Investing in China? It looks good now, but just wait. If yesterday’s Senate subcommittee on security hearing on China is any indicator, there is bipartisan support for a Cold War style strategy of containment against China. And that includes something like a new NATO, suggested by the Brits, called the G-10.
Senator Richard Blumenthal (D-CT) announced Thursday that he and Senator Josh Hawley (R-MO) — hardly ideological bedfellows — wrote to the Assistant Attorney General to open an investigation into TikTok owner ByteDance and Zoom.
This untelevised hearing stood in stark contrast to the Senate Foreign Relations Committee hearing where California Democrat Diane Feinstein praised China. No one praised it from the Security Subcommittee.
China knows two things: the U.S.’s greatest asset is its allies. (China has basically none. Maybe Iran?) U.S. multinationals like Apple AAPL +0.5% are nearly totally dependent on it for its supply chain. Xi Jinping wants to keep it that way. But can he?
Unlike the last Cold War with the Soviet Union, which focused on military might and the Russians trying to convince the world that their form of government was best, the new Cold War is different.
China has really won on the industrial side. Let’s face it. Yes, the U.S. and Germany and Japan make cool, high tech stuff and heavy equipment that China doesn’t make. But so many of the parts that go with it come from China. Without China, no big machine, no cool iPhone. China is an industrial hegemon.
China hasn’t led on the tech side. It’s getting there. Name a famous tech company and it’s either American or Chinese. Facebook! TikTok. Microsoft! Lenovo. Cisco! Huawei.
So the new Cold War is not about China building military bases in Cuba, and trying to convince the Brazilians to be a one party state flying the hammer and sickle flag (which about a third of Brazilians would probably like, anyway). Instead it is about who will rule the fourth industrial revolution of ultra high technology: China or the West? It won’t be Europe. China’s got them beat. It’s got just one competitor. We’re it.
In 2014, China overtook the U.S. in Purchasing Power Parity, based on the IMF’s calculations of consumer spending power.
“Hopefully, we will see continued bipartsan interest in overseeing a broad based strategy on China, together with our allies,” says Dan Sullivan, Chairman of the Senate Subcommittee on Security.
In May, the White House published the U.S. strategy appropriate to China. It also said China was expanding political and military power, putting it under the auspices of the Department of Defense. That means that even if a president like Michael Bloomberg, a pro-China globalist, was sitting in the Oval Office, he would have to content with the DoD’s view on China as a strategic threat.
“These documents from the White House have strong bipartisan support in Congress, though will not see that in the press,” says Sullivan. “China will be the foreign policy issue for the next 50 to 100 years.”
Roger Wicker, a Mississippi Republican said the pandemic has revealed just how risky China is to global supply chains.
China shipping ground to a halt in the first quarter as the country basically closed its doors to fight the new SARS coronavirus, first discovered in Wuhan, a city of 11 million. Many U.S. businesses were forced to go without a supply.
U.S. pharmaceutical companies are over reliant on China for the basic inputs required to make drugs, including over the counter medications like Tylenol. “We cannot tolerate having those vulnerabilities,” Wicker says. “The government needs to help our economy become more resilient to China.”
This week, the White House announced a massive loan under the Defense Authorization Act for Kodak, the old film company, whose turning its Rochester, NY facility into a pharmacological inputs lab. The stock skyrocketed over 300% on Wednesday, falling 10% on Thursday.
Since the trade war, corporations have been rethinking their supply chains. Then the pandemic happened. Now companies that don’t have an Asian market to serve are the most likely to be at least considering a move. Larger corporations are likely to remain because they have a China market to sell to, and their volumes are high. They love China’s logistics. No one compares.
“There are ongoing conversations about moving out,” says John Scannapieco, an international trade lawyer with Baker Donelson in Nashville. “Most people took for granted their supply chain pre-Covid. Many firms did not realize how reliant they have become to one source or one country,” he says.
For years, American companies were told they needed to get lean and mean in order to compete with China. China benefited from low taxes, and labor and regulatory arbitrage against the U.S.
Yesterday’s Senate security hearing revealed that the Republicans and Democrats have known this for years, but now the fire is at their feet.
Over the years, much of American supply chain has resided in Asia and most of that is China. In a perfect world every country would make everything they need, but that world doesn’t exist, says Scannapieco.
“People are balancing the increased cost of moving with the cost of China risks in their business practices,” he says. They’re now starting to create a program that focues on China, Mexico and the U.S. supply chains. Scannapieco thinks Mexico will be the beneficiary of reshoring, more so than the U.S.
The U.S. will likely reshore critical and strategic supplies — from rare earth minerals to medical supplies.
Chairman Sullivan said the American businesses in China are suffering from what he called “promise fatigue”.
“The Phase One trade deal is insufficient. It does not get to the structural issues – subsidizing state owned enterprises and the basic core structure of China’s non market forces,” says Mike Wessel of the U.S. China Economic Review Commission. Wessel was one of the four people providing expert opinion to the Senate Subcommittee on Thursday.
Democrats were in agreement with Republicans, only they were more likely to call for the U.S. to work with allies. This is likely to become a foreign policy issue during the election, and so Democrats will try and paint the Trump Administration as going it alone.
“The allies have held our coat while we bloodied our noses,” says Wessel. “They need to come to the forefront and work with us.”
It was the U.K. that came up with the idea of a D-10, a group of 10 democracies including India, South Korea, Japan, Australia, Canada, the U.S., France, U.K. and Germany, that ideally would work together to counter China’s state directed capitalism. It’s already working to some degree. The U.S. got the U.K. to give up allowing Huawei in its 5G build-up. France is doing the same. If France doesn’t use Huawei, will Germany? Unlikely.
“The main object of the D-10 is to protect strategic assets and be offensive in terms of joint research and investment screening,” Keith Krach, the Undersecretary for Growth, Energy & Environment at the State Department told Senators. “The best defense is a strong offense.”
The main takeaway from yesterday’s hearing from the Sullivan led committee was that no matter who wins in November, China is on the outs. That doesn’t mean a decoupling is in order. But what it does mean is that the U.S. wants a two way street, and is going to continue to pressure China to be reciprocal, to abide by the same rules of the game as the U.S., Europe and Japan. If they don’t, the supply chain’s coming out.
Xi Jinping doesn’t want to lose his country’s position as go-to manufacturer for everything under the sun.
“China wants to make it harder for companies to leave, “ says Rush Doshi, a China strategist with the Brookings Institution who provided testimony to the Senate. “They are hoping to move towards automation and smart manufacturing with their huge 5G grid in order to keep China cheap and at the center of global supply chains,” he says, adding “Many of those supply chains they already dominate.”