Trade war: will US espionage fears scupper Chinese rail group?

State-owned CRRC faces claims that its rail cars could be used for spying

James Politi in Springfield and Tom Mitchell in Beijing



In its 19th century heyday, the city of Springfield in Massachusetts produced the first industrial assembly line, the first gasoline-powered automobile and the first sleeping rail car. Wason, one of its leading companies, made passenger coaches and streetcars for clients across the US and countries as far afield as Egypt. While Wason went out of business in the 1930s, Springfield prospered well into the 20th century before deindustrialisation forced many of its factories to close.

So when a Chinese company announced in 2014 that it was investing $95m in a new plant to build rail cars — on a site that once housed a vast Westinghouse factory that closed in the 1970s — many in the region were excited about the prospects. For the past four years, around 200 workers have been employed in a gleaming new factory producing cars for the Boston subway system, with work on similar contracts for Philadelphia and Los Angeles to follow. 

Yet rather than being celebrated as a symbol of potential regeneration, the plant has found itself sucked into the escalating trade conflict between the US and China.

For its critics, the issue is symbolised by the giant Chinese flag flying alongside the stars and stripes at the main gates — a nod to its ownership by CRRC, a Chinese state-owned enterprise that is the biggest manufacturer of rolling stock in the world.




Leading US politicians from both parties have accused the company of using its links with the Chinese state to compete unfairly for contracts and of being a vehicle for possible Chinese espionage. Some have called for CRRC’s exclusion from upcoming tenders for the Washington and New York subway systems.

Such criticisms have been greeted with bemusement in Springfield. John Scavotto Jr, the leader of the local chapter of the sheet metal workers union, says the CRRC facility is a “godsend” — with high-paying jobs including benefits — but is worried about its future and is angry at the hostility coming from US President Donald Trump and Washington.“This guy wants to have his war with China, let him have it, but leave us alone in Springfield,” he says, speaking of the US president. “I beg them to come down here from Washington and see for themselves what they’re trying to hurt, what they’re trying to quash, what they’re trying to make disappear.”


In 2014, CRRC won a contract to supply Boston's subway system with more than 280 cars © Jake Belcher/FT


The furore over CRRC and its Massachusetts plant is emblematic of the increasingly febrile climate surrounding many Chinese investments in the US, at a time when the world’s two biggest economies are engaging in a process of decoupling that is driven by broader commercial and strategic tensions. 

Chinese investment in the US has always been fairly controversial, even after the country’s accession to the World Trade Organization in 2001. Oil company Cnooc’s proposed 2005 takeover of Unocal was scuppered in large part because of political opposition, and others have met similar fates since then.

Chinese foreign direct investment in the US did, however, increase over the years, hitting a peak of $46bn in 2016. Since Mr Trump came into office, it has dropped sharply, to $29bn in 2017 and just $5bn in 2018, according to Rhodium Group. A key driver of the decline emanated from Beijing, rather than Washington, following capital controls that reined in foreign acquisitions by many private Chinese entities. But perceived US hostility has been another major spur, especially over the past year.

Chinese acquisitions of American companies in sensitive technological sectors are now routinely knocked back on national security grounds by the Committee on Foreign Investment in the US. Cfius also recently forced a Beijing-based company to sell Grindr, the gay dating app, over fears of potential misuse of its trove of personal data. 

CRRC’s initial Springfield investment, agreed after it won a contract in 2014 to supply Boston’s subway system with more than 280 cars, represents a rare instance of a Chinese greenfield manufacturing investment. Such projects have trickled into the US at a rate of about $1bn a year since 2011 according to Rhodium. The Springfield plant was precisely the type of investment that both Washington and Beijing welcomed at the time — a rare infusion of Chinese manufacturing dollars and knowhow in an industrial sector that no longer exists in the US. 

Kevin Kennedy, the official in charge of Springfield’s economic development, calls the CRRC investment “a return to our manufacturing roots”.

John Scavotto Jr, leader of the Springfield chapter of the sheet metal workers union, says the CRRC facility is a 'godsend' © Jake Belcher/FT

     CRRC has created upwards of 200 jobs in Massachusetts



After its breakthrough tender win in Boston over Canadian, Japanese and South Korean rivals in 2014, CRRC went on to secure subway car contracts in Chicago, Philadelphia and Los Angeles between March 2016 and March 2017. CRRC won the Boston tender with a bid of $557m, substantially below those of Hyundai Rotem ($721m), Kawasaki ($905m) and Bombardier ($1bn).

Those four contract wins, secured during the final years of Barack Obama’s presidency and the first few months of Mr Trump’s, occurred in a markedly different phase in Sino-US relations. Since Mr Trump signalled his intention in late 2017 to take a tougher line on Chinese trade and investment issues than his predecessors had, CRRC has lost at least three bids for railcar contracts, including two in New York and one in Atlanta.

China-made components that CRRC assembles in Springfield were targeted in Mr Trump’s first round of trade war tariffs, imposed in July 2018 on Chinese industrial exports worth about $50bn a year. When CRRC applied for an exemption from tariffs on China earlier this year, the request was rejected by the office of the US trade representative — despite dozens of letters of support for its relief petition from politicians, union officials, chambers of commerce and vocational schools in Massachusetts and California.

“CRRC’s first North American facility and its success is critical to our city and region’s economy, bringing back manufacturing and skilled labour,” Springfield mayor Domenic Sarno wrote.

“I am surprised by the knee-jerk reactions in the world of trade that have happened in this country under this president,” adds Mr Kennedy. “The business world wants you to be reliable and predictable and that’s how we, the mayor and I, try to do our business in Springfield . . . CRRC kept its word and created upwards of 200 jobs here in Massachusetts. Most of those are in Springfield and they’re looking at expansion. We have no complaints at all about the relationship.”



Outside of Massachusetts, the Chinese company has another US affiliate in Chicago, CRRC Sifang America, which is building rail cars for the subway system there and possibly the Washington metro, should it win that contract.

But as the company’s US presence has expanded, so has the political opposition. CRRC’s most vocal critics on Capitol Hill include Chuck Schumer, the leader of the Democrats in the Senate, and Marco Rubio, the Republican senator from Florida. “This is part of China’s long-term strategy to undermine US industry and dominate the advanced technologies of the 21st century,” Mr Rubio wrote in the New York Post at the end of May. 

A few days earlier, Mr Schumer had called for the US commerce department to probe whether CRRC posed a national security risk “given what we know about how cyberwarfare works”.

A small lobbying group called the Rail Security Alliance (RSA), backed by some of America’s top freight rail companies, has been beating the drum hard about the dangers allegedly posed by CRRC. Its arguments range from suspicion that CRRC will eventually move on from passenger rail cars and dominate the US freight rail sector to worries about the state support it enjoys. “If they wanted to play by the same rules as France, Germany, Canada, Korea and Japan play by, fine,” RSA’s Erik Olson says. “But those aren’t the rules they play by. From an economic standpoint they are driven to produce jobs in China for the Chinese.”

The tariffs imposed on CRRC’s China-made components last July are having an impact. “We basically lost the Atlanta contract [in March] because of price, which is unusual,” says Russell Askalof, a former quality control manager at CRRC in Springfield. “Part of the reason we won so many of the other contracts was that CRRC [Massachusetts] was able to parlay the cheap labour in China that it uses to build the frame of the cars into a substantial discount for the total car.”

“Morale is pretty low right now,” adds Mr Askalof, who left the company last month. “People are very concerned about their jobs.”

As for the concerns about hacked subway cars, the RSA points to the advanced technology that is contained in modern rail cars, with sensors and systems used to track and regulate everything from temperature to location. The allegation levelled against CRRC that it could be a vehicle for espionage strikes a particular nerve as the company enters the Washington Metro race.

“You have members of Congress, the intelligence community, Department of Defense officials, staff, whoever [riding the DC Metro],” says Mr Olson. “We don’t think CRRC will do anything nefarious and start a war or anything, but could they track people, could they use this as an intelligence gathering tool? One hundred per cent.”

Thilo Hanemann, a partner at Rhodium, says that protectionism has driven some of the backlash against Chinese companies. “There is a long list of Chinese greenfield projects in the US that [have been] attacked by special interest groups trying to protect their market and the current climate provides fertile ground for those campaigns,” he says. “It seems everyone is jumping on the red-scare bandwagon now.”

Jia Bo, vice-president of CRRC’s Massachusetts unit, rejects the criticisms from the RSA and lawmakers. The rail cars built in Springfield, he says, abide by all the safety standards and procurement rules requiring that the majority of components are made in the US. While the shells of the cars are indeed imported from a CRRC subsidiary in north-east China — and therefore subject to Mr Trump’s punitive tariffs — the high-value networking and monitoring systems are sourced from US, Japanese and German suppliers also used by CRRC rivals. “I feel they are using this as an excuse to exclude us from the competition,” Mr Jia says.

He defends CRRC even more forcefully over the spying claims: safety cameras are installed to ensure the rail cars run securely and any data goes to the relevant transit authorities. “What they are saying, espionage, is a kind of speculation or an imaginary allegation,” he says. As for whether CRRC’s investment is now in jeopardy, he acknowledges that the company does “face a certain level of risk” and thinks the US and China both need “better communication”, but he does not believe the tension would be permanent. “The issues will be solved,” he says.

In Washington, CRRC does have one powerful defender in Richard Neal, the Democratic chairman of the House Ways and Means committee, which oversees taxes and trade. Mr Neal represents Springfield and its surrounding region and has been pushing back against some of the criticism. “There’s no question that the Chinese have a long history of actions that have threatened American jobs, technology and national security,” Mr Neal said last month. “However, it’s in our best interest, whenever possible, to strike the proper balance between protecting our national security and welcoming companies that create jobs and invest in our community. I believe we can do both.”

Kathy Brown, head of a neighbourhood council in Springfield, says she has not seen any evidence of opposition to, or scepticism about, CRRC in her meetings with residents — or even on local social media networks. “It’s pretty exciting to watch one of those cars roll out and make their way down Page Boulevard [the Springfield street where CRRC is located],” she says.

Ollie Hall, a Springfield resident and military veteran, agrees that CRRC should not be targeted simply because it is a Chinese company. “We buy a lot of products from [Chinese companies], now they want to make trains,” Mr Hall says. “If they make them for this country, to help build this country, to make it a better country, who could it harm?”

Giovanni De Caro, a 43-year old electrical assembly and repair worker at CRRC’s plant who grew up in Springfield, says the investment “brought this part of the city back to life”. He is confident that the company can continue to win contracts in America. “I think other cities throughout the US, are going to say ‘OK, let’s see what [CRRC] can do for us’,” he says. “They’ll realise that [what] other people are saying about us isn’t true.”

Mr De Caro has little sympathy for Mr Trump’s trade war with China. “I think it’s going to backfire. It will hurt us in the long run, and not just here at our company. All goods will get more expensive, so it’s going to be harder on working class families.”


Additional reporting by Arjun Kapur

The Hong Kong Extradition Bill and China’s Weakness

The proposed law is a sign that China isn’t as strong as it would like everyone to believe.

By George Friedman        

Massive demonstrations have erupted in Hong Kong, triggered by a proposed new law that would make it much easier to transfer residents of Hong Kong to Chinese custody. Hong Kong is part of China, but it has a different legal system, derived from its past as a British colony, and many Hongkongers see the law as intended to short-circuit their rights from the colonial period and make them subject to Chinese laws, which limit the rights of the accused. The extradition law would therefore place in jeopardy all in Hong Kong that Beijing might see as a threat.

The law was proposed by the Hong Kong government, which is heavily influenced or, perhaps better said, controlled by Beijing. Since the handover from the U.K., many believe Beijing has been encroaching on Hong Kong’s autonomy, even though, under the handover agreement, Beijing was supposed to avoid interfering in Hong Kong’s affairs. That agreement is being whittled away, but Britain has little say on the matter. Beijing and the Hong Kong leadership should have expected the intensity and breadth of the resistance that arose. Since the Chinese have a good sense of the mood in Hong Kong and certainly realized the radical nature of the extradition law, it is hard to imagine they didn’t expect resistance, although perhaps not as much as there was.
Thus the interesting question is: What was Beijing thinking?
  





Hong Kong’s Value
Hong Kong is an invaluable asset to China. It is also an extraordinary threat. Hong Kong’s economic importance has declined somewhat as mainland cities have become integrated into the global economy, but it serves a critical economic role for China. It is an unmatched avenue for economic relations with the rest of the world that operates under its own laws, distinct from those in China. It can trade under more flexible rules, it can raise foreign capital in different ways, and it permits the movement of essential foreign nationals with greater openness than China. It’s part of China, yet it’s far more integrated with the international economic system than China is. It is a needed interface between China and the world, and losing it would mean losing a critical channel for interacting with the global economy. Things can be done in Hong Kong that can’t be done in China itself, and that is invaluable to Beijing. It would be irrational for the Chinese to make any significant changes there, and Beijing is not irrational.

But the very thing that makes Hong Kong invaluable to China is what makes it so dangerous. Hong Kong faces the world. It also faces China. Chinese citizens are fully aware of the difference between China and Hong Kong. It is more than economics, although economic envy certainly matters. It is also the fact that ideas that are generated in Hong Kong diffuse into China as a whole, particularly the coastal region. Residents of Hong Kong derive their values largely from the British. They expect the right to criticize, to innovate (not only economically), and to adopt hybrid social styles that are part Chinese and part Western.

For a great deal of the post-Deng era, this is precisely what Beijing wanted from Hong Kong. It was a time of innovation – with limits – in China, and the innovative ferment in Hong Kong was welcomed in China. At a time when an economy is surging and transforming, a society needs social and intellectual transformation, too. Hong Kong was one of the more valuable channels for this process of transformation.

China today is in a very different position than it was a decade ago. The 2008 financial crisis weakened China’s position as an exporter. Since then, it has been striving to increase domestic consumption, bring its financial system under control and manage slower growth without creating political and social crisis. President Xi Jinping is seen as having more power and a greater ability to impose his will on China than any leader since Deng Xiaoping. He has changed the rules of succession, making it possible for him to govern indefinitely, and has carried out systematic purges of opponents and those not aligned with his plans as part of his anti-corruption campaign. It wouldn’t be a stretch to call him a dictator. China’s Central Committee did not appoint a dictator because China was doing well; it appointed one because it was not doing well. It needed radical change, and entrenched interests resisted measures that would introduce such change. Dictators arise in times of crisis, not in times of glorious vistas.
 
Paying a Political Price
As the Chinese economy tries to rebalance itself, even while facing international pressures from the United States, a key consumer of Chinese goods, doubts about Xi and resistance to his edicts are inevitable. Beijing has imposed significant security measures in China, including facial recognition software that identifies wrongdoers in crowds. Whether such technology works is less important than the fact that people know it is there and dread it. It symbolizes the lengths to which Beijing will go to maintain Chinese stability.

And this is why Hong Kong is so dangerous. It is not fully under Beijing’s control and, therefore, not subject to China’s political and social restrictions. Hong Kong’s advantage is that it is China’s interface with the outside world. But with that comes the possibility that outside values can seep into Hong Kong and, from there, can flow into China itself, particularly that part of China that is the heart of the industrial economy and would like to emulate Hong Kong’s success and values.

China’s imperative is to retain Hong Kong’s economic and commercial value, while limiting the political price. Hence the law on extraditions. It sends a message that Hong Kong can retain its favored economic and commercial status, but that Beijing can still reach in and shut down any political tendency that might increase disaffection in China. It is not a move a secure and confident China would make; it is one an insecure China would make, because it endangers Hong Kong’s economic value, as foreigners may avoid doing business there to avoid being subjected to the new law, to reduce its threat.

The response was too intense to withstand, and Hong Kong’s chief executive, Carrie Lam, backed down, suspending the bill on Saturday, only to see as many as two million people return to the streets again on Sunday anyway. The extradition law is an existential event. Xi is trying to parse the economic and political dimensions of Hong Kong, preserving one and limiting the other. Hong Kong refuses to accept that division both because it values the political dimension and because the dynamism of Hong Kong would disappear without it.

Xi wants the economic value, but he cannot risk the political price. In the not-too-distant future, he will sacrifice much of the former to limit the latter. He can’t afford mass arrests now, but he can’t afford the spread of Hong Kong’s resistance to the rest of China. Dictators live by the sense of their irresistible power. If Hong Kong resists successfully, Xi will be weakened. And he can’t let that happen.

Fed Stimulus Just Ain’t What It Used to Be

Federal Reserve may cut rates soon, but its efforts may have less oomph due to changes in the U.S. economy

By Justin Lahart


Unnerved by mounting risks to the U.S. economy, the Federal Reserve is considering lowering interest rates. Rate cuts might not provide the economy with as much oomph as in the past, though.

Fed policy makers are holding a two-day meeting Tuesday and Wednesday and, while they probably won’t cut rates just yet, they are likely to signal a move could come as early as their July meeting.

Even with trade tensions and a shaky global environment darkening the U.S. outlook, the risk of a recession still seems low. But with its target range on overnight rates set at just 2.25% to 2.5%, the Fed doesn’t have a lot of dry powder. That makes it wary of waiting too long to support the economy lest conditions deteriorate, warranting deeper rate cuts than it is able to manage.

The economic response to a cut could be muted, though. Not only are there longstanding shifts in the makeup of the economy that over the past several decades seem to have diminished the power of rate moves, but the scars left by the housing bust and financial crisis may have made consumers in particular less responsive to rate cuts.

The slog out of the last recession was long and hard, but it was just the most disappointing in what has been a series of slow recoveries. The Fed cut rates deeply through both the 1990-91 and 2001 downturns. In both cases, the economy grew more slowly coming out of those recessions than it had before the 1990s.


Fed Chairman Jerome Powell speaks during a conference at the Federal Reserve Bank of Chicago on June 4. Photo: Scott Olson/Getty Images


A big reason is that the role of some of the most interest-rate sensitive industries in the labor force—the ones that hire like crazy in response to low rates—has been greatly diminished, argue economists at the Federal Reserve Bank of Kansas City. In 1980, construction and manufacturing accounted for about 25% of total U.S. employment. By the time the 1990-91 recession began, that had fallen to 21%, slipping to 18% before the 2001 recession and 15% ahead of the last recession. Now it is at 13%.

Another important difference between this last expansion and previous ones is that housing, after falling by so much in the downturn, had such a modest comeback. Home sales remain below their late 1990s levels, when the U.S. population was lower, and housing’s direct share of gross domestic product is now at levels which in other periods would have been associated with recession. The share of Americans who own the home they live in also has fallen.

Although lower rates might stimulate home sales a bit, a variety of forces are weighing on housing, including out-of-reach prices. This matters because housing is one of the ways that rate cuts have traditionally boosted the economy. Lower mortgage costs prompt people to buy not just a house but many other things—furniture and appliances—that go with it.

Mortgage refinancing—another avenue for lower rates to make their way into consumer spending—also might be lacking. Many homeowners already refinanced during the years coming out of the recession, locking in ultralow rates.

Then, there is the increased caution Americans seem to be taking with their finances since the financial crisis, leaving the saving rate substantially higher than before the recession. Even a decade later, memories of the severity of the downturn may still be too fresh for people to respond exuberantly to lower rates.

It could take more than just rate cuts to get the economy really going again.

Can Global Rules Prevent National Self-Harm?

Most policy mishaps in the world economy today – as in the case of US President Donald Trump’s tariffs – occur as a result of failures at the national level, not because of a lack of international cooperation. And, with the exception of two types of cases, countries should be allowed to make their own mistakes.

Dani Rodrik

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CAMBRIDGE – US President Donald Trump has used national security as a justification for his tariffs on steel imports, his threatened tariff hikes on autos, and the tariffs he recently vowed to impose on Mexican imports. “If you don’t have steel, you don’t have a country,” he declared (to cite just one example). While Trump’s national-security claim seems absurd on the face of it, it raises difficult questions for the word trade regime and global economic governance more broadly.

The critical challenge of global governance is determining the dividing line between policy domains in which nation-states are free to do as they please and those that are regulated by international agreement. In a world economy that has become increasingly interdependent, pretty much everything that one country does spills over to others.

But such spillovers are not by themselves a sufficient reason to constrain national autonomy. Consider public education, gasoline taxes, or highway speed limits. Each of these policies has consequences for trade partners. Improved skills alter a country’s comparative advantage and hence others’ trading opportunities. Gasoline taxes and speed limits affect demand for oil and hence prices on world markets. Such policies are not regulated internationally, and doing so would be widely – and rightly – considered absurd.

The canonical case for global governance is based on two classes of problems. The first concerns global public goods (or bads): policies that benefit the world at large, but produce little or no benefit at home. Controls on greenhouse-gas emissions is a key example. The second class of problems is so-called beggar-thy-neighbor policies: actions that produce economic benefits at home only to the extent they harm others – and generate global inefficiency in the process. A classic example is the cartelization of some scarce commodity to extract monopoly prices from trading partners.

These cases present impeccable arguments for global economic governance. But few of the issues that preoccupy policymakers these days fall neatly into one or the other category. For example, subsidies, industrial policies, employment-protecting tariffs, non-tariff measures that target health or social concerns, poor financial regulations, and inappropriate (excessively austere) fiscal policies are neither global public goods/bads, nor beggar-thy-neighbor policies.

Some of these policies are in fact beggar-thyself policies. Others do produce domestic benefits, but because they address real market distortions or legitimate social objectives, not because they impose costs on other countries. If global governance is in a muddle today, it is because many policies have become internationalized through happenstance or the operation of political lobbies, rather than with any genuine economic justification.

Consider the national security argument for tariffs. If Trump’s argument is baseless, as many believe, it is the US economy first and foremost that bears the costs of his misguided approach. In other words, Trump’s tariffs are a beggar-thyself policy. If, on the other hand, we give Trump the benefit of doubt and are willing to accept that there is a genuine national security case, then it is proper for the decision to be made domestically.

It is impossible to know before countries apply such policies which situation applies. Either way, delegating ultimate authority to an international body seems unwise. Even when a policy, such as a national-security tariff, is misguided, democracies should be allowed, as a general rule, to make their own mistakes. Empowering international bureaucracies to prevent countries from harming themselves when there is considerable ambiguity beforehand would seem inappropriate. It would also set a dangerous precedent for other areas.

In the case of national security, World Trade Organization principles are vague and remain largely untested in practice. The relevant text seems to open the door very wide by saying “Nothing in this Agreement shall be construed… to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests.” And yet, in a recent ruling in a case not involving the United States, the WTO has adopted the position that it can review national decisions in this area and judge their appropriateness. Predictably, the US has criticized this decision.

Global governance enthusiasts must reckon with the fact that most policy mishaps in the world economy today – as in the case of Trump’s tariffs – occur as a result of failures at the national level, not because of a lack of international cooperation. Trump’s tariffs are bad policy not because they harm certain other countries, but rather because they impose substantial costs directly on the US economy.

Global arrangements cannot be relied on to prevent such domestic failures, and they are as likely to be captured by special interests as domestic political processes – with far less democratic legitimacy. External constraints may in fact aggravate domestic governance failures, insofar as they empower particular distributional coalitions at the expense of the broad public.

The best we can hope for is what one might call “democracy-enhancing global governance.” Unlike “globalization-enhancing global governance,” democracy-enhancing global governance would leave most policy domains – those that cannot be classified as global public goods or beggar-thy-neighbor policies – to national regulation. Global oversight would be restricted to procedural requirements – such as transparency, accountability, participation by relevant stakeholders, use of scientific/economic evidence – intended to strengthen domestic democratic deliberation, without prejudging the ultimate outcome.

It is doubtful that such a light mode of global governance would make a difference when it comes to Trump’s trade follies. But at least it would deny Trump (and other nativist politicians) any basis for the chronic complaint that the WTO and other international bodies are trampling on national sovereignty.


Dani Rodrik, Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government, is the author of Straight Talk on Trade: Ideas for a Sane World Economy.