Colombia Near-Shoring, More Huawei Squeeze, Climate Change and the Week in Review
Colombia Near-Shoring, More Huawei Squeeze, Climate Change and the Week in Review
How to near-shore. U.S. National Security Advisor Robert O’Brien and other U.S. officials traveled to Colombia this week to meet with President Ivan Duque. O’Brien used the occasion to announce the Trump Administration’s new “Western Hemisphere Strategic Framework” and a U.S. International Development Finance Corporation (DFC) initiative to “catalyze” up to $5 billion in private investment in rural areas of Colombia over the next three years. According to multiple U.S. media outlets, “Colombia will be part of a pilot program meant to incentivize near-shoring of U.S. businesses.”
What it means: The two most frequent topics we get questions from clients and potential clients about are the future trajectory of U.S.-China relations and whether “near-shoring” of U.S. supply chains is actually going to happen. We’ve spent a lot of time in this space on the U.S.-China relationship, but here now is one of the most important developments on near-shoring we’ve observed since the age of COVID-19 began.
In actuality, many supply chains across a number of industries were already shifting before COVID-19 became a global pandemic. The U.S.-China trade war as well as the rising cost of labor in China led many firms to diversify their supply chains. COVID-19 accelerated the trend. China’s cost competitiveness may have declined in recent years, but there is simply no ready-made alternative – or even a constellation of ready-made alternatives – to replace it immediately.
This announcement on Colombia is, as far as we can tell, the first U.S. government attempt at a policy level to directly assist U.S. multinationals in reimagining their supply chains. The idea, we think, is a good one, and we will tell you more about why in the next installment of our newsletter. Today, we will merely confine ourselves to the observation that what the U.S. announced it is doing falls flat upon scrutiny. The new “strategic framework” is little more than a document filled with platitudes and devoid of much in the way of any historical awareness about how the U.S. is viewed in Latin America. This is no “Marshall Plan” for the near-shoring of supply chains – if anything, it reads like an inferior version of China’s Belt and Road Initiative – heavy on vision but exceedingly light on the substance. Its genre is more fantasy than policy.
The U.S. will have the same problem in Latin American countries that China does throughout the Indo-Pacific. China, for instance, has relatively few allies (North Korea is its only defense treaty relationship), in part because its neighbors are suspicious of China’s intentions and directly threatened by China’s ambitions (Japan, Vietnam, the Philippines…the list is long). The U.S. has made its own mistakes in the region (most notably and tragically in Vietnam and Cambodia), but by and large, the U.S. is far away and has no imperialistic designs on the region.
The inverse is true in Latin American countries. In Latin America, the U.S. is near, present, and has a history of imperialism and interference. China has its own ambitions, to be sure, but China is far away and far more concerned with its regional neighborhood, not to mention incapable of projecting military force in the Western hemisphere. We do think near-shoring will become an important dynamic, but if the U.S. treats Latin America as if it were a virgin supply chain paradise as ready for utilization as the Aztec, Mayan, and Incan Empires were for conquest, U.S. companies will find the road ahead harder than they think and will need to strategize accordingly.
Huawei: down but not out. The U.S. Department of Commerce announced new restrictions on 38 Huawei affiliates. It also imposed license requirements on any transaction involving items subject to Commerce export control jurisdiction, which means semiconductor manufacturers need a license to sell to chips to Huawei whether they are designed by Huawei or not. U.S. Secretary of State Mike Pompeo said in a statement that, “the Trump Administration sees Huawei for what it is – an arm of the Chinese Communist Party’s (CPC’s) surveillance state…the United States will continue to restrict most U.S. exports to Huawei and its affiliates on the Entity List for activities that threaten U.S. national security and international stability.”
What it means: Industry analysts and foreign media described the latest U.S. restrictions as a “death sentence.” Nikkei reported that Huawei and ZTE, China’s two largest telecoms gear providers, had been forced to slow down the rollout of 5G base stations in recent weeks as a result of U.S. sanctions. According to the Associated Press, once resilient Huawei is now “suffering in earnest,” while Digitimes reports that HiSilicon is hemorrhaging engineers from its integrated circuit design team in Taiwan. There is no denying that U.S. sanctions are putting Huawei in a difficult position, but we would caution our readers not to assume that this is a “death blow” for Huawei or for China’s high-tech industry in general. This is the U.S. closing loopholes rather than making new policy. A straight-up Tencent or Bytedance ban would get our attention more than these new restrictions because they would represent a tangible escalation.
We are more interested in the reports that seem to contradict the dominant narrative emerging around Huawei. Digitimes also reports, for instance, that Taiwanese semiconductor firms have not changed their sales goals despite the Huawei bans. Huawei has launched a project called Nanniwan aimed at “de-Americanizing” its supply chains. (Nanniwan is also the subject of a Chinese Communist folk song from the early 1940s, which imagines a once barren Nanniwan blooming with life in a gloriously imagined future.) Huawei is also starting the challenging, arduous, perhaps impossible long march of becoming its own chip fabricator, aiming to complete a 45 nm chip line by the end of the year. (For a crude frame of reference, 5 nm or 7nm is considered “cutting edge.”) One of Huawei’s chief partners in the effort is Shanghai Microelectronics, which is a Chinese company that wants to produce semiconductor manufacturing equipment like lithography machines so that China is not so dependent on ASML, which dominates market share for these complex and expensive machines and which the U.S. has pressured not to sell to China. This is one of the key areas that China is still far behind on being able to produce advanced semiconductors.
Huawei is under significant pressure. Even the Global Times admitted as much, though it also underscored the inventory that Huawei has amassed, which might give it up to “two or three years” of buffer. But how much time does Huawei have, and how quickly can it make up the ground it needs to in order to survive the U.S. attempt to destroy it? And, if time is not in Huawei’s favor, what happens next? Does the U.S. just play one giant game of whack-a-mole, bopping whatever Chinese companies emerge because of Huawei’s struggles on the head as they become a threat? Or does the U.S. decide that all Chinese companies are the arm of the CPC and decides to treat them accordingly? These are not questions with easy answers, but they are the critical ones to understand the future, and we are focusing on gathering more information and insight on them every day.
The geopolitics of climate change. Two disturbing scientific studies were published recently. In Nature, researchers from Ohio State University concluded that Greenland’s ice sheet is melting at an accelerated rate and that “even if we went back to a climate that was more like what we had 20 or 30 years ago, we would still be pretty quickly losing mass.” In a second study also published in Nature, scientists concluded that new modeling “provides independent support for predictions of ice-free conditions [during the summer] by 2035” in the Arctic.” For some frame of reference, when we published a geopolitical study of the Arctic region in 2017, we assumed some of the Arctic’s maritime routes would be open during the summer by the 2030s…but not all of them!
What it means: If COVID-19 has taught us anything, it is that sometimes the most dangerous threats are the ones we cannot benchmark until it is too late. COVID-19, for instance, mimicked symptoms of pneumonia at first, and seemed to have a low enough mortality rate so as to prevent governments from acting quickly to suppress the spread of the virus. China was the first culprit of this, but multiple nations underestimated COVID-19 and only accurately diagnosed the threat when it was too late. Everyone is appropriately scared of Ebola because you cannot mistake Ebola for a flu. With COVID-19, by the time we know what hit us, we were already fracked, and even after we knew what hit us, the effects of COVID-19 were varied enough that many were willing to risk infection so they could go to Mardi Gras.
That, unfortunately, is the story of climate change on steroids. The problem with climate change has always been that the earth’s climate is so ridiculously complex that even the most competent scientists cannot give policy makers clear enough answers about what will happen when and how severe the consequences will be. As a result, climate change has become a political football between those that are not willing to sacrifice economic productivity based on what they interpret as loosey-goosey doomsday claims about the imminent demise of the planet and those who feel that the climate change threat is so self-evident as to justify massive government intervention and lifestyle changes in an attempt to avert global catastrophe. And that may be the hardest thing about climate change of all: it is not the sort of thing that just one nation can decide to tackle on its own. Climate change is a global problem, and in the absence of global consensus, actually doing what is necessary becomes impossible and hostage to geopolitics.
As a result, the frog is slowly being boiled alive. (We are the frog in this metaphor, if that wasn’t already clear.) COVID-19 might well be a result of climate change: as far back as 2008, scientific studies were warning that infectious diseases were increasing, especially zoonotic (i.e. diseases that can be spread between animals and people…like COVID-19) ones, and that “climate change may drive the emergence of [these] diseases.” The locust plague that has wreaked havoc on East Africa and continues to threaten Southwest Asia is directly attributable to changing weather patterns, especially more intense tropical cyclones in the region in 2018 and 2019. Flooding throughout Asia this year has caused death and destruction, and is not over yet: the Three Gorges Dam in China just recorded a record-level flood peak, and huge swaths of Bangladesh are underwater due to the longest-lasting monsoon rains since 1988. The latest news on melting ice in Greenland and ice-less summers in the Arctic suggests that the threat of rising sea levels may be facing us even sooner than scientists initially thought.
Climate change is not just the most significant geopolitical issue of our time, it is the most important issue of our time. If you’re not getting ready for how to manage the risks and opportunities posed by climate change, you’re no different than the folks who kept partying even after we knew COVID-19 was not a killer to be trifled with.
Belarusian dictator Alexander Lukashenko is attempting to violently restore order in Belarus despite ongoing mass protests against his rule. Belarusian workers at potash mines went on strike to protest Lukashenko, important because Belarus is the second-largest producer of potash and the sixth-largest exporter of fertilizer in the world. State TV crews also went on strike earlier this week, leaving empty chairs and catchy Russian pop music for watchers to enjoy.
Kim Jong-un has reportedly delegated authority to his sister, Kim Yo-jong, and a number of other close aids.
Turkey is threatening to sever diplomatic ties with the United Arab Emirates over its decision to normalize relations with Israel. (Turkey is apparently hoping everyone will forget that Ankara recognized Israel…in 1949.)
The People’s Daily outdid itself with this incredible piece of propaganda, entitled “Why do Chinese people love the Communist Party of China so much?”
Mexico and Argentina agreed with U.K. pharmaceutical company AstraZeneca to produce a COVID-19 vaccine which will be produced in Mexico and Argentina and distributed throughout Latin America and the Caribbean.
Japanese Defense Minister Taro Kono told Nikkei that the Japanese government wants to join the Five Eyes intelligence-sharing alliance.
A Datafolha survey published in Folha de São Paulo gave Brazilian President Jair Bolsonaro his highest approval rating since the beginning of his term (37 percent).
Argentine President Alberto Fernández told La Red radio station that his government was considering changing the monthly limit on U.S. dollar purchases in Argentina due to increased demand.