Tuesday, October 24, 2017

How Xi can make Trump's visit a success

An edited version appeared in Asia Times

It has been widely reported that the Whitehouse staff has been busy preparing a comprehensive approach to China for Trump’s widely anticipated trip to China in November. In fact, two different approaches have been formulated based on the idea of confrontation or cooperation.

Most prominent advocate in favor of confrontation has come from the Steve Bannon school of international thinking, wherein Gordon (the Collapse of China) Chang salutes Bannon as the Paul Revere warning America of the coming economic war with China.

A whole generation of China watchers has been waiting for Chang’s prophecy to find some shred of reality but can only conclude that he is a blindfolded seer muttering gibberish in the wilderness. Yet, Bannon’s Breitbart has seen fit to elevate Chang to the position as “renowned expert on Asia.” This mutual admiration speaks volumes on the callow superficiality of these novitiates in international relations.

Any student of Econ 101 knows that the notion of an economic war between the U.S. and China is preposterous. Much of Bannon’s argument, as is those from Commerce Secretary Ross, rests on the charge that China has gained unfair possession of corporate America’s intellectual property.

We owe it to helping ensure the success of Trump’s China trip by examining this question of China’s alleged hijacking American IP in some detail.

It’s true in the 1980’s and 1990’s, China’s economy was tiny compared to the U.S. and its quality of technology far behind. Therefore as a matter of national policy, China insisted that for certain critical industries, foreign companies wishing to invest in China must form joint ventures with foreign ownership not to exceed 50%. Passenger cars belong to one of these critical or so-called pillar industries.

However, it would be inaccurate to accuse China of coercing the foreign company into handing over its know how and trade secrets. To paraphrase Bill Gates when he entered China, “You want to play in the China market, you go by their rules. If you can’t abide by their rules, don’t enter.” (Google elected to withdraw from China but Baidu came up with their version of search technology anyway.)

GM was one of the first car companies to invest in China and had to form a 50/50 JV with Shanghai Auto Industries Corp. No doubt SAIC learned a lot from their JV partner, but look at what GM got.

GM introduced their Buick into China just as China’s market for passenger cars was taking off and Buick became the established “luxury” car for the Chinese consumer. At one point, GM’s take of profits from all the Buicks sold in China, even at 50%, exceeded the total of the paper-thin profits GM earned from all the sales in the US. GM’s profit from China delayed the inevitable bankruptcy of the parent for some years.

Getting into the China market in exchange for sharing their technology was a deliberate business decision, no coercion involved. Few companies that made the decision to get into China regretted doing so, only the politicians back home like to cry foul.

Autodesk in the San Francisco Bay Area faced a different problem. They had a computer aided design program for the PC that was extremely popular in China. Except, practically every copy in China at the time was a bootleg copy; very few if any were paid for. For years, software piracy was a popular bone of contention between the American embassy staff and the Chinese officials.

The country manager of Autodesk saw the problem differently. He saw all the pirated copies as his installed base, already trained and familiar with the basic program. He then introduced a high-rise building design application to run on top of the CAD program, which he then sold like hot cakes. At the time China was undergoing a building boom and the users were far more interested in paying for the package and getting trained to use the building design program than spend the time trying to find a bootleg version.

Today, China’s economy has narrowed the gap with the US and has been developing its own IP that might benefit the US; in other words a reversal of roles is underway.

Take the example of China Railway Rolling Stock Corp (CRRC) in the US. This company has won contracts to supply subway cars for new lines and replace old cars in Boston, Chicago and Los Angeles. The contract for each city was worth well north of $500 million and each car delivered will qualify as “Buy America,” which means with a local content exceeding 60%.

CRRC will accomplish the local content requirement by shipping the outer shells from Changchun to the US and make all the other components of the car in the US. The final assembly would also be done in the US. CRRC’s proprietary design has reduced the weight of the car, thus reducing cost while enhancing rider safety. They will use their manufacturing methodology in America and supervise local (American) labor to make a superior product.

The CRRC bid was at least 20% lower than competing bids from Canada and South Korea. There were no US bidders. In other words, the use of Chinese know how will provide American cities with state of the art rail cars, at affordable prices, made with American labor, and resulting in the infrastructure improvements to make America great again.

The point about IP is that it’s a dynamic, ever changing asset and not static like a piece of gold that could be locked up in the vault. The owner can profit by sharing its know how via joint venture or license. The IP can also leak away, as employees leave the company, for example. Competitors can copy and reverse engineer to achieve the same end. Even carefully written patents are not foolproof but serves as the beginning of disputes giving litigation attorneys countless billable hours.

The issue of intellectual property ownership is simply too complicated for the Bannons or Bannon-lites to use effectively for the purpose of stoking friction between China and the U.S.

There are other companies from China that would like to invest in America, share their expertise in low cost production for the benefit of local employment and economy. GM for example invited Fu Yao to invest in a plant in Ohio to make windshields for the auto industry. The governor of Ohio was ecstatic. So long as xenophobia does not intrude, good things happen.

Judging from the rapport China’s Xi established with Trump in his visit to Mar-a-Lago earlier this year, we could surmise that Xi has figured out how to make Donald Trump feel good about himself. Xi can use the goodwill to point out to Trump that the flow of technology is now bi-directional and sharing can only help both countries achieve greatness.

In a private conversation, Xi might want to explain to Trump that North Korea won’t feel that they have reached mutual threat parity with the US until their intercontinental missiles can reach Trump’s properties on the East Coast and hurt him in the pocketbook. The only way to calm down the situation is to talk.

Xi can’t tell Pyongyang what to do, but certainly can try to broker a session at the conference table. The operative words are step-by-step, confidence building conversation that hopefully can lead to serious negotiations. Since Trump does not have the patience for this painstaking process, Xi could hint that someone else should take the lead.

Trump in turn can shower praise on Xi’s vision in creating the Belt and Road Initiative and make the observation that trains already run from China straight to London, an economic lifeline increasingly vital to U.K. as Brexit moves forward. Given that governor Jerry Brown has already declared California to be part of the initiative, Trump may also want to ask Xi how the US can participate in the BRI.

A surprising offer would be for Xi to propose sharing China’s quantum encryption technology with America! The idea would be to initially develop hack proof communication between the governments in Beijing and Washington and gradually expand to cyber communications between two countries and put the network out of the reach of the criminal elements. The implications would be huge and Trump can look exceptionally statesman-like as he emerges from his visit to China.

The key to making Trump’s China visit an unqualified success, in addition to having positive cooperative developments to talk about, is to keep the two leaders’ exposure and engagement with the western medial to a minimum.  Minimize the opportunity for Trump to strut or tweet and for the western media to create real or fake news. Let the discussions and frank exchanges proceed behind closed doors.

Friday, October 6, 2017

India’s National Interest Lies in Collaboration with China, not Conflict

I wrote this article for Diplomatist, a publication based in India. It should have been published by now. Below is an electronic version.

The border scrum at Doklam, located between former kingdom Sikkim now under India’s control, Bhutan and China may have attracted front-page coverage in India and China, but not much attention elsewhere.

There were conflicting reports as to how the high altitude, shoving match started. Indian military force entered the Chinese side to stop road building undertaken by the PLA, alleging that the activity was a threat to India’s security.

The territorial dispute was supposed to be between China and Bhutan and India represented that they were intervening at the invitation of Bhutan.

Some observers noted that the Indian incursion begin shortly after Prime Minister Modi returned from his visit to the White House and hinted that perhaps President Trump encouraged Modi into acting as an anti-China proxy.

While there is no public evidence that Trump made such a suggestion, it would be well for Modi to keep in mind that while Trump believes in “America First,” it does not mean he supports “India Second.” Furthermore, he is well known for standing on one position today and an opposite position next.

More importantly, India should consider whether it is in their national interest to antagonize China and render them into an adversary.

Some hawks in India are spoiling for a fight reminding anyone that would listen that the India today is not the same as the India of 1962. In 1962, Prime Minister Nehru was under the impression that the legacy as a former British colony was enough to intimidate the PLA.

He was wrong and his poorly equipped and poorly prepared soldiers suffered a humiliating defeat. While India today is no longer the undernourished force of 1962, neither has China’s PLA been standing still.

Hosting the Commonwealth Games was nearly a disaster

A review of recent events should suffice to put matters in perspective. Beijing surprised the world with a spectacular staging of 2008 Olympics. Two years later, India was to host the Commonwealth Games, not exactly as grand as the Olympics but noteworthy enough as a sporting spectacle nonetheless.

India almost did not pull it off. As host, India didn’t have the resources to stage various venues in a style commensurate with the prestige of the international sporting event. The host had to explore whether Beijing would loan of some of the equipment such as scorekeeping displays to the Games.

Even though India has been a nation on the rise since 2010, there remains a significant gap between India and China. It’s rather comical that India would wish to turn China into a rival when India has so much more to gain with China as a friend.

The foundation of western civilization rests on competition and confrontation leading to conquests and colonization. The British Empire emerged following this fundamental tenet and the U.S. followed the English lead and became the hegemon in a unipolar world.

But the world is changing and shifting away from unipolar to multipolar, and the influence of the hegemon is eroding in face of cooperation and collaboration emanating from various corners of earth.

India does not need to westernize to greatness

As a once great eastern civilization, India hardly needs to follow the path of western imperialism to become great again. In fact, it’s in India’s national interest to seek collaboration and regain its pole of influence by leveraging friendly relations with its neighbors.

China has been offering its assistance building infrastructure projects around the world. Railroads, highways, ports and harbors are projects that qualify as part of China’s Belt and Road initiative.

Rather than participating in the recent Belt and Road Forum held in Beijing, India opted to snub the event. Since 160 countries were represented including the U.S., India’s absence was not conspicuous but India’s pout was nevertheless silly.

There is growing excitement in Pakistan over the China Pakistan Economic Corridor (CPEC), a multibillion-dollar bilateral development project that officials in Islamabad avowed would usher in an era of unprecedented progress and prosperity—from recent Asia Times.

What’s good for Pakistan should be good for India as well. All political leaders in India need to concede is that domestic priorities trump over national pride and a drive to supremacy over rivals.

The people of India are sure to appreciate a network of high-speed trains for regularly commute, and modern highways that are completed and continuous from north to south and east to west. The economic boom that would follow would surely exceed Pakistan by orders of magnitude.

China has demonstrated that such infrastructure projects belong in their sweet spot of competence. Under the auspices of the Belt and Road initiative (BRI), China has been building roads and railways not just in Pakistan but other parts of Asia and Africa.

China’s BRI is more a loose prescription for international cooperation and not a strict set of specifications to qualify projects for financial assistance and Chinese participation. The most important requirement is that the project upon completion would benefit the local economy and the financial return would justify the investment.

The stated purpose of BRI is to facilitate global commerce and trade. By definition such investments benefit all participants of world trade. There would be no losers, only winners. India occupies a strategic location on China’s maritime silk road and could only prosper by being part of it.

India’s paths to collaboration are many

India already has a number of venues to promote collaboration with China. Shanghai Cooperation Organization is one of these. India and Pakistan are recent members of SCO and Iran is expected to join next. Coupled with China, Russian and the Central Asia nations, SCO is a powerful organization not for military alliance but for economic and cultural exchanges.

Before SCO, India was part of the BRICS consortium, consisted of Brazil, Russia, India, China and South Africa, the five largest of the fastest growing economies. BRICS meet regularly to discuss and arrange for closer business cooperation.

Finally as a founding member of Asia Infrastructure Investment Bank, India already knows the benefits of obtaining financing from AIIB. Just last week, the Finance Ministry signed a USD 329 million loan agreement with AIIB for the Gujarat Rural Roads Project.

There is ample opportunity for India to collaborate with China. India should be pleased to find Great Britain leading the charge of developed nations into joining AIIB. If the former colonial master can see the wisdom of working with China, why not India?

Comment on Wolf Warrior 2

I added my two cents to the cinema hit from China in Quora.

Some go to the movies to be intellectually stimulated, some just for the entertainment. Belonging to the latter category, I found WW2 quite entertaining.
The movie opens with a 007 like action, except all taking place under water—a new twist. Near the beginning of the movie, the hero got into a drinking contest with a big burly black guy. All the beer they can chug-a-lug wouldn’t do the job, so then the hero whips out bottles of Mao Tai. Down the hatch goes the white lightening and sure enough, down goes the black guy. Since that free product placement, sales of Mao Tai in China have gone through the roof.
As for tidbits that could be considered as propaganda:
  1. As US navy was leaving the coast of the embattled African country, the PLAN was streaming toward the shore to rescue the Chinese workers in factories built by Chinese companies.
  2. There was a tag line that goes something like this: A PRC passport won’t get you to anywhere you want to go, but will bring you back from wherever you might be.
  3. The government and the rebels stopped shooting to let the Chinese convoy pass because “they are our friends and we will need them after the fight is over.”
A farfetched coincidence is that the hero and the numero uno bad guy had a personal vendetta involving the loss the love of the hero’s life. So the hero is consoled by getting the beautiful heroine at the end and he gets to beat the sadistic bad guy, who happens to be an American mercenary, to death.
So after the Chinese expats and their fellow African workers were safely on board the Chinese naval ships, both sides of the revolution presumably went back to fighting happily ever after.
What’s not to like in a movie like that?