Editors note: Senator Marco Rubio is doing a good job with this report calling attention to the fact that we lack a defense to China 2025. Restarting a legitimate debate on smart industrial strategy.
The Happy-Meal-toy making days of China are long gone. They’re making robots there now.
[Kenneth Rapoza | February 12, 2019 | Forbes]
China’s private companies, like Huawei, are building smart cities in far away places like Bogota, Colombia. Theyir scientists are building and sending spacecraft to the dark side of the moon. China’s gone from the 1980s maker of cheap clothes that shrink after a few washings to the hottest growth market for every single luxury designer brand in Europe.
The Communist Party, led by Xi Jinping, wants to make China the corporate power of Asia by 2025. It’s well on its way.
If you take the U.S. intelligence agencies at their word, then China is the biggest ideological and geopolitical threat facing the U.S. It’s not ISIS. It’s not the Russians (though they come in a close second) or the Iranians (third). It’s the Chinese, according to the 2019 Worldwide Threat Assessment report.
The takeaway from Washington is this: You cannot have the No. 1 economy in the world be a capitalist, democratic system and the No. 2 economy be a hybrid capitalist system ruled by the communist party, a party that sets the table for economic development. The rules are totally different. Something’s got to give. So far, China has opened a bit more, and the U.S. has closed a bit more by way of increasing trade tariffs.
“These are two different systems,” says Scott Clemons, chief investment strategist with Brown Brothers Harriman. “I don’t blame China for what they are doing. It’s the West that wanted to weave China into the global economy. They’ve acheived that. China has a lot on its plate. It has unfavorable demographics and no real safety net. It’s doing what it has to do for its people.”
The Trump administration’s view is that it’s time the U.S. do something for its people too.
On Tuesday, Senator Marco Rubio released an 80-page report on China’s stellar rise up the economic food chain that warns of negative outcomes if the U.S. does not act. The report covers potential policy responses and challenges to Beijing’s Made in 2025 program, which promises to make China the next Silicon Valley and surely Asia’s tech powerhouse. Think Japan 1980s on human growth hormone.
Which is a good comparison actually. Because in the blood sport of global trade, Team America thinks Team China is juicing. Much of their rise in tech know-how has come from technological transfer requirements as a cost of entering into a joint venture with a Chinese company in the mainland. Some of it has come from theft of intellectual property.
For Rubio, the solution is somewhat Chinese, though his senior policy aides were quick to point out that the Florida senator is not calling for top-down economic planning. Markets are a force for good, they were sure to note.
However, a lack of industrial policy here at home means there is no coordinated effort to rival the actual coordinated effort in China that is designed to compete with and maybe beat American tech companies.
“The role of government is to align our economic policies with the right national priorities,” Rubio said in a video recorded for the Senate Small Business & Entrepreneurship Committee today. “Right now, we have the wrong priorities. Our most important priority should be creating dignified work through investment and through innovation. That will require the hard work of forming a new consensus, but we can build an America that is better for the future generations,” he said.
Some have criticized Rubio’s call for a higher capital gains tax, a move he thinks might get U.S. tech companies to spend more on research and development than in stock buybacks. Rubio’s policy advisor team said that Chinese companies in the tech space are spending more on R&D than in stock buybacks, for sure. But it is unclear how much the U.S. spends versus China. That also depends on what is measured. China’s government spends billions on funding startups, for example.
Highly leveraged investments in technological discovery offer unknown outcomes, but distributions to shareholders are quantifiable. The existence of nonproductive alternatives to capital investment makes the product of the firm’s American workers less valuable. Using capital to buy back shares increases asset prices, but it can also mean lower investment in the economy, and therefore lower worker pay, Rubio’s report authors wrote.
Since entering the WTO in 2001, China has grown beyond anyone’s wildest dreams.
China exports have exploded in nearly ever big-money, manufacturing sector. That includes sectors that employ blue-collar labor at middle-income salaries: railroad equipment (600% increase from 2001 to 2017); machinery and equipment (900%); cars (1,200%); marine vehicles (1,100%); and airplanes (1,200%), according to the Organization for Economic Cooperation & Development.
U.S. growth has been good as well, for a developed market. But marine vehicles and high R&D technology exports have declined as China’s rose over the 1997-2017 period, according to the OECD.
Working-class jobs in areas like machinery and equipment manufacturing, fabricated metals, automotive, paper and pulp, and textiles have all seen wage growth fall below inflation over the last 20 years, according to the OECD.
Following months of tit-for-tat tariffs between the two sides, the world is slowly discovering that the confrontation between the U.S. and China extends far beyond Trump’s concern over trade balances.
The Chinese government is determined to acquire American technology, and they’re willing to use a variety of means to do that–from foreign investments, corporate acquisitions and cyber intrusions to obtaining the services of current or former company employees to get insider information, analysts for global trade research firm Smartkarma wrote in an e-book titled “The End of Fair Trade,” released this month.
One measure will tighten technology exports like semiconductors, and another has the U.S. being tougher on Chinese acquisitions.
Ant Financial, the financial arm of Alibaba, the tech firm created by billionaire Jack Ma, was stopped from acquiring Money Gram last year.
Trump also signed a bill in August that expanded the operating powers of the Committee of Foreign Investment in the United States (CFIUS). The law makes filing with the CFIUS mandatory for foreign acquisitions deemed sensitive to U.S. interests.
From the report:
Though Made in China 2025 is a foreign actor’s plan for the domination of critical commercial sectors at the expense of American industries, the U.S. should not miss the opportunity its prominence provides. Claiming, as the plan does, that ‘without strong manufacturing, there is no national prosperity,’ should be a wake-up call for American political economy as much as a cause for scrutiny.”
Trump’s last round of tariffs against China came with talk of “reciprocity.” That means if China is charging 20% for an American-made widget to enter its market, the U.S. is not going to charge the Chinese 2% for the Chines- made widget sold here. They’re going to charge the same duties.
An Asia Society task force concluded in 2017 the United States should insist on trade reciprocity in the U.S.-China relationship, even if it means raising tariffs, something free-market types loathe.
But that’s just one step in the “ideological battle,” as the Director of National Intelligence called it in their threat assessment last month.
If Washington views China’s investments—be they in robotics or biotech—as a threat to U.S. corporate interests, and if that threat is based on years of stolen data and unfair trade practices, then leveling out tariff rates isn’t enough to stop these two from butting heads in the future.
“You can mix capitalism and communism, but how do you deal with the limits of a political system that impedes the private sector from competing” asks Phil Zhu, a professor at the University of San Diego. “Look at Huawei. It’s private. But outside of its smartphone handsets, who are its competitors in the 5G space? Huawei has all the resources. That’s why in the end this is not about tariffs. China will agree to buy more stuff and open a new market. That’s an easy solution for them, but they are going to protect their long-term interests,” he says. “I think you can make short-term compromises, but over the long term, these two competing political systems are much harder to reconcile.”