Should we decouple from China or not?
While COVID-19 has monopolized our discussions, habits and livelihood, a much bigger ‘new normal’ has been gaining momentum in the background. It’s one that will impact our businesses for much longer: the end of globalization. Just like most countries in the West were in complete denial about the coronavirus back in January, we are now again months away from a new crisis and irreversible trend that will hit our prosperity even harder than the pandemic.
Ever since the financial crisis of 2008, the world has run out of steam towards globalization: foreign direct investments, global trade, cross-border bank loans and international supply chains have all shrunk relative to GDP growth. But in January 2018 the US Defence Secretary James Mattis said competition between great powers, China and Russia, not terrorism, is now the main focus of America's national security. This made decoupling a military strategy. Since then, ‘cold war’ tensions between the two largest economies of the world have only caused more aggravation and COVID-19 has accelerated the process of decoupling. Before the summer, Trump threateningly tweeted that he would “cut off the whole relationship with China”. The net result: two thirds of Americans now view China as unfavorable, one third as very unfavorable, and 90% see China as a real threat to America.
In 2020, the “war on China” shifted from hard trade talks to bashing China across all areas including economics, politics, technology, education, healthcare, production, etc. The most visible wars are fought around Hong Kong, Covid-19 and Huawei, but the smaller attacks are intensifying daily and setting the scene of the endgame to decouple the West from China: delisting Chinese firms from the US stock exchange; cutting off Chinese banks access from dollars; export ban to over 200 Chinese tech companies; denying entry visas to Chinese students and communist party members; changes of heart in the UK around Huawei, a military incident with India in LAC and India blocking all Chinese apps; U.K., Australia’s and Canada’s support of Hong Kong separatists; and much more… It feels as if the former British empire of the 19th century reappeared to fight China, but this time they are led by the new superpower America. As China has never forgotten how the Western imperialists back then forced it into a century of shame and decay, its politicians in response have recently shifted their tone from diplomatic and moderate to provoking and confrontational. Lessons in world history have told us that confrontation between two major powers have always led to wars unless a third power could intervene. Are we destined for a hot war, or can Europe still change the course of history? In my view, Europe has 3 counter-intuitive choices to make to secure our future, our democracy and international liberal order.
Deploy or Delay
In 2015, China announced proudly the “made in China 2025” plan to make China a dominant player in global high-tech manufacturing. This state-led strategy was created to help China’s economy through the difficult transition over the middle-income trap, that torments many developing countries. The 2025 plan targets 10 critical high-tech sectors where China seeks to reduce its dependency on foreign imports down to 30% - from oil to semiconductors - and in the process become the global innovation leader of the 4th industrial revolution. In hindsight, China was visionary in 2015 to launch this ambitious plan, but at the same time
provoked America as innovation leader for them to induce a fast-track decoupling plan. China and America both want to decouple from each other, but for quite opposing goals: sovereignty versus supremacy. Decoupling as such now seems inevitable, but in today’s inter-dependent, connected, recently more vulnerable world, the question is not if, but how fast we want this to happen?
If the best way to predict the future is to look at the past, Huawei can shed some light on what the hard decoupling we are heading towards today could look like. China’s national technology champion has silently upgraded itself from a state-supported copycat to leading innovator multinational in just two decades. Telecom providers around the world deployed Huawei’s 4G, and now 5G technology, often in favor of competitors Ericson and Nokia for combined reasons of cost, innovation, security and client support. Just like Google, Apple, Facebook, Amazon or Microsoft, Huawei too became too big to fail or be controlled by politicians. Worse even, Huawei was Chinese. With 5G orders being placed, the witch-hunt on Huawei was now open, and the rest is history. Huawei was depicted as the scariest company on the planet, yet the proof for unreliable behavior was conveniently a matter of national security.
Most telcos on the other hand found that the most secure 5G in the world is actually from Huawei. So, let’s not take any risks, and burn this witch quickly at the stake, now we still can! Sure, that’s completely rational.
Under pressure from President Trump himself, one country after another decided to ban the vendor from their infrastructure. This collective paranoia against Huawei leads to a decision that will cost Europe 40 Billion Euro, but more importantly delay the full roll-out of 5G by 3 to 5 years. Simply said, by the time that countries who banned Huawei have 5G coverage, China will have accrued a full generation gap in technological advancement. Our Western infrastructure will be years behind China to build new smart cities, health- and social care, autonomous vehicles, smart utilities, manufacturing and logistics. Now picture Huawei as only one of the many Chinese technology companies that will jump a generation ahead of us over the next 5 years. And then I wonder, instead of blocking Chinese companies, shouldn’t we instead scrutinize them to play according to our rules? Can we leverage their leading-edge innovations to challenge and support our own champions like Ericsson and Nokia? Can we not better work together with the global leaders, including the Chinese, to build a global cyber security infrastructure that would benefit the whole world? Can we still afford a delay in a world that develops at lightning speed?
Depend or Decline
If COVID-19 made anything crystal clear is how much the world has become dependent on China. When the Chinese factory wheels stopped turning, the world’s supply-chain broke, making the managerial buzzwords ‘margin’, ‘efficiency’ and ‘just-in-time’ sound as empty as the containers that had to ship our basic supplies. The global deficiency of facemasks, test kits and ventilators boosted the deglobalization trend and the new fashionable words are now ‘reshoring’, ‘localization’ and ‘resilience’. Back in April, Japan was the first government to aid its firms shift production back home, and many more countries are contemplating this plan.
President Trump got elected by millions of disappointed Americans who endured a decline of their wages, if they still had one, much due to 1 billion Chinese who entered into WTO’s global trading system in 2001. The working-class American could feel everyday what the elites on Capital Hill could not, namely that the bottom 50% of Americans now have only 1% of America’s wealth. While many in the West view Trump’s victory with contempt, it was the result of a nation of inequality that was being created in and by the West, and welcomed by China. What Trump omits to tell his voters is that the trade deficit of 345 billion USD with China includes about 50% of American products being shipped back to U.S., nor does he talk about an even bigger number that benefits American companies to produce in China: a 350 Billion USD annual local revenue from the still growing Chinese market. It will be impossible to re-shore these U.S. factories as long as they make money locally.
However, if we stop importing from China, we must be ready to pay the price for it. We will have to set-up factories that do not exist today, we will need to establish local supply chains, we will need to add cost of labor and use materials to offer longer production cycles. It is not impossible, but will consumers be willing to spend more and consume less in times of recession? Are Western governments prepared to shift budgets from healthcare, social care, education and environment into logistics and factories knowing that it will add more robots than workers to produce more durable products? Before we make these though choices, we need to appreciate that China has high-performing industrial ecosystem clusters that can respond quickly to capacity as we saw with face mask productions entities popping out of nowhere in no time. We need to realize that China has a well-trained workforce that took a decade to train, who are able to mass produce in very large-scale automated facilities with top-notch quality control procedures and systems. Are we going to re-create that? As China wants to decouple as well over time, can we not work together with Chinese factory bosses to relocate their factories, employees and systems instead of building our own? Can we diversify our risk by depending more on their overseas investment strategies in Asia, Africa and elsewhere? Do we want to become independent from China or independent from the Chinese? Can any company afford an additional economic decline because we fear another disruption in the supply chain? If we look at how China handled the crisis, maybe it’s not unwise to depend on those who are more resilient to deal with change and uncertainty.
Defuse or Defend
The Western response to the pandemic has unveiled how fragile our liberal international order is under stress. Its basic principles guaranteed by multilateralism and safeguarded by the American hegemony are being seriously challenged today, including the free movement of people, ideas, goods, and capital; a world order sustained by the rule of law. Almost two hundred years of Western domination could come to an end as the world’s protector is in free fall economically, socially and politically. Prior to the crisis, the narrative was that China and Xi Jinping’s dystopian control, is a threat to our free world; but one could argue today that the biggest risk to our liberal order is ironically being killed by suicide by the world’s biggest democracy America. Elvis has left the building. Will Biden turn the tide if elected? Sadly, the only consensus between republicans and democrats is that China is evil. The war on China seems the last viable deflection from the polarizing tensions within, a recipe for destruction of the world order as we know it.
We are heading for a coronapocalypse where every Western government will have to regain public trust to survive. Most Asian countries on the other hand, have little doubt on how well their government has handled the crisis. Paradoxically, Asian leaders learnt the value of governance from the West. China realized for the very first time that the Western preachers of governance, democracy, intervention and even human rights are failing to demonstrate the universal success of their own value system. It has made Chinese leaders increasingly strongminded and nationalistic, most noticeable in their response to America’s growing threats. A potentially explosive cocktail. China-hawks frighten us with China’s true ambition of global domination. They are convinced China will take advantage of the worldwide ruin to their benefit. As we recognize ourselves into this behavior from our own colonial history, our fear justifies a decoupling from China. But China’s 2500 years history doesn’t show any initiative for global imperialism, even when China was at center stage of the economic world before 1850. Could China take leadership of the new world order? Or is our own lizard-brain taking over as we all live in fear now?
Maybe we are simply raising the wrong question. Instead of looking at China, a much better question would be: How is 88% of the world, the non-Western world, thinking about China’s rise? How are 6,6 billion people feeling about China? The Belt and Road Initiative (BRI) can answer that question. In merely 5 years’ time, the BRI has attracted 65 countries, 60% of the world’s population, with 75% of energy resources and 30% of GDP to participate in China’s original masterplan. It’s obvious the non-Western world is welcoming China to mentor them in how to eliminate poverty, increase life expectancy, improve livelihood and create a safer society. What the West has taken for granted, the rest of the world wants now too, and China has become their preferred guide. Western media easily write China off as bad news with debt traps, creation of vassal states and stealing resources, but fewer words are being spilled on how China has given billions of people new hope, new means and the prospect of happiness. As long as we focus on the negative events related to China’s affairs and words, and not see the underlying world trends induced by China’s rise, we will be fighting many senseless battles, and loose the meaningful war on global progress of humanity. Do we even dare to engage in a war with China while killing the dream of billions in the emerging world?
The COVID-19 crisis made the divergence between American and European interest crystal clear. ‘America first’, with China as its main rival, compels a full decoupling from China, and makes an accidental war with China an actual plausibility. Europe, on the other hand, has experienced firsthand how the emerging world in North-Africa and the Middle-East have stopped accepting its ‘fate’, and are taking their destiny in their own hand by hitting to our Western shores. By decoupling hard from China, Europe will be fighting an American war, whilst pushing the Rest of the world post-COVID in China’s arms. Europe should not make America’s enemies our own enemies. Europe has its our own battles to fight and interests to protect such as immigration for example. China could be a partner or enemy in how we deal with 15% of the world’s population in Africa. China could become the best ally of 20% of the world’s population by supporting predominantly Islamic countriesin Middle East, Africa and Asia. As we will decouple from China, why not build the factories along the BRI regions, even with Chinese capital – and kill two birds with one stone? Europe cannot save the new world, but the new world can save Europe from populism. For this and many more reasons, Europe should defuse the geopolitical timebombs America is targeting at China in the wake of the U.S. election as our interests and prosperity are at stake. Do we deglobalize, decouple, deploy, delay, depend, decline, defuse or defend? What is clear is D-day is coming to the world and Europe has a choice to make.