Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: China Page 2 of 10

China’s Rise Is Normal

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On June 17, 2024

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China used trade protection and cheap wages & grabbed industry from the leading industrial power exactly the same as the US did with Britain.

 

The tech/science lead follows the manufacturing floor, with some delay, this was, again, the same with Britain & the USA.

The dynamics of industrialization are well understood at this point. The first books to read are “Bad Samaritans” and “Wealth and Democracy”.

Unlike Japan or South Korea, China has a larger population than America (same as America vs. Britain) and is has a large land mass and plenty of resources. In fact, it has slightly more land area than America.

Initial industrialization in England is an interesting story and still hotly debated. Later industrialization waves are mostly all the same. (The USSR is an exception, as are city states.)

Big leaps, as opposed to adaptations of existing models almost always come from states in hot competition, and among them the peripheral states usually win (Britain, for example, is peripheral to Europe.) The biggest tech surges in Chinese history came during warring states periods.

I’m very impressed by China’s rise and the West’s sheer incompetence in enabling it, but it’s not a huge leap the way the industrial revolution was. It’s just an extension of a previously existing model.

Japan’s rise was more impressive than China’s, as the first non-European nation to pull it off. But as an island nation with limited population, they were sharply limited. They made 2 runs at the US, one a war, one industrial, and neither let them become the foremost power.

The West was very good at keeping everyone but client states from industrializing. Even Japan needed British aid (the first time), then America’s (the second time.) But the West got stupid under neoliberal “end of history” ideology & let China run the playbook, thinking it wouldn’t challenge the West. Oops.

Americans probably should have learned from the Western experience with Japan. The British enabled Japan’s rise only to have Japan attack British possessions. Without American aid, that loss would have been permanent. But China is a continental power w/a massive population. The stupid was epic.

A radical change in economic model hasn’t happened yet, and seems unlikely to before ecological and economic collapse puts an end to the viability of the current model. Looking at Chinese cities with the 7 lane highways is instructive. It’s just a better version of the same old

A complete change of the permission system will be necessary for radical economic change. No one in power, whether in the West or China, wants that or can even imagine it.

Who knows, radical economic change might happen in China when collapse really starts biting. After all, they have the manufacturing base. But usually it happens at a periphery or in a tight area with multiple competing states.

This stuff is fairly well understood. However it’s not economists who put the pieces together, it’s sociologist and historians and even some anthropologists. Economists have done more damage to the West than astrologers did to Chinese dynasties. MBA factories get an honorary mention. (They mostly weaponized economic theories, as when they noticed economic theory saying that high profits come from not competing.)

One of the most instructive trends right now is watching so many people screaming about population collapse, when what the world actually needs is a lower population. (We could have avoided that necessity, but the window is closed. Sometimes you have to act at the right time.)

All people who yell about lower birth rates can imagine is economic growth through population expansion. Anyone who thinks that way can’t create a new economic model, they’re stuck in the old one. (Elon Musk is a good example.)

People who can’t even understand population overshoot are incapable of the thinking required to deal with the world’s actual problems.

We’ll talk about permission systems at a later date. As noted, they’re key.

Using Comparative & Absolute Advantage To Explain China’s Rise

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On May 14, 2024

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Economists spend a lot of time talking about comparative advantage: France has just the right climate and land to make great wine, for example. In the Industrial Revolution England had good quality coal in just the right place. Germany has a lot of good industrial workers and craftsmen.

Most comparative advantage, however, is cost advantage. If it’s cheaper and you can produce it for less, it’s hard to compete against you.

Absolute advantage is different. Absolute advantage is when you are the only one who sells something other people want or need. For most of the 20th century if you wanted commercial airplanes you could only get them from the US or Europe or Canada (until Canada’s aviation industry was mostly destroyed in the 50s under threat from the President of the US.) Cars were available from the West and the USSR, then from Japan and Korea. Most advanced medicines were made only by the West, though India came on strong for a lot of generics towards the end of the century.

Absolute advantage is far superior to comparative advantage: you can charge much more.

This is the second article on the West’s situation via China. If you haven, read the first “You can’t run industrial policy or a war economy under neoliberalism.”

Absolute advantage can be created. The rise of England didn’t start with the Industrial Revolution, it started when England banned exports of wool to the Netherlands. Be clear, English weavers sucked in comparison, but it didn’t matter. England produced most of the wool, and if you wanted woolens, you had no choice but to buy them England, inferior thought they were at the start, or do without.

This sort of policy used to be fairly standard. When I was young Canada would not export raw logs or raw salmon, for example, but by the 80s we had begun to do so. African nations have recently started insisting on doing primary processing in country: refine the ore or hydrocarbons, tin the fish, and so on. It’s not the same as advanced manufacturing, but it captures more of the value. If you have a resource there is more demand than supply for, you can insist. Perhaps tinning or smoking fish in the US or Mexico saved ten cents a can, but so what, before fish farming there was never enough salmon.

The problem with absolute advantage, though, is it makes you lazy. When you’re competing on comparative advantage, you have to drive down costs or increase quality, or ideally both. People don’t have to buy your goods, so they have to be better or cheaper.

Now the problem is that for about two centuries the West has had absolute advantage. For most intents and purposes everything we made had absolute advantage outside the West. We had better weapons, machines, clothes, medicines, transport. Everything.

Japan was the first non-Western nation to catch up, but an island nation without significant resources, it couldn’t compete and was conquered and made into a satrapy. South Korea was given the same treatment, and allowed to industrialize, as was Taiwan.

I was a young adult when Japan roared in the 80s, but Japan was never a serious threat, simply because it didn’t have enough population. It was never going to unseat the US or Europe, only claim its place in the (still) Western system.

China is a different matter. The reason China is eating the West’s lunch is that it has overcome most of our absolute advantage and is now competing with us on comparative advantage: Chinese goods are cheaper and in some cases, like EVs, Chinese goods are better. This often isn’t a small difference: you can buy an EV in China for 14K, and it’s a decent car.

Further, China has a massive domestic market. Oh, incomes are still not as high in the West, but the population makes up for it, and Chinese industries mostly aren’t oligopolies or monopolies. In 2019 there were over 500 EV companies. As of 2023 there were still about a hundred. The competition was fierce. There is nothing like it in the west, where car companies are essentially an oligopoly, and don’t truly compete on either price or quality.

China moved up the technological chain. They actually practice competitive market capitalism much more than we do: their markets are closer to “free” than any western country’s. They have effective subsidies due to the exchange rate and direct government intervention, of course, but that’s not the key issue any more (though it was for a long time), it’s that they are genuinely better at manufacturing than we are, and more responsive to what buyers actually want.

Many nations in the West used to have competitive internal markets, with a myriad of companies competing, but under neoliberalism, and to be fair to a certain extent under Bretton Woods liberalism, they were replaced by oligopolies. The problem with real competition is that you might lose. Fake competition is far safer, and offers far better returns for the ownership and executive classes.

Until, of course, you run into companies which are used to real competition, and they eat your lunch and you scream to the government for tariffs and trade war.

Mind you tariffs aren’t a bad idea, but if they are to work, Western companies must actually become competitive again and they don’t want to do that, it’s too much like work. Nor, as I’ve noted before, is it easy for them to do. Internal rent in the West is very high, and thus so is the cost of living. If they’re involved in a trade war, they have to sell to their own citizens, but the only way they know to reduce prices is to crush wages and if they do that, well, the internal market isn’t what it needs to be. (This is what FDR and Keynes realized, which is why New Deal and post-war capitalism emphasized having wages rising faster than inflation. It created a robust market.)

Offshoring anything another country doesn’t already know how to make is stupid, because when you offshore the locals learn how to make what you offshore and eventually they make it themselves for themselves and compete with you. “Friendshoring” can’t work, it can only crate new competitors with lower costs.

The days of the West’s absolute advantage are over. We threw it away for a few decades of high profits funneled to elites, and now we must learn to compete on comparative advantage again, something we mostly don’t have and aren’t used to being necessary.

It’s the bed we made and we have to lie in.

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China Builds A Temporary Bridge In Seven Days: Baltimore Will Take Years To Rebuild Theirs

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On April 17, 2024

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I know I’m a broken record on this, but it’s important. China is dynamic. They’re higher tech in general than America or Europe and they have an engineering culture and a belief in technology which we have lost.

The ability to do this sort of thing just doesn’t exist outside of China, to the best of my knowledge. They’re not just better than everyone else, they’re miles better.

It will take years for Baltimore to build a new bridge. Perhaps they should hire a Chinese company to build a temporary one in the meantime.

The Chinese have automated delivery vehicles all over the place. Robots in retail outlets and restaurants. The world’s largest high speed rail network.

The future doesn’t happen in America any more, it happens in China. According to people who visit, there’s also essentially no homelessness.

More than that China is willing to regulate: when delivery workers were abused, China stepped in and mandated better treatment. They also, publicly, built recreation and rest stations for them. During the pandemic they put up temporary hospitals in a week.

And more and more they design at home. This is similar to the switch from Britain to America in the 19th century: at first the Brits kept the design jobs, but increasingly they moved to the US. Of course in that case it was helped by the immigration of engineers and scientists, especially Scottish ones, but the Chinese are doing just fine, now, without a lot of Europeans and Americans. (Though there’s still an idealization of whites, if you’re an engineer or a scientist who wants a job in China and can speak Mandarin, you’ll have a job fast.)

It’s not our world any more. It’s the Chinese.

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Why China Is Wise Not To Sanction The West

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On March 27, 2024

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The West has sanctioned China repeatedly, most notably in chip production technologies, but not just in those.

It has backfired, with China quickly building its own chip manufacturing capacity, though they still have a ways to go to entirely catch up. Huawei has also created their own phone OS, cutting the Google/Apple duopoly, and Apple sales are crashing, while the government is telling all government departments not to use Intel or AMD chips.

But China has largely not replied with its own sanctions. The reason is obvious: as long as they don’t, the US remains dependent on China for a vast swathe of goods. The reason chips were sanctioned is that it was one of the only areas where the West was ahead of China (the others are biotech and arguably aviation, though given Boeing’s problems, that’s an arguably.)

If China sanctioned the West, the West would have to re-shore a vast swathe of manufacturing: if not back to Europe and the US, at least to reliable allies. It would become stronger, as Russia did under sanctions.

It would also be in a far better position to wage war. Right now, in a US/China war, the US would be swiftly be crippled by its need for manufactured goods it can only get from China.

To put it simply, the US is far more dependent on China than vice-versa, and China wants to keep it that way.

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US Sanctions On China’s Chip Industry Have Completely Backfired

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On February 16, 2024

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The highlight:

According to SEMI’s market research group, China isn’t slowing down. SEMI is forecasting China’s capacity to keep growing at a significant rate over the next few years. For 300mm, SEMI expects China to have 29% of the worldwide capacity in 2026, increasing from 21% in 2022 (Figure 2). The 200mm capacity is expected to grow from 16% to 24%. And foundry capacity is expected to reach 42% in 2026 up from 27% in 2022, outpacing the Taiwan foundry capacity expansions.

China has its goal set on being more chip-independent and spending less than $300 billion a year on importing semiconductors. To accomplish these goals, they are spending a lot of money on fabs and equipment, and in some cases forming JVs to get the right chips for their industries. So, will the European and US CHIPS Acts help to increase Europe’s and the US’s capacity? A little, but as Peter Wennink recently commented, the EU chip goal is unrealistic. I’ll add in as is the CHIPS Act in the US. China has a significant head start and it will take significant investment by the EU and US to catch up, and it is unlikely politicians and shareholders will continue to fund the exercise to reach the desired goal of 20%. (my bold)

The chart:

As for the fabricators which chips are manufactured with, well, China bought tons overseas just before the sanctions hit, BUT:

The bad news for equipment companies outside of China is that due to sanctions against foreign companies selling certain types of equipment, as well as China trying to create an independent chip market, Chinese semiconductor equipment companies are seeing above-market growth. Naura Technology, AMEC, and ACM Research at mid-year of 2023 are seeing 68%, 27%, and 47% growth respectively over 2022.  Most of this is driven by the China market.

The Chinese, pre-sanctions, were not pushing indigenous chip capacity. Chinese companies preferred American, Taiwanese and US chips, seeing them as more reliable than domestic alternatives.

A chip act might have made sense IF the US was genuinely going to re-shore production, far beyond chips or IF it was going to go to war within the next two to three years.

As it is, all it will accomplish in the end is losing the Western absolute advantage in chips and transferring the market leading position to China.

Which brings us to this beautiful, semi-related bit of news:

The effect of anti-Russia sanctions was to make Russia into the world’s fifth largest economy while massively ramping up their weapons production and overall growth rate. Germany has slipped to sixth and Russia is now a firm Chinese ally. It is true that America is making more money by supplying Europe with expensive fossil fuels, but by any rational assessment, anti-Russia sanctions strengthened America’s self-declared enemies, and weakened its allies.

In other words, the policy that Daleep was the architect of was a disaster. Yet he is lauded as capable rather than as a complete fuckup. To be fair, I suppose, he was undoubtedly following orders, but he owns the orders he follows unless he objected to them and predicted their failure.

All of this applies, times ten, to anyone involved in the anti-China sanctions, which have backfired catastrophically.

America, land of the highly paid incompetent fuck up.

 

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Western China Economic News Is Totally Deranged

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On February 8, 2024

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So, the New York Times has a headline:

China Deflation Fears Raised By Falling Prices For Food and Cars

No. China’s growth is fine, and some products dropping in price is also fine. Car prices are dropping fast because China has a competitive market for car production: they have hundreds of car companies. That is driving tech improvements and price competition. This is a good thing, it is not based on “no one has enough money to spend so everyone has to drop prices” which is what caused the Great Depression (the deflationary episode that makes everyone quake.)

I think that China is making a mistake with car production, because of climate change, but it’s not even slightly an indication of the possibility of the bad type of deflation.

As for food, China’s importing more and is coming out of a period where they have multiple huge disease outbreaks and culls for both pork (the primary meat in China) and chicken (the second most common.)

Lower food prices are a good thing as long as wages are increasing, which they are.

The constant drum-beats of doom about the Chinese economy are propaganda driven insanity. The Chinese economy is still growing faster and is overall stronger than any Western economy.

If you want a summary of what the Chinese are doing (deliberately deflating housing prices and switching investment into manufacturing, among other things), I wrote a long summary article last year on the Chinese economy’s transition last year. Read it, because you won’t find this out from any Western mainstream media source, except possibly the Financial Times (and even then, not put together properly.)

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The Anti-China Chip Jeremiad Is The Stupidest Policy Imaginable

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On January 4, 2024

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So, if at first, or second, or third, or tenth you don’t succeed, try try again. The Netherlands, under heavy pressure, has canceled already approved sales of ASML lithography machines to China.

The leadership of ASML had resisted these sanctions because they said it wouldn’t work: what would happen is that China would learn how to make the machines themselves.

What he didn’t say, but it is true, is that ASML would not just lose the Chinese market, they would eventually lose the world market anywhere that didn’t put high tariffs on China or ban Chinese ASML machines, because when China learns how to make their own they will inevitably be cheaper, and the quality will catch up at some point.

Sanctions work on weak nations. They do not work on strong nations, or on nations which have strong friends. Russia sanctions might have worked if China and India and most of the South had gone along, but since China was never going to let Russia be destroyed, and since Russia produces all the fuel and food and most of the minerals it needs, plus still has a fair bit of advanced and heavy industry, especially arms manufacturing, it was never going to happen.

Sanctions against China are insanity. All they do is accelerate local production.

The thing is that before the sanctions most Chinese majors preferred US or South Korean designed chips. They were considered better and more reliable. Executives would not buy Chinese chips, even when they were available.

But when the US first launched its chip sanctions they were clearly trying to take out Huawei, one of China’s largest companies.

Being reliant on western chips went from the safe choice to the insanely risky choice and China, both private and public, spent vast sums and made huge efforts to build their own chip industry (including lithography machines are alternatives.)

There was a small window to turn this around when Biden was elected, but he doubled down on sanctions.

This needs, I think, some unpacking.

I don’t like to reach for arguments are about racism, but there’s a weird assumption in the Western ruling class that the West is just superior to everyone else: that our technological lead was somehow innate and inevitable and eternal.

Given that China had the tech lead over the entire world for a couple thousand years (or may 1,500 before which it was India or Ancient Greece and before that it was always Mesopotamia or Egypt) this seems strange. Europe took the tech lead for complicated reasons, both China screwing up and European events which were historically contingent and mostly not planned.

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A full discussion is beyond the scope of this article (and fills many many books) but “Why Europe and not China” is its own genre.

But nobody with any sense thought it was because Europeans or those of European descent are innately superior to Chinese.

I’m a broken record on this, but where the industrial base goes, the tech lead goes, at least in the industrial era. Pre-industrial it’s a bit more complicated, but it’s not an awful guideline, the exceptions tend to be transient, but they do exist (the ancient Greeks were insanely advanced) and they tend to occur where there are is a group of constantly competing small nations, which is the over-simplified explanation for European pre-industrial revolution technological advancement and also explains the massive leaps China took during warring states periods.

But if you don’t have a forced competition between near equals who know they can’t sit still or a genuine breakthrough (the industrial revolution) or both, then the more normal processes mean that where the industrial base is, so goes the tech.

Now, sanctions against China would make sense IF and only IF, you were going to take advantage of them immediately. In other words, go to war or make really radical changes to try and re-industrialized.

How radical? Well, my estimate is that if the US wants to re-industrialize it needs to drop housing and rental prices by about two-thirds, and forbid all excess profits on any product which isn’t new, say less than ten years old (and a new model is not new. Smarthone producers should have been allowed to gouge on smartphone prices for ten years after the first iPhone, for example.) No food gouging, no pharma-price gouging on medicines decades old, and so on.

The US (and Europe) need a crash, not in living standards, but in price structures. That means the people at the top need to become a lot less rich, very very fast. Social welfare isn’t a problem, actually, letting ordinary people have a backup so they can take risks and start new companies is a good thing, and so is forcing companies to really compete for employees. Tech advancement and economic growth was far better in periods with when the US had more generous welfare systems.

Obviously these policies are extremely radical, and equally obviously, America isn’t going to pursue them, so anti-China sanctions are basically pointless and actually accelerate their tech progress.

China now has the lead in more techs than not. That’s not going to change: it’s going to get worse. When the US sent its industrial base to China that became inevitable because all “end of history” bullshit was, in fact, bullshit. Capitalism doesn’t require representative democracy and neither does fast technological progress. (It doesn’t need capitalism, per se, either, but that’s the only solution we know and it was necessary for China to do capitalism to get the industrial base transfer. Also, again, another book sized topic.)

Anyway, again, anti-China or Russia sanctions increase the speed with which they catch up in tech, not decrease it. The Russia sanctions could have been justified if they let Ukraine win, but obviously they didn’t, and it should have been obvious at the time they wouldn’t because of China’s very good reason for not allowing them to work.

Our leaders, still only good at making themselves richer, worthless for all other purposes. And, in the end, the policies they pursued to make themselves rich will just turn them into the people running shithole countries which don’t much matter.

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China Will Be Understood To Be The World’s Premier Power In Less Than A Decade

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On December 1, 2023

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The signs of American collapse are everywhere. The Russians are out-producing not just the US, but the West in missiles, tanks and drones. The Chinese have a larger navy than the US and can build three ships in the time it takes the US to build one, and yes, their domestic arms industry is larger and more productive than America’s. They and the Russians are also ahead technologically in missiles, and arguably drones. (America has more expensive larger ones, but Ukraine shows what works is swarms of smaller ones.)

What’s really damning is the Western inability to ramp up production for the Ukrainian war. The Russians vastly increased production, the West hasn’t and can’t. De-industrialization is real.

I’ve gone over this in a number of articles, but the bottom line is that China is the largest trade partner of most of the world, is providing the loans for much of the world (at cheaper interest rates); is doing far more development work and so on. It is aligned with Russia. Major conferences are now lead by China: both the Iran/Saudi deal and the major Palestinian peace effort—and neither were discussed in English. They’re equal in most techs and catching up in those they are behind in like semiconductors, satellites and commercial aircraft.

But it’s the naval bit I keep coming back to. China will have a much, much larger navy than America: it already does and the American navy is shrinking while the Chinese one is growing.

The rise of China has been concealed by inertia and by the overhang of dollar being the unit of trade, but everyone is going to see and acknowledge this soon, especially as trade is increasingly settled in local currencies and alternatives to the Western banking system grow.

It just doesn’t make sense to go to the US any more if want most goods, military gear or even to move up the industrial chain. (See “How to use China to make your left wing government successful.”)

It’s all over but the shooting. In Thucydides Trap, Graham Allison’s book and article, he notes that usually the rise of a new power leads to war, sometimes multiple wars.

This is a reader supported Blog. Your subscriptions and donations make it possible for me to continue writing, and this is my annual fundraiser, which will determine how much I write next year. Please subscribe or donate if you can.

We’re about a thousand dollars out from the first reward, the first four chapters of my book “Creation of Reality”, which will be published right after we make the goal.

On a personal level, this feels weird, in that all the things I’ve been warning about for decades are now happening. De-dollarization, industrial hollowness leading to military incapacity, and the Global South abandoning Europe and American en-masse.

Slowly, then quickly.

I mean, it’s not weird, these things were obvious. But 30 years is a long time in a human life. To see it all happening now, just as I (and others) predicted feels really weird.

Same as climate change: for a long time we were warning, and not it’s here in ways only fools can deny. Exactly as predicted. I always said it would happen sooner and worse than the IPCC claimed.

The Chinese are going to get in the neck, of course. They’ll get lead-trace and then be gutted by climate change and ecological collapse like everyone else. Their time in the sun will be brief.

It’s Chinese bad luck to make it to the top of the industrial heap at the moment when the entire industrial stack is about to become impossible to maintain. They played by the industrialization rules, and they’re going to die by them.

Still, unless the North China breadbasket gets wiped out an early inundation, the Chinese will probably hold on longer than most. Big if, though. My money is that a big inundation will hit far sooner than most models say.

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