The agreement at the December 1 presidential dinner meeting of the US and China following the G20 summit in Buenos Aires, to freeze further moves on tariffs during a 90-day period when the two countries would seek agreement on trade and other issues, was followed with typical Trumpian exaggeration and confusion. Then mid-week American prosecutorial overreach highlighted the tech war between the two giant economies as the US seeks to contain the emergence of China as a global technology power.
China’s Huawei Technologies announced last June that it will increase its annual spending on research and development (R&D) to between $15bn and $20bn, as it seeks to be a global leader in 5G technology. According to Reuters, it spent ¥89.7bn yuan ($13.23bn) on R&D in 2017, accounting for 14.9% of its total revenues. China’s biggest telecommunications equipment and smartphone maker said it will allocate 20-30% of revenues to basic science research.
Reuters says Amazon and Alphabet (parent of Google), the two biggest spenders on R&D in the United States, spent $22.6bn and $16.6bn, respectively, in 2017, according to financial data company Factset.
China has increased R&D spending over time — an average of 18% per year between 2000 and 2015, compared to 4% in the US. If current trends continue, the US National Science Board expects China to pass the US in R&D expenditures by the end of 2018.
In 2017 Huawei became the world’s biggest supplier of telecommunications equipment, according to IHS Markit, despite being locked out of the US market on national security grounds.
Last week Huawei agreed to spend $2bn (£1.5bn) in an effort to alleviate British security services’ concerns about vulnerabilities in its products while it was reported that Japan is expected to ban government use of products made by Huawei and another Chinese firm, ZTE, over cybersecurity concerns. It would follow moves by New Zealand and Australia to block Huawei.
However, the biggest news on US-China relations came on Wednesday when the arrest was revealed by Canadian authorities of the chief financial officer of Huawei, at the request of the US for alleged violations of Iran sanctions. This latest move by Washington against the Chinese technology giant was against Meng Wanzhou, the daughter of Huawei’s founder, Ren Zhengfei, who was changing planes in Vancouver. The extradition warrant reflects the reality of a US/China war about tech rather than trade deficits and likely will result in reprisals at some point.
The Thucydides Trap
Reviewing the past 500 hundred years, the Harvard Thucydides’s Trap Project has identified 16 cases in which a major rising power has threatened to displace a major ruling power. Twelve of these sixteen rivalries ended in war.
“It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.”
Thucydides, History of the Peloponnesian War, 431 BCE
However, Arthur Waldron, a notable scholar on Chinese history and military affairs writes that two greatest classicists of the last century, Professor Donald Kagan of Yale and the late Professor Ernst Badian of Harvard, long ago proved that no such thing exists as the “Thucydides Trap,” certainly not in the actual Greek text of the great History of the Peloponnesian War.
"Although Thucydides presents the war as started by the resident power, Sparta, out of fear of a rising Athens, he makes it clear first that Athens had an empire, from which it wished to eliminate any Spartan threat by stirring up a war and teaching the hoplite Spartans that they could never win...The Spartans, Kagan tells us, wanted no war, preemptive or otherwise. Dwelling in the deep south, they lived a simple country life that agreed with them."
There may well be the emergence of something akin to the Cold War between the West and the late Soviet Empire, but the difference then was that the United States had very little economic engagement with the Soviet Union.
“The US and China are in for a long and acrimonious confrontation,” Arthur Kroeber of Gavekal Dragonomics, a China-based research firm, wrote last September, according to The Wall Street Journal. "This isn’t driven by President Trump alone, he wrote, but “by a powerful coalition of security and economic officials who believe the US is entering an existential conflict with China for global economic, technological and geopolitical dominance.”
Kroeber noted in an interview that China doesn’t offer just low labour costs, it also has well-developed infrastructure and logistics, skilled labour such as engineers, and access to China’s own huge internal market. “That can’t be matched somewhere else.” Multinationals may require two supply chains: one with access to the US, and one with access to China. Then there would be a choice: would the US-centric or China-centric supply chain serve the rest of the world.
Greg Ip of the Journal noted: "In the short run, China would clearly be the loser: It still depends heavily on the US for intellectual property, know-how and investment, and as a market for exports."
[Yet over time, China could overcome those disadvantages. It “has all the necessary prerequisites to make an Asian-based trading bloc work without the U.S.: a large domestic market, political support for open markets and manufacturing expertise,” writes Larry Brainard of TS Lombard, an investment advisory. China already does more trade in manufactured and intermediate goods with the European Union than the US, and twice as much with the rest of Asia, he notes.]
Last month in Singapore, Henry Paulson, former Goldman Sachs chief and US Treasury secretary (2006-2009), warned of an “Economic Iron Curtain” dividing the world if the US and China fail to resolve strategic differences. Paulson explained his reasons for the current conflict and shared a path forward to avoid a “long winter” between the world’s biggest economies: here is Paulson's menu of choices for both sides.
China's reemergence as world's biggest economy
China had been the world’s biggest economy for nearly two millennia, but in the 1890s it was overtaken by the United States.
In 2014 China's economy surpassed the United States as the world's largest economy as measured by purchasing power parity [PPP] according to the the International Monetary Fund. The IMF has forecast that the global share of China's GDP will be 18.72% at end 2018 compared with the US at 15.17%. This is based on eliminating price differences for similar goods and services (see World Bank explanation of purchasing power parities here — data is for 2011).
In the aftermath of the death of Mao Zedong, China' revolutionary leader, who had left economic mayhem and massive social disorder in his wake, called the Cultural Revolution or formally the Great Proletarian Cultural Revolution (1966-1976), the Communist Party in December 1978 agreed to the famous four-character policy gaige kaifang (改革开放) — a reform of the economic system and an opening up to the outside world
The intervening forty years have been a period of remarkable economic transformation, that is unique in world history for a high population country.
China added about 375m jobs from the start of the reform and opening-up in 1978 to 2017, according to the National Bureau of Statistics (NBS). The number of rural and urban jobs in the country totalled 776m at the end of last year, up 93% from 1978, the NBS reported.
Urban jobs reached 425m at the end of 2017, up 346% from 1978.
The surge in job creation was accompanied by robust economic growth. China's GDP recorded average annual growth of around 9.5% over the past 40 years.
According to the World Bank, China and many of its neighbours in East Asia have largely driven the world’s progress in reducing poverty. In China alone, nearly 800m people have escaped poverty since the 1980s.
"And while East Asia was home to around half of the world’s extreme poor in 1990, today just over 9% of the extreme poor live in the region."
Angus Maddison, the late renowned British economic historian, has written
"The Ch’ing dynasty performed extremely well in terms of its own objectives from the end of the seventeenth to the beginning of the nineteenth century. From 1700 to 1820 population rose from 138 to 381m — nearly eight times as fast as in Japan and nearly twice as fast as in Europe. This population growth was accommodated without a fall in living standards. Chinese GDP grew faster than that of Europe in the eighteenth century even though European per capita income rose by a quarter The second achievement was the feeling of security derived from the huge expansion in the area of imperial control. In 1820, China’s national territory was 12m square kilometres, about twice what it had been in 1680. The expansion was in very sparsely populated regions, which in 1820 accounted for only 2% of total population. They were not then intended for ethnic Chinese settlement, but to secure the Inner Asian frontiers in great depth to prevent barbarian intrusions of the type China had experienced in the past."
Most of the 19th century was a period of humiliation for China with European colonial powers demanding concessions from a humiliated former giant that had also to contend with internal rebellion.
Maddison wrote that "There were a whole series of internal rebellions which were difficult and costly to suppress. The biggest, the Taiping rebellion, lasted 14 years and incurred enormous damage to China’s central provinces. The traditional military forces failed to suppress it and fiscal resources were under great strain in developing a new military response. The authorities ceased to be able to maintain major hydraulic works. The Yellow River dikes were not maintained. There was a disastrous change in the course of the river in 1852–55 and a silting up of the Grand Canal. By the end of the century, it could no longer be used to provide grain supplies to Peking. As a result of these disasters, China’s population was no higher in 1890 than in 1820 and its per capita income was almost certainly lower."
Xi Jinping became Chinese president in 2012 and he set “Two Centennial Goals” for China: First, the world's most populous country will have a “moderately prosperous society” by doubling its 2010 per capita GDP to $10,000 (current dollar) by 2021, when it celebrates the 100th anniversary of the Chinese Communist Party — in 2017 the GDP per inhabitant was already $8,900. Second, China will become a “fully developed, rich, and powerful” nation by the 100th anniversary of the People's Republic in 2049.
IMF data (measured in terms of purchasing power parity) published this year show that in 2010 the United States' share of global GDP was 16.8% and China's was 13.9%. By 2012, the ratios will be 14.5% and 20.1%.
The road ahead
The British had a trade problem with China in the late 1700s and while there was a demand for Chinese tea, porcelain and silk in Britain, Imperial China refused to open its market beyond a restricted concession to operate at the port of Canton (modern Guangzhou) on the Pearl River Delta.
Karl Mark wrote in 1858, "The Indian finances of the British Government have, in fact, been made to depend not only on the opium trade with China but on the contraband character of that trade...While openly preaching free trade in poison, it (Britain) secretly defends the monopoly of its manufacture. Whenever we look closely into the nature of British free trade, monopoly is pretty generally found to lie at the bottom of its 'freedom.'
Read my account of Britain and the opium trade here.
China has done well from the globalisation system that was put in place by the United States and its allies since 1945. However, western policymakers have been proved wrong in believing that increasing prosperity would result in a weakening of the power of the Communist Party.
Silicon Valley developed with the substantial help of demand from the Pentagon during the Cold War and also the US Space Program. In 2015 China announced its 'Made in China 2025' 10-year plan to develop chip making competence and other areas of high technology, with subsidies from the government.
A huge e-commerce market has developed in China while leading American digital firms, including Google, Amazon, eBay, and Uber, have expanded internationally but they have all failed in China, the world’s largest digital market.
This Harvard Business Review article says Western digital companies "have failed to understand the complex business environment there, adapt their strategies and business models to the Chinese market, and develop new technologies and services to cater to the preferences of Chinese users."
It is argued that the Chinese 2025 plan "For the United States and other major industrialized democracies...not only undermine Beijing’s stated adherence to international trade rules but also pose a security risk. Here are views from 1) the US and 2) Hong Kong.
China Daily, an official Beijing newspaper, reports that on Oct 26, 1978, Deng Xiaoping, then China's effective leader and the key reformer, was travelling on a Japanese bullet train from Tokyo to Kyoto when he was asked how he felt about the high-speed rail known as Shinkansen.
"I just felt it's so fast, as if someone was whipping at the back," said Deng, amazed by Japan's remarkable modernization.
"It was just right for us," he added, a word that was later widely interpreted to imply his ambition to lead China on a path of reform and opening-up, which he declared seven weeks later at the Third Plenary Session of the 11th Central Committee of the Communist Party of China held in Beijing on December 18-22.
China Daily says that at that time, Japan had the world's only two high-speed railway lines and its economy was 4.6 times bigger than that of China.
Deng, who died in early 1997, did not live to see today's China, which has 25,000km of high-speed rail, or about 66% of the world's total. China Daily says the Fuxing bullet train between Shanghai and Beijing runs at a speed of 350km per hour.
Last month I travelled from Hong Kong to the city of Shenzhen, the electronics capital of China. It took 10 minutes to travel the 40km route and most of it was underground.
In 2010, China overtook Japan as the world's second-largest economy and in 2017, China's economy was 2.5 times bigger than that of Japan, according to the IMF.
It's interesting that the development of the bullet train in China illustrates a common complaint from multinationals when they have to share technology with Chinese giant ventures.
Hong Kong's South China Morning Post reported in August 2017:
"Starting in 2004, China got its fast-rail know-how off the ground by setting up joint ventures with market leaders from Germany, France and Japan. The foreign partners signed technology transfer contracts with the Chinese government, giving them access to the vast Chinese market.
But years later, after helping to train the Chinese engineers and develop a local supply chain, the foreign companies said they had lost out – and their former partners were now rivals.
They accused the Chinese companies of breaching contracts that had limited the use of their technology to China – with those firms now trying to sell Chinese technology abroad – and said that they had replicated rather than innovated."
Lu Xiang, a researcher with the Chinese Academy of Social Sciences, told the Post that China had improved in the area of intellectual property protection and it would be willing to negotiate with the US if it provided evidence of forced technology transfers.
As China has huge markets, without some changes in the rules, foreign firms cannot afford not to participate there.
On my fourth visit to China in November 2018, I was with Lai Keat Woon, a businessman based in Kuala Lumpur. Even in Chengping, a small city of about 400,000, about 80 minutes by road from Szenchen, the visible level of entrepreneurship in the city was impressive.
New York Times - China Rules: They didn’t like the West’s playbook. So they wrote their own.
The American Dream Is Alive. In China. Imagine two poor 18-year-olds, one in the U.S., the other in China. Who has a better chance of success? Are you sure?
The Land That Failed to Fail: The West was sure the Chinese approach would not work. It just had to wait. It’s still waiting.
How China Took Over Your TV: “Made in China” once meant assembled there. Now the Chinese are mastering the art of making everything.
How China Walled Off the Internet: The web was supposed to set the world free. China's is censored, but booming anyway.
FIVE TAKEAWAYS: How did the land once commonly — and with some disdain — known in the West as Communist China come to lead the world in the number of homeowners, internet users, college graduates and, by some counts, billionaires?
The ‘Madman’ Behind Trump’s Trade Theory: Peter Navarro—a business-school professor, a get-rich guru, a former Peace Corps member, and a former Democrat—is among the most important generals in Trump’s trade war.
The failed politician has admitted that he was “the cruellest and meanest son of a bitch that ever ran for office in San Diego.”