Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…
Today’s issue is about how the Chinese Communist Party (CCP) just censored a Houston Rockets basketball executive, and why this move blew up into a geopolitical scandal. The episode reflects the dangerous amount of power that China has gained over the U.S. and reveals the failure of the Clinton-Bush-Obama administration foreign policy frameworks. And as an added bonus, under Obama, Joe Biden was the point man to deal with Chinese leaders.
But first, some house-keeping.
Next week I’m going to explain in more depth why you should do this, but… pre-order my upcoming book, Goliath: The Hundred Year War Between Monopoly Power and Democracy. A few years ago, I feel like I lucked into a learning about the secret history of political economy and power in the 20th century. The book, and this newsletter, are the result. If you pre-order it, the book gets on various lists and gets more promotion from fancy people, which then leads to more exposure, and more lists and promotion, etc. That means that the ideas you and I care about - democracy in commerce - get to a wider audience.
It’s already causing trouble. So far, Ed Luce at the Financial Times attacked my arguments about fascist Chinese power, and Farhad Manjoo in the NYT used the book to recast the Obama era in a way that generated bitter pushback from senior Obama officials. This is the debate we need to have as a society. So pre-order it! If you like this newsletter, you will love Goliath: The Hundred Year War Between Monopoly Power and Democracy.
(Photo by Kenneth Lu)
The Out of Control Chinese Leader Xi Jinping
Over the weekend, the Houston Rockets General Manager Daryl Morey posted a tweet favorable to Hong Kong protesters, a tweet that said “Fight for Freedom. Stand with Hong Kong.” Twitter is banned in China, and the tweet would have ordinarily been ignored. But Chinese politics is changing; Xi Jinping, having consolidated power using nationalistic rhetoric, has unleashed Cultural Revolution-style pressure inside Chinese bureaucracies. Any bureaucrat who doesn’t ramp up volume aggressively against even a perceived slight to Chinese honor could be undermined or even imprisoned.
There are many examples of this hyper-nationalism; earlier this year, the Chinese government denied visas to German lawmakers who criticized the country’s human rights record. In this case, the offending party was just a basketball team executive. Yet, the CCP can apparently brook no resistance, anywhere.
China’s state-owned top broadcaster said it would stop showing team events, and Chinese tech giant Tencent announced it would no longer live-stream games or carry team news. China's consulate general in Houston said the team should clarify its views, and the Chinese Basketball Association, led by former NBA player Yao Ming, cut all ties with the Rockets.
The National Basketball League Kowtows
The Rockets are a popular team in China, and China is an important market for the NBA. It would be hard to convey the level of sycophancy to the Chinese that business leaders in America immediately adopted. Morey deleted his tweet and apologized, top NBA player and Adidas spokesperson James Harden said sorry to the Chinese, and the NBA issued two statements, a mild one in English and a harsh condemnation of Morey in Chinese. The billionaire owner of the Rockets, Tilman Fertitta, criticized his own employee.
Most amusingly, the billionaire owner of the Nets, Chinese tech giant Alibaba co-founder and prominent Yale Law donor Joseph Tsai, wrote an essay condemning Morey’s comments, bringing up 19th century Opium Wars as one rationale for why all 1.4 billion people were immediately offended at the comments of someone posting on a platform banned in China.
Why does China have so much leverage?
The Chinese market is massive, both as an importer and exporter. We can see it use its power to attempt to bully U.S. politicians over agricultural products in hopes of gaining leverage in the trade war. This NBA situation is no different.
Among the nearly 1.4 billion people who call China home, 640 million of them watched some kind of NBA programming over the course of the 2017-2018 season, per league figures. That's nearly twice the population of the entire United States.
"When global partners are looking at the NBA, I think for them the two big markets are really the U.S. and China," Chang said. "And in some respects for some of these guys, they start to look at China as almost a bigger opportunity going forward.”
The National Basketball Association, like most American producers of goods and services, sees the potential for eye-popping profits in China. Of course, it’s a trade-off that comes with steep costs, like censorship. And it will ultimately collapse because the CCP is not interested in trade, it is interested in dominance.
Since the 1980s, the Chinese have used a simple set of strategies to take over industrial capacity. First, use imports and foreign financing/know-how to learn the business, then gradually replace foreign businesses with domestic ones, and finally subsidize the Chinese producers abroad until they dominate the global market. The Chinese have done this across many different sectors, most prominently the telecommunications equipment space, with Huawei causing a global national security crisis as it is now the best value for telecom equipment buyers in the world.
It’s not obvious how the Chinese could learn how to replace the NBA or international soccer, which is also quite popular in China. China is investing in youth sports, but my guess is that it won’t replace foreign sports starts with its own stars, because there’s no real strategic need to do so. The CCP will simply impose conditions on global sports, ensuring that, like with Chinese-owned social media platform TikTok, sports becomes a zone where politics are not allowed. It is increasingly doing that in Hollywood, as the U.S. government noted in 2015.
A lot of people are saying that the NBA is greedy, willing to sacrifice human rights for profits. And in some sense, that is true. But what just happened to the NBA is a result of signals the U.S. government has been sending to the American business community for years, that commercial relationships with autocracies - however compromised they may appear - ultimately help lead to democracy.
Bill Clinton pioneered this policy framework. The idea was called ‘engagement' with China, and many Western China watchers, in an orientalist fantasy world, sought to ‘shape’ China as a great power compatible with the liberal international order. As I wrote in June, this policy was part of a “a global utopian view, peddled most aggressively by Thomas Friedman in his 1999 book The Lexus and the Olive Tree and his 2005 The World is Flat…. China would become a democratic state, slowly, because its people wanted McDonald’s and X-Boxes, and McDonald’s and X-Boxes turned countries democratic.” Clinton’s policies sent large chunks of the U.S. industrial base and American factories to China. Under Clinton, U.S. businesses exported capital and technology and even armed the Chinese state, accidentally transferring missile machining tools to the Chinese military.
George Bush and Barack Obama continued this policy architecture. Bush oversaw the main years of the ‘China shock', when Wall Street, private equity, and China cooperated to rip the economic guts out of the midwest. During the Obama administration, despite some rhetoric of a ‘pivot to Asia’ to deal with China, this policy architecture largely dominated D.C. One very clear example is that of how Joe Biden sought to sell American entertainment product while Vice President.
Joe Biden’s China Deal
In 2012, Hollywood studios were increasingly frustrated at their inability to get into the Chinese market. China had maintained a system whereby American studios could sell only 20 films a year into their fast growing theater chains, and often wouldn’t make decisions until after the movies were made. This created a situation where studios would preemptively censor their own creative work in the hopes that their films would be imported by China.
The Obama administration, pursuing the strategy of engagement, or deepening trade ties, sought to loosen this restriction. And they sent Joe Biden to cut the deal, as Cecilia Kang reported.
During a luncheon [in 2012] in Los Angeles, Vice President Biden convinced China's vice president to agree to a deal that would unlock new fortunes for Hollywood. Biden asked Xi Jinping to relax China's quota of allowing only 20 foreign films to be shown at a time and to increase distribution fees for Hollywood firms.
China had been reluctant to change its decades-old restrictions meant to control the flow of non-Chinese films into the nation that could hinder its own arts industry. But Biden pressed his Chinese counterpart during those last hours of Xi's five-day U.S. visit.
"By the end of the luncheon, we had a handshake," Biden said Friday at the Creativity Conference hosted by the Motion Picture Association of America, Microsoft and ABC News. As a result, "your share of box office revenues doubled," Biden told the crowd of network executives, studio heads and technology lobbyists.
Part of this deal was straightforward aid to a U.S. industry, Biden doing the bidding of former Senator Chris Dodd, who had since become the head of the Motion Picture Association of America.
Biden joked there were rumors in the Senate that Dodd "controlled me," adding that he left a meeting with Obama and German Chancellor Angela Merkel to speak at the MPAA event.
But this deal also signaled to American entertainment executives, including those at the NBA, that U.S. government policy was to encourage more trade with China, no matter what. If they sought to sell their product in China, the U.S. would back them with geopolitical muscle. What Biden and the United States Trade Representative Ron Kirk didn’t consider was the leverage over studio output that that increased dependency on the Chinese market gave to the Chinese government.
Such leverage has already been an important part of China’s exporting power. For decades, China has been an important factory for the world. I wrote about this dynamic in July.
The list of products and commodities companies say they can no longer make in America is long. Nylon products, optical scanners, consumer robotics, electronics, all types of clothing, specialty chemicals… etc. China has become the factory of the world…
My favorite example is Stephen Lang of the American Bridal & Prom Industry Association, who said, “we can't make wedding gowns and prom dresses in the United States.” The entire labor force for doing so, and even things like beads for hand-sown adjustments, are now in China. “It’s impossible… We can't even get the materials in this country to make this clothing.”
From prom dresses to point of sale terminals, the argument from American distributors is pretty much always the same. The ecosystem of production doesn’t exist in the U.S. anymore…
China uses a host of monopolizing strategies to extend its geopolitical and commercial power, everything from below cost pricing to grab market share, patent trolling, espionage, mergers, and financial manipulation. In fact, the CCP is best understood as a giant monopoly that also controls a nation of 1.4 billion people and a large military apparatus.
In 2010, China used its power as an exporter to withhold rare earth minerals, a vital component in electronics production. And now, Chinese government strategists recognize that the country is no longer just a key exporter, but has leverage through its importing status. The exertion of power over the NBA is just the latest example.
We’ve Been Here Before
As usual, there’s a historical analogy.
In the 1930s, the Nazis sought, through the size of the Germany market, to prevent Hollywood from making movies critical of the Hitler regime, with some success. More importantly, Germany used monopolies and cartels to extend its economic power over foreign countries, even before its tanks rolled in to occupy them.
Here’s FDR’s Attorney General Francis Biddle, in 1944:
"The integration of the European industrial economy under German leadership and control was well advanced, accordingly, even before the war began."
The Germans subsidized certain key industries, and then used those subsidies to force foreign producers to cut deals to restrict output. They doled out patents selectively so that French, British, and American companies could only use some advances. It was a comprehensive strategy:
Nazis used their American subsidiary corporations to spy on U.S. industrial capacity and steal technology, such as walkie-talkies, intertank and ground-air radio communication systems, and shortwave sets developed by the U.S. Army and Navy. They used patents or cartel arrangements to restrict the production of stainless steel, tungsten-carbide, and fuel injection equipment. According to the U.S. military after the war, I.G. Farben, the Nazi chemical monopoly, had influence over American production of “synthetic gas and oils, dyestuffs, explosives, synthetic rubber (‘Buna’), menthol, cellophane, and other products,” and sought to keep the United States “entirely dependent” on Germany for certain types of electrical equipment.
Biddle saw what they were doing with cartel arrangements, saying that "German productive capacity increased as the non-German companies, resting on the security of these agreements, continued to restrict their own capacity and output, to limit their technical research and to neglect generally the development of new processes." Naturally the Germans were using all of these output restrictions to prevent the U.S., the French, and the British from building up their armaments capacity, especially in the high-tech aluminum/aerospace area.
China is doing the same thing. In September 2018, the Pentagon released a report about U.S. dependency on China, and focused not on civilian items but inputs critical to the military. The DOD wrote that “China is the single or sole supplier for a number of specialty chemicals used in munitions and missiles…. A sudden and catastrophic loss of supply would disrupt DoD missile, satellite, space launch, and other defense manufacturing programs. In many cases, there are no substitutes readily available.”
On the production side, the the whole world is now highly dependent on China. On the other side, importing, the NBA kowtowing shows that the intertwining of economic exchange is even more dangerous than we assumed.
But there is a bright side.
Xi Jinping’s Massive Error
President Xi is, like Trump, a cunning but not especially brilliant mafia boss style leader of a major geopolitical power. He has given himself lifetime office and purged the top ranks of the Communist Party, which has radically restructured corporate and political bureaucracies in China. Chinese bureaucrats are aggressively attacking anyone who makes any sort of critique of Chinese government policy, whether it is smart to do so or not.
This is especially true with the recent protests in Hong Kong. Hong Kong protesters are a sore spot, because it is particularly embarrassing for nationalists to see people who they think of as Chinese rejecting CCP rule. Chinese leaders have until relatively recently been able to engage in soft and effective projections of power bribing elites through consulting contracts, think tanks, and academic sinecures. No longer.
China’s biggest asset in gaining power was how most people in the West just didn’t realize that the CCP aimed to use it. Now China’s cover is blown. The raw exercise of power to censor a random Houston Rockets basketball executive has made millions of people take notice. Everyone knows, the Chinese government isn’t content to control its own nation, it must have all bow down to its power and authority.
Even as late as July, the older China watchers were still trying to plead for a strategy of shaping China into a ‘constructive player’ in the international stage, instead of realizing that we have to use what power we have to protect ourselves (see this embarrassing open letter signed by dozens of elite China experts). Earlier this year, Joe Biden let slip that he doesn’t realize how much power dynamics have shifted.
At a campaign stop in Iowa City, Iowa, Biden pointed to his years serving as vice-president and as chairman of the Senate Foreign Relations Committee, telling the crowd that there’s not a “single solitary” world leader who would trade the problems the United States faces for those confronting China.
“China is going to eat our lunch? Come on, man,” said Biden, who last week announced his bid for the 2020 Democratic presidential nomination.
“They can’t figure out how they’re going to deal with the corruption that exists within the system,” Biden said of China. “I mean, you know, they’re not bad folks, folks. But guess what? They’re not competition for us.”
Biden had to walk back his comments after he was roundly criticized for the naivete of his remarks. Biden learned quickly. And that is a very good thing, that the consensus is solidifying against the dangerous actions of Xi Jinping and the CCP.
The West is in a lot of trouble. But the single biggest problem is that our strategists and thinkers were asleep, unaware of the danger of an autocratic Chinese apparatus. No longer. As I noted, China is increasingly central to 2020. (Democrats may even eventually realize that foreign policy means more than just blowing things up in the middle east, but also includes trade, finance and even entirely different regions like East Asia!).
The bottom line is, we may respond well to China, or we may respond badly to China. We will, however, respond. And it’s about time.
Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, buy my upcoming book, Goliath: The 100-Year War Between Monopoly Power and Democracy.