Marc Levinson

Tag: China

  • Burner Phones

    A year and a half ago, before a trip to China, I spoke with several people in Washington who know that country far better than I. They all gave me the same advice. My electronic devices would be examined by Chinese authorities the moment I set foot in the country, they warned. I should leave my electronics at home, they said, and take only a burner phone.

    I recalled those conversations a few days ago at a meeting of the Maritime Research Alliance in Denmark. During my trip, I learned that the Copenhagen Business School, one of the country’s leading educational institutions, has advised its staff to bring only burner phones when visiting the United States. If they carry other devices, the university has warned, immigration authorities could inspect the contents and use them as an excuse to deny entry into the country.

    This is frightening. And dangerous.

    At the moment, the U.S. government seems very hostile to foreigners, supposedly in the interest of national security. “Visiting America is not an entitlement. It is a privilege extended to those who respect our laws and values,” Secretary of State Rubio insists.

    This tough-at-the-border attitude is supposedly protecting national security. Over decades, however, nothing has protected America’s national security more than its openness. Around the world there has been a deep well of public sympathy for the United States. Its openness to diverse points of view is one reason people in other countries have sought to visit, study, and do business in the United States. By giving visitors reason to fear that they may be detained by an immigration officer for expressing views that may differ from Mr. Rubio’s or for having a suspect name in their contact books, the United States is doing nothing more than isolating itself from the world.

    The story of the French scientist headed to a conference of space researchers who was turned back by immigration officers at Houston Intercontinental Airport is well known in Europe. Companies, including U.S.-based companies, are discouraging foreign executives from traveling there, especially if they are Muslim or Chinese. “Danes really used to admire the United States,” one Danish acquaintance told me. “Now, not so much.” That ought to worry us much more than a critical sentence on a visitor’s computer.

  • Piling On

    If there’s one thing the political types in Washington can agree on today, it’s this: let’s go after China. Just about everything is seen as part of a nefarious Chinese master plan to take over the world.

    In February, the Biden Administration announced a plan to subsidize the manufacturing of ship-to-shore container cranes in the United States after concluding that Chinese-made cranes represent a security risk. “These cranes may, depending on their individual configurations, be controlled, serviced, and programmed from remote locations,” the U.S. Maritime Administration insists, without much proof. Over time, the Chinese-made cranes are to be replaced by cranes manufactured in the United States by Mitsui, a Japanese company, because the Japanese are now our trusted friends…

    …except when it comes to making the steel that goes into the cranes. In March, President Biden made clear his opposition to Nippon Steel’s plans to purchase United States Steel Corporation because the United Steelworkers Union is against it. Since then, senators of both parties have attacked the transaction on the basis of a report by an outfit called Horizon Advisory, which claims that “Nippon’s exposure to and operations in the Chinese market…introduces a potential national security risk.” It’s not clear who paid Horizon to write this report, but if a Japanese company’s involvement in China is reason to block its investment in the United States, do we really want Mitsui, which has extensive ties to China, to be making our container cranes?

    This month, we’ve heard from both Republican and Democratic members of Congress who want to prohibit index funds from investing in China and to tax investments in China in a punitive way. One of them, Rep. Victoria Spartz, thinks that “Congress has a duty to the American people to protect their hard-earned money from foreign adversaries like China” and therefore needs to tell Americans which stocks they can and cannot own. Instead of index funds that hold Chinese stocks, apparently, we should own stocks like U.S. Steel, which, according to the consulting firm Macrotrends, trades at a lower price now, adjusted for splits and dividends, than it did in 2006.

    Let’s be clear: China poses some serious national security challenges to the United States. They need to be addressed in a careful and sober way. Treating everything as a Chinese threat may generate headlines, but it does nothing to make the United States more secure. It’s just piling on.

  • More than Cheap Labor

    It’s been no secret that Chinese companies have been building factories in Mexico to protect their access to the United States market in the face of high U.S. tariffs on many Chinese exports. The Financial Times has now put numbers on this: using figures from Xeneta, a data analytics company, and Container Trades Statistics, a data supplier, the FT estimates that the number of containers from China imported into Mexico rose 28 percent in the first three quarters of 2023, compared with the same period of 2022.

    This needs to be kept in perspective: Mexico’s containerized imports from China over those nine months, the equivalent of 881,000 twenty-foot containers, are about what the United States imports directly from China in a single month. Nonetheless, it’s obvious that many Chinese companies see Mexico as a ticket to the United States. Many Mexican exports enter the United States duty-free under the U.S.-Mexico-Canada Agreement. The remainder typically face very low tariffs. While the punitive duties the United States has imposed on many Chinese products since 2018 generally apply to Chinese-made goods shipped to the United States through Mexico, they may not apply to goods that are in some way transformed in Mexico, such as Chinese-made components used to make other products in Mexican factories. Several Chinese vehicle manufacturers are reportedly scouting sites for Mexican assembly plants from which they could export to the United States with low or zero tariffs, causing considerable distress in Washington.

    Predictably, a blowback is underway, with talk about rewriting the rules of origin that determine what is a Mexican product for purposes of U.S. Customs. If done right, this could actually benefit Mexico.

    At present, there is little Mexican value added other than factory labor in most of the manufactured goods that come across the border into the United States. Nearly half the value in Mexican exports originates in other countries. If Chinese-owned factories in Mexico must incorporate more North American value added in order to receive U.S. trade preferences, they will likely need to undertake more sophisticated activities in Mexico, such as making more of their own inputs there and engaging more Mexican engineers, designers, and programmers. That could help the Mexican economy become more than a cheap labor play, which the 30-year-old free-trade arrangement among Mexico, Canada, and the United States has distinctly failed to do.

  • China’s Intangible Future

    China, as everyone knows, is a manufacturing powerhouse: it accounted for nearly one third of manufacturing globally in 2022, according to United Nations data. Factories were responsible for 28 percent of China’s economic output (compared to around 10 percent for the United States). So it’s understandable that on a recent visit to talk about my book Outside the Box, my hosts were particularly eager to discuss my assertion that in the future, globalization will have more to do with spreading ideas than with moving stuff.

    How does one support such a claim? Normally, one would bring data to bear, perhaps creating a simple chart showing a rising line. In this case, though, the data aren’t worth much. Even people who specialize in tracking international trade at places like the World Trade Organization and the United Nations Conference on Trade and Development admit that they don’t have a handle on the exchange of intangibles across borders. If an American tourist buys a ticket on Lufthansa or rents a hotel room in Tokyo, statisticians can tally a U.S. import of services because a monetary transaction occurs. But if engineers in France and Korea collaborate on the design of a video game, their sharing of code may not register as trade. Some of the value of digits moving internationally shows up in economic statistics as a return on investment, but much of it doesn’t show up at all.

    While we don’t know the quantity of intangibles flowing across borders, there are some relevant things we do know. One is that services, from research and development to after-sales maintenance and repair, account for a growing proportion of the value of manufactured goods. Another is that consumers in the world’s wealthy countries, and even in some middle-income countries, are devoting increasing shares of their spending to services and diminishing shares to goods.

    My hosts in China, I suspect, are concerned that if goods trade grows slowly, China’s vast factories and gigantic container ports won’t be fully utilized. They may be right. That’s a good reason for Chinese firms and their workers to focus more on creating intangible value, such as by inventing products and selling services, and focus less on stamping or weaving or assembling goods. But the government’s crackdown on data flows shows that it may not be ready for Chinese firms to export intangibles as vigorously as they export stuff.

  • The Risks of China

    “We have no choice but to follow the party,” a Chinese seafood entrepreneur told the Wall Street Journal recently. The Chinese government, the Journal asserts, is increasingly forcing private firms to follow Communist Party guidance and using its control over financial markets to punish those that don’t comply. In the process, state-owned enterprises are playing a larger role in the economy, reversing years of effort to downsize the state sector and expand the economic role of private investment. It’s a pretty good bet that China’s economy will become less innovative in the process.

    This development is one more nail in the coffin of what I have called the Third Globalization, the period when international trade grew by leaps and bounds due to long, complicated value chains. As I point out in Outside the Box, this model gained favor in the late twentieth century in part because the corporate bean counters who demanded that manufacturing be located where production and transportation costs were lowest failed to account for risk. Yet risks can’t simply be wished away. If goods don’t get delivered on time, investments are confiscated, or proprietary information ends up in the hands of potential competitors, the costs of long value chains can far exceed the advantages of low production costs and cheap shipping.

    As foreign businesses see it, China now has risks in spades. Dozens of foreign companies, from Abercrombie & Fitch to Zara, face the threat of of trade sanctions and customer displeasure due to allegations that their value chains include producers who use forced labor in the western province of Xinjiang. Foreign banks lost an estimated $400 of fees in an instant when the Chinese government blocked a $40 billion stock offering by the financial company Ant Group in November. The threat that Communist Party functionaries will play a greater role in guiding the activities of foreign-owned enterprises and joint ventures in China is just one more risk that has to be pencilled in.

    In response to the perception of greater risk, firms are carefully shifting their supply chains out of China and are trying to avoid tying up their money there. According to OECD data, the stock of foreign direct investment in China, which was around 25% of the country’s GDP between 2008 and 2016, fell five percentage points between 2016 and 2019. (For comparison, the share in the United States is over 40% and rising.) In 2019, the net inflow of foreign direct investment into China came to 1% of the economy, the lowest level since 1991.

    Skip the eulogies: globalization is by no means dead. But as firms and governments assess its true costs, the global economy is looming less important in our lives. We can expect international trade in goods to grow more slowly than the world economy over the next few years, and perhaps to start declining. One consequence, as Paul Krugman wrote recently, is that “America’s future will be defined by what we do at home, not on some global playing field.” The came could be said of many other countries as well.