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.

China no longer growing at Ludicrous Speed

Guangdong province factory

To the extent that official GDP figures mean anything at all, it’s worth noting that Chinese growth is slackening as trade and manufacturing get hit hard:

China is expected to report on Monday that economic growth cooled to its slowest in 28 years in 2018 amid weakening domestic demand and bruising U.S. tariffs, adding pressure on Beijing to roll out more support measures to avert a sharper slowdown.

[…]

Analysts polled by Reuters expect the world’s second-largest economy to have grown 6.4 percent in the October-December quarter from a year earlier, slowing from the previous quarter’s 6.5 percent pace and matching levels last seen in early 2009 during the global financial crisis.

That could pull 2018 gross domestic product (GDP) growth to 6.6 percent, the lowest since 1990 and down from a revised 6.8 percent in 2017.

We have a culprit:

Surprising contractions in December trade data and factory activity gauges in recent weeks have suggested the economy cooled more quickly than expected at the end of 2018, leaving it on shakier footing at the start of the new year.

Sources have told Reuters that Beijing was planning to lower its growth target to 6-6.5 percent this year from around 6.5 percent in 2018.

Tepid expansion in industrial output and weaker consumer spending is squeezing companies’ profit margins, discouraging fresh investment and raising the risk of higher job losses.

Some factories in Guangdong – China’s export hub – have shut earlier than usual ahead of the long Lunar New Year holiday as the tariff war with the United States curtails orders. Others are suspending production lines and cutting back on workers’ hours.

Beijing slowing credit growth is also to blame:

Qin Nan, the chief executive of a Beijing-based manufacturer, needs to borrow at least Rmb5m ($740,000) to expand production of his company’s air purifiers and air conditioners. But because his company lacks an equivalent amount of collateral in property and other assets, Chinese banks were willing to lend only Rmb2m.

[…]

Mr Qin’s grievances, which he recently aired on social media, are increasingly common among private sector companies in the world’s second-largest economy, which have been hit by a squeeze on lending as Beijing has worked to reduce the economy’s dependence on debt-fuelled stimulus. If their complaints are not addressed, the consequences could be disastrous for Chinese officials as they try to avoid a precipitous deceleration in economic growth, which last year slowed to a 28-year low of 6.6 per cent, according to data released on Monday.

Interestingly, according to data cited by the article, “non-state companies” (including foreign-invested enterprises) received only 11% of new loans issued by the official banks in 2016, despite accounting for more than half of total economic output. (Private sector firms received 52% of new loans in 2012.) More fodder for the great debate about how much of China’s economy is really private.

More:

Mr Xi and Mr Liu [the vice-premier] appear to have underestimated both US President Donald Trump’s willingness to launch an all all-out trade war with China, which has sapped investor and private-sector investment, and also their ability to force the country’s state-controlled banking sector to direct more lending to non-state companies.

Also worth bearing in mind:

Yes, China’s 6.6% growth in 2018 is its slowest in nearly 3 decades. But given the size of its economy, that represents about $1.2trn of additional demand, nearly twice as much as it generated with 14% growth in 2007.

(And yes, we should take official figures with a big pinch of salt. And yes, China faces big downside risks. But it is worth taking a moment to look past the growth rate at the fact that, within a decade, we’ve gone from talking about a $4trn economy to a roughly $13trn economy.)

Here’s another angle on it:

China GDP growth global comparison

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.

Huawei insanity

The Huawei Affair just keeps escalating. I hope this doesn’t lead to a Sino-American war. It’s really not worth it.

A second Canadian has just disappeared into detention in China – by sheer coincidence, of course.

Meantime, the permanent bureaucracy shows the president who’s boss:

Despite President Trump’s statement that he might intervene in a criminal case against the chief financial officer of Huawei Technologies Co., such a move would break from longstanding tradition and advisers have warned him that his options are limited, according to people familiar with the matter.

When news broke last week of the arrest of Meng Wanzhou, threatening the president’s trade talks with China, he asked for options, according to one person, and advisers told him the arrest and potential prosecution of Ms. Meng was essentially out of his hands.

The arrest was a Justice Department matter, they said, and the White House should stay out of it for now, this person said. There are no immediate plans to intervene in the matter, officials added.

Trump can and absolutely should make the DoJ drop this case:

Former Justice Department officials said that while Mr. Trump’s intervention in the Meng case would be a departure from the norms against White House involvement in criminal cases, there is nothing in the Constitution that bars it. Such actions are more common – though still unusual – if the action is framed as a national-security matter.

While the circumstances were different, President Obama pushed the Justice Department to drop cases against several alleged Iran-sanctions violators while negotiating a plan for that country to curb its nuclear program.

David Goldman is probably right that certain elements of the national security state are trying to sandbag Trump.

Here’s an explainer on the legal niceties of the case. All well and good, but it blithely ignores the insanely provocative nature of this move, how it is *perceived* outside the US (backlash is bad), as well as the selective way in which the law is being applied:

The arrest of Huawei chief financial officer Meng Wanzhou is a dangerous move by US President Donald Trump’s administration in its intensifying conflict with China. If, as Mark Twain reputedly said, history often rhymes, our era increasingly recalls the period preceding 1914. As with Europe’s great powers back then, the United States, led by an administration intent on asserting America’s dominance over China, is pushing the world toward disaster.

The context of the arrest matters enormously. The US requested that Canada arrest Meng in the Vancouver airport en route to Mexico from Hong Kong, and then extradite her to the US. Such a move is almost a US declaration of war on China’s business community. Nearly unprecedented, it puts American businesspeople traveling abroad at much greater risk of such actions by other countries.

It may not be kidnapping but it certainly looks like kidnapping. From FT:

To put the incident’s shock value in an American context, it was as if a daughter of Steve Jobs, who was following him up the corporate ladder at Apple, had been detained in Moscow pending her possible extradition to Beijing.

The hypocrisy of this move against an extremely high-profile Chinese businesswoman is a little hard to take:

Meng is charged with violating US sanctions on Iran. [Ed: Not quite.] Yet consider her arrest in the context of the large number of companies, US and non-US, that have violated US sanctions against Iran and other countries. In 2011, for example, JPMorgan Chase paid US$88.3 million in fines for violating US sanctions against Cuba, Iran and Sudan. Yet chief executive officer Jamie Dimon wasn’t grabbed off a plane and whisked into custody.

And JPMorgan Chase was hardly alone in violating US sanctions. Since 2010, the following major financial institutions paid fines for violating US sanctions: Banco do Brasil, Bank of America, Bank of Guam, Bank of Moscow, Bank of Tokyo-Mitsubishi, Barclays, BNP Paribas, Clearstream Banking, Commerzbank, Compass, Crédit Agricole, Deutsche Bank, HSBC, ING, Intesa Sanpaolo, JP Morgan Chase, National Bank of Abu Dhabi, National Bank of Pakistan, PayPal, RBS (ABN Amro), Société Générale, Toronto-Dominion Bank, Trans-Pacific National Bank (now known as Beacon Business Bank), Standard Chartered, and Wells Fargo.

None of the CEOs or CFOs of these sanction-busting banks was arrested and taken into custody for these violations. In all of these cases, the corporation – rather than an individual manager – was held accountable. Nor were they held accountable for the pervasive lawbreaking in the lead-up to or aftermath of the 2008 financial crisis, for which the banks paid a staggering $243 billion in fines, according to a recent tally.

More on Huawei CFO arrest

We learned last week why the US wants Meng Wanzhou extradited:

With Ms. Meng, 46, seated inside a glass box at British Columbia’s Supreme Court, Mr. Gibb-Carsley laid out what had led to her arrest. He said that between 2009 and 2014, Huawei used a Hong Kong company, Skycom Tech, to make transactions in Iran and do business with telecom companies there, in violation of American sanctions. Banks in the United States cleared financial transactions for Huawei, inadvertently doing business with Skycom, he said.

The banks were “victim institutions” of fraud by Ms. Meng, Mr. Gibb-Carsley said. In 2013, articles by Reuters alleged that Huawei used Skycom to do business in Iran, and had tried to import American-made computer equipment into the country in violation of sanctions. Several financial institutions asked Huawei if the allegations were true, Mr. Gibb-Carsley said.

At the time, Ms. Meng arranged a meeting with an executive from one of the financial institutions, he said. During the meeting, she spoke through an English interpreter and presented PowerPoint slides in Chinese, saying that Huawei operated in Iran in strict compliance with United States sanctions. Ms. Meng explained that Huawei’s engagement with Skycom was part of normal business operations and that Huawei had sold the shares it once held in Skycom.

But there was no distinction between Skycom and Huawei, Mr. Gibb-Carsley said. Huawei operated Skycom as an unofficial subsidiary, making efforts to keep the connection between the companies secret. […]

Ms. Meng’s presentation to the financial institution constituted fraud, Mr. Gibb-Carsley said. Her attorney, David Martin, said the bank was HSBC.

The legal nuances of this are way above my pay grade, but this is definitely a provocative move by the US:

No business executive has EVER been arrested for sanctions violations before — much less someone of Meng’s prominence. This is not law enforcement business-as-usual but a new and dramatic escalation. How on earth could tis have been done without informing POTUS?

===

It surely could have been done without Trump’s knowledge: It is a policy measure masquerading as a criminal justice action. The president is not informed over every extradition request, and this could have been processed at Assistant Secretary level, according to friends who have worked in sanctions enforcement at a senior level.

China appears to have taken a hostage in response:

A former Canadian diplomat has been detained in China, two sources said on Tuesday, and his current employer, the International Crisis Group, said it was seeking his prompt and safe release. […]

“International Crisis Group is aware of reports that its North East Asia Senior Adviser, Michael Kovrig, has been detained in China,” the think-tank said in a statement. […]

The exact reason for the detention, which was made sometime early this week, according to the sources, was not immediately clear.

By the way, those who are inclined to voice their outrage and righteous indignation over this shocking act of American thuggishness might want to consider China’s history of detaining foreign citizens under often dubious circumstances. I would add to this list Mark Reilly, the British head of GSK’s China operations, who spent a year in and out of detention before being deported from China following a secret one-day trial.

Sadly, like anyone facing legal problems in autocratic China, Mr Reilly’s human rights have since been blithely disregarded by the authorities.

For months, he had only limited means to communicate with friends, family, and legal representatives, and was unable to see Louise, Jessica or Jill.

Then, in May, this already perilous situation took a turn for the worse. At a police press conference in Changsha, a 90-minute flight west of Shanghai, Mr Reilly was formally accused of presiding over a ‘massive bribery network’ in which doctors and health officials were illegally paid £320 million over several years.

In scenes reminiscent of a Soviet-era show trial, detectives aggressively dubbed him a criminal ‘Godfather’, who they claimed had greased palms with cash and free holidays, and arranged for associates to be given sexual favours from prostitutes.

They were shocked, shocked to find bribery and sexual favors going on here!

A question of passports

Canadian passport

Christopher Balding (“Not China Naive Balding”) explains why it matters, a lot, whether the arrested Huawei CFO Wanzhou Meng entered Canada on a Canadian passport, as has been rumored:

@BaldingsWorld

Here is what people don’t know about the dual passport situation with regards to Chinese citizens. You may ask, why would the CFO of Huawei enter Canada under a Canadian passport? There are very clear reasons and I absolute no doubt about it guarantee every Chinese 1/n

citizen with two passports knows what I am about to tell you. The simplest answer is that if you enter another country using a non-Chinese passport it is a lot easier, typically you don’t need a visa. That may be part of it but that isn’t the primary reason. 2/n

The primary reason, and let me reiterate, every Chinese I have ever met with two passports knows this, when you enter a country, which ever country passport you enter the country is what nationality the accepting country recognizes. In other words, when she entered Canada 3/n

with a Canadian passport, if that is in fact what she did, she is recognized as a Canadian citizen. If she enters France/Japan/China with a Canadian passport, she is recognized as a Canadian citizen by international law. Why does that matter you ask? If you ever get 4/n

into trouble, the only country the host country allows you to get consular or other access to is your country of citizenship. Most “Chinese” with second passports enter China using Canadian/US/Australian passports even if they have Chinese passports for this exact reason. 5/n

When Chinese with second passports travel abroad, they use the second passport not just because of the visa ease issue, but because they prefer being represented by actual humane governments. So when she entered Canada on a Canadian passport, if she did, 6/n

She was telling you, and I absolutely guarantee she knew what I’m telling you, she would rather be represented by Canada than by China. She could get a visa no problem and enter with her Chinese passport. Let me put it another way, Chinese with means are making clear 7/n

And conscious choice who they want representing them if they get jammed up, and it is rarely China. In her case, that may not be the best choice. However, I absolutely guarantee you every Chinese with two passports knows this and chooses this way. Done

1:32 AM – 7 Dec 2018

And a BBC reporter comments:

@StephenMcDonell

to @BaldingsWorld

We did ask the #China Foreign Ministry yesterday if Meng Wanzhou had entered #Canada on a Chinese or Canadian passport but no response.

1:30 AM – 7 Dec 2018

Balding again:

@BaldingsWorld

High probability: Huawei CFO not arrested directly for Huawei activities but for running transactions through closely held separate independent Cayman SPV which she runs that channeled FX transactions and profits through NYC. If that is the case, she is screwed

3:19 AM – 7 Dec 2018

This is also interesting:

China has said it will immediately implement measures agreed under a trade war “truce” with the US.

The commerce ministry’s remarks came days after Donald Trump and his Chinese counterpart, Xi Jinping, agreed to give negotiators 90 days to resolve their trade spat.

Few details have been made public about what the two sides will negotiate, a lack of clarity that has unsettled stock markets.

“China will immediately implement the consensus both sides already reached on agricultural products, energy, autos and other specific items,” a commerce ministry spokesman, Gao Feng, said at a regular press briefing. […]

Gao’s briefing came hours after the trade detente risked being rattled by the arrest in Canada of a top executive from the Chinese telecom giant Huawei at the request of the US.

Hmmm. Clearly, there is a *lot* more going on here than meets the eye. As usual, it’s stupid to rush to judgment before the facts are revealed (a thing I am definitely guilty of).

The plot thickens!

Huawei CEO Meng Wanzhou

The internet is abuzz with more news and speculation related to the stunning arrest of Huawei CFO Wanzhou Meng:

• I previously noted that “This is about as dumb as the US trying to arrest Julian Assange, but with far nastier geopolitical implications.” For what it’s worth, here’s Wikileaks weighing in:

@wikileaks

Editorial comment: The U.S. extradition of Huawei CFO Meng Wanzhou from Canada, for actions performed in China, is the same extra-territorial invasion through lawfare, that the U.S. government is applying to the UK, by extraditing Assange from the UK, for publishing in the UK.

4:26 PM – 6 Dec 2018

• Comrade Balding, an academic formerly based in Shenzhen, has some very interesting thoughts, among them:

@BaldingsWorld

There’s more coming on Huawei. I just don’t know when it’s going public

8:58 AM – 6 Dec 2018

===

Fact: timing of Huawei arrest is a great big political F+*#?!U

Fact: everyone in China knew she broke the US laws. Obama admin knew Huawei broke the law. Trump admin knew Huawei broke the law.

It’s only political if you think she should get away with it

8:48 AM – 6 Dec 2018

===

FWIW, I’ve know for a few months that there is more coming down the road with Huawei. Have confirmation from multiple unrelated people

2:08 AM – 6 Dec 2018

• The Alibaba-owned South China Morning Post ran this piece Thursday on how Meng told Huawei employees “in an internal talk on compliance that there are scenarios where the company can weigh the costs and accept the risks of not adhering to the rules.” Is China planning to throw Meng under the bus?

• Reuters correspondent “SJ” writes:

@SijiaJ

What happened on December 1? Xi & Trump met, Huawei founders’ daughter got arrested, Danhua Capital founder committed suicide

10:11 PM – 5 Dec 2018

• Wait, who committed suicide? From SCMP reporter Zheping Huang:

@pingroma

Prominent Stanford physics professor and blockchain venture capitalist Zhang Shoucheng died at age 55 on Dec 1 in the US after fighting depression, according to a family statement. Story TK

“Danhua lists 113 U.S. companies in its portfolio, and most of those companies fall within emerging sectors and technologies (such as biotechnology and AI) that the Chinese government has identified as strategic priorities,” the USTR name-checked Zhang’s VC in its Nov. 20 report

10:48 PM – 5 Dec 2018

Odd timing on that. “The family of Stanford professor Zhang Shoucheng, a world-renowned physicist and venture capitalist, denied speculation on Chinese social media that his death was connected to tensions in US-China relations or the arrest of Huawei’s CFO in Canada on Saturday.” (SCMP)

• An intriguing piece of gossip:

@maggiexiao

Replying to @BaldingsWorld

Rumor says Meng entered Canada with a Canadian passport. China recently strengthened its no-dual citizenships policy . So that means she voluntarily gave up her Chinese citizenship. If true, does China still have the rights to claim her back?

6:24 PM – 5 Dec 2018

• David Goldman comments:

First, never before has the United States attempted the extraterritorial rendition of a foreign citizen – Meng is a Chinese national – in connection with sanctions violations. It has imposed travel and banking restrictions, but seeking an arrest warrant for this is entirely without precedent. […]

The question is: Who ordered the arrest, and why?

It is possible that President Trump knew about it and sanctioned the arrest, to be sure. But it is unlikely that the president would escalate the conflict with China with the arrest of a senior executive of China’s flagship high-tech manufacturer on the same day that he sought to de-escalate the trade war.

If Trump did not initiate the arrest, who did? There are two alternative possibilities.

The first is that the order came from administration officials who believe that the United States must provoke a confrontation with Beijing now, before China becomes too powerful to intimidate. Some parts of the permanent bureaucracy and the intelligence community believe that China’s economy is fragile and that an economic war would produce an economic crisis and political instability, perhaps even toppling Xi Jinping.

That view may seem fanciful, but it is argued seriously, for example by some former senior officials of the Trump administration.

The second possibility is that Trump’s enemies in the permanent bureaucracy simply want to prevent the president from negotiating a deal with China that would enhance his image and remove risks to economic growth.

Goldman notes that the only American politician to comment publicly on the matter has been Senator Marco Rubio, who earlier this year tried to torpedo Trump’s agreement with Xi regarding ZTE. He “celebrated the arrest” in an email to Axios. Hmm.

• Huawei is in deep trouble and not only in the US. From Reuters: “Japan plans to ban government purchases of equipment from China’s Huawei Technologies Co Ltd and ZTE Corp to beef up its defenses against intelligence leaks and cyber attacks, sources told Reuters.”

• …And: “Australia and New Zealand have already blocked Huawei from building 5G networks.”

• …And: “Britain’s BT Group said on Wednesday it was removing Huawei’s equipment from the core of its existing 3G and 4G mobile operations and would not use the company in central parts of the next network.”

• I’ll close with Professor Balding again – somewhat off-topic, but it caught my eye:

I think what most people who haven’t spent a lot of time in China don’t get is how abnormal the business, economic, financial, and negotiation climate is. People see the shiny tall glass office buildings and the Ritz and they make the assumption they get it. That’s wrong 1/n

The stories that get out in public are wild. The stories that never make it into the public are at least 10x crazier. The IP theft and theft stories you hear about in public are low hanging fruit where someone falls out of favor in Beijing. I know first hand accounts of 2/n

Flat out 10 ten digit USD thefts. Companies who have valid contracts telling a foreign partner they’re ignoring a contract and they will have them abducted or jailed if they even think about trying to enforce a contract with again 10 digit USD values. You DC/NYC debutantes 3/n

simply do not understand what you are dealing with.The rules are different. You think fentanyl doesn’t get various levels of state protection? Get real. You think this IP theft and gangsterism isn’t quasi official policy? Get real. You need to be realistic about your counterparty

6:14 AM – 6 Dec 2018

US kidnaps daughter of Huawei founder

Wanzhou-Meng

Ok, I don’t think this is the trade war people signed up for:

Canada has arrested the chief financial officer of China’s Huawei Technologies who is facing extradition to the United States on suspicion she violated U.S. trade sanctions against Iran.

Wanzhou Meng, who is also the deputy chair of Huawei’s board and the daughter of company founder Ren Zhengfei, was arrested in Vancouver at the request of U.S. authorities.

“Wanzhou Meng was arrested in Vancouver on December 1. She is sought for extradition by the United States, and a bail hearing has been set for Friday,” Justice department spokesperson Ian McLeod said in a statement to The Globe and Mail. “As there is a publication ban in effect, we cannot provide any further detail at this time. The ban was sought by Ms. Meng.

A Canadian source with knowledge of the arrest said U.S. law enforcement authorities are alleging that Ms. Meng tried to evade the U.S. trade embargo against Iran but provided no further details.

She is being sought by federal prosecutors based in New York:

Huawei released a statement saying its CFO was arrested while changing planes in Vancouver and is facing charges in “the Eastern District of New York.”

“The company has been provided very little information regarding the charges and is not aware of any wrongdoing by Ms. Meng. The company believes the Canadian and U.S. legal systems will ultimately reach a just conclusion,” the statement said.

How is this even remotely legit? Has Meng even been to the US? I don’t see how the US has jurisdiction here.

We’ll find out more soon, but at first glance this strikes me as extremely dubious, both legally and politically. This is about as dumb as the US trying to arrest Julian Assange, but with far nastier geopolitical implications.

UPDATE: China responds:

Remarks of the Spokesperson of the Chinese Embassy in Canada on the issue of a Chinese citizen arrested by the Canadian side

2018/12/06

At the request of the US side, the Canadian side arrested a Chinese citizen not violating any American or Canadian law. The Chinese side firmly opposes and strongly protests over such kind of actions which seriously harmed the human rights of the victim. The Chinese side has lodged stern representations with the US and Canadian side, and urged them to immediately correct the wrongdoing and restore the personal freedom of Ms. Meng Wanzhou. We will closely follow the development of the issue and take all measures to resolutely protect the legitimate rights and interests of Chinese citizens.

UPDATE: Bloomberg has a good rundown of the situation.

Analysts said it’s more likely the case proceeded separately from the trade talks as part of Trump’s efforts to step up prosecutions against Chinese companies that conduct economic espionage and violate sanctions. In October, the U.S. said Belgium extradited a Chinese intelligence official accused of stealing trade secrets from U.S. companies — an unprecedented development.

Either way, China is almost certain to view Meng’s arrest as a major escalation in the trade war that will foment fears of a wider Cold War between the world’s biggest economies. As part of trade talks, Trump has insisted that China stop providing government support to strategic sectors including artificial intelligence and robotics as part of its “Made in China 2025” policy.

This is misguided. Why would China stop providing government support for strategic sectors? Those sectors are key to China’s future competitiveness in manufacturing and technology. In effect, the US is badgering China to radically change its growth plans out of deference to its chief global rival. China will never do that, even if it agrees to do so on paper. The smart play for US would be to drop its free-trade fantasies and pursue its own industrial policy.

Tiankai’s tariff terror

Chinese ambassador Cui Tiankai

Cui Tiankai

The Chinese ambassador to the US offers a stern but misguided warning about the alleged dangers of tariffs:

Speaking to Reuters before heading to join Chinese President Xi Jinping’s delegation at the Group of 20 summit in Buenos Aires, Cui Tiankai said China and the United States had a shared responsibility to cooperate in the interests of the global economy.

Asked whether he thought hardliners in the White House were seeking to separate the closely linked U.S. and Chinese economies, Cui said he did not think it was possible or helpful to do so, adding: “I don’t know if people really realize the possible consequences – the impact, the negative impact – if there is such a decoupling.”

He drew parallels to the tariff wars of the 1930s among industrial countries, which contributed to a collapse of global trade and heightened tensions in the years before World War Two.

“The lessons of history are still there. In the last century, we had two world wars, and in between them, the Great Depression. I don’t think anybody should really try to have a repetition of history. These things should never happen again, so people have to act in a responsible way.”

The problem is that protectionism did not cause the Great Depression. Like the idea that the Great Wall is visible from space (which was told to me by a certified tour guide in Beijing), this is a myth that just won’t die.

Allow economist Ian Fletcher to explain:

Let’s start by reminding ourselves of a basic fact: the Depression’s cause was monetary. The Federal Reserve had allowed the money supply to balloon excessively during the late 1920s, piling up in the stock market as a bubble. The Fed then panicked, miscalculated, and let the money supply collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. Trade had nothing to do with it.

The Smoot-Hawley tariff was simply too small a policy change to have so large an effect as triggering a Depression. For a start, it only applied to about one-third of America’s trade: about 1.3 percent of our GDP. One point three percent! America’s average tariff on goods subject to tariff went from 44.6 to 53.2 percent—not a very big jump at all. America’s tariffs were higher in almost every year from 1821 to 1914. Our tariffs went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the great recessions of 1873 and 1893 spread worldwide without needing the help of any tariff increases. […]

World trade did indeed decline, but this was due to the Depression itself, not higher American tariffs. This is no surprise, as declines in the values of the currencies of America’s major trading partners wiped away much of the effect of the tariff anyway.

Fletcher quotes economic historian William Bernstein as follows:

Between 1929 and 1932, real GDP fell 17 percent worldwide, and by 26 percent in the United States, but most economic historians now believe that only a miniscule part of that huge loss of both world GDP and the United States’ GDP can be ascribed to the tariff wars. .. At the time of Smoot-Hawley’s passage, trade volume accounted for only about 9 percent of world economic output. Had all international trade been eliminated, and had no domestic use for the previously exported goods been found, world GDP would have fallen by the same amount — 9 percent. Between 1930 and 1933, worldwide trade volume fell off by one-third to one-half. Depending on how the falloff is measured, this computes to 3 to 5 percent of world GDP, and these losses were partially made up by more expensive domestic goods. Thus, the damage done could not possibly have exceeded 1 or 2 percent of world GDP — nowhere near the 17 percent falloff seen during the Great Depression…

A defense of economic nationalism

Darren Beattie provided (in 2017) a much-needed defense of the ideological foundations of economic nationalism:

It is entirely possible therefore to support tariffs, immigration restrictions, and various other restrictions on the free market in a manner that benefits the American worker and that is also consistent with the highest respect for individual freedom, enterprise, self-reliance, and other virtues of capitalism.

He makes a great point about the Cold War context which spawned free-trade ideology:

The Soviets who posed an existential geopolitical threat to the United States embraced a generally classical Marxist philosophy that was both an economic and a moral doctrine.

Free-trade doctrine provided an ideological foil to an expansionist Marxist regime. From that standpoint, it has served its purpose.

But today’s threats of concentrated power do not seem to conform to the “government dangerous, private sector benign” picture as easily as they may have during the Cold War. This is because 1) the distinction between public and private seems to no longer apply to many of the most powerful sectors of the economy, and 2) new forms of technology have enabled equally dangerous concentrations of power to accrue in the private sector (think of Silicon Valley). So, with the end of the Cold War, we must reevaluate the relationship between economics and liberty.

Furthermore, several structural features in the economy have accelerated since the end of the Cold War that severely threaten the middle class, whose robust health is often considered indispensable to a culture of individual freedom.

It is also indispensable to political stability.

Beattie is right that the public discourse is very superficial on this issue, as I pointed out with reference to trade policy in my post on Ian Fletcher’s book Free Trade Doesn’t Work: What Should Replace It and Why. In fairness, trade policy is boring and makes for poor clickbait. Also, most pundits and politicians have absolutely no clue about economics. Fortunately, this article is free of economic jargon and just addresses the ideological assumptions underpinning most people’s thinking on the trade topic.