Newsletter 53 - January 30, 2021
Welcome to the 53rd edition of Trade War. A sweeping new strategy paper that lays out a detailed approach for the U.S. to deal with China draws lots of attention. Xi Jinping gives another speech for Davos which talks of ‘mutual respect’ and avoiding a cold, war but China’s leader is called out for hypocrisy.
More detail emerges on the Biden administration’s evolving approach to Beijing, with reports that it will be less oriented towards benefitting American big corporates and more worker-focused, and for the first time in 30 years Taiwan reports economic growth that is faster than China’s.
The Longer Telegram
A well-timed China strategy paper penned by an anonymous author, only identified as a “former senior government official with deep expertise and experience dealing with China,” has been published by the Atlantic Council, with a shorter version running in Politico. (I am affiliated with the Atlantic Council as a senior fellow.)
In a nod to George Kennan’s 1946 “long telegram” on Soviet grand strategy, it is titled “The Longer Telegram: Toward a new American China strategy.”
The strategy paper has drawn widespread attention through its new and for some controversial policy recommendations, including advocating drawing “red lines” that will invite certain U.S. response, such as a Chinese invasion of Taiwan, and in particular for its call to try to use cleavages in the Chinese leadership - others in the Party that are likely upset with Xi Jinping’s assertive approach - to bring about a shift in China’s global strategy.
Red Lines for China
As New York Times reporter Edward Wong put it in an interesting twitter thread citing the Taiwan example, “the most striking passage is on the “red lines” that the writer says the US should convey to China. Though many US officials & analysts denounce China for its military expansionism & actions in the region, there’s no agreement on whether US should draw clear red lines on this.”
While some say this would be an unnecessary provocation, I believe that China already has in effect established its own red lines, regardless of the U.S. approach. The most obvious one is zero tolerance for foreign governments (and for international companies too) taking any action which suggests the people of Taiwan deserve to control their own destiny. As China acts with increasing bellicosity in the region, there is a persuasive argument —one well-made by the author of the strategy paper — that Washington now needs to warn Beijing of its own red lines.
Exploiting CCP alienation with Xi
One question that has been raised in response to “The Longer Telegram” is whether there are moderate forces in the Chinese leadership capable and willing to step forward to lead in a post-Xi China, as the strategy paper suggests.
Again, the New York Times’ Wong: “The writer's boldest assertion: Xi has alienated other party leaders, and the US must exploit this. They argue if US imposes costs on Xi's actions, that strengthens the standing of anti-Xi officials. And US messaging should be about Xi, not the CCP and its 90 million members.”
“Western analysts always seek “moderates” within authoritarian systems,” Wong continues. “Of course there are disagreements within the ranks of a political body. The question is whether outsiders have accurate insights — and whether they can operationalize that.”
Who would replace him?
It is unclear whether any Chinese leaders today would be markedly more friendly towards the U.S. argues Politico’s David Wertime, tweeting “who would replace him? there’s no no guarantee leaders in the mold of Deng Xiaoping or Jiang Zemin would be as solicitous toward U.S. interests today, helming a nation soon to surpass the U.S. in economic might. Nor is it clear the CCP would again choose men like them.”
Yes, but we know the challenge of Xi
Yes to that, but I would also note this: while there is no certainty what values might define a future leader, it is becoming clear what Xi’s are: a resurgent role for ideology and for an ever more controlling party-state extending into business, economics, and society, plus ambitions for a far stronger international role for China while weakening U.S. global influence. All of this makes relations with China under Xi’s leadership particularly challenging for the U.S. as well as for many countries around the world.
So while being mindful of Xi’s striking consolidation of power, including changing China’s constitution to allow him to stay indefinitely, those of us who watch China should absolutely be wondering what might motivate any future Chinese leaders, and how that could affect China’s relations with the world. After all, Xi’s continued reign only seems inevitable until it no longer is inevitable.
More Kissinger than Kennan
Wong, a former China bureau chief for the New York Times, also makes another very interesting point in the tweet thread mentioned above: the anonymous author’s advocacy of a policy of repairing the tattered US relationship with Russia, to use it as a foil against China, is a mirror image of the one used by Nixon when he strengthened relations with China to put pressure on the then Soviet Union.
“The writer is more Kissinger than Kennan in advising the US to woo Russia. They want a mirror image of Nixon's opening with China, which was done to get China's help in countering the USSR. They say the US must break the recent "strategic condominium" between China and Russia.”
Dark motives can’t stand the light of day
China, predictably, has quickly criticized “The Longer Telegram.” “This strategy paper once again exposes the attempt of some people on the U.S. side to instigate a “new Cold War” and ideological confrontation, bring about regime change and contain China,” said the spokesperson to the Chinese Embassy to the United States. “That the author of the paper chooses to remain anonymous only reveals the dark motives behind which cannot stand the light of day.”
With decoupling, ‘all sorts of people stand to lose’
The investment relationship between China and the U.S. is far bigger than officials figures show, reports Reuters, citing a new report by the Washington-based group the National Committee on U.S.-China Relations.
U.S. investors held $1.2 trillion in Chinese equity and debt securities as of the end of last year, five times the amount data from the U.S. Treasury Department shows. Much of the missing investments were the result of Chinese companies “using complex legal structures to issue shares out of tax havens that trade on U.S. exchanges,” the report says.
Meanwhile, Chinese holdings of U.S. securities reached $2.1 trillion, 36% more than official figures, the report concludes. If the U.S. and China move further towards decoupling, “all sorts of people stand to lose a lot” Adam Lysenko, director at research firm Rhodium Group told Reuters.
Xi Jinping: Davos Man
Xi Jinping has given another speech at Davos, this time virtually, which seems to be a warning to the Biden administration not to take too confrontational a stance with China.
"Repeatedly, history and the reality reminded us that, if we walk down the path of confrontation — be it a cold war, a hot war, a trade war or a tech war — all countries are going to suffer in terms of their interests and their people’s well-being," Xi said on January 25 in the prerecorded speech. “We should reject the outdated Cold War and zero-sum game mentality, adhere to mutual respect and accommodation, and enhance political trust through strategic communication.”
But the fact Xi’s speech comes even as China pursues an ever more assertive foreign policy, spooking its neighbors, has been widely noted, contrasting his call for “mutual respect and accommodation” with China’s ongoing military harassment of Taiwan.
The contrast of Xi’s speech with Chinese jets threatening Taiwan was caught in the juxtaposition of these two headlines:
Biden team: Why work to open China for Goldman Sachs?
Top members of the Biden administration are pushing for a trade policy less focused on opening markets overseas for U.S. financial firms and pharmaceutical companies, and more oriented towards boosting jobs at home, an attitude that is “becoming mainstream among Democrats,” reports the Wall Street Journal’s Bob Davis.
National Security Adviser Jake Sullivan is a prominent proponent of the new view, as is Biden transition task force member and Council on Foreign Relations fellow Brad Setser, who “has provided much of the intellectual firepower behind the proposed shift,” Davis writes.
“Mr. Setser urges that trade and tax policy promote U.S. exports of manufactured goods, a call picked up by Mr. Sullivan and incoming U.S. Trade Representative Katherine Tai,” the Journal reports.
China expert joining Biden Administration
Politico’s China Watcher is now reporting that Brad Setser is joining the Biden administration in a trade-related role. Setser, whose thinking on China I greatly respect, last year generously gave a shoutout to my work on China’s weak social safety net and how it hinders economic growth, here and here:
Weakness in China’s social safety net
…And in the following tweet where Setser cited my book “The Myth of Chinese Capitalism” along with “Trade Wars are Class Wars,” by economics commentator Matthew Klein and Beijing-based finance professor Michael Pettis.
Taiwan GDP growth outpaces China - 1st time in 30 yrs
Taiwan’s economy grew by 2.98% last year, powered by its early and lasting success in controlling the pandemic and red hot export growth. That growth was faster than China’s GDP rise of 2.3%, the first time in three decades that Taiwan’s economy grew more rapidly, reports Bloomberg News.
Taiwan’s largest technology companies, such as TSMC and Foxconn, have benefitted from a “global demand boom for semiconductors, 5G smartphones, electric vehicles and high-performance server equipment.”
“In 1990, Taiwan was a $166 billion economy dominated by exports of consumer electronics and plastic goods, while China had just opened its first McDonald’s restaurant, an early milestone in its reform,” notes Bloomberg. “That was also the last year that Taiwan’s economic growth outpaced that of its giant neighbor.”
Dangerously dependent on Taiwan semiconductors
Taiwan is increasingly being recognized globally as a key source of high end semiconductors, even as China threatens countries that try to strengthen relations with it. “Leaders across the globe are realizing just how dependent they’ve become on the island democracy,” reports Bloomberg News, citing a recent shortage of auto industry chips that affected production at Toyota, Ford, and Volkswagen.
“Taiwan, which China regards as a province, is being courted for its capacity to make leading-edge computer chips. That’s mostly down to Taiwan Semiconductor Manufacturing Co., the world’s largest foundry and go-to producer of chips for Apple Inc. smartphones, artificial intelligence and high-performance computing,” says Bloomberg.
I discuss the negative impacts of Xi’s continuing assault on private enterprise, in this must-read Atlantic Magazine piece by author and former Washington Post Beijing bureau chief John Pomfret.
How China has used its Mao-era mobilization politics in its drive to eliminate poverty, is described in this interesting Financial Times piece by Georgetown professor Kristen Looney.
While Xi often cites the importance of Marxism-Leninism, something noted in “The Longer Telegram,” what does China’s leader actually mean by it? asks George Washington University’s Don Clarke in this blog.
"Great work" and "infinitely readable account of some of the biggest issues facing China's economy" - High praise for "The Myth of Chinese Capitalism" from one of the best writers on the U.S.-China trade relationship - thanks for the kind words.
(picture from a recent morning walk by Trade War author)