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The China I Know A Four-Part Series

发表时间:2020-09-21 15:42

The relationship between China’s government and the U.S. government seems to plumb new depths every week.   In this, the second installment in my series on China, I examine the state of the world’s most important bi-lateral national relationship. First we shall look at how the relationship has evolved since the late 1970’s. I then examine today’s Cold War analogies, describing how little, actually, the U.S./China contest of today has in common with U.S./Soviet Cold War. Then I attempt to turn the focus to what I consider to be the true nature of the conflict, concluding with some thoughts about where I believe the contest is headed.

U.S. China policy: accommodation, competition, containment, confrontation

American policy since China’s U.S.-supported WTO accession in 2001 has progressed through a series of stages to where it sits today under a confrontational, unpredictable Trump administration. But matters were quite different under the prior U.S. presidents.

As Neil Thomas points out in his excellent and highly-detailed historical analysis of U.S. engagement with China, entitled Matters of Record: Relitigating Engagement with China, U.S. presidents G.H.W. Bush, Clinton, G.W. Bush and Obama all, more or less, held the globalist American view: that there is a place in the world for a rising China, but that, as China rose, it must also play by the rules that bind all the world’s other leading economies.

Obama was known for his Asia Pivot, an acknowledgment that the world had entered the Asian Century, and that the U.S. would take steps to strengthen its relationships across Asia, while managing, if not economically containing, an increasingly assertive China. The 12-nation Trans-Pacific Partnership, which Obama championed, but which Trump abruptly abrogated early in his term, was seen by some as perhaps the last chance for American-led economic containment of China.

The largely trade-related China policy initially adopted by the Trump administration began before his election, driven by Trump’s need for votes in the key, post-industrial Rust Belt states of Ohio, Michigan, Wisconsin and Pennsylvania.   Trump saw a political opportunity among the working-class voters in those states whose good-paying factory jobs, Trump would say, the Chinese stole with their unfair trade practices. Once in office Trump kept up his anti-China rhetoric, but professed personal friendship with president Xi.

2018: The year everything started going wrong for China

China’s government has a plan for everything that matters, and for things that really matter, it has a backup plan in case the first plan doesn’t work. Such is the nature of a control and stability-obsessed, one-party government dominated by an executive branch in possession of all levers of power, and which operates according to Soviet style 5-year plans.   Six years into the rule of Xi Jinping, the government of China began dealing with a series of grave crises, challenging much of Beijing’s meticulous planning and throwing its leadership off balance.   They have yet to fully recover.

The Chinese government assumed, as did many Americans, that Hillary Clinton would succeed Barack Obama as U.S. president. Clinton had been tough on China, especially in the realm of human rights, while serving as Obama’s Secretary of State. A pre-election online poll taken by China’s English language Party mouthpiece, the Global Times, reported a 95 percent negative view of Clinton.

So when Donald Trump pulled off his improbable win China’s leaders were both surprised and cautiously hopeful. Their initial point of view reminds me of a scene from the 1970 World War II film Kelly’s Heroes, starring Clint Eastwood and Donald Sutherland.

A group of American soldiers had a scheme to rob a bank full of gold behind German lines.   They slipped away from their units, fought their way to the bank, and then hit a snag.   A German soldier in a fortress-like Tiger tank was guarding the bank, and he wouldn’t leave.

“What are we gonna do?” asked one of the soldiers.

Cue one of the movie’s great character creations played by Don Rickles.   Crapgame was a sly, New York City street hustler who ran a smuggling operation out of his Army supply depot.

“You make a deal,” said Crapgame.

“What kind of a deal?” asked the soldier.

“A DEAL deal,” sneered Crapgame, in his best New York accent, adding blandly, “maybe the guy’s a Republican.”

China’s leaders—the world’s great bi-lateral transactionalists--thought they had found something of a kindred spirit in Donald Trump. Yes, Trump says unkind things about China and, yes, he knows nothing about China’s culture, history or its diplomatic red lines. But here, they thought, was a New York City operator--a wheeling-dealing, bottom-line Republican.   He didn’t seem to have many principles. But the Chinese didn’t care. Principles can stand in the way of deals. Trump might just sit down with them and make the Deal of the Century—and a bonus: without another of Professor Obama’s human rights lectures.

Oh, how disappointed they have been.

The Chinese correctly reckoned that Trump, on his own, would be happy if China just bought more American made goods produced in states where he needs re-election votes. He clearly doesn’t care how China runs its country, and that’s just the kind of business partner China is always looking for.   But domestic politics have made Trump supremely unpredictable.

In January of 2018 Trump initiated his trade war with China, which soon escalated into a tit-for-tat battle of tariffs and other import restrictions impacting billions of dollars in goods moving in both directions.  

In March, in what became a Road to Damascus moment for many in the West, Xi amended the Chinese constitution to become, in essence, China’s paramount leader for life.   American public opinion of China made a U-turn and landed where it is today, with negative views surpassing even post-Tiananmen sentiment in 1991.

Then in December of 2018, Meng Wanzhou, COO of Chinese telecommunications giant Huawei and daughter of its chairman, was arrested in Vancouver by Canadian authorities at the request of the US.   Meng remains in Canadian custody, fighting extradition to the U.S. to face charges of bank fraud. The Chinese government was incensed, jailing two Canadians in retaliation, but ultimately blaming Trump for what they saw as a blatant attempt to one-up China in his trade war.

Then in 2019 things went from bad to worse.

Beijing had a long-term plan for the slow, salami slice strangulation of Hong Kong, which included the gradual transfer of Hong Kong’s priceless financial loci to more manageable centers in Shenzhen and Shanghai. But the massive protests and riots of the summer of 2019 forced Beijing’s boot to come down harder--and ten years earlier--than planned. The result was a draconian National Security law which violated China’s Hong Kong commitments, soured China’s relations with much of the world, and led to a tranche of China-unfriendly legislation issuing from the U.S. Congress.

In November of 2019, the New York Times published an explosive story, backed by leaked Party documents, describing the forced detention of up to a million Uighur and other ethnic Muslims in the country’s Xinjiang province.   China’s assertion that the gulags were really vocational training centers were unconvincing.   Evidence has since emerged of forced sterilization of Uighur women, a practice which can constitute genocide.   The UN’s top human rights body, the Human Rights Council, issued a joint statement urging China to end the mass arbitrary detention. The U.S. State Department, in an extraordinary step, created a web page specifically targeting China’s practices in Xinjiang. More China-unfriendly legislation sailed through Congress.

But nothing compared to the 2020 COVID-19 pandemic for paradigm-shifting impact. The pandemic revealed both the strengths and the weaknesses of a top-down authoritarian state. Signs of trouble in Wuhan arose weeks before the annual Lunar New Year diaspora. But these early alarms were suppressed by local Party leaders conditioned to await orders from Beijing. This allowed the virus to spread far beyond its epicenter.

Once it became clear to Beijing that a national crisis was unfolding, China’s authoritarian model responded with an unprecedented—and effective--national mobilization.   Trump initially praised the Chinese leader’s pandemic response. But as the virus spread to American soil and polling increasingly showed an American public unhappy with Trumps’ pandemic leadership, Trump’s previously cordial tone on China also changed. The virus became the “Chinese” or “Wuhan” virus, or the “kung flu.”   Though earlier professing a warm friendship with Chinese president Xi, Trump now said he wasn’t interested in talking to Xi at all.

Beijing didn’t have a plan for the fallout which attended the spread of the virus to virtually every corner of the earth. Rightly or wrongly, the world has since blamed China. Perceptions of China among billions of people the world over have been altered for a generation.  

A new Cold War?

Into this setting steps U.S. Secretary of State Mike Pompeo, whose speech in July of this year signaled to many the formal start of a new Cold War between the United States and China.  

Pompeo chose the Richard M. Nixon Library as the venue for his speech. Though Nixon is most remembered for the Watergate scandal that brought down his presidency, he rose to power during the 1950’s Red Scares as one of America’s leading anti-communists. Pompeo, his own political fortunes tied for the moment to Donald Trump’s now uncertain re-election prospects, is staying a step ahead of a group of ambitious conservative U.S. senators (Rubio, Cruz, Cotton and Hawley) all eying the presidency in the post-Trump era.   Like Nixon, these conservatives welcome talk of a Cold War, and style themselves as America’s new, anti-communist cold warriors.  

Nixon’s improbable 1972 visit to China to meet Mao was seen as a pivotal event in China’s opening to the West. Nixon’s efforts, said Pompeo, were well intentioned, but failed to change China.

“The truth is that our policies and those of other free nations resurrected China’s failing economy only to see Beijing bite the international hands that were feeding it. We opened our arms to Chinese citizens only to see the Chinese Communist Party exploit our free and open society.”  

Treading just short of a call for regime change, Pompeo urged the world to oppose China’s government.   “We, the freedom-loving nations of the world, must induce China to change. . . Securing our freedoms from the Chinese Communist Party is the mission of our time . . .”

Pompeo used Cold War ideological themes to suggest a righteous global struggle against China. But what is the true nature of this conflict?   Will the coarse excesses of 1950’s McCarthyism come back to infect American politics once again?   Will the U.S. and its allies be fighting Chinese-armed communist insurgencies across the developing world?   Will the U.S. and China get into an arms race or even a shooting war?

Why this isn’t another Cold War

Many American conservative politicians see political opportunity in positioning China the same way conservatives viewed the Soviet Union during the Cold War: a threat to American values that could end up on our shores if we aren’t vigilant. It was a winning strategy for a previous generation of U.S. conservatives.   Barry Goldwater, Richard Nixon and Ronald Reagan were all leading cold warriors, and became their party’s presidential nominees on a foundation of fervent anti-communism.  

Here I hope to pierce through the messaging of U.S. politicians, which is primarily directed at a domestic audience, and attempt to get to the heart of the matter. Today’s U.S./China contest is really about two issues: the future of western-style, private market capitalism and American technological leadership. First, I will discuss issues also present in the U.S./Soviet contest that are, at least for the moment, of secondary importance.

The military dimension

As with the Soviet Union there is certainly a military dimension in the contest with China, but it needs to be kept in perspective.   China’s military is strong and growing—and it is nowhere near the global military threat that the Soviet Union posed to the U.S. and its allies at the height of the Cold War. There are no armies glowering at each other across a divided Europe. There are no proxy wars in the Middle East and elsewhere pitting Chinese and American advisors and weapons against each other. But the U.S. military presence in the air and waters around China creates the potential for inadvertent conflict. And the free, democratic future of a small island lying off China’s coast likely hangs in the military balance.

Throughout history China’s military has been dominated by its ground forces; its army is the world’s largest. China’s People’s Liberation Army Navy (PLAN), a few decades ago little more than a coastal patrol force, is now the world’s largest in terms of vessels (300), though not in terms of total tonnage. Like the Soviet Union, China has a robust land-based nuclear missile deterrent.   China’s Navy fields at least six nuclear powered ballistic missile submarines.

Chinese military planning and weapons development focuses not on global hegemony (at the moment), but on winning a regional conflict.   This could be defensive, such as defeating a hostile blockade of the South China Sea, or offensive, such as the invasion and subjugation of Taiwan. In both cases, China, like the Soviet Union, sees its main adversary as the U.S..   To address tactical weaknesses and to counter U.S. power in the region China has constructed and militarized islands in the South China Sea. It fields a suite of impressive “carrier-killer” and “Guam-killer” missiles to defend against mainly American threats in what is known as the “first island chain” around China. China’s has one relatively unremarkable conventionally-powered aircraft carrier, with another soon to enter active service.

Though China’s military is by far the largest and most powerful in Asia, it is correctly characterized today as a regional military power, with very limited ability to project sustained power beyond its own immediate neighborhood. The U.S., on the other hand, fields 11 nuclear powered super-carriers, each one more than twice the displacement of the Chinese carriers and packing nearly three times the strike capability. China has one military base outside of Chinese territory, in Djibouti at the mouth of the Red Sea.   The U.S., in contrast, maintains some 800 military bases in more than 70 countries and territories around the world.

The final difference, when comparing China’s military capabilities with the Soviet Union, is warfighting experience.   The immense Soviet military machine that confronted the West in the Cold War was forged in its long, horrible, but ultimately victorious struggle against Nazi Germany in World War Two. The last time China’s military was engaged in a fight of any consequence was against U.S.-led UN forces in the 1950-1953 Korean War. For the Chinese this was largely a ground operation, as UN forces owned the skies and seas.   One must go back to the age of sail to find a substantial Chinese naval engagement. Today’s China has a big navy, a huge army, and a lot of very advanced military kit—especially missiles, which must be taken seriously. None of China’s main military assets, however, have been tested in battle.

The following are the two regional issues which might spark military engagement between the U.S. and China.

Artificial Islands in the South China Sea

The U.S. has the great luxury of conducting its ship-borne commerce with the world across four vast, uncontested coastlines: Atlantic, Pacific, Gulf of Mexico and Great Lakes. China has only a relatively short Pacific coastline.   Along the southern portion of that coastline, through the South China Sea, passes one third of the world’s commerce and virtually all of China’s oil and gas, which it imports from the Gulf. As China grew and prospered—largely through trade with the world--it realized that it had an enormous strategic vulnerability.   Simply put, whoever controls the South China Sea, also controls China.

Until just a few decades ago, China possessed little more than a coastal patrol navy.   Owing to the weakness of its Navy and the constricted, contested nature of its lifeline to the world, China’s military strategists saw that the event of war most, if not all, of China’s maritime commerce could be easily blockaded by hostile foreign navies controlling a few strategic pinch points into and out of the South China Sea.   China had a big problem. It didn’t have the blue water navy it needed to keep its sea lanes open.   China needed a “gap solution” to protect itself.

This solution had three main elements: (1) build the world’s largest fleet of surface combatants (China now has 300; the U.S. 287); (3) develop a “carrier killer” missile that could either sink the powerful American carriers, or merely keep them far away; and (3) construct and militarize artificial islands on reefs in the shallow South China Sea. These islands were to become China’s “unsinkable aircraft carriers” until China’s People’s Liberation Army Navy was ready to do its part.

Defying international law and the competing claims of smaller neighbors Vietnam, the Philippines, Malaysia and Brunei, China constructed the islands in the South China Sea, garrisoning them with soldiers, equipping them with runways, fighter aircraft, radar and missile batteries.   China’s intent for the islands was clear: to maintain the shipping status quo and, in the event of war, control access—area denial in military parlance—to a body of water vital to China’s national autonomy and survival.

Frequently overlooked in reference to China’s South China Sea objectives is energy. Lacking sufficient domestic oil and gas reserves, China imports some 80% of its energy from the Gulf.   Finding energy closer to home and in Chinese-controlled waters is a major national priority.

Island building has helped China address its vulnerability to a marine blockade.   But like many of the steps China has recently taken to address its vulnerabilities and to assert its territorial sovereignty, it comes with a heavy cost to its external relations.   In the treaty-busting Trump era, China would no doubt have liked to position itself as the sole global power actually upholding the rules-based international order. But by violating its commitments under the U.N Convention on the Law of the Sea, and then ignoring the ruling of the Permanent Court of Arbitration invalidating its claims, China has lost the high-ground, while alienating its regional neighbors. In late July the U.S., together with its ally Australia, issued a joint statement formally rejecting China’s South China Sea territorial claims. The move will embolden others to follow suit.

China is very unlikely to reverse course on the artificial islands. The islands are now, in parlance made popular by Middle East diplomacy, a fact on the ground. But it is possible that they may become substantially demilitarized.   That would happen only if China determines that the limited military value of the islands is outweighed by other negatives, such as China’s deteriorating relationships with its smaller neighbors and the risks of inadvertent war arising from the constant “freedom of navigation” cruises challenging China’s claims by the U.S., French and British navies.

Though useful for all nature of non-military functions, such as search and rescue and supporting China’s energy exploration and fishing fleets, the artificial islands are of quite dubious military value in the event of a shooting war-- somewhat akin to a 21th century Maginot Line.   The chief limitation of these “unsinkable aircraft carriers” in a highly mobile, over-the horizon modern digital battlefield is that, of course, they don’t submerge and they don’t move.   It takes little imagination to assume that their coordinates have been pre-programmed into the cruise missile batteries of the U.S. Seventh Fleet’s surface and submarine assets, as well as the Guam and Diego Garcia-based bombers of the U.S. Air Force.   If the shooting ever starts, these islands would be the first targets.

Taiwan: The new Berlin

Across the long sweep of Chinese history, emperors who unified China, or who reclaimed or expanded China’s territory, are generally held in the highest regard. The Kangxi Emperor, of the Qing dynasty and given the name Xuanye (1654-1722), is considered one of China’s greatest emperors. His enduring fame was cemented when a 300-ship force under admiral Shi Lang won a decisive naval battle resulting in the Qing capture of Taiwan in 1683.

Today’s president Xi, having amended the Chinese constitution to keep him in power indefinitely, should not be seen as just another of the mainly technocratic Chinese leaders rotating through the top job in a more or less orderly fashion every ten years since Mao.   Xi’s effective consolidation of power has made him, in essence, a modern Chinese emperor.   His eyes are on history and his place in the pantheon of great Chinese leaders.   That bid for greatness, in the ancient Chinese tradition, cannot happen without aggressively protecting Chinese territory and restoring lost territories to Chinese rule.   Uniting the Mainland with Taiwan is Xi’s greatest, most sacred duty to China (领土完整神圣不可侵)and the most essential element to his enduring legacy.

The fact that Taiwan is now self-ruled, its people uninterested in unification with the Mainland, does not in any sense deter Beijing from insisting that Taiwan come under Beijing’s sway—by force if necessary.   Taiwan is a vibrant, pluralistic, prosperous democracy—but it wasn’t always that way.   The recent death of the man called the father of Taiwan democracy, Lee Teng-hui, reminded many of the fact that Taiwan, though now a democracy, had an undemocratic, authoritarian period every bit as repressive as any seen on the Mainland.   Taiwan didn’t hold its first direct presidential election until 1996.

Though it has a smattering of Japanese and indigenous people is its population, Taiwan is primarily ethnically Chinese, with strong family and commercial connections to the Mainland.   Because of the narrow straits separating Taiwan from the Mainland—and steadfast support from the U.S. continuing to the present--Taiwan was not subjugated by Mao after 1949, and has never been under Chinese Communist Party rule. Its people and its traditional, authentic Chinese culture thus escaped the nihilistic agonies of the Cultural Revolution.   What’s more, Taiwan proves that democracy can rise from authoritarianism and abide peacefully and prosperously in the Chinese breast.   It’s continued autonomy, therefore, is seen as a profound insult to the deeply-held idea of Chinese unity, and its government a challenge to the undemocratic governing model of the Communist Party of China.

Sentiment in favor of unification with the Mainland was, as recently as twenty years ago, polling in the 50-60 percent range, with strongest support coming from older Taiwanese who were attracted to China’s rising power and prestige and who may have been born on the Mainland. But the desire for unification has declined in recent years—especially among the young, who are now more inclined to identify as Taiwanese than Chinese. Even Taiwan’s pro-Beijing KMT Party has dropped its support for what has been called, perhaps incorrectly, the 1992 Consensus agreement aimed at eventual unification.  

The reason for the recent change is obvious.   The people of Taiwan have an open internet and an unregulated media. They witnessed the spectacle of Hong Kong’s massive 2019 protests, and have watched Hong Kong’s government, under the guise of One Country Two Systems, ignore its people and institute a series of increasingly repressive measures. The people of Taiwan don’t want to be the next Hong Kong.

All of these factors, and more, combine to make Taiwan the most potentially dangerous military situation for China and for the U.S.. The U.S. is obligated under the Taiwan Relations Act of 1979 to provide Taiwan with military and other self-defense assistance. But the U.S. has no mutual defense treaty with Taiwan.   Chinese military planners have gamed an invasion scenario occurring after this year’s U.S. presidential election. They theorize that Trump is likely to lose the election, but that he and his supporters will refuse the accept the outcome, thereby pitching the U.S. into a distracting leadership and constitutional crisis. This, they think, might be the best time to move on Taiwan.

On the question of whether the U.S. would come to Taiwan’s aid in the event of attack, the U.S. has always followed a policy of “strategic ambiguity” which served two purposes. It kept China guessing, and it also deterred Taiwan from pursuing independence, which Washington did not support.   In a recent article in Foreign Affairs Magazine, Richard Haass and David Sachs say China’s growing military capability may embolden it, so they urge the U.S. to move beyond strategic ambiguity and make an explicit declaration that the U.S. would come to the aid of Taiwan if it were attacked.

On 16 September, Reuters reported that the U.S. plans to sell Taiwan as many as seven major weapons systems, including mines, cruise missiles and drones.   This breaks with decades of cautiously incremental weapons sales.   “Washington has been eager to create a military counterbalance to Chinese forces, building on an effort known within the Pentagon as ‘Fortress Taiwan’, as Beijing’s military makes increasingly aggressive moves in the region.”

The Ideological Dimension

Another major difference between the U.S./China contest and the U.S./Soviet Cold War is ideological.   On its face, it would seem a perfect fit. Both the Soviet Union and today’s China profess to being communist.   Washington’s China hawks seem unable to utter the name China without preceding it with what they intend to be a derisive modifier: “communist.”   But does this focus on ideology mean that the contest with China is really a reprise of the Cold War’s fight between capitalism and communism? It is certainly a contest of quite different political economies. But, as we shall see, and notwithstanding the name which China attaches to its ruling party, the U.S. is actually not battling a communist regime.

Both Krushchev’s Soviet Union and Mao’s China hewed closely to the communist economic model.   The State owned all instruments of production.   Agriculture was collectivized. There was no private sector; all workers were employees of the State.   Economic and industrial planning was totally centralized.  

Marx’s proletariat would search vainly for communist touchstones in today’s China. There is no class struggle amid China’s largely unified but economically stratified masses. State economic planning is muted in China’s vibrant private sector, its businesses possessing the instruments of production, and a fabulously rich (and getting richer) ruling class. One struggles to imagine a third world worker’s or agrarian movement finding any kinship in what passes for rural communism in today’s China. Chinese land use and ownership, as it was and sometimes still is in some Latin American countries, is not controlled by the people who work the land, but by a Party elite who often personally profit from its re-distribution. No, today’s China is no one’s idea of a Soviet-style (and certainly not a Maoist) communist system.   Indeed, if it was (think Cuba, North Korea) the West would have little to worry about—at least with respect to economic competition.

More importantly for this discussion, both the Soviet Union and Mao’s China actively exported their versions of Marxist/Leninist class struggle and revolution around the world, spawning bloody proxy conflicts with American-supported governments in Asia and Latin America. Those days are, gladly, long gone.   Communism, as a framework for revolutionary change, has rather fallen out of fashion.

Today’s China doesn’t build influence by fomenting class struggle or arming Marxist rebel groups. It doesn’t need to. Xi’s China has something that Mao’s China didn’t: money, lots of it.   China sprinkles largesse around the developing world, and is not at all shy about using its economic strength to get what it wants, and to punish countries which displease it. But no one is clamoring to replicate China’s political system in their country.

The economic dimension: the future of capitalism

This leaves us with the last and most important distinction with the U.S./Soviet Cold War: Economics. The Cold War was not about today’s realities: two giant economies slugging it out in a common ring.   The U.S. and Soviet economies might as well have been on separate planets.   The Soviets chose not to participate in the Bretton Woods economic conference convened by the soon-to-be victorious countries toward the end of World War II, setting up an entirely separate economic system in the Soviet Bloc.   So separate from the West was this system that when the whole rotten Soviet structure finally collapsed in 1991 the event didn’t even register on the world’s major stock indexes.

We have now reached the nub of the issue.   The contest with China is economic. More precisely, the U.S. and much of the West are now in a battle against the Chinese version of capitalism—a hybrid--which is correctly characterized as State Capitalism.   China’s system, which puts the muscle of the Chinese government and often the political desires of the Party behind Chinese business, has become an economic threat to businesses from more open, liberal, market-based Western economies.

What makes this contest different than American competition with companies from other leading economies, like Germany and Japan? Yes, of course Germany and Japan are liberal democracies. But let’s not immediately follow Mike Pompeo into an obvious, but ultimately unproductive, comparison of political systems. What China’s government has done, in essence, is take on board the best parts of capitalism and discard the pieces that conflict with its illiberal governing model.

China’s version of capitalism, in one sense, looks quite familiar to a Westerner.   People and businesses are free to pursue private commercial objectives, own businesses and property and amass wealth. The State allows many markets to function according to the laws of supply and demand.   But across the commercial spectrum the separation between public and private interests blur.   Everything that matters is tilted to serve the interests of the State. The Party maintains tight control over all major economic levers, all flows of information, all strategic industries.   Many of the biggest and most important businesses in China are owned by a unit of the Chinese government. Even privately-owned businesses have Party committees that participate in management and keep the company on the political straight and narrow.

In many respects, China’s version of capitalism is in the process of beating the open, liberal, market-driven capitalist West, including the U.S., at its own game.   At stake in this contest, therefore, is not our liberal democratic political systems (which is an important discussion for another day), but the future of western-style private sector capitalism itself.

A study in codependence

The messy entanglements of U.S./China contest make the tidy polarity of the U.S./Soviet Cold War look so simple. China has developed a deep and unhealthy trade, economic, capital and technological codependency with the West--and especially the U.S.   As tensions rise, this codependency—and any sudden withdrawal from it--is far more dangerous to China than it is to the U.S. This is why hardly a day passes without some Chinese spokesperson decrying the American rush into another Cold War. A Cold War and the economic and technological de-coupling which would follow terrifies China’s government.

China still needs U.S. technology, but U.S. semiconductor companies are afraid that a ban on technology exports to China will impact their sales.   A recent Trump administration proposal to blacklist China's top chipmaker Semiconductor Manufacturing International Corporation was vigorously opposed by companies that supply China’s chip sector with sophisticated and expensive equipment.

China underwrites America’s unhealthy addiction to deficit spending by investing its immense dollar reserves in safe U.S. Treasuries. Yet China is painfully aware that the U.S. probably has the power (if not the will at the moment) to shut China’s state-owned banks out of the inter-bank dollar settlement system—at a time when the majority of China’s foreign reserves are dollar-denominated and its own currency, the renminbi, comprises less than 2 percent of international payment volumes.

American consumers are also willing codependents.   They caper down the aisles of Wal-Mart snapping up cheap Chinese-made goods, while decrying the loss of American manufacturing jobs to “unfair” Chinese trade practices.   American multinationals, desperate to participate in China’s immense market, are especially craven.   They quietly endure regulatory and market discrimination, coerced technology transfers, and rampant IP theft. They meekly acquiesce to Chinese government censorship, even imploring the U.S. government to remain silent on the abuses lest the Chinese retaliate.

American universities have become deeply codependent with China. Chinese students still clamor to get into U.S. universities. These students are very attractive revenue sources for the universities. They pay full out of state tuition, and back-fill declining domestic enrollment and sports revenue lost from COVID restrictions.   China is also the largest foreign source of donations to U.S. universities.

Source: The Wire China

The gathering storm

The fight between the U.S. and China will play out primarily in four separate battlegrounds that, importantly, were not present in the Soviet Cold War contest: trade (market reciprocity), technology, education, and monetary policy.

The Technology Battleground

“Our Celestial Empire possesses all things in prolific abundance and lacks no product within its borders. There is therefore no need to import the manufactures of outside barbarians in exchange for our own produce.”

— Qianlong Emperor, Second Edict to King George III of Great Britain, 1792

Ancient China rose to greatness almost completely isolated from the West. But modern China got to where it is today through access to western markets and investment, western technology, and western education—and hard work by millions of Chinese people.   Now the Chinese government is attempting to achieve a paradigm shift. While still promoting exports and warmly welcoming continued foreign investment, Beijing is now focusing China’s immense State resources on developing and owning--for the benefit of the State and Party--the next set of global technology standards.  

Making the tiny ball and socket at the business end of a seemingly mundane, everyday product like a ballpoint pen actually requires precise tolerances and special metal working techniques. This is something that German, Swiss and Japanese manufacturers have mastered for decades—but not, until recently, the Chinese. In 2015, when Premier Li Keqiang singled out the products at a seminar in Beijing, he noted that his writing with a Chinese pen was “rough.” For Li, China's failure to manufacture the key components of a ballpoint pen was symbolic of one of China’s technical weaknesses. “That's the real situation facing U.S.,” Li said at. “We cannot make ballpoint pens with a smooth writing function.”

The reason the Chinese hadn’t yet mastered the technology of a ball point pen isn’t down to a lack of brain power.   China has as many brilliant engineers and metallurgists as the next country. The cause is systemic: developing ball point pen technology wasn’t a government priority.   Government-approved, funded and directed innovation is how China’s R&D engine operates.   China got around to mastering the ball point, but only after Li’s comments were reported and a concerted government intervention took place.

Innovation can certainly occur without government mandates.   And in a country as big and vigorous as China, private, random or serendipitous innovation will always happen. But you can’t count on when and how that innovation will happen, and the word random is not in the Party’s vocabulary.

Made in China 2025 is a national strategic plan launched in 2015 aimed at moving Chinese manufacturing up the value chain and into global competition, if not dominance, in such areas as biotech, robotics, aerospace, semiconductors and artificial intelligence. The program, according to the Council on Foreign Relations, is not just aimed at reducing China’s reliance on foreign technologies. It will use government subsidies, mobilize state-owned enterprises, and pursue intellectual property acquisition to catch up with—and then surpass—Western technological prowess. The Chinese government has committed some U.S.$300 billion to the project.

The Chinese businesses which the government hopes will arise from this massive R&D effort—the next Apple, Intel, Microsoft or Pfizer—are known as national champions. They will be controlled, and in most cases owned, by a unit of the Chinese government. For a sense of how a Chinese national champion will attempt to own global technology standards, look no further than the country-by-country 5G rollout tiffs that have arisen over Huawei network equipment.   Westerners should not view Huawei as just another big telecommunications company competing with the likes of Ericsson, Nokia and Samsung on the global stage.   Huawei should be seen in the context of China’s State Capitalist system: a national champion that has the full economic, political and coercive power of the Chinese state behind it.

Below I discuss just two of the most important technology battlegrounds: semiconductors and artificial intelligence.

a. Semiconductors

Nowhere is China’s foreign technology vulnerability more obvious than in semiconductors. A searing 2019 study by the Center for Strategic and International Studies recounts how, despite investing hundreds of billions of dollars and running a decade-spanning, state-sponsored IP theft operation, China completely failed to develop a competitive domestic semiconductor industry. In 2016 president Xi admitted as much.   “The fact that core technology is controlled by others is our greatest hidden danger.”

Denying China access to U.S. technology has become a major effort of the Trump Administration.   In July, as if on cue, China’s Huawei, the world’s leading maker of cellular handsets, announced that it will no longer be able to produce its flagship Kirin mobile phone chipsets because they need software and manufacturing equipment from U.S. companies that is no longer available due to U.S. sanctions. “From Sept. 15 onward, our flagship Kirin processors cannot be produced,” said Huawei’s Richard Yu. “Our AI-powered chips also cannot be processed.   This is a huge loss for us.”

In late August it was reported that China’s multi-billion dollar investment in a new semiconductor center of excellence in Wuhan had collapsed under the weight of tepid local government support and government funding shortages.   In what must seem like one step forward, two steps back, China is nowhere near overcoming its deep reliance on foreign semiconductors.

b. Artificial Intelligence

In 2017, China’s State Council published its Artificial Intelligence Development Plan, part of China’s "Made in China 2025" plan.   The Chinese want to use AI to produce goods and control companies, while balancing industrial supply and demand.   But the central government also plans to use AI to monitor and control China’s people. AI will power China’s Orwellian Social Credit system.

Source: Forbes

Some commentators have allege that China has a jump on the West in AI development. But a stunning recent survey of AI academic contributions by Macro Polo finds that, while many AI researchers come from China, the best AI work in the world is done at U.S. universities and companies. Further, Chinese researchers generally stay in the U.S. at the completions of their doctoral studies.

· The U.S. has a large lead over all other countries in top-tier AI research, with nearly 60% of top-tier researchers working for American universities and companies. The U.S. lead is built on attracting international talent, with more than two-thirds of the top-tier AI researchers working in the U.S. having received undergraduate degrees in other countries.

· China is the largest source of top-tier researchers, with 29% of these researchers having received undergraduate degrees in China. But the majority of those Chinese researchers (56%) go on to study, work, and live in the U.S.

· Chinese PhD students overwhelmingly stay in the U.S. after receiving their degrees. They find work in universities and corporations.

Source: Macro Polo

The Academic Battleground

China’s top academic institutions receive lavish government support and attract only the cream of China’s academic class. Yet they still labor under tight political controls which limit research to only strategically important areas of enquiry. Corruption and political control is rife within the academic journal publishing industry.  

In all of China’s State-run universities incoming freshmen are required to attend two weeks of rigorous military training and political indoctrination—a discipline-inducing step undertaken in response to the student activism underlying the Tiananmen incident 1991. The core curriculum in all disciplines includes a series of courses in Marxist thought. Undergraduate learning emphasizes rote memorization and does not encourage critical thinking skills.   Academic freedom, in the western sense, does not exist in China’s institutions of higher education.

For these reasons, and many more, China’s system of higher education does not come close to matching its global economic status. According to U.S. News and World Report’s global university ranking, China has only two universities in the global top 100—Tsinghua (36) and Peking (59). Talented Chinese students will almost invariably seek to study abroad—especially when pursuing graduate and advanced degrees.   The U.S., UK, Canada and Australia are the most popular foreign destinations. Interestingly, despite political tensions with the U.S. and visa complications, the Chinese students continue to come to U.S. universities.

Source: Open Doors

In the face of China’s uncompetitive and deeply underdeveloped system of higher education, the Chinese government has made two key determinations:

· Chinese students who study abroad must be managed while living abroad and encouraged to return home to use their superior education for the benefit of China, especially in STEM disciplines; and

· Foreign academic experts are sources of key know-how.   These experts will be identified, approached and incented to come to China to teach, conduct research and share their expertise.

The United Front Work Department (UFWD) is a Party organ reporting directly to the Chinese Central Committee. It gathers intelligence on, manages relations with, and attempts to influence non-Party elite individuals inside and outside China. The UFWD is active in two respects with Chinese students studying abroad. They keep tabs on student activities and communications while they are abroad. The UFWD also attempts to bring the students back when their learning is complete, enroll them in the Party-run Western Returned Scholars Association, and help them advance their careers. The UFWD is also affiliated with the Confucius Institutes that have operated at hundreds of U.S. universities. Many of these are being shuttered because their activities have been found to go far beyond their stated goal of language and cultural exchange.  

The Chinese government instituted the Thousand Talents program to attract Chinese-born researchers back to China and to incent leading foreign researchers to positions in Chinese universities. The program has been viewed with concern in the U.S. A National Intelligence Council report declared that the underlying motivation of the program is to “to facilitate the legal and illicit transfer of U.S. technology, intellectual property and know-how” to China. In January 2020, the FBI arrested Harvard professor Charles Lieber, a leading nanoscience expert, for failing to disclose his ties to the program.  

If the U.S. and China are truly in a global race for technological supremacy, should American universities be educating China’s future engineers and scientists?   That seems to be the current thinking in the Trump administration. Despite the financial perils facing U.S. universities in the COVID era and America’s difficulty in attracting international students, the Trump administration announced in May that it may impose new restrictions on students who want to work in the U.S. after graduation. The new measures are seen as primarily aimed at students from China, by far the largest source of international students for U.S. universities.

James McGregor, Greater China chairman for APCO Worldwide, doesn’t agree.   He says the U.S. needs to be smarter about retaining foreign-born researchers. “The best and brightest come to our universities and we tell them to go home.   That might have been OK in the 1950s, maybe in the ’60s. It’s absolutely ridiculous now. We should staple a green card to [the diploma] any foreigner who gets a PhD in the hard sciences.”

Cold War hysteria is largely responsible for helping China build its rocket and nuclear weapons programs in the 1950’s.   Chinese scientist Qian Xuesen was educated at MIT, became a cofounder of the Jet Propulsion Laboratory in Pasadena, California, and a professor at Caltech. Qian had been one of the U.S. scientists who questioned Nazi rocket scientists on behalf of the U.S. government after World War II. He also worked on the Manhattan Project to develop a U.S. nuclear weapon.

In the early 1950’s Qian was stripped of his U.S. security clearance for alleged connections to the Communist Party. He resigned from Caltech and asked to leave the U.S. for China.   He was held under house arrest for five years, and in 1955 he was deported.   Qian was greeted as a hero in China and went on to become the father of Chinese rocketry, helping jump-start China’s space, missile and nuclear weapon programs. No substantive evidence of spying was ever released. Deporting Qian was “the stupidest thing the country ever did,” said Dan Kimball, undersecretary of the Navy at the time of Qian’s arrest.


The Monetary Battleground

Chinese State Capitalism is, by design, usually a one-way commercial street. China encourages inbound FDI.   Yet getting earnings from that FDI out of China and into foreign corporate treasuries is not so easy. China has access to western capital and markets, while reciprocal access is often denied.

One of the most clear-cut examples of this is how China prevents foreign companies and individuals from direct trading on China’s two major Mainland stock Exchanges: Shanghai and Shenzhen. Foreign investors cannot directly purchase securities listed on these exchanges.   Foreign companies cannot raise money from IPO’s, and foreign brokerages are barred from trading.   None of these restrictions apply in the reverse at the NYSE or NASDAQ. The largest IPO in history, U.S.$ 21.77 billion, was the 2014 NYSE IPO of China’s Alibaba.

In an effort to force greater reciprocity, plans are well progressed to de-list Chinese companies from U.S. stock exchanges when they fail to meet U.S. accounting standards. As evidence of how much this step concerns China’s government, China’s securities regulator recently offered to allow U.S. regulators to examine the books of Chinese firms trading on American exchanges.   They have also proposed loosening restrictions on foreign ownership in several areas, including banking, insurance, credit rating, bond underwriting and brokerage. This isn’t happening because China reckons it is time to be fairer to foreign companies.   It is happening because China’s economy is growing at its slowest pace in 30 years and China badly need foreign investment dollars to continue flowing.

China will crack the door open just wide enough to achieve four critical aims: (1) to show the world they are opening-up (sort of); (2) to attract foreign liquidity, which will help mitigate credit risks in China’s badly over-leveraged, state-owned banking sector; (3) make up for the steady loss of manufacturing-related inbound investment; and (4) to moderate current account balance issues and capital flight caused by a weakening renminbi.

Decades of trade with the West have built up China’s immense foreign currency reserves, over half of which is held in dollars and dollar-denominated assets, like U.S. Treasuries. China currently holds $1.1 trillion worth of U.S. Treasuries, which is about 4.4 percent of the U.S. national debt.   The International Monetary Fund added the Renminbi to the special drawing rights basket in 2016 (joining the U.S. dollar, euro, yen and British pound as a reserve currency).   But the Renminbi is used in less than 2 percent of international bank transfers—something which is unlikely to change in the foreseeable future. China regulates its currency too closely for it to be a popular choice.

Washington has refined its dollar sanction playbook with the likes of Russia, Iran, North Korea and Venezuela. What unnerves the Chinese is the prospect, once thought to be far-fetched, that Donald Trump may choose to weaponize the international inter-bank transfer systems to prevent Chinese banks from clearing dollar-denominated transaction.

“If Washington were to sever China’s corporate and financial system from the U.S. dollar payments system, which is underpinned by infrastructure such as the Swift international payments messaging system and the Clearing House Interbank Payments System (Chips), says Karen Yeung of the South China Morning Post, “it could start a financial tsunami that would lead global finance into unchartered territory.”

While most analysts believe that the U.S. would take such a step as the last resort in a financial war with China, the Chinese government and People’s Bank of China are taking the threat seriously and rapidly developing work arounds. “We have to mentally prepare that the United States could expel China from the dollar settlement system,“ says Guan Tao, former director of the international payments department   of China’s State Administration of Foreign Exchange.

Similarly, China might seek to offload its U.S.$ 1.1 trillion holdings of U.S. treasuries.   While China, like Russia, has recently moderated its purchase of U.S. treasuries, China wouldn’t rapidly or substantially unload its holdings.   Any change in its position would need to be gradual, lest the market reaction impact the value of its remaining holdings. China hawks have suggested that the U.S. could default on the bonds China holds—the ultimate nuclear option. But, again, this would be against U.S. interests, as it would trash U.S. bond ratings, increase yields, and raise the cost of borrowing.

What’s next?

Despite their profound political and economic differences, the U.S. and China have, since the late 1970’s, peacefully co-existed, cooperated and generally prospered side-by-side.   And now, as economic and technological conflict grows, one wonder what happens next.

Can China, without altering its political system, tweak its State Capitalist model to adhere to the commercial practices that are generally followed by the U.S. and the world’s leading economies?   EU trade commissioner Phil Hogan, who until resigning recently was negotiating an investment treaty between China and the EU, had this to say in late July. “Meeting halfway [with China] will not work for the EU. Our markets are largely open, probably the most open in the world. We have therefore made it very clear that we expect and are demanding a rebalancing of the asymmetry.” The Chinese are reluctant to accede to the EU’s demands for more balanced market access, fearing the U.S. will see that and demand it as well.

Peter Navarro, president Trump’s often caustic trade advisor, has said that in order for China to have a normal trade relationship, at least with the U.S., it needs to do seven things:

1. Stop stealing our intellectual property;

2. Stop forcing technology transfers;

3. Stop hacking our computers;

4. Stop dumping into our markets and putting our companies out of business;

5. Stop state-owned enterprises from heavy subsidies;

6. Stop the [importation of] fentanyl [and]

7. Stop the currency manipulation.

Of the above list, all items except (5) are achievable without asking the Chinese government to change their State Capitalist economic system, which China, under Xi, is simply not going to do without a fight.   China’s State-Owned Enterprises, despite their inherent inefficiencies and voracious appetite for credit, will continue receiving support from the Chinese government. They are politically reliable, they dominate strategic industries, and are at the vanguard of Chinese efforts to develop Chinese-owned technology standards.

Other abusive practices such as hacking, drug exportation and various IP transgressions could end with the stroke of Xi’s pen. Forced technology transfer is fundamentally unfair because no such technology shake-downs greet Chinese companies entering the large, attractive, open markets of the U.S. or Europe.   The Chinese generally shrug off the foreigner’s complaints in one of two ways. Some see forced technology transfer as a simple commercial transaction--table stakes that foreign companies mU.S.t pony-up to do business in China.   “You want access to our huge markets to make money?   Fine, but you have to give U.S. your technology in exchange.” Others, more disingenuously in my opinion, point to the Century of National Shame when foreign countries and companies plundered China.   This is the shrug which amounts to “Well, mate, what comes around, goes around.”  

As to outright IP theft, I have never heard a Chinese colleague deny that it happens. But I have heard some try to justify it by claiming that everyone does it and that, besides, the U.S. stole British technologies when Britain was an industrial power and the U.S. was a developing country.   Even if this were true (it isn’t), nothing that Americans might have done in the 18th or 19th centuries could compare to the gargantuan, State-sponsored apparatus of brazen industrial espionage that China maintains today.   Like so many other superlatives attached to China, the world has never seen anything like it.

Finally, currency manipulation (7) is a matter of monetary policy perspective and should, in my opinion, not be on this list.   All governments, to one degree or another and by various means, attempt to manage the exchange value of their national currency. The fact that China’s currency is closely managed by the government, is not readily convertible, and is subject to strict capital controls ultimately works against China’s interest, relegating the renminbi to less than 2 percent of international business transactions.

If relations between the U.S. and China continue to deteriorate and move to the point of decoupling, historians looking back at this crucial period will likely conclude that China could have changed the current negative trajectory of events by verifiably addressing most, if not all, of those 7 items--and with little or no economic and political cost.

Conclusion

U.S. action going forward should focus more on protecting the West’s open, liberal, market-based capitalist system from the abuses of China’s State Capitalist system, and less on unproductively criticizing China’s political system, or urging the Chinese people to change their government.   Donald Trump’s “America First” viewpoint may drag the U.S. out of its complicated, symbiotic relationship with China.   The economic down-sides of such a move, while painful, are manageable because so much of the American economy is either internally generated, or linked to stable trade partnerships with neighboring Canada and Mexico. This is decidedly not the case with China.   Isolation from western markets, money and technology is fundamentally contrary to China’s business model. China is strong today because of its engagement with the world.  

Next week, in Part Three of this series, we will examine China’s relationship with the world and how, as China becomes more isolated, and its engagement with large, Western economies declines, its growth is threatened.  


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