© REUTERS/Mario Anzuoni

California is the fifth largest economy in the world and in recent years it has been pioneering a new brand of diplomacy, first on climate change and now increasingly on tech policy. With its relative political cohesiveness, policy philosophy, tech-industrial base, and soft power, the Golden State is moving into a unique league in the international system: a sub-national great power.

The role of US states globally has traditionally been relegated to trade delegations with governors occasionally travelling to foreign financial centers in search of investment. California’s first significant entrée as a diplomatic actor was over the issue of climate change.

California’s role at the 2017 UN Climate Conference marked a watershed. Then governor Jerry Brown led a coalition of states and cities dedicated to meeting the Paris Accord’s emissions targets despite the Trump administration’s withdrawal from the agreement. Speaking to a rapturous plenary session in the European Parliament afterward, Brown included California and Texas in a list of powers—along with the United States, Russia and India—that need to tackle climate change more earnestly. The scene had the trappings of an address by a head of state. The governor met with Chinese President Xi Jinping, and California signed an agreement to cooperate on climate tech and withstand the headwinds of the US-China trade war.

Skipping Sacramento

When it comes to tech, California is a superpower. European policy-makers know this. Well, kind of. Streams of ministers and political delegations from Berlin and Brussels regularly shuttle to Silicon Valley hoping to learn from the world’s most dynamic innovation ecosystem, attract investment from its oceans of venture capital, and take selfies with tech founders. But rarely—if ever—do they bother to travel 140 kilometers inland from the Bay Area to the Californian state capital of Sacramento. In fact, not a single European Commissioner has visited California’s State Legislature in recent years.

German Economy Minister Peter Altmaier likes to frame the tech race in starkly geopolitical terms as a clash of values, in which Europe must become a co-equal pole. But when it came to his high-profile US trip in July, where he was on a fact-finding mission into American frontier tech, the German minister visited Silicon Valley and Washington but skipped Sacramento, where he could have found natural allies.

As California resets the regulatory philosophy for tech, Brussels—and others—could be working with the state. Take for instance, California’s sweeping new Data Protection Law. Signed into law in June 2018 with little notice, it has been called an American GDPR because its provisions mirror the EU’s data directive so closely. The law’s effect will be significant. It provides similar protections to all classes of personal data, with fines reaching $7,500 per user and possible amendments that would allow for class action lawsuits against companies that systematically violate California’s data law.

More revolutionary, Sacramento is considering forcing data brokers to disclose the value of personal data. This would bring a whole new reality to personal data, allowing for lawsuits for damages, forms of taxation, transparency and other modes of commercial compensation. California tech laws are often replicated across the United States. Its data breach law became the gold standard for US cybersecurity and was copied by 48 other states. California’s data privacy law goes into effect in 2020 but other states are already beginning to copy it.

The Power of the Techies

As the development cycle for general purpose technologies like AI, 3D printing, and quantum computing accelerates, California’s move to set rules could have global implications. Sacramento was ground zero for Uber and Lyft drivers working to secure rights such as minimum wage, overtime, and health and retirement benefits. They have been joined by traditional unions in the attempt to redefine gig worker rights in a way that could revamp the 21st century labor movement. California is considering a blanket ban on arming police body cams with facial recognition AI. The state is also drawing on moratoria on facial recognition technology in San Francisco and similar measures in Berkeley and Oakland.

The implications could go beyond California’s borders with implications for global law enforcement, democracy, and open society. For instance, China has been recently caught using massive pools of facial data hoovered up in public spaces in the US to train surveillance AI meant to track and monitor the country’s mostly Muslim Uighur minority. And as recently as October 2019, California’s governor Gavin Newsom signed a law banning candidate use of deep fakes 60 day before an election.

Perhaps equally important, a large share of the world’s top programmers are based in California. They are increasingly mobilizing, when they feel their companies are betraying their values-based missions. Google programmers successfully rose up against the company’s cooperation with the Pentagon on Maven Project—an AI-face recognition project for military drones. More and more, California’s techies, too, will be looking to state politics as a check on companies, which could have significant implications for the US military’s tech edge. The Pentagon has taken note.

Championing Human Rights

Sacramento is creating new institutional infrastructures to engage with the world. Newsom’s number two, Lieutenant Governor Eleni Kounalakis—formerly President Barack Obama’s ambassador to Hungary–has been appointed the state’s chief representative on International Affairs and Trade, a kind of Californian foreign minister. After the appointment, she called Trump’s trade policy “erratic” but went further, stating California’s ambition to help “set the standards for democratic values” around the world. The state already has an office in China and plans to open another in Mexico. Other states are doing so as well. For instance New Jersey has opened an office in Germany.

California is becoming a more confident global actor in other areas, too. Even as China and California have already started to build an asymmetric alliance on climate change, the state is increasingly taking strong positions on China’s human rights record, democracy and tensions with Taiwan and Hong Kong. California State Speaker Anthony Rendon stated, “all of us, here in California and elsewhere, have a duty to stand in solidarity with those who stand for freedom…I want the people of Hong Kong to know that California stands with them.”

The state’s massive procurement budget and even greater public pension system, CaLPERS, are increasingly being leveraged to advance human rights, democracy, and rule of law and to combat corruption. As a border state reflecting America’s changing face, it is leading the resistance on Trump’s immigration and relations with Latin America.

No Army, No Currency

There are, however, limits to California’s neo-Hanseatic bid to redefine statecraft. For one, the international system is still nation-state centric. California lacks some of the capabilities traditionally associated with Great Power status. First and foremost, it has no military. California is thus not a player in the exercise of war. It also lacks some of the geo-economic attributes that allow the European Union to project power internationally—namely control over tariffs and its own currency.

And there are the practical challenges. First, the primacy of Washington. California attempted to undercut the Trump administration by negotiating a deal directly with Volkswagen, BMW, Ford, and Honda to reduce greenhouse gas emissions. The deal effectively would have set emissions rates for the entire US, and in doing so, would have helped establish California as a regulatory hegemon within the US by setting American policy—in direct opposition to Trump’s Washington. But the Trump administration has been ruthless in its attempt to block California’s right to regulate emissions and has punished car companies for having worked with the state.

So Goes the World

Then, there’s Big Tech. As the state enters a great tech political awakening, it remains to be seen if California can resist capture by the state’s uniquely powerful tech juggernauts that are seeking to pacify the state’s policy ambition.

Like the world’s diplomats, Big Tech’s political Svengalis had long ignored Sacramento and concentrated their rule-shaping efforts on Washington, Brussels and London. For instance, they lobbied Congress for federal privacy regulations that would either supersede the Sacramento law or at least water down its privacy provisions. This has hit problems given the political polarization, dysfunction, and lack of bandwidth in Congress. Now, Big Tech is concentrating their efforts on Sacramento itself. After all, California is one of only two states—the other is Alabama—that are pushing ahead with a massive antitrust case against Google.

But even with these limiting factors, the rise of California heralds a criteria shift as to what makes a foreign policy actor—and a power—as geo-economic issues like climate change, and connectivity take on greater importance in global politics. As a direct result, the clean lines of the Westphalian system continue to break down. A neo-Hanseatic system of subnational actors is emerging with California at the forefront—joining a tapestry of other powers that include Big Tech companies, multi-stakeholder organizations, and political movements like FridaysForFuture.
New European Commission President Ursula von der Leyen has argued that her top two priorities for the EU’s next five years are tech policy and climate change, both areas where California is an undisputed global leader.

One measure of her seriousness could be whether or not she seeks an asymmetric alliance with like-minded leaders in Sacramento. After all, Sacramento politicians are fond of saying: “As California goes, so goes the nation.” If trends continue, perhaps it should be: as California goes, so goes the world.

The post California Calling appeared first on Berlin Policy Journal - Blog.

© REUTERS/Stringer

In its quest for technological supremacy, China has a specific soft spot: its chip industry.

Beijing semiconductor efforts in the recent years and decades have not born fruit. Be it microprocessors, memory chips or mobile processors, in all of these fields the country is still not capable of developing its own top-notch assets on a large scale. Consequently, there is still a high reliance on chips produced by the semiconductor market leaders, normally situated in the US (e.g. Intel) as well as in Taiwan (e.g. Taiwan Semiconductor Manufacturing Co, or TSMC) and South Korea (Samsung Electronics).

This high level of dependence became very clear recently: In 2018, after the Chinese smartphone manufacturer ZTE was accused of illegally selling US equipment to Iran and North Korea, the US Department of Commerce imposed a ban on American companies selling their products to the company. Unable to buy chips from American chip makers like Qualcomm, ZTE teetered close to bankruptcy.  From a Chinese perspective, the last straw came when the same procedure was used in May, this time with telecoms giant Huawei as target.

These actions served as a wake-up call for China, pushing it to put greater efforts into achieving technological self-sufficiency—a claim already made by President Xi Jinping. This blatant exposure of China’s vulnerabilities in the global supply chain feels particularly painful for decision-makers in Beijing since Chinese strategists themselves pursue precisely this approach—pushing others to become technologically reliant on China and weaponizing this “interdependence” to exert economic and political pressure when required.

Untapped Market Potential

To reduce its reliance on foreign semiconductor industries, China has set up initiatives and funds to counteract the trend. However, according to Gu Wenjun, chief analyst at Shanghai-based semiconductor research company ICWise, it will take up to 40 years for China to reach self-sufficiency in many areas of chip production.

Although China has most probably lost the battle on “traditional chips” for the time being, it might win another one: In line with its ambitious and aggressive efforts to become an AI superpower, Beijing has recently started to cast an eye on AI chips. These chips are specifically designed to process and compute machine learning algorithms at a faster pace and are optimized for AI-specific functions, be it in the context of autonomous vehicles or robots as well as within the framework of cloud computing services or data centers.

For instance, this September, Chinese tech giant Alibaba officially entered the AI chip market by presenting the Hanguang 800. According to the company, this AI chip can shorten computing tasks that would usually last one hour down to a couple of minutes. Just one month earlier, Huawei presented its first commercial Ascend 910 AI computing chip. Other tech companies and start-ups such as Baidu, Tencent, Bitmain or Horizon Robotics intend following suit to capitalize on a niche in the semiconductor industry that still possesses market potential on an international scale.

Even though their American counterparts such as Google and Facebook have also already entered the “AI chip race” (at least for in-house purposes), no clear leader can be perceived so far, which gives Chinese companies a chance to successfully exhaust this untapped market potential.

Role Model for Europe

At first glance, one could simply regard this as yet another field where China will take a bold step in its efforts to solidifying its position as AI superpower. However, Europe can learn from the Chinese approach when it comes to its own endeavors to catch up in the global AI power game. It can detect the areas within the AI industry (or in the technological realm in general) where there are opportunities to gain ground or even to take the lead globally by benefiting from the first mover advantage—as the US and China have done when it comes to many AI-related components, which have been missed by Europe in the past.

One such area, for instance, could be using AI systems to process machine and engine data (temperature, pressure, rotor speed, etc.), which has a strong industrial base in Europe. With such an approach, Europe could combine its strengths in the physical world (i.e. its manufacturing industries) with AI technologies, also in the context of the increasing data generated by the Internet of Things (IoT). On the other hand, heavy investments in consumer data would most probably mean fighting a losing battle with the US and China.

There are also other data types where Europe could showcase its strengths: According to a study by the Center for Data Innovation, public health data can be leveraged on a large scale within the EU and could provide an opportunity for fueling further AI developments. Another related opportunity for Europe could be to focus on the quality of data, which can compensate for the lack of quantity to some extent. China, for instance, is said to have weaknesses in compiling structured data. However, in order to build on these scenarios, private sector data-sharing approaches in the business-to-business and business-to-government areas must be further supported by institutions such as the European Commission.

Against this backdrop, the European Union and its member states still have a chance to gain ground in the global AI industry. Within this context, however, the debate concerning AI ethics for Europe as a unique selling point is important but not sufficient. In combination, however, with a related thriving industry or at least with certain strong points in the European AI ecosystem, such a human-centered digital area can be developed to its fullest potential in order to compete with the US and China.

The post What China’s “Chips Endeavor” Can Teach Europe appeared first on Berlin Policy Journal - Blog.

© REUTERS/Thomas Peter

In 1989, the global economy changed even more profoundly than global politics. While political rivalry actually never disappeared entirely, and nations like Russia never became liberal democracies, the “End of Economic History” could indeed be recorded, quite in the sense of Francis Fukuyama’s famous article.

1989 was not only the year that saw the Central European nations revolt against Communism, it was also the year that Japan suffered its biggest ever financial debacle, and the Soviet Union started its economic decline. Both developments deprived the world of two economic powerhouses. Scenarios of Japan becoming the world’s number one economy were quickly forgotten and gave way to the idea that the US would enter the era of “unlimited wealth,” as US economist Paul Pilzer wrote.

The major difference between the “post-historical” global economy that emerged in the 1990s and the traditional industrial economy of the 19th and 20th centuries was a new type of cooperation between major economic areas. Previously nations that tried to “catch up” actually used the same technologies as the others, but in a more effective way; this very fact explains why their economic rivalry only reinforced the political one. The fight for markets excluded compromises simply because it was a pure “zero-sum” game.

The post-industrial revolution of the 1970s and the 1980s changed all this. In the new globalized world, the US became the front runner in producing computers and semiconductors, in creating the operational systems these computers used, and in making the most effective economic use of new technologies. When selling software, the US and other Western powers didn’t sell the knowledge embodied in the original programs; they just sold copies, which could be reproduced in any quantity at zero cost. At the same time, the newly emerged economies in Asia used US technologies to create sophisticated hardware, producing these goods in increasing amounts.

This new configuration was perfectly “post-historical” in Francis Fukuyama’s sense. Both parts of the world’s economy became dependent on each other, and in this new order, there were no reasons for economic wars and quarrels. The United States was an absolute economic superpower. By 1992 it produced 26 percent of world’s gross product, according to IMF data, and controlled around half of the patents in force. But the economic policy it pursued vis-à-vis all potential rivals was super-friendly and extremely decent.

Benevolent Superpower

The US supported the economic reforms in Russia in the early 1990s; it bailed out Mexico from its debt crisis in 1994; it refrained from introducing any restrictions on cheap Asian imports after the 1997-98 financial crisis; and it advocated the accession of China to the WTO on conditions designed for a mid-sized developing economy rather than for a rising industrial powerhouse. During these decades, the peripheral economies grew fast, increasing the demand for US technologies and software, and supplying Western nations with affordable industrial goods, thus improving the quality of life in the global North. To my mind, this perfect interdependence was the essence of globalization. The globalized world was indeed a “post-historical” one.

The consequences of globalization are well known. Between 1991 and 2015, more than 1 billion people were brought out of extreme poverty, with “emerging Asia” accounting for roughly 75 percent of this number. China became the world’s largest exporter of goods in 2009, the largest industrial producer in 2010, and the world’s largest economy in 2016 (by GDP based on purchasing power parity). The “Asian century,” observers claimed, was set to begin.

The US share in the global GDP as measured by purchasing parity ratio decreased to 15.1 percent by 2018, and its trade deficit grew from $31 billion in 1991 to $622 billion in 2015. Asian nations turned into the largest holders of foreign currency reserves (China, Hong Kong, South Korea, Taiwan, Malaysia, and Thailand account for more than $4.65 trillion in combined international currency reserves), while the US is now the largest debtor nation in the world. It seemed that the newly industrialized world was successively challenging the post-industrial one, and the final outcome of this epic battle was far from predetermined. But while these numbers indeed appear to show that the gap between the leader and the follow-ups has narrowed dramatically, they do not reflect the whole situation. Look at the United States’ technological dominance instead―here, nothing much has changed.

Chips and Systems

As of early 2019, it’s true that more than a half of all desktop or notebook computers in the world were produced in China. But the country is able to furnish less than one-third of them with locally-produced microchips and remains highly dependent on imports. Meanwhile, up to 60 percent of all global makes rely on Intel microchips. In server processors, Intel’s domination is even greater―98 percent. Both Intel and AMD lead the development of new generations of chips, while mass manufacturing of the devices has been relocated to Asia. Companies like SK Hynix of South Korea or TSMC and UMC of Taiwan position themselves as American firms’ competitors, but continue to depend on them for the most vital technologies.

In 2018, more than 65 percent of all smartphones produced in the world were manufactured in China―and 78 percent of them were built by “genuine” Chinese brands, from Huawei and Xiaomi to OPPO and Vivo. But at the same time 97.98 percent of all the smartphones in the world run on either Windows, Android, or iOS operating systems. If all computers and computer-like devices are counted, the share of Microsoft, Google, and Apple software comes to an impressive 95.93 percent. As for the market for online searches, Google has a market share of 92.82 percent compared to 1.02 percent held by Baidu, the Chinese search engine, and 0.54 percent held by Yandex, which pretends to be the undisputed leader of the Russian high-tech sector. Among the 10 most popular social networks, US-based Facebook, YouTube, WhatsApp, and Instagram account for 8.12 billion users, while the Chinese or Chinese-oriented QQ, Douyin, and Sina Weibo only have 1.67 billion users. Of close to 300 billion e-mails exchanged in the world daily, up to 92 percent are received by inboxes registered with US-based companies. Apple and Google-built services are clearly in the lead with a 75 percent market share.

All the Big Players Are American

In 2007, PetroChina became the first trillion-dollar company by market value, and in 2008 Russia’s Gazprom advanced to the fourth position on the list of world’s most valuable companies. But as of March 2017, all the top 10 companies by market capitalization were once again American―for the first time since the 1970s! Therefore, the idea of a “US retreat from the world” looks a bit questionable. The same is true when looking at the financial side of things. As of April 2019, mainland China and Hong Kong together held around $1.33 trillion in US Treasury bonds. But even if they tried to sell them off, a “financial tsunami” would remain unlikely, since US banks can easily buy them out and get loans from the Federal Reserve using Treasury bonds as a perfect collateral. Just remember that between 2008 and 2011 the Federal Reserve’s balance sheet grew by $2.1 trillion. This could well be repeated if China engaged in full-scale financial confrontation.

In short, two decades into the 21st century, the US still appears the undisputed global leader in terms of technological domination and enjoys clear superiority in each and every domain of the information economy. If any other nation tried to wage “economic war” against the United States, it would be certainly defeated―and not so much by financial sanctions, asset freezes, or trade embargoes, but by denial of access to US-made or US-controlled technological and/or communication capabilities.

If all this is true, why do the other powers do nothing to counter this dominance? My answer is simple: because the American political leadership never used this component of US strategic power to subjugate any foreign government or foreign company―at least not until now. Since 1990, the US has waged many wars and boldly made use of its military power in Iraq (twice), Bosnia, Serbia, Kosovo, Afghanistan, Somalia, Libya, Syria, and many other corners of the globe. But it never relied on its technological superiority for promoting its political goals. As far as the information technology domain is concerned, the history of war and conflict seemed firmly over in all the years that have passed since Francis Fukuyama outlined his famous hypothesis.

Crossing the Red Line

But much of this has changed in recent years as President Donald Trump decided to “get tough” with China and launched a full-scale trade war against Beijing. Without any doubt, the US has good reasons, since China has for years imposed protective tariffs on US goods (in 2017, the US took $13.5 billion in custom duties from $506 billion Chinese imports, while the Chinese authorities levied $14.1 billion in duties on $127 billion worth of US imports). Chinese companies have also violated many US laws protecting intellectual property and forced foreign investors to share their technologies when outsourcing production facilities to China. More examples could be added.

The fundamental difference to all the previous economic tensions is that the US authorities have recently invoked sanctions against several Chinese high-tech companies―most notably Huawei and ZTE―actually accusing them of industrial espionage in the United States. And even this wouldn’t change the situation much if the restrictions imposed were aimed at curbing the companies’ imports from the US or their purchases of US-manufactured components. But as of June 1, 2019, several US companies, following the authorities’ orders, effectively banned Huawei from their services: Microsoft discontinued the supply of its Windows operating systems for Huawei laptops and other content-related services, and Google announced that it was blocking some elements of its Android operating system (GoogleMaps, YouTube, GooglePlay, Gmail) on Huawei smartphones.

Here, it seems to me, the US government crossed an important red line. It undermined the trust foreign hi-tech companies had in the technological platforms that for decades secured America’s dominance in the globalized world. Microsoft or Google don’t just produce American software―for a long time, they have been producing American soft power. It now appears that this soft power can easily be turned into a hard variety. The long-term consequences of such a change may be profound.

Chinese Retaliation

What will happen next? Of course, the affected Chinese corporations will suffer a major blow; Huawei and ZTE may well be stopped from their expected expansion―but I would be surprised if the Chinese government did not retaliate. Unlike the oil-producing countries or other commodity economies, China already produces billions of units of hi-tech products and will definitely continue its industrial expansion. Therefore it is crucial for Chinese companies to develop their own operating system (Huawei already announced it will have one available by the end of 2019)―and the Chinese government will do its best to help them achieve this end. At the same time, Chinese producers will want to devise their own microchips (today not a single Chinese company is listed among the top 25 semiconductor producers in the world), which will not be a huge problem since they have already acquired or stolen all the major technology from Western companies. So sooner or later, technological platforms will emerge that will be able to compete with the dominant American companies.

It should be noted that Chinese software and social networks are predominantly used either in China itself or by overseas Chinese. This hasn’t changed for years―while goods manufactured in China conquered the world, Chinese software has so far remained limited to the Chinese community. Now, however, the US would appear to be facilitating the internationalization of the Chinese hi-tech sector. This is helped by China’s incredible sway over the most important consumer markets in the world. In the case of Russia, for instance, consumer products account for less than 3.1 percent of overall exports; in the case of China, the figure exceeds 59 percent. The users of China-made computers and mobile devices abroad―serving around 2 billion people around the globe―are China’s main economic asset, which it will use with all possible ardor. As a result, a real alternative to the US technological platforms will emerge for the first time.

Of course, the US will not simply roll over. In recent years, it initiated at least two major economic shifts of global importance. First, the so-called Fourth Industrial Revolution introduced fully automated production techniques, thereby endangering the position of labor in the production chain. This undermines China’s and other rapidly developing countries’ main competitive advantage: the relatively low labor costs that propelled them toward global industrial leadership. In the future, US companies may be able to discard their overseas production capacities and bring not only their capital but also their industrial facilities back to the US, increasing their independence from China. Second, the US and Europe have embarked on a journey toward energy independence―focusing either on nonconventional extraction techniques (the US) or on developing renewable energy sources (Europe). Both trends will make the West far less dependent on commodity economies like OPEC or Russia.

The End of “Chimerica”

All this will definitely produce a kind of division in the current “post-historical” economic system. Both parts of what analysts had prematurely started to call “Chimerica” will increasingly rely on their strongholds. In the case of China, it’s the hardware produced on the mainland and supplied all over the world. In quite a short time, these devices will be furnished with Chinese operational systems and Chinese microchips―and the Chinese will do their best to make sure that their software cannot be uninstalled. I would also expect all Chinese smartphone manufacturers to replicate Apple’s system of free iMessages and FaceTime calls etc., which will lift overall demand for their products.

On the US side, there are many competitive advantages as well: first of all, the US will make full use of its total domination of the microchip market, which can hurt Chinese manufacturers dramatically; second, it may increase its pressure on Chinese consumers as an increasing number of software applications will not work on Chinese smartphones, and, last but not least, the West can use the global internet projects it is currently developing to increase its dominance. It can, for example, announce that China-produced devices will be barred from space-based internet providers. As the result, the global economic and informational realm that exists today will split apart, and countries and companies will lean to the one or the other dominant technological “core.” It’s difficult to say how far this division will go, but the general trend is easy to see.

Undoubtedly, the ongoing economic and technological split will be followed by the reinforcement of political contradictions between different blocs and alliances. Today, the US has by far the largest number of loyal supporters: in Europe, Latin America, and Japan, most will side with the Americans. The United States’ financial capabilities, its economic reach, and its long-term strategic alliances will contribute to creating a Western economic and technological space that cautiously opposes the one created by China. But the Chinese have made remarkable progress over the past two decades.

Between 2005 and 2018, China’s investments in Africa went from $23 to $352.7 billion; Chinese companies invested around $170 billion in Latin America; the government started the Belt and Road Initiative; and, of course, Beijing worked hard to turn Moscow into its economic vassal (all the leading Russian mobile communication companies opted for Huawei’s hardware to comply with a new law that obliges them to collect and keep all the customers records for at least a year). Both economic superpowers are likely to press their allies and economically dependent nations to adopt their technological and software standards.

How high is the probability of “Chimerica” being destroyed for good in the current economic showdown? It’s entirely possible. Even though China exported more than $539.5 billion worth of goods to the US in 2018, this accounted for only 4 percent of its nominal GDP. During the same year, Beijing increased the bank loans provided to local companies and households by more than 16.2 trillion renminbi ($2.4 trillion or 17.9 percent of country’s nominal GDP). The Chinese authorities seem oblivious to the danger of creating the greatest credit bubble in history as they seek to increase economic growth by boosting local demand.

Do Not Fear

So the preparations for a “decoupling” from the US are in full swing. Of course, if things take a turn for the worse, the world may face a full-scale economic recession. But it could well be the last recession of the globalized world. The political rhetoric that goes along with it―praise for protectionism, export substitution, and reliance on different nations’ own competitive advantages―may contribute to the creation of “multiple globalizations” centered around either the US or China.

Back in 2008, a young American strategist called Parag Khanna first described the model for this new era of economic and political competition. Khanna argued that the coming world will be led by three “empires”: the United States, China, and the European Union, which are capable of projecting their economic and societal models across the globe. All the other nations, Khanna argued, will be downgraded to either “second” or “third world countries;” the first group will at least be able to influence “imperial” competition, while the latter will no longer play any role in world affairs at all. This scenario looks more realistic as the technological showdown advances.

Should we fear the advance of this “post-globalized” world? I don’t think so. Economic progress is often uneven, fluctuating between cooperation and fierce competition between major rivals. As potential adversaries mature, the contradictions between them increase. But the most crucial point here is that since World War II, economic competition has played out increasingly peacefully. The 1989 economic revolution that left the US at the top of the economic hierarchy didn’t provoke any political quarrels―on the contrary, it caused a short “post-historical” era in world politics. In the economic and technological sphere, this “post-historical” age lasted even longer―and even now it seems that while economic tensions rise, the risk of political confrontation isn’t increasing. Francis Fukuyama, it would seem, had a point after all.

The post The (Temporary) End of Economic History appeared first on Berlin Policy Journal - Blog.

© Yoan Valat/Pool via REUTERS

On May 10, 2019, Facebook founder and CEO Mark Zuckerberg arrived at the Élysée Palace in Paris for a meeting with French President Emmanuel Macron. The images that were released to the press uncannily resembled those from a traditional head-of-state working visit: two men square off across a table in a gilded room, leading their respective teams into negotiation, notepads at the ready, steely and determined looks on their faces.

Today’s tech firms are some of the most valuable corporate entities in history, with revenues higher than many countries’ GDP and user bases larger than the populations of many more. Many of their policy decisions—for example, on the bounds of acceptable public speech online—certainly have significant global ramifications, and squarely lie in the realm of essential human rights, making them significant political actors.

Denmark, having recognized the political influence and impact of the tech sector, appointed a “tech ambassador” to Silicon Valley in August 2017. “Companies such as Google, IBM, Apple and Microsoft are now so large that their economic strength and impact on our everyday lives exceeds that of many of the countries where we have more traditional embassies,” the then Danish foreign minister, Anders Samuelsen, said when announcing the position.

It has become almost a cliché to point out how powerful and “state-like” major technology companies like Facebook, Google, Amazon, Apple, and Microsoft have become. For some, the Macron-Zuckerberg meeting provides the latest case-in-point: government and firm appearing seemingly as equals, on a level playing field.

But do these companies indeed have “foreign policies” of their own, and if so, what are they trying to achieve? How have tech giants navigated the world’s diplomatic halls? More critically, how might firms like Facebook and Microsoft benefit from being portrayed—and portraying themselves—as diplomatic actors?

Facebook’s Rocky International Record

Mark Zuckerberg has a mixed relationship with European politicians, evading some and embracing others.

For example, a British parliamentary committee investigating “Disinformation and Fake News” tried every trick in the book to get the Facebook CEO to testify in late 2018, including issuing a host of formal summons letters, physically seizing confidential documents from the founder of an American company engaged in a lawsuit against Facebook, and repeatedly highlighting Zuckerberg’s refusal to fill the empty chair via all available channels. In a begrudging hearing in Brussels earlier that year, Zuckerberg managed to set the terms for a remarkably lopsided debate format, fielding questions for 45 minutes and collectively responding for 25—dodging pointed questions, and not providing an opportunity for MEPs to follow up.

Zuckerberg’s April 2019 visit to Berlin included meetings with the Justice and Consumer Protection Minister at the time, Katharina Barley, a member of the center-left Social Democrats, and the co-leader of the Greens, Robert Habeck, who had come out in favour of breaking up Facebook a year earlier. These were markedly less formal than the Macron meet-up. Barley in particular dismissed Zuckerberg’s call for stronger state engagement in a broad range of internet affairs. “Regardless of state regulation, Facebook today already has every possibility to guarantee its users the highest standards of data protection,” she said. Unlike in France, Zuckerberg’s reception in Germany was subdued and not particularly reminiscent of the world of international diplomacy in substance, tone, or optics.

Public-private negotiations clearly lack the protocol and formality of state negotiations. Rather, they depend on the goals the tech firms and states are pursuing, and the images they are trying to project.

Style Not Substance

Among nation states, the principle of sovereign equality applies. When it comes to negotiating with tech firms, however, states ultimately still have the upper hand—whether the setting is formal or informal.

Much of this is due to the tenuous legal standing of digital platforms for user-generated content. Internet companies have long faced a conundrum, summarized by digital media scholar Tarleton Gillespie in his recent book Custodians of the Internet: to avoid offending users and advertisers, firms have needed to develop systems for policing and removing objectionable or illegal material. But by doing so, they appear to take on responsibilities for that content as its publishers. This leaves them exposed to lawsuits and legal sanctions that can threaten their commercial viability.

The answer, enshrined in early internet law in the United States and the European Union, was a principle called “intermediary liability,” intended to grant some protection to companies that made those kinds of “moderation” decisions. Without this limited immunity of sorts, platforms could be found legally responsible for every copyright infringing video they hosted, every piece of libel or defamation that was published on someone’s profile page, and every instance of illegal content accessible in a country (such as Nazi material in Germany).

Lobbyists With Deep Pockets

The majority of international “foreign policy” activities by the advertising-dependent platforms are about avoiding the costly repudiation of these legal frameworks. They have been savvy in terms of their use of political voice, engaging in massive international lobbying efforts, shaping legislation, and crucially, rallying support amongst civil society and advocacy groups to prevent major legislative changes.

According to the Corporate Europe Observatory’s LobbyFacts project, Google spends more on EU lobbying than any other individual company (over €6 million in 2017 alone) and even many industry associations. Microsoft is not far behind, having spent around €4.5 million a year on Brussels lobbying in the past decade, topping firms such as Shell, ExxonMobil, and Bayer. And while it remains a controversial subject, growing attention is now being paid to the way that large amounts of funding from platform companies may affect the willingness of civil society groups (especially American ones with ties to Silicon Valley) to advocate for or against certain forms of regulation.

One might look at the Global Internet Forum to Counter Terrorism (GIFCT)—a coalition of firms that have committed to combating the spread of terrorist material—where tech executives, academics, and the Western national security establishment rub shoulders. They give the impression of attending a high-flying forum for international diplomacy. But GIFCT was created at the behest of the European Commission, which coerced the firms into a set of commitments through its Code of Conduct on Countering Illegal Hate Speech Online. Despite its trappings as an international organization, it is effectively about pacifying regulators.

Microsoft: An Image of Neutrality

The biggest American tech firms are not merely reactive; they also attempt to proactively set the agenda themselves.

In early November 2018, for example, Microsoft President Brad Smith swept into the main chamber of the International Court of Justice (ICJ) at The Hague’s iconic Peace Palace to deliver an address on contemporary peace and conflict. He presented a video—“Cybersecurity and the World: A Time to Reflect, a Time to Act”—which featured himself and Microsoft’s communications director, Carol Ann Browne, walking the battlefields of Verdun and discussing the perils of war and arms races with the head of the French war graves authority. The message eventually pivoted to the May 2017 WannaCry ransomware attack that hit the British National Health Service and other businesses around the world, apparently in order to demonstrate the impending threat of World War I-like catastrophic digital conflict.

Microsoft has been uniquely proactive in pitching itself as a particularly security-aware and responsible international technology company. As a creator of consumer software and hardware as well as a provider of enterprise IT services, Microsoft is less worried about intermediary liability regulation. Instead, it has sought to increase its international profile and legitimacy within contemporary cybersecurity policy debates.

In a related 2017 speech, Smith called for a “Digital Geneva Convention” to limit the use of offensive cyber operations by states, and has since spearheaded a complex lobbying effort focused at various private and public stakeholders in the internet and cybersecurity governance ecosystem. These varied efforts have been unified by their use of loaded internationalist imagery and concepts—such as the ICJ’s halls, the Geneva Conventions, the Red Cross, and the battlefields of Verdun—to grab hold of the lineage of international peacebuilding efforts and emphasize Microsoft’s role as a legitimate, savvy, and important player and measured mediator in international politics.

Cybersecurity Statesman

Smith frequently appears at international events with foreign ministers and other high-ranking officials, which in effect grants him authority as a cybersecurity statesman of sorts. He has been an effective operator thus far, playing a leading role in crafting the declaratory “Paris Call for Trust and Security in Cyberspace,” announced at the 2018 Internet Governance Forum alongside the World War I Armistice commemoration. The call brings together a large group of states, civil society organizations, and firms in a commitment to increase digital security: “States must work together, but also collaborate with private-sector partners,” the agreement reads.

Alongside this effective instance of agenda-setting, it is worth pointing out that Microsoft’s own recent past of public-private interaction includes being the NSA’s very first partner in the infamous PRISM surveillance program disclosed by Edward Snowden. In recent months, the company has faced criticism and internal controversy due to new contracts with US Immigration and Customs Enforcement and the Department of Defense. Smith’s presentations also conveniently avoid any specific responsibility Microsoft may have had in the incidents he discusses, including WannaCry (which involved a vulnerability in Windows systems).

A charitable interpretation might suggest that the imagery of international diplomacy is both substantively appropriate considering the gravity of the issues at stake, as well as stylistically helpful in describing the situation at hand. A more critical perspective, however, might suggest that Microsoft and its shareholders clearly benefit from the association, and the company is itself actively pushing this framing.

Partners in Governance?

While Amazon and Twitter have kept a low profile, Facebook, Google, and Microsoft appear to increasingly be seeking a greater public role in governance. They are attempting to move away from the coercive, hierarchical relationship that was evident in processes like the EU Internet Forum and resulted in the hate speech code of conduct.

Macron drew Zuckerberg to Paris by threatening new legislation, but also dangled a carrot to match his stick. He proposed a “co-regulation” approach to content governance that offered Facebook a seat at the negotiating table, providing the company with a potential opportunity to shape policy outcomes to better suit their own preferences.

This initiative and Microsoft’s role in the Paris Call demonstrate how Big Tech has been exploring ways through which it can de-politicize the policymaking process, making it less confrontational and more akin to equals or colleagues steering outcomes towards a set of common goals—be it “protecting the accessibility and integrity of the Internet” (in the case of the Paris Call) or “combating the dissemination of content that incites hatred” (in the French example).

While other governments seem to be less enthusiastic than France about granting tech firms co-equal partnership, momentum appears to be building across Europe. A recent Council of Europe initiative announced with Apple, Facebook, and Google intends to “strengthen its cooperation with the private sector in order to promote an open and safe internet,” creating a framework through which companies can “sit side-by-side with governments when shaping internet policy.”

Even though such initiatives may be non-binding, they carry weight by ceding some responsibility from elected officials to company representatives. Both politicians and the public should be mindful of portraying tech firms and states as equal partners, and transferring diplomatic metaphors to the public-private realm. This imagery may be more helpful to Big Tech’s public relations efforts than to crafting sound public policy.

The post Big Tech Hits the Diplomatic Circuit appeared first on Berlin Policy Journal - Blog.

© REUTERS/Thilo Schmuelgen

In early November, weeks before the debate erupted in Germany over whether China’s Huawei should be allowed to participate in the country’s next-generation mobile network, I asked a senior Australian official which way he expected Berlin to lean on this critical question.

Australia had already taken the decision to ban Huawei and other Chinese suppliers from its 5G network on national security grounds. The United States, embroiled in an escalating trade war with China, was doing the same. And New Zealand, a small country with close economic ties to China, would soon follow suit, despite fears of a backlash from Beijing.

But in Germany, Europe’s economic powerhouse, there was little or no debate about the security risks associated with Huawei, the Shenzhen-based company that is now the world’s biggest supplier of telecommunications equipment. And the clock was ticking down. Germany’s 5G auctions were scheduled to begin in the spring of 2019.

The Australian official, speaking on condition of anonymity, recalled how Canberra’s decision to ban Chinese suppliers had taken a huge amount of political guts. It had required close collaboration and trust between the Australian government and the country’s intelligence agencies. And it had meant accepting that Australia would suffer short-term―and perhaps longer term―political and economic consequences for angering the Chinese.

“A Systemic Competitor”

In Germany, the official pointed out, the political backdrop looked quite different. The election campaign in 2017 brought no serious debate over the big foreign policy questions facing Germany. Then came the failed coalition talks between Chancellor Angela Merkel’s conservatives, the Greens, and the Free Democrats. Next, the reeling Social Democrats (SPD) had reluctantly stepped into the breach, keeping Merkel and her weary grand coalition in power. But the chancellor had emerged battered and bruised. German politics was consumed by questions about Merkel’s future and distracted by a tedious months-long debate over the fate of Hans-Georg Maassen, the soon-to-be ousted head of Germany’s domestic intelligence agency. Public trust in the intelligence community, never high in Germany, had hit a new low.

“German politics has been preoccupied with itself for over a year,” the Australian official told me at the time. “The strong leadership and political stability required to take big decisions on issues like 5G does not appear to be there.”

Much has changed in the three months since. Merkel staved off a brewing internal revolt by stepping aside as leader of her CDU party, restoring a fragile calm to German politics. Germany’s leading industry lobby made headlines in January with a surprisingly critical paper on China, in which Berlin’s top trading partner was described as a “systemic competitor.”

And finally, the debate over Huawei and 5G has taken off, animated by the early-December arrest in Vancouver of Meng Wanzhou, the Chinese company’s Chief Financial Officer and the daughter of its founder. Barely a day goes by in Berlin now without a conference or closed-door government meeting on the issue.

The Government is Split

But while Germany’s political class has woken from its slumber, it still feels paralyzed. The decision whether to follow the lead of Canberra and Washington and ban Huawei as a supplier for its 5G infrastructure is the first big strategic decision that Berlin will have to take since the dawn of a new era: that of Donald Trump, Xi Jinping, and big data. The experience is deeply unsettling for a country that is not used to making big national security choices of its own, and which is struggling to define its role and interests in a more Hobbesian world of big power competition.

Germany’s leadership would have preferred—as it initially tried to do in the debate over the Nord Stream 2 pipeline—to label the 5G issue an Unternehmenssache, or issue for companies like Deutsche Telekom to decide.  Another favored option would have been to take the heat off the politicians by assigning a ministry, or perhaps Germany’s cyber security authority, the BSI, responsibility for the decision-making process.

Instead a fight has broken out within the government, with China skeptics in the SPD-led foreign ministry pushing for an outright ban of Huawei, and the CDU-led economy ministry pushing back out of concern such a ban would delay the rollout of 5G across Germany, push up cost, and put the suddenly slowing German economy at a competitive disadvantage.

More recently, members of the Bundestag have demanded a say in the matter. Whispering in everyone’s ear are German companies, led by big automakers who have become entirely dependent on the Chinese market. They fear that if Huawei is excluded, their businesses will feel the wrath of the Chinese state.

The Dangers of China‘s Intelligence Law

It is slowly becoming clear that this is a political decision that may have to be made by the chancellor herself. Merkel, known for sitting out contentious debates like this until the direction of travel is clear, has offered few clues about her thinking. On a visit to Japan in early February, she suggested China would have to provide no-spying guarantees if home-grown companies like Huawei were allowed to participate in Germany’s 5G rollout—a statement that even close allies of the chancellor laughed off as horribly naive.

Merkel is a physicist who likes to focus on facts. But the facts are no savior here. Yes, Huawei has been deeply entrenched in the German telecommunications market for years. It has a longtime partnership with Deutsche Telekom, which vouches for its products and professionalism. Huawei is a private, not a state-owned company. And neither the US nor any other government has produced a “smoking gun” that proves Huawei is an espionage risk because of its Chinese roots. The company vigorously denies that it has ever passed on information to the Chinese state or ever would.

And yet, China’s intelligence law from 2017 obliges all Chinese citizens and organizations to support and cooperate with the state in intelligence gathering. If Beijing came knocking, would Huawei really have a choice in the matter?

A confidential paper from the Mercator Institute for Chinese Studies (MERICS) that was circulated to top German government officials in mid-February is clear on this matter. “In light of the overall political and legal environment in China, trusting the Chinese party-state and Chinese companies with not abusing their access to critical infrastructure is unwarranted,” the paper reads.

Can You Trust in a Trust Clause?

Complicating the calculus for Berlin and other European capitals is the complexity of 5G, a transformational leap forward in technology, that will allow data to be streamed about a hundred times faster than 4G and make driverless cars, smart cities, and other large-scale applications of connected devices feasible on a commercial scale. In a November note entitled “The Geopolitics of 5G,” analysts at political risk consultancy Eurasia Group argued that this complexity raised the potential for malicious cyber-attacks exponentially.

Still, Germany’s BSI cyber security watchdog believes the risks of using a Chinese supplier like Huawei for 5G can be managed by introducing tougher vetting procedures, including a certification process for all hardware and software updates. Germany’s interior ministry, which oversees the BSI, wants to add a “trust clause” to Germany’s telecommunications law. Another idea is to keep Huawei out of the core 5G network without excluding them completely―an approach favored by France.

But some German politicians dismiss these ideas as a grey solution to a black-and-white-problem. “In the end, no matter how many technical fixes and no-spy deals the government dreams up, there are no weaselly ways to resolve this,” Reinhard Buetikofer, a Greens member of the European Parliament, told me.

A Call for Courage

Public pressure from the Trump administration is not making it easier on the Europeans, who are desperate to avoid the impression that they are kowtowing to Washington. Late last year, US officials came through Berlin to present their argument against Huawei behind closed doors. But lately, they have abandoned any semblance of discretion, going public with their campaign. Both Vice President Mike Pence and Secretary of State Mike Pompeo have both issued open warnings to Europe about using Huawei in recent weeks.

Iranian Foreign Minister Mohammad Javad Zarif summed up the dilemma for Berlin and other European capitals in his speech at the Munich Security Conference. “If the United States were to come in the course of their fight with China and tell Europe to stop dealing with China, what would you do? Whatever you want to do then, do now, in order to prevent that eventuality. Because a bully will get bully-er if you succumb,” he said.

In an ideal world, Europe’s big countries could agree on a common 5G approach. That would give each of them a degree of cover. Informal talks have been taking place between the Germans, French, and British in recent months in the hopes of aligning their positions, one European diplomat told me. The European Commission is also scrambling after staying silent for months.

“Germany does not want to take a big decision like this on its own,” the diplomat said. “But you can’t delay forever. At some point the courage must be found.”

The post The Huawei Conundrum appeared first on Berlin Policy Journal - Blog.

© REUTERS/Wolfgang Rattay

First it was Chinese goods flooding the world after leader Deng Xiaoping’s sweeping economic reforms at the end of the 1970s. Now it’s Chinese money targeting acquisitions across the globe. This latest trend has raised serious concerns, as governments fear China is making strategic investments that could affect their economies or even jeopardize national security.

The Committee on Foreign Investment in the US (CFIUS), a government watchdog organization, has been particularly vigilant as Chinese direct investment in America reached a record $15.3 billion in 2015, according to the Rhodium Group research service.  In early December, President Obama upheld the committee’s recommendation to effectively stop the sale of German semiconductor supplier Aixtron SE to China’s Grand Chip Investment Fund – a deal totaling $714 million.

It was only the third time in more than 25 years that the White House had blocked a corporate acquisition on national security grounds, and it highlights how complex the debate has become – especially as advanced technology and defense are increasingly linked. The Treasury Department said there was “credible evidence that the foreign interest exercising control might take action that threatens to impair national security.”

China’s overall strategy is quite plain: It homes in on advanced technology companies that can enable Beijing to leapfrog ahead in key industries. According to German Ambassador to China Michael Clauß, Chinese investment in Germany in the first half of this year rose 2000 percent the same period in 2015, and most of that investment landed in the high-tech sector. “It seems … they are trying to close the technological gap through acquisitions,” he told Reuters.

A Perfect Fit

That is evident in the Aixtron case. Beijing has launched a program to build up its own production of semiconductors, and Aixtron would undoubtedly fit neatly into this portfolio.  We could then see a scenario where the People’s Republic (PRC) purchases Western technology in key sectors to expand and modernize its own operations, making it more competitive with the very Western countries where it made the acquisition. Essentially, it’s the high-tech equivalent of the way China adapted foreign expertise in manufacturing at much lower costs and surpassed Western producers.

This approach also dovetails with Xi Jinping’s broader, long-term aim of pulling even with the US on the global stage. Beijing plans to pursue this larger world role on various fronts, from the South China Sea to technology. Industrial modernization is one part of the effort. The Chinese leader wants to see his country become a leading innovator by the end of this decade. “Great scientific and technological capacity is a must for China to be strong and for people’s lives to improve,” he was quoted as saying this summer by the Xinhua news agency.

If implemented successfully, the government’s “Made in China 2025” plan to enhance technology and automation is an obvious challenge to Western economies like Germany, that have until now been global leaders in advanced engineering and machinery.

There are significant reasons to believe that progress will not be as smooth as the planners in China hope; for one, the Communist Party state – which Xi is intent on preserving and strengthening – is by nature ill-equipped to implement the necessary structural reforms, while Xi’s campaign of political and intellectual orthodoxy stands in the way of innovation.

Defense applications are relatively easy for governments to identify, but the wider issue of strategic industrial competition is set to become more acute in the years ahead, especially given the rising tide of complaints from developed nations over the lack of reciprocity in China. Western companies have regularly reported obstacles in expanding their operations on the mainland and working with Chinese enterprises on an equal basis, let alone making acquisitions. Ambassador Clauß reported recently that German companies operating in the People’s Republic were feeling a “considerable rise in protectionism.”

A Safeguard Clause

That prospect seems to be prompting at least some European governments to rethink their strategy. Germany did allow China’s domestic appliance manufacturer Midea to buy into robot maker Kuka, but Berlin has reconsidered its initial approval of the Aixtron purchase; Deputy Economy Minister Matthias Machnig said new, security-related information had come to light. In the summer, Economy Minister Sigmar Gabriel had called for a safeguard clause that would allow European countries to block foreign takeovers of firms specialized in technology strategic to the EU’s economic success. German EU Commissioner Günther Oettinger wants to see a European foreign trade law to protect companies like Kuka from being bought up by non-EU entities.

Aixtron has a subsidiary in California and employs about one hundred people in the US . The company’s technology can be used to produce diodes, lasers, and solar cells, and it’s used by US defense contractors. The White House statement on the proposed acquisition said, “The national security risk posed by the transaction relates, among other things, to the military applications of the overall technical body of knowledge and experience of Aixtron.”

Aixtron responded that the Obama administration’s order applied only to its American business and did not stop the Chinese group from acquiring its shares. Meanwhile, the Chinese Foreign Ministry in Beijing responded by saying, “A normal commercial acquisition deal should be considered using commercial standards and market principles. We don’t want the outside world to overinterpret this commercial activity from a political angle nor to add political interference.”

In the initial phase of China’s development, investment flowed chiefly into the People’s Republic. Foreign companies built up their positions in the world’s largest developing market and played a central role in modernizing everything from consumer goods to industrial machinery, followed by high-speed trains and electronics. But then, the Chinese started shopping overseas. It started with raw materials, logically enough given the country’s shortage of vital industrial inputs. China pushed into Africa, Latin America, and Australia in search of iron ore, copper, and other hard commodities. There were also less successful efforts to purchase large tracts of land to grow food for the country’s 1.4 billion people.

But the shopping list now seems limitless, ranging from real estate to cinema chains, luxury yacht makers, and breakfast cereal and meat processing firms. Annual outward investment has soared to more than $100 billion a year. China’s spending in Europe alone has totaled around €50 billion since 2000, with the largest investment in Britain followed by Germany and France. Chinese investors have bought up everything from Volvo cars to Pirelli Tires and the Club Med resort chain.
Now, some fear that Chinese buyers – backed by the government in Beijing and cheap loans from state banks – will purchase whatever they fancy, with an emphasis on acquiring technology China lacks in key fields.

The Mercator Institute for China Studies in Berlin (MERICS) and the US research company Rhodium Group released a joint study last year predicting that the People’s Republic would be one of the biggest crossborder investors by the end of this decade, with its offshore assets surging from $6.4 trillion to $20 trillion by 2020. Much of that will be in the form of portfolio investments and accumulation of foreign exchange reserves, but its total global stock of outbound foreign direct investment (FDI) was set to almost triple from $744 billion to up to $2 trillion by the end of the decade, with flows to western countries rising fast, according to the study.

Welcome and Fear

This would be a natural development for a country that started late and still lags far behind developed nations when it comes to the FDI share of GDP. In fact, China’s FDI/GDP ratio is still under ten percent, compared to three times as much for the US and almost four times as much for Germany. Investments in raw materials, meanwhile, will fall: the PRC will always need hard commodities, but the shift toward consumption and services and away from manufacturing growth will reduce that demand.

Intense price competition in many non-state sectors means that overseas investments offer a higher rate of return, particularly in utilities. And some companies and countries have actually welcomed Chinese investment because they need the capital and value the connection to Beijing.

The challenge is inescapable for Western countries struggling to cope with China’s impact. World governments and the EU will have to confront the natural repercussions of China’s growing presence in a world that both welcomes and fears the People’s Republic.

The post Money Talks appeared first on Berlin Policy Journal - Blog.