A step forward

Always impossible to know what’s going on behind the scenes, and results matter more than gestures, but this seems like a good thing. As the saying goes, jaw, jaw is better than war, war. And it’s not all theatrics; grand symbolic gestures can create political space for outcomes that would otherwise be hard to imagine.

I also view it as a positive sign that Mr. “Troika of Tyranny” was off in Mongolia during this event.

Japan’s Belt and Road

Abe and Modi in 2016

In light of a certain state visit ongoing in Tokyo, I nominate this as the fact of the day (emphasis mine):

While Japan’s “lost decades” and China’s rise have led most observers to overlook Japan’s role in Southeast and South Asia, the country has remained an important source of development assistance, public lending, and private investment across the region, particularly as Japanese companies have extended their supply chains deeper into Asia. At the end of 2016, Japan’s stock of foreign direct investment in major Asian economies (excluding China and Hong Kong) was nearly $260 billion, exceeding China’s $58.3 billion. It is undeniable that Japan has increasingly had to jockey with China for high-profile projects as China’s footprint across Southeast and South Asia has grown. But Japan’s longstanding relationships and its long record of private and public investment across the region make it a worthy competitor with China.

Japan’s Belt and Road, particularly with US backing, could give China’s massive trade and infrastructure strategy a serious run for its money. And Japan is still the world’s third-largest economy…

Some economic doom & gloom

David Stockman says it wouldn’t be prudent

A sobering assessment of America’s economic health by a former Director of the Office of Budget and Management (OBM). Whether you agree or disagree with his analysis, it’s worth a listen:

Listen to “Josh Jalinski Talks to David Stockman, Author & Former Budget Director” on Spreaker.

Quoth David Stockman:

The trade war with China is aimed at the wrong problem: it’s not bad trade deals or even nefarious activities by the Chinese state, the problem is bad money – this tremendous money-pumping that the Fed has done over the last 20 or 30 years, which has really undermined the Main Street economy and caused production and good jobs to shift offshore.

[…]

At the federal level, we now have [$]22 trillion of debt… If you take households that have 15 and a half trillion of debt, business that has about 14, you take the federal government, state and local, and then financial institutions, the total debt in our society today is $70 trillion, sitting up there on top of a GDP that’s barely 20 trillion. So we have three and a half times as much debt as we have income, and if you look at history… that is off the charts, that is a warning sign that this system is not sustainable. When we had a healthy economy, pre-1971, we had in fact a whole century of good economic prosperity and progress, from 1870 to 1970, the average debt-to-GDP ratio for the whole economy was 150%, not 350%.

Pork

This is an interesting thread by investor Adam Townsend about agriculture and US-China trade that sheds light on China’s monumental takeover of Smithfield Pork in 2013. What happens when you sell domestic farmland to a Chinese government-supported company? Worth reading in full, despite the terrible formatting (thanks to its origins on Twitter):

1/ This is a kick a*s thread about China, tech theft, its food supply and its pollution. You are about to become an expert, lets begin…
Technology…
CFIUS (Committee on Foreign investment in the US) is made up of 32 different federal agencies…
2/ that review foreign purchases that could affect U.S. security such as access to technology, military contracts, installations or other sensitive information. Agriculture isn’t part of the CFIUS mandate nor is the USDA or FDA.
3/ The committee isn’t required to review any deals, relying instead on outsiders or other government agencies to raise questions about the appropriateness of a proposed transaction.

The most common foreign investor that hits the CFIUS radar is China. Let’s peel that onion
4/ President Obama stopped a Chinese investment fund from acquiring the U.S. subsidiary of a German semiconductor manufacturer
In September 2017, Trump halted a China-backed investor from buying the American semiconductor maker Lattice
5/ A Chinese company’s plan to acquire the American money transfer company MoneyGram fell apart after CFIUS expressed their concerns that the personal data of millions of Americans would be exposed
6/ CFIUS advised against a Chinese group’s attempt to buy Xcerra, a Massachusetts HQ’ed tech company
Trump blocked the purchase of the chipmaker Qualcomm by Singapore-based Broadcom Ltd.on the advice of CFIUS

Now we gotta talk about Chinese pollution. Buckle up…
7/ Only (about) 11 percent of Chinese land can be farmed. Most of its tremendous land mass is inarable, degraded by erosion, salinization, acidification, industrial effluent, sewage, excessive farm chemicals and mining runoff.
8/ Chinese rivers have been drying as demand from farms and factories have depleted them. Of the ones that remain, 75 percent are severely polluted, and more than a third of those are so toxic they can’t be used to irrigate farms,

Now we gotta talk about food…
9/ Chinese authorities have encouraged companies to gain greater control over the entire supply chain for imported agricultural products.

Enter the United States…China’s average annual water resources are less than 2,200 cubic meters per capita. The United States, by contrast
10/ is about 9,400 cubic meters of water per person
The United States has six times more arable land per capita
Pork
The Chinese currently eat 88 pounds per capita annually (Americans eat 60 pounds) They produce and consume half of the world’s pork, so…
11/ when there are fluctuations in their domestic production – even small fluctuations – it can really increase their need for imports.

To meet the growing demand, China’s hog farms have grown and multiplied, and more than half of the globe’s pigs are now raised there.
12/ But even so, its production can’t keep up with the pork emand
US pork exports to China went from about 57,000 metric tons in 2003 to more than 2.31 million metric tons (mt) in 2016 which converts to $5.94 billion

It’s cheaper to produce pork in the US than in China.
13/ Our meat industry churns out hogs for about $0.57 per pound, versus $0.68 per pound in China’s new, factory-scale hog farms. The main difference is feed costs. US pig producers spend about 25% less on feed than their Chinese counterparts. We have more abundant land, water…
14/ …and grain resources.
“Control oil and you control nations; control food and you control the people.”
So, China buys Smithfield Pork…

In an effort to cut out the middleman, China is trying to circumvent the American farmer. Instead of buying food from farmers who…
15/ … work their own land, they want to own and operate these American farms themselves—as well as the livestock barns and slaughterhouses.

Chinese consumers, pay a large premium for US pork as it is viewed as higher quality due to our strict food safety laws.

Shaunghui,…
16/ a Chinese meat-processing company in 2013, purchased Smithfield for 30 percent over its market value. It was the largest purchase of a U.S. company by a Chinese firm and the first acquisition of a major American food company by a Chinese business.

U.S. Treasury Department
17/ allowed the purchase to go forward after assurances from Smithfield CEO Larry Pope that there was no connection between Shaunghui and the Chinese government. A year later it was discovered that the Chinese government did have a connection to Shaunghui.
18/ he Communist Party supported the Smithfield purchase with “preferential policy”, as well as “investment,” Zhang Taixi, the government-appointed president of WH Group (the corporate name Shaunghui adopted in 2014), told reporters!
19/ The WH Group advanced the China Communist Party aims to own the entire production chain for pork with the least geographic distance between U.S. pork production and the Chinese market.

One of the benefits to owning every aspect of production from feed through packaging…
20/ is that you can increase production on demand.

ChemChina, a China Communist Party owned company, recently bought Syngenta, a Swiss agrichemical company, for 43 billion dollars, and this creates a bigly foothold in feed production.
21/ What if the Chinese government becomes of the largest players in American agriculture.

We’ve handed over a vertically integrated system to a foreign government.
22/ Side effect of that is the damage left in its wake, production leads to more barns being built and, in turn, waste coming out of those barns. You need more feed for those pigs, so you’re raising more row crops and putting more of that waste onto the fields.
23/ Between 2007 and 2012, Iowa had the largest increase in hog and pig sales of any state in the country, a jump of $1.9 billion. The number of polluted Iowan waterways increased 15 percent between 2012 and 2014. Not only do the waste pits used to capture manure…
24/ …from large hog operations produce antibiotic-resistant bacteria, the pathogens can travel miles away. When a foreign investor buys land, local population loses farming rights, which can lead to people losing their homes, livelihoods, and access to resources like water.
25/ …to preserve its well-being, Iowa outlawed selling farmland to foreign buyers. The median age of the American farmer is 55, in the next five years about 92,000,000 acres will go up for sale.

Rail of fail

Nearly 420 million people are reported to have used China’s high-speed rail system during the annual Spring Festival holiday that has just wrapped up. Late last year, China opened the Vibrant Express, Hong Kong’s first bullet train, which zips passengers from the Special Administrative Region to Guangzhou in 48 minutes.

Meanwhile, in the US:

California Gov. Gavin Newsom announced Tuesday he’s abandoning a plan to build a high-speed rail line between Los Angeles and San Francisco, a project with an estimated cost that has ballooned to $77 billion.

“Let’s be real,” Newsom said in his first State of the State address. “The current project, as planned, would cost too much and respectfully take too long. There’s been too little oversight and not enough transparency.”

The idea long championed by Newsom’s predecessor, Jerry Brown, is years behind schedule. The latest estimate for completion is 2033.

Newsom, though, said he wants to finish construction that’s already underway on a segment of the high-speed train through California’s Central Valley, arguing it will revitalize the economically depressed region. He’s also replacing Brown’s head of the state board that oversees the project and pledged more accountability for contractors that run over on costs.

One can’t really blame the new governor for this, as the promise of an LA-to-SF bullet train, which California voters approved in 2008, has always been a huge scam:

When California voters approved construction of a bullet train in 2008, they had a legal promise that passengers would be able to speed from Los Angeles to San Francisco in two hours and 40 minutes.

But over the next decade, the state rail authority made a series of political and financial compromises that slowed speeds on long stretches of the track.

The authority says it can still meet its trip time commitments, though not by much.

Computer simulations conducted earlier this year by the authority, obtained by The Times under a public records act request, show the bullet train is three minutes and 10 seconds inside the legal mandate.

Such a tight margin of error has some disputing whether the rail network will regularly hit that two-hour-40 minute time, in part because the assumptions that went into those simulations are highly optimistic and unproven. The premise hinges on trains operating at higher speeds than virtually all the systems in Asia and Europe; human train operators consistently performing with the precision of a computer model; favorable deals on the use of tracks that the state doesn’t even own; and amicable decisions by federal safety regulators.

And let’s not even get started on the New York City subway.

Actually, let’s.

The Monroe Doctrine in action

Breaking Bad territory

The US is reasserting the Monroe Doctrine in Venezuela, and some countries are not happy about this:

Russia and China pushed back against the U.S. recognition of Venezuela’s opposition leader as president and warned against further inflaming the political crisis in the Latin American country, which relies on billions of dollars in investments from the two countries.

Russian President Vladimir Putin expressed support to President Nicolás Maduro in a telephone call in which he said he favored peaceful dialogue to resolve the crisis, the Kremlin said Thursday.

[…]

China, another major investor in Venezuela, said it was highly concerned about the situation in Venezuela and warned against military intervention.

[…]

Beijing has extended some $55 billion in energy-related loans alone to Venezuela, according to calculations by the Center for Strategic and International Studies in Washington.

Unable to come up with hard currency to service these loans, Caracas has been paying in discounted barrels of oil—but struggled even to do that after prices collapsed in 2014. China agreed to extend an additional $5 billion credit line to Venezuela in September, 2018.

Russia has invested a total of over $4.1 billion in Venezuela. In addition to the two countries’ trade and joint investment in oil and gas projects, they are also cooperating on the military front: Russia provides Kalashnikov rifles, helicopters, anti-aircraft missile systems, and jet fighters to Caracas, and is building a Kalashnikov production plant in Venezuela that is expected to open this year. The WSJ article might have added that Russia sent a pair of nuclear-capable strategic bombers to Venezuela last month.

The US is being condemned in some quarters for, in effect, appointing a president for Venezuela. The reality is that the world tends to operate more along the lines of a collection of drug cartels than the principles of international law, and the US is not going to allow its two main geopolitical rivals to meddle in its neighborhood indefinitely. Like Walter White in that great scene in Breaking Bad, the US is telling Russia and China to stay out of its territory.

Refresher on the Monroe Doctrine:

In his December 2, 1823, address to Congress, President James Monroe articulated United States’ policy on the new political order developing in the rest of the Americas and the role of Europe in the Western Hemisphere.
President James Monroe

The statement, known as the Monroe Doctrine, was little noted by the Great Powers of Europe, but eventually became a longstanding tenet of U.S. foreign policy. Monroe and his Secretary of State John Quincy Adams drew upon a foundation of American diplomatic ideals such as disentanglement from European affairs and defense of neutral rights as expressed in Washington’s Farewell Address and Madison’s stated rationale for waging the War of 1812. The three main concepts of the doctrine—separate spheres of influence for the Americas and Europe, non-colonization, and non-intervention—were designed to signify a clear break between the New World and the autocratic realm of Europe. Monroe’s administration forewarned the imperial European powers against interfering in the affairs of the newly independent Latin American states or potential United States territories. While Americans generally objected to European colonies in the New World, they also desired to increase United States influence and trading ties throughout the region to their south. European mercantilism posed the greatest obstacle to economic expansion. In particular, Americans feared that Spain and France might reassert colonialism over the Latin American peoples who had just overthrown European rule. Signs that Russia was expanding its presence southward from Alaska toward the Oregon Territory were also disconcerting.

[…]

As Monroe stated: “The American continents … are henceforth not to be considered as subjects for future colonization by any European powers.” Monroe outlined two separate spheres of influence: the Americas and Europe. The independent lands of the Western Hemisphere would be solely the United States’ domain. In exchange, the United States pledged to avoid involvement in the political affairs of Europe, such as the ongoing Greek struggle for independence from the Ottoman Empire, and not to interfere in the existing European colonies already in the Americas.

TLDR: “This is ARE hemisphere.”

Hypersonic race

Russia says it has conducted another successful test of a nuclear-capable hypersonic missile:

Moscow’s hypersonic glide vehicle, dubbed Avangard, has been in development for three decades and can travel at least five times the speed of sound, or about one mile per second.

The weapon, which the U.S. is currently unable to defend against, is designed to sit atop an intercontinental ballistic missile. Once launched, it uses aerodynamic forces to sail on top of the atmosphere.

Sources familiar with U.S. intelligence reports assess that the Russian hypersonic glide vehicles are equipped with onboard countermeasures that are able to defeat even the most advanced missile-defense systems. The weapons are also highly maneuverable and, therefore, unpredictable, which makes them difficult to track.

The US appears concerned:

The Defense Department is looking to step up its development of hypersonic weapons — missiles that travel more than five times faster than the speed of sound — DOD leaders said at the National Defense Industrial Association-sponsored “Hypersonics Senior Executive Series” here today.

“In the last year, China has tested more hypersonics weapons than we have in a decade,” said Michael Griffin, undersecretary of defense for research and engineering. “We’ve got to fix that.”

Russia also is involved in hypersonics, Griffin said. “Hypersonics is a game changer,” he added.

If Russia were to invade Estonia or China were to attack Taiwan tomorrow, Griffin said, it would be difficult to defend against their strike assets. “It’s not a space we want to stay in,” he told the audience.

Let’s you and them fight

As usual in geopolitics, there is more going on behind the scenes than some of the more breathless news reports would suggest:

The Russian forces currently in Syria will take action to restrain Hezbollah and Iranian activity there, according to understandings reached by Israel, the United States, Jordan and Saudi Arabia with Russian President Vladimir Putin, a Jordanian official confirmed to Israel Hayom.

The understandings are the product of behind-the-scenes diplomatic talks that were underway prior to U.S. President Donald Trump’s decision this week to withdraw American forces from Syria.

According to the terms of the understanding, Russia will continue to give Israel the freedom to strike Hezbollah and Iranian targets and weaponry that threaten the “balance of power” in Syria. According to the Jordanian official, it was these understandings between Trump and Putin that paved the way for the U.S. decision to pull its forces from Syria.

Other high-ranking Jordanian officials have confirmed that Jordan, Israel and Saudi Arabia are working together to contain the threat posed by Iran and Hezbollah’s presence in Syria. Several of them emphasized that U.S. officials had made it clear that U.S. intelligence agencies would increase cooperation with Israel, Jordan and Saudi Arabia, particularly on sharing intelligence, in a joint attempt to counter Iran’s attempt to create a contiguous Shi’ite corridor from Tehran to Beirut.

It looks like the Middle East is increasingly going to have to sort itself out, with a little help from nearby Russia. The consequences are hard to predict, but the US withdrawal from Syria almost certainly reduces the risk of conflict between the US and Russia, as well as between the US and its NATO ally Turkey, which threatened earlier this month to launch an offensive against the US-backed Kurdish forces in Syria.

Pulling out

Evacuation of Saigon

Sometimes you just have to go

M K Bhadrakumar of Asia Times praises the decision to pull US troops out of Syria:

To take the last argument first – what will be the impact on the Syrian situation? To be sure, ISIS is down, but not quite out. But then, ISIS is today only residual terrorism, after the huge defeat in Iraq.

At any rate, the brunt of the fight against the ISIS was borne by the Syrian government forces and their allies – remember Aleppo? Their grit to finish the job has never been in doubt and there is no reason to fear any let-up.

In fact, their interest lies in stabilizing the security situation in the quickest possible way so the political process leading to a post-conflict Syrian order can be speeded up.

Ironically, the departure of the US forces could help matters, since in many ways the US military presence only impeded the anti-ISIS fight in Syria. It is well known that terrorist groups took shelter in the US-led security zones in eastern Syria.

The Al-Tanf base and its 50-square-kilometer security perimeter was only the most glaring example. Again, the “no-fly zones” prevented Syrian and Russian jets from hunting down the ISIS cadres and de facto amounted to US air cover for terrorists.

It’s really very hard to understand what the US strategy was in Syria. Was there even a specific strategic goal? What was the desired end-state of this campaign?

Personally I suspect most Americans’ reaction to this news has been: Wait, we had troops in Syria? Yeah, the public was never consulted about this, at all. I am not the only person who finds it bizarre that an ostensibly democratic nation can be engaged in a major foreign military campaign for years on end without a scintilla of public approval, or even knowledge, let alone a formal declaration of war. Did you know the US has at least a dozen military bases in Syria? What is going to happen to those?

Regardless, this is excellent news for the US. Give non-intervention a chance!

US wants China to show it the money

Wang Jisi Peking University

From David Cowhig’s Translation Blog, this is a good interview with a Chinese academic regarding the increasingly contentious state of US-China relations. Wang Jisi is Dean of the School of International Studies at Peking University. While I don’t necessarily agree with all of his points, he has a very calm and measured perspective on things that I find refreshing:

Zhao Lingmin: Why does Trump want to launch a trade war against China? Is it to hurt China?

Wang Jisi: My understanding is that American entrepreneurs still do not want to withdraw from China. They think they can make a lot of money in China. After all, the Chinese market is big, and in the past 30 or 40 years, some very strong path dependencies have been created – how can such a big and complex supply chain simply move somewhere else? There are not many places to choose from. For the present, these enterprises are opportunistic. They say that they want to exert pressure on China on the US government. On the other hand, they say to China that if you give me preferential policies, I will not leave. I think there are still many American companies see things that way. They have a wait-and-see attitude.

Their feelings about China are complex. On the one hand, they are very dissatisfied with various restrictive policies. On the other hand, they also realize that China is not the only country with these restrictions. Many many developing countries have similar restrictions. If you move your company to Egypt, don’t you think that the Egyptian government will regulate you? When they think about it, China is still good a good place to be. They can make money here. Therefore, they think that they should exert pressure on the Chinese government to continue with reform and open up some more industrial sectors to foreign investment.

Therefore, the reason the United States launched a trade war against China was not to pull out of China or to completely “decouple” from China, but to change China’s behavior so that it can make more money. This conclusion I have drawn from decades of involvement in Sino-US economic and trade relations. Some people in the US government and others in some American companies, however, are also preparing for the worst: decoupling of many of the economic links between China and the United States. This is dangerous.

[…]

Zhao Lingmin: In addition to the trade imbalance, what other causes of US dissatisfaction in the US – China relationship?

Wang Jisi: The US military is unhappy. The military is a big interest group. A few year ago, it did not believe that China was strong enough to pose a threat to the United States, and that China did not mean to truly exclude the United States from the Asia-Pacific region. During the past two years, China has taken a very firm position on the South China Sea issue. The United States has begun to feel that that the Chinese military is much stronger than before. They feel that if the US does not exert pressure on China, it will not have a foothold in the Western Pacific. The military, including the military-industrial complex, are hardliners on China policy. Formerly, when terrorism was the top concern, there was a lot of military spending and a great many companies and others forming a huge chain of interests linked to the manufacture and sale of weapons. Now, by pointing to China, contradictions with China on military security issues can be used to argue for more military spending.

In addition, the Confucius Institutes in the United States have made Americans feel that China’s values are different from those of the United States. China’s promotion of Chinese values in the United States is very difficult for Americans to accept. The ideological contradictions between China and the United States are also reflected their attitudes towards Chinese students and scholars studying in the United States.

I wrote about Confucius Institutes here.

Zhao Lingmin: Some say that the pressure that the United States has put on China was to a great extent the cause of the firm line of Chinese foreign policy over the past several years.

Wang Jisi: I am not here to make political and moral judgments. If we are looking for the cause, it was the change in Chinese policy that led to adjustments in US policy towards China. In recent years, China’s strength has been increasing rapidly along with its international influence. China has increased its operations maintain protect China’s territorial sovereignty and maritime rights. China has put increased pressure on “Taiwan independence” and other splittist forces. China has strengthened the leadership of the Communist Party. The United States has become increasingly uncomfortable with China’s actions and has begun to react strongly. We can expect that these US reactions to Chinese actions will become ever more intense. The US may switch from the defensive to the the offensive.

The cause-and-effect relationship we see today also applies to 1949 and 1979. In those two years, changes in Chinese internal affairs led to big changes in Sino-US relations. Changes in US internal affairs have always had relatively little impact on Sino-US relations despite the many different presidents since then and many different political currents swept the US during those decades. The financial crisis broke out in 2008. That was major event for the United States. Did it cause a major change in Sino-US relations? Not at all.

I very much agree with my colleague Professor Tao Wenzhao that for over 200 years, the United States has never changed its strategic goals for its relationship with China:

  • Free flow of goods and capital, and
  • Free free flow of information and values.

Chinese have always had reservations or imposed boycotts to oppose two goals. We should criticize and have reason to criticize the United States but we should realize that China’s own actions have changed Sino-US relations and US perceptions of China.