The PRC, trade, foreign investment etc

Parliament’s Justice Committee today has the second (and final?) public hearing of submissions on their foreign interference inquiry.  The first such session was described to me by someone who watched it all as “just hopeless”, and accounts I’ve read don’t suggest any reason to doubt that take.  If there were signs of seriousness about the process, they seemed to be about trying to play down, or pretend there was nothing to, concerns around the PRC.   The acting chair had introduced the hearing by suggesting she would prefer not to hear names.     Her party, earlier this week, launched a foreign affairs discussion document in which they talked of their “friends in Beijing”.  What hope for a serious investigation.

Reports this morning suggest the Committee is just about to have another acting chair, with previous acting chair Maggie Barry deciding to leave the committee, and substantive chair Raymond Huo (who initially opposed any public submissions, claiming government departments could say all there was to be said) having belatedly recused himself, as someone about whom concerns had been raised, notably in Anne-Marie Brady’s paper.  In another sign of the unseriousness of the exercise, a senior National MP on the Justice Committee told the committee two weeks ago, when Brady appeared, that he hadn’t even read the paper.  I might not have expected all MPs to have done so –  although all should –  but a senior MP, actually sitting on the committee, part of National’s international affairs team…..

It is reported that National MP Chris Bishop is to be the new acting chair.   As I happened I was engaged with Bishop briefly on this issue on Twitter yesterday, when he politely took exception to my suggestion that the inquiry, especially around the PRC, was really a faux inquiry.   His claim was that

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and went on to ask the basis for my concern.   240 characters really isn’t the length for such discussions, so I simply pointed him to my submission to the inquiry, and in addition to some of the points above noted the Jian Yang situation.  Perhaps he was in earnest.  Perhaps his acting chairmanship will really mark some sort of turning point in the inquiry.  It would be great if it did, but it is hard to have any optimism given how deeply entrenched, especially in the two main parties, the wish to pretend there are no problems, and to just get on treating the PRC as a normal country (“our friends”) has become, from Jacinda Ardern and Simon Bridges down.

There was another example of the establishment approach in this area in the Herald yesterday, in a column by lobbyist and former trade negotiator Charles Finny, offering to “make sense of the US-China dispute”.  Par for the course for the Herald, general readers would not have any idea that Finny serves on the Advisory Board of the (largely taxpayer-funded) New Zealand China Council, set up to champion closer ties with the PRC (and never known to have said anything critical of the regime), and he is also chair of Education NZ, the government body charged with promoting export education, much of it to the PRC.   On a good day, Finny appears to be alive to some of the risks around the PRC –  he did after all go on national TV and suggest that he was always careful what he said around Jian Yang and Raymond Huo given their apparent close ties to the PRC embassy – and I suspect he is mostly a true-believer in the mantra of the “rules-based order” and of the ever-increasing web of preferential trade agreements New Zealand is party to.

But his “making sense of the US-China dispute” column didn’t make sense of it at all, because it totally failed to place the rising tensions in a wider strategic or political context.  It was, on his telling, all the fault of the Americans (“the Trump Administration’s ‘America First’ mentality), and not at all about choices made by the PRC.  Later in the article, Finny does actually note first that some of the approaches that bother him began under Obama (judges for the WTO), and that there isn’t necessarily much difference between the approach being adopted by Trump and that by Democratic Party contenders, which you would think might matter.  But instead all we get is a worry that New Zealand could see

enormous pressure on New Zealand to stop buying Chinese technology or to co-operate with Chinese universities or research entities,

(Shouldn’t any decent media outlet have thought at that point that Finny should have to disclose his Education NZ and China Council involvements?)

Finny’s approach seems to be that no matter the character of the regime, we should simply keeping on doing more trade, buying more technology, allowing more investment.  There seems to be no sense at all of anything around security risks –  be it Huawei, Hikvision or whoever –  no sense that, however the New Zealand government labelled it in a treaty, the PRC is no market-economy, but one with an ever-increasing role for a state with totalitarian aspirations and abilities.   Simply no recognition of the way the PRC has sought to inject its pernicious influence –  and don’t pretend it is just another state – into the affairs of all sorts of other countries, including our own, including our own ethnic Chinese New Zealand citizens.   Now, you might think Trump is going about tackling these challenges in a poor way – or perhaps won’t even follow through –  but that is a quite different matter from whether there is a real issue that needs addressing.   Finny –  and the New Zealand political establishment –  would, it appears, prefer to pretend otherwise.  And don’t pretend –  as some try to –  that this is just about another big country getting richer and stronger.   There would be nothing like the level of concern there now is across the US political spectrum if China were opening up, reducing the power of the state, reducing the power of the Party, stopping the threats to Taiwan, stopping corroding freedom in Hong Kong, demolishing artificial islands in the South China Sea, not engaging in state-sponsored intellectual property theft, not imprisoning a million Uighurs, not attempting to exert control over diasporas and foreign Chinese-language media, and so on.    Those are the sorts of things that should be concerning our MPs and ministers, but not one will utter a word.      (And by contrast I listened to an interview yesterday with Pete Buttigieg, one of the fairly left-wing Democratic contenders.  I can’t imagine he agrees with Donald Trump on almost anything, and yet on China and the risk and threats he was fluent and serious.  I was impressed.)

As it happened, a reader this morning posted a link to a column from the New York Times by the (often rather breathlessly enthusiastic) champion of globalisation Tom Friedman on the US/China issue.  I don’t suppose he is generally much of a Trump fan either, and yet

A U.S. businessman friend of mine who works in China remarked to me recently that Donald Trump is not the American president America deserves, but he sure is the American president China deserves.

and, for example,

But when Huawei is competing on the next generation of 5G telecom with Qualcomm, AT&T and Verizon — and 5G will become the new backbone of digital commerce, communication, health care, transportation and education — values matter, differences in values matters, a modicum of trust matters and the rule of law matters. This is especially true when 5G technologies and standards, once embedded in a country, become very hard to displace.

And then add one more thing: The gap in values and trust between us and China is widening, not narrowing. For decades, America and Europe tolerated a certain amount of cheating from China on trade, because they assumed that as China became more prosperous — thanks to trade and capitalist reforms — it would also become more open politically. That was happening until about a decade ago.

But, as he goes on to note, it simply isn’t now.  And New Zealand politicians seem to refuse to confront the implications of that, accentuating local issues that were already building (as one small but prominent example, Jian Yang was already in country –  told by Beijing to lie about his past –  and in Parliament before Xi Jinping took the top job).

In somewhat the same vein the government has a consultation open at present (submissions close tomorrow) on possible changes to the overseas investment regime.  I took the opportunity to make a short submission for two reasons:

  • first, I generally favour greater openness to foreign investment, but
  • second, the discussion document dealt (rather superficially) with national security issues and how the rules might best handle those.

These days, New Zealand does not get much foreign direct investment –  and especially not much in the way of greenfields new developments.  I don’t think the screening etc regime is the main reason –  mostly, I suspect, we don’t have that much foreign investment because (a) there are few opportunities here, and (b) for the same sorts of reasons business investment generally has been weak for decades (high cost of capital, high real exchange rate, high taxes on business profits –  in that case, especially for foreign investors).  But I’d generally favour a more liberal environment, for almost all industries and for investors of almost all countries.

It is also worth recognising that most of any benefit (to productivity in New Zealand for example) from foreign investment will come from investment by firms based in rich and advanced countries.  Of course, there might be rare exceptions –  a firm based in Zambia, Laos or El Salvador –  but they will be exceptionally rare (the best ideas, technologies, management systems etc) will be in the rich countries –  part of why they got, and stay, rich.  So I’d favour a pretty-much open slather approach to foreign investment –  existing assets or new –  for investors based in rich countries (the OECD membership might be a decent starting point, and one could add in places like Singapore and Taiwan.

For most of the poorer or smaller countries, I really don’t care much what the rules are.  Probabilistically, there is almost nothing at stake (at least in economic terms) in maintaining restrictions on Zambia, Laos, El Salvador (or 100 others) if that is what the political process demands.  But, equally, there isn’t much risk or downside to opening up to them either, especially if one is focused on the benefit of New Zealanders being (generally) able to sell to the highest bidder.

There are various odious regimes in the world.  Most them don’t matter much to New Zealand at all (thinking places like Equatorial Guinea).  But the PRC does and in my view we should –  while the regime remains as it is – be treating investment from there quite differently, for various reasons.    One is a straightforward economic one.  Almost any large PRC firm is either an SOE or has a significant element of state/Party control to it.  We spent years here trying to reduce the hand of the state in direct business operations in New Zealand.  State entities typically don’t run businesses well, don’t allocate investment efficiently, and so on.  There is no more likelihood (to put it mildly) that PRC state-controlled companies will do so than the New Zealand government ones will –  and at least the New Zealand government ones are ultimately answerable to New Zealanders.  Such investment is likely to be a net negative for New Zealand even if the price paid to the initial New Zealand vendor is higher than that vendor could have got from another –  private –  purchaser, whether from New Zealand or another country.

But the deeper reason is that the PRC is a big and powerful totalitarian state, that has repeatedly displayed aggressive intent, which has values antithetical to those of most New Zealanders.   Individual PRC buyers may well be perfectly decent well-intentioned people –  as plenty of 1930s Germans were too –  but a totalitarian state has, and repeatedly demonstrated, its leverage over its own people, by fair means and (too often) foul.  We would simply be ill-advised to allow PRC-associated interests to have significant investments in many sectors in New Zealand.  One could think of media or telecom companies, or tech firms.    The PRC banks operating here should be a matter of concern, especially if they get materially larger than they are now.   But the concern should range wider.  For example, the greater the control PRC interests have of elements of the dairy industry, the more difficult New Zealand might find it to be handle the sort of economic coercion the PRC has attempted to engage in re various countries in recent years.

And, of course, to circle back to my earlier point, it is not as if the PRC is one of the world’s advanced economies.  Productivity levels languish far behind even New Zealand’s modest levels, and everyone recognises the dependence the regime has had on industrial espionage.  Deep pockets aside –  with a mix of market and non-market motives –  how much genuine benefit to New Zealanders is there likely to be from PRC foreign investment over time?

It is possible that this sort of restrictive regime could come at some economic cost, in terms of lost productivity opportunities for New Zealand. My sense is that it would probably be quite a small cost, but we can’t be sure.  Perhaps more importantly, many precautions have a cost –  whether it be a national defence force, Police, anti-virus software, or a lock on your front door.  The PRC is a threat to New Zealand and countries like us, and we need to be willing to spend some resources (perhaps sacrifice some short-term opportunities) to establish some resilience to those threats.

But, of course, our elected “leaders” and business establishment figures have no interest in any of this.  For them, it seems, the character of the regime matters not a jot, it demonstrated track record at home, abroad, and in New Zealand matter not a jot.  There are deals to be done, donations to be collected, and  –  if there are any risks –  well that will be someone else’s problem another day.  And in the process they’ve allowed our political system to become corrupted, indifferent to the character of the regime, indifferent to the values of New Zealanders.  But their “friends in Beijing” are no doubt happy.

 

23 thoughts on “The PRC, trade, foreign investment etc

  1. While agreeing with the sentiment of doing less business (or more accurately, less disadvantageous business) with PRC, I wonder if our current trade agreement would limit such actions?

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  2. I think your points about the overseas investment regime are very good. One benchmark criteria for exclusion from foreign investment in NZ could be any country having been found by an international court or tribunal to have breached an international agreement, and failed to recognise and remedy the finding. In China’s case, it has been found to be in breach of the UN Convention on Law of the Sea (UNCLOS) by an Arbitral Tribunal;

    https://www.policyforum.net/bogged-south-china-sea/

    The irony of this being that the US is not a party to UNCLOS. So, even that approach becomes somewhat problematic as a criteria. But certainly, the South China Sea situation I find of particular concern. We are but a small island nation with no defence of our own, bar international law. Any country who fails to uphold international law is a very serious threat to our sovereignty.

    Here’s a good primmer on the South China Sea situation;

    Liked by 2 people

  3. Re US-China, out of interest, any strong opinion on which country / political economy is better placed to endure a prolonged trade tiff?

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  4. Hard to tell isn’t it. The US is (a lot) richer per capita, but with an enfeebled political system at present, and a sense that we in the West are “soft” and unwilling to pay a material price for anything. Democracies can cope with a great deal of pain/loss in serious wars, and look how long costly but not total conflcts like Vietnam went on, at great cost (including actual conflict deaths). And, actually, look at how long the US paid the price of a really high share of GDP devoted to defence spending – a (short term) loss of consumption just as much the impact of (say) higher tariffs, or reduced access to low cost supply chains for (eg) electronics.

    As for the PRC, the Party rules and the Party can choose, but….part of the grand bargain has been ever-rising material living standards, and China is spending a lot diverted to building up military capability. In the long-run the PRC/CCP regime could prove more brittle than the West (which might be decadent in many respects, but still runs on a deep well of consent, common cause etc).

    Part of the answer might depend on how the rest of the West reacts. A better US President would be building coalitions and alliances around shared perceived threats. While in the real world, Trump is Trump.

    What is also hard to tell is how large the economic hit to the West from bifurcating the world economy back into two parallel systems (as in the Cold War) would be. It won’t be 20% of GDP, but perhaps people might debate whether it was nearer (say) 2% or 5%.

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  5. Thank you for your article. It is worth mentioning the obvious difference in population; for every 5 New Zealanders there are 139 Chinese citizens. So the Chinese govt can say “trust us; we are not rapacious capitalists; we believe in joint development so everyone benefits” and so on. However when China rather sensibly IMHO decides to stop importing waste from other countries it does so with immediate effect. If we were equal partners who cared about one another they would have given NZ a few years to adjust. So in Auckland waste is carefully sorted, collected and then stacked in ever larger heaps of paper and plastic. Equivalent European countries have large waste incinerators generating electricity and coupled with waste heat used for district heating networks.

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    • I was glad they stopped importing our (and the whole world’s) waste. Because of poor environmental regulation, much of it that was not re-cycled was disposed on in their rivers – which subsequently became a major contributor to ocean plastic;

      https://www.weforum.org/agenda/2018/06/90-of-plastic-polluting-our-oceans-comes-from-just-10-rivers/

      NZ simply needs to solve its own waste problems and the easiest way is just to ban all plastics that we are unable to recycle locally until we have the infrastructure to recycle them locally. There are clear substitutes (i.e., PET and HDPE plastics) that we can recycle locally.

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      • All bottles and tins to be returnable. It is worth our society paying to reduce our waste – it creates low paid work suitable for teenagers, pensioners and anyone who really needs money.
        Near lake Kutubu in Papua I met young men who collected the empty coke tins discarded by international workers on the local gas field; they would put them on the road for the trucks to flatten and then every few months take a few sacks of flattened tins to Lae (about 500Km by road) to sell for the aluminium value.
        Given a price high enough and a section of the population poor enough and there would be minimal waste in NZ. Businesses would hate the idea and we have governments that listen to big businesses but not to the vagrants who could make money returning milk, beer and soft-drink bottles.

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      • You are so right, Bob. That was where all my pocket money came from as a kid :-). There is a great lobbying organisation that I suspect will be successful at the political level here;

        https://www.nzpsc.nz/home/

        Expect lots of changes around waste!

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      • Rather than recycle we could burn them seeing as they are primarily hydrocarbons. High temperature incineration with co-generation would be a useful approach.

        Liked by 2 people

      • Katherine, thanks for the link. They seem to have missed one point – a bottle deposit scheme would also reduce litter ruining NZ’s clean tourist image. Just in the 15 years I’ve lived in Auckland I have noticed more litter despite the best efforts of my local council.

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  6. I am not a fan of Trump, for the same reasons you have given in various past posts, but his contribution in bringing the spotlight on China has been at least helpful. My worry with him is his only interest is in doing a “deal” with China – the treatment of Huawei being just one chess piece on the board for him.

    The timing of the Huawei bans seems suspicious – trade talks broke down in the last month and suddently the US plays this card (likewise the Google decision to pull Android has been linked to a threatened US government anti-competition investigation). If China turns around and says, ok US, we will accept tariff free imports of soy or something, suddenly Huawei gets un-banned. If this happened the entire credibility of any security arguments gets destroyed (forever) – any attempt to raise it in future will be viewed as a cynical negotiation strategy… Something similar seems to have happened with ZTE, although the ZTE ban arose from violations of Iran embargoes, not security issues.

    I think the US and Five Eyes group haven’t helped things by being secretive around the reasons for opposing Huawei. The only cited reasons are that Mr Ren is ex-PLA, and Chinese law requires corporate cooperation with intelligence gathering. If there are genuine suspicions based on technical grounds, at some point the cards have to be shown.

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    • Damoyo, here is a link to an excellent article by the ASPI re: Huawai. I think there is a lot more to it than just a negotiation tactic by Trump. The cards were shown in 2012 at the African Union HQ and China’s hacking has become far more prolific since then. Recently the Australian parliament suffered a massive attack from China.

      https://www.aspistrategist.org.au/editors-picks-for-2018-the-african-union-headquarters-hack-and-australias-5g-network/

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      • Sure – there may well be concerns, but my point is that Trump is possibly not personally that interested in them, seeing them only as a tool to gain leverage in wider negotiations. He is a loose cannon, and in his cynical worldview, it may be perfectly okay to greenlight a Chinese company in order to get some “win” in another part of negotiations. But that would be a collossal mistake in my view.

        The linked to article doesn’t seem to offer any conclusive evidence of Huawei having security problems – again it is only circumstantial evidence. China itself is no doubt hacking all sorts of people and systems, but is that uniquely a Huawei problem?

        For what it’s worth, I worked for this company for several years, until recently (outside NZ). I was not in the technical or engineering side of things, and am also not Chinese (so only ever shown what they want you to see), so I can offer no particular insights into the riskiness of their products. One thing i read recently that was interesting, was from the GCHQ in the UK – they operate this source code analysis “cell” to try spot if there are backdoors. Their recent statement was that there are no specific backdoors, but the code itself is generally insecure and any issues raised were only dealt with on reactive basis (which is exactly my experience about how we dealt with things when working for this company, much to the annoyance of customers). Security in the products is not something baked into the development process and culture, but fixed on a case by case basis when flagged. Whether this is by intention or not is hard to say – other people familiar with working in China have said similar things to me so I think it is a cultural phenomena… but, having stacks of telecoms infrastructure worldwide, which is insecure, is probably helpful to the Chinese state and its employed teams of hackers… Huawei in this case being “useful idiots”…

        Liked by 1 person

  7. “And in the process they’ve allowed our political system to become corrupted, indifferent to the character of the regime, indifferent to the values of New Zealanders.”

    This is a key point. The Chinese Communist Party realised some years ago that the politicians of the Western nations were made of weak moral fibre and offer them enough money or opportunity to enrich themselves and they will play ball. Our politicians are the weakest link and the Chinese state has been buying influence and calling up favours for decades. Look at any of the big time politicians of the US and you find extensive business connections with China. Just this week news emerged of the business connections Joe Biden’s son has with China. In New Zealand we’ve seen a succession of gift bearing Chinese tycoons wanting to be friends with NZ politicians. From Dover Samuels to Jenny Shipley the Chinese have clearly worked out that offer personal enrichment and most will quickly turn and become a cheer leader for the regime, even if that means sell their country down the river in the process.

    Liked by 3 people

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