Allegiance in the Time of COVID
Alan Pentz, CEO
Washington DC
June 5, 2020 - I’ve been writing about the emerging Long Competition between the U.S. and China for a while now. My guess has always been that there would come a time when most companies and, to some degree, most countries, would have to choose to join one side or the other. Originally, I thought that choice wouldn’t be so binary. I believed there would be a spectrum of allegiance.
Canada and Mexico operate in the U.S. sphere of influence and have economies deeply intertwined with ours; so, there isn’t much of a choice. They are all in on Uncle Sam. Likewise, countries like Japan, South Korea, and Australia will need to keep close to the U.S., though maybe not quite as close as Mexico. With China so nearby, they will trade with the Big Kahuna at their doorstep but to adhere to China’s geopolitical sphere of influence would risk losing all independence and sovereignty. And as we’ve seen recently, countries will choose sovereignty over economics almost always.
Europe is somewhere in between and I thought it would spend most of its time playing the U.S. off of China and vice versa to extract maximum benefits from each. To some extent, that will happen; but, China’s latest moves in the wake of the COVID-19 outbreak have dramatically accelerated and raised the stakes of the allegiance process.
What some observers such as Peter Zeihan and Bill Bishop have pointed out is that China’s power structure is fundamentally insecure. The Communist Party is a self-serving elite focused mainly on self-preservation and the return of China to world power status. But, the recent wolf warrior diplomatic movement seems to show that the Party will choose self-preservation over world power status. They will hold tightly onto the benefits of zombie state-owned enterprise companies that pump out empty apartments, ghost cities, and bridges to nowhere rather than enrich their own populace. Of course, that was all fine when China’s economy was growing at 15% a year. Even at 9%, the Party and its cronies took 7% and the workers got only 2%. Everyone is getting more, but at 1-3% growth or in a contraction that the U.S. experienced during COVID-19, splitting the pie isn’t as easy.
So, China has opted instead to rally around the nationalist sentiment and isn’t reserving their ire for the U.S. Europe, India, and many other countries are targets as well. It’s China against the world in an effort to keep the Party in power and to direct public anger outwards. China and the world will be left poorer; but, it’s worth it to the elites to maintain order and their status.
Companies will not be spared either. Multinationals operating in China are going to get squeezed as part of this process. China has made sure to target R&D and 5G deployment money to Chinese companies and has taken a “shop local” approach by limiting American and other Western countries’ access to this market. China has little choice now but to fund domestic alternatives to key Western suppliers for fear of being cut off as they recently were from key semiconductor technologies. Right on queue, the Chinese government is rumored to be readying a series of restrictions on Apple, Boeing, and others. Cisco may have helped build the Great Firewall but it won’t get the upgrade contract.
The U.S., in contrast, will always be more open. But, even here, there is bipartisan pressure for CFIUS to prevent Chinese acquisitions of American companies and recent legislative efforts to delist Chinese companies from American stock exchanges. The pressure to bring suppliers back to the U.S. or to redeploy supply chains to friendlier countries like Taiwan, South Korea, or, even better, Mexico will increase as will the incentives to do so.
I’m not a believer in the more radical visions of this future. Despite the rhetoric, the U.S. and China will continue to trade for mutual benefit. It’s hard to move billions of dollars of equipment, retrain workers, and create an advanced semiconductor industry from scratch. The rhetoric will escalate, the changes on the ground will be slower, but these last few months have convinced me that they will move. It seems like decades since the CEO of Microsoft could credibly give a speech claiming that China cared as much about privacy regulation for Artificial Intelligence as the West did and called for global cooperation. That might have seemed unrealistic at the time, now it just seems ludicrous. That world ended a couple of years ago and those with large interests in China deliberately ignored those facts for a while. However, the accelerant that is COVID-19 has made the conclusions unavoidable.
So given all that, what does the U.S. need to do now? First, we need to be realistic. China is going to be a problem for decades to come. American companies will continue to trade there but they cannot be dependent. The current tensions will quiet down in a year or two but I believe there has been a permanent rupture that makes going back to the time of the mid 2010s when China and the U.S. were “partners” a fantasy. Even if we wanted that, the Communist Party needs us as a villain to keep themselves in power. It’s also largely a fantasy in Europe. It’s clear now that only the countries truly on China’s side will be China and the few countries fully bought in on the Belt and Road with no other options. Second, the U.S. needs to move decisively to invest in core technologies and supply chain diversification through a large digital infrastructure and R&D program. It’s time to build the future now.
Author
Alan Pentz, CEO and Founder of Corner Alliance, has worked with government leaders in the R&D and innovation communities across DHS, Commerce, NIH, state and local government, and the non-profit sector among others. He has worked in the consulting industry for over ten years with Corner Alliance, SRA, Touchstone Consulting, and Witt O'Brien's. Before consulting, Alan served as a speechwriter and press secretary for former U.S. Senator Max Baucus and as a legislative assistant for former U.S. Representative Paul Kanjorski. He holds an MBA from the University of Texas at Austin.
