Elon Musk, China, and the Biden Collapse
The Chinese government increasingly controls U.S. discourse and policy. The problems with the CCP are getting worse, not better.
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Today I’m writing about what Elon Musk’s purchase of Twitter shows about the U.S. relationship with China.
Random Monopoly of the Day
I’m going to try and start throwing in short write-ups of random monopolies I come across, since you guys send me this stuff all the time. Today’s monopoly has to do with plastic toys. Over the last ten years, a firm called Diamond Select Toys has sought to monopolize collectibles, specifically, American vinyl toys. Diamond took over shelf space and then excluded competitors, eventually overrunning the landscape with plastic crap. Comic artistKelly Turnbull described what happened next.
iBustMyMeetra335 @iBMM335What's the difference https://t.co/PGL2wAiTiO
“I Love China!”
Today, most big tech firms spend their time buffing up their credentials on national security, considering the war in Russia and the threat from China. But that wasn’t always so. In 2015, Mark Zuckerberg, while attempting to get regulatory approval for Facebook to enter China, embarked on the most cringe-worthy feat of flattery of the decade, asking Chinese leader Xi Jinping to name his unborn child at a White House state dinner. Zuckerberg even learned Mandarin, and blurbed Jinping’s book.
Zuckerberg’s pleas failed. Chinese strategists knew that social media technology isn’t difficult to build, and they didn’t want a Western platform dominating speech in China. But flattery, for others, will get you everywhere, especially if you have something the Chinese want.
And with that, the big news over the past week in media has been billionaire Elon Musk’s takeover of Twitter, the relatively small but highly influential social network for political elites, a purchase Musk is ostensibly pursuing to promote free speech. Most of the light and heat in the debate is over Musk’s content moderation choices. But that problem can be addressed by removing Section 230 of the Communications Decency Act, and restoring the traditional role of courts as regulators of illegal speech.
Though there are risky borrowing choices involved in this buy-out, I do not really worry about making Twitter profitable enough to service its debt. It’s a horrendously managed company, so Musk should be able to turn it around. The more interesting critique of Musk’s purchase of Twitter is not about his personal political goals, but about his ties to China. These ties have largely escaped scrutiny because looking too closely at Musk would implicate much of corporate America, who have similar dependencies. It’s actually hard to find a firm that isn’t addicted to Chinese production, consumption or capital, from Amazon to Apple to Disney, to Nike to Blackrock.
But Musk’s dependency on the Chinese government is overwhelming and personal, to the point where he nearly equalled Zuckerberg in cringe-worthy statements. While insulting U.S. politicians and regulators, he operates as a mascot for Chinese society, and at Chinese conferences says things like “China rocks” and “I love China” in return for huge subsidies. Unlike Zuckerberg, Musk’s flattery delivered, but that’s because he had something they wanted, which is battery, space, and electric vehicle technology. (Indeed, there are reasons to see Musk’s empire of SpaceX, Tesla, and Starlink as problematic from a competition standpoint). In return for building out the Chinese electric vehicle ecosystem Chinese government essentially gave Musk a free factory in Shanghai, as well as access to their market.
Both China and Musk have benefitted from this arrangement, with Tesla generating “more than a quarter of its total revenue from China, or about $13.8 billion.” According to the Wall Street Journal, the firm “sold more than 470,000 cars made at its Shanghai factory last year, data from the China Passenger Car Association showed. Tesla said it delivered more than 936,000 vehicles globally in 2021.”
The result of this alliance is that Musk became richest man in the world, and China gained market power within a thriving electric vehicle ecosystem. As Musk conveyed six days ago to Tesla investors, China controls certain key parts in the Tesla supply chain worldwide. Moreover, Tesla is increasingly not an American company, using Shanghai as an export platform. One Tesla executive noted that Shanghai’s “lower cost structure” means that their “mix of cars" is shifting towards China.
The net effect of this arrangement is that Musk has the capital to buy Twitter in the U.S. even though he openly insulted the Securities and Exchange Commission, which had penalized him for lying to investors. That is not how Musk is treated in China. Here, for instance, is what happened last year.
Periodically, the Chinese bureaucracy reminds powerful entities within China, and that includes corporate America, who is in charge. Tesla, as many others have, was thus forced to engage in a self-confession, turning on its belly to demonstrate subservience to the Chinese, a far cry from Musk’s routine attacks on American regulators and policymakers as bastards and fascists. In many ways, Musk has gotten the ability to access unlimited capital in return for effectively acting an agent of the Chinese government.
China as the Great Geo-Political Monopolist
Musk is useful to China, because he is helping Chinese strategists execute on their long-term goals. What are these goals? In May of 2020, the Chinese Communist Party (CCP) declared its economic strategy, using the phrase “dual circulation.” Dual circulation meant fostering a domestic productive apparatus that is independent of foreign technology and finance, while making sure the rest of the world is dependent on Chinese control of key supply chains, whether it’s shipping, railroad construction, electric batteries, or solar panels. Chinese ‘grand economic strategy,’ in other words, is to operate as a giant monopoly on which the rest of the world must rely.
And it’s working. A few months ago, Federal Maritime Commissioner Carl Bentzel put out a report on Chinese control of shipping, showing that over 85% of intermodal chassis are manufactured in China, and over 40% of the world’s commercial ship order book were built in China. Chinese producers control railroad production and container cranes, active pharmaceutical ingredients underpinning the entire pharmaceutical industry, as well as huge swaths of the global telecommunications industry. It is in fact hard to find industries over which Chinese government doesn’t have significant influence.
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And the point of this economic grand strategy is clear, because China believes the U.S. presents an existential threat to their governance system. Whether we like it or not, the Chinese government has declared that it will defeat the U.S. and liberal democracy itself in a global conflict, and that conflict - for the moment - is playing out in the economic and ideological sphere. There are obvious signs of this dynamic every day. Here, for instance, is the Wall Street Journal yesterday.
Chinese President Xi Jinping has told officials to ensure that the country’s economic growth outpaces the U.S.’s this year, according to people familiar with the discussions, even as its economy sags under its worst Covid-19 outbreak since the pandemic began.
In meetings over the past few weeks, Mr. Xi told senior economic and financial officials that ensuring that the economy is stable and growing is important because it is critical to show that China’s one-party system is a superior alternative to Western liberal democracy, and that the U.S. is declining both politically and economically.
Of course, the strategy isn’t just economic. The Chinese leadership believes they will be able to demoralize and defeat the U.S. without firing a shot, but they are also preparing to defeat the U.S. violently, building up a massive blue water navy and a military apparatus to rival America’s. China recently signed a security deal with the Solomon Islands, a strategic chain of islands in the Pacific that cost thousands of American lives during World War II. China obviously is seeking to use its position there to sink American ships, should that be necessary.
Many around the world are not concerned with this dynamic, because they don’t think that the defeat of the U.S. would be particularly problematic. But since I believe that free expression and liberty are values that only exist because they are protected by a strong liberal democratic state, I am concerned.
The U.S. Built the China Threat
The Chinese government is explicit about its goals, and has been for decades. But largely, it is Western financiers and monopolists who have helped China undermine liberal democracy, both in the U.S. and in Europe. American strategists, arrogant after the end of the Cold War, frittered away our national strength by moving the U.S. towards a low production economy dominated by finance and branding. China served as the willing manufacturing center for all the factories we chose to offshore.
It went far beyond simple manufacturing, of course. Bill Clinton armed China, explicitly transferring sensitive missile technology from McDonnell Douglas against the Pentagon’s wishes. China only has a rocket program with missiles pointed at U.S. cities because the U.S. government helped them design it. Beyond that, Joe Biden as Vice President helped empower Chinese censorship of Hollywood, Chinese firms exploit trade loopholes to dominate industries, and Chinese firms use American technology that our own laws lock us out of. It’s not like China had to twist our arms to get what they wanted, we largely sold it to them.
In other words, most of our policies vis-a-vis China are designed to foster the dependence that the Chinese state wants. Dominant monopolies in the U.S., everyone from Walmart to hospital power buyer Vizient, love importing from China. Despite all the rhetoric about resiliency and supply chains, and the images of nurses wearing garbage bags for lack of being able to produce domestic PPE, we are more dependent today on Chinese imports than we were in 2019.
There have been some policy shifts. The Trump administration put up tariffs, which matters, but aside from that, did little. He made noises about banning TikTok, but did not follow through, and Biden dropped the idea. The Biden administration kept Trump’s tariffs, but handed over the U.S. solar industry to China for environmental reasons, despite the fact that solar panels in China are made with coal-fired power plants using slave labor. (Thanks John Kerry!)
And now inflation is making elite policymakers panic and run straight back into the arms of Chinese production. Larry Summers has been pressing to reduce China tariffs. Republicans in the Senate, while no one is looking, are also encouraging Biden to do so. They are helped by Treasury Secretary Janet Yellen, and advisors on Biden’s national security staff, who also getting aggressive on that point.
On Friday, Treasury Secretary Janet Yellen said that easing tariffs on some goods is “worth considering,” following comments a day earlier from Deputy National Security Adviser Daleep Singh that most of the duties on Chinese imports “serve no strategic purpose” — particularly those on consumer goods.
The rollback of tariffs, while China is setting up to sink the U.S. Pacific fleet, is downright insane. It’s also foolish to imagine that you can address inflation by lowering tariffs, considering that we can’t actually move things through the backed-up ports, and also considering the reality that China has shut down Shanghai and Beijing over COVID. How exactly is a flood of cheap stuff going to get to the U.S. when it can’t leave China because of COVID and can’t enter LA/Long Beach because of ship traffic jams?
The only thing removing tariffs will do is encourage businesses not to re-shore production to the United States or outside of China. After all, if it’s clear that policymakers want a return to cheap Chinese production, then businesses won’t invest to build factories, since those factories will become unprofitable in a few years, once China can flood us with imports again.
It’s all so stupid and thoughtless. And this brings me back to Musk, China, and Twitter. There is an ideological and media component to the contest between the U.S. and China, and the Chinese government already owns TikTok, one of the most important media platforms in the world, used by over 100 million Americans. It is crazy we allow TikTok in this country. It is an easily replicable service, it is not complex technology, and allowing the CCP to control what a generation of Americans watch is dangerous. The CCP cannot overtly manipulate TikTok in the U.S., it must be subtle. But subtlety is quite manageable, and can be built into the structure of Twitter. Elon Musk’s control of this social network could enable the CCP to have influence over another important platform for discourse. And that, far more than any questions over censorship, is what policymakers should be thinking about.
What I’m Reading
Corporate profits have contributed disproportionately to inflation. How should policymakers respond? Josh Bivens, Economic Policy Institute
SEC fears may cement Vanguard monopoly, Financial Times
Asking the Wrong Questions, Ramblings of a Pharmacist
Consumer welfare standard under siege after 40-year dominance of antitrust, Washington Examiner
Thanks for reading!
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P.S. I got the following note from a BIG reader.
This is from a Wi-Fi professionals slack, the background is all the major wifi vendors are experiencing long shipment delays (6-8 months is normal) due to chipset shortages. It seems costs have increased so much they are now charging customers extra for products not yet delivered:
Anybody else get the letter from Ruckus about back-dating price increases on orders already processed in 2021 and still not delivered, forcing us to re-do all those orders already in pipeline and then either eat the difference ourselves or pass on the price increases to customers who are already upset about delays that are now reaching into 2023?
This is a fairly standard chip shortage issue, there’s two major wifi AP chipset vendors, Qualcomm Atheros and Broadcom. Both are fairly monopolistic in practices, you’ve covered them both before. There are smaller companies, MediaTek in particular have some share, but they’re not used by the enterprise networking vendors.
I haven’t heard of backdated price increases, but they could become common.