Strategic Competition Archives - WITA

A Generational Shift in Sourcing Strategy

Rafael Centeno — Wed, 23 Nov 2022 20:15:37 +0000

There are only so many times you can shake the foundation of a structure before it changes what is built above it. With supply chains almost constantly feeling the effects of repeated shocks in the last half decade, recovering and strengthening have become front of house for supply chain professionals.

We are now in a rebuild that is not just looking to construct the same edifice all over again, but to improve and shift it to firmer ground. In practice, that means reassessing and contracting closer to home and spreading sourcing functions in more locations than before.

Companies around the world are now moving towards making the leap to source components and materials in the near vicinity of their final markets in the hope of having shorter, more reliable, less risky, and increasingly sustainable supply chains.

There will be winners and losers from this change, but it is clear from the recent past that continuation of long-distance, low-cost labour sourcing comes with its own price tag, which is driving change.

The emphasis is no longer low cost at all costs, but a more nuanced search for reliability, proximity and the right skills mix. This will drive the next phase of global manufacturing and logistics in an automated age.

These trends are shown clearly in our research, which surveyed logistics, supply chain and transport professionals to understand how sourcing and production are changing to fit more unstable times, as well as a changing global labour force and consumer base.

The results were conclusive: We are now well into a new phase of supply chain strategy, one where sourcing is being prioritised and brought into closer orbit of the contracting company and intended market.

Read on to get a global and European analysis of the state of near-sourcing, nearshoring and reshoring in the post-pandemic era.

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To read the full white paper, please click here.

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Annual Report on the EU’s Anti-Dumping, Anti-Subsidy and Safeguard activities and the Use of Trade Defence Instruments by Third Countries targeting the EU in 2020

Jake O'Keeffe — Mon, 30 Aug 2021 15:13:13 +0000

This 39th Report gives information on the EU’s anti-dumping, anti-subsidy and safeguard activities, as well as the trade defence activity of third countries against the EU in 2020, in line with the Commission’s reporting obligations.

The European Union is committed to open rules-based trade, supported by the tools to defend European industry against unfair trade practices. The Commission ensures that where industries are harmed because of unfair practices, such as dumped and subsidised imports, they can rely on the EU’s trade defence instruments to provide an effective response.

Ensuring fair trade conditions for European producers also means dealing with trade defence actions taken by third countries against the EU, which reached their highest level in 2020.

While 2020 presented new and unique challenges in global trade, the Commission adapted and responded to these challenges and those posed by existing and new unfair trade practices and continued its enforcement of the EU’s trade defence instruments.

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To read the full report from the European Commission, please click here.

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Reality Bytes: The Limits of Transatlantic Digital Co-Operation

Ryan Murphy — Tue, 13 Jul 2021 19:09:32 +0000

The EU and the US plan to boost co-operation on digital policy. They should not prioritise regulatory harmonisation, and instead work on areas where mutual compromise is more realistic.

When US President Joe Biden met EU leaders in Brussels in June, one of the most important things they agreed was that there should be increased transatlantic co-operation on technology policy. They announced the creation of the Trade and Technology Council (TTC) – a new forum for discussion on technology standards and governance – and a formal dialogue on the thorny issue of competition in technology markets. Biden’s attention to digital issues, his willingness to work with the EU, and his stated commitment to shared values in the digital sphere are a relief to the EU after the Trump years. Europeans are also cautiously optimistic about resolving the dispute over digital services taxes, after the G7 agreed to amend international tax treaties to ensure digital giants can be forced to pay tax in the countries where they make sales.

The fanfare about greater co-operation should be greeted with a degree of scepticism, however. Many past attempts at transatlantic policy co-ordination – such as the New Transatlantic Agenda, the Transatlantic Economic Council, and the Transatlantic Trade and Investment Partnership (TTIP) – sputtered out with little achieved. In some cases, these initiatives even caused major rifts in domestic politics on both sides of the Atlantic. The joint EU-US statement announcing the TTC and the competition dialogue suggests that Europe should not get carried away. For example, the statement contains little detail about how these dialogues will work in practice, reportedly because of internal disagreements on both sides about basic procedural details.

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To read the full report from the Centre for European Reform (CER), please click here.

Image from the Centre for European Reform.

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The EU and Climate Security: Toward Ecological Diplomacy

Ryan Murphy — Mon, 12 Jul 2021 19:12:54 +0000

The EU stands at a critical juncture in its commitment to energy transition and action against climate change. The European Green Deal brings together multiple strands of policy to propel European states toward a low-carbon economy. However, as the EU deepens and accelerates its internal energy transition, climate action must become a more pivotal issue for the union’s external action. Europe’s energy transition will have far-reaching effects, particularly for the bloc’s relationship with the wider world. At the same time, the impacts of climate change on politics and interstate relations globally will present increasingly pressing challenges for the EU’s security and other interests.

These observations are highly pertinent and connect to another major EU commitment: becoming a stronger geopolitical power. Linking these issues, this compilation explores how the EU could—through its external policies—be an effective geopolitical power in dealing with climate change and ecological shifts.

Extensive analytical work has accumulated on climate security and mainly makes the general case for why the EU needs to take climate factors more seriously within its foreign policies. But after more than a decade of policy efforts, the EU already has a dense network of ongoing initiatives that fall to some degree within the scope of climate security. Given this, the priority should no longer be restating the basics of why climate represents a geopolitical challenge. The EU has already moved some distance along this policy curve. Rather, it should be to assess the more precise ways in which the EU is approaching climate security.

The following six chapters here assess different elements of the climate security challenge. Through these different contributions, a core argument emerges: the EU needs a broader understanding of climate geopolitics to extend and improve its already rich array of policy initiatives in this area. It essentially needs to transition from its current conceptualization of climate security to a more ambitious notion of ecological security.

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To read the full report from the Carnegie Endowment Europe, please click here.

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The EU’s Unsustainable China Strategy

Ryan Murphy — Fri, 09 Jul 2021 19:22:24 +0000

In recent years, the EU’s approach to China has mainly focused on economic factors and the interests of a few member states. However, internal and external political tensions – as well as China’s emergence as an economic competitor – have prompted the EU to reassess its approach to the country.

The US–China rivalry is further complicating the EU’s relationships with both countries. While the Biden administration has signalled it is keen to work with allies in ‘dealing’ with China, the EU has demonstrated a limited willingness to do so.

Balancing its relationships with the US and China has proven difficult for the EU, which aims to be a relatively neutral third pillar in the world order. However, this is a risky and largely unsustainable strategy that could result in continued soft triangulation between these two superpowers and provide limited benefits.

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To read the full report from Chatham House, please click here.

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A New Comprehensive China Policy: Principles and Recommendations for a Serious Debate in Congress

Anne Allen Hodge — Fri, 09 Apr 2021 13:29:51 +0000

SUMMARY

A major new bill on China policy is on the horizon. In a way, Congress has been preparing for a grand debate on China for years. Comprehensive bills have been filed. The U.S.–China Economic and Security Review Commission and the Congressional-Executive Commission on China are veritable idea factories. In addition, there are the almost 300 individual stand-alone measures that were introduced in the past Congress. This Backgrounder offers its own guidelines and recommendations. It is time to put as many existing ideas as possible to the legislative test and construct a China policy that will give direction to the present and future Administrations.

KEY TAKEAWAYS

1.) The most persistent and consequential challenge that will confront the United States for the next several decades is China.

2.) Congress now has a once-in-a-decade opportunity to construct a China policy that will give direction to the Biden Administration and future Administrations.

3.) A Congress-led China policy requires a comprehensive approach that engages all levers of power while defending human rights, religious liberty, and economic freedom.

Senate Majority Leader Chuck Schumer (D–NY) has prioritized Senate passage of a major new bill on U.S. China policy. How the bill will come together—a total of eight committee chairs have been tasked with drafting it—remains an open question. Whatever the ultimate vehicle, this bill is a once-in-a-decade opportunity for Congress to develop a comprehensive approach to China. It should adhere as closely to the regular order as possible. In the process, Members should consider the following principles and specific policy recommendations.

Seven Principles for a Congress-Led China Policy

In order to fashion a China policy that is in the U.S. national interest, Congress should:

1. Go Big. Some Members want to make the bill entirely about economic competitiveness. But the China challenge encompasses a much larger gambit. It is also about more than the U.S. military presence in the region—which is essential to the U.S. presence in the Indo–Pacific and handled by Congress through the National Defense Authorization Act (NDAA) and defense appropriations bills.

There are diplomatic issues at stake. There are issues involving Taiwan, Tibet, and Xinjiang, and faith communities of many stripes. There are domestic regulations that handicap the U.S. globally. All these and many other issues need to receive proper, systematic treatment. The U.S. competed with the USSR for 40 years in every area of engagement, all within the general framework of containment, and learned to adjust and adapt as conditions warranted. A similar comprehensive approach is warranted with respect to China, certainly different than the Soviet Union, and more complex, and thus needing similarly big ideas.

2. Watch the Congressional Purse. As one-time Senate Minority Leader Everett Dirksen (R–IL) is said to have remarked: “A billion here, a billion there, and pretty soon you’re talking about real money.” The fact that the federal debt is above $28 trillion and growing, with many looking the other way, does not mean that “money is no object.” Someday, the U.S. will have to make good on these debts. America’s strength lies not in how much taxpayer (and bond holder) money it can promise, but how well it can harness the advantages of its educational and research institutions, its deep markets, and the ingenuity of its people.

3. Stay Engaged. Congress often passes legislation on foreign policy and then forgets about it. In the upcoming China debate, Congress should institute forward-looking procedures requiring affirmation of the policies’ implementation. Carefully constructed certification and reporting requirements can be useful. Conversely, reporting requirements meant to simply prevent a Member from offering a more substantive proposal, are not.

4. Use Waivers Sparingly. There are ways to draft waivers that preserve congressional intent. The complex and amended waivers in the 2017 Counter America’s Adversaries Through Sanctions Act are good examples. On the other hand, blanket “national interest” or “national security interest” waivers are not the most effective use of Congress’s time.

Similar to the dynamics around reporting requirements, in processing the dozens of amendments that will be offered on this bill, it will be tempting to agree to the most sweeping of waivers. Members should resist. If their commitment is not strong enough to defend their amendment and force a vote, they should not offer it. U.S.–Chinese relations are headed in one direction for the foreseeable future. It will be exceedingly difficult for the Administration to argue for maximum diplomatic flexibility.

5. Avoid Protectionism. COVID-19 highlighted U.S. dependence on China for such necessities as pharmaceuticals and personal protective equipment. Congress has also recently stood up a task force to examine national security supply chains and their vulnerability to Chinese influence. In the past, the U.S. has responded by requiring certain commodities or sectors to be supplied only from domestic U.S. sources. Often, such efforts are driven by a desire to shore up an ailing U.S. industry. Such remedies result in higher prices and often do not fix the base problem.

Instead of protectionism, the U.S. should focus on targeted measures that restrict critical purchases from entities controlled by the Chinese Communist Party and allow the United States to take full advantage of its rich network of allies to meet its national security needs.

6. Create a Policy Framework. One need look no farther than the Taiwan Relations Act (TRA) to know that congressional policy statements matter. Administrations come and go, but the TRA has remained. Another example is the enduring value of the 1992 Hong Kong Policy Act, on which most action on Hong Kong has been built since. Congress should aim to create the same sort of lasting policy on China policy generally. It should think beyond the length of one session of Congress or one Administration, or the next election cycle.

7. Look Beyond China Itself. China presents the U.S. with many direct challenges. It seeks to constrain the movement of the U.S. Navy in international waters. Its agents steal U.S. intellectual property. With Made in China 2025 and Standards 2035, it has publicly declared economic war on vital elements of the U.S. economy. It is trampling on the rights of America’s friends in Hong Kong and destitute mainlanders. But the U.S. is not alone in this struggle. It has allies in Australia, Japan, the Philippines, South Korea, and Thailand, and partners in India, Taiwan, Singapore, and throughout Europe. Whether Congress is talking about foreign policy or supply chains, it must keep the broader supportive context in mind.

14 Priorities for a Comprehensive China Bill

The following list is not exhaustive. The base China legislation and floor debates will involve many worthwhile proposals. This list is a sample of some of the highest-priority, immediately actionable items.

1. Taiwan. As much as Congress has done over the past few years, much remains to be done. Congress should take action on the provisions contained in the Rubio–Merkley Taiwan Relations Reinforcement Act, including making the director of the American Institute in Taiwan a Senate-confirmed position and helping U.S. businesses and nongovernmental organizations navigate pressure from China on Taiwan-related issues.

Congress should make an unequivocal, binding statement in support of a free trade agreement with Taiwan. The U.S. Trade Representative’s (USTR) institutional tendency is to avoid Taiwan. At the very least, a substantive proposal and debate will force it to face Taiwan.

To help facilitate regular interaction on trade issues, Congress should require the USTR to remove it from the same office dealing with China and put it under the authority of the Assistant USTR handling Japan, Korea, and the Asia–Pacific Economic Cooperation. Dealing with China takes up so much of the USTR’s time that there is little left for Taiwan, even if the USTR is inclined to engage it. It often is not, due to Beijing’s sensitivities, another aspect of the gap that separating the functions will help ameliorate.

2. Xinjiang. Congress should direct the Administration to tackle forced labor in China by requiring an expansion of existing cotton and tomato Withhold Release Orders (WROs) to a region-wide level for a two-year period. Congress should provide that, if an overwhelming percentage of goods apprehended by the U.S. Customs and Border Protection under the expanded WRO are found to have been produced with forced labor, the U.S. must institute a region-wide rebuttable presumption that goods produced in certain sectors of Xinjiang are produced with forced labor. In addition to addressing forced labor, Congress should extend Priority-2 refugee status to Uyghurs fleeing persecution in China.

3. Hong Kong. Congress should extend safe haven protections to Hong Kong citizens facing newfound persecution by declaring them eligible for P-2 refugee status. According to U.S. refugee laws, a refugee is an individual who has experienced, or has a well-founded fear of future, persecution on account of “race, religion, nationality, membership in a particular social group, or political opinion.” The Department of Homeland Security should remain in charge of evaluating the eligibility of individuals seeking refugee status.

4. U.S.–Chinese Space Cooperation. Congress should codify prohibitions on U.S.–Chinese space collaboration in what is currently renewed annually in the appropriations process, and expand congressional notifications to include the Senate Foreign Relations and House Foreign Affairs Committees. Congress should also tighten executive branch waiver authority, or scrap it altogether in favor of the direct approach to military-to-military engagement in the FY 2000 NDAA.

5. The Better Utilization of Investments Leading to Development (BUILD) Act. Congress should reform the BUILD Act to make it explicitly about countering Chinese influence.What makes U.S. government-provided foreign infrastructure financing and risk insurance at all palatable is its place in a broader China strategy. That place should be made clear in the law that authorizes the new International Development Finance Corporation. Funds should also be made subject to the regular appropriations process so that Congress can maintain sufficient oversight.

6. Chinese Cyber Theft. Congress shouldcodify Executive Order 13694, which blocks property of foreign entities engaged in cyber theft and other cyber malicious activities, expand the action to physical theft and deemed exports, and decouple the sanctions from reliance on the International Emergency Economic Powers Act.

7. Confucius Institutes. Congress should require universities and K–12 schools to disclose their financial ties to Confucius Institutes—nationwide propaganda organizations, masking as cultural institutions, sponsored by the Chinese government. Shortly after taking office, the Biden Administration withdrew a rule proposed late in the Trump Administration to do so. Congress should require it to be reinstated. As for the purported purpose of the institutes to encourage the study of Mandarin, there are alternative ways of ensuring a sufficient pool of Mandarin speakers is available for U.S. government service.

8. Easing Export Controls on India. Congress should revise the Arms Export Control Act to include India among a special group of NATO alliance members and key non-NATO partners (Australia, Israel, Japan, New Zealand, and South Korea) facing lower regulatory hurdles to U.S. arms exports.

9. Chinese Influence within International Organizations. China is using economic and diplomatic pressure to secure support in international organizations. Congress should authorize the Administration to use aid and other incentives as a counterweight. Beijing has also clearly signaled its desire to put Chinese nationals in positions of authority in the United Nations system. The U.S. needs to be well prepared for appointments and elections. It should develop a robust list of prospective candidates and ongoing procedures to campaign and rally support for these candidates.

Congress can help by establishing an office to coordinate this process and renew the congressional reporting requirement on the status of U.S. employment in the U.N. to help keep track of progress. Finally, Congress should use its financial leverage to enhance U.N. transparency, whistleblower protections, and accountability, which help to reveal malfeasance in the U.N. system.

10. Rare-Earth Minerals. Congress should address concerns about supplies of rare-earth minerals by focusing on reform at home. It is not China that has made these minerals difficult for the U.S. to secure, but domestic regulation. Actions that Congress can take to get at the problem include clearly defining “navigable waters” in the Clean Water Act to strictly limit federal authority, prohibiting pre-emptive and retroactive vetoes under Section 404 of the Clean Water Act, empowering states to manage their water resources, repealing the National Environmental Policy Act, reforming the Endangered Species Act, prohibiting the use of the social cost of carbon in regulatory proceedings, and eliminating agencies’ ability to regulate greenhouse gases.

11. The 2022 Winter Olympics. Congress should encourage the International Olympic Committeeto postpone the 2022 Beijing Olympics and select a new host country. In the absence of such a change, Congress should call for an international diplomatic boycott. This means no official attendance beyond what is necessary for the participation and security of U.S. athletes.

12. Religious Liberty. Congress should require the Administration to issue a report listing individuals and entities sanctionable under the Global Magnitsky Act, along with explanations for why they may not yet be sanctioned.

13. Banking-Sector Reform. Congress should reduce impediments to competition in the financial-services sector so that people will want to invest in U.S. markets instead of in other countries. To strengthen the U.S. financial-services sector and attract more investment and capital formation, Congress should implement reforms, such as creating new charters for financial firms that eliminate activity restrictions and reduce regulations in return for straightforward higher-equity or risk-retention standards, as well as adjusting the currency-transaction-report threshold for inflation from $10,000 to $60,000 and the non-bank reporting threshold for inflation from $3,000 to, $10,000 and repealing the beneficial ownership reporting regime on small businesses.

14. Digital Currency. Congress should respond to China’s plans for creating a digital currency by fostering innovation at home. The United States cannot assert significant influence over China’s digital currency plans. It can, however, orient its own policies to create a prosperous environment for America’s financial innovations. Congress should remove barriers to market entry for alternative monies, and ensure that no single type of money enjoys a regulatory advantage. At a minimum, Congress should amend “legal tender” laws, eliminate capital gains tax disadvantages, and modify private coinage statutes.

Conclusion

In a sense, Congress has been preparing for a grand debate on China for years. Comprehensive bills have been filed, such as the Strengthening Trade, Regional Alliances, Technology, and Economic and Geopolitical Initiatives Concerning China (STRATEGIC) Act and the America Labor, Economic competitiveness, Alliances, Democracy and Security (America LEADS) Act. The House Foreign Affairs Committee’s 2020 China Task Force Report has literally hundreds of recommendations. The U.S.–China Economic and Security Review Commission and the Congressional-Executive Commission on China are veritable idea factories. And, none of this even accounts for the almost 300 individual stand-alone measures that were introduced in the past Congress.

It is time to put as many of these ideas as possible to the legislative test and construct a China policy that will give direction to the Biden Administration and Administrations to come.

Walter Lohman is Director of the Asian Studies Center, of the Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy, at The Heritage Foundation.

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To view the original report by The Heritage Foundation, please click here.

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The Avoidable War: The Decade of Living Dangerously

Sebastian Petersen-Alven — Wed, 24 Feb 2021 20:45:20 +0000

The year 2020 was a devastating one, but also a year of great change and transformation as the world adapted with difficulty to meet challenges largely unprecedented in living memory, and the trends of global power appeared to shift dramatically. And it was a revelatory year — one that pulled the lid off the true extent and meaning of our globalized, interconnected world, revealed dysfunction present in our institutions of national and international governance, and unmasked the real level of structural resentment, rivalry, and risk present in the world’s most critical great power relationship — that between the United States and China.

2020 may well go down in history as a great global inflection point. It is thus worth looking back to examine what happened and why and to reflect on where we may be headed in the decade ahead. The Avoidable War: The Decade of Living Dangerously, the third volume of ASPI’s annual Avoidable War series, does precisely that. It contains selected essays, articles, and speeches by Asia Society and ASPI President the Hon. Kevin Rudd that provide a series of snapshots as events unfolded over the course of 2020 — from the COVID-19 pandemic, through an implosion of multilateral governance, to the impact on China’s domestic political economy.

Finally, it concludes with a discussion of the growing challenges the world will face as the escalating contest between the United States and China enters a decisive phase in the 2020s. No matter what strategies the two sides pursue or what events unfold, the tension between the United States and China will grow, and competition will intensify; it is inevitable. The Chinese Communist Party is increasingly confident that by the decade’s end, China’s economy will finally and unambiguously surpass that of the United States as the world’s largest, and this will turbocharge Beijing’s self-confidence, assertiveness, and leverage. Increasingly, this will be a “decade of living dangerously” for us all. War, however, is not inevitable. Rudd argues that it remains possible for the two countries to put in place guardrails that can prevent a catastrophe: a joint framework he calls “managed strategic competition” that would reduce the risk of competition escalating into open conflict.

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To read the full report by The Asia Society Policy Institute, please click here.

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Forecast 2025: China Adjusts Course

Griffin Ursin — Mon, 26 Oct 2020 17:23:36 +0000

Forecasting is a fraught exercise. It is made all the more daunting when paradigms shift, testing basic assumptions and altering drivers of change. If 2020 has yielded any lessons, it is that the foreseeable future invites more questions than it provides concrete answers.

Yet amid these muddied dynamics, the search for clarity is more important than ever. From the existing global system to relations between preeminent powers, the status quo may be irreparably shaken. What lingers in the air is a palpable sense that an era of creative destruction is upon us. It is an unfolding drama where the ending has yet to be written.

The starring role that China plays in this drama makes understanding its general trajectory—from the economy to domestic politics and technology development to energy policy—of immense interest and import to the world, and particularly for its peer competitor the United States.

So what kind of China should be expected by 2025? That singular question animated this effort to forecast the country’s path forward over the medium term.

Our simple answer: A China that will be near-majority middle class for the first time, with increasing technological parity with Silicon Valley and a less carbon-intensive energy landscape, all under the aegis of a stronger Xi Jinping and his vision of governance. Achieving these outcomes will require trade-offs, in this case a China that will likely redouble on domestic priorities and moderate its appetite for global adventurism.

This view of a more capable yet more outwardly cautious China is based on a composite of four scenarios across specific functional areas, bounded by the timeframe through 2025. It is also predicated on several macro assumptions and key factors that are likely to determine China’s behavior over that time period. In other words, this forecast exists within a defined scope, the elements of which are explained below.

WHY 2025?

We decided on a medium-term time frame for several reasons. First, conditions can change on a dime, but we believe five years, relative to a 10- or 20-year forecast, is a more manageable timeline to provide relatively concrete and specific scenarios for the future of China’s political economy.

Second, the five-year cycle also coincides with China’s own 14th Five-Year Plan (FYP, 2021-2025) that essentially sets the parameters on what to expect in terms of priorities and key agendas. In addition, the time period also overlaps with the new US administration and veers into the first years of Xi’s third term.

Three, Chinese leaders themselves have imbued this next FYP cycle with more significance than usual because it begins the 15-year period leading up to 2035, the midway status point for Xi’s national rejuvenation agenda that runs up to 2049. In this context, the 15th and 16th FYPs will be building directly on the outcomes of this five-year cycle even more so than in the past.

Still, five years can be an eternity in an environment where current shifts accelerate and unexpected factors manifest to knock China from its intended path. These uncertainties could lead to various permutations of China’s trajectory and a wider range of outcomes than we currently expect.

Recognizing this degree of uncertainty, we nonetheless aimed to distill, to the best of our abilities, a clear and comprehensive view of how China’s political economy will be shaped.

MACRO ASSUMPTIONS

Grappling with the complexity of current dynamics and the numerous factors at play is important. As such, it was necessary to bound our forecast within clear assumptions for the five-year time period. These assumptions are:

China’s political economy will remain largely what it is today, ruled by a strong Chinese Communist Party (CCP) led by General Secretary Xi Jinping.
Direct US-China military confrontation is unlikely, but competitive dynamics and tensions will become more explicit and play out across all major geographies.
Globalization will likely continue to stall as countries turn more inward and regionalism becomes more prominent.

We also eschewed low probability, high impact “fat tail” scenarios, such as a “Taiwan confrontation” or a “political transition crisis.” Such scenarios remain possible, but what’s possible is not necessarily what’s probable. They are, however, certainly worthy of discussion and continued monitoring beyond this product because of their outsized impact on the future of China and global markets.

In our view, these macro assumptions preclude entertaining the outlier scenarios above and set parameters on the domestic and global environment in which China will operate—an environment that can both facilitate and constrain China’s behavior. If these key assumptions are undermined over the medium term, then the entire forecast will need to be reevaluated accordingly.

KEY FACTORS

In addition to these macro assumptions, it’s important to determine what key factors may have changed that inform how we think about China going forward, to help avoid over-reliance on simple, straight line projections. We believe there are two key factors, one domestic and one external, that have changed and that matter for our forecast to a considerable degree:

1. Stronger center, weaker localities: from dealing with debt and growth to executing on reforms and environmental initiatives, local governments are being kept on a much shorter leash and are less able to freelance relative to just five years ago. The main manifestation of this dynamic will be Beijing’s continued fiscal hawkishness and increased actions to induce local compliance with central mandates.

2. Global power under global scrutiny: Beijing faces its toughest external environment in about a generation, centered on US-China tensions. China likely can no longer count on a relatively stable external environment, one of the key ingredients that has facilitated its economic success to date. Its conduct and intent, both domestic and foreign, will be put under a global spotlight, forcing it to respond.

Building on these factors and the macro assumptions, our team constructed base case scenarios for China’s economy, politics, technology, and energy. Each base case represents the most likely outcome over the five-year time period. Needless to say, these base cases do not represent the totality of scenarios. But we believe they are the most probable realistic outcomes based on our understanding and approach to analyzing China.

SUMMARY OF BASE CASES

This forecast product has four components: economy, politics, technology, and energy. Each section contains the lead analyst’s base case calls, followed by specific assumptions and leading indicators, and then in-depth analysis of each base case with assigned probability. Each section then concludes with a less likely secondary scenario as a complement to the base case.

Economy: Eluding the Middle Income Trap
Houze Song

By 2025, Beijing will have had little choice but to reform its way out of challenges that result in a Chinese economy that will likely become more open, balanced, and efficient.
China faces one of the most daunting external environments in decades, which ironically will likely push Beijing to further embrace foreign direct investment (FDI) and improve the business environment.
On the domestic front, China’s “internal circulation” agenda will be less about self-reliance but focus on improving productivity and inducing more local competition, while keeping a lid on financial risk.
The pursuit of reform priorities means that at the end of the 14th Five-Year Plan (FYP, 2020-2025), China will likely have eluded the “middle-income trap” and become a near-majority middle-class country.

Politics: Stronger as Xi Goes
Neil Thomas

In 2025, Xi Jinping will remain General Secretary of the Chinese Communist Party (CCP), Chair of the Central Military Commission, and President of the People’s Republic of China. He will likely emerge the strongest he has ever been after the 20th Party Congress in 2022.
It’s unlikely that a clear successor will emerge from the 2022 political transition, to avoid diluting Xi’s authority as the CCP focuses on executing his domestic reform agenda.
Xi will likely focus his power on “the politics of execution” in his third term, as the 14th FYP begins his strategy to transform China into a superpower by 2035. This program will strengthen governance, discipline, and ideology to enhance Beijing’s ability to transmit policy through central agencies and local governments.
A strengthening focus on domestic priorities will involve some trade-offs, so Xi is unlikely to announce any major new foreign policy initiatives in the next five years.

Technology: Fragile Tech Superpower
Matt Sheehan

By 2025, China’s technology ecosystem will have matured and be on par with Silicon Valley in terms of dynamism, innovation, and competitiveness.
That dynamism will increasingly take the form of industrial applications of information technology, as the locus of Chinese innovation shifts from the consumer internet to the industrial internet.
China will largely succeed in deploying highly capable “new infrastructure”—cloud computing, 5G networks, smart cities, and surveillance networks, among others—to facilitate this transition to the industrial internet.
US export controls on semiconductors will act as a modest brake on China’s new infrastructure rollout. But expanding restrictions on semiconductor manufacturing equipment will mean that China remains vulnerable to future interruptions to its supply chain for advanced chips.

Energy: Setting Course for Peak Emissions
Ilaria Mazzocco

By 2025, China will be close to achieving peak emissions as a result of more ambitious actions to bolster renewables, pivot toward market mechanisms, and enhanced energy efficiency measures.
Renewables will benefit from cost competitiveness relative to coal even in the absence of subsidies.
Power sector reforms announced in 2015 will see meaningful progress to better support Beijing’s decarbonization efforts.
These factors will mean that non-fossil energy sources such as nuclear, wind, and solar will be the major beneficiaries relative to coal over the medium term.

This analytical product has been a collective MacroPolo endeavor. We harnessed our specialized knowledge and our broad understanding of how China functions to arrive at a comprehensive assessment of the country’s trajectory.

It was a challenging process to say the least, as all attempts at forecasts are. Yet through it all, this very exercise sharpened and disciplined our own thinking. Whether you agree with our assessment, we hope you find it as useful and clarifying as we did in creating it.

To download the full report, please click here.

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Damien Ma is the Director of MacroPolo

Houze Song is a Research Fellow at MacroPolo

Neil Thomas is a Senior Research Associate at MacroPolo

Matt Sheehan is a Fellow at MacroPolo

Ilaria Mazzocco is a Senior Research Associate at MacroPolo

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From globalization to deglobalization: Zooming into trade

Jash Desai — Mon, 03 Feb 2020 20:48:46 +0000

After decades of increasing globalization both in trade, capital flows but even people to people movements, it seems the trend has turned towards deglobalization. This article shows some evidence of the decrease in merchandise, capital and, to a lesser extent people to people flows. In addition, zooming into trade, the article offers an account of the importance of the strategic competition between the US and China to foster the deglobalization trend further.

This is true for trade but even beyond in the tech and finance space. Finally, the demise of the WTO could be one of the most relevant turning points towards deglobalization, especially as far as trade is concerned. This should bring downward pressure to growth globally.

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Read the full report here

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Trade and Trade Diversion Effects of United States Tariffs on China

Johnny Morris — Tue, 05 Nov 2019 17:12:49 +0000

Since mid-2018 the United States of America and China have been locked in a trade confrontation which has resulted in several rounds of retaliatory tariffs. This paper investigates the impact the United States tariffs on China on United States imports. This paper finds that United States tariffs against China have resulted in a reduction in imports of the tariffed products by more than 25 percent. The analysis finds that China’s export losses in the United States have resulted in trade diversion effects to the advantage of Taiwan Province of China, Mexico, the European Union and Viet Nam among others. The analysis also finds that those effects have increased over time. The analysis finds some preliminary evidence that Chinese exporters may have started to bear part of the costs of the tariffs in the form of lower export prices. Overall, the results indicate that the United States tariffs on China are economically hurting both countries. United States losses are largely related to the higher prices for consumers, while China’s losses are related to significant export losses.

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To view the original report from UNCTAD please visit here

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