Beijing – State of the Structure

Bildergebnis fÃ¼r us china trade liu he lighthizer

One of the few areas in which Donald Trump, US President, enjoys bipartisan support these days is his criticism of China’s economic practices.

Even abroad, there seems to be an overlap with certain positions of the Trump administration.

For instance, in Germany there are widespread concerns about a ‘sell-out’ of German industrial know-how. These fears have been exacerbated by recent take-overs – Kuka, the robotics company, being the most prominent one. More so, German companies have become increasingly frustrated about unfulfilled Chinese promises about the creation of a ‘level playing field’.

In that sense, there is potential for confronting China through a unified Western coalition.

However, Trump wouldn’t be Trump if it were that easy.

Instead he:

claims that ‘the EU treats (the US) as badly as China’.
slapped tariffs on European steel exports for ‘national security’ reasons, thereby, circumventing de jure WTO violations, but de facto violating WTO rules.

The Trump administration demands nothing less than a systemic change of China’s economy. Amongst other things, Trump wants the Chinese regime to put an end to:

Forced technology transfer
IP theft
Subsidies to Chinese companies

In a way, Trump wants China to abandon the mechanisms that propelled the country to become the world’s largest economy (GDP / PPP).

It should come as no surprise that China is not fond of doing so – especially given Washington’s tone.

More so, the team around Robert Lighthizer, US trade representative, wants China to write these changes into law and to create a verification system that enables the US to monitor progress.

After years of lofty promises, it seems reasonable for the US to push for it.

At the same time, it remains doubtful whether the CCP is fond of an American judicial dictum.

China is playing for time. Its strategy is twofold.

In current negotiations, China’s target price seems to be getting tariffs lifted by making another set of bold and unenforceable promises.
In the medium-term – having 2020 in mind – it gambles to sit this out; hoping for a less hostile Democrat to become President.

The aspect of ‘saving face’ further complicates negotiations.

Both, Trump and Xi, will have to prove their domestic constituencies that the pains endured are worth the gains.

Especially vis-à-vis Trump, it will be interesting to see how he can withstand two pressures – having 2020 in mind:

The farmers that helped elect Trump in 2016 have been battling Chinese tariffs for a year now. How much longer are they willing to stick by Trump?
The US President considers the stock market to be a proxy for the success of his economic policies. Continuously falling stock markets as a result of further trade tensions will certainly make Trump re-consider his next steps.

Trump’s recent antics have:

Re-iterated the importance of self-reliance for China:

Last May, China got a taste of what a dependency on American companies in the supply-chain might lead to – with the quasi-collapse of ZTE, a Chinese phone-manufacturer. The company violated US sanctions by exporting to Iran and North Korea. As a result, the US banned American companies from selling essential components to ZTE.

The recent spats revolving around Huawei will most certainly accelerate China’s efforts to decouple its economy from the US. China can be expected to double-down on import substitution efforts and on production relocation.

Hurt American businesses:

China has been dubbed by Boeing as ‘the world’s first $1 trillion market for jets.’ It is expected that until 2037, China will need more than 7,000 new commercial jets to meet its travel demands. This is without a doubt not something Boeing would like to miss out on. Yet considering the tit-for-tat protectionist jabs between the countries, Boeing might find itself caught in the whirlwind sooner than later.

Last week showed again that it’s difficult to predict progress on resolving the ‘trade-war’ (US-version), respectively the ‘trade-dispute’ (Chinese version).

However, it has become clear that the differences won’t be resolved any time soon. Too much is at stake.

After all it really is a ‘fundamental clash between two radically different economic models’ that are ‘as insoluble as oil and water’ (Bannon; Shell).

Bildergebnis fÃ¼r german industry

Impressed and alarmed by China’s recent initiatives, Peter Altmaier, German Minister of Economics, published his ‘National Industrial Strategy 2030’, a white-paper on German and European industrial politics.

The paper mentions German firms, such as Siemens or Deutsche Bank, whose survival is of ‘national political and economic interest’. It also hints at the creation of a ‘Beteiligungsfazilität’, a state-investment fund stepping in to prevent foreign take-overs of critical companies.

However, in recent weeks Altmaier has come under fire. Representatives of the Mittelstand (small and medium-sized companies forming the backbone of the German economy) have been most vocal in their criticism.

A feeling of neglect best summarises their sentiment.

There is indeed a need for a new ‘Mittelstandsstrategie’. Various issues need to be addressed. Many companies suffer from higher energy prices on a European scale. There is also the need for a discussion revolving around corporate taxes.

Valid points, but a polemical outcry:

1. Altmaier explicitly mentions the issue of energy prices and corporate taxes in his paper. An accusation of neglect in this context is simply wrong.

2. Various circles act as if Altmaier’s white-paper is the final outcome. He clearly states the opposite. It ought to serve as a basis for discussion.

3. The accusation that the state is inept of identifying crucial economic sectors by drawing analogies to operative state-led blunders is cheap. The German state certainly didn’t excel with projects it had to conduct on its own, such as the BER airport. Yet the analogy is misplaced. Within the context of industrial politics, the state should identify crucial economic sectors (1) and direct investment to them in their infant stages (2). The track-record of China and the Tiger economies speaks volumes.

4. Moral handwringing without providing tangible recommendations is too easy. Accusing Altmaier of ‘centrally planned economics’, like the FDP does, is ludicrous. Even if it’s hard to admit and might taste bitter: Chinese subsidies helped the country become a leader in crucial sectors.

5. Critics would be well-advised to (re-) read Ha-Joon Chan’s book ‘Kicking Away the Ladder’ to learn about the origins of Western wealth. Hint: it has to do with industrial politics.

Time to wake-up:

Given what’s at stake for the German economy, its politicians should leave their dogmatism behind. They should take up Altmaier’s invitation for shaping Germany’s economic future.

The argument that the German economy has been doing well without industrial politics is naive. With the emergence of the e-Mobility and the A.I. revolution, an entire ecosystem is at stake.

1.8 million German jobs depend upon its automotive industry.

In the same vein, many Mittelstand suppliers depend upon the bigger fish in the pond. The SMEs would be at risk if the big fish were no longer in Germany, but in China.

In that sense, industrial politics isn’t a zero-sum game.

A more active state:

In her book ‘The Entrepreneurial State’ Mariana Mazzucato highlights the crucial role of the state in technological breakthroughs.

The iPhone wouldn’t be the iPhone if it were not for the state. The Internet, GPS, battery and voice recognition were all pioneered by researchers on a government pay-roll.

The government ought to correct market failures, by facilitating investments into sectors deemed too risky for private investors. Certain investments require a planning horizon that exceeds the patience of shareholders. In that sense, the government should support crucial technological fields early on.

The trust in the country’s creative forces of the free-market vis-à-vis technological progress has taken a hit. For a long time, German energy companies were reluctant to invest into renewable energy.

Instead they kept focusing on the cash-cows of nuclear energy and coal. They perceived renewable energy as a hobby, as Peter Bofinger, member of the German Council of Economic Experts, remarks. It was the German government with its ‘Erneuerbare Energien Gesetz’ (Renewable Energy Sources Act) that laid the foundation for wind-energy and photovoltaics.

Looking at the German automotive industry with its recent track-record (including the Diesel emissions scandal and its lagging position in e-Mobility), it seems as if the private sector of Germany’s most important economic branch could need more than a little nudge by the state.

Tag: Beijing

As insoluble as water and oil:

‘Made in … 2030’