US CHINA TRADE WAR — SECTION 301 NEGOTIATIONS, NOT JUST TRUMP, ASIA SOCIETY REPORT, HUAWEI INDICTMENTS, HONG KONG EXTRADITION, CHINA’S LONG TERM ECONOMIC PROBLEMS, GOVERNMENT SHUTDOWN, QUARTZ SURFACE PRODUCTS

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE – FEBRUARY 21, 2019

Dear Friends,

At the outset of this newsletter, I want to address one complaint.  Some have criticized my blog for being too tough on China.  The objective of this blog post is not to be tough on China, but to describe the actual US China trade relations as it is.  Sounding happy about the US China trade relationship will not solve the problems between the US and China in the trade area.

In reality, the US and China are going through a very tough situation right now with 10 to 25% tariffs on $250 billion in imports from China. The trade problem has risen to a crisis situation.  President Xi in his recent letter to President Trump at the end of January emphasized the importance of this specific time in US China relations.  President Xi is correct.  This is a critical time for US China trade relations but as explained below, it is not just President Donald Trump.  Both the US and China need to settle this trade dispute.

More importantly, to illustrate the actual situation, I quote from actual government documents and news reports, which are attached to this blog. I want readers to understand the actual trade situation between the US and China not because I Bill Perry am describing it that way, but because the US government or credible news reports are describing the actual situation that way.

US China trade problems can only be solved if both the US and Chinese government understand the actual issues.  My job as a US lawyer is to predict the future and warn my clients and the readers of this blog post both in the United States and China about upcoming problems so the problems can be dealt with and hopefully settled.  Like a navigator on a boat my job is to spot the rocks and hazards before the boat hits an unexpected rock and sinks.

With regards to this specific blog post, I wanted to write it after the couple of rounds of talks in Washington DC to give my take on the situation.  From the White House Statement and even the Chinese statement from Xinhua, it is very clear that the key issues discussed in the trade talks are: Forced Technology Transfer, IP Theft and Enforcement of any trade agreement.  Trump and USTR Robert Lighthizer are not going to settle for an agreement with broad meaningless promises from the Chinese government, which are not kept.  The US wants tangible results and promises that can be enforced.

In the February 5^th State of the Union speech, one of the few times President Trump received bipartisan applause from both the Republican and Democratic Congressmen and Senators was when he mentioned that he was negotiating a tough trade deal with China.

The most important point to understand is that US China Trade problem is not just Donald Trump.  As stated before, Trump may be the spark, but its China’s changing economic and political policies that are the gunpowder.  This is clearly illustrated by the recent Asia Society Task Force report “Course Correction: Toward An Effective and Sustainable China Policy” by very famous China hands and career diplomats that US China relationship has reached an inflexion/turning point and has to change.

As described more below, the Asia Society report is echoed by a report from John Garnaut of Australia, who says that President Xi Jinping and his clique have decided to move China back to the time of Mao and Stalin.

Another key point is the December 1^st arrest of Huawei CEO, Ms. Meng Wanzhou, the daughter of the Huawei founder, in Vancouver, Canada based on an extradition warrant from the United States for bank fraud.  The key point is that the arrest of the Huawei CFO was not a topic of conversation during the first rounds of negotiations.  In the Fourth Round of negotiations in Beijing, the Chinese government suggested a separate round of negotiations solely on the Huawei issue but so far the US has not accepted the offer. I suspect that Trump will be reluctant to intervene.

The ZTE situation was very different from the current Huawei situation.  ZTE was still at the administrative level before the Commerce Department.  In contrast, criminal indictments have been issued in two different Federal Courts, one in Seattle with regards to the T-Mobile theft of intellectual property and the second indictment in the Eastern New York for bank fraud against Ms. Meng.

Criminal indictments against Huawei have raised these issues up to a much higher rule of law issue.  That makes it more difficult for President Trump to intervene.  As President, Trump controls the Executive Branch of the US Government, including the Commerce Department, but President Trump does not directly control the Courts, which is the Judicial Branch of the US Government.

One key point of the Huawei situation is the idea in China that they can apply the Chinese “way” to doing business internationally.  The numerous indictments against Chinese companies and the enforcement of extradition requests, not only in Canada, but also in Hong Kong, indicate that the Chinese way is not going to work internationally.  If Chinese executives can be arrested in Hong Kong, that clearly illustrates the real vulnerability of Chinese corporate officials, who do not follow international rules, especially if the Chinese company is a multinational, such as Huawei.

It is also very clear that China’s economy is still hurting.  Even if China is able to get a trade deal with US, that will not stop the dramatic economic fall in the Chinese economy.  The Chinese government has decided to attack private industry and return to Statism.  That policy is hurting China very badly.

Another issue complicating the negotiations is the recent Government shut down, which has caused the deadlines in all ongoing trade cases to be pushed up 40 days at Commerce and 35 days at the ITC.

My firm is also representing a number of US importers and fabricators in the Quartz Surface Products Antidumping and Countervailing Duty case.  As part of that effort, we are trying to persuade US fabricating companies and importers to fill out the questionnaires from the US International Trade Commission’s (“ITC”) so that their voices will be heard.  Have uploaded blank copies of those questionnaires to this blog below.

One big issue in the Quartz decision is the Commerce Department’s critical circumstances determination, which has caused Customs to reach back and try to get cash deposits of millions of dollars in imports prior to the Preliminary Determination.  Such a Customs action could well drive 100s if not 1,000s of US importers when the ITC in all probability will reach a negative critical circumstances determination as it does in close to 90% of the cases. This action raises the question whether the Antidumping and Countervailing Duty laws are truly just remedial statutes.

If anyone has any questions, please feel free to contact me.

Best regards,

Bill Perry

1. If anyone wants to unsubscribe to the newsletter, please let me know and I will remove them from the list.

CORE ISSUE OF THE 301 CASE AGAINST CHINA IS IP THEFT, FORCED TECHNOLOGY TRANSFER, AND ENFORCEMENT

The section 301 case started in the spring of 2018.  The core of the complaint is China’s aggressive campaign to steal intellectual property (“IP”)  from US and other foreign companies.  See attached Full Section 301 Report USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER and Interim Report USTR FULLL 301 Report Update.  See more details below.

In the summer of 2018, the US first imposed 25% tariffs on $15 billion in imports from China.  China retaliated against US exports of agricultural and other products, including Soybeans

The US then in September imposed 25% tariffs on second $35 billion in imports from China in response to China retaliation.  China retaliated again.

US then imposed 10% tariffs on $200 billion in imports from China with a trigger of January 1, 2019 for tariffs to go to 25%.   See the Federal Register notices on my blog, www.uschinatradewar.com, for more details.

It should be noted that the tariffs on the first $50 billion in imports is to offset the harm caused to the United States and US companies because of the IP Theft and Forced Technology Transfer.  The tariffs on the $200 billion are in direct response to the Chinese government’s decision to retaliate against the US tariffs.

President Trump’s and USTR Lighthizer’s firm belief is that because of a US trade deficit and a Chinese trade surplus of $350 billion and total Chinese exports of $500 billion plus, the US could weather a trade war much better than China.

China’s response to the Section 301 case was “deny, deny, deny” and that the US was simply trying to contain China.  The Chinese Government’s decision to retaliate and refuse to deal with the US trade complaints led to the US escalation of the trade war to cover $250 billion in imports from China.

The full 301 report started and makes it clear that two key issues are IP Theft and Forced Technology transfer.  The attached 301 Federal Register notice starting the Section 301 case, FED REG PRESIDENTIAL DETERMINATION 301 CHINA, states:

First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China in order to require or pressure the transfer of technologies and intellectual property to Chinese companies. . . .

Fourth, the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber- enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.

Enforcement of any agreement with China is also a big issue. At the beginning of the Section 301 Report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER, it lists ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, which the Chinese government has ignored.  The last two agreement are the recent 2016 agreements between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China and to stop cyberhacking for commercial gain.  According to the USTR, the Chinese government ignored both Agreements.  See page 8 of the USTR 301 report.  All those agreements between the US and China were breached.

See statement by former USTR Charlene Barshefsky below that the Chinese government’s failure to follow the WTO agreements signed in the early 2,000s means that China should actual follow the Agreements or leave the WTO.  The Chinese government has run out of time.

SECTION 301 PROCEDURES

As to the procedures in the Section 301 case, please see my October 1, 2018 blog post for a detailed explanation of the 301 case, three outstanding lists and the issue of product exclusion requests.  The three lists of tariffs cover $250 billion in imports from China.

The deadlines to file an exclusion request for the first $50 billion have past.  Moreover, USTR Lighthizer has stated that there will no exclusion requests for the $200 billion until there is an outcome of the negotiations with the Chinese government.  If the negotiations go well, all or some of the 301 tariffs could be lifted so there will be no need for exclusion requests.  If the duties remain in place, then the USTR will have an exclusion process.

NEGOTIATIONS START AND THE FOURTH ROUND IS PRESENTLY ONGOING IN WASHINGTON DC

Because of the enormous pressure on the Chinese economy, as described more below, in November the Chinese government pushed for a meeting between President Xi and President Trump.  On December 1^st, at a meeting in Buenos Aries at G-20, President Xi made a long presentation leading President Trump and USTR Lighthizer to believe that a structural deal could be struck with China regarding IP theft and forced technology transfer.  That discussion resulted in the US postponing the increase in the 10% tariffs on $200 billion until March 1^st.

See the attached United States Trade Representative notice setting a hard date of March 2^nd for US China Trade Deal, MARCH 2 USTR NOTICE PUBLISHED.  If there is no deal by March 1st, the tariffs on $200 billion in imports automatically could go from 10% to 25%.

But there are conflicting views as to whether the follow up negotiations in four rounds, first with Deputy USTR Jeffry Gerrish in Beijing and then in Washington DC with USTR Lighthizer, followed by additional negotiations in Beijing and the fourth round now in Washington DC indicated a Chinese government’s willingness to actually deal with IP Theft and Forced Technology Transfer issues and make any “structural” agreement truly enforceable.

A real question is what is meant by the word “structural”?  Again, the core issues in the Section 301 deal are IP Theft, Forced Technology Transfer and cyber hacking.  If the US and Chinese governments consider IP Theft and Forced Technology Transfer to be “structural’ issues, it appears that there is no deal yet in these areas.

There are reports in the Press that trying to persuade the Chinese government to compromise on the structural issues has been like “pulling teeth”.  But if the Chinese government were not willing to compromise on IP Theft and Forced Technology Transfer, in all probability the negotiations would have already ended.

On January 31, 2019, however, after the second round of negotiations in Washington DC, The White House issued the attached statement, WHITE HOUSE STATEMENT, as follows:

“The talks covered a wide range of issues, including: (1) the ways in which United States companies are pressured to transfer technology to Chinese companies; (2) the need for stronger protection and enforcement of intellectual property rights in China; (3) the numerous tariff and non-tariff barriers faced by United States companies in China; (4) the harm resulting from China’s cyber-theft of United States commercial property; (5) how market-distorting forces, including subsidies and state-owned enterprises, can lead to excess capacity; (6) the need to remove market barriers and tariffs that limit United States sales of manufactured goods, services, and agriculture to China; and (7) the role of currencies in the United States–China trading relationship. The two sides also discussed the need to reduce the enormous and growing trade deficit that the United States has with China. The purchase of United States products by China from our farmers, ranchers, manufacturers, and businesses is a critical part of the negotiations.

The two sides showed a helpful willingness to engage on all major issues, and the negotiating sessions featured productive and technical discussions on how to resolve our differences. The United States is particularly focused on reaching meaningful commitments on structural issues and deficit reduction. Both parties have agreed that any resolution will be fully enforceable.”

This White House Statement indicates that the structural issues of IP Theft, Forced Technology Transfer and enforcement were indeed the subject of the first two negotiation rounds.

At the same time in late January, the Chinese Government’s mouthpiece, Xinhua, stated in the attached article, XINHUA STATEMENT TRADE TALKS, as follows regarding the Washington DC negotiations:

“Liu, also a member of the Political Bureau of the Communist Party of China Central Committee and chief of the Chinese side of the China-U.S. comprehensive economic dialogue, led the Chinese delegation for the two-day trade talks that concluded on Thursday in Washington.

Liu delivered a message from Chinese President Xi Jinping to Trump, in which Xi pointed out that China-U.S. relations are at a critical stage.

Xi said when he and Trump met in Argentina last December, the two heads of state agreed to jointly advance the China-U.S. relationship featuring coordination, cooperation and stability.

“According to the consensus we have reached, economic teams from both sides have since conducted intensive negotiations and achieved positive progress,” said Xi. . . .

On the China-U.S. trade talks, the Chinese vice premier said that teams from both sides have spared no time in implementing the important consensus between the two heads of state.

He noted that during the latest round of talks, the two sides held candid, specific and constructive discussions about issues of common concern, which included trade balance, technology transfer, protection of intellectual property rights and a two-way enforcement mechanism, as well as other issues of concern to the Chinese side.”

Note that the Chinese side has acknowledged the importance of the IP theft, Forced Technology Transfer and enforcement issues.  Note also that at the meeting in the Second Round between Trump and Liu He at the White House at the end of January, USTR Lighthizer stated that the name of the game is “enforcement, enforcement, enforcement”, which would counter the original Chinese Government strategy of “deny, deny, deny”.

After the third round of negotiations in Beijing, there were newspaper accounts that it was like “pulling teeth” to get the Chinese government to give in on structural issues, including Forced Technology Transfer.  But there was also an agreement that any deal would come forth in a Memorandum of Understanding and that there would be a framework agreement between China and the US.  The big stumbling block seems to be Forced Technology Transfer.

Most experts, including Senator Rob Portman, expect there to be an interim agreement of Understanding by March 1^st, which would allow Trump to state that the duties at least will not be raised to 25% as a more comprehensive agreement is further negotiated.

Trump has stated several times that the March 1^st deadline could slide depending upon the negotiations and that a face to face, Trump/Xi meeting could happen soon.  In talking to many trade experts, the universal belief is that the US government will punt.  Have a short Memorandum of Understanding as the negotiations continue.

Some Chinese and other commentators believe that Trump will back down in the Xi and Trump meeting.  I do not think so.  Trump cannot back down on the IP issues, which are the core of the 301 case.

OTHER COUNTRIES AGREE WITH TRUMP ON US CHINA TRADE DISPUTE

Although the Chinese government and observers may think that the trade war is only coming from Trump and the United States, many other countries have jumped on US band wagon with regards to IP Theft and Forced Technology Transfer by China.  The countries include EC, Canada, Australia, Japan, South Korea and many other countries, because China has stolen their IP too.

Through its Made in China Program the Chinese government has focused on acquiring foreign technology/intellectual property by any means necessary from many different countries, not just the United States.

.        The technology for high speed trains was stolen from Germany and Japan.

.        Semiconductor technology was stolen from Australia and the US.

In fact, the systematic attacks on their IP have caused many companies to look at moving production out of China to other countries.

As described below, there have been aggressive attacks on US and foreign intellectual property by such companies as Huawei, which has bonus programs for employees to encourage theft of IP

In the United States, these aggressive attacks on IP have led to a new China initiative at the Justice Department and criminal prosecutions of Chinese companies and Chinese nationals for the theft of intellectual property.  These Justice Department criminal cases have led to the extradition of various Chinese nationals to face prison time in the United States.

Some commentators have suggested that the US dropped the ball by not going the WTO Route.  The USTR issued the attached report in February 2019, USTR REPORT WTO CHINA, stating, in effect, that using the WTO to deal with China has not worked.

Moreover, there were never multilateral negotiations with China, i.e. China at a one table with a number of different countries.  In fact, we are seeing a similar process to the WTO Agreement with China, which started first with the bilateral negotiations and the US China WTO Agreement.  That US WTO Agreement was followed up with agreements between China and many other countries.  In other words, any US China 301 Agreement will probably be a blueprint for future bilateral negotiations and result in similar bilateral agreements negotiated between China and other countries to stop international IP theft and forced technology transfer.

BEING TOUGH ON CHINA IS A BIPARTISAN REPUBLICAN DEMOCRAT ISSUE

Contrary to many commentators in China and elsewhere, the tough position against China in these trade negotiations is not just President Donald Trump.  The Chinese government should not expect a change in the tough US position on China trade policy if there is a change in US government. US China Trade Policy is not just a Republican issue.  It is bipartisan issue.  Traditionally, the Democratic party is much more protectionist than the Republican party, because the Democratic party is supported by the labor unions.

In the 2019 State of Union, President Trump spoke of a need for a strong US trade response against China and a strong structural trade agreement with China because of decades of IP theft.  This point provoked a bipartisan standing ovation from Republicans and Democrats.  Democrats hate Trump, but they agree completely on a tough response to China.  See the following video of the State of the Union at https://www.youtube.com/watch?v=OSy9NcPRSGs.

Cyber hacking is another example where the Chinese government made an agreement with the United States and President Obama and then proceeded to ignore it, break the agreement and continue aggressive cyber hacking to steal US IP.  In fact, many trade experts believe that the Chinese government believed that President Obama could be played.

Based on quotes from numerous sources, the Chinese government has succeeded in uniting both ends of the political spectrum, Democrats and Republicans, against China.  This trade situation is not going to change any time soon no matter what party is in power.

THE ASIA SOCIETY REPORT ON CHINA SUPPORTS THE BIPARTISAN TOUGH US TRADE POLICY AGAINST CHINA

Many Chinese and US commentators may believe that the trade fight with China is just Trump.  That simply is not true.

In February 2019, the Asia Society published the attached report entitled “Course Correction: Toward An Effective and Sustainable China Policy”, ASIA SOCIETY REPORT COURSE CORRECTION. The authors of the report are some of the most famous “China” hands in the United States, including Orville Schell, who has written dozens of books on China, former USTR Charlene Barshefsky, who negotiated the US China WTO Agreement, and Winston Lord, the Ambassador to China under Ronald Reagan and later the Assistant Secretary of State for East Asia under President Bill Clinton.  These are “old friends” of China.

Many of the members of the Task Force writing the Report speak fluent Chinese and have held very high positions in the US government dealing with China in Democratic and Republican Administrations.  These experts believe that the United States and China are at a true “inflexion”/turning point.  When “old China friends” are stating that the Chinese government needs to beware, it should be careful of the situation.

The report is very, very tough against China stating in part:

“The United States and China are on a collision course. The foundations of goodwill that took decades to build are rapidly breaking down. Many American opinion makers are starting to see China as a rising power seeking to unfairly undercut America’s economic prosperity, threaten its security, and challenge its values, while their Chinese counterparts are starting to see the United States as a declining power seeking to prolong its dominance by unfairly containing China’s rise. Beijing’s recent policies under Xi Jinping’s leadership are primarily driving this negative dynamic, so the Trump administration is right to counter those Chinese actions that defy norms  of fair economic competition, abrogate international law, and violate fundamental principles of reciprocity. The Trump administration is justified in pushing back harder against China’s actions, but pushback alone isn’t a strategy. It must be accompanied by the articulation of specific goals and how they can be achieved. . . .

The Report goes on to criticize the Trump policy of using tariffs to get China’s attention, but then says:

As the Trump administration stands up to China, it must also clearly express a willingness to pursue negotiated solutions by spelling out specific steps that could restore equity and stability to the relationship. Otherwise, the United States risks an irreparable, and possibly avoidable, rupture in this crucially important bilateral relationship. To avoid such a breakdown, the United States and China should seek negotiated solutions to priority issues whenever possible and erect prudent guardrails—including the appointment of specially designated officials—to keep the relationship from running further off the tracks. An adversarial United States-China relationship is in no one’s interest. More responsible statecraft is required both to protect American interests and to increase the chances of avoiding that no-win outcome.

At the same time, China’s increasingly unfair business practices have generated growing international criticism, especially from the very businesspeople who have traditionally been most enthusiastic in their support   of engagement with China. One of their most serious concerns is the way Beijing has ramped up its massive state drive to dominate the technologies of the future, both at home and abroad. This has included not just legitimate forms of Chinese innovation and investment, but also the acquisition of foreign technology through illegitimate means such as cyber theft, intellectual property violation, and forced technology transfer. As market reforms stalled or were reversed and the Chinese state’s role in the economy has grown, it has become increasingly clear that China is no longer converging with global norms of fair market competition but is in fact steadily diverging from them.

Xi Jinping’s revival of personalistic autocratic rule, including the scrapping of presidential term limits and his refusal to adhere to precedent for the peaceful turnover of political power for top leadership positions, makes China a less predictable and trustworthy partner and accentuates the political and values system gap that makes finding common ground more difficult. The Chinese Communist Party has tightened its control over information and society. It enforces ideological orthodoxy, demands political loyalty, and screens out foreign ideas, particularly in education and the media. Moreover, by arresting rights lawyers, incarcerating and indoctrinating Muslim minorities in the Xinjiang region, and repressing independent Christian congregations throughout the country, the regime has attracted increased international opprobrium as a human rights violator and set itself more explicitly in opposition to liberal values. . . .

This new dynamic that emanates from Beijing has precipitated a deep questioning—even among those of us who have spent our professional careers seeking productive and stable U.S.-China ties—about the long-term prospects of the bilateral relationship. We view this current period as unprecedented in the past forty years of U.S.-China relations. In the past, good sense usually prevailed and American and Chinese policymakers and scholars always managed to overcome severe bilateral strains triggered by specific incidents. We saw such a recovery even after the 1989 Tiananmen Square crackdown, as well as after the 1995-96 Taiwan Strait crisis, the 1999 accidental bombing of the Chinese embassy in Belgrade, and the 2001 collision between a U.S. surveillance plane and a Chinese fighter jet. By contrast, the current downturn in relations is deeper and more systemic in scope. What is more, it is occurring at a time when the U.S. and China’s economic and military capabilities have become more evenly matched, making the dangers of overt conflict far greater. . . .

Unfortunately, by the midpoint of the Trump administration’s first term, the negative trends in Chinese behavior that were highlighted in our earlier report have only grown more pronounced and worrisome. If the three most harmful trends identified below are now to be effectively addressed, a more robust and proactive U.S. policy toward China is required.

(1)           China’s pursuit of a mercantilist high-tech import-substitution industrial policy

 The Chinese state ramped up its clearly scripted and lavishly funded strategy to dominate the technologies of the future, not just through its own innovation but also by acquiring foreign technology by inappropriate means. This is not a standard industrial policy in which the government merely enables or channels spontaneous market activity. Instead, the policy aims to help Chinese firms control targeted sectors of technology markets both at home and abroad, dominate a wide range of cutting-edge industries deemed “strategic,” and put systemic limits on the operation of foreign competitors in its own domestic markets. As a result of this strategy, many foreign firms are pressured to transfer technology in order to conduct business in China, while others become victims of cyber theft by Chinese state actors. Despite decades of reform, discriminatory treatment of foreign firms is still deeply embedded in the Chinese system of bureaucratic protectionism.

As a result of intensified state control, the Chinese economy is diverging from global market norms. While rhetorically China’s leaders espouse an open global economic order, domestically the party-state is now dominating the economy more than it has at any time since the Mao era. Market reforms and the opening of the country to imports and inbound investment have stalled. At the same time, China’s government funds outbound investments by private as well as state firms to bring home technology and know-how in areas like robotics, chip fabrication, artificial intelligence, aerospace, ocean engineering, advanced railway equipment, new energy vehicles, power equipment, agricultural machinery, new materials, and biomedicine and medical devices. The goals of China’s industrial policy as expressed in the government’s major plans, such as “Made in China 2025” and “Civil-Military Integration,” are not just to help China achieve high-tech import substitution and dominate global markets in tech sectors, but also to enhance the country’s military power.

Beijing’s approach is forcing the United States and other advanced industrial countries to reassess their open and market-based commercial relationships with China in order to discipline mercantilist and zero-sum Chinese practices, preserve their own economic competitiveness, and protect their defense industrial bases. . . .

3.     China’s hardening authoritarianism

Under Xi Jinping’s leadership, China has been reversing what had been a slow and sometimes halting process of social and political liberalization by turning back toward more authoritarian forms of political control. For three decades after Mao Zedong’s death in 1976, China’s party-state gradually lessened its ideological controls on social and economic life. This progress created domestic support in both countries for U.S.-China cooperation. By making a U-turn back to personalistic dictatorship, Leninist party rule, and enforced ideological conformity, Xi has created new obstacles to engagement with the United States and other liberal democracies around the world, while also erecting barriers to Chinese interactions with foreign civil society institutions such as universities, think tanks, and non-governmental organizations (NGOs). . . .

More specifically, with regards to trade, as former USTR Charlene Barshefsky states in the following presentations on the Report, if China will not follow the WTO Trade rules, it should leave the WTO.  See https://asiasociety.org/video/chinas-decisive-turn-toward-statism and https://www.youtube.com/watch?v=uT01OGl7uG0.

HUAWEI IN A WORLD OF HURT FACING TWO MAJOR CRIMINAL INDICTMENTS IN TWO FEDERAL COURTS, WHICH COULD GROW TO THREE

As stated above, Huawei was not the topic of the January negotiations in Washington DC.  In the most recent negotiations in Beijing, the Chinese government proposed a separate negotiations track on Huawei, but to date the US government has not accepted

In fact, on January 28, 2019, the day before the negotiations began in Washington DC, the Justice Department issued two attached indictments against Huawei.  The first attached bank fraud indictment, ACTUAL HUAWEI IRAN INDICTMENT, was filed in the Federal District Court in the Eastern District of New York and is entitled United States of America Vs Huawei Technologies Co., Ltd., Huawei Device USA, Skycom Tech Co., Ltd., Wanzhou Meng, also known as Cathy Meng and Sabrina Meng and a number of unknown defendants.

The indictment was filed in the Federal District Court in the Eastern District of New York and provides detailed allegations against Huawei, Huawei USA,  Meng Wanzhou, the Huawei CFO and daughter of the owner, and several unnamed co-defendants alleging evasion of Iran sanctions, bank fraud, and  obstruction of justice.

One commentator in Hong Kong stated in an article, that ultimately this first indictment means that Huawei will pay a fine.  No, that is not the point.  Ms. Meng faces years in prison—real jail time.

The second attached indictment, DOJ TRADE SECRETS INDICTMENT HUAWEI, against Huawei took place here in Seattle when Huawei stole key robot technology from T-Mobile.  One of the most important parts of the T-Mobile indictment, which will have a direct impact on the US China 301 negotiations, is that Huawei has in place a bonus program to reward employees who steal foreign intellectual property.

The indictment states:

47. On July 10, 2013, at the same time that HUAWEI CHINA and HUAWEI USA were falsely claiming that the conduct of A.X. and F.W. was “isolated,” constituted a “moment of indiscretion,” and was contrary to Huawei’ s corporate polices, HUAWEI CHINA launched a formal policy instituting a bonus program to reward employees who stole confidential information from competitors. Under the policy, HUAWEI CHINA established a formal schedule for rewarding employees for stealing information from competitors based upon the confidential value of the information obtained. Employees were directed to post confidential information obtained from other companies on an internal Huawei website, or, in the case of especially sensitive information, to send an encrypted email to a special email mailbox. A “competition management group” was tasked with reviewing the submissions and awarding monthly bonuses to the employees who provided the most valuable stolen information. Biannual awards also were made available to the top three regions that provided the most valuable information. The policy emphasized that no employees would be punished for taking actions in accordance with the policy.
48. The launch of this HUAWEI CHINA bonus program policy created a problem for HUAWEI USA because it was in the midst of trying to convince T-Mobile that the conduct in the laboratory was the product of rogue employees who acted on their own and contrary to Huawei’s policies. As a result, on July 12, 2013, the HUAWEI USA Executive Director of Human Resources sent an email to all HUAWEI USA employees addressing the bonus program. The email described the bonus program as: “[I]ndicat[ing] that you are being encouraged and could possibly earn a monetary award for collecting confidential information regarding our competitors and sending it back to [HUAWEI CHINA].” The email went on to say: “[H]ere in the U.S.A. we do not condone nor engage in such activities and such a behavior is expressly prohibited by [HUAWEI USA’s] company policies.” The email did not state that the bonus program had been suspended by HUAWEI CHINA. Rather, the email emphasized that “in some foreign countries and regions such a directive and award program may be normal and within the usual course of business in that region.”

The indictments against Huawei are extremely serious, and I would be very surprised if Trump would agree to introduce Huawei into the trade negotiations.

Ms. Meng finds herself—immersed in a criminal action exposing her to 30 years in prison for bank fraud.  Although Ms. Meng received bail and is staying at her Vancouver house, she is due back in Canadian Court in February.  And there is probably a good chance that Ms. Meng will be extradited to the United States, where she will face even tougher problems.

There is also a potential third indictment against Huawei for theft of a US intellectual property for diamond glass used for mobile screens.  Huawei apparently stole the technology, and now the FBI is investigating the situation.  See attached article from Bloomberg entitled “Huawei Sting Offers Rare Glimpse of the U.S. Targeting a Chinese Giant”, HUAWEI GOES AFTER MORE TECHNOLOGY

THE PROBLEM WITH THE CHINESE WAY AND EXTRADITION REQUESTS ARE ENFORCEABLE IN HONG KONG

As stated in the past blog post, the Chinese government’s decision not to have any agreement with the United States or other countries with regards to the enforcement of judgments or extradition warrants also gives Chinese individuals a false sense of security.  Many Chinese individuals feel they are immune to laws in other countries and can break them with impunity and they can apply the “Chinese way” of playing games in international and commercial transactions in many countries.

Chinese companies, however, are now international operations.  As soon as the Chinese individual takes a step out of China, however, he or she can be arrested.  You can run, but eventually you cannot hide from US and other foreign extradition warrants and judgments.

The attached January 14^th article in the South China Morning Post entitled “A Chinese math prodigy turned hedge fund coder and the stolen strategies that cost him his freedom”, ARREST CHINESE NATIONAL IN HONG KONG, described a Chinese graduate from Hubei , who stole” intellectual property from a UK company.  The article described the situation where a Chinese national in Hong Kong had fled the United Kingdom (“UK”) after stealing intellectual property from a UK company.  The Chinese individual was arrested in Hong Kong on a UK extradition warrant.  If a Chinese national can be arrested in Hong Kong on an extradition warrant from the UK, can US criminal extradition warrants be enforced in Hong Kong?

LONG TERM PROBLEMS AND IMPACT ON CHINESE ECONOMY

On January 31, 2019, during the US China negotiations, Premier Liu delivered a letter from Chinese President Xi Jinping to President Trump, in which Xi pointed out that China-U.S. relations are at a critical stage.  This is absolutely true.  This is a crucial point in history not only for relations between the US and the rest of the Western/Democratic countries but for China itself because it is facing a steep economic decline. 

As a result of the US Trade War and more importantly the Chinese government’s decision to strongly favor state run companies and aggressively attack the Chinese private industry, there is a real decline in the Chinese economy.  Major Chinese economists in and out of China are predicting a potential recession in China in the next year.

See below statements from Nicholas Lardy and Professor Xiang Songzuo. If the subsequent statement by John Garnaut’s on Xi’s ideology being similar to Stalin is correct, however, these changing economic and political policies will not end any time soon.

There has been enormous changes in the political and economic thinking in China in the last two to three years.  The first historical political and economic change in China began with the end of the Cultural Revolution, the Death of Mao Tse Tung and the rise of Deng Xiaoping.  Deng Xiaoping believed in term limits, decentralization of economic power and the move to a market economy.  This was a major change in the economic and political philosophy in China.

One of Deng’s most famous says is it does not matter whether the cat is black or white so long as it catches mice.  As indicated below, however, that is not the philosophy of President Xi Jinping.

The perception of the United States and many countries was that China was moving to a more open Democratic society with a strong market economy and that reform would press forward.  This transition would take substantial time, but China was moving in the right direction.

With the decision of Xi Jinping to become leader for life in China, like Mao Tse Tung, however, the situation in China has changed dramatically and the perception of China by the United States and many other countries has changed.

Recently, within the last two years, the Chinese government has started an attack on private industry in China.  State-owned companies can get loans and many advantages and have become more powerful in China.  In bad economic times, such as the present, private companies cannot get the loans to stay alive.

Meanwhile, the Chinese government has cracked down on private industry making it more difficult to operate in China in the form of substantial regulatory and tax pressure on private industry.  Private companies face very high taxes, which on entrepreneurs are as high as 60%.

The real threat to President Xi’s economic decision, however, is that 80% of employment in China is in the private industry, which has been the engine of most of the change.

Chinese experts in and out of China have warned the Chinese government that the Chinese economy is in a very perilous situation.  See statements of Nicholas Lardy and Professor Xiong in Beijing below.

The three pillars that have held the Chinese economy up in the past are gone—exports (China the factory of the World), infrastructure and real estate spending (debt is enormous).

The only one left is increased consumption by Chinese consumers.  But that is not appearing.  Too many average Chinese are feeling future bad economic times.  In bad economic times, the average Chinese does not spend.  He or she saves.

NICHOLAS LARDY — US EXPERT ON THE CHINESE ECONOMY

In January 2019, Nicholas Lardy, a US expert, who has been studying the Chinese economy for decades, through the Paulson Institute, published a new book entitled “The State Strikes Back The End of Economic Reform in China”.  Some of the important quotes from that book are as follows:

“Since 2012, however, this picture of private, market-driven growth has given way to a resurgence of the role of the state in resource allocation and a shrinking role for the market and private firms. Increasingly ambitious state industrial policies carried out by bureaucrats and party officials have been directing investment decisions, most notably in the program proclaimed by President Xi Jinping known as “Made in China 2025.”  . . .

“This book mobilizes a wealth of data to evaluate this resurgence in the role of the state, applying an analysis of China’s medium-term growth potential and the implications of this growth for the global economy. Its core conclusion is that absent significant further economic reform returning China to a path of allowing market forces to allocate resources, China’s growth is likely to slow, casting a shadow over its future prospects. Of major importance for the rest of the world newly dependent on China’s economic ups and downs, the goal of reducing financial risks, which have accumulated in the years since the global financial crisis”. . . .

The fundamental obstacle to implementing far-reaching economic reforms in China is the top leadership’s view that, while state-owned firms may be a drag on China’s economic growth, they are essential to maintaining the position and control of the Chinese Communist Party and achieving the party’s strategic objectives (Economy 2018, 15–16). These strategic objectives are outlined in the Made in China 2025 program and other industrial policies and include achieving domestic dominance and global leadership in a range of advanced technologies. Other strategic objectives are international, notably the Belt and Road Initiative, where state-owned construction companies such as the China State Construction Engineering Corporation Limited are major contractors for building roads, rail lines, power plants, ports, and other infrastructure in countries participating in the initiative.”

State Strikes Back at pp 46, 47, 49 and 507-508 (2019).

XIANG SONGZUO-CHINESE EXPERT ON THE CHINESE ECONOMY

As mentioned in a previous newsletter, on December 21, 2018 the Epoch Times in an article entitled “China May Be Experiencing Negative GDP Growth” reported on a December 2018 speech by Xiang Songzuo, Deputy Director and Senior Fellow of the Center for International Monetary Research at China’s Renmin University, who reportedly has stated that the Chinese stock market is looking like the US stock market in 1929 just before the Great Depression.  The article goes on to state:

Xiang challenged the figure given by the National Bureau of Statistics, which claims that China’s rate of GDP growth is at 6.5 percent. According to some researches, Xiang said, the real growth rate could be just 1.67 percent, while more dismal estimates say that China’s economy is actually shrinking.

In his speech, Xiang said that the Chinese regime leadership had made major miscalculations, especially in terms of the Chinese Communist Party’s (CCP) stance in the Sino-U.S. trade war. He criticized propaganda slogans aired by Party- controlled mass media, such as “The Americans are lifting rocks only to have them smash on their own feet,” “China’s victory is assured,” or “China will stand and fight” as being overly confident and ignorant of the real difficulty that the country faces.

Beyond the CCP’s stubborn attitude towards U.S. demands, a second cause for the recent downturn in the Chinese economy was the severe hit to private enterprises this year, Xiang said. Private investment and investments into private enterprises have slowed sharply, severely impacting confidence among entrepreneurs.

Various official statements implying the eventual elimination of private business and property have reduced private sector confidence. This includes the idea, put forward by some Party-backed scholars, that the market economy has already fulfilled its role and should retreat in favor of planned, worker-owned economics.

Xiang said: “This kind of high-profile study of Marx and high-profile study of the Communist Manifesto, what was that line in the Communist Manifesto? The elimination of private ownership—what kind of signal do you think this sends to entrepreneurs?” . . ..

Xiang said that a huge challenge for China is the Sino-U.S. trade war. He believes that it is no longer a trade war, but a serious conflict between the Chinese and American systems of values. The China-U.S. relationship is at a crossroads, he said, and so far there has been no solution found to resolve their differences. . . .

The core challenge facing private enterprises is not financing difficulty, though there are problems in this area, Xiang said. The fundamental problem is fear of unstable government policy.

“The leaders in the State Council said it clearly in the meeting of the Standing Committee: in China, the government is what can be least trusted. Therefore, in order to solve the debt problem, first, the debts that the government owes businesses need to be resolved, followed by the problem of state-owned enterprises owing private enterprises, and then that of large private enterprises owing smaller ones,” he said.

Mr. Xiang’s speech dovetails with what I have heard from friends who recently returned from China.  Their friends in China have told them that management in China companies has been telling its workers to be prepared to “chi ku” eat bitter, for the next ten years because of the poor economy and save their money.  Saving money in China does not result in increased consumption.

AUSTRALIAN EXPERT, JOHN GARNAUT, THE MAJOR PROBLEM IS THAT XI FOLLOWS STALIN AND MAO IDEOLOGY AND THAT WILL IMPACT THE LONG TERM RELATIONSHIP BETWEEN CHINA AND THE US AND OTHER WESTERN/DEMOCRATIC COUNTRIES FOR YEARS TO COME

On January 17^th, Bill Bishop, a China expert in the US, under the brand Sinocism, released a long speech by John Garnaut, one of the top journalists covering China before joining the Australian Government.  The blog post, Engineers of the Soul: Ideology in Xi Jinping’s China is long.  But if the analysis is correct, it illustrates in detail why over many years so long as Xi and others like him with this ideology are in power, the US, Australia, EC and the Western and other Democratic countries will oppose China.  The article below is extensive, but it is very enlightening.  See the entire article by clicking on the link above.  This is the political reason for the Western/Democratic problems with China now:

“Regular Sinocism readers are no doubt familiar with John Garnaut, one of the top journalists covering China before he joined the Australian government, first as a speech writer for Prime Minister Malcolm Turnbull and then as a China policy advisor. John led the Australian government’s analysis of and response to PRC/CCP interference and influence efforts in the country, and his work has since had significant influence in other Western capitals.

John is now out of government and has allowed me to share with you a speech he gave at an internal Australian government seminar in August 2017. . . .

I knew John a little in Beijing and besides having tremendous respect for his work, and especially his access to Princelings at a level I am not sure any other foreign correspondent has ever had, I always found him to be a reasoned and thoughtful chronicler of the PRC.

Some now say he has become a China hawk, but I see it as more the evolution of a sophisticated China watcher who believes in seeking truth from facts, no matter how difficult it may be to accept the reality of the direction Xi and the CCP appear to be taking China. This is a trajectory I have found myself on, along with many of the most experienced foreign China watchers I know.

I wish I could say I find John’s arguments unconvincing, but in fact they only seem more accurate now, over a year after the 19th Party Congress, than they did when he gave this talk in 2017.

On to John’s thought-provoking talk:

Asian Strategic and Economic Seminar Series

Engineers of the Soul: what Australia needs to know about ideology in Xi Jinping’s China

As some of you know I’ve just spent the past eight months as a model public servant on my very best behavior: biding time, concealing opinions and strictly respecting the bureaucratic order.

Now I get to go unplugged.  . . .

But in the meantime I’m here as someone who was born into the economics tribe and has been forced to gradually concede ground to the security camp. This retreat has taken place over the course of a decade, one story at a time, as I’ve had to accept that economic openness does not inevitably lead to political openness. Not when you have a political regime that is both capable and committed to ensuring it doesn’t happen.

Politics isn’t everything but there’s no country on earth where it is more omnipresent, with the exception of North Korea. And there is no political system that is as tightly bound to ideology.

In the work I was doing upstairs in this building I went out of my way to remove ideology from my analysis of how China is impacting on Australia and our region. It was simply too alien and too difficult to digest. In order to make sense to time-poor leaders it was easier to “normalise” events, actions and concepts by framing them in more familiar terms.

This approach of “normalising” China also served to sidestep painful normative debates about what China is, where it is going and what it wants. It was a way of avoiding a food fight about who is pro-or-anti China. Taking the “Communist Party” out of “China” was a way of de-activating the autoimmune response that can otherwise kill productive conversation.

This pragmatism has worked pretty well. We’ve taken the China conversation to a new level of sophistication over the past year or so.

But by stripping out ideology we are giving up on building a framework which has explanatory and predictive value.

At some point, given the reach that China has into Australia, we will have to make a serious attempt to read the ideological road map that frames the language, perceptions and decisions of Chinese leaders. If we are ever going to map the Communist Party genome then we need to read the ideological DNA.

So today I’m stepping into the food fight.

I want to make these broad points about the historical foundations of CCP ideology, beyond the fact that it is important: 

1. Communism did not enjoy an immaculate conception in China. Rather, it was grafted onto an existing ideological system – the classical Chinese dynastic system.
2. China had an unusual veneration for the written wordand acceptance of its didactic value.
3. Marxism-Leninism was interpreted to Mao and his fellow revolutionaries by a crucial intermediary: Joseph Stalin.
4. Communism – as interpreted by Lenin, Stalin and Mao – is a total ideology. At the risk of being politically insensitive, it is totalitarian.
5. Xi Jinpinghas reinvigorated ideology to an extent we have not seen since the Cultural Revolution.  . . .

 A Dynastic Cosmology

It was clear from my work as a journalist and writer in New China – to use the party speak – that the formal ideology of communism coexists with an unofficial ideology of old China. The Founding Fathers of the PRC came to power on a promise to repudiate and destroy everything about the dark imperial past, but they never really changed the mental wallpaper.  . . .

So this is my first observation about ideology – ideology in the broadest sense, as a coherent system of ideas and ideals: the founding families of the PRC are steeped in the Dynastic System.

Admittedly, communism and feudal imperialism are uneasy bedfellows. But they are not irreconcilable. The formula for dynastic communism was perfected by Chen Yun: their children had to inherit power not because of privilege but because they could be counted upon to be loyal to the revolutionary cause. Or, as he put it: “at least our children will not dig up our graves”.

Xi Jinping has exercised an unwritten aristocratic claim to power which derives from his father’s proximity to the founder of the Red Dynasty: Chairman Mao. He is the compromise representative of all the great founding families. This is the starting point for understanding the worldview of Xi Jinping and his Princeling cohort.

In the view of China’s princelings – or “Revolutionary Successors”, as they prefer to be known – China is still trapped in the cycle which had created and destroyed every dynasty that had gone before. In this tradition, when you lose political power you don’t just lost your job (while keeping your super) as you might in our rather gentrified arrangement. You lose your wealth, you lose your freedom, you probably lose your life and possibly your entire extended family. You are literally erased from history. Winners take all and losers lose everything.

With these stakes, the English idiom “life-and-death-struggle” is far too passive. In the Chinese formulation it is “You-Die, I-Live”. I must kill preemptively in order to live. Xi and his comrades in the red dynasty believe they will go the same way as the Manchus and the Mings the moment they forget.

China’s veneration of the written word

A second point, related to the first, is that China has an extraordinary veneration of the written word. Stories, histories and teachers have great moral authority.  . . . What is more certain is that China was particularly receptive to Soviet ideology because Chinese intellectuals found meaning in Russian literature and texts earlier and more readily than they did with other Western sources. “Russian literature was our guide (daoshi) and friend,” said Lu Xun.

In classical Chinese statecraft there are two tools for gaining and maintaining control over “the mountains and the rivers”: The first is wu (weapons, violence – 武) and the second is wen (language, culture – 文).

Chinese leaders have always believed that power derives from controlling both the physical battlefield and the cultural domain. You can’t sustain physical power without discursive power. Wu and wen go hand-in-hand.

The key to understanding the allure of the Soviet Commintern in Shanghai and Guangzhou in the 1920s is that their (admittedly brilliant) agents told a compelling story. They came with money, guns and organizational technology but their greatest selling point was a narrative which promised a linear escape from the dynastic cycle. . . .

Mao’s discursive advantage was Marxist-Leninist ideology. Language was not just a tool of moral judgment. It was an instrument for shaping acceptable behavior and a weapon for distinguishing enemies and friends. This is the subtext of Mao’s most famous poem, Snow. Communist ideology enabled him to “weaponise” culture in a way his imperial predecessors had never managed.

And it’s important to remember who was the leader of the Communist world during the entire quarter of a century in which Mao rose to absolute power.

The “Great Genius” Comrade Stalin. 

Mao knew Marxist Leninist dogma was absolutely crucial to his enterprise but he personally lacked the patience to wade through it. He found a shortcut to ideological proficiency with Joseph Stalin’s Short Course on the History of the Bolsheviks, published at the end of Stalin’s Great Terror, in 1938.  According to Li Rui, when interviewed by historian Li Huayu, Mao thought he’d found an “encyclopaedia of Marxism” and “acted as if he’d discovered a treasure”.

At the time of Stalin’s death, in March 1953, The Short Course on the History of the Bolsheviks had become the third-most printed book in human history. After Stalin’s death – when Stalin was eulogised as “the Great Genius” on the front page of the People’s Daily – the Chinese printers redoubled their efforts. It became the closest thing in China to a religious text.

The Short Course is hard reading but it offers us the same shortcut to understanding Communist ideology as it did for Mao.

Stalin’s problem was different to Lenin’s. Lenin had to win a revolution but Stalin had to sustain it. . . .

Stalin’s Short Course is a manual for perpetual struggle against a roll call of imagined dastardly enemies who are collaborating with imagined Western agents to restore bourgeois capitalism and liberalism. It is written as a chronicle of victories by Lenin and then Stalin’s “correct line” over an endless succession of ideological villains. It is perhaps instructive that many of the most “vile” internal enemies were said to have cloaked their subversive intentions in the guise of “reform”. . . .

The most original insight in Stalin’s Short Course on the History of the Bolsheviks is that the path to socialist utopia will always be obstructed by enemies who want to restore bourgeois capitalism from inside the party. These internal enemies grow more desperate and more dangerous as they grow increasingly imperilled – and as they collaborate with the spies and agents of Western liberalism.

The most important lines in the book:

• “As the revolution deepens, class struggle intensifies.”
• “The Party becomes strong by purging itself.”

You can imagine how this formulation was revelatory to a ruthless Chinese leader like Mao who had mastered the “You Die, I Live” world into which he had been born – a world in which you choose to either kill or be killed – and who was obsessed with how to prevent the decay which had destroyed every imperial dynasty before.

What Stalin offered Mao was not only a manual for purging his peers but also an explanation of why it was necessary. Purging his rivals was the only way a vanguard party could “purify” itself, remain true to its revolutionary nature and prevent a capitalist restoration.

Purging was the mechanism for the Chinese Communist Party to achieve ever greater “unity” with revolutionary “truth” as interpreted by Mao. It is the mechanism for preventing the process of corruption and putrefaction which inevitably sets in after the founding leaders of each dynasty leave the scene.

Crucially, Mao split with Khrushchev because Khrushchev split with Stalin and everything he stood for. The Sino-Soviet split was ideological – it was Mao’s claim to ideological leadership over the communist world. Marx, Lenin, Stalin, Mao. It was Mao’s claim to being Stalin’s true successor.

We hear a lot about how Xi and his peers blame Gorbachev for the collapse of the Soviet state but actually their grievances go much further back. They blame Khrushchev. They blame Khrushchev for breaking with Stalin. And they vow that they will never do to Mao what Khrushchev did to Stalin.

Now, sixty years on, we’re seeing Xi making his claim to be the true Revolutionary Successor of Mao.

Xi’s language of “party purity”; “criticism and self-criticism”; “the mass line”; his obsession with “unity”; his attacks on elements of “hostile Western liberalism”, “constitutionalism” and other variants of ideological “subversion” –  this is all Marxism-Leninism as interpreted by Stalin as interpreted by Mao.

This is the language that the Deep Red princelings spoke when they got together and occasionally when I interviewed them and crashed their gatherings in the lead up to the 18th Party Congress.

And this was how Xi spoke after the 18th Party Congress:

‘‘To dismiss the history of the Soviet Union and the Soviet Communist Party, to dismiss Lenin and Stalin, and to dismiss everything else is to engage in historic nihilism, and it confuses our thoughts and undermines the party’s organizations on all levels.’’

Today, the utopian destination has to be maintained, however absurd it seems, in order to justify the brutal means of getting there.  Xi has inserted a couple of interim goals – for those who lack revolutionary patience – but the underlying Marxist-Leninist-Stalinist-Maoist logic remains the same.

This is the logic of his ever-deepening purge of peers who keep getting in the way.

The purge of the princeling challenger Bo Xilai; the security chief Zhou Yongkang; the two vice chairs of the PLA Central Military Commission Xu Caihou and Guo Boxiong; the Youth League fixer Ling Jihua; the potential successor Sun Zhengcai just a fortnight ago.

None of this is personal. It’s dialectical. And inevitable.

It’s pushing and accelerating China’s journey along the inexorable corkscrew-shaped course of history.

“History needs to pushed along its dialectical course,” said Xi, in his speech to mark the party’s 95th birthday in 2015. “History always moves forward and it never waits for all those who hesitate.”

The same logic applies outside the party as within.

“The decadent culture of the capitalist class and feudalistic society must be opposed,” said the authoritative Guangming Daily, expanding on another of Xi’s speeches.

The essence of Maoism and Stalinism is perpetual struggle. This is the antidote to the calcification and putrefaction that has destroyed every previous dynasty, dictatorship and empire. This is why Xi and his Red Successor peers believe that Maoism and Stalinism is still highly relevant today. Not just relevant, but existential.

Xi has set in motion a purification project – a war against the forces of counter-revolution – that has no end point because the notional utopian destination of perfect communism will always be kicked a little further down the road.

There is no policy objective in the sense that a Wall Street banker or Canberran public servant might understand it – as a little more energy market efficiency here, or compression of the Gini coefficient there. Rather, this is how you restore dynastic vigour and vitality. Politics is the ends.

This is what Mao and Stalin understood better than any of their peers. This is what Xi Jinping’s Deep Red Restoration is all about. And why the process of extreme politics will not stop at the 19th Party Congress.

Which brings us to the title of this seminar.

Engineers of the human soul

At my first team bonding session in this building I asked who was the world leader who described artists and authors as “engineers of the human soul”.

Was this word image the creation of Stalin, Mao or someone else?

If you’re thinking Joseph Stalin, then you’re right:

“The production of souls is more important than the production of tanks…. And therefore I raise my glass to you, writers, the engineers of the human soul”.

To me this is one of the great totalitarian metaphors: a machine designed to forge complete unity between state, society and individual.

The totalitarian machine works to a predetermined path. It denies the existence of free will and rejects “abstract” values like “truth”, love and empathy. It repudiates God, submits to no law and seeks nothing less than to remold the human soul.

The quote is from Stalin’s famous speech at the home of the writer Maxim Gorky in preparation for the first Congress of the Union of Soviet Writers in October 1932. This marked the end of Stalin’s Great Famine and Cultural Revolution – the prototype for Mao’s Great Famine and Cultural Revolution – in the lead up to Stalin’s Great Terror.

For Stalin, Lenin and the proto-Leninists of 19th Century Russia, the value of literature and art was purely instrumental. There was no such thing as “art for art’s sake”. In their ideology, poetry has no intrinsic value beyond its purpose of indoctrinating the masses and advancing the cause of revolution.

Or, to use the engineering language of the original Man of Steel – Joseph Stalin – literature and art are nothing more nor less than cogs in the revolutionary machine.

But, if you think the answer is Chairman Mao, then you’re also right. Mao extended Stalin’s metaphor a decade later at his famous Yan’an Forum on Literature and Art delivered in two parts in October 1942, and published (in heavily doctored form) one year later:

“[Our purpose is] to ensure that literature and art fit well into the whole revolutionary machine as a component part, that they operate as powerful weapons for uniting and educating the people and for attacking and destroying the enemy, and that they help the people fight the enemy with one heart and one mind.”

This is when Mao made plain that there is no such thing as truth, love or artistic merit except in so far as these abstract concepts can be pressed into the practical service of politics.

Importantly, with contemporary significance, Mao’s talks on literature and art was his way of introducing the Yan’an Rectification Campaign – the first great systematic purge of the Chinese Communist Party. This was a project of orchestrated peer pressure and torture designed first to purge Mao’s peers and then to instil communist ideology deep within the minds of the hundreds of thousands of idealistic students and intellectuals who had flocked to Yan’an during the anti-Japanese war.

Importantly, the Communist Party never sought to “persuade” so much as “condition”. By creating a fully enclosed system, controlling all incentives and disincentives, and “breaking” individuals physically, socially and psychologically, they found they could condition the human mind in the same way that Pavlov had learned to condition dogs in a Moscow laboratory a few years earlier.

This is when Mao’s men first coined the term “brainwashing” – it’s a literal translation of the Maoist term xinao, literally “washing the brain”. Mao himself preferred Stalin’s metallurgical metaphor. He called it “tempering”:

“If you want to be one with the masses, you must make up your mind to undergo a long and even painful process of tempering.”

Mao’s Yan’an Talks on Literature and Art vanished and were then resurrected and republished everywhere at the onset of the Cultural Revolution – the most audacious and successful act of social engineering that the world has ever seen.

And, most relevant to all of us today, if you are thinking President Xi Jinping, then you’re also right.

President Xi, or Chairman Xi to use a more direct translation, was speaking at the Beijing Forum on Literature and Art, in October 2014. Xi’s Forum on Literature and Art was convened on the 72nd anniversary of the young Chairman Mao’s Yan’an Forum on Literature and Art.

Xi was arguing for a return to the Stalinist-Maoist principle that art and literature should only exist to serve politics. Not politics as we know it – the straightforward exercise of organisational and decision-making power – but the totalitarian project of creating unity of language, knowledge, thought and behaviour in pursuit of a utopian destination.

“Art and literature is the engineering that moulds the human soul; art and literary workers are the engineers of the human soul.”

Like Mao’s version, Xi’s art and literature forum speech was not published until one year later.

Like Mao’s speech, the published version made no acknowledgment that large chunks had been added, deleted and revised – to reflect the political imperatives of the times.

Like Stalin and Mao, Xi’s speech marked a Communist Party rectification campaign which included an all-out effort to elevate the respective leaders to cult status. Nothing in Communist Party choreography happens by accident.

It should be noted here that when Mao was rallying the country in 1942 he did so under the banner of ““patriotism” – because the idea of communism had absolutely no pulling power.

It’s no different today. Xi:

“Among the core values of socialism with Chinese characteristics, the deepest, most basic and most enduring is patriotism. Our modern art and literature needs to take patriotism as its muse, guiding the people to establish and adhere to correct views of history, the nation, the country and culture.”

And the old warnings against subversive western liberalism haven’t changed either.

For Lenin, Stalin, Mao and Xi, words are not vehicles of reason and persuasion. They are bullets. Words are weapons for defining, isolating and destroying opponents. And the task of destroying enemies can never end. (This deserves a stand alone discussion of United Front strategy – but I’ll leave this for another day).

For Xi, as with Stalin and Mao, there is no endpoint in the perpetual quest for unity and regime preservation.

Xi uses the same ideological template to describe the role of “media workers”. And school teachers. And university scholars. They are all engineers of ideological conformity and cogs in the revolutionary machine.

Among the many things that China’s modern leaders did – including overseeing the greatest burst of market liberalisation and poverty alleviation the world has ever seen – those who won the internal political battles have retained the totalitarian aspiration of engineering the human soul in order to lead them towards the ever-receding and ever-changing utopian destination.

This is not to say that China could not have turned out differently. Elite politics from Mao’s death to the Tiananmen massacres was a genuine contest of ideas.

But ideology won that contest.

Today the PRC is the only ruling communist party that has never split with Stalin, with the partial exception of North Korea. Stalin’s portrait stood alongside Marx, Engels and Lenin in Tiananmen Square – six metres tall – right up to the early 1980s, at which point the portraits were moved indoors.

For a long time we all took comfort in thinking that this ideological aspiration existed only on paper, an object of lip service, while China’s 1.4 billion citizens got on with the job of building families and communities and seeking knowledge and prosperity.

But it has been much more than lip service.  Since 1989 the party has been rebuilding itself around what the draft National Security Law calls “ideological security” including defending itself against “negative cultural infiltration”.

Propaganda and security – wen and wu, the book and the sword, the pen and the gun – are once again inseparable. Party leaders must “dare to show their swords’’ to ensure that “politicians run newspapers”, said Xi, at his first National Propaganda Work Conference, on August 9, 2013.

Xi has now pushed ideology to the forefront because it provides a framework for “purifying” and regaining control over the vanguard party and thereby the country.

In Xi’s view, shared by many in his Red Princeling cohort, the cost of straying too far from the Maoist and Stalinist path is dynastic decay and eventually collapse.

Everything Xi Jinping says as leader, and everything I can piece together from his background, tells me that he is deadly serious about this totalising project.

In retrospect we might have anticipated this from the Maoist and Stalinist references that Xi sprinkled through his opening remarks as president, in November 2012.

It was made clearer during Xi Jinping’s first Southern Tour as General Secretary, in December 2012, when he laid a wreath at Deng’s shrine in Shenzhen but inverted Deng’s message. He blamed the collapse of the Soviet Union on nobody being “man enough” to stand up to Gorbachev and this, in turn, was because party members had neglected ideology. This is when he gave his warning that we must not forget Mao, Lenin or Stalin.

In April 2013 the General Office of the Central Committee, run by Xi’s princeling right hand man, Li Zhanshu, sent this now infamous political instruction down to all high level party organisations.

This Document No. 9, “Communique on the Current State of the Ideological Sphere”, set “disseminating thought on the cultural front as the most important political task.” It required cadres to arouse “mass fervour” and wage “intense struggle” against the following “false trends”:

1. Western constitutional democracy – “an attempt to undermine the current leadership”;
2. Universal values of human rights – an attempt to weaken the theoretical foundations of party leadership.
3. Civil Society – a “political tool” of the “Western anti-China forces” dismantle the ruling party’s social foundation.
4. Neoliberalism – US-led efforts to “change China’s basic economic system”.
5. The West’s idea of journalism – attacking the Marxist view of news, attempting to “gouge an opening through which to infiltrate our ideology”.
6. Historical nihilism – trying to undermine party history, “denying the inevitability” of Chinese socialism.
7. Questioning Reform and Opening – No more arguing about whether reform needs to go further.

There is no ambiguity in this document. The Western conspiracy to infiltrate, subvert and overthrow the People’s Party is not contingent on what any particular Western country thinks or does. It is an equation, a mathematical identity: the CCP exists and therefore it is under attack. No amount of accommodation and reassurance can ever be enough – it can only ever be a tactic, a ruse.

Without the conspiracy of Western liberalism the CCP loses its reason for existence. There would be no need to maintain a vanguard party. Mr Xi might as well let his party peacefully evolve.

We know this document is authentic because the Chinese journalist who publicised it on the internet, Gao Yu, was arrested and her child was threatened with unimaginable things. The threats to her son led her to make the first Cultural Revolution-style confession of the television era.

In November 2013 Xi appointed himself head of a new Central State Security Commission in part to counter “extremist forces and ideological challenges to culture posed by Western nations”.

Today, however, the Internet is the primary battle domain. It’s all about cyber sovereignty.

Conclusion

The key point about Communist Party ideology – the unbroken thread that runs from Lenin through Stalin, Mao and Xi – is that the party is and always has defined itself as being in perpetual struggle with the “hostile” forces of Western liberalism.

Xi is talking seriously and acting decisively to progress a project of total ideological control wherever it is possible for him to do so. His vision “requires all the Chinese people to be unified with a single will like a strong city wall”, as he told “the broad masses of youth” in his Labor Day speech of May 2015. They need to “temper their characters”, said Xi, using a metaphor favoured by both Stalin and Mao.

There is no ambiguity in Xi’s project. We see in everything he does and – even in a system designed to be opaque and deceptive – we can see it in his words.

Mr Xi did not invent this ideological project but he has hugely reinvigorated it. For the first time since Mao we have a leader who talks and acts like he really means it.

And he is pushing communist ideology at a time when the idea of “communism” is as unattractive as it has been at any time in the past 100 years. All that remains is an ideology of power, dressed up as patriotism, but that doesn’t mean it cannot work.

Already, Xi has shown that the subversive promise of the internet can be inverted. In the space of five years, with the assistance of Big Data science and Artificial Intelligence, he has been bending the Internet from an instrument of democratisation into a tool of omniscient control. The journey to Utopia is still in progress but first we must pass through a cyber-enabled dystopia in order to defeat the forces of counter-revolution.

The audacity of this project is breathtaking. And so too are the implications.

The challenge for us is that Xi’s project of total ideological control does not stop at China’s borders. It is packaged to travel with Chinese students, tourists, migrants and especially money.  It flows through the channels of the Chinese language internet, pushes into all the world’s major media and cultural spaces and generally keeps pace with and even anticipates China’s increasingly global interests.

In my opinion, if you’re in the business of intelligence, defense or international relations; or trade, economic policy or market regulation; or arts, higher education or preserving the integrity of our democratic system – in other words, just about any substantial policy question whatsoever – then you will need a working knowledge of Marxism-Leninism Mao Zedong Thought. And maybe, after the 19th Party Congress, you’ll need “Xi Jinping Thought” too.

END”

That is the real problem facing China.  Xi and the Chinese government have decided to give up economic reform and go back to the time of Mao and Statin.  This is real Communist ideology.

One may think that John Garnault is exaggerating.  It cannot be that bad.  But as noted above, with the Conference on Statism at the Asia Society, many Chinese experts, old friends of China including Orville Schell and Chrarlene Barshefsky, who was the USTR who negotiated the US China WTO agreement, believe that China has returned to Statism.  That is the same point of Nicholas Lardy above.

When I was in Beijing China in the mid-2,000s, I met many Chinese lawyers.  One lawyer told me in Beijing that there was a saying in China—Mao made China stand up, Deng made China rich and the hope is that the new leader will give China some form of Democracy.  That Chinese lawyer now lives two blocks away from me in Washington State.

Another Chinese lawyer in Beijing believed strongly in the mid-2,000s that China was on the right path to a new opening that might lead to a limited form of Democracy.  He now lives 30 minutes away from me.

Many Chinese have fled China because of the fear of what is going on in China now.

My hope and prayer is that I am wrong, but I do not think so.

GOVERNMENT SHUTDOWN

Because of a major disagreement between President Trump and Congress, a major part of the Government, including the Commerce Department and the US International Trade Commission (“ITC”), were shut down for over a month.  As a result, Commerce and the US International Trade Commission have extended all trade investigation deadlines by 35 to 40 days.

QUARTZ SURFACE PRODUCTS ANTIDUMPING AND COUNTERVAILING DUTY CASES—ITC QUESTIONNAIRES AND CRITICAL CIRCUMSTANCES TRAP

We are in the process of representing a substantial number of US importers and fabricators, US producers of downstream products, in the Quartz Surface Products from China Antidumping and Countervailing Duty case.  Quartz Surface Products are used to produce kitchen countertops, shower stalls and many other downstream products.

The Commerce Department recently issued a critical circumstances determination exposing thousands of importers to millions of dollars in liability and bankruptcy in a situation in which the US International Trade Commission (“ITC”) goes no critical circumstances in over 90% of the cases.

Cambria, the Petitioner in the case, has taken the position that it not only represents the producers of the slab, the raw material, but also all the producers of the downstream products, the fabricators.  We have learned that there are more than 4,000 fabricators of the downstream producers with 1000s of jobs at stake.  Cambria essentially argues that it is the sole representative of an industry with more than 4,000 companies.

Cambria’s objective in this case is very clear—drive up the prices of the raw material so as to drive out the fabricators, the downstream producers, all 4,000 of them.  We are working to include the fabricators in the domestic industry, but the fabricators have to be willing to answer the ITC questionnaires so as to have their voices heard.

The ITC questionnaires in the case are attached US producers–Quartz surface products (F) Foreign producers–Quartz surface products (F) US importers–Quartz surface products (F) US purchasers–Quartz surface products (F) Questionnaire Transmittal Letter QSP INITIAL ITC E-MAIL RETURN INSTRUCTIONS.

If anyone has any questions about the Section 301 case, the trade war with China, IP Protection, Huawei problem, the Quartz Surface Products case, antidumping or countervailing duty law, customs laws and any other trade or customs questions, please feel free to contact me.

Best regards,

Bill Perry