Trade War
Newsletter 45 - November 13, 2020
Welcome to newsletter 45 of Trade War. Again apologies for its lateness (I may have to consider moving publication day to Saturday going forward.)
The likely shape of President-elect Joe Biden’s China policy is becoming clearer (work with allies; tough on human rights) while Beijing’s plans for its own indigenous supply chain are becoming clearer (spoiler: the U.S. may not like it at all..)
New labor abuses emerge in Apple’s supply chain which could prove an opportunity for China’s first iPhone maker and Ray Dalio comes out in support of Chinese regulators and the crackdown on Ant Group.
Renegotiate Trump’s trade deal?
China is hoping to renegotiate Trump’s trade deal under a new Biden administration, reports the South China Morning Post. The phase one deal is viewed in Beijing as unrealistic for China to implement, and “twisted” in Washington’s favor, say Chinese government advisers.
“It saw China commit to buying US$200 billion in additional US goods on top of 2017 levels, but stopped short of forcing major structural changes to China’s economic model,” points out the Hong Kong paper. Still, former US officials believe there is “virtually no chance of Biden giving China a “softer” deal.””
That view is shared by those in Beijing: “The incoming Biden administration will probably take a tougher stance on Hong Kong, Taiwan, Xinjiang, South China Sea, other human rights issues, and the alleged Chinese intelligence activities in the US,” Shi Yinhong, an advisor to China’s State Council told the paper.
Biden outreach to allies, pressure over human rights
President-elect Joe Biden is unlikely to ease up on China but will focus more on working with U.S. allies to confront Beijing, including over its China’s human rights record, report William Mauldin and James T. Areddy of the Wall Street Journal.
“These are two things that Biden and the Biden people are talking about—the first is the outreach to allies and partners and like-minded states—democracies,” Daniel Russel, former Asia diplomat in the Obama-Biden administration told the Wall Street Journal. “Secondly is ensuring our policy and strategy are rooted in shared values,” including human rights, democratic principles and market economies.
Indigenous, controllable, safe and secure supply chain
In the recently-revealed April speech by China’s top leader, Xi didn’t just talk about urbanization, he also vowed to push for greater Chinese economic self-reliance, reports the South China Morning Post.
“To ensure our industrial safety and national security, we must build up an indigenous, controllable, safe and reliable supply chain with more than one source for every important product and supply channel,” Xi said.
China will use a “new type of whole-country system” and “fight key battles over core technologies,” according to its new five-year plan, particularly in “areas such as artificial intelligence, quantum information and integrated circuits,” the South China Morning Post writes.
“That whole-country approach means that all available resources will be mobilized and concentrated into a few projects perceived to be of vital importance to the nation’s future. China also did this in its development of nuclear weapons in the 1960s, when the country was poor and very much isolated from the world,” the Hong Kong paper reports.
‘Artificially cutting off supply to foreigners’
According to a translation of Xi’s speech that was printed in the Nov. 1 edition of Qiushi, an official publication of the Chinese Communist Party, the Chinese leader calls for an all out effort to develop an indigenous supply chain that the world relies on, thus giving China new leverage over other countries.
“We must sustain and enhance our superiority across the entire production chain in sectors such as high-speed rail, electric power equipment, new energy, and communications equipment, and improve industrial quality,” Xi said. “And we must tighten international production chains' dependence on China, forming powerful countermeasures and deterrent capabilities based on artificially cutting off supply to foreigners.”
Apple supply chain troubles opportunity for China’s first iPhone maker?
Meanwhile, problems with labor abuses have emerged in Apple’s China supply chain, leading the iPhone maker to suspend new business with one of its top Taiwanese contractors. The problems which involve a student workers’ program - commonly used in China and long rife with exploitation - are in assembler Pegatron Corp, reports Bloomberg News.
Apple is “producing four new iPhone models with 5G, and has been working with Pegatron to expand iPhone assembly outside of China. Those efforts are unlikely to be impacted by this suspension,” writes Bloomberg. “But Apple’s move hands an opening to rival Luxshare Precision Industry Co., which is on the verge of becoming the first mainland company to assemble the iPhone.” (Pegatron’s shares fell 2.1% in Taipei, while Luxshare was up almost 1% in Shenzhen, with the news.)
Private business: align with the state’s interests
More detail on the surprise halting of the massive initial public offering of Ant Group: Xi personally decided to halt the IPO, after founder Jack Ma infuriated the government, reports the Wall Street Journal.
Xi “has displayed a diminishing tolerance for big private businesses that have amassed capital and influence—and are perceived to have challenged both his rule and the stability craved by factions in the country’s newly assertive Communist Party.”
Dalio: Reasonable, caring and highly-informed Chinese regulators
Self-described “chronic bull on China” Ray Dalio has come out supporting the decision by Chinese regulators to crack down on Ant Group, reports Reuters.
“Ant is a whole new concept in terms of banking, and almost could replace or threaten the banking system in China,” Dalio, founder of Bridgewater Associates, told the China Town Hall 2020. “It hasn’t yet been properly established in terms of regulatory review and the like.”
“And it’s important to be clear that what we have in China is state capitalism. So the state is going to control those things,” Dalio said, describing Chinese regulators as “reasonable, caring, and highly-informed.”
Dual circulation response to ‘protracted conflict’
More good explanation of the nature of China’s “dual circulation” strategy, and the degree to which it is seen as almost a wartime action, given the deep conflict between the U.S. and China, this time in a note by Anthony Marchese and Freda Zhang of Apco Worldwide.
""Dual circulation is a response to what Xi has termed a “protracted conflict”—a reference to a series of lectures given by Mao Zedong during the Chinese Civil War. This “conflict” is centered on increasingly negative international sentiment towards Beijing alongside"
China’s unproductive workers challenge innovative economy
The key to China meeting its bold innovation and productivity goals, as laid out most recently in its five-year plan, likely will hinge on China’s “hundreds of millions of working people who would actually fulfill President Xi Jinping’s ambitions,” writes Bloomberg Opinion’s Anjani Trivedi.
“For now, subsidies and incentives have kept people in jobs and forced companies to retain headcount, but reskilling and upgrading needs to happen. Growth in coming years will depend on how productive each Chinese worker is. High-tech industries depend on that as much as increasing capital,” Trivedi writes.
So far, things aren’t looking encouraging: "While real gross domestic product has expanded at an average growth rate of 10.5% since 2000, labor efficiency has fallen every year by 0.53%."
Notable/In Depth
Here is a really interesting roundup video of thoughts on Trump, Biden, and the U.S.-China relations by people in Beijing.
Fascinating conversation that examines the role of intellectuals in China before and after Xi’s accession, between CSIS’ Jude Blanchette and New York Times’ Chris Buckley.
TikTok given another 15 day reprieve by the Trump administration (will it ever be banned?)
But ban on Xinjiang cotton gains strength with announcement by U.S. apparel company Eileen Fischer: “Until there is clear evidence of change in these regions, our ban on cotton from these regions will continue to be a core policy.”
Upcoming speaking
Coming up on Wednesday: I talk about my book "The Myth of Chinese Capitalism" with Bay Fang, former journalist and diplomat, and until recently president of Radio Free Asia. Details in the link:
And on Thursday, I will be speaking also about my book and China, at the Washington State China Relations Council. Details here.
In case you missed it..
Here is the video and the written testimony I gave earlier on the challenges facing the Chinese economy and US-China relations, including policy recommendations, to the U.S.-China Economic and Security Review Commission.
