EU – State of the Structure

Popper’s Paradox of Tolerance with Chinese Characteristics

Posted on Oct 10, 2019 by PS in Politics

karl-popper_header.width-900.jpg

Europe finds itself in an ambivalent position. On the one hand, repelled by Trump’s style of politics. On the other, fearful of Kissinger’s scenario materialising: Europe’s decline towards an appendix of a Chinese Eurasia.

From Kuka’s industrial robots over Silex’s micro-electrical systems to Krauss-Maffei’s machines: European craftsmanship, creativity, and innovation are the envy of the world. The many European hidden champions are embedded into a deep web of suppliers and partners extending into the smallest corners of Europe. Their operations not only safeguard the old continent’s prosperity, but also form the backbone of its societies.

While open markets have benefitted both China and Europe since the PRC’s opening in 1978, the playing field has become increasingly uneven. Or rather, the playing field has never been even. But Europe was too greedy to see it.

Although there have recently been announcements about an easing in joint venture constraints for car manufacturers in China, forced technology transfer is still happening en masse. A recent study by the EU Chamber of Commerce in China found that ‘unfair technology transfers continue despite government assurances.’ 19% of the 532 respondent chamber members reported that they were affected by forced technology transfer. The number of unreported cases is probably even higher due to retaliatory concerns.

Most policymakers have (or should have) woken up to the fact that elites at Zhongnanhai have chosen ‘Perestroika without Glasnost’. China’s system depends upon the symbiosis of the state and the economy. The trade negotiations of the US administration with China (while dubious in style) show that China does not intend to change its economic system any time soon.

Now what might a European response look like? The great Karl Popper might provide some insights:

‘Unlimited tolerance must lead to the disappearance of tolerance. If we extend unlimited tolerance even to those who are intolerant, if we are not prepared to defend a tolerant society against the onslaught of the intolerant, then the tolerant will be destroyed, and tolerance with them.’

It would be naïve to wait until the sell-off of European companies to China is over. After all economic policy is a means to an end – and not an end in itself. Policy should be guided by reason and providence. The time for dogmata and ivory tower theories is up.

As insoluble as water and oil:

Posted on May 18, 2019Aug 13, 2019 by PS in Politics

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).

‘Made in … 2030’

Posted on Apr 30, 2019Aug 13, 2019 by PS in Politics, Uncategorized

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.

Behind the smoke and mirrors of German-American tensions:

Posted on Mar 13, 2019Aug 13, 2019 by PS in Politics

Der amerikanische Botschafer Richard Grenell am 14. Januar 2019 bei BundesprÃ¤sident Frank-Walter Steinmeier

Germany’s dilemma is that its security is dependent upon the US while its economy increasingly is not.

In 2017, China was Germany’s principal trading partner for a second consecutive year. (Nienaber, Michael (2018). Reuters)

More so, the US is becoming increasingly less popular in Germany. Richard Grenell, US ambassador to Germany, seems to be spurred on by this very fact.

Some even refer to him as the ‘most undiplomatic diplomat in Berlin’.

Three issues strain the current German-American relationship:

The Nord Stream 2 pipeline
The nature of German-Iranian trade relations
The development of 5G infrastructure by Huawei

Certain issues (such as the heightened energy dependence on Russia & the close relationship between Huawei and the Communist Party of China) rightly deserve attention.

However, what many people take issue with are:

The blatant US foreign policy double standards
Its dominion-esque top-down communication
Its flagrant hypocrisy

Nord Stream 2:

The rationale against the pipeline-project is that Germany risks becoming too dependent upon Russian energy. In that line of thought, Germany would be exposed to Putin’s mood swings.

Yet unless Putin decides to go on a Kamikaze mission, it seems rather unlikely that Putin will decide to turn off the gas pipeline.

Russia has become ever more reliant on the cash generated by oil and gas exports, which account for 44% of all government revenues. (Butler, Nick (2019). Financial Times)

It’s safe to assume that Putin knows about the linkage between the energy cash-flows and the stability of his regime – especially whilst monitoring what’s happening in Venezuela.

Yet what’s really behind the smoke and mirrors?

As the EU’s demand for gas continues to rise, its own supplies begin to run out. The EU is now faced with a bifurcation.

Increasingly rely on Russian natural gas
Lean towards liquified natural gas (LNG)

The US is (surprisingly) the biggest producer of the latter, and now keen to become the biggest exporter, too.

However, shipping LNG across the Atlantic is expensive and the required terminals to unload LNG in Europe are not in place yet, which makes option 1 (see above) more attractive.

One might sense economic interests masked behind security concerns.

But would the US really …?

Never mind…

German-Iranian trade relations:

Speaking about US concerns of using one’s leverage in one domain to exert power in another (i.e. Russia’s energy geopolitics), let’s travel 3000km south-eastward towards Teheran.

Convinced of an existential threat from competitors, America is weaponizing the dollar to preserve its global economic and geopolitical position. (Das, Satyajit (2018). Bloomberg)

Foreign-policy and trade hawks in D.C. have discovered the power of the US’ global financial might (derived by the USD being the world’s reserve currency).

If that’s not enough, the US increasingly threatens traditionally close allies with secondary sanctions.

In this specific instance, the US intends to nudge Germany away from conducting business with Iran, and thereby providing funds to the ‘leading state sponsor of terror’.

Iran is by far not a saint. It supports militias in different places ranging from Lebanon to Syria. Its track-record on human rights issues is appalling.

Yet it is irritating to see how Iran is being demonised and bashed, while Saudi Arabia seems to get a blank cheque for close to anything (ignoring the fake US outcry about the Khashoggi murder).

US hawks, such as National Security Advisor John Bolton, openly advocate Iranian regime change for the sake of ‘liberating’ the Iranian society.

It seems like Mr. Bolton should attend a ‘History 101’ session on the Middle East. Wasn’t there a link between the overthrow of Mossadegh by the US in 1953 (‘Operation Ajax’) and the Iranian revolution in 1979 …?

Again, never mind.

At the same time, the US turns a blind eye on Saudi Arabia.

A country where women cannot leave their houses without their husband’s permission. A country where transgenders get tortured to death. A country where human-rights activists get locked up. A country that kills its own journalists abroad. A country that bombed Yemen, one of the poorest countries, to the brink of starvation.

While this doesn’t acquit Iran of any of its human-rights violations, it puts a lot of things about US foreign policy into perspective:

Power Politics & Interests > Morality

Something the public fortunately increasingly acknowledges:

Huawei’s 5G infrastructure:

Last but not least, let’s turn to the latest friction point between Germany and the US:

Huawei’s 5G infrastructure.

Last week, Mr. Grenell advised Peter Altmaier, Germany’s Minister of Economic Affairs, to cut ties with Huawei. If Germany were not to follow order, it would risk losing access to US intelligence.

An allied diplomat threatening a German minister. So much for the state of the transatlantic alliance.

The US’ recommendation is rooted in the fear that Huawei’s infrastructure could become a Trojan horse for the CCP’s spying activities.

There has neither been proof for the US suspicions (1) nor for the technical feasibility of the accusations (2).

More so, it’s a rather bold move by the US to warn about the dangers of spying – merely six years after the NSA’s spying excesses in Germany have been uncovered.

In reality, leading US public officials have realised that the 21^st Century great power struggle will be decided within the realm of technology – especially A.I. and 5G.

Losing to a competitor, that embodies to some an alternative model, would fundamentally question the appeal of the US’ model.

Yet it seems that some on Capitol Hill are afraid about the competition of systems.

Meanwhile Germany got an amuse-gueule of what it will feel like to be caught up in this century’s great-power struggle.

A Second New Government in Europe Within Two Days

Posted on Jun 5, 2018Jun 8, 2018 by PS in Politics

What happened?

Besides Italy, Spain also received a new government after former PM Mariano Rajoy lost a confidence vote. The vote was caused by corruption scandals within Rajoy’s conservative Partido Popular (PP). Pedro Sanchez of the Social Party (PSOE) replaces Rajoy.

Why does it matter?

Sanchez will lead a minority government in the Spanish lower-house, just as Rajoy did. The lack of concessions, in the form of cabinet positions, towards the parties that supported Sanchez’ motion is interesting. Sanchez will have to carefully calibrate his policies to appease other parties in order to pass legislation, as his party only holds 84 seats – with an absolute majority requiring 176 seats.

What’s next?

The two most pressing questions the latest developments in Spain pose relate to the European Union and Catalonia. With respect to both issues, no major disruptions to the status-quo ought to be expected. The new Spanish government (PSOE) is a center-left party that will place value on the modus operandi, ensuring Spain’s continued economic recovery. While Sanchez offered forums for dialogue with Catalonia, neither will Madrid under his rule be open for Catalan independence.