China con­fronts its lim­its

The Globe and Mail (Ottawa/Quebec Edition) - - FRONT PAGE - NATHAN VANDERKLIPPE ASIA COR­RE­SPON­DENT BEI­JING With re­port­ing by Alexan­dra Li

Events since Wash­ing­ton banned ZTE from pur­chas­ing U.S. parts have re­vealed the lim­its of ri­val su­per­power’s state-cap­i­tal­ist model

ZTE Corp. boasts that it is China’s 26th-most valu­able brand, a telecom­mu­ni­ca­tions gi­ant that ranks among the world’s top man­u­fac­tur­ers of smart­phones.

Yet, it took Wash­ing­ton only a few weeks to shut the com­pany down this spring by ban­ning its pur­chase of U.S. com­po­nents. On May 9, ZTE said it could no longer con­tinue to op­er­ate.

Soon af­ter, the United States re­versed its ac­tion against the com­pany, let­ting it spring back to life.

But the myth of Chi­nese in­vin­ci­bil­ity had been punc­tured, a mo­ment that looms over ev­ery­thing that has hap­pened since: rapidly es­ca­lat­ing trade fric­tion; ris­ing wor­ries about a new cold war; a global cam­paign by the United States to stymie the spread of Chi­nese telecom­mu­ni­ca­tions tech­nol­ogy; and now, the ar­rest of Meng Wanzhou, the chief fi­nan­cial of­fi­cer of Huawei Tech­nolo­gies, the com­pany in the crosshairs of that cam­paign.

“The ag­gres­sive ac­tions by the Trump ad­min­is­tra­tion are based on a be­lief that China’s eco­nomic and po­lit­i­cal po­si­tion are far weaker than Bei­jing ad­mits,” said Jude Blanchette, who leads the China prac­tice for Crump­ton Group, a strate­gic ad­vi­sory firm based in Ar­ling­ton, Va.

Ms. Meng’s ar­rest at Van­cou­ver air­port on Dec. 1 has roiled stock mar­kets around the world and has made Canada the in­ad­ver­tent cus­to­dian of a top ex­ec­u­tive of China’s largest pri­vate com­pany, raising fears about Chi­nese retri­bu­tion.

But it has also placed Ot­tawa in a fraught po­si­tion be­tween jostling su­per­pow­ers bat­tling for the pri­macy of their cor­po­ra­tions and the in­flu­ence of their vastly dif­fer­ent sys­tems of gov­er­nance.

What is tak­ing place be­tween the United States and China is “geopo­lit­i­cal war­fare be­ing slugged out in the trenches of the dig­i­tal tech­nol­ogy mar­ket,” said Mike Gow, a lec­turer in in­ter­na­tional busi­ness at Bri­tain’s Coven­try Busi­ness School.

It was only a decade ago that China staged a jaw-drop­ping spec­ta­cle at the Sum­mer Olympics. Then, its lead­er­ship or­ches­trated an even more stun­ning per­for­mance: Bei­jing’s deft nav­i­ga­tion of the global fi­nan­cial cri­sis, which left deep gouges on the West­ern world but barely scratched China.

In the years that fol­lowed, the coun­try be­gan to take on an air of in­vul­ner­a­bil­ity. West­ern ob­servers openly ex­pressed awe at its achieve­ments – its ex­plo­sive ac­cu­mu­la­tion of patents and sci­en­tific pub­li­ca­tions, its fu­tur­is­tic cities, its ri­otous eco­nomic ex­pan­sion – and warned of the ways that China, with its ef­fi­ca­cious cen­tral­ized po­lit­i­cal sys­tem, was eclips­ing a frac­tured West. Economists be­gan to de­bate the year in which the Chi­nese econ­omy would sur­pass that of the United States.

Then came the day ZTE stood hum­bled.

“The Chi­nese cer­tainly real­ized firms such as ZTE are far weaker than they once thought,” said Dali Yang, a po­lit­i­cal sci­en­tist who spe­cial­izes in China at the Univer­sity of Chicago – but that’s not to say China will cave to U.S. de­mands.

Still, the ZTE ex­pe­ri­ence has added im­pe­tus to the U.S. ac­tions against China, led by a White House stud­ded with ad­vis­ers who have long warned that China poses an ex­is­ten­tial threat to the United States.

In­deed, dis­tinct ide­o­log­i­cal con­tours have shaped the U.S. bid to es­ca­late tar­iffs and block the spread of Huawei tech­nol­ogy, an ef­fort that claimed an­other suc­cess on Fri­day with Ja­pan con­sid­er­ing a ban on gov­ern­ment pur­chases of ZTE and Huawei equip­ment.

“It got to a point where we re­ally can’t deal with a big coun­try that’s based on state cap­i­tal­ism and dis­crim­i­na­tory eco­nomic poli­cies,” said Wil­liam Zarit, chair­man of the Amer­i­can Cham­ber of Com­merce in China.

What China has ac­com­plished with Com­mu­nist Party rule may be in­cred­i­ble, “but I think what’s miss­ing in the nar­ra­tive there is that they wouldn’t have done it with­out the sup­port of the West. And so I think the mis­cal­cu­la­tion that’s be­ing made right now on the Chi­nese side is think­ing that it was their sys­tem,” said Mr. Zarit, a Bei­jing-based se­nior coun­sel­lor with the Co­hen Group, a strate­gic ad­vi­sory firm. “If the trade war goes like I would like to see it go, it would help open up the econ­omy. Which is good for China – and it’s good for the rest of us, too.”

In some ways, how­ever, the op­po­site is also hap­pen­ing. Chi­nese Pres­i­dent Xi Jin­ping has called for China to re­duce its de­pen­dence on the United States, whose ef­forts to un­der­mine Huawei are seen in Bei­jing as an at­tempt to thwart China’s de­vel­op­ment. Huawei is among a group of ma­jor Chi­nese dig­i­tal com­pa­nies that have in­vested heav­ily in ar­ti­fi­cial in­tel­li­gence (AI), as the coun­try’s lead­er­ship seeks to leapfrog West­ern dom­i­nance of other mod­ern tech­nolo­gies and build ad­vanced com­put­ing into a new eco­nomic pil­lar.

The United States wants “to cur­tail their AI ca­pa­bil­i­ties,” said Phill Hynes, an in­de­pen­dent risk con­sul­tant with ex­ten­sive ex­pe­ri­ence in China. But in do­ing so, “they’re go­ing to force China to be­come self-re­liant.”

At the same time, the trade war has forced China to grap­ple with its own lim­i­ta­tions. This sum­mer, the ed­i­tor of China’s Sci­ence and Tech­nol­ogy Daily, Liu Yadong, prompted gasps – and more than a few mur­murs of agree­ment – when he de­clared the gap be­tween China and the West re­mains “large.”

U.S. in­flu­ence has also been re­in­forced by its abil­ity to push al­lies away from Huawei. Aus­tralia and New Zealand have blocked the com­pany’s next-gen­er­a­tion wire­less tech­nol­ogy, and in­tel­li­gence ex­perts in Bri­tain and Canada have urged their coun­tries to do the same.

“It could put China in a vul­ner­a­ble po­si­tion if other coun­tries join their camp, echo the U.S. and say no to our tech­no­log­i­cal in­no­va­tions,” said Su Hao, found­ing di­rec­tor of the Cen­ter for Strate­gic and Peace Stud­ies at China For­eign Af­fairs Univer­sity.

China “has gone through a mo­ment of truth,” said David Kelly, re­search di­rec­tor at China Pol­icy, a Bei­jing-based ad­vi­sory firm. “There is a test­ing of as­sump­tions go­ing on, par­tic­u­larly of mar­ket mech­a­nisms ver­sus state-plan­ning mech­a­nisms.”

Still, even if the United States wields power over China’s tech­nol­ogy sec­tor, it’s not clear what it can ac­com­plish – a mat­ter of pro­found im­por­tance for the world’s two largest economies.

“Many of the changes the U.S is ask­ing for cut to the heart of the Com­mu­nist Party’s hold on power,” Mr. Blanchette said, “and thus are non-ne­go­tiable.”

There is a test­ing of as­sump­tions go­ing on, par­tic­u­larly of mar­ket mech­a­nisms ver­sus state-plan­ning mech­a­nisms.

DAVID KELLY

RE­SEARCH DI­REC­TOR AT AD­VI­SORY FIRM CHINA POL­ICY

WANG ZHAO/AFP/ GETTY IM­AGES

When the United States banned Chi­nese tele­com gi­ant ZTE, whose sign is seen on a build­ing in Bei­jing, from pur­chas­ing U.S. com­po­nents, the Chi­nese gov­ern­ment real­ized such firms are far weaker than it once thought.

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