Long read: The Beijing Pivot

Whilst America surely needs to sort out its balance between capital and labour, there is another balance it needs to rework – its dominance in high tech with reindustrialisation. And China is not helping with the latter. Trump’s recent visit to China with an entourage of top American business leaders gave a sense of the shift in bargaining power. This piece in the Polycrisis delves deeper into it with implications for the rest of the world. It begins with the recent flex which drove the rapprochement from the US towards China (compared to the restrictionist approach before):

“…the US may have maintained a monopoly on economic sanctions for decades in the post-war period, but China’s retaliatory export controls on rare earths last year, and Iran’s effective blocking of the Strait of Hormuz more recently, underscores the fact that powerful economic weapons are not solely the prerogative of Washington. US adversaries can harm the American economy and erode political will to continue restrictionist policies advocated by economic warriors.”

The author says this in light of the Chinese manufacturing boom:

“…China’s manufacturing capability has developed rapidly since the 2000s. Local governments are encouraged to develop not only in established strategic products like the “new three”—solar, EVs, and batteries—but also “new quality productive forces” like robotics, AI, shipbuilding, and biomedical manufacturing.

The speed with which some of China’s high-tech manufacturing has improved has taken some countries by surprise. Electric vehicles have been the most striking example, and it’s thanks to that boom in production that China overtook Germany as the world’s biggest passenger car exporter in 2022. German car sales in China, which were once a significant source of trade income, collapsed in just a few years.”

But China got here as it realised it needs leverage to counter its own growing reliance on the rest of the world: “China’s actions have been informed by its own economic, developmental and security strategies. Beijing’s drive for self-reliance during the economic war of the past decade came in part because of its fears of reliance on imported commodities. China became a net food importer in 2004, and in 2021 overtook the US to become the world’s largest food importer. It has been a net oil importer since the early 1990s, growing to become the world’s largest oil importer, and perhaps most surprisingly, became a net coal importer in the 2010s.

… Xi began making statements about the need to plan for various challenges posed by foreign reliance soon after coming to power in 2013, but it was not until 2017, with the sanctioning of the giant Chinese telecommunications firm ZTE by the first Trump administration that Beijing was alerted to the extent of the threat. Kyle Chan has referred to that moment as a “wake-up call for Beijing,” noting that soon after, the Ministry of Commerce began establishing a “legally grounded, unified system of export controls.” With the US sanctions on Huawei in 2019, the need for such controls was made abundantly clear, and after the outbreak of Covid-19, Xi was open about China’s massive supply chain vulnerabilities. In a hostile geo-economic world, these would require sustained attention.”

Even more than the US, the implications of the Chinese manufacturing boom are dire for Europe: “The rapid eclipse of German global car exports by Chinese automakers in 2022 was a major turning point, persuading European leaders that Beijing could excel in advanced manufacturing and design. The timing of this roughly coincided with Europe’s squeeze by a protectionist American industrial policy in Biden’s Inflation Reduction Act. Covid supply chain shortages and the energy shock stemming from Russia’s invasion of Ukraine meant that Europe had to acknowledge the end of liberal globalization.

…The 2024 Mario Draghi report on EU competitiveness advised focusing on a strategic selection of manufacturing industries and buying the rest (mostly from China); the bloc would need €800 billion of investment a year to effect this. But implementation of the Draghi report has been slow…EU politics are, of course, never simple and the IAA will pit French restrictionism (prioritizing EU-based production) against the cooperationist stance of trade-liberal states like Germany and the Nordics. Germany’s auto industry fears losing not just its remaining market in China but also its own Chinese-based manufacturing, its technical collaboration with Chinese firms, and its exposure to the “fitness centre” of the hyper-competitive Chinese auto market.

….Chinese foreign direct investment in Europe is also growing. Hungary has attracted much Chinese FDI in its car and battery factories, and Spain, too, is fast becoming a destination for Chinese capital. It already hosts a Chery auto facility, and a €4bn CATL-Stellantis battery factory is being built in Aragon; SAIC will build its first mainland European factory in Galicia.”

The global south would have hoped that as China moved up the value chain, it can take some share in low value add manufacturing but unlike the US and Europe in the past, China isn’t vacating that space either. “For all the alarm about Chinese high-tech goods, advanced manufactures are only a small part of China’s exports. The vast majority of exports remain simpler goods like apparel, and so far China is not abandoning these industries as it moves up the value chain….China’s extensive production of cheap goods, both simple and complex, reduces the space available for lower-income countries to industrialize and produce their own low-tech, labor-intensive exports.”

A few third world countries have some leverage: “Some countries have the good fortune to possess natural resources. The DRC, Guinea, Zimbabwe, and Namibia have all had some success in attracting investment by restricting exports of raw extractives. Indonesia has collected significant amounts of FDI and value-added exports from its export ban on raw nickel ore introduced in 2020.

Countries bereft of their own natural resources, or desirable consumer markets, might benefit from overseas Chinese foreign direct investment, or at least find opportunities to localize some parts of the value chain, if they can draw upon strong state capabilities. Almost half of the solar gear imported into Africa now is cells and wafers, rather than fully assembled panels. This means that countries like Ethiopia, Tanzania, Nigeria, and Kenya are already capturing a lot more of the value of the continent’s solar boom.

For those developing countries with even fewer bargaining chips and resources at their disposal, perhaps the best they can hope for in the near-term is taking advantage of China’s prolific manufacturing by deploying renewable energy and batteries to reduce their liabilities for fossil-fuel imports.”

The authors talk about what policy options should developing countries like India consider to progress amidst this squeeze.

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