G2 - US vs. China

G2 – US vs. China
Origin, current status & potential consequences
Presented on the Executive Club of the Diplomatic Council @ Schlosshotel Konberg, 2019-06-28

agenda
 Intro
The global think tank does its job
 Drama
The US vs. China trade war
 Megatrends
The end of globalisation?
 Misconceptions
In the China trap?
 Hegemony
The underlying fabric
 Consequences
The dichotomy of the world
 Conclusion
What we have to expect
www.diplomatic-council.org2019-06-28 2

Intro
 This years topics of the DC Executive Club look attractive again.
 Franck Mathot on “Market Intelligence: Exploring and understanding markets”
 Thomas Gronenthal on “Finding international customers via social media”
 Melanie Prinz on “International Logistics”
 Andreas Neumann & Daniel McKee on “Business in the USA, that's how it works”
 Irene Ho on “Business opportunities in Asia”
 The topics are very much in line with the mission of the DC.
 That’s great.

Intro
 However, major upheaval lies ahead.
 Minor hick-ups?
 Just a big show?
 The “End of the world as we know it” (Joschka Fischer)?
 What is good practice today – will it still be applicable tomorrow?
 Will the US vs. China trade conflict expand into a 2nd "cold war“?
So, let’s contemplate …
 Which force field we are acting in?
 What are the likely consequences for internationally operating companies?

Drama
Before our very eyes a veritable drama is unfolding.

Drama
 So, the economic struggle between the two heavyweights is in full swing.
 How will it go on?
 How will it end?
 Will it ever come to an end?
 China sanctions enjoy bi-partisan support in the US.
 New York Times’ Thomas L. Friedman:
“Donald Trump is not the American president America deserves.
But he sure is the American president China deserves.”
“It took a human wrecking ball to get China’s attention.”
 Financial markets so far seem not to be frightened – yet (GiS).
“The markets assume that the U.S.-China trade crisis is only temporary and
that the crisis’ impact on global commerce will remain limited.
If these assumptions are wrong, however, the resultant uncertainty could hurt global business”
 Observers increasingly conclude that the U.S.-China trade war could drag on for a long time still.
 So, it is worth digging a bit deeper.

Megatrends
The end of globalisation?
In McKinsey & Company stated …
Globalization in the sense of off-shoring manufacturing is in retreat since mid 2000s.
It did not recover after the financial crisis.
 Increasingly …
 Services are traded rather than goods.
 Trade relations spanning the globe are replaced by intraregional trade.
 Low-skill jobs are automated
 The long China effect is fading …
 Cheap labour availability caused automation efforts to pause for ~ 40 years .
 Ageing populations in some parts of the world,
 Rising wages in China
… cause full-scale automation of manufacturing processes have a come-back.
 Globalisation anyway is a thing of the past.

Misconceptions
In the China trap?
 Recent history of the West’s relationship with China is a story of …
 Repeated misunderstandings,
 Misconceptions and
 Outright beginner errors.
 Governments,
investors and
the whole corporate world …
 Sleepwalked into an adventure,
 Which in most cases turned out to become a disaster.
 Vladimir Ilyich Ulyanov (Lenin) :
“When it comes time to hang the capitalists,
they will vie with each other for the rope contract.”
 China however wasn’t that blunt so far
 China acted smartly in most cases – and is expected to continue.

Misconceptions
In the China trap?
 The China dream
The illusion of 400 million customers
 Why China failed to fail
A lesson for the West
 Market vs. Strategy
Which will prevail?
 The ‘awakening’
BRI & Made in China 2015

Misconceptions - The China dream
The illusion of 400 million customers
 Carl Crow‘s “400 Million Customers”, 1937 kick-started an
unprecedented race for an apparently huge market.
 Competition often left commercial reason behind.
 Neither low purchasing power, lack of demand, nor the restrictive regulations put the
global crowd of investors off.
 China didn't even have to lure Western investors into the trap.
 Blinded by their dreamed-up returns they pushed forward towards the trap on their
own.
 Western nations have seen their investments & dreams turn to dust.
 In 2005 James McGregor counted even “One Billion Customers”.
 He explains, that business in China was never quite what it seemed.
 Many foreign executives were left with their pockets turned inside out.
 China is not alone playing this game either.
 This is no surprise - we should have known before by what rules China had to play.

Misconceptions - China failed to fail
A lesson for the West
 The NY Times wrote on 2018-11-18:
 “China now leads the world in the number of homeowners, internet users,
college graduates and, by some counts, billionaires.
 Extreme poverty has fallen to less than 1 %.
 An isolated, impoverished backwater has evolved into a significant rival to the US.
 During this time, 8 U.S. presidents assumed that …
 Prosperity would fuel popular demands for political freedom
 Bring China into the fold of democratic nations.
 Or the Chinese economy would falter under the weight of authoritarian rule and
bureaucratic rot.
 But neither happened. Instead, China’s communist leaders have defied expectations
again and again.
 They presided over 40 years of uninterrupted growth, often with unorthodox policies
the textbooks said would fail.”
 And so it may continue

Misconceptions - Market vs. Strategy
Which concept will prevail?
 James McGregor stated:
 Xi said in a speech that China has a 15-year long march to take on the United
States and overcome.
 That’s how they’re thinking.
Meanwhile, leaders in the US are yelling at each other on cable news every day.
 China is always looking for strategy and logic.
Trump never gets near either of those things.
 Market forces in global trade favour the incumbents.
 To get there, some national champion nursery has to be set up first.
 To succeed is less about the Art of the Deal, economic short-termisn and
eying the next favourable election outcome.
 It needs long-term planning, strategies on state-level, economic political
testbeds, and permanent adaptation.
 To outcompete China again, the US would need to treat this situation like a
Sputnik moment - otherwise China will.

Misconceptions - The ‘awakening’
Belt & Road Initiative
 …
 McGregor: China had America in a really
good position - and they overreached.
 In 2013, Xi Jinping announced the launch of
the Silk Road Economic Belt and the 21st
Century Maritime Silk Road.
 China’s BRI also raised fears.
 It has the potential to rearrange the global
balance of power.
 BRI investments are to be financed largely
through generous lending.
 Some debtors fear falling into a debt trap
 Ironically China here once again is proving
to be an erudite student of the USA.
 However, without taking recourse to
violence as a means of last resort when
“convincing” the participants.

Misconceptions - The ‘awakening’
Made in China 2025 - The defining moment
 With Chinas government’s ten year plan in 2015 the tide turned
 “Made in China 2025”: rapidly develop 10 high-tech industries.
 US suspects: discriminatory treatment of foreign investment, forced
technology transfers, intellectual property theft, and cyber espionage.
 McGregor:
“The U.S. should adopt a wake up, grow up, compete with China approach”,
“It’s going to be a pretty hard proposition to make China change its system.
The Chinese system is working for China better than the American system is working
for America. And that’s a real threat, we’ve got to make our system work better.“

Hegemony
The underlying fabric
 Chinas rise
Is it inevitable?
 Power politics scenarios
What is past is prologue?
 Hegemony
China learning from the US

Hegemony
Chinas rise - Is it inevitable?
 With the exception of the last 200 years Chinas economy was the largest in the world.
 During the last 40 years however, the country was recovering at a breath-taking speed.
 The IMF last year proclaimed China could become the world’s largest economy by 2030.
 HSBC too projected China is on course to be the world’s biggest economy by 2030.
 World Bank: in 2017 China reached just 15% of the US per capita GDP;
its population ~ 1.4 bn and that of the US hovering around 325 million (4.3 times)
 Simple projection leads to the insight that those predictions are quite straightforward.
 With this expectation in sight however counter forces seem to be awakening.
 Donald Trump said via Fox News he believes China’s intention is to “replace the US as the
superpower” but this will not happen under his watch.

Hegemony
Power politics scenarios - What is past is prologue?
 John Mearsheimer asks “Can China rise peacefully?”
 In the concept of power politics …
 There is just one regional hegemon: The US.
 A regional hegemon will not tolerate a 2nd one.
 The US will go to great lengths to contain China, violence included.
 China will attempt to dominate Asia as the best survival strategy.
 Once done it will make sure that no other hegemon emerges elsewhere.
 Is this what we are going to experience throughout the next two decades?
 The theory’s weakness …
 All actors will be driven by sober rationality.
 This cannot be expected in all cases.
 After all the first "Cold War" never turned into a hot war.
 Mearsheimer hopes that Chinas rise may prove his predictions wrong.
 It would not be the 1st time that the middle kingdom surprises western scholars and politicians.

Hegemony
China is learning from the US
 During the decades of American hegemony, the US have developed a finely balanced
set of tools to ensure its rule effectively.
 Most of them were well camouflaged.
 Among all these activities short of war were …
 covert intervention,
 client elites,
 psychological torture,
 worldwide surveillance,
 cyberwar,
 space competition,
 trade pacts, and
 military alliances.
 China is already, an avid student of the hegemonial measures of the USA.
 In terms of generous loans to 3rd World countries e.g. for BRI, China has proven to play
no less skilful on the instruments of power.
 We can even expect China to apply its own version of the Monroe Doctrine.
 Regardless of the outcome of the current trade war, there is a more compelling
undercurrent to the contenders’ visible actions: the forces of power politics.

Consequences
The dichotomy of the world
 Manufacturers fleeing China
 No losing face
 Choosing sides
 China striking back

Consequences
Manufacturers fleeing China
 The trade war is already pushing businesses out of China - and it could be permanent.
 However, this trend begun before these dramatic events.
 The China impact on the world economy lasted about 30 to 40 years.
 Driven by cheap labour costs and a huge potential of hard-working labourers, China
became the manufacturing powerhouse.
 Wages in China rise & abandoning the '9-9-6' working habits are questioned.
 China morphs from industrialising country to an industrialised one.
 Growth rates return to moderate and more sustainable ranges.
 Chinese businesses themselves look for alternatives.
 Now Africa becomes China’s new China.
 Sino-US-trade war is just accelerating an immanent development.

Consequences
No losing face
 China will certainly be ready to engage in compromises – to buy time.
 The red line the country will never cross: agreeing to a humiliating trade pact.
 Losing face will definitely never be an option.
 The haunting memory of Chinas humiliation by the great colonial western
powers, the plundering of its resources, the opium war is all too fresh
 Donald Trump is not likely to respect the Chinese people’s national pride.
 He will rather will try to kick them publicly.
 Strategic thinking with history in mind -
clashes with deal making and quarterly reporting cycles.
 No trade deal is to be expected hence.

Consequences
Choosing sides
 The Huawei story tells us, what is about to come.
 Huawei is certainly one of Chinas flagships when it comes to advanced technology.
 The US threatens each one doing business with Huawei with severe consequences
 It discourages them in taking part in Chinas “Belt and Road Initiative”.
 Trump administration is seeking to thwart ‘Made in China 2025’.
 In consequence the trade conflict may lead to a division of the world into two spheres.
 It is already happening - just as it did during the Cold War.
 Unclear, who will be the winner.
 Smaller countries will be the losers if they haven’t chosen side yet.
 For countries like Pakistan or Singapore will be almost impossible.
 Germany like many other countries it will suffer serious losses of prosperity.

Consequences
China striking back
 China ran a trade surplus of $420 billion with the United States last year.
 It is obvious that it can’t come close to matching the US in terms of tit-for-tat tariffs.
 But it does have other arrows in its quiver.
 Expert commentary and internet speculation have focused on three:
 An embargo on imports of soybeans from the United States,
 An embargo on exports of rare earth metals to the United States, and
 The diversification of China’s currency reserves away from the dollar.
 Leaving the USD ecosystem & persuading partners to deal outside the $-world would
leave the US most vulnerable and cause its harshest response.

Conclusion
What we have to expect
 Currently Trump and Xi may meet on the G20 summit in Osaka & ease the tensions.
 However, the damage is done. It can’t be undone anymore.
 Is this the beginning of a total segregation of all important economic activities?
 Nouriel Roubini: A full-scale cold war thus could trigger a new stage of de-globalization,
a division of the global economy into two incompatible economic blocs.
 The consequences would be even more severe than those of the previous Cold War.
 What started as a trade war may escalate into a permanent state of mutual animosity.
 US Security Strategy deems China a strategic “competitor” to be contained on all fronts.
 China and the US will both expect all other countries to pick a side.
 Problem: Many US allies now do more business with China than with America.
 Some of them may well be squeezed to an untimely death.
 Graham Allison sees even an inevitable pretext of two contenders destined for war.
 Alfred W. McCoy sees 5 scenarios by which the American century may prematurely end ~ 2026.
 I agree with Joschka Fischer: We will see “The End of the World As We Know It”.

www.diplomatic-council.org
Questions - Comments - Suggestions?
2019-06-28 26

G2 - US vs. China

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