is Gordon Chang, author of The Coming Collapse of China, published in 2001. In the US, he continues to get invited to pontificate in public. Outside of the country, his prediction of the collapse of China is seen itself to have collapsed.
Peter Navarro has run wild using Chang’s playbook and has produced books and documentaries that distort China and its trade policies based on exaggerations and outright fabrications.
Navarro’s colleagues at the University of California at Irvine can attest that he has no background or expertise on China. Professionally trained economists around the world look on his amateurish China-related writings with disdain. Even so, Navarro has ridden his China-bashing rhetoric to the inner circle of the White House.
Now that we are faced with threats of mutual economic disruption via a trade war, it’s time to weigh the costs and benefits of treating China as an adversary based on factual information instead of rants and exaggerated tweets.

Why China joined the WTO

China entered the World Trade Organization in 2001, having begun the application process some 15 years earlier. At the time, the size of China’s economy was less than 5% of that of the US. As a developing country, China was entitled under WTO rules to certain measures to protect its manufacturing industries.
The motivation for China to enter the WTO was to force its domestic industries to improve their manufacturing practices so as to compete in the global market. Contrary to implications from President Donald Trump’s announcements, being a member of the WTO did not give China any license to game the system.
Not without irony, it is the White House that is violating the US membership in WTO by arbitrarily and unilaterally threatening to raise tariffs against China.
In those early days, China insisted that in certain industries, for foreign companies to enter the country, the foreign company had to form a joint venture of which it owned no more than 50% and had to share the technology necessary for the JV to succeed.
That was China’s strategy to catch up by learning from the West. US companies did not have to enter the China market if they found those conditions unacceptable.
General Motors for one was very glad that it did. GM made more money on Buicks sold in China through its 50:50 JV than its total sales in the US, and this delayed having to declare bankruptcy. The import duty on foreign-made cars also helped GM in China. Even today, it continues to enjoy a higher margin on cars made and sold in China than in the US.
Lest anyone get the impression that China’s economic success depended on transfer of American technology, the total US investment in China has been far less than factories set up there by Hong Kong and Taiwanese businesses. These ethnic-Chinese businesspeople entered mainland China at least a decade before US companies, and they were the ones that introduced good manufacturing practices to China.

A trade war puts the US at a disadvantage

If the Trump team insists on launching a tariff war, it needs to understand that America will be at a disadvantage, simply because China does not have to buy commodities such as soybeans, pork and wine from the US. Other countries are eager to sell to China. You can think of China as a buyer’s market.
In contrast, if the US were to stop buying daily-use consumer goods from China, the American household would have to pay a lot more for imports from elsewhere. You can think of the US as a seller’s market.
There is no question that membership in the WTO has greatly helped China’s rise economically, because if a factory can’t compete, it goes out of business. Consequently China is a much stronger country than it was two or three decades ago.
Reliance on stolen intellectual property might have been important in the past, but China is now generating significant IP of its own. In some areas, such as fifth-generation mobile communications, robotics in manufacturing and artificial intelligence, China is already among the world leaders.
Threatening a trade war and other combative posturing will not deter China’s goal to become the strongest economy in the world. At the same time, China does not interfere with American elections or join in Middle East conflicts.
China goes out of its way not to pose a security threat to the US. A quick comparison should amply illustrate this point: The US Navy holds “freedom of navigation” exercises in the South China Sea. China has declined to reciprocate by conducting such exercises in the Caribbean.
To treat China as an adversary is a misuse of the US federal budget, takes attention away from genuinely urgent issues in other parts of the world and gives up any opportunity to collaborate with China in ways that could spell real benefits for the American people.