Former deputy national security adviser Matt Pottinger had this to say about China last week: “We saw a baby shark and thought that we could transform it into a dolphin. We kept feeding the shark and the shark got bigger and bigger. And now we’re dealing with a formidable, great white.”
I respect Matt Pottinger, first of all because he served in the Marine Corps, and second because he knows a lot about China, including fluent Mandarin. But numbers aren’t his strong suit, and the numbers tell a different story.
We didn’t bring about China’s spectacular economic growth — from less than $200 in GDP per person in 1980 to $12,500 in 2020. In inflation-adjusted 2010 dollars, that’s a 26-fold jump from $430 to $11,200 in forty years. Access to the U.S. export market helped, to be sure, but it didn’t help nearly as much as China’s exports to the world’s poorest countries.
Before the Great Financial Crisis of 2008, China was exporting about $20 billion a month to the U.S. and the same volume to the so-called Global South. In the subsequent 15 years, China’s exports to the U.S. grew to about $40 billion a month (and continue to grow in spite of the 2019 Trump tariffs, which I predicted would fail). But exports to the Global South were nearly $140 billion a month, or seven times higher in March 2023. For the first time in March 2023, China’s exports to the Global South were larger than its exports to all developed markets.
China is building 5G broadband networks in Brazil, Bangladesh, and Indonesia, railroads and mines in Africa, and ports in a dozen venues. Its largest automaker BYD just announced an $11,300 electric vehicle with a 200-mile radius, maybe the Model T of the 21st century.
There are countless things China does wrong, but there is one thing it learned how to do well, and that is to take people who are making $2 a day and employ them for $10 a day. I called this “Sino-forming the world” in my 2020 book You Will Be Assimilated. As an investment banker for a Hong Kong boutique in 2014, I saw first-hand how Huawei entered Third World markets. You can read an extract from the book—about Huawei’s success in Mexico—here.
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Broadband infrastructure is a wedge to bring in e-commerce, e-finance, AI applications for manufacturing, logistics, and healthcare. People who spent their lives working a subsistence plot or sitting in a market stall suddenly had access to the world market—to employment and business opportunities, and to imports of Chinese consumer goods.
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After the 2008 crash, China shifted its emphasis to what Donald Trump reportedly called “sh*thole” countries. The Belt and Road Initiative built the digital and physical infrastructure to drive China’s export market. A decade ago, China responded to the prospect of a shrinking labor force by exporting its labor-intensive industries to Vietnam, Indonesia, and other countries with cheaper labor.
Before I moved to Wall Street in 1993, I spent a good part of my career in so-called development economics, trudging through the “sh*thole” countries from Mexico to Peru to Nicaragua and (after the fall of Communism) to Russia. U.S. corporations for the most part couldn’t have cared less. They were too busy making money on software. China took what it learned in its own transformation and set out to “Sino-form” the “sh*tholes.” Now it’s happening. That’s why Brazil’s President Lula made the pilgrimage to Beijing this year, and why China’s BYD wants to buy the abandoned Ford plant in Brazil.
China is hard-wiring economies with billions of people into its economic machine. Chinese commentators compare this to Mao Zedong’s civil war strategy of surrounding the cities from the countryside.
Matt Pottinger told Nikkei how impressed he was by a 2013 Xi Jinping speech to Chinese Communist Party members predicting that capitalism will inevitably fall, and socialism will triumph. Pottinger takes such things at face value; in fact, China is Communist in the same way that the Mafia is Catholic. Karl Marx would have looked at today’s China with astonishment. Artificial Intelligence, 5G broadband, and Cloud computing are crushing manufacturing costs in China, and China is assimilating the Global South into its economy.
Trump and his advisors, including the estimable Matt Pottinger, thought we could contain China by fencing off the United States and denying China access to US technology. The tariffs didn’t work, and the Chinese are working around our tech controls, as the Wall Street Journal reported earlier this week. China’s 5G broadband and applications to manufacturing, mining, and logistics run off older chips that China can produce itself.
China hasn’t won, though—not by any means. Why not create an alliance of the U.S., Japan, South Korea, and some of the Europeans to compete with China for the billions of people at the margin of the world economy? I proposed such a consortium in a Newsweek op-ed. We need a Moonshot for manufacturing that will keep us ahead of China, as I proposed in a recent study for the Claremont Institute.
Playing Whack-a-Mole with Chinese chip technology
