The Tide Has Turned

poster: “smash the imperialist war conspiracy, forge ahead courageously to build our peaceful and happy life” Fensui diguo zhuyide zhanzheng yinmou, wei jianshe women heping xingfude shenghuo er fenyong qianjin! 粉碎帝国主义的战争阴谋,为建设我们和平幸福的生活而奋勇前进! designer: Gu Yuan (古元) ca 1950. The little figures trampled by Mao Zedong and the crowd on the poster represent the United States (Harry Truman) and Great Britain (Winston Churchill). © No copyright infringement intended. All rights belong to their respective copyright owners https://chineseposters.net

Sept 13 2021_Over the past years mijngroeve.nl posted numerous articles on the changing nature of China’s relationship with the West and the lack of a European coordinated strategy on how to deal with China’s rise. From the moment the Soviet empire collapsed in 1989 up to quite recently, the EU’s focus was predominantly on the management of the economic relationship with the PRC. China’s low-cost production base and potentially huge market grew into a crucial part of the global value chain and became an engine of growth for many European countries, in particular Germany, about the only European country that has been enjoying a trade surplus with the People’s Republic.

The business first approach was based on the premise that China, at some point, when it would have become large and strong enough economically, would (have to) integrate fully into the global value chain. It would (have to) open its domestic markets to foreign investment and offer a level playing field for foreign companies just like the American and European markets in order create added value in the global economic chain.

China First

This premise neglected the fact that since the rise to power of Xi Jinping in 2012 the PRC has embarked on a China first policy.  Yes, before the infamous Trump declared his America first policies, Xi Jinping had already started to formulate his own China first policy. A key motivation for Xi was that he was convinced that China was facing the most challenging internal and external threats in its history despite its phenomenal economic growth. This includes a deeply-held view among Xi and his closest associates in the CCP that the West is seeking regime change in China and that the PRC is in a systemic competition.  Moreover, in his view the opening of China’s domestic market to the West greatly heightened the risk of creating permanent dependencies on foreign companies, technologies and know-how, potentially making the country very vulnerable to Western pressure and sanctions. Xi was also dismayed by the overdose of foreign cultural influences, which according to him had led to subversive thinking within the CCP, the military and Chinese society as a whole.

Simultaneously Xi has held a strong belief that the West, and especially the USA, has fallen in irreversible decline. He spotted opportunities to exploit weaknesses among the foreign opponents and began to feel increasingly confident that China would win the systemic competition. He used the open markets of the West to the maximum benefit of China, while never believing in the need for a truly open Chinese market himself. Already back in 2012, when he took command of the Communist Party, Xi Jinping proclaimed “only socialism can save China”.  The majority of American and European politicians and businessmen preferred to ignore it as the perfunctory mention of a silly slogan from a bygone past- not to be taken literally in modern-day, market-powered China.  

Under Xi’s guidance China introduced policies and plans aiming for self-sufficiency in vital industries and technologies, while at the same time continuing to lure the West with the bait of a lucrative, open Chinese market.  He put forward a new strategy, mixing a very aggressive approach with deep concerns of China’s vulnerabilities. In this strategy, national security became omnipresent, dominant and comprehensive, with domestic and external components tightly connected and intertwined. It has resulted in a very combative security-oriented posture, in which China pro-actively defends its national sovereignty and territorial claims, while loudly demanding respect for its country and Party. In Xi’s eyes, China is not a rising power, but a returning one. The Western-dominated international order is just a historical aberration that should be corrected…

Surveillance state

It has also culminated in a surveillance state, in which reform minded CCP-ers have been silenced or incarcerated and the media, internet and the entire population tightly monitored. From his first day in power, Xi -true to the style of his great inspirator Mao Zedong- has tried to mobilize the CCP and the population for a long struggle which will result in the “the great rejuvenation of the Chinese nation” by 2049. Only the Party can achieve this goal, hence absolute loyalty is required and even miniscule dissent not to be tolerated: the private sector, the military, the government, the young and old, everybody has to work in unison to accomplish the CCP’s historical mission…

What we hear in the news about China in 2021 is mostly a continuation and intensification of ideas and plans formulated by Xi as far back as 2012-2013. It should no longer come as a surprize to the West. Unfortunately it still does for some, it seems. Especially several European leaders, Merkel foremost among them, seem to have difficulties to accept the fact that the paradigm has already shifted in the relationship with the PRC. Under the Trump Government the American Congress   -more vocally and clearly than the American President himself- began to put national security first too. In other words, also for the US economics and finances are no longer the only or most important factor in the relations with the PRC. Politics and strategy are. This sets new challenges for the EU, in its essence a predominantly economic organization, and particularly for those member states who sofar could comfortably rely and count on (the promise of) economic benefits and returns in their exchanges with China.

Some Europeans have preferred to put solely the blame on the erratic Trump government for the escalation of tensions in the Sino-American relationship over the past 2-3 years. They conveniently forget or fail to mention the China first policies that the Xi Jinping regime has consistently pursued: since 2012 Xi has been preparing for a scenario dictated by a long-term confrontational relationship with the US, controlled by a form of managed competition and limited cooperation to avoid serious, military conflict.  The roots of all the recent talk in the West about decoupling can be directly linked to this development inside China.  

The current CCP leadership appears more and more convinced the country only requires the West very selectively. And where there is dependence in such global connections, it seems confident that it can co-opt or divide foreign counterparts to maximize China’s state interests. Beijing is trying to make cooperation with China conditional, expecting no less than full compliance in return. Those foreigners who refuse to comply, are discredited, disenfranchised, bullied or not granted access.   

De-coupling

Ironically while the EU is still fretting about the potential scope and effect of an eventual decoupling and trying to find ways to avoid it (refer the comprehensive investment agreement/CAI) or minimize its impact, it is the regime in Beijing itself which is giving the impression to be more than willing to suffer short term losses or make serious sacrifices for perceived long term (strategic) gain.  For Xi security gains are the predominant goal, consequentially costs in the form of worsened bilateral relations should be accepted. For example, by sanctioning MEPs and European think-thanks who criticized PRC policies towards Hong Kong and in Xinjiang, China signalled its willingness to give up the CAI in order to affirm its sovereignty. Xi’s recent clampdown on China’s big tech companies also proves he is ready to bear the financial burden: the Hong Kong market, where many Chinese tech firms targeted by the crackdown are listed, has lost over $600 billion in value since July 2021 according to a Reuters report, hurting Chinese tech companies’ global competitiveness.  

The big tech’s capability to independently collect massive amounts of data (and money) probably was deemed an existential threat to the power monopoly of the CCP. The Party is now rapidly taking back full control over all those enterprises. As a small consolation to the Chinese entrepreneurs Xi has promised to erect a new stock-market in Beijing…. The CCP-led national rejuvenation project is meanwhile firmly hammered into the corporate mission of China’s industry leaders. The CCP is relentlessly calling for patriotic sentiments and support by the private sector. CEO’s who fail to obey the Party’s orders and show ‘unpatriotic behavior’ are dumped along the wayside…Xi Jinping’s views on science and technology are very pragmatic: they are just a governing tool that should be used to guarantee economic progress, social stability and -above all- the Party’s absolute grip on power.

The leadership in Beijing sees the relative performance and stability of the party state in these tough Corona times as a confirmation of its viability and legitimacy. It’s proud to let the rest of the world know. In foreign relations, it exudes self-confidence and arrogance. At home the CCP is doubling down – strengthening its party-state capitalist model by enforcing discipline and central control. The West’s arduous and uncoordinated fight against Covid stands in sharp contrast and serves as further proof that China is rising and the West is declining in the eyes of the Chinese communists.

ASML/Peter Wennink

While the paradigm shift from economics to national security is fully and quickly consolidating in 2021, more and more Western companies could find themselves in the crossfire. Two years ago, some of my posts indicated how TSMC and ASML were getting drawn into the Sino-American geopolitical technology war. Today CEO’s have to walk a very fine line, trying to please Washington and Beijing… The recent public performances of Peter Wennink, CEO of ASML, offer a good example. When the European Commission published its plans in 2020 to bring back semiconductor manufacturing to Europe, Wennink was regularly heard in the media praising the global frictionless semiconductor ecosystem, in which China plays its part, creating the most cost efficient supply chain. Setting up foundries in Europe wouldn’t pose any solution at all, according to the Dutch CEO, as Europe lacks semiconductor design houses and an assembly line infrastructure.

Mutual dependencies would be the best to safeguard cooperation and avoid conflicts, hence export controls should be averted too. Europe shouldn’t worry about technical autonomy, but focus on interdependence and multi-lateralism. No doubt his message was not only meant for the incoming Biden administration, The Hague and Brussels, but also for the regime in Beijing: here was a high tech CEO telling Xi he would really like to continue to do business with China , but hey, what could he do if Western politicians started to block him from selling his unique EUV-equipment?

In the course of 2021 Wennink started to change his tune. Suddenly construction of a European fab would no longer mean a break up of the ecosystem, but should be considered a strong contribution to a wise geographical distribution of the world’s leading-edge semiconductor manufacturing capacity. What made him alter his mind?

It must have dawned upon Wennink that not only in Washington but even in Brussels the paradigm shift has finally happened: no longer economics, but national security and geopolitics reign supreme. The Dutch CEO has realized that unlike previous efforts this time the EU is really ‘meaning bizznizz’ and committed to bring back advanced semiconductor manufacturing to the continent, at all cost. And ASML is in the end still the one who will benefit the most from it: any potential loss of China business, will be more than compensated by the new chance of selling its leading-edge lithographic equipment to all the new fabs currently being announced in Europe and the US (and Japan and South Korea).

Wennink is fortunate, being CEO of a company that possesses a unique technology and leverage over China and the USA. Other European companies are less fortunate, having made themselves dependent for their growth on the Chinese market. Those CEO’s not only feel forced to use the same politically correct messages towards Beijing as Wennink used in 2020, but are under heavy pressure to comply with any new conditions set by the communist regime.  As a consequence we have seen Western banks closing accounts of Hong Kong people associated with the pro-democracy movement and companies exercising heavy forms of self-censorship out of fear of offending Chairman Xi and ‘public opinion’ in China, as it could lead to boycotts and immediate market share loss.

Extra-territoriality

Out of a need for economic survival, succumbing to the demands and whims of Beijing could turn into the new normal for some European companies.  China’s steady shift towards ‘extra-territoriality’ in its law-making and policy regulations does also have a major impact on Westerners: the intent to proactively control behavior and narratives beyond the PRC as f.e. already exemplified in the national security law in Hong Kong in 2020 and in the new maritime law of September 1 2021, which requires multiple classes of foreign vessels traversing Beijing-claimed waters to provide detailed information to state authorities and take aboard Chinese pilots. While nobody is clear if and how the PRC would like to implement such a maritime law, its intention can’t be misinterpreted: China is building a legal framework to have the rest of the world gradually acquiesce into what Beijing already considers ‘faits accomplis’ and on which it is not willing to budge: i.e. Hong Kong has never had autonomous rights, the whole South China sea belongs to the PRC, and Taiwan is an undisputable and inalienable part of the PRC.

Xi Jinping

Crucial for our global future will be the actions of Xi Jinping, who has amassed more power than any of his predecessors, by grabbing the three top titles (CCP general secretary, Central Military Committee chair, and PRC president) in his country. Whereas the  CCP party elite settled for a more collective leadership style after Deng Xiaoping’s death in 1997, Xi managed to completely reverse this trend.   Though the CCP and China  are not always a monolithic bloc, Xi is the single most important political figure in a country with the world’s largest population, second largest economy, and second-largest active-duty military force, as well as a growing arsenal of nuclear weapons. 

By appointing himself as President for life Xi has created a succession crisis: who will be his successor and when? A regular and peaceful transfer of power is by no means guaranteed, another factor Western politicians and businessmen should take into account when dealing with today’s PRC. Xi’s ‘anti-corruption’ campaigns and purges of domestic opponents have left him with hundreds of angry, disgruntled enemies and provided him, his family members and closest associates no easy exit from the political scene, even if he would like to.  

We are witnessing a historical moment in international politics, where China is aggressively defending its party state model and loudly demanding its place on the world stage. Xi’s track record over the past decade suggests he sees communist China in a permanent struggle mode against the West, with the year 2049 bringing the ultimate victory for the PRC. Around the time when China is expected to be fully rejuvenated, Xi would be 96 years old. A Dutch saying goes “a noxious weed doesn’t die easily”: while it isn’t likely Xi will be the Great Helmsman until 2049, he nevertheless seems to have no intention to relinquish power any time soon.  

The sustainability of his type of authoritarianism is very questionable and unpredictable. There simply is no precedent in history.  Despite Beijing’s bullish talk and propaganda of China’s superior model of governance, it invests enormous amounts of resources into a ballooning security apparatus – desperately trying to extinguish any threat to its stability: according to a recent analysis by the Jamestown foundation, the Chinese government spent around USD 6.6 billion just on censorship in 2020! The CCP apparently continues to see  plenty of domestic perils to the Party’s legitimacy and longevity.  This kind of paranoia comes at a heavy price, not just for the Chinese population, but for the Chinese government’s budget as well. How united will China remain in its historical mission?

refer also https://www.csis.org/analysis/after-xi-future-scenarios-leadership-succession-post-xi-jinping-era

Access control

This nationalist, non-compromising and self-centered China will seek to further limit and excessively control access to information as part of its risk management strategy. It will make interaction and interconnectivity with the Western world increasingly complex and difficult. How to even reach agreements on digital standards, cybersecurity, 5G/6G with China under these circumstances? Obviously it’s not in China’s interest to have an overnight de-coupling as it still needs Western (financial) markets, technology and know-how to support its longer term goal and to fund Xi’s strategy.

China is not planning to scrap its export and investment growth model of the past 20 years. And besides the West, it has of course access to other significant markets as well. But perhaps Xi underestimated the urgency by which the West is now moving to adjust vital supply chains irrespective of the involved economic costs. And possibly he misjudged the willingness of the West, Japan and Australia and others to come together to more closely coordinate standardization of our digital world.  In another 2-3 years some of these vital chains will look quite different, while a fragmentation between a Western and Chinese digital hemisphere does no longer look like some farfetched possibility.  

Whereas the PRC’s tech sector has always operated under a high degree of uncertainty, the recent CCP crackdown on big tech begs the question how Xi wants to manage this crucial sector in his modernization plans. How to stimulate and cherish innovation in a paranoid security state? Moreover, if China is increasingly cut off from advanced technology, equipment and software tools of the West, Xi’s dreams of a world leading Chinese semiconductor industry will face a serious setback, just like his ambition to have China quickly climb up from the lower-end positions in the global value chain, regardless of all the Chinese propaganda and noise in certain Western circles that the PRC’s innovation will overtake the rest of the world in 10-15 years.

The foundations on which the party security state are built are in reality less solid than what Xi wants us to believe. There is therefore no reason for the EU to kowtow to Beijing’s bullying, bluff and whims. Dialogue with Beijing should naturally be continued, but not from a position of weakness but strength. And with an eye on reality: the trend towards de-coupling was kicked off by Xi Jinping himself, not because of some conspiracy by the West against China.  An economic level playing field as aimed for by Merkel via the CAI is not in the cards any time soon, European businessleaders better be (made fully) aware of that. In the end it’s up to Beijing to decide if it would like to be a responsible stake-holder in the global economic system and whether it would like to shape or reform it in peaceful ways to reflect China’s growing importance. Or to just continue to subvert it in the current aggressive fashion.

The Hague, Brussel and Berlin

What the opinion of the Dutch cabinet is about this paradigm shift isn’t clear as ~6 months after the elections The Netherlands still doesn’t have a new government. The care-taking Rutte government has been mostly silent on the China topic, being pre-occupied with Covid, domestic issues and the fall-out of the American withdrawal from Afghanistan. Rutte is no doubt anxiously awaiting the outcome of the German elections. Will a new German Chancellor revive the CAI? Or will national security get the priority in German policies towards China too? The European parliament as well as European countries with less close trade ties with the PRC than Germany and The Netherlands would like to see a much more assertive European stance towards China, that unequivocally upholds the international order and universal values, while countering more pro-actively the PRC’s Belt & Road initiative.

Merkel managed to bypass these voices most of the times as evidenced by her push through of the CAI at the end of 2020 with the blessing of Macron. It will be interesting to see if a new German Chancellor decides to follow in Merkel’s footsteps and go against the tide or opts to side with the current trend in Washington and Brussels. Irrespective of what the outcome will be, European politicians and business leaders better prepare for a Chinese party-state economy that will continue to fiercely compete and expand globally, that aims for self-reliance in the digital- and high-tech space and in strategic industries and that will not shy away from publicly and relentlessly defending and promoting its national security state. A country that will staunchly stand up for its ‘national sovereignty and territorial integrity’, while asserting and policing ‘red lines’ or claims (regarding Taiwan, Tibet, Hong Kong, South China Sea, Xinjiang etc) very forcefully abroad….

refer also: https://merics.org/en/report/ccps-next-century-expanding-economic-control-digital-governance-and-national-security and https://www.mijngroeve.nl/history/the-unravelling-of-the-china-dream/ and https://www.mijngroeve.nl/music/smasher-of-the-week-23_wang-kun-the-red-girl-with-the-white-hair/ and https://asiatimes.com/2021/08/us-paradigm-shifts-from-engaging-to-handling-china/ en https://www.mijngroeve.nl/history/xi-is-the-mole/

update Sept 15 2021: https://edition.cnn.com/2021/09/15/politics/us-uk-australia-nuclear-powered-submarines/index.html