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American Officials Erase US Role in Empowering Their New Number One Enemy China

By Conor Gallagher – naked capitalism – May 28, 2023 

As Washington increasingly inflates the China threat, a few pieces of sly propaganda to sell that conflict are coming more into focus. Recent speeches devoted to China by key figures in the Biden administration largely rested on falsehoods that conveniently erase decades of mistakes by the American elite and therefore shift all the blame onto China.

Both Treasury Secretary Janet Yellen and national security advisor Jake Sullivan recently engaged in this rewriting of history that claims the Chinese stole American jobs and similarly that Beijing nefariously took control of the “clean” energy industry and will now use its position to coerce other nations, potentially slowing climate action.

One can see why it’s an attractive talking point for DC officials as it helps sell the conflict to working class Americans and environmentalists, but it’s simply not true.

The blame for American industry (green or not) relocating to China was caused by the greed of American elites who reaped massive profits in the process. Now they claim taking on China will bring back jobs and help tackle climate change. Nevermind that much of the American industry now being relocated out of China is going to other “low-cost” countries or that the US war machine is the world’s largest greenhouse gas emitter.

How are Yellen and Sullivan portraying the US as an innocent bystander that never could have foreseen the loss of US manufacturing to China?

Here’s Yellen speaking on April 20 at the John Hopkins School of Advanced International Studies:

Over the past few decades, China has experienced an impressive economic rise. Between 1980 and 2010, China’s economy grew by an average of 10 percent per year. This led to a truly remarkable feat: the rise of hundreds of millions of people out of poverty. China’s rapid catch-up growth was fueled by its opening-up to global trade and pursuit of market reforms. … China has long used government support to help its firms gain market share at the expense of foreign competitors.

…The actions of China’s government have had dramatic implications for the location of global manufacturing activity. And they have harmed workers and firms in the U.S. and around the world…. China’s unfair economic practices have resulted in the over-concentration of the production of critical goods inside China.

And here’s Sullivan in his big speech about the new US international economic policy  speaking at the Brookings Institution last month:

The so-called “China shock” that hit pockets of our domestic manufacturing industry especially hard—with large and long-lasting impacts—wasn’t adequately anticipated and wasn’t adequately addressed as it unfolded.

First off, to the point of government support. China no doubt provides subsidies for firms largely in fields deemed strategic. The US also does so (see: Inflation Reduction Act, oil, agriculture, auto, etc.).

No doubt that China has bent and broken WTO rules, but that was working just fine for US officials until it wasn’t. Now that officials like Sullivan have woken up to the fact that offshoring everything to China was a disastrous long-term security plan, they say it’s Beijing’s fault for the “China shock.” But contrary to Sullivan’s claim such an outcome couldn’t have been foreseen, it was “adequately anticipated.” Here’s a piece from the New York Times back in 2000 titled “Unions March Against China Trade Deal”:

Thousands of steelworkers, truck drivers, auto workers and other union members rallied on Capitol Hill and swept through the halls of Congress today in a show of muscle intended to block a trade agreement with China.

Their message, conveyed by union leaders and rank-and-file members who came from as far away as Michigan and Nebraska, was that trade was working for American corporations but not for American workers.

… [the union members] said, they are only opposing a deal with a country that does not respect workers’ rights and would stop at nothing, in their view, to steal the jobs that are the backbone of the American middle class.

It was obvious at the time what was happening; the real story is well-known, but just to recap: it was American elites’ greed that caused the American working class to lose 3.7 million decent paying jobs from 2001-2018.

Matt Stoller and Lukas Kunce tell the story from a national security perspective in a 2019 piece at The American Conservative. Using old US telecom equipment company Lucent Technologies as a starting point. In 1996, AT&T spun off Bell Labs into Lucent, which began to buy up companies in an effort to keep its stock price high. Lucent also lended money to risky startups who would then buy Lucent equipment. Then came the dot-com bust, and the company, already dealing with accounting scandals, began massive layoffs. But that wasn’t the end of the story. Stoller and Kunce write:

In the early 2000s, the telecom equipment market began to recover from the recession. Lucent’s new strategy, as Mottl put it, was to seek “margin” by offshoring production to China, continuing layoffs of American workers and hiring abroad. At first, it was the simpler parts of the telecom equipment, the boxes and assembly, but soon contract manufacturers in China were making virtually all of it. American telecom capacity would never return.

Lucent didn’t recover its former position. Chinese entrants, subsidized heavily by the Chinese state and using Western technology, underpriced Western companies. American policymakers, unconcerned with industrial capacity, allowed Chinese companies to capture market share despite the predatory subsidies and stolen technology. In 2006, French telecom equipment maker Alcatel bought Lucent, signifying the end of American control of Bell Labs. Today, Huawei, with state backing, dominates the market.

The erosion of much of the American industrial and defense industrial base proceeded like Lucent. First, in the 1980s and 1990s, Wall Street financiers focused on short-term profits, market power, and executive pay-outs over core competencies like research and production, often rolling an industry up into a monopoly producer. Then, in the 2000s, they offshored production to the lowest cost producer. This finance-centric approach opened the door to the Chinese government’s ability to strategically pick off industrial capacity by subsidizing its producers. Hand over cash to Wall Street, and China could get the American crown jewels.

Can you blame Beijing? If the US wants to sell off their industry, wouldn’t it be crazy not to take it? The fact is the Chinese used the system Washington built against them, and now the likes of Sullivan and Yellen cry foul.

Long Yongtu, China’s chief negotiator for WTO accession has defended Beijing’s role in the country’s economy, saying “when we promised to adopt a market economy, we made it absolutely clear that it would be a socialist market economy.”

The loss of US manufacturing decimated the country’s research capacity. It means the US relies on components made in China for aircraft carriers and submarines. It means a trillion dollars in defense spending helps enrich China – the very country which is supposedly behind the increased defense spending in the first place.

Of course, Yellen and Sullivan admit no mistakes by the US ruling class. It was impossible to know this would happen, they say, despite warnings at the time that this very situation would arise.

Not surprisingly, when Politico did a 20-year-anniversary story on China’s accession to the WTO, most US lawmakers didn’t want to talk about their vote to normalize trade relations with China in 2000 (which paved the way to the WTO).

But four American “experts” who did the planning and negotiating of the normalization of trade ties with China have zero regrets. That’s hardly surprising as it seems the number one qualification to become an expert is the ability to never admit being wrong. It also probably didn’t hurt that all these experts were rewarded with better positions and often cashed in afterwards.

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Yellen and Sullivan also play up how confronting China is part of their newfound focus on minerals critical for a green economy, but what they’re really doing is disguising another lack of foresight by American elites. Sullivan says critical minerals are “the backbone of the clean-energy future” and that “clean-energy supply chains are at risk of being weaponized in the same way as oil in the 1970s, or natural gas in Europe in 2022.”

Many of these minerals are controlled by China and are also critical for the US defense industry. Who could have foreseen? Here’s another tidbit from that 2000 New York Times article:

In an effort to counter the unions’ message, the administration released a Commerce Department study showing that every state would benefit from increased trade with China. And Gen. Colin L. Powell, the former chairman of the Joint Chiefs, endorsed the agreement, saying that among its other benefits it would be in the nation’s security interests.

How has that worked out? Well, it’s now unclear. As Army Technology points out:

The US Department of the Interior released a list of 35 minerals it deems essential to the economic and national security in 2018 (updated in 2022), amongst them many REEs. The problem for the US is that the local production of these materials is hugely limited.

The extent of reliance on imports varies from mineral to mineral. Beryllium is mainly used to create lightweight material used in fighter jets, lithium is essential for modern battery production and tin is used in electronics, including soldier semiconductors, a sector that is projected to reach a value of $17.5bn by 2030.

Whereas the US produces some of the minerals mentioned above, it entirely relies on China and other countries for many other supplies. Cerium is used in batteries and in most devices with a screen and magnets forged from neodymium and samarium are impervious to extreme temperatures that are used in fighter jet fin actuators, missile guidance, control systems, aircraft and tank motors, satellite communications and radar and sonar systems.

Here again, it was the US that moved rare earth and other mineral processing to China, that sold off mining operations to Chinese companies, and reaped the rewards for doing so. As Stoller and Kunce describe:

In the 1970s and 1980s, the Defense Department invested in the development of a technology to use what are known as rare-earth magnets. The investment was so successful that General Motors engineers, using Pentagon grants, succeeded in creating a rare earth magnet that is now essential for nearly every high-tech piece of military equipment in the U.S. inventory, from smart bombs and fighter jets to lasers and communications devices. The benefit of DARPA’s investment wasn’t restricted to the military. The magnets make cell phones and modern commercial electronics possible.

China recognized the value of these magnets early on. Chinese Premier Deng Xiaoping famously said in 1992 that “The Middle East has oil, China has rare earth,” to underscore the importance of a rare earth strategy he adopted for China. Part of that strategy was to take control of the industry by manipulating the motivations of Wall Street.

Two of Xiaoping’s sons-in-law approached investment banker Archibald Cox, Jr. in the mid-1990s to use his hedge fund as a front for their companies to buy the U.S. rare-earth magnet enterprise. They were successful, purchasing and then moving the factory, the Indiana jobs, the patents, and the expertise to China. This was not the only big move, as Cox later moved into a $12 million luxury New York residence. The result is remarkably similar to Huawei: the United States has entirely divested of a technology and market it created and dominated just 30 years ago. China has a near-complete monopoly on rare earth elements, and the U.S. military, according to U.S. government studies, is now 100 percent reliant upon China for the resources to produce its advanced weapon systems.

And now as the US presses the situation in Taiwan and enacts chip controls (and pressures other countries to do the same), how is China considering retaliating? From Nikkei Asia:

China is considering prohibiting exports of certain rare-earth magnet technology in a move that would counter the U.S.’s advantage in the high-tech arena.

Japan specializes in making high-performance magnets from rare earths while the U.S. produces products that use the magnets… Washington has since moved to forge a rare-earth supply chain on U.S. soil. China’s share of all rare earths produced globally dropped to roughly 70% last year from about 90% a decade earlier, according to the U.S. Geological Survey.

At the same time, China still holds a tight grip on processing rare earths. Most rare earths extracted in the U.S. go to China for refining before being shipped back to the U.S.

The CHIPS Act and the Inflation Reduction Act have added roughly 77,000 jobs so far, according to Jack Conness who does a neat job tracking the investments. That’s still a far cry from the 3.7 million jobs sent to China from 2001 to 2018, and it doesn’t look like many more will be returning despite the push to move production out of China as ties deteriorate. There’s the problem of automation, which FiveThirtyEight noted back in 2016:

 Because of rising wages in China, the need for shorter supply chains and other factors, a small but growing group of companies are shifting production back to the U.S. But the factories they build here are heavily automated, employing a small fraction of the workers they would have a generation ago.

And there’s always the pesky issue of American workers asking for decent wages. Both Yellen and Sullivan waxed on about “friendshoring” – relocating from China to friendly countries, which also happen to be low-wage. This is evidence of more short term thinking and prioritizing profits. Recall that China was initially thought of as friendly, and the selling point was that gifting it American industry would only make it friendlier.

Companies from China are already out in front of the friendshoring trend and are increasingly setting up shop in Mexico in order to be closer to their biggest market in the US.

Sullivan and Yellen don’t touch on that or just how difficult this reorganizing of supply chains will be. A 2020 Bank of America study found that it would cost American and European  firms $1 trillion over five years to shift all the export-related manufacturing that is not intended for Chinese consumption out of China.

Additionally, China remains the main player in East Asian production networks, which makes manufacturing electronics products, for example, without Chinese parts and components increasingly unrealistic. Meanwhile, the US is still the largest source of inward foreign direct investment flows into ASEAN. From The Diplomat :

These different roles played by the U.S. and China in the East Asian economic system are a result of the distinct fundamentals of their domestic economies. China has pursued a production – and investment – based growth model in the past few decades, while the United States is a post-industrial, heavily financialized economy, sustained by high consumption and its central position in the global financial order. These fundamentals will prove to be harder to shape than unilaterally altering trade policies.

On the one hand, this means that attempts at isolating China are limited by the economic realities. “Friend-shoring,” “nearshoring,” and newfound industrial policies in the United States (and Europe) could very well lead to the diversification of U.S. imports, lessen the perceived national security risks associated with import dependence, and provide economic benefits to ASEAN countries by shifting some manufacturing activity from China to Southeast Asia. However, these policies are unlikely to fundamentally challenge China’s central position in regional trade and production networks in the mid-term. As Apple’s struggles in diversifying the production of the iPhone show, China-centered production networks are not easy to replicate in other countries, as Chinese logistics and suppliers possess significant advantages.

With that in mind, it’s likely this ends up as another situation similar to the purchasing of Russian oil via India:

May 29, 2023 - Posted by aletho | Corruption, Economics, Timeless or most popular | China, United States