Desperate Times
US refusal to negotiate makes China conflict inevitable, Germany’s biggest companies are ditching the fatherland, Russia and Iran coordinate to eject US occupation troops from Syria.
UPDATE: By refusing negotiation over China’s rise, the United States might be making conflict inevitable. How far will mounting tension with China be translated into the economic policy of the United States?
Germany’s biggest companies are ditching the fatherland. The malaise now pervades the whole of the German economy, which slipped into a recession in the first quarter amid a flurry of surveys showing that both companies and consumers are deeply skeptical about the future.
US army has been reinforcing its occupation in Syria over the past few months. Russian and Iranian forces in Syria are coordinating to eject Washington’s troops from the country.
America Has Dictated Its Economic Peace Terms to China
By Adam Tooze
By refusing negotiation over China’s rise, the United States might be making conflict inevitable. How far will mounting tension with China be translated into the economic policy of the United States? After a rash of sanctions and overtly discriminatory legislation, with action on U.S. investment in China pending, and with talk of war increasingly commonplace in the United States, the Biden administration knows that it needs to clarify its economic relations with the country that is the largest U.S. trading partner outside North America.
In the wake of this month’s International Monetary Fund and World Bank spring meetings, Treasury Secretary Janet Yellen has made her first major statement on economic relations with China since 2021. Judged by the tone, her message is intended to clarify and calm the waters of speculation and debate about motives and intentions. In the current situation, however, it is far from clear whether clarity actually contributes to calm.
The scenario that Yellen rejects is that of the Thucydides trap, but her reasons for doing so are telling. The idea that “conflict between the United States and China” is “increasingly inevitable” is, she insists, based on a false premise. That outlook was “driven by fears, shared by some Americans, that the United States was in decline. And that China would imminently leapfrog us as the world’s top economic power, leading to a clash between nations.” America would seek military confrontation to forestall the unfavorable shift in the power balance attendant on China’s phenomenal economic growth. This makes no sense, Yellen reassures us, because the American economy, thanks to its foundational institutions of freedom, its culture of innovation, and the wise governance of the Biden administration, is in rude health.
“The United States remains the most dynamic and prosperous economy in the world.” So, Yellen insists, America has no reason to seek to “stifle China’s economic and technological modernization” or to pursue a deep decoupling. America’s economic power, the treasury secretary goes on, “is amplified” by its relationships with “close friends and partners in every region of the world, including the Indo-Pacific.” America thus has “no reason to fear healthy economic competition with any country.” And then Yellen delivers the punchline: “China’s economic growth need not be incompatible with U.S. economic leadership.”
It is worth lingering over the implication here. Conflict is not inevitable because America is doing well. That in turn means that China can grow without threatening American economic leadership. But what if that were not the case? Yellen does not spell out the implication. Yet in that eventuality, where Yellen leaves little room for doubt, all bets would be off. Even now, even when the Biden administration professes to be confident about America’s economic prospects, Yellen insists: “As in all of our foreign relations, national security is of paramount importance in our relationship with China.”
At one level, this is obvious. No public official will ever say anything else. Security is the basic function of states. But everything depends on the scope of your vision of national security and the level of trust. And if you have to state the priority of national security in foreign relations out loud, you know you have a problem.
For Yellen, it is obvious that America is entitled to define its national security at a planetary level. She claims, for instance, that among America’s “most pressing national security concerns” is the defense of Ukraine against Russian aggression. Anyone who chooses to ignore America’s sanctions against Russia and falls within its jurisdiction will face serious consequences. Likewise, since America has decided that it wishes to deny certain technologies to the Chinese military, it will impose sanctions and trade limits accordingly.
So a strong and self-confident America has no reason to stand in the way of China’s economic and technological modernization except in every area that America’s national security establishment, the most gigantic in the world, defines as being of essential national interest. For this to be anything other than hypocrisy, you have to imagine that we live in a Goldilocks world in which the technology, industrial capacity, and trade that are relevant to national security are incidental to economic and technological modernization more broadly speaking.
Yellen pays lip service to that Goldilocks vision, by insisting that U.S. measures against China will be tightly targeted. But, as everyone knows, those targeted measures have so far included massive efforts to hobble the world leader in 5G technology, Huawei, sanctions against the entire chip supply chain, and the inclusion of most major research universities in China on America’s entities list that strictly limits trade.
Meanwhile, to add to the perplexity, while Yellen insists that national security sanctions tell us nothing about America’s intentions toward Chinese growth, she trumpets legislation passed on the Biden administration’s watch, notably the Chips Act and the Inflation Reduction Act, which feature strong anti-Chinese elements, as contributing significantly to America’s own future prosperity.
The upshot is that America welcomes China’s economic modernization and will refuse the lure of the Thucydides Trap so long as China’s development proceeds along lines that do not infringe on American leadership and national security. And America’s attitude will be all the more benign the more successful it is in pursuing its own national prosperity and preeminence precisely in those areas.
It is telling that what seems to be intended as a reasonable and accommodating statement is, in fact, so jarring. China must accept America’s demarcation of the status quo. If it does not respect the boundaries drawn for it by Washington between harmless prosperity and historically consequential technological development, then it should expect to face massive sanctions.
One must be grateful to Yellen for stating the point so clearly. But how on earth does Washington expect Beijing to respond? China is not Japan or Germany after 1945. In relation to the United States, if the question of “leadership” is posed, parity is the least that Beijing must aim for. The status quo that Yellen takes for granted clearly cannot be legitimate in the long run. As Beijing has said, it aspires to a fundamental reordering of world affairs such that American talk of leadership is retired forever. Nor is China the only major Asian power to share this view. India’s understanding is no different.
In Washington, this meets with blank incomprehension or even a sense of wounded pride. Does China not understand that it owes its growth to an American-led order? To rebel against that order, Yellen says quite openly, is not in China’s interest. Yellen is right that conflict between China and the United States is not inevitable. It does depend on the moves that both sides make.
But it is hard to see how her vision, in which the United States arrogates to itself the right to define which trajectory of Chinese economic growth is and is not acceptable, can possibly be a basis for peace. If the United States is still interested in global economic and political order, and it surely should be, it must be open to negotiate peaceful change. Otherwise, it is simply asking for a fight.
Read more here.
Europe's economic engine is stalling: The deindustrialization of Germany
By Gabriel Rinaldi and Peter Wilke (edited)
Germany’s biggest companies are ditching the fatherland. Chemical giant BASF has been a pillar of German business for more than 150 years, but its latest moonshot — a $10 billion investment in a state-of-the-art complex the company claims will be the gold standard for sustainable production — isn’t going up in Germany. Instead, it’s being erected 9,000 kilometers away in China.
In February, the company announced the shutdown of a fertilizer plant in its hometown of Ludwigshafen and other facilities, which led to about 2,600 job cuts. Such malaise now pervades the whole of the German economy, which slipped into a recession in the first quarter amid a flurry of surveys showing that both companies and consumers are deeply skeptical about the future.
That concern is well founded. Nearly 20 years ago, Germany overcame its reputation as the “sick man of Europe” with a package of ambitious labor market reforms that unshackled its industrial potential and ushered in a sustained period of prosperity, driven in particular by strong demand for its machinery and cars from China. While Germany frustrated many partners by exporting vastly more than it was buying, its economy flourished.
However, a perfect storm is brewing over the former European powerhouse, signalling that its current recession isn’t just “technical,” but rather a harbinger of a fundamental reversal in economic fortunes that threatens to send tremors across Europe, injecting even more upheaval into the Continent’s already polarised political landscape.
Confronted by a toxic cocktail of high energy costs, worker shortages and reams of red tape, many of Germany’s biggest companies — from giants like Volkswagen and Siemens to a host of lesser-known, smaller ones — are experiencing a rude awakening and scrambling for greener pastures in North America and Asia.
Absent an unexpected turnaround, it’s hard to avoid the conclusion that Germany is headed for a much deeper economic decline.
The reports from the front lines are only getting worse. Unemployment rose year-on-year by about 200,000 in June, a month when companies normally add jobs. Though the overall unemployment rate remains low at 5.7 percent and the number of job vacancies high at nearly 800,000, German officials are bracing for more bad news.
New orders at the country’s engineering companies, long a bellwether for the health of Germany Inc., have been dropping like a stone, falling 10 percent in May alone, the eighth consecutive decline. Similar weakness is apparent across the German economy, from construction to chemicals.
Foreign interest in Germany as a place to invest is also receding. The number of new foreign investments in Germany fell in 2022 for the fifth year in a row, hitting the lowest point since 2013.
“One sometimes hears about ‘creeping deindustrialization — well, it’s not just creeping anymore,” said Hans-Jürgen Völz, chief economist at BVMW, an association that lobbies for Germany’s Mittelstand, the thousands of small- and medium-sized firms that form the backbone of the country’s economy.
To understand the long-term effects of deindustrialization, one needn’t look further than America’s Rust Belt or the U.K.’s Midlands, once thriving industrial corridors that fell victim to policy missteps and global competitive pressures and never fully recovered.
Only with Germany, the consequences would play out on a continental scale.
The country’s reliance on industry makes it particularly vulnerable. With the exception of software maker SAP, Germany’s tech sector is essentially non-existent. In the financial world, its biggest players are best known for making bad bets (Deutsche Bank) and scandal (Wirecard). Manufacturing accounts for about 27 percent of its economy, compared with 18 percent in the U.S.
A related problem is that Germany’s most important industrial segments — from chemicals to autos to machinery — are rooted in 19th-century technologies. While the country has thrived for decades by optimizing those wares, many of them are either becoming obsolete (the internal combustion engine) or simply too expensive to produce in Germany.
Take metals. In March, the company that owns Germany’s largest aluminum smelter, Uedesheimer Rheinwerk, said it would shutter the plant by the end of the year due to the high cost of energy.
Such reports would be less worrying if Germany had a strong history of economic diversification. Unfortunately, its track record on that front is patchy at best.
Germany pioneered modern solar panel technology, for example, to become the world’s largest producer in the early 2000s. After the Chinese mastered the technology it entered the market with cheap innovative alternatives and Germany’s solar-panel makers collapsed.
In biotech, Mainz-based firm BioNtech was as the forefront of the development of the mRNA vaccine that proved crucial in helping the world overcome the COVID-19 pandemic. But on the back of that success, the company announced plans in January for what its founder called a “huge” investment in cutting-edge cancer research — in the U.K.
Innovation begets economic growth and as Germany’s traditional industry declines, the question is what big new thing will replace it. So far, there’s nothing in sight. Germany ranks only eighth in the Global Innovation Index, an annual ranking compiled by the U.N.’s World Intellectual Property Organization. In Europe, it’s not even in the top three.
In artificial intelligence, a technology many observers believe will drive economic growth for the coming generation, Germany is already an also-ran. Only four of the 100 most-cited scientific papers on AI in 2022 were German. That compares with 68 for the U.S. and 27 for China.
“Germany has nothing to offer in any of the most important future-oriented sectors,” said Marcel Fratzscher, the head of Germany’s DIW economic institute. “What exists is old industry.”
The power of technology to transform an economy — or leave it behind — is apparent when comparing the trajectories of Germany and the U.S. over the past 15 years. During that period, the U.S. economy, driven by a boom in Silicon Valley, expanded by 76 percent to $25.5 trillion. Germany’s economy grew by 19 percent to $4.1 trillion. In dollar terms, the U.S. added the equivalent of nearly three Germanys to its economy over that period.
The erosion of Germany’s industrial core will have a substantial impact on the rest of the European Union. Germany is not just Europe’s largest player; it also functions like the hub of a wheel, linking the region’s diverse economies as the largest trading partner and investor for many of them.
Over the past three decades, German industry has turned Central Europe into its factory floor. Porsche makes its top-selling Cayenne SUV in Slovakia, Audi has been churning out engines in Hungary since the early 1990s, and premium appliance-maker Miele makes washing machines in Poland.
Thousands of small- and medium-sized German firms, the so-called Mittelstand that forms the backbone of the country’s economy, are active in the region, producing mainly for the European market. While they won’t disappear overnight, a sustained decline in Germany would inevitably pull the rest of the region down with it.
“There’s a danger that Europe will end up being the loser in this shift,” Klaus Rosenfeld, the chief executive of Schaeffler, a car-parts maker, acknowledgedrecently, adding that his company was likely to build its next plants in the U.S.
While EU officials have blamed the region’s looming deindustrialization on what they see as unfair policies in the U.S. and China that place European companies at a disadvantage, the problems in Germany run much deeper and are largely homemade. And they don’t have easy fixes.
Put simply, the formula that made Germany Europe’s industrial powerhouse — a highly skilled workforce and innovative companies powered by cheap energy — has come undone.
As a generation of baby boomers retires in the coming years, Germany is speeding toward a demographic cliff that will leave its companies without the engineers, scientists and other highly skilled workers they need to stay competitive in the global market. Within the next 15 years, about 30 percent of Germany’s workforce will reach retirement age.
Compounding those demographic challenges are skyrocketing energy costs in the wake of Russia’s war on Ukraine, and Germany’s own efforts to combat climate change.
By halting deliveries of natural gas to Germany, the Kremlin effectively removed the linchpin of the country’s business model, which relied on easy access to cheap energy. Though wholesale gas prices have recently stabilized, they’re still roughly triple where they were before the crisis. That has left companies like BASF, whose main German operation alone consumed as much natural gas in 2021 as all of Switzerland, with no choice but to look for alternatives.
The country’s Green transformation, the so-called Energiewende, has only made matters worse. Just as it was losing access to Russian gas, the country switched off all nuclear power. And even after nearly a quarter century of subsidizing the expansion of renewable energy, Germany still doesn’t have nearly enough wind turbines and solar panels to sate demand — leaving Germans paying three times the international average for electricity.
Though the public at large appears blissfully unaware of the economic challenges that lie in store, those on the front lines have no illusions.
“The geopolitical developments have made it abundantly clear that our economic model is no longer a guarantor of prosperity,” said Andreas Rade, the managing director of the Association for the German Auto Industry, the sector’s main lobbying arm.
The car industry has buoyed Germany’s fortunes for more than a century and the country’s economic future rests in large measure on the ability of the sector — which accounts for nearly a quarter of its output — to maintain its hold on the luxury segment in a world of electric vehicles.
It’s not looking good. While the companies have recently booked record profits with the help of pent-up demand in the wake of the pandemic, that boost looks more like a last gasp than renewal.
Long a source of national pride, the car industry has become Germany’s Achilles’ heel for reasons that have more to do with hubris than the country’s structural deficiencies. For years, companies like Mercedes, BMW and Volkswagen refused to let go of the combustion engine, dismissing Tesla and other early innovators as flashes in the pan.
That strategic blunder opened the door not just to Elon Musk, but for China, which began investing substantial sums in electric vehicle development 15 years ago as the Germans pooh-poohed the idea, to build a substantial lead. Last year, Chinese producers accounted for about 60 percent of the more than 10 million all-electric cars sold worldwide.
China’s automobile exports soared 75.7 percent year-on-year in the first half of 2023 (H1), sustaining the trend of robust expansion, data from the China Association of Automobile Manufacturers showed. During the period, the country exported 2.14 million automobiles with new energy vehicle exports of 534,000 units, surging 160 percent from the same period last year.
China's passenger vehicle exports climbed 88.4 percent year-on-year to 1.78 million units in the same period, while its exports of commercial vehicles rose 31.9 percent to 361,000 units. In June alone, China exported 382,000 automobiles, up 53.2 percent from the same period of 2022.
Volkswagen, which has dominated the Chinese auto market for decades, lost its crown as the country’s largest automaker in the first quarter to BYD, a local competitor, amid a surge in EV sales. China is the world’s largest car market, accounting for nearly 40 percent of Volkswagen’s revenue.
A recent study by insurer Allianz projected that if current trends hold with Chinese manufacturers increasing their market share in both China and Europe, European carmakers and suppliers could see their profits fall by tens of billions of euros by 2030, with German companies bearing the brunt.
Though German carmakers have undergone a collective foxhole conversion on EV’s and are racing to catch up, they still lack the competitive advantage they enjoyed for more than a century with combustion engines. Indeed, the essential technology in an EV isn’t the motor, which is off-the-shelf technology, but the battery, which relies on chemistry, not the mechanical engineering prowess that defined Vorsprung durch Technik.
What’s more, electric vehicles are increasingly evolving into rolling tech-entertainment capsules, with self-driving cars just around the corner. And if there’s one area in which Germany hasn’t excelled, it’s digital technology. That might explain why Tesla is now worth more than three times all the German automakers combined.
With German engineering having lost its edge in the electric era, the carmakers are doubling down on their overseas investments, especially in China or the U.S. — neither of them unfamiliar with using tax incentives and subsidies to rope in investors. Funding offered by the U.S.’s Inflation Reduction Act has proved a particularly attractive lure. Volkswagen unveiled plans in March to build a $2 billion factory in South Carolina, where it wants to revive the Scout brand, a popular American 4×4 in the ’60s and ’70s.
In April, executives from the carmaker’s battery startup, PowerCo, stood alongside Canadian premier Justin Trudeau as they announced a €5 billion investment in a new battery factory in Ontario. The carmaker has pledged to invest billions more in North America in the next several years as it shifts to electric vehicles.
In Germany, by contrast, Volkswagen has abandoned plans to build a new factory for the “Trinity,” a new electric SUV, opting instead to retool existing facilities. The carmaker, which has a stable of brands that also includes Audi and Porsche, decided not to build a second battery plant in its home state of Lower Saxony due to the high cost of electricity. In April, however, the company announced it would invest roughly €1 billion in an electric vehicle center near Shanghai.
A recent survey of 128 German auto suppliers by the VDA, an industry group, found that not a single one planned to increase their investment in their home market. More than a quarter were planning to shift operations abroad.
Read more here.
Russia, Iran coordinating to expel US troops from Syria
US army has been reinforcing its occupation in Syria over the past few months. In a report released by Al-Monitor on 14 July, a high-ranking US military official was quoted as saying that Russian and Iranian forces in Syria have been coordinating with the specific aim of forcing Washington’s troops to eventually withdraw from the country.
The official said that “he's seen signs that Russian military commanders in Syria have been quietly coordinating with Iran’s Islamic Revolutionary Guard Corps (IRGC) on long-term plans to pressure the United States to withdraw its forces” from Syria, Al-Monitor wrote.
“There's a confluence of interests between those three groups, the Iranians, the Russians, and the Syrians. I see evidence of operational-level planning between mid-level Quds Force leadership that's operating in Syria [and] Russian forces that are operating in Syria,” the anonymous official told the outlet.
According to the official, the Russian-Iranian coordination in Syria centers around “collaborative planning, collaborative understanding, and intelligence sharing … [at the] mid-level to upper echelon” of Moscow and Tehran’s armies.
“Frankly, [it's] the same sorts of things that we would do with our partners in the face of something we were trying to accomplish. We see them doing that on their side, as they try to think about how they sync the different things that different arms of them are doing in order to put that pressure on us,” the source added.
In recent months, Washington has continued to reinforce its occupation in Syria, particularly in the country’s oil-rich northeast. In occupied Hasakah, local sources told Syrian news agency SANA last week that large deliveries of US logistical equipment and cement recently made their way into the region.
Such reinforcements have been ongoing for months, particularly in the aftermath of the surge in Iranian-linked attacks against US bases in Syria this year.
According to Al-Monitor, “Pentagon officials deny their forces' actions in Syria have had anything to do with Russian and Iranian provocations,” adding that the US believes its recent responses “have arrested the escalation cycle for now.”
Over the past two years, attacks on US bases by Iran-linked groups in Syria have become commonplace. In early 2023 particularly, US military sites across Syria witnessed significantly increased levels of drone and missile attacks.
In March, one such strike resulted in the killing of a US military contractor at a base in Hasakah. In response, US forces bombed Deir Ezzor, killing several, including Syrian and, allegedly, Iranian military officers. Shortly after the US strikes, two more occupation bases were attacked.
The attacks against Washington have “fallen silent” since the strikes on Deir Ezzor, Al-Monitor suggests.
US Army General Douglas Sims told reporters recently: "We don't anticipate an issue, nor do we see a level of escalation we're concerned about in Syria."
Nonetheless, the Al-Monitor report states US forces in Syria remain “vulnerable.”
Last month, a leaked Pentagon document revealed that Russia and Iran have agreed to establish a joint operations room in Syria to coordinate a pressure campaign against the US military.
On 25 March, Lebanese newspaper Al-Akhbar reported that “there is undeclared Russian-Iranian coordination to escalate against the US presence in Syria, to pressure the US and force it to decide to withdraw from its bases in the north and east of the country.”
Read more here.