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China (Fire), China (5g), Furcation and the Week in Review

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China (Fire), China (5g), Furcation and the Week in Review

The paradigm shift in U.S.-China relations. Late Tuesday evening, Chinese officials at the Consulate General of China in Houston began burning documents in the courtyard; Houston police and fire officials responded to local reports of the smell of paper burning. The United States subsequently announced that it had ordered the consulate closed by Friday at 4 pm local time due to a “political provocation” that involved “stealing” intellectual property. China condemned the move and said it would retaliate if the US did not reverse its decision: the U.S. consulate in Chengdu looks to be the target of China’s tit-for-tat follow-up.

Meanwhile, Chinese President Xi Jinping addressed a forum of entrepreneurs in Beijing and told them that they should “concentrate on managing the country’s affairs well, and give full play to the advantage of a huge domestic market

What it means: “Paradigm” is an over-used word. It came into popular usage after Thomas Kuhn wrote his highly influential book The Structure of Scientific Revolutions in 1962. In it, Kuhn developed the idea of how scientific knowledge is produced by paradigm shifts over discrete periods of time.

A “paradigm” in a Kuhnian sense represents the overall organizing model or theory that is broadly accepted in a given field at a particular time. Scientific knowledge evolves – or undergoes a “paradigm shift” – when anomalies or evidence emerges that undermine the organizing principles of the current paradigm and often lead to rapid adoption of a new paradigm. And so it goes.

What has happened in U.S.-China relations in the last two months is worthy of describing as a “paradigm shift.” The overall organizing theory no longer fits. U.S.-China relations are in a fundamentally new realm.

The shift began when the United States imposed harsh export controls on the companies that Huawei is dependent on for the production of its 5G technology. Up to point, the U.S. had caused significant pain for China with tariffs and other restrictions, but it had not fundamentally threatened Huawei’s competitiveness abroad or the domestic rollout of 5G networks in China.

Now it has – and by taking advantage of China’s dependency on foreign imports, and especially of foreign imports made in part with hard-to-replace U.S. technology, the U.S. effectively obliterated any incentive China had to concede or compromise on trade or market access-related issues. Hence why Xi Jinping appeared to tell China’s entrepreneurs that only by focusing on domestic affairs now could they take advantage of the “historical trend” of economic globalization.

Xi’s message to China’s business community is clear: China needs to prepare for a new Long March, only this time, the destination is not Shaanxi province, but high-tech self-sufficiency. Both the US and China are burning the last chance at compromise in their respective courtyards. The Decoupling Era has arrived.  

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First-mover perks. rain and Huawei jointly announced the launch of South Africa’s first standalone 5G network – the first commercial standalone 5G network on the entire African continent. Shortly thereafter, Vodacom, a South African mobile communications company, announced a technology partnership with Alipay to create an app that will create a payments ecosystem: Vodacom will operate the platform, and Alipay will supply the technology.

What it means: The United States is trying to limit China’s rise by kneecapping Huawei’s ability to roll out 5G networks. The problem is that while the United States can rely on some like-minded democracies to follow its lead and can even in some cases coerce unwilling U.S. partners to go along, it cannot destroy Huawei. It can only slow it down.

Too often, Huawei and the Chinese government are thought of as the same entity. They share many interests in common and no doubt Huawei has benefited immensely from support the Chinese government has given it. But Huawei is also an elite multinational corporation that offers the best 5G technology in the world at a price point a cost-conscious government like South Africa can afford.

The sort of cooperation and opportunity for Alipay to partner with Vodacom is how the dividends of Huawei’s prowess is going to pay off. While the U.S. is still figuring out how to auction off spectrum and to close its domestic digital divide, a country like South Africa is building standalone 5G networks and Chinese companies are getting an opportunity to innovate on South African networks powered by Huawei technology.

There is no doubt Huawei faces considerable challenges in its near-term future, as the U.S. attempts to block Huawei from markets and while the Chinese government encourages Huawei to focus more on domestic affairs rather than profit margins as Xi has now ordered (see above) – but this is a reminder that in a strategically significant country like South Africa, which is located far away from both China and the US, and which just wants to enjoy the potential benefits of 5G networks as soon and as cheaply as possible, Huawei is going to be the choice, and nothing the U.S. can do, absent the magical appearance of 5G gear that is equally cheap and functional, will change that.

We are in need of a new word. Japan announced government support for Japanese companies relocating manufacturing out of China; 87 different companies will receive a total of 70 billion yen ($653 million) to relocate production to Vietnam, Laos, Malaysia, and Japan. Turkey Wealth Fund Chief Executive Officer Zafer Sonmez told Bloomberg in an interview that the $33 billion fund will look to make large investments in strategic sectors like petrochemicals and aerospace because private companies could not provide leadership. The Turkish government presented a bill to parliament that would enforce new restrictions on social media companies active in Turkey with more than 1 million daily users. India’s Reliance Industries chairman and managing director Mukesh Ambani announced a bold, new, and distinctly Indian approach to 5G.

What it means: The two best words we have to describe what is happening in the world are “decoupling” and “bifurcation.” The problem is of course that these words both imply that there are only two poles. China and the U.S. are decoupling, or bifurcating, or whatever word you want to use, and because they are the two largest economies in the world, these words are good enough. But as these developments above underscore, this is about more than two countries. This is about a general transformation in how the world is working. This is about a fundamental shift from a world defined by globalization to a world defined by geopolitics.

Yes, some of the Japanese companies above are relocating manufacturing to other Asian countries. But 50 out of the 87 are reshoring to Japan. Sonmez’s statement to Bloomberg that “privatization has run its course” was a stark indictment of the last 40 years of global trading developments. The Turkish government cracking down on foreign social media companies because some trolls said not-nice things about his daughter and son-in-law could in practice lead to the Turkish government controlling what goes on social media in the future. (As for trolls, Mr. Erdogan should see some of the hate-mail we get sometimes!) On the India story, we point you in the direction of Ben Thompson’s excellent newsletter Stratechery, which, while behind a paywall, is an excellent investment if tech policy developments are your jam. The gist, however, is that Ambani is promising a “made in India 5G solution” that he claims can be ready for field deployment as soon as next year.

What can we call this? “Furcation” is technically right but sounds weird and is too cumbersome. Whoever helps us come up with a better word will earn our most sincere appreciation.

Honorable Mention

2020 has been such a great year for pandas. According to Everland, a Samsung-operated theme park in South Korea, Chinese panda couple Ai Bao and Le Bao gave birth to the first baby panda “via natural mating” in South Korean history! Mom and baby are doing well, and seriously, look how cute this baby panda is.

Less cute: the US and UK accused Russia of testing in-orbit anti-satellite weaponry earlier this week. Yeah, it’s still 2020.

In what is being dubbed as “Operation Legend,” the United States is deploying federal law enforcement to U.S. cities like Chicago and Albuquerque which President Donald Trump says are “plagued by violent crime.” If this were happening in any other country, we’d probably be talking about that nation’s political instability – so we will.

European Union leaders reached agreement on a compromise that would enable the European Commission to borrow money on behalf of the entire bloc and distribute that money to member-states via grants and loans; now the real haggling begins.

Mexican President Andrés Manuel López Obrador (AMLO) announced he was putting the Mexican army and navy in charge of customs at all Mexican border crossings and seaports to curb drug smuggling and corruption.

Reuters reports that Ethiopian poultry farmers have been forced to euthanize millions of chickens due to lack of demand as a result of COVID-19 related hotel closures.

The Israel Defense Forces (IDF) announced that it was sending reinforcements to its northern border with Lebanon to respond to Hezbollah threats to take revenge for Israel killing Hezbollah fighters in Syria in recent airstrikes.

The overall situation in the Mediterranean is extremely tense: even though Turkey and Russia released joint statements asserting that they had started a new initiative to deescalate the situation on the ground in Libya, the rest of the news is all bad. Egypt’s parliament approved the possibility of Egyptian military intervention in Libya to fight “terrorist groups and militias”; French President Emmanuel Macron called for EU sanctions on Turkey for its violations of Greek and Cypriot sovereignty and criticized Turkey’s role in Libya; Greece placed its naval forces on alert after Turkey said it was sending a drilling survey ship to waters close to a Greek island.

If you’ve made it this far and waded through what a mess this week was, here is your reward: this incredible video of Turkmenistan’s president, the inimitable Gurbanguly Berdimuhamedow, going fishing in full camo, is everything you could want from Central Asian propaganda. Never change, Gurbanguly! Never change.

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