The China Thread

[Threviel]

Do you really think China or Russia could occupy Germany, much less France or Italy?

As Grumbler says, military expenses are a result of long-term strategy. And there is no European common strategy. There can't be. We're 27 different countries each with different needs.

Yes, Russia is vastly superior militarily to Europe. Also an army with experience and a total ruthlessness for civilian life.

But the question should be this:

Would Russia listen to a threat of violence from Germany when invading a neighbouring state?

A militarily superior Germany, Poland, France and Italy has a strong voice. A militarily inferior EU can write a harsher letter.

FFS, look at Europe in the thirties. A militarily ready France could easily have stopped the war in 36 or so.

[The Minsky Moment]

My view of China's strategy is that economics and commercial interests are secondary to political goals. At the moment Xi is building what I think will be a successful and quite durable state capitalist model that basically injects a degree of political control into private businesses (not least to control the internal risks of the animal spirits in private businesses), but also to inject some private sector style risk taking and nimbleness into SOEs.

I don't see the latter - the SOEs took some awful risks in the B&R initiative because they were told to and then the stopped because they lost their shirts and Xi told them to stop.  That's not exactly Schumpeterian entrepreneurial risk-taking in action.  The Chinese economic model predates Xi but has become more state directed under his rule.  It has been successful because high investment levels have driven economic growth rates that compensates for significant capital misallocation. The problem for China is that no advanced nation (i.e. on the technological and income frontier) has ever succeeded with such a model on a sustained basis.  I suppose there is always a first but count me skeptical.

The Chinese leadership regularly breaks international trade and investment agreements. 

Yes and not just limited to that.  China's treatment of the Law of the Sea Convention is an object lesson for anyone who thinks its behavior can be easily controlled through paper agreements without some real enforcement mechanism backing it.

[Sheilbh]

I don't see the latter - the SOEs took some awful risks in the B&R initiative because they were told to and then the stopped because they lost their shirts and Xi told them to stop.  That's not exactly Schumpeterian entrepreneurial risk-taking in action.  The Chinese economic model predates Xi but has become more state directed under his rule. It has been successful because high investment levels have driven economic growth rates that compensates for significant capital misallocation.

Agreed - and there may be clarity on this in the future because we are awaiting the 14th Five Year Plan (and in a world once more where that is relevant). The other side of this of course is if you don't have high household consumption (and China doesn't yet) and you don't want to be over-exposed as just an export economy (and China doesn't for strategic reasons) then you need a strong state investment sector to create demand - especially given the old growth target and I've read the new 5 Year Plan will be the first without a growth target.

But I think there's been a move from just Belt and Road style projects to SOEs getting private capital and increasing their capital investment and R&D - which is what you would probably want them to do  and seems a more disciplined (and potentially successful) approach than just things like B&R. Especially now that there is clearly a tech war with the US/West which I actually think provides a focus for China that was perhaps not previously there.

The other side is I wonder how much of this is actually a way of managing the decline of certain SOEs especially in energy or heavy industry if China is serious (and I think they are) about Xi's energy transition/climate commitments?

The problem for China is that no advanced nation (i.e. on the technological and income frontier) has ever succeeded with such a model on a sustained basis.  I suppose there is always a first but count me skeptical.

Yeah I get that. And they're probably not there yet - I think I saw the idea that the goal was for SOEs to get more market discipline and for private businesses to get more party discipline. I think that exchange could be productive and helpful and I'm not convinced that state capitalist model will fail. I think it's certainly a solid enough model for the medium term, especially in the context of energy transition which I think will be a dominant economic factor for the next 20-30 years.

You're right about no advanced nation, but I suppose my query would be have seen an example of this model in operation that is already so sophisticated and so involved in the world economy? So while your point is right, are China already further along than any previous state capitalist model? I could be wrong, but my suspicion is they are.

[The Minsky Moment]

Russia, Turkey, and Mexico follow a state capitalist model to some degree - they all have GDP/person a roughly the same level as China - in the US$9000-12,000.  China is in the middle of that pack although growing faster.  But most OECD nations are in the 30-60K range - that is a big gap.

[DGuller]

In some way the way the Western world deals with China reminds me of the episode after WW2 where the Brits gave away their leading jet engine technology to USSR.  Stalin was puzzled why they would do that, but was glad to take it.

[Josquius]

I am growing worried at Chinese tech companies huge edge in producing the same quality but for much cheaper. Why wouldn't you buy a Chinese phone, its perfecty logical to do this. As a random man on the street you don't care about China getting access to your country's networks, you just want what's best for you.
And there's no clear way for government to tackle this short of unfair treatment of Chinese goods.

[DGuller]

There would be nothing unfair about treating Chinese goods adversely if they're an arm of foreign state, especially hostile one.  In general I find it to be a grave dereliction of duty on the part of Western governments when they leave their citizens to fight against hacking by hostile states all on their own.

[Sheilbh]

Shouldn't the question be can Russia occupy one or more  of the Baltics, given that they're countries you're bound by treaty to defend?

Not just in NATO, but in the Eurozone - the Baltic states are core, very integrated member states. But I think they are broadly seen as not quite fully "European".

Incidentally interesting piece on frustrations from other member states at the Franco-German push to agree this deal with China:

Germany's drive for EU-China deal draws criticism from other EU countries
Italy, Poland, Belgium and Spain don't like the way the investment agreement was pushed through in the last days of the German presidency of the EU.
By Jakob Hanke Vela, Giorgio Leali and Barbara Moens   
January 1, 2021 9:04 am

German Chancellor Angela Merkel's strong push to conclude the EU-China deal in the last days of the year has left a bad aftertaste among a group of EU countries who said they felt ignored.

Officials from Italy, Poland, Belgium and Spain criticized the way Germany pushed through the investment agreement with China in the final days of the German presidency of the Council of the EU, despite their warnings that the timing was tone deaf to slave labor concerns in China and risked alienating incoming U.S. President Joe Biden.

The officials said they felt steamrolled by Merkel and the "German engine" inside the European Commission, in particular Commission President Ursula von der Leyen and trade department director Sabine Weyand, who are both German.

"There's a lot of frustration among smaller countries about the way the Commission has been used to push through one of Merkel's pet projects at the end of her term and the end of her legacy," said one EU diplomat.

"Is this the way the EU will work post-Brexit? The Brits are just out and we're already missing their open market-oriented approach," the diplomat said. "If Germany weighs in too much, smaller EU countries have nothing to say."

The EU on Wednesday sealed a bilateral investment pact with China, allowing investors to acquire companies in a number of sectors, limiting joint venture requirements and allowing foreign employees to work in their respective markets.

But the critics worried that the deal was a political win for Chinese President Xi Jinping and came just as his government cracked down on democracy in Hong Kong, ethnic minorities in Xinjiang and journalists reporting on the origins of the coronavirus pandemic.

"We are giving a positive signal to China at a time of significant human-rights concerns," Italian Undersecretary for Foreign Affairs Ivan Scalfarotto told the Corriere della Sera on Thursday, citing China's crackdown in Hong Kong, "the persecution of Uighurs," and the four-year prison sentence imposed on a journalist this week for reporting on the pandemic in Wuhan.

German officials insist they and the Commission consulted with other capitals and that while some raised objections no one held up a "stop sign" to halt the deal.

Transatlantic snub

One EU official also pointed out that Weyand briefed member countries twice before Brussels sealed the pact with China, even though the Commission already had a legal mandate to negotiate and so was allowed to conclude the deal.

But that mandate was seven years old, as another diplomat from the group of critical countries pointed out, adding he was skeptical whether it was wise for the Commission to conclude the deal based on that mandate, given that relations with China had changed significantly in the meantime.

Diplomats also pointed out that some countries, such as Poland, had publicly voiced their opposition to rushing the deal through. "We need more consultations and transparency bringing our transatlantic allies on board. A good, balanced deal is better than a premature one," Polish Foreign Minister Zbigniew Rau tweeted last week.

The countries also argued that Brussels should have coordinated its approach with U.S. President-elect Biden, who said he wanted to work with the EU to tackle China. Biden takes office on January 20, so China's last-minute concessions, which paved the way for this week's deal, suggested Beijing wanted to lock the EU into an agreement before the transatlantic allies could coordinate a tougher approach.

Brussels should have waited for the new U.S. administration to take office before concluding the deal, Italy's Scalfarotto said. "This decision at this specific stage creates a problem," he said. "The incoming administration cannot speak, but it had made it clear that it would have preferred Europe to wait. I want to hope they don't consider it rude ... we must not miss the opportunity to work with Biden."

Scalfarotto said that, while Europe was entitled to seal its own trade deals, there was no need for "unnecessary rudeness."

EU tensions

Italy was also unhappy that French President Emmanuel Macron was invited to take part in a videoconference with Chinese President Xi Jinping alongside Merkel, who represented the EU presidency, while other EU leaders were not.

"I don't believe that having Macron, the choice of one country over the other 26, was justified. It's an unusual format which also marks a defeat for us Italians," Scalfarotto said, adding that Italy had asked to have EU leaders only on the call.

Other EU officials echoed the criticism of France. While France's junior minister for trade Franck Riester last week publicly criticized the deal over a lack of commitments on slave labor and a lack of investment protection, Paris ended up backing the deal.

Two diplomats said Macron had secured benefits for some particular companies, such as Airbus. Merkel, another official said, reached an understanding with Macron under which she would get to conclude the deal under the German presidency, while the ratification and signing of the deal would be finalized under the French Council presidency in the first half of 2022.

The group of critical countries worried the Franco-German push had led Brussels to ignore some legitimate concerns about the deal. They feared this approach, ignoring other views, did not bode well for the way the EU would handle its relations with America and China in the future.

"This isn't just another deal with some small country," one of the diplomats said. "The way we position ourselves in the U.S.-China dynamic will make or break the EU."

Hans von der Burchard contributed reporting.

[garbon]

What's the positive spin on this agreement?

[Sheilbh]

What's the positive spin on this agreement?

I think it's basically that it is good for European business and provides more certainty around investment in China (and vice versa). It is Europe taking a step towards strategic autonomy which is necessary after Trump (and the fact that 74 million people voted for him this time round too) and general uncertainty around the US's long-term commitment to Europe. It will tie China into more international, liberal market obligations which may result in either change of behaviour or enough enforceable rights to mitigate the "bad" behaviour. And China has made concessions that are "as good as it's going to get" so do you agree a deal of some type and bank those benefits or conclude there won't be a deal in foreseeable.

I'm not convinced any of them particularly stack up - except that it's good for European business - the thing about Macron and Airbus is particularly striking.

[Sheilbh]

What's the positive spin on this agreement?

Just to add to this the Portuguese PM has now added another argument for the agreement that is, I think, true. Backing out now under American pressure would send a bad message about the EU when it's trying to behave as a strategically autonomous power. Politically that is right.

[garbon]

What's the positive spin on this agreement?

Just to add to this the Portuguese PM has now added another argument for the agreement that is, I think, true. Backing out now under American pressure would send a bad message about the EU when it's trying to behave as a strategically autonomous power. Politically that is right.

Well apart from fact that cozying up to China doesn't increases one's autonomy. Out of the frying pan, into the fire?

[Sheilbh]

Well apart from fact that cozying up to China doesn't increases one's autonomy. Out of the frying pan, into the fire?

I agree on the substance. But I think there's no easy off-ramp for European politicians that doesn't end in a perception that they've folded under pressure from the US - which is the opposite of the image they want to give. And I think that will be a not insignificant driver in what happens now.

[garbon]

So yet again short term political concerns take precedent.

[Tamas]

It's OK I am sure European industries will enjoy competing with slave labour prices :p