Beware the long arms of American and Chinese law

A rules-based order is giving way to something that feels more like 19th-century imperialism

Gideon Rachman

© James Ferguson/Financial Times


A small town in Germany gets a letter from US senators, threatening it with “crushing, legal and economic sanctions”. Professors at Oxford and Princeton tell students to submit essays anonymously — to protect themselves from potential arrest for violating Chinese law.

Welcome to the world of extraterritoriality. The US and China are increasingly seeking to extend the reach of their domestic law overseas — compelling foreign companies and people to do the bidding of Washington or Beijing. The rise of extraterritoriality is the latest sign of the sad decline of our old friend, the rules-based international order, under which big powers at least pretended to play by the same rules as everybody else.

In the extraterritorial world, there is one set of rules for superpowers and another for everybody else. This looks less like the 21st century, as imagined by international lawyers and more like the 19th century, in which imperial powers imposed their will on others.

It is the US that has gone furthest in the use of extraterritorial law. Its most important weapon is one available to no other nation — the dollar’s status as the global reserve currency. That means foreigners often use the American financial system and so become vulnerable to prosecution under US law. It also means that America can threaten foreigners with financial sanctions that have global reach.

Even during the Obama years, the US was using its extraterritorial power with increasing enthusiasm. Just think of the many world football executives arrested in Switzerland in 2015 and extradited to stand trial in the US. Their mistake was to process allegedly corrupt transactions through US banks.

The Trump administration has taken up the sanctions cudgel with even more enthusiasm. Following the crackdown on the pro-democracy movement in Hong Kong, the US has targeted Carrie Lam, Hong Kong’s chief executive and some of her colleagues. Ms Lam recently admitted that she is having difficulty using credit cards.

Russia is also a target for US sanctions, which is where the German port of Sassnitz came into the picture. Russian ships completing the controversial Nord Stream 2 gas pipeline to Germany have been docking there. 

This has attracted the attention of senators Tom Cotton, Ted Cruz and Ron Johnson, who last month sent a letter to the town and a German company involved in the project, threatening them with sanctions. Mike Pompeo, US secretary of state, has warned companies involved in Nord Stream: “Get out now, or risk the consequences.”

German politicians are outraged by this pressure — but they are also worried. American law is sufficiently vague to make any German bank or law firm involved in Nord Stream, potentially vulnerable to US prosecution.

Perhaps the most spectacular extraterritorial application of US sanctions law by the Trump administration was the arrest of Meng Wanzhou, chief financial officer of China’s Huawei Technologies, who was detained in Canada, for alleged offences related to US sanctions on Iran. 

Huawei has also been targeted by US laws that prevent the sale of American computer chips to the Chinese tech giant. That will make it much more difficult for Huawei to roll out its 5G technology around the world.

The very notion of extraterritoriality is highly sensitive in China, because of its echoes of the 19th century, when many foreigners lived under their own laws in Chinese cities such as Shanghai.

But these days China is no longer merely on the receiving end of extraterritorial laws. 

The language of its new national security law, announced in June, is so vague and sweeping that it potentially makes even foreigners speaking overseas vulnerable to prosecution for “subversion” in China.

Western universities are taking the threat seriously. Patricia Thornton, who teaches Chinese politics at Oxford university, recently tweeted: “My students will be submitting and presenting work anonymously”, as protection against the law. Professors at US universities have announced similar moves.

The main fear is that Chinese students could be reported on and pursued for straying from Beijing’s official line — perhaps over Taiwan, Hong Kong or Xinjiang. This risk has only increased as seminars move online, where they can be recorded. Some western academics and think-tankers are also concerned about their own safety, and are refusing to travel to China.

Beijing’s ventures into extraterritoriality have begun with free speech, but are unlikely to end there. Emulating the US, China is now working on its own “unreliable entities” list that targets foreign companies accused of endangering Chinese national security.

The US, and perhaps China, have the power to enforce their laws around the world. 

For midsize powers that is not an option. Instead, smaller countries need to prop up international rules-making bodies, such as the World Trade Organization — which has ruled against both China and the US on occasion.

Without common international rules, third countries may increasingly find themselves torn between the competing extraterritorial demands of Washington and Beijing. 

In that situation, our world will look increasingly like the one described by the Greek historian, Thucydides, in which — “The strong do what they will and the weak suffer what they must.”

Believe It Or Not, 2021 Is Looking Worse Than 2020


This year is, by any measure, brutal.

First came a pandemic so baffling that virtually no one other than Sweden made it through without a near-depression. (Reminiscent of the previous decade’s financial crisis, when only Iceland got it right.)

Then came civil unrest on a scale not seen since the 1960s, about which more than enough has already been written.

Then came fires that are burning even parts of the Northwest previously thought to be non-flammable, blanketing the region with toxic smoke.

That’s a lot. But it might be just the warm-up act for a couple of potentially bigger crises.

The upcoming presidential election, for instance, will be conducted amid a pandemic that is forcing many states with little mail-in voting experience to adopt the practice wholesale. 

The inevitable mess will be tolerable if one side wins in a landslide big enough to swamp doubts about the election’s legality. But that’s not looking likely as battleground state polls tighten.

Trump Is Within the Margin of Error in Seven Swing States

(MSN) – With the election just weeks away, voters and polling officials have seen Democratic presidential nominee Joe Biden’s lead over President Donald Trump narrow in the past few days. Now, the most recent state polls show that Trump is within the margin of error to win in seven major swing states: Arizona, Georgia, North Carolina, New Hampshire, Nevada, Texas and Iowa.

While national polls show Biden ahead of Trump by 7 percentage points, as of Wednesday, most polls in major swing states show no clear or definitive winner. In Georgia, a state that hasn’t voted Democratic since the ’90s but is now considered a toss-up, Biden is projected to win 47 percent of votes compared with Trump’s 46 percent, well within the 3.6 percent margin of error, according to an AARP poll released September 10.

Arizona, New Hampshire and North Carolina all show Biden leading by only 3 percentage points in recent polls, while a September 12 New York Times/Siena College poll shows Biden with a 4 percentage point lead in Nevada, which is within the 5.3 percent margin of error.

Since Trump tends to outperform his polls, a close race is now probable (barring a debate flame-out by one candidate or the other, a very real possibility), and both sides expect the other to try to steal the election through vote-rigging and/or voter suppression. 

See “Trump has a plan to steal the election – in fact, he has a bunch of them” and “The Dems plan to steal the presidency.”

Republicans view vote-by-mail as a ploy for Democrats to practice their traditional big-city political machine corruption on a national scale. Democrats, meanwhile, fear that in-person voting during a pandemic will keep at-risk groups (i.e., likely Biden voters) away from the polls.

The result: Whoever loses will believe they were robbed and – having learned from the recent “peaceful but fiery demonstrations” that rioting is both fun and frequently profitable — will take to the streets. 

The losers will also head to the courts to pursue what the other side will label a coup, prompting more angry protests, and so on, until one side takes control by brute physical or judicial force. It will not be pretty. 

Meanwhile, developments in the stock market virtually guarantee turmoil in 2021. It seems that retail investors – aka “dumb money” – have become the dominant players in both Big Tech stocks and related call options. 

Here, for instance, is the trading volume of calls relative to stocks. Normally more stocks trade than options. 

But suddenly:

Options and stock trading 2021 worse 2020


And here is Tesla’s stock and option trading, prior to its recent stock split.

Tesla options 2021 worse 2020

 

Anyone with a sense of financial history would look at the above, along with reports that “tech stocks are the most crowded trade ever”, and conclude that it’s Big Short time. 

But thanks to the combination of free stock trading apps like Robinhood and government pandemic relief money flowing to Millennials, the dominant players in this market have a different take, which is, “that stock is rising, let’s buy call options on it!”

The apparently inevitable result is turmoil in the financial markets, possibly concurrent with the political system melting down. 

Which sets the stage for a 2021 that makes this year seem placid by comparison.

Washington’s New Economic Strategy in Latin America 

Nearshoring is as much a geopolitical issue as an economic one. 

By: Allison Fedirka

 


A few weeks ago, the head of the U.S. National Security Council – not a State Department official, as would normally be the protocol – introduced the Western Hemisphere Strategic Framework, Washington’s new economic strategy for its half of the world, while in Miami. 

Then, for the first time ever, Washington successfully lobbied the Inter-American Development Bank to take on a U.S. official as its head – a position typically reserved for non-U.S. and non-Brazilian members who have less voting power in the bank. Later still, Secretary of State Mike Pompeo made history as the first secretary to visit Suriname and Guyana.

Developments such as these belie the ordinarily passive approach the U.S. takes to managing relations with its southern neighbors. 

Washington has long held the upper hand and so has rarely needed to tinker with a system that works in its favor. 

But as it debuts its new economic strategy for the region, it will resurrect memories for countries that have been hurt by these kinds of initiatives in the past. 

The U.S. may see new-found potential in its relationship with Latin America, but the same cannot necessarily be said for Latin America.

A National Security Issue

The increase in the United States’ commercial interest in Latin America owes largely to a shift in focus from military conflict in the Middle East to economic conflict with China (and, to a lesser extent, Russia).

The U.S.-China trade war has changed supply chain security from a purely economic issue to a national security issue. In short, China’s role as a global manufacturing hub – especially for medical equipment, pharmaceuticals, microchips and other electronics – is now considered a threat. 

Consequently, Washington has begun to consider new locations for U.S. companies whose factories are currently in China. With its geographic proximity, relatively cheap labor force and firmly established ties, Latin America is an obvious candidate.

Capital Stock and Voting Power in the Inter-American Development Bank
(click to enlarge)


The potential relocation of factories is as much a geopolitical question as it is an economic one. Companies generally go where it makes the most economic sense, but when there are geopolitical interests at stake, it is up to the governments to create incentives and frameworks that compel other actors to produce the desired results.

Washington’s latest hemisphere-wide economic initiative, Back to the Americas, means to address mutual economic-security needs, most notably by relocating U.S. manufacturing companies to Latin America. The relocation would be supported by U.S. investments in infrastructure in host countries that would, in theory, drive economic growth. 

At the end of July, Mauricio Claver-Carone, then the White House senior director for Western Hemisphere affairs and now the IDB president, said that up to $50 billion in investments could enter the region through Back to the Americas through the participation of four U.S. government departments as well as the U.S. Agency for International Development, the U.S. Trade and Development Agency, the U.S. International Development Finance Corporation and the Export-Import Bank. 

It builds on the Growth in the Americas initiative, which launched in 2018 and expanded its scope in December 2019 to focus largely on using private sector investment in infrastructure projects to create new jobs and increase economic growth. 

A key component to achieving these goals is the reduction of regulatory, legal, procurement and market barriers to investment by host country governments.


(click to enlarge)


The timing is hardly coincidental: China has steadily enlarged its economic footprint in Latin America over the past two decades. 

Beijing used the region to help meet its demand for hydrocarbons, metals and food supplies. From 2000 to 2019, Chinese trade with the region grew from $12 billion to nearly $315 billion. 

It is currently the top trade partner of Brazil, Chile, Uruguay, Peru and Argentina. (In every country except Argentina, China replaced the U.S.) 

According to the Inter-American Dialogue, Chinese state loans to the region exceeded $140 billion from 2005 to 2019, though the amounts have significantly dropped since 2015. 

China has also made substantial investments in mining and agriculture, power generation, utilities and infrastructure, though again the pace has slowed over the past three years.

The Back to the Americas initiative aims to preserve the U.S. foothold in the region and keep foreign competition at bay. The recently announced Western Hemisphere Strategic Framework, however, rests on five pillars: securing the homeland, advancing economic growth, promoting democracy and the rule of law, countering foreign influence and strengthening alliances with like-minded partners. 

Relocating manufacturing to the Americas not only takes the supply chain out of China’s hands but also helps diversify it. The finished products made for U.S. consumption may also allow the U.S. to regain some of the space it has lost to China in Latin America. 

If Washington can encourage Latin American countries to create environments conducive to U.S. interests by giving them money, there may be less need for Chinese financing and more transparency with financial activities, and these countries can more easily access funding from northern financial institutions.

What Washington Has to Offer

But U.S. ambitions will face several obstacles. Local governments may find themselves in the uncomfortable scenario of having to choose between Beijing or Washington, including over how they adopt 5G technologies. Many will seek a balance that will allow them to reap the benefits of siding with one without alienating the other.

Unlike China, the U.S. doesn’t have state-owned enterprises that can do its bidding, or seemingly endless discretionary spending for overseas projects. 

There will be some funding by the U.S. government along with additional money from places like the IDB, which contributes about $12 billion in infrastructure funding annually, but private enterprise will play a greater role. 

The U.S. government can incentivize companies, but it can’t force them to participate in its plans. Companies could simply decide the market isn’t right for them.

More importantly, the U.S. strategy requires buy-in from participating countries. This is why it contains provisions that may meet the region’s needs. 

By targeting infrastructure projects, the U.S. is effectively addressing the long-standing economic development challenge of huge infrastructure investment gaps faced by every country in the region. 

A 2019 study by the IDB estimated that the region’s infrastructure investment gap is the equivalent of 2.5 percent of gross domestic product (roughly $150 billion) per year. 

U.S investments alone can’t solve these problems, but neither can the host countries without large outside capital injections, which U.S. companies can offer.

Infrastructure development also addresses the region’s interest in improving its overall trade competitiveness. 

Poor transportation and logistics facilities play a major role in raising the price of domestically produced goods to the point that they struggle to compete in global markets.


(click to enlarge)


Furthermore, the focus on manufacturing aims to diversify the region’s economic activity away from natural resource extraction. Reducing dependence on commodities would inoculate local economies to price shocks and potentially lead to higher-value goods being produced.

Not every Latin American country has the same relationship with the U.S., of course, and those most likely to participate will be countries that have traditionally allied with the U.S. or whose economies are too integrated with the U.S. not to participate. 

Panama and Costa Rica, for example, are already working to address domestic regulatory measures to meet U.S. requirements, while Ecuador admitted it has an economic need to enact reforms that will facilitate economic cooperation with the U.S.

The poster child for what this initiative could look like in practice is Colombia, which is predisposed to keep a close relationship with the U.S. and has already thrown its support behind the project. Colombia’s ambassador to the U.S. openly acknowledged that Bogota wants to benefit from U.S. nearshoring efforts and welcomes it as an opportunity to reindustrialize. 

In some ways, it has been preparing all year. In February, the government launched a new national logistics policy that focuses on reducing logistics costs by simplifying bureaucratic procedures and improving road and fluvial transportation infrastructure. 

The objective of the plan is to incentivize foreign direct investment, boost exports and create economic opportunities. This was followed in the summer by new tax breaks and other measures to attract up to $11.5 billion in non-hydrocarbon foreign direct investment by 2022. 

In direct response to Back to the Americas, ProColombia has conducted a targeted campaign to identify companies interested in moving to Colombia from China.

Concerns

The U.S. has a long and complicated history with Latin America when it comes to cooperation, particularly when geopolitical agendas are so closely tied to economic ones There is a camp that looks at increased U.S. interest in the region with skepticism. 

Though they share a desire to see value-added goods hold a greater share of exports, they believe the U.S. manufacturing initiative runs the risk of producing low-value-added exports by exploiting local workforces. 

There is also concern that increased trade with the U.S. could render the region a depository for U.S. goods. Similar initiatives in the past have damaged domestic industries in the region, prompting governments to pursue costly import substitution schemes and to impose strict regulatory environments to prop up local industry and employment.

The other major issue is that there are strings attached. The U.S. government and companies alike will be looking for certain security and political guarantees from their partners. Ultimately, the ability to offer attractive investment environments to U.S. investors will fall to the Latin American governments themselves. 

Past instances where countries in the region have carried out reforms to participate in U.S.-supported economic programs ended poorly. For example, President John F. Kennedy’s Alliance for Progress purported to enhance economic cooperation to improve Latin America’s per capita GDP, establish democratic governments, achieve price stability, enact land reform and improve other economic and social planning. 

Washington spent $1.4 billion annually from 1962 to 1967 on this program but failed to produce the desired economic development. Similarly, the Washington Consensus was introduced to the region to help solve the debt crisis and boost growth. 

It required countries to implement northern-formulated, structural economic reforms that clashed with many of the region’s political and social systems. This led to its failure and rejection, most notably in Argentina.

Hence why this is as much a geopolitical initiative as an economic one. 

The economic question can be answered only after there are clear sectors, projects and numbers to work with. The current economic environment favors the U.S., but complicated pasts are hard to overlook. All governments will also have to evaluate participation in these plans against national needs. 

The fact that the U.S. has renewed interest in the region has geopolitical significance considering the U.S. has managed to muscle through its agenda but not with strong results.

 

Political Incompetence Can Be as Deadly as Covid-19

Spaniards did their part, staying home and wearing masks. But politicians quarreled among themselves and repeated the mistakes of the first wave of the virus.

By David Jiménez

Prime Minister Pedro Sánchez with Spain’s coronavirus task force. A second wave is buffeting Spain and restrictions have been reimposed.Prime Minister Pedro Sánchez with Spain’s coronavirus task force. A second wave is buffeting Spain and restrictions have been reimposed.Credit...José María Cuadrado Jiménez /La Moncloa, via Epa-Efe — Shutterstock


MADRID — Politicians here seem to be mystified as to why Spain is, once again, the European country hardest hit by the coronavirus pandemic. They have blamed the recklessness of youth, our Latin inability to keep our distance, and even immigration. And yet all this time the answer has been right under their noses: Nothing has eased the spread of the virus as much as their own incompetence.

Spaniards patiently accepted the toughest confinement in Europe during the first wave of the virus in March, enduring serious economic losses in exchange for protecting the lives of their elders and the most vulnerable. We have been among the most disciplined in adhering to regulations like wearing masks, which are used by more than 84 percent of the population.

Yet, today we are seeing our sacrifices being squandered by a political class that did not hold up its end of the bargain. On Monday, the Madrid government imposed a partial lockdown in 37 areas; on Wednesday it requested urgent assistance from the army and the dispatch of at least 300 doctors after being overwhelmed by a new wave of infections.

Spain had the virus under control when it ended the state of emergency on June 21. Prime Minister Pedro Sánchez declared victory and organized a hasty loosening of lockdown that included the reopening of the tourism industry. Responsibility for health care management was handed off from a central government that had handled the pandemic ineptly (Spain led in mortality and health-worker infection rates) to the country’s 17 autonomous regions, which have not done any better. That there were a few exceptions, such as the northern region of Asturias, only underscores the widespread failure.

Before this second wave, there was plenty of time to put in place measures that have shown their effectiveness in Asian countries and have lessened the impact of the pandemic in closer ones, such as Portugal. But our politicians decided to ignore them: Health care systems were not fortified, plans were not made for the reopening of schools, and the tracking system recommended by all the experts was not put into place.

One of the keys to slowing the spread of the virus is to perform polymerase chain reaction testing on as many people as possible who have been in contact with infected people. But the average number of potential cases that Spain manages to trace is lower than Zambia (9.7 for every confirmed Covid-19 case), one-fourth that of Italy (37.5) and one-twentieth of Finland (185).

Our politicians have little incentive to strive for excellence, because they know that Spaniards’ loyalty to their parties rivals their loyalty to their favorite soccer teams. Ideology and partisanship carry more weight at the polls than the candidates’ preparation, honesty and experience, sending them the message that their success doesn’t depend on their management or the results they obtain. If the pandemic has taught us anything, it’s that the price of not having our very best at the helm is too high.


Tents set up at the Gómez Ulla Military Hospital in Madrid to handle a surge of patients.

Tents set up at the Gómez Ulla Military Hospital in Madrid to handle a surge of patients.Credit...Sergio Perez/Reuters

 

While political parties continued to deflect blame about who was responsible for the first wave, the second wave was already underway. Now it is out of control and dozens of places are once again enduring lockdown restrictions. Hospitals, which have a chronic deficit of doctors, are experiencing déjà vu. The health care workers we applauded as heroes in March and April view “the spectacle of our political leaders with dejection and indignation,” according to the General Council of Official Medical Colleges of Spain.

Of course, these frustrations are not unique to Spain. The confluence of the pandemic and the emergence of populism and extremism around the world, from the United States to the Philippines, has hindered responses that are based on knowledge, science and effective management. But in the case of Spain, these problems transcend the current situation.

Our political parties have become organizations that are hermetically closed to outside talent. Spaniards do not elect individual candidates, but choose a regional party list with candidates selected by the parties in a process where intrigue and relationships count more than competence. Most of our representatives arrive at positions of responsibility with no experience beyond the political. Only 36 percent of Congress members in 2018 declared that they had ever worked in the private sector.

In normal times, Spain’s political dysfunction was less obvious. But the pandemic has revealed a painful truth: Incompetence costs lives and ruins economies. This is evident in the region of Madrid; today the financial and governmental center of Spain is in dire straits.

New York and Madrid were in similar situations in June. After initially being hard-hit by the coronavirus, both cities seemed to have the pandemic under control. Since then, the region of Madrid has seen cases multiply to 772 per 100,000 inhabitants while New York has kept the situation under control with 28 infections per 100,000 inhabitants. There is no mystery here either: The difference is explained by the number of trackers, hospital support, prudent reopening of businesses, and tests.

In recent months, the president of the community of Madrid, Isabel Díaz Ayuso, a member of the conservative Popular Party that has been ruling the region for 25 years, had promised trackers, health care reinforcements, and schoolteachers, who have arrived late or not at all. In addition to the tensions with the central government, experts’ recommendations have been subject to political opportunism, measures have been put in practice too late and, characteristic of Spain’s ruling class, blame has been spread to avoid responsibility.

Reversing mediocrity in Spanish politics will require profound reforms that must begin with education, whose benefits in fostering a new generation of leaders may not appear for years. But nothing is stopping us from beginning with more concrete measures that could slow our political decline.

It is crucial that Spain reform electoral law so that voters choose their representatives directly, rethink the territorial organization that has caused a lack of coordination among regions, and strengthen the independence of the government institutions, which are filled with politicians who offer blind loyalty to their political parties. Yet none of this will matter if Spanish leaders aren’t held accountable at the polls.

In the next election we should not forget those responsible for the disastrous handling of the coronavirus pandemic.

 

David Jiménez (@DavidJimenezTW), a journalist, is the author, most recently, of “El director.” This essay was translated by Erin Goodman from the Spanish.