USA-China Trade Deals, Technology, and Decoupling
On December 13th, 2019, President Trump and China’s Vice Minister of Commerce Wang Shouwen confirmed an incoming “phase one” trade deal. Full details weren’t immediately available. The timing of the announcement—after months of negotiations—is interesting. A few days prior, the Financial Times reported “Beijing has ordered all government offices and public institutions to remove foreign computer equipment and software within three years, in a potential blow to the likes of HP, Dell and Microsoft.” Recent articles didn’t mention if this was addressed in today’s deal. If it wasn’t, that’s not a surprise.
It also wouldn’t be shocking if either party backed out of the newest trade agreement, since they’ve done that before. Robert Lighthizer even said it’s “wise to be skeptical of whether China would deliver on certain agreements.” If the deal goes through, that might be a big win for Trump. Especially since it comes on the heels of his new USMCA agreement. From PBS: “On Tuesday, House Speaker Nancy Pelosi announced Democrats had reached a compromise with the Trump administration…. Mexico ratified the deal back in June, but the revised agreement will now head back to the country’s legislature for votes. Canada is expected to ratify the deal in parallel with the U.S., but that process may extend into the new year due to American politics.”
Back to the Financial Times report, a TechCrunch article says: “The country has attempted this sort of thing before halfheartedly, but this is the most serious effort yet to isolate itself from the influence of the western technology sector…. Tens of millions of devices will need to be replaced, but it isn’t as simple as trading out HP machines for Chinese-manufactured ones. The components and software must be Chinese as well, so Intel and AMD processors are out, as are Nvidia GPUs, ARM architectures, Sony image processors and so on… many Chinese companies have been preparing for this eventuality for years. China has made its desire to establish independence from U.S. companies especially quite clear and many state-backed enterprises have been unable to use U.S. suppliers for some time.“
This is part of a larger trend which may be inevitable, despite any trade deals: the decoupling of U.S. and Chinese economies. Both sides became entangled decades ago, and Trump’s trade war (alongside China’s actions) is a step toward changing this. Either fixing or harming, depending on one’s point of view. No one knows for sure where this path will lead, or if it even ends.
What’s known, however, is various abuses at the hands of China’s government, and the global economy is increasingly intolerant of that. As China grows more powerful, the cost of doing business rises, which diminishes their importance to international companies; who weren’t overly happy with China before, but could set ethics aside to make more money. Now, more than half of U.S. manufacturing executives are bringing jobs back to American shores or planning/considering such “reshoring.”
The Chinese government has a history of discriminating against foreign companies and instituting heavy censorship. Their “Great Firewall” blocks access to unapproved websites. China pressures or influences outside organizations like the NBA and Disney. They have draconian rules for social behavior of citizens, including an upcoming Social Credit Score, and “re-education camps.” They’ve been accused of genocide, organ harvesting, and using forced labor. Recent issues with Hong Kong aside, China largely has its corner of the world locked down and is hostile to outsiders. The government controls its companies, even the ones which aren’t labeled state-owned. Book burnings can happen and journalists are under the gun. From AFP: “At least 250 journalists are jailed around the world, with the largest number held in China, amid a growing crackdown by authoritarian regimes on independent media, a press watchdog group said Wednesday.” And the Chinese are exporting massive quantities of Fentanyl. New standards led to a drop in shipments destined for the U.S., except many suppliers are just sending Fentanyl to Mexico instead. Some argue that China is weak on the issue. The opioid epidemic still churns ahead, killing tens of thousands. Chinese pollution is also deadly. Researchers from the Chinese University of Hong Kong “found [air pollution] to cause an average 1.1 million premature deaths in the country annually, about 1,000 in Hong Kong. Around 20 million tonnes of rice, wheat, maize and soybean are also lost to exposure to ozone each year.” This pollution affects the entire planet.
Plus, a Bloomberg article claimed that the Chinese government slipped surveillance chips into certain motherboards during manufacturing. While this might be fake news, and people are calling for Bloomberg to retract the story, it sounds plausible in theory. China has a decades-long history with spying. (The Atlantic notes how the U.S. also uses spies.) The Wall Street Journal published an article in April 2019 saying “Senior U.S. law enforcement and intelligence officials have escalated their warnings characterizing Chinese espionage as the single most significant long-term strategic threat, encompassing both spycraft intended to steal government secrets and the sustained heist of intellectual property and research from the corporate and academic worlds…. China has also grown bolder and more successful in traditional spy games, including targeting less conventional recruits. The effort is being abetted by an ocean of hacked personal data that may help pinpoint who is vulnerable to inducements.”
So it’s no secret that other countries are interested in pulling out of China. Access remains limited and it might be more trouble than it’s worth. And if it wasn’t for their still-imperfect economy, China probably wouldn’t care. Their government seems to want autonomy akin to the “Hermit Kingdom” North Korea, with as little outside contact as possible, and taking part in the global economy from a mere sense of opportunism. I could be wrong; appearances CAN be deceiving and I’m not a foreign policy expert. But it’s not like China is doing much to dissuade this perception, and they have serious problems at hand.
If the Chinese government wants to remove non-Chinese software and hardware, it’s their next logical step to reduce dependency on foreign nations. All that’s surprising about this FT report is the timeline. It doesn’t seem feasible for China to replace everything by 2022 because they’re behind on preparations. Huawei launched an operating system, for example, yet it doesn’t work on PCs. Huawei’s consumer division CEO Richard Yu claimed in May 2019 the OS “could be ready for smartphones and laptops by the end of the year in China, and by mid year in 2020 for international markets.” They unveiled Harmony at a conference in August 2019, but there hasn’t been news (as of December 2019) whether devices are using it, aside from one Smart TV. According to a Reuters article, “there are no plans currently to roll out the OS to its phones, tablets and computers… the company would still prefer to use Android on its phones, according to the Shenzhen Special Zone Daily newspaper.”
Backtracking isn’t rare because plenty of Chinese innovation comes from American and European technology (a major sticking point in trade deal negotiations). “According to some reports, Chinese IP theft has cost the United States $225 billion to $600 billion a year. No wonder, then, that getting China to better protect IP is a point of rare consensus among both the White House and the Democratic leadership. But history tells us to be cautious; Washington’s demands are unrealistic. Countries do not enact strong IP rights systems until their ability to innovate at home displaces reliance on outside knowledge.” This ties into the above mention of spying.
China has their “Made in China 2025” plan, which has a longer timeline, but there’s still reason to be skeptical. “The goals of Made in China 2025 include increasing the Chinese-domestic content of core materials to 40 percent by 2020 and 70 percent by 2025. The plan focuses on high-tech fields including the pharmaceutical industry, automotive industry, aerospace industry, semiconductors, IT and robotics etc, which are presently the purview of foreign companies… China is facing a multitude of internal issues such as a slowing economy, higher wages, increased costs of an aging population, a shrinking workforce, wealth inequality, an underdeveloped social welfare system, and environmental degradation. It is also competing in the manufacturing space from newly emerging economies like Vietnam and highly industrialized countries. In order to maintain economic growth, standards of living, and meeting the demand of its increasingly educated workforce, it needs to lift the game on its economic and technological competitiveness.“
The New York Times reported that “Chinese corporate borrowers have defaulted on nearly $20 billion in loans this year. The amount is small compared with China’s overall economy, but the toll is rising. Chinese companies owe hundreds of billions of dollars in debt that is coming due over the next two years…. China now faces the difficult task of figuring out which of these companies it will allow to fail.”
If China wants 100% self-sufficiency, they‘ll have a hard time getting there. Their economy is slowing, and could sputter to a halt if outside investment drops enough. Even Chinese companies are leaving Chinese shores. “Made in China” is ambitious and doesn’t look workable in less than a decade. Despite the bluster on the world stage and positive PR, there isn’t enough strength behind the scenes. But there’s a chance China pulls it off—if so, who severs economic ties first? China, or other nations?