China’s failed charm campaign

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A few weeks ago, in the run-up to the US-China Apec summit, I warned Swampians not to get too optimistic about any fundamental shift in the relations between the two countries. I take no pleasure in saying I think I’m being proven right.

Sure, big business and multinational CEOs would love to pretend that we could time warp back to the 1990s, but it’s not happening, as seen by Wall Street pulling back money from China, and Moody’s telling staff in the country to work from home before lowering the country’s credit outlook last week. The very legitimate fear was that employees might be subject to investigation, police raids or worse for delivering bad news. Who wants to do business in a country in which executives have to worry about being “invited to tea”, as the euphemism goes, if they step wrong?

As I’ve already written, business leaders should be asking themselves the same thing about the US should Donald Trump be re-elected. But that’s a topic for another day (or, in my dreams, never). To get back to China, and why the world is falling out of love with investing there, we need to look at how the big picture grievances of excessive Chinese trade surpluses, cheap product dumping, and shaky rule of law are not going away, but rather getting worse. And this isn’t just about the US-China relationship, but also the US and Europe.

Late last week, European Commission President Ursula von der Leyen met Chinese President Xi Jinping to discuss growing EU concerns about the growing trade deficit with China, which she said was down to “well known” causes like lack of fair market access in strategic sectors, preferential treatment for Chinese companies and overcapacity in the country’s manufacturing, which is resulting in the dumping of clean tech such as electric vehicles and lithium batteries on to world markets.

Chinese officials claim that the trade deficit with the EU, which has doubled in the past two years, is going to get better soon, but I’m not sure how. China isn’t cutting state investment money but is rather shifting stimulus money away from housing and into manufacturing. As Peking University professor Michael Pettis has written, that maths doesn’t work when other regions like the EU and the US want to produce more locally (as I think they rightly should as part of geographic de-risking — need we go over again the risks of producing critical strategic goods in just one small part of the world?).

In the past, the US and the EU simply would have hoovered up cheap Chinese stuff, and let jobs and investment dollars go elsewhere. That’s no longer a political possibility. So, I think we will see greater trade and investment strife between not only the US and China, but also Europe and China, in the near future. I suspect that such problems will start with clean tech, but I suspect that the car industry may quickly become ensnared in a bigger trade conflict in the coming year.

My question is whether the US and Europe, which are supposed to restart talks about shared green steel and clean tech supply chains in the next few weeks, will find any common ground that mitigates pain for any of the three sides. Those talks were supposed to take place in late autumn, but got derailed by the Israel-Hamas war. So, will the US and the EU come closer on trade and climate change in the coming year? This new Financial Times film, with input from me, colleagues like Martin Wolf, and also leading policymakers such as John Podesta, has some interesting things to say about all this. Check it out here.

Recommended reading

• Likewise, I’m in agreement with Bret Stephens about the disturbing silence from many of those same students about the really horrific Israeli rape victim stories. This hard and necessary piece turned my stomach. But that’s why it must be read.

• On a brighter note, I was delighted to read about the new Inside Literary Prize, which will be voted on by a jury of prison inmates around the country. These people have a lot of time on their hands, obviously, and are frequent, careful readers (I’ve taught literature to women in prison and can attest to this personally). It will be fascinating to see what they come up with. 

• The New York Times’ front page series on the AI race is detailed, long-form narrative worth digging into. That 2015 conversation between Elon Musk and Larry Page really creeped me out. Silicon Valley cannot be left to its own regulatory devices.