Showing posts with label global trade. Show all posts
Showing posts with label global trade. 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

Sunday, October 9, 2022

US pushes ‘rule-based disorder’ Latest set of sanctions targeting the chip industry will do no one any good, certainly not the US itself

First posted in Asia Times. Upon becoming president of the United States, Joe Biden immediately set forth to promote “rule-based international order,” ostensibly for the world community, but the message was really intended for China. The “world order,” according to Biden, was for Beijing to conduct its foreign affairs in line with Washington’s expectations. Now into the second year of his regime, it has become increasingly clear that Biden’s idea of order is actually disorder and is causing chaos not only in the world but especially to the American economy. The latest example is the most recent series of sanctions and embargoes forbidding sales of semiconductor chips and manufacturing equipment to China. Up to now, China has been far and away the largest buyer for semiconductor processing equipment and is the major market for advanced chips designed by such Silicon Valley companies as Nvidia and made by such foundries as Taiwan Semiconductor Manufacturing Company (TSMC). The ban seeks all the members of the semiconductor industry, foreign and domestic, to go cold turkey and stop doing business with China. Heretofore, the industry has been a prime example of a virtuous circle created by globalization. In simplified terms, we can say that innovations in chip designs for new uses are created in Silicon Valley, fabricated by foundries in Taiwan and South Korea, and then shipped to China to assemble into devices and final products, which are then sold around the world. Companies engaged in making fabrication and processing equipment kept pushing the boundaries of their technology and collaborated with the foundries to produce the next generation of advanced chips. The equipment companies were not just in the US but also in Japan and the Netherlands. Everyone wins in a virtuous circle In a virtuous circle, everybody does what he does best and contributes to a supply chain at the most cost-effective efficiency. Everybody wins in such a circle. By breaking up the circle, everybody loses. South Korean foundries such as Samsung sell 40% of their output to China, including foundries they operate inside China. China represents around 30% of sales for semiconductor fabrication equipment from American companies such as Applied Materials and Lam Research. China is also the most important market for ASML, the Netherlands-based company that is in essence the only maker of advanced lithographic machines. Despite the just-imposed ban, the company has continued to increase its local hire in China to support its sales and technical services. Every member of the circle now faces a perplexing dilemma: Do they obey the Washington edict at the expense of their financial interests and companies’ futures? Or do they pay a lot of money to lawyers and lobbyists to plead on their behalf and secure certain dispensations that would allow their continuing to do business with China, perhaps at a more subdued level? Or do they find questionable routes and intermediaries to continue their sales to China? Or can they flat out defy Washington? In theory, their lost sales to China would be replaced by the expansion of a new and growing US market, as foreign companies such as TSMC and Samsung are enticed or coerced into building new fabs in the US. The challenge is whether other members of the circle can survive long enough while waiting for the new capacities in America to make up the immediate shortfall around the world. Furthermore, there are serious concerns and doubts as to whether new fabs could actually happen in the US. The cost of defying Washington’s order will be high, but the industry can already see that the cost of yielding to Biden’s sanctions makes no sense given the devastating consequences. TSMC obediently gave up on serving Huawei, its most important customer, under orders from Donald Trump’s White House more than two years ago. Now it apparently has given up on the rest of the China market in exchange for locating fabs in the US. Since then, the market capitalization of the company has declined by half from its peak. Washington offers losing propositions Washington doesn’t offer any incentives or rewards, just threats and intimidation if they are not obeyed. This is what a hegemon does, but increasingly the world is disenchanted and not convinced South Korea is the latest to feel the sting that goes with being a loyal American ally. Washington expected the Koreans to give up their huge markets in China, and the reward was for their president to face a rude and very public brushoff when he greeted Biden at the UN General Assembly (UNGA) in New York recently. According to K J Noh, who understands the Korean language, South Korean President Yoon Suk-yeol cursed in the foulest terms at the way he was treated. Hard to blame him though. Biden is asking his country commit economic seppuku but acted like Yoon was some Asian scumbag – another gaffe that the White House staff will have to repair. The European Union has also learned that there is no upside in being a groupie of American foreign policy. By joining the US in supporting the Ukrainians and sanctioning Russia in the Ukrainian war, the EU is facing a bleak cold winter with a shortfall of fuel to heat homes and fire the boilers that the German industries will need to keep operating. Facing record-breaking inflation, the people in the EU are becoming restless and beginning to agitate and question the reasons for antagonizing Russia and bringing economic misery on to themselves. Shortly before the UNGA, the Shanghai Cooperation Organization concluded its annual conference, held in Samarkand, Uzbekistan. Under China’s leadership, the SCO welcomed Iran and Belarus as new members, with a long list of other nations applying to join, including Turkey, Saudi Arabia, Egypt and others. The SCO now accounts for half of the world’s population and more than 25% of global GDP. Non-aligned countries find the SCO increasingly attractive as an antidote to American unilateralism. Geopolitical rivals such as India and Pakistan or Saudi Arabia and Iran can leave their contentions outside and join the organization to work on trade and economic cooperation, and collaborate on combating terrorism. Unlike the American led groups of nations, political or military alliances are specifically excluded within the SCO. There are, by the way, no nations waiting to join the US alliance to contain China. As I observed in June, the US approach to recruiting others to join in an alliance to contain China is a faltering strategy that will lead to America’s self-destruction. Biden’s insistence on decoupling China from the semiconductor supply chain is another step in that direction. Another step to self-destruction Washington seems not to have anticipated China’s likely response to the latest sanctions. Its semiconductor industry is redoubling its efforts and investments to develop technical advances that would replace the chips and fab equipment that have been cut off by the American sanctions. China has the raw technical manpower graduating from their colleges and universities every year and has recruited senior engineers and fabrication technologists – Asia Times called them godfathers – from Taiwan, Japan and South Korea to advise on the technical and management direction. News from China already indicates that they are making breakthroughs getting around the American embargoes. Even American analysts say that the trade barriers are doomed to fail. In the long run, the Biden sanctions will help China create its own independent semiconductor industry and leave the currently established providers out in the cold. When and if China decides to retaliate in full, it has the wherewithal to inflict pain in kind. China’s CATL is the world’s largest producer of lithium batteries for electric vehicles. The company has announced plans to build a US$7 billion plant in Hungary to serve European automakers. Its plans for North America are on hold since Nancy Pelosi’s jaunt to Taipei. China also has a virtual stranglehold on the world supply of rare earth minerals, some crucial in strategic military applications, and can elect to restrict sales to the US. Most recently, the Pentagon was aghast to find that the engine of the F-35 fighter depends on rare-earth magnets made in China. This latest “discovery” shows the deep integration of the two major economies and the difficulty of disentangling and decoupling the two. It also can show the destructive power of paranoia in Washington. The wise old gnomes in the bowels of the Pentagon probably wouldn’t suggest tearing apart all the existing F-35s to remove the magnets from China, but could certainly see this matter as another “urgent” reason to increase the defense budget greatly in order to develop a domestic replacement. The hostile drumbeats from Washington reverberate within the echo chamber for the benefit of the handful of allies sitting inside, seemingly unaware of the ongoing peaceful cooperation between China and the rest of the world. It’s hard to know when the American people will say enough is enough and vote for a thorough reform of how Washington makes friends instead of enemies.

Thursday, February 28, 2019

Time to rethink America’s relations with China


Late last year, a Hoover reportwas published on how Uncle Sam should deal with China’s presence in America and concluded that “constructive vigilance” was the indicated course of action.

Then this February, Asia Society released their report toward an effective and sustainable China policy, which they called “Course Correction.” This was supposed to be an update of the report published in 2017 to serve as advisory guide to help Trump craft his China policy as his administration came into power.

Comparing the two reports, the Asia Society report was a bit more specific and better written and less riddled with errors. But both based their reasoning and conclusions on the same fundamental premise, a dubious one to say the least.

Namely, the presumption of both reports was that the US can do no wrong and all Donald Trump had to do was to merely carry on the America’s mantle of exceptionalism.

If there were any criticism of Trump’s nonsensical trade war with China in the two reports, the rebuke was faint and bordered on being apologetic for mentioning it. Collectively, the authors showed no desire to prick Trump’s ego. Sprinkled throughout the text the reader could smell the paimapi*attaboy as they pat Trump on the rump.

Mind you, this was a president who had unilaterally decided to transfer nuclear weapon technology to Saudi Arabia for the sake of weapons sales and tore up a nuclear non-proliferation treaty in order to restart another arms race with Russia.

The second report did propose as a “novel” suggestion that the US engage China via “smart competition.” Whatever that was supposed to mean, the suggestion did not disparage the win-lose outcome that the Trump/Ross/Lighthizer team was seeking to extract from China.

Their reasoning has been that China had been taking advantage of the US since becoming a member of WTO and it’s time for payback. They thought raising tariff on imports from China would inflict hurt on China.

Unfortunately, consequences of tariffs are complex and damaging to all parties including unintended collateral damages. The export side and the import side have to work out how to share the burden of the added duty. Overall is that they will do less business while raising the cost to the ultimate buyer. Everybody loses.

Anyone familiar with game theory know that any win-lose arrangement is not a stable resolution but would devolve into a lose-lose endpoint. The only way for the US to really win is to make sure that both parties win and that’s called “smart collaboration.”

What’s in it for Uncle Sam to work with China?

China’s companies (SOE or not, what does it matter?) are already in the USto refurbish old bridges and replace dilapidated subway cars using American labor but with Chinese knowhow. They could do more if the American government weren’t so vigilantly against Chinese investments in the US.

Even if it’s a stretch to consider the US as part of the Silk Road, the always pragmatic Chinese would find a face saving but a mutually winning solution to get the job done. Surely, it’s obvious that Trump’s policy of letting the private sector do the work has not created any new jobs nor rectify any falling down infrastructure.

As for Huawei, whether and if any of their technology has been pilfered from others, that’s past history. Fact is no one can steal their way into becoming the world’s dominate telecom supplier. Huawei is now the leaderin 5G technology because they have made the necessarily massive investment to get there.

Trump Administration has gone to great length to try to stop Huawei’s progress and interrupt their market access. That’s just a temporary setback for Huawei in those parts of the world that remain intimidated by the US hegemony.

Much of the world’s other developing markets would rather have the 5G network now and reap the benefits of advanced technology. While not a developing economy, apparently Germany has decided to buy Huawei. They remember that it was the American intelligence and not the Chinese that listened in on Angela Merkel’s mobile phone.

By confronting Huawei, Trump will slow Huawei down but at the expense of American suppliers that sell into Huawei’s 5 G systems. The fewer systems Huawei install means fewer sales for Intel, Qualcomm and others.

Thus, in seemingly an attempt to gain a win-lose advantage, it will end up lose-lose. Huawei will lose some momentum for a while and the US will be without the ownership of the most advanced telecommunication network.

It’s entirely possible that the eventual end point will be a world divided in two. One part of the world will use Huawei’s 5G and evolving to 6G while the other part will be waiting for technological advances to arrive. When another provider does shows up, it won’t be American because the US doesn’t have any companies participating in this space.

Is China’s foreign policy in conflict with the US? Not at all. China does not post the PLA around the world and have built only one military base in Djibouti to support China’s naval ships sailing around the horn of Africa on anti-piracy patrol—no mere “freedom of navigation” exercises there.

Instead of exporting American troops to station around the world, China exports their capital and expertise to help countries in Africa and Latin America with infrastructure projects.

National security advisor John Bolton has gone to Africa to warn these countries of China’s so-called predatory financing and to wait for better packages from the US, which of course never materialized.

Secretary Mike Pompeo has also made the rounds around the world warning countries not to fall for China’s trap. He was met with stony resentment from African leaders and president of Hungary, “Are we too stupid to figure out what’s good for us?”

In comparing China vs. the US, Ecuador said China has never assassinated our government leader, has never had a military base on our land and has never removed leaders from our neighboring countries.

While John Kerry was the US Secretary of State, he said, “We want China to understand that this doesn’t have to be a rivalry…but it is much more important for us to find the ways to cooperate.” 

The irony now is that it is the US that does not understand.


*Chinese expression for patting the horse on the fanny, i.e., excessive flattery

CNBC on China in Africa - The human stories


China has transition from trade to Africa to make in Africa with Chinese investments. China has become Africa's major trading partner since 2009.

China sets up factories to design products for the local market, provide TV programs dubbed in Swahili

China producing green energy in Africa Wind mills can generate energy then convert into electricity and need transmission and management expertise. China’s infrastructure investments in Africa from 2005 to 2015 amounted to $50 billion

African presence in China, especially in Guangzhou. 
 https://www.youtube.com/watch?v=rGztH3NhZw4

China’s building of the Nairobi Monbasa railroad. Chinese have ten years to operate and train the local staff to take over the management and operation. Amanbo, e-commerce website in Africa to help Africans in e-commerce
https://www.youtube.com/watch?v=tfLJAGRSnIk