Pandas can fly

The struggle to reform China’s economy

How Xi Jinping could both calm the trade war and make China richer

FOR THE past two weeks Chinese and American negotiators have been locked in talks in Beijing and Washington to end their trade conflict before the deadline of March 1st, when America will ratchet up tariffs on Chinese goods or, perhaps, let the talks stretch into extra time. Don’t be distracted by mind-numbing details on soyabean imports and car joint-ventures. At stake is one of the 21st century’s most consequential issues: the trajectory of China’s $14trn economy.

Although President Donald Trump started the trade war, pretty much all sides in America agree that China’s steroidal state capitalism makes it a bad actor in the global trading system and poses a threat to security. Many countries in Europe and Asia agree. At the heart of these complaints is the role of China’s government, which funnels cheap capital towards state firms, bullies private companies and breaches the rights of foreign ones. As a result, China grossly distorts markets at home and abroad.

The backlash is happening just as China’s model of debt, heavy investment and state direction is yielding diminishing returns. Growth this quarter may fall to 6%, the worst in nearly three decades. Many suspect that the true figure is lower still. By opening the economy and curbing the state, Xi Jinping, China’s autocratic leader, could boost performance within China’s borders and win a less hostile reception beyond them. He is loth to limit the power of the government and the party, or to accept American demands. But China’s path leads to long-term instability.

Its leaders are entitled to feel smug. The party has presided over one of history’s great successes. Since 1980 the economy has grown at a 10% compound annual rate as nearly 800m people have lifted themselves out of poverty. A country that struggled to feed itself is now the world’s biggest manufacturer. Its trains and digital-payments systems are superior to those of Uncle Sam, and its elite universities are catching up in the sciences. Although inequality and pollution have soared, so have living standards.

Yet as our essay this week explains, since Mr Xi took power in 2013, China has in some ways gone backwards. Two decades ago it was possible, even sensible, to imagine that China would gradually free markets and entrepreneurs to play a bigger role. Instead, since 2013 the state has tightened its grip. Government-owned firms’ share of new bank loans has risen from 30% to 70%. The exuberant private sector has been stifled; its share of output has stagnated, and firms must establish party cells which then may have a say over vital hiring and investment decisions.

Regulators meddle in the stockmarket, critical analysis is suppressed and, since a botched currency devaluation in 2015, capital flows are tightly policed. Mr Xi has ignored Deng Xiaoping’s advice to “hide your capabilities and bide your time”, launching the “Made in China 2025” plan, an attempt to use state direction to dominate high-tech industries. This has alarmed the rest of the world, though it has yet to produce results.

Make no mistake, Mr Xi’s approach can continue for some time. Whenever the economy slows, stimulus is injected. In January banks extended $477bn of loans, a new record. But structural shifts are working against China. The working-age population is shrinking. Investment is a swollen 44% of GDP. As resources are sucked up by wasteful projects and inefficient state firms, productivity growth has slowed. Now that debt has surged, interest payments will amount to nearly three-quarters of new loans.

The backlash abroad risks becoming yet another drag. As barriers to trade rise, China cannot rely on the rest of the world for growth. Its share of world exports will struggle to rise above today’s 13%. Its biggest and most sophisticated firms, such as Huawei, are viewed with suspicion in Western markets (see article). Mr Xi promised a “great rejuvenation” but what beckons is lower growth, more debt and technological isolation.

China’s leaders have underestimated the frustrations behind the trade war. They have assumed that America could be placated with gimmicks to cut the trade deficit, and that the row will end when Mr Trump leaves the Oval Office. In fact American negotiators, with the support of Congress and the business establishment, have demanded deep changes to China’s economy. Western opposition to China’s model will outlast Mr Trump.

To deal with hostility abroad and weakness at home, Mr Xi should start by limiting the state’s role in allocating capital. Banks and financial markets must operate freely. Failing state firms should go bust. Savers must be permitted to invest abroad, so that asset prices reflect reality, not financial repression. If money flows to where it is productive, the charge that the economy is unfairly rigged will be harder to sustain and the build-up of bad debts will slow.

Mr Xi also needs to temper China’s industrial policy. It is too much to imagine that it will privatise its 150,000 state firms. But it should copy Singapore, where a body called Temasek holds shares in state firms, giving them autonomy while requiring that they operate as efficiently as the private sector. Spending on industrial policy should shift away from grandiose schemes such as Made in China 2025 towards funding basic research.

Lastly, China must protect the rights of foreign firms. Within China that means giving foreigners full control of subsidiaries, including over their technological secrets. Beyond its borders it means respecting intellectual property, which will be in China’s interest as its firms grow more sophisticated.

Given China’s poor record, America will need room to respond through tariffs or arbitration if China does not meet its commitments. But America should also reward good behaviour. If Chinese firms can use greater transparency to persuade it that they are operating on commercial principles, they should be treated like businesses from any other country.

Today, these reforms seem a distant prospect. But they were accepted wisdom among China’s technocrats a decade ago. They are also popular at home. Corporate bosses and senior officials say that they want American pressure to get through to Mr Xi in a way they cannot. Under him, China is becoming trapped in a bad cycle of sluggish growth, debt, state control and hostility abroad. A more economically liberal China would end up richer and make fewer enemies. It is time for Mr Xi to change course.

Brexit betrays Margaret Thatcher’s carmaking legacy

Honda’s closure of its UK plant is part of a slow-motion tragedy for the industry

John Gapper

Leave means leave. It has taken a long time for Japanese carmakers in the UK to grab the attention of Theresa May’s government. Honda’s decision to close its vehicle and engine-making plant in Swindon and take production back to Japan has done so — although, sadly, too late.

Justin Tomlinson, the Brexit-backing local MP, kept his fingers firmly in his ears this week, insisting that Honda’s decision was based on “global trends and is not related to Brexit”. Margaret Thatcher, the former Conservative prime minister who lured Japanese companies to the UK in the 1980s by promising easy access to the EU single market, would have been less blasé.

Honda faced various difficulties in Europe, including a sales downturn exacerbated by the diesel crisis (although less than a tenth of its cars made in Swindon run on diesel). The plant operates below capacity and tariff cuts in the EU-Japan trade deal made it easier to bring production home.

But only a fool or a propagandist would deny the impact of Brexit and the threat to the pan-European integrated supply chains on which manufacturers such as Honda, Nissan and Toyota have relied. “We strongly request that the UK will consider this fact seriously,” the Japanese government wrote in September 2016, which is about as close to shouting a warning as it gets.

Honda is also closing a plant in Turkey and Takahiro Hachigo, chief executive, insisted tactfully on Tuesday that the Swindon decision was not related to Brexit, but the first cars rolled off the Swindon line just before the launch of the single market in 1993. Saying “sayonara” less than six weeks before the UK is due to leave the EU speaks volumes.

The unravelling of the UK’s achievement in reviving its car industry by welcoming foreign companies is a tragedy in slow motion. Nissan has reversed its 2016 promise to build the next X-Trail SUV in Sunderland and Toyota’s patience is being tested, despite having announced last year that it will build its new Auris hatchback in Derby.

Carmaking is highly competitive — Renault’s automobile operating margin last year was 4.3 per cent, for example — and even tiny disruptions and cost increases can render a viable plant unviable. This is what made Brexit dangerous for the UK industry, which not only exports 80 per cent of cars it produces, but relies on frictionless imports of parts to run just-in-time assembly lines.

The departure of Honda has a broader significance than simply the loss of 3,500 jobs around a former Spitfire plant in Swindon, both for UK carmaking and manufacturing in general. Japanese companies showed the UK not only how to produce high-quality cars, but how to run factories well and to inculcate harmonious relations between workers and managers.

It is easy to forget how dysfunctional the UK carmaking industry used to be — particularly after the 1975 nationalisation that brought brands including Rover and Jaguar under British Leyland. Cars were shoddily made and industrial relations with unions were terrible, leading to constant disputes. The UK industry’s output peaked at 2m cars in 1972, falling to 1m by 2009.

That was why Thatcher put so much effort both into forming the single market and courting the companies her party now attacks. Part one of her strategy for remaking the UK economy was eliminating the regulations and union obstructionism that had burdened many companies. Having (often brutally) cleared them away, part two was to implant an alternative.

The Japanese carmakers did her a huge favour by having faith that the UK would be a stable European base. They led the way for others, helping to reinvigorate an industry that was in deep trouble to remarkable effect. Before Brexit started to hurt, the industry had bounced back to making 1.7m cars and 2.7m engines in 2017, employing 850,000 people directly or indirectly.

Swindon was among the biggest beneficiaries of her strategy for economic restoration. Once a town of 100,000 that relied heavily for jobs on Isambard Kingdom Brunel’s former Great Western Railway works (which employed 17,000 at its peak but had fallen to 2,000 by the time it shut in 1986) it transformed into a cluster for high-value manufacturing and professional services.

“A home for Euro-strivers,” the FT wrote of Swindon in 1988, when this was taking hold and US companies were picking it as a location for UK and European headquarters. Its population is now 220,000, including many graduates in skilled jobs at its 8,600 companies.

But something in Swindon rejected the European implant, just as in Derby and Sunderland. Despite having thrived on the arterial route between Remain-voting London and Bristol, its citizens voted Leave in the 2016 referendum by 54.7 per cent to 45.3 per cent. Perhaps they believed the area’s economic transformation was so ingrained that Honda would never depart.

Now they know better. One Honda employee interviewed by Channel 4 News described the UK government’s Brexit prevarication as “idiocy of epic proportions”. The cruellest aspect is that Swindon’s citizens, and many others in the UK auto industry, were persuaded to risk themselves.

Athens and Jerusalem

On geopolitics and the intellectual tradition.

By George Friedman


It is time for me to write the book I always wanted to write, the book that may have no readers but that sums up my work. My book on America, “The Storm Before the Calm,” will be out in September, freeing me to write the book that has no title yet. The intent of this next book is to embed geopolitics, my life’s work, with philosophy, my love; I want to imagine that geopolitics derives from the great minds I read. My other books I have written alone. The writing of this one, or at least the thoughts that give it life, will be shared with my readers. And they, being in my mind far wiser than all the professors of philosophy I have met, will point out my errors and inconsistencies and will enrage me until I do better.

Each week I will write about a fragment of thought that I have been mulling over. Some will be polished; most – such as this one – will not have reached the clarity worthy of the reader. But each fragment is meant to be a prism through which I can understand important things in due course. The pieces will appear each Thursday.

It may be that most people will object to its obscurity and carelessness. If so, I will return to my cave and mutter.

This week’s fragment of thought is on the relationship between geopolitics and the shaping of the human soul. It traces Europe to Christianity, Christianity to Athens and Jerusalem, and these cities to wars between Babylon and Persia. It also traces the tension between the dictums “know thyself” and “I am the Lord thy God.” It is only a first sketch, so don’t expect too much of it.

European civilization has a unique place in world history. It was Europe, through exploration and conquest, that forged the global understanding that there is a single humanity living in multiple hemispheres and made that notion common knowledge. Until then, humanity had lived with a different and false map of the world, ignorant of its breadth and variability. Since Europe was the continent of Christianity, it spread Christianity. But Europeans’ realization of the many different cultures that existed, worshipping so many different gods, ultimately weakened the self-confidence of Christianity and of European civilization. But that is a story to consider at a later date. For now, the question is why it was Europe and not some other civilization that tore the veil away and revealed the breadth of the world.

All of this is a geopolitical problem. Religion would seem not to be part of geopolitics any more than philosophy is, but geopolitics is complex. It is about the relationship of humans to a place, but the nature of a place is shaped by complex forces – which, in this case, include Christianity. And Christianity itself emerges from two cities that are both near and very far apart: Athens and Jerusalem. It is there that we must begin.

Athens was the city in which reason came to know itself as man’s highest moment, and in which Aristotle said, “Knowing yourself is the beginning of all wisdom.” Jerusalem is the city that enshrined the commandment “I am the Lord thy God … Thou shalt have no other gods before me.” Athens was the city of logos – reason and discourse. Jerusalem was the city of awe not of men but of God and his law. The Gospel of John begins with the proclamation, “In the beginning was the Word [logos], and the Word was with God, and the Word was God.” In that phrase, John sought to unite reason and revelation, the principles of Athens and Jerusalem. Athens held the core belief that to know thyself was the highest of goods; Jerusalem, that knowing God’s law was the greatest of things. Christianity obsessed over the soul and the self at the same time that it obsessed over God’s will. The Christian scholar Thomas Aquinas struggled with this tension, as did the Jewish philosopher Maimonides and the Muslim scholar al-Farabi. The dilemma of Athens and Jerusalem embedded itself in Eurasia. The tension between reason and revelation defined the region.

From a purely geopolitical point of view, it is striking that all of this played out along the rim of the Mediterranean, a small region within a far vaster world. It is hard to imagine two cities more distant in spirit than Athens and Jerusalem. Athens was built above a port, Piraeus. Ships from all over the Mediterranean arrived daily, delivering luxuries from around the basin. Athens was a wealthy city and, as some have said, corrupt and even weak because of its wealth. Jerusalem rested on a hill, overlooking a hard land where luxuries were few and held in suspicion. Athens luxuriated in the good life. Jerusalem luxuriated in a hard and jealous God. Athens knew many truths; Jerusalem, only one.

The one thing that bound them together was Persia. Persia threatened the Athenians’ very existence – but they were saved first by the Spartans (who were more Hebrew than Athenian) and then by their own navy. The Israelites were not threatened by the Persians but rather saved by them. The prophets had warned the Israelites that their failure to adhere to God’s laws would cause the fall of Jerusalem. In the end, this is what happened. They were conquered by Babylon (roughly located in present-day southern Iraq), the Israelites were exiled, and many wound up in Persia. Persia and Babylon fought a war – or, more precisely, an episode of a war that is ancient if not eternal. After defeating Babylon, King Cyrus allowed the Israelites to return to Israel and rebuild the temple in Jerusalem.

The Athenians had allies. The Spartans and the Athenians had a common interest in avoiding being subjugated by Persia. The Israelites lived on difficult land and struggled with one other – one of the reasons for God’s aforementioned warning. And because the land was hard, there were few allies available, and because the Israelites were meant to focus on God, diverting their attention to subtle statecraft could be difficult. Their relative poverty and limited ports also meant they were not embedded in the wider world of the Mediterranean. So, the Athenians won, the Israelites lost – yet, they recovered what was lost because of Persia’s war with Babylon and the Israelites’ ability to shape Persian policy toward them.

Greece defeated Persia because it had strategic depth: a navy that could strike the Persian flank and rugged hills to retreat into. The Greeks, moreover, did not have to unite until war broke out. Their own fragmentation increased their defensive capability. Israel faced a different problem. It had hills in the north and desert to the south, but there was little to protect it in the east. Therefore, the Israelites had to maintain constant vigilance and unity, for a threat could materialize quickly. The Israelites did not have the Greek comfort of strategic depth. Greece had luxury – even Sparta was luxurious compared to Israel. The Greeks had the luxury to think about knowing themselves. Israel, united by the commandment to honor God and his laws, could mass and win. Divided by a lack of piety, they could be crushed – and they were. The moral problem and the geopolitical reality merged. Or, more precisely, geopolitical reality generated a moral principle essential to survival.

Athens and Jerusalem were in many ways forged in the Persian-Babylonian crucible. But their most significant effect was not to the east but to the west and north, in Europe. Athens and Jerusalem served as the foundation for post-pagan Europe and dominated it. Europe dominated the creation of a single world as well. Part of Europe’s hunger came from searching for discounts in India. But the Christian components of the European surge into the world should not be neglected. And therefore, Athens and Jerusalem must not be neglected.

As I’ve said, this is not intended to be anything more than a fragment of thought. But it is the beginning of the question: What is the relationship of geopolitics to the intellectual tradition? I do not regard geopolitics as a mechanistic tool designed to predict next week. I see it as part of a very old discussion of how we humans should understand the things we do and the things we have done. I regard global self-awareness as a giant punctuation mark in human history that can be traced back to Christianity, Christianity to Athens and Jerusalem, and Athens and Jerusalem to Persia and Babylon – one of the axes of the world.

There will be more to follow.

Finally, Asset Forfeiture Is Ruled Unconstitutional — Sort Of

Among all the many things governments do that seem to violate the Constitution — not to mention common sense and basic fairness – asset forfeiture stands out.

Believe it or not, states and cities now partially fund themselves by arresting people, taking their stuff and then failing to return said stuff after deciding not to prosecute. Or prosecuting, fining and jailing someone, and still keeping their car, house, cash or whatever in addition to the legally mandated punishment.

Somehow, these – let’s call them what they are – thieves had the gall to argue that this practice was both legal and just. But yesterday the Supreme Court ruled unanimously that it’s neither of those things because, duh, the Bill of Rights applies to the states as well as the federal government. From today’s Wall Street Journal:

Justices Against Unjust Forfeiture
The Supreme Court says state seizures can violate the Constitution. 
Police and prosecutors around America have long used asset forfeiture as a cash cow, but a unanimous Supreme Court ruling Wednesday should make them think twice. The Bill of Rights keeps paying dividends even after 228 years. 
Tyson Timbs was caught selling heroin in Indiana. The maximum fine under state law was $10,000, yet the cops seized his $42,000 Land Rover. He had bought the car with legal money, but police said it was still forfeit because he had used it to transport the drugs. 
In state courts, Mr. Timbs argued that this out-of-proportion penalty violated the Eighth Amendment, which bars “cruel and unusual punishments” and “excessive fines.” Lower courts ruled in his favor. But the Indiana Supreme Court held that the ban on excessive fines didn’t apply to the states. 
This was always a questionable claim, as we wrote last year, since most of the Bill of Rights has been incorporated to the states under the 14th Amendment’s Due Process Clause. On that point Justices left and right agree. In her opinion for the Court, Justice Ruth Bader Ginsburg held that the safeguard on excessive fines, quoting earlier cases, is “fundamental to our scheme of ordered liberty” and “deeply rooted in this Nation’s history and tradition.” 
Justice Ginsburg traces the clause back as far as Magna Carta. When the 14th Amendment was ratified in 1868, she adds, 35 of the 37 states banned excessive fines in their constitutions. “In short,” she writes, “the historical and logical case for concluding that the Fourteenth Amendment incorporates the Excessive Fines Clause is overwhelming.” That includes, importantly, its application under previous rulings to civil forfeiture, which is more prone to abuse. 
Justice Neil Gorsuch joined the Court’s opinion, while also filing a one-page concurrence asking whether “the appropriate vehicle for incorporation may well be the Fourteenth Amendment’s Privileges or Immunities Clause.” Justice Clarence Thomas’s separate concurrence expands at length on this argument, insisting that freedom from excessive fines has little to do with “due process” properly understood. 
This is a familiar argument from the Court’s originalist wing, including the late Justice Antonin Scalia. In McDonald v. Chicago, the 2010 case that incorporated the Second Amendment to the states, Scalia expressed his own misgivings with the idea of “substantive due process.” Yet he joined the majority opinión. 
Justices Gorsuch and Thomas are welcome to keep advancing this view, and it’s true that substantive due process has sometimes been abused to justify judicial inventions. But by now it is well-trod judicial ground, and there is no legal overreach in this case. 
The important practical point is that the Court’s ruling in Timbs v. Indiana puts states and cities on notice. Some police departments have set annual targets for asset seizures, and a limiting legal principle has been nowhere to be found. During oral argument, Indiana’s solicitor general said that if a driver in a Ferrari was going five miles over the speed limit, that could be grounds for police to take the car. 
The Justices did not set a standard for what counts as an “excessive” seizure, so specific cases will no doubt play out in challenges to police abuses in lower courts. But defendants trying to protect their property against unjust state seizure will now have the Constitution firmly on their side.

As the article makes clear, this ruling doesn’t end asset forfeiture but does provide Constitutional justification for victims who want their stuff back. So expect a tidal wave of lawsuits that end up costing rapacious police departments, mayors and governors more than the theft is worth. This is not the end, in other words, but it is the beginning of the end.

One form of government theft down, several dozen more to go.