Wednesday, May 6, 2020

Perplexed by China

We have to blame someone, so why not blame Trump. This is the Democrats’ playbook. We will see how well it works. As for Republicans, they seem clearly to want to blame China for the current pandemic, and for a bunch of other things. We have become reliant on Chinese industry and manufacturing, and we do not like it. So we are talking about bringing manufacturing home, as though it is a simple process that can be accomplished with a flick of someone’s pen. We do not ask whether we can produce the same things at the same price. 

One suspects that the China bashing is all about politics. Standing up against the Asian behemoth makes politicians look good. It makes them look tough and it gives them a lot of exposure in the press.

The result: it becomes nearly impossible to evaluate the reality of the situation. How well do we understand the competition between Asia and the West? Where can we go to find enough information to gain some true insight into the reality on the ground?

For that we can turn to David Goldman. The Claremont Review of Books has excerpted his new book on China. Reading the chapter is eye-opening and sobering. For your edification I will offer up some significant chunks of text.

Naturally, we all believe that China has stolen everything it has from us. Such is not the case. Goldman opens on this note:

As matters stand the United States will be overtaken by China in the next several years. China is developing its own intellectual property in key areas. Some of it is better than ours—in artificial intelligence, telecommunications, cryptography, and electronic warfare. In other key fields like quantum computing—possibly the holy grail of 21st-century technology—it’s hard to tell who’s winning, but China is outspending us by a huge margin.

China’s first great multinational company, Huawei, is rolling out fifth generation (5G) mobile broadband across the whole of Eurasia, from Vladivostok, Russia to Bristol, England, despite a full-court press by the Trump Administration to stop it. In January 2020 Great Britain—America’s closest ally—brushed off Trump’s personal intervention and allowed Huawei to build part of Britain’s 5G network. The European Community announced it would take no measures to exclude the Chinese giant. Washington tried to strangle Huawei by slapping export controls on U.S. components for 5G equipment and smartphones, only to see Huawei continue expanding using Asian components while achieving self-sufficiency in chip production.

Everyone is up in arms about the possibility that Huawei will be stealing our personal data. The hue and cry is overblown. Goldman puts it in perspective:

U.S. officials warn that Huawei’s 5G systems will allow China to eavesdrop on the world’s communications and steal the world’s data. That’s a risk—the “Five Eyes” group of English-speaking countries has monitored the world’s signal traffic for decades—but other risks are bigger. End-to-end encryption of voice calls is already here, and Chinese-led breakthroughs in cryptography soon will make it impossible for anyone to steal large amounts of data. But Huawei doesn’t think it needs to steal the world’s data. It expects the world to hand it over for free.

Of course, one Gordon Chang predicted some two decades ago that China would collapse. For being wrong for twenty years he has been anointed an expert. The reality on the ground exposes the prediction as fatuous:

Since publication of Gordon G. Chang’s popular The Coming Collapse of China in 2001, China’s per capita Gross Domestic Product has risen five-fold. Chinese cities that were Third World slums have blossomed into steel-and-glass behemoths that look like sci-fi movie sets—not just Shanghai, Shenzhen, and Guangzhou, but cities deep in the interior like Chengdu and Chongqing, each with 30 million inhabitants. China’s growth has slowed to 6% a year—about three times America’s rate. China’s debt burden is slightly over three times its GDP, about the same as America’s.

If you are thinking of invading China, you should think again. China is not a military weakling.

 China has invested massively in rocketry, hypervelocity glide missiles, submarines, and other military technologies that deny access to China’s coast and its environs. A 2019 University of Sydney study warned that China’s missile force could neutralize most American Western Pacific assets within hours after war’s outbreak. Even if we wished to pursue a military option against China, we have been blocked from doing so.

China has demonstrated its ability to sink American ships and blind U.S. satellites. The combination of Chinese rocketry, submarines, electronic countermeasures, and air defense makes our Western Pacific military assets sitting ducks. We lost the South China Sea years ago. Unsurprisingly, the Philippines in February 2020 unilaterally withdrew from its joint defense agreement with the United States. When our oldest ally in Asia goes to the other side, we should ask ourselves: why?

According to Goldman, China is not seeking to become an empire. It is working to create a network of trading alliances, financed by Chinese money and dependent on China:

Nor is there anything secret about China’s global ambitions. It aims to integrate Eurasia into a Chinese economic sphere under the multi-trillion-dollar Belt and Road Initiative, and to use its 5G broadband dominance to lead a Fourth Industrial Revolution. Huawei’s website has advertised China’s plan for global economic supremacy since 2011; China has proclaimed it with great fanfare—and considerable expense—at every telecommunications conference for the past ten years. China’s military ambition is important, but subordinate to an economic and technological vision so vast that American analysts have lacked the intellectual bandwidth to perceive it.

It would be a very good idea if we could overcome the tendency to imagine that today’s China is merely another version of Communism. In truth, as even I have noticed, Maoism ended with the death of Mao. The Deng Xiaoping revolution was capitalist:

Soviet Communists told their most talented scientists, “Invent something new, and we’ll give you a medal, and maybe a dacha.” China says, “Invent something new, launch an Initial Public Offering, and become a billionaire.” By the end of 2019 there were 285 billionaires in China—including Alibaba’s Jack Ma, who, like many of his fellow billionaires, is a Communist Party member. There are more Marxists in Cambridge, Massachusetts, than in all of China. I met a professed Marxist over dinner in Beijing a couple of years ago—a pleasant fellow who taught Marxist-Leninist doctrine at the Communist Party’s cadre school. His daughter had just graduated from a top American university; he asked if I could help her get a job on Wall Street.

He continues:

We aren’t facing drunken, corrupt Soviet bureaucrats, but a Mandarin elite cherry-picked from the brightest university graduates of the world’s largest country. America confronts something far more daunting than moth-eaten Marxism: a 5,000-year-old empire that is pragmatic, curious, adaptive, ruthless—and hungry. China’s current regime is cruel, but no crueler than the Qin dynasty that buried a million conscript laborers in the Great Wall. China was, and remains, utterly ruthless.

Surely, China has stolen technology. Worse yet, we have allowed it to steal technology. The Trump trade negotiations were designed to rectify the problem.

But the problem now is that China does not really need to steal technology; it makes its own:

The most important thing China appropriated from the United States is the one big idea that made America the world’s only superpower after the Soviet Union’s collapse. That idea is to drive fundamental R&D through the aggressive pursuit of superior weapons systems, and let the spinoffs trickle down to the civilian economy. China is like a two-stage rocket. The export-driven, cheap labor economy that turned it from an impoverished rural country into a prosperous urbanized giant after Deng Xiaoping’s reforms was the booster. China began to discard that booster ten years ago. The next stage is Huawei’s Fourth Industrial Revolution, driven by artificial intelligence, robotics, the internet, and massive big data applications to supply-chain management, transportation, health care, and other fields.

China envisions a virtual empire in which game-changing technology dominates production, purchasing, finance, and transportation. It puts massive resources into basic research, science education, and infrastructure. America’s commitment to basic research and science education, in contrast, has shrunk to roughly half its size during the Reagan Administration.

And China is vastly outpacing us in terms of technical and scientific education:

China now graduates more scientists and engineers than the United States, Europe, Japan, Taiwan, and South Korea combined, and six times as many as the United States alone. During the past ten years the quality of Chinese scientific education has risen to world standards. Mao Zedong’s Cultural Revolution of the 1960s nearly destroyed China’s university system. Thanks to American graduate schools, Chinese universities have assembled a world-class scientific and engineering faculty. Four out of five doctoral degrees in computer science and electrical engineering in America are awarded to foreign students, of whom Chinese are the largest contingent. Only 5% of American undergraduates major in engineering, which means there aren’t a lot of available faculty positions for recent doctorates.

China no longer needs to steal or copy Western technology. Over the past five years China has produced the world’s best 5G equipment, some of the world’s fastest supercomputers, hypervelocity strategic missiles, computer chips that rival the best America can design, and an unhackable cybersecurity technology, quantum cryptography. A Chinese robotic spacecraft made the first soft landing on the dark side of the moon in 2019. That’s just the beginning.

But, ours is clearly the larger economy. The problem with that truth, Goldman continues, is simple: when it comes to the purchasing power, China is ahead. Salaries are much lower in China than they are here, but the cost of living is much, much lower:

Whose economy is bigger depends on your measure. In U.S. dollar terms, America’s is much larger. But if you include the relative cost of goods and services, China’s economy is about $4 trillion bigger than America’s, according to the World Bank’s measure of purchasing power parity. That accounts for the fact that domestic Chinese prices are much lower than U.S. prices. A half-hour taxi ride from Chengdu Airport in August 2019 cost me about five U.S. dollars. In any American city it would’ve cost $50 to $70 dollars. In current U.S. dollars, China’s 2018 GDP was about $13 trillion versus over $20 trillion for the U.S. But purchasing power parity is a more informative measure.

As Marc Andreessen has remarked that America can barely build anything any more, China has been building at a phenomenal clip:

China has built the world’s longest highway system (about 90,000 miles), the world’s largest high-speed rail network (about 18,000 miles today, growing to 24,000 miles by 2025), and enough housing to move nearly 600 million people from the countryside to cities. None of this was there 30 years ago. China’s infrastructure is the wonder of the modern world. Compared to China’s airports, roads, and rail lines, most of the United States looks like a Third World country.

How does America compare with China today?

In 1960 America produced 40% of the world’s GDP. Now it produces 24%. Even more important is the decline of America’s share of high-tech industrial production: according to the World Bank, it fell from 18% in 1999 to just 7% in 2014, while China’s rose from 3% to 26%. America’s commitment to high-tech manufacturing collapsed with the tech bubble of 2000, never to recover. By no coincidence, the income of U.S. households barely grew during the next 20 years.

Of course, the initiative and industry manifested by Chinese schoolchildren vastly outpaces that shown by ours. Then again, we have more diversity. I trust that you do not find that comforting:

China’s challenge is formidable. We are competing with 1.4 billion intelligent and industrious people. Chinese schoolchildren turn up at 7:30 a.m. and leave at 5:00 p.m. Ten million Chinese teenagers take the college entrance exams each year and prep 12 hours a day for two years to gain acceptance at a good university. The Asian work ethic explains why 28% of students at America’s Ivy League colleges are Asians, although Asians comprise just 5.6% of the U.S. population. We have educated a world-class engineering faculty for Chinese universities, the best of which are at par with the best American universities.

The next time you hear a politician rant about how we are going to defeat China, how their authoritarian system cannot compete against our liberal democracy, give Goldman’s points some serious thought. It might be that the current pandemic will prove to be a challenge to America, a challenge to get our act together and to get to work. 

Yet, don’t get your hopes up too high. 


David Foster said...

"We have become reliant on Chinese industry and manufacturing, and we do not like it. So we are talking about bringing manufacturing home, as though it is a simple process that can be accomplished with a flick of someone’s pen. We do not ask whether we can produce the same things at the same price."

I don't know of anyone who thinks it is that simple, but one has to start somewhere. A big part of it is a public change in attitudes toward manufacturing, and this is definitely happening...people are seeing what's going on with Honeywell and the respirator masks, wit Ford and GE with ventilators, and plenty more, and seeing the excitement in making things.

The belief that American middle-class affluence is dependent on China is often asserted...even by smart people who should know better, such as Art Laffer...and is highly questionable, to put it mildly. See my post here:

Sam L. said...

"We do not ask whether we can produce the same things at the same price." Likely, we can't, but the ones made HERE will be better, and won't have "backdoors" to be exploited by the Chinese.

Chinese are smart, too.

"As Marc Andreessen has remarked that America can barely build anything any more, China has been building at a phenomenal clip:" This is due to TOO MUCH GOVERNMENT interference.

Kansas Scout said...

A very different perspective was just on Realclearworld.

UbuMaccabee said...

We cannot compete with China right now because we are in the middle of a civil war. China must realize this, and plans to take advantage of our internal divisions. China wins be default.