An Anti-Communist Coronavirus

China Is the Perpetual Sick Man of Asia
Its financial markets may be even more dangerous than its wildlife markets.
By Walter Russell Mead

A Chinese woman wears a protective mask in Beijing, Feb. 3. 

The mighty Chinese juggernaut has been humbled this week, apparently by a species-hopping bat virus. 

While Chinese authorities struggle to control the epidemic and restart their economy, a world that has grown accustomed to contemplating China’s inexorable rise was reminded that nothing, not even Beijing’s power, can be taken for granted.
We do not know how dangerous the Chinese coronavirus will be. 

Chinese authorities are still trying to conceal the true scale of the problem, but at this point the virus appears to be more contagious but considerably less deadly than the pathogens behind diseases such as Ebola or SARS—though some experts say SARS and coronavirus are about equally contagious.
China’s initial response to the crisis was less than impressive. 

The Wuhan government was secretive and self-serving; national authorities responded vigorously but, it currently appears, ineffectively. 

China’s cities and factories are shutting down; the virus continues to spread. 

We can hope that authorities succeed in containing the epidemic and treating its victims, but the performance to date has shaken confidence in the Chinese Communist Party at home and abroad. 
Complaints in Beijing about the U.S. refusing entry to noncitizens who recently spent time in China cannot hide the reality that the decisions that allowed the epidemic to spread as far and as fast as it did were all made in Wuhan and Beijing.

The likeliest economic consequence of the coronavirus epidemic, forecasters expect, will be a short and sharp fall in Chinese economic growth rates during the first quarter, recovering as the disease fades. 

The most important longer-term outcome would appear to be a strengthening of a trend for global companies to “de-Sinicize” their supply chains. 

Add the continuing public health worries to the threat of new trade wars, and supply-chain diversification begins to look prudent.
Events like the Chinese coronavirus epidemic, and its predecessors—such as SARS, Ebola and MERS—test our systems and force us to think about the unthinkable. 

If there were a disease as deadly as Ebola and as fast-spreading as coronavirus, how should the U.S. respond? 

What national and international systems need to be in place to minimize the chance of catastrophe on this scale?
Epidemics also lead us to think about geopolitical and economic hypotheticals. 

We have seen financial markets shudder and commodity prices fall in the face of what hopefully will be a short-lived disturbance in China’s economic growth. 

What would happen if—in response to an epidemic, but more likely following a massive financial collapse—China’s economy were to suffer a long period of even slower growth? 

What would be the impact of such developments on China’s political stability, on its attitude toward the rest of the world, and to the global balance of power?
China’s financial markets are probably more dangerous in the long run than China’s wildlife markets. 

Given the accumulated costs of decades of state-driven lending, massive malfeasance by local officials in cahoots with local banks, a towering property bubble, and vast industrial overcapacity, China is as ripe as a country can be for a massive economic correction. 

Even a small initial shock could lead to a massive bonfire of the vanities as all the false values, inflated expectations and misallocated assets implode. 

If that comes, it is far from clear that China’s regulators and decision makers have the technical skills or the political authority to minimize the damage—especially since that would involve enormous losses to the wealth of the politically connected.
We cannot know when or even if a catastrophe of this scale will take place, but students of geopolitics and international affairs—not to mention business leaders and investors—need to bear in mind that China’s power, impressive as it is, remains brittle. 

A deadlier virus or a financial-market contagion could transform China’s economic and political outlook at any time.
Many now fear the coronavirus will become a global pandemic. 

The consequences of a Chinese economic meltdown would travel with the same sweeping inexorability. 

Commodity prices around the world would slump, supply chains would break down, and few financial institutions anywhere could escape the knock-on consequences. 

Recovery in China and elsewhere could be slow, and the social and political effects could be dramatic.
If Beijing’s geopolitical footprint shrank as a result, the global consequences might also be surprising. Some would expect a return of unipolarity if the only possible great-power rival to the U.S. were to withdraw from the game. 

Yet in the world of American politics, isolation rather than engagement might surge to the fore. 

If the China challenge fades, many Americans are likely to assume that the U.S. can safely reduce its global commitments.
So far, the 21st century has been an age of black swans. 

From 9/11 to President Trump’s election and Brexit, low-probability, high-impact events have reshaped the world order. 

That age isn’t over, and of the black swans still to arrive, the coronavirus epidemic is unlikely to be the last to materialize in China.

A Communist CoronavirusWonder Land

One President Trump Victory: Companies Rethink China

The trade war is nearing a possible truce, but global companies are nevertheless moving to reduce their dependence on Chinese factories to make the world’s goods.
By Keith Bradsher

Companies around the world are trying to reduce their dependence on Chinese factories.

BEIJING — Whatever deal Washington and Beijing reach over the trade war, President Trump has already scored a big victory: Companies are rethinking their reliance on China.
The two sides are nearing an agreement, with President Trump saying on Thursday that an “epic” trade pact could be weeks away and that he may soon meet with Xi Jinping, China’s top leader.
But already, spurred by tariffs and trade tensions, global companies are beginning to shift their supply chains away from China, just as some Trump administration officials had wanted.
The move, known as decoupling, is a major goal of those who believe the world has grown far too dependent on China as a manufacturing giant.
As Beijing builds up its military and extends its geopolitical influence, officials fear that America’s dependence on Chinese factories makes it strategically vulnerable.
Now companies in a number of industries are reducing their exposure to China.
GoPro, the mobile camera maker, and Universal Electronics, which makes sensors and remote controls, are shifting some work to Mexico.
Hasbro is moving its toy making to the United States, Mexico, Vietnam and India.
Aten International, a Taiwanese computer equipment company, brought work back to Taiwan. Danfoss, a Danish conglomerate, is changing the production of heating and hydraulic equipment to the United States.
President Trump’s victory in this department is not unalloyed.
Despite his promises to bring jobs back to the United States, most of the work is shifting to other countries with lower costs.
Reshaping global supply chains also takes time, and China will remain a vital manufacturing hub for decades to come.


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Still, chief executives say the trade war has prompted a fundamental reassessment of China as the dominant place to make things.
Even Chinese companies are expanding overseas, although they still have most of their production in China.
“China was the factory of the world,” said Song Zhiping, the Communist Party chief at the China National Building Materials Group, a state-owned giant.
“Things are changing. That’s why Chinese companies are going out of China.”
A spokeswoman for the United States trade representative’s office declined to comment.
While President Trump portrays his trade fight as a clash over jobs, proponents of decoupling within the administration see the effort as a way of contending with a stronger, more aggressive China.

Already, China dominates the market for items like solar panels, and has emerged as the world’s largest producer of cars, car parts and many other sophisticated products.
It plans to build jetliners, advanced computer chips, electric cars and other goods of the future.
Any deal is likely to leave in place new American tariffs on cars, aircraft parts, equipment for nuclear power plants and other items that administration officials see as essential for economic and security reasons. 
But more broadly, U.S. officials hope companies in other industries will also find friendlier countries in which to do business.
China emerged as a manufacturing powerhouse over the past two decades.
The work force was low cost and relatively skilled.
The Communist Party prevented the emergence of independent labor unions.
Subcontractors abounded, meaning companies could strongly negotiate for lower supply costs.
China built an extensive network of highways and rail lines.
It has a vast and growing local customer base, meaning companies don’t have to go far to sell their products.
Businesses flocked there.
China accounted for one-quarter of the world’s manufacturing by value last year, up from 8 percent in 2000, according to the United Nations Industrial Development Organization.

The value created in China by manufacturing last year was bigger than in the United States, Germany and South Korea combined.
But wages and other costs in China have been rising for years.
A growing number of businesses complain that Chinese officials favor local competitors or do nothing to stop intellectual property theft.
The prospect of more trade fights only adds to the reasons to diversify, which also include threats elsewhere like President Trump’s threat to close the border with Mexico and Britain’s troubled exit from the European Union.
“Localization will matter more,” Joe Kaeser, the chief executive of Siemens, one of Germany’s largest conglomerates, said in an interview late last month on the sidelines of the China Development Forum in Beijing.
“You’re more resilient to political discussions.”
China may not necessarily oppose some of the efforts to decouple.
Beijing has long hoped to shed low-skilled, polluting manufacturing jobs and move higher up the value chain.
“The total size of the work force is falling, the labor cost is rising and we are losing our competitive advantage in low-cost industries,” Miao Wei, China’s minister of industry and information technology, said at the China Development Forum.
He added that the country would focus instead on high-tech, innovative industries.
Still, Chinese officials must walk a fine line.
As the country’s economy slows, an abrupt shift of work out of China could lead to job losses and instability.

Companies around the world are trying to diversify their supply chains, which means relying less on Chinese exports.

Decoupling efforts appear to be in their early stages.
A broad survey by UBS of chief financial officers at export-oriented manufacturers in China late last year found that a third had moved at least some production out of China in 2018.
Another third intended to do so this year.
The typical company was moving the production for about 30 percent of its exports, UBS found.
Companies now want to depend less on one place, which means looking for an alternative to China, Bill Winters, the chief executive of Standard Chartered Bank, said at the World Economic Forum in Davos, Switzerland, this year.
“People who are concerned at the prospect of greater tariffs on Chinese exports, for example, are looking to move export facilities from China to other countries, including Chinese companies,” Mr. Winters said.
Countries seeking to displace China have begun pointing out that exports from their countries are less likely to face tariffs.
For companies with operations in China, “the trade war between the United States and China creates a new uncertainty,” Airlangga Hartarto, Indonesia’s minister of industry, said in an interview in Davos.
The ability to diversify depends on the industry.
Some auto parts companies have run their American factories more hours each day to avoid tariffs on Chinese-made goods, said Razat Gaurav, the chief executive of LLamasoft, a supply chain management company in Ann Arbor, Mich.
By contrast, he said, manufacturers of smartphones and smartphone components — which have generally not been hit by President Trump’s tariffs — have found few places to move work because China dominates that supply chain. 
Still, some in that industry are shifting too, such as Sony’s closure of a Beijing smartphone factory last month after expanding production in Thailand.

Chinese companies play a key role in in the solar panel industry.

For now, companies are looking for alternatives.
Steve Madden, the shoe company, is moving production to Cambodia.
Hasbro, the world’s leading toymaker, has a goal for the end of next year “to be 60 percent out of China,” by shifting production to the United States and elsewhere, Brian Goldner, the company’s chairman and chief executive, said in a recent conference call.
Though much of the work leaving China is going to other low-cost countries, some companies are following President Trump’s suggestion that they move production to the United States.
Danfoss, a Danish maker of heating and cooling systems as well as sensors and transmitters, has seen rising costs in China, especially for skilled labor, said Kim Fausing, the company’s chief executive and president.
It is also looking for ways to reduce transportation-related emissions of global warming gases.
When Danfoss bought an American heating systems company a year ago and found that the company had recently shifted some work to China, it acted quickly.
“The first thing we did after we acquired it was we moved everything back” to the United States, where Danfoss already had a dozen factories, Mr. Fausing said.
The first round of 25 percent tariffs that President Trump put in place last July included hydraulic parts long manufactured by Danfoss in northeastern China.
The company transferred production of these parts to the United States as well.
“There is not much of a difference between the costs in China and the United States,” Mr. Fausing said.
“You have to have a very good case today to justify producing something in China and shipping it to the U.S.”

China's global theft of commercial secrets

China hacked Norway's Visma to steal client secrets

By Jack Stubbs

LONDON -- Hackers working on behalf of Chinese intelligence breached the network of Norwegian software firm Visma to steal secrets from its clients, cybersecurity researchers said, in what a company executive described as a potentially catastrophic attack.
The attack was part of what Western countries said in December is a global hacking campaign by China's Ministry of State Security to steal intellectual property and corporate secrets, according to investigators at cybersecurity firm Recorded Future.
China's Ministry of State Security has no publicly available contacts. 

The foreign ministry did not respond to a request for comment.
Visma took the decision to talk publicly about the breach to raise industry awareness about the hacking campaign, which is known as Cloudhopper and targets technology service and software providers in order reach their clients.
Cybersecurity firms and Western governments have warned about Cloudhopper several times since 2017 but have not disclosed the identities of the companies affected.
Reuters reported in December that Hewlett Packard Enterprise Co and IBM were two of the campaign's victims, and Western officials caution in private that there are many more.
At the time IBM said it had no evidence sensitive corporate data had been compromised, and Hewlett Packard Enterprise said it could not comment on the Cloudhopper campaign.
Visma, which reported global revenues of $1.3 billion last year, provides business software products to more than 900,000 companies across Scandinavia and parts of Europe.
The company's operations and security manager, Espen Johansen, said the attack was detected shortly after the hackers accessed Visma's systems and he was confident no client networks were accessed.

"PARANOIA HAT"
"But if I put on my paranoia hat, this could have been catastrophic," he said. 

"If you are a big intelligence agency somewhere in the world and you want to harvest as much information as possible, you of course go for the convergence points, it's a given fact."
"I'm aware that we do have clients which are very interesting for nation states," he said, declining to name any specific customers.
Paul Chichester, director for operations at Britain's National Cyber Security Centre, said the Visma case highlighted the dangers organisations increasingly face from cyber attacks on their supply chains.
"Because organisations are focused on improving their own cyber security, we are seeing an increase in activity targeting supply chains as actors try to find other ways in," he said.
In a report https://www.recordedfuture.com/apt10-cyberespionage-campaign with investigators at cybersecurity firm Rapid7, Recorded Future said the attackers first accessed Visma's network by using a stolen set of login credentials and were operating as part of a hacking group known as APT 10, which Western officials say is behind the Cloudhopper campaign.
The U.S. Department of Justice in December charged two members of APT 10 with hacking U.S. government agencies and dozens of businesses around the world on behalf of China's Ministry of State Security.
Priscilla Moriuchi, director of strategic threat development at Recorded Future and a former intelligence officer at the U.S. National Security Agency, said the hackers' activity inside Visma's network suggested they intended to infiltrate client systems in search of commercially-sensitive information.
"We believe that APT 10 in this case exploited Visma networks to enable secondary operations against Visma's customers, not necessarily to steal Visma's own intellectual property," she said. "Because they caught it so early they were able to discourage and prevent those secondary attacks." 

This Trade War Is A Bummer For China

By Kenneth Rapoza

A worker browses his smartphone outside a construction site wall depicting the skyscrapers in the Chinese capital at the Central Business District in Beijing, Wednesday, Sept. 19, 2018. 

The Chinese government rolled out Beijing's No. 2, Li Keqiang, again on Wednesday to blatantly state that the economy is in worse shape than they previously imagined.
"We're are having greater difficulties in keeping stable performance of the Chinese economy," he said today at a World Economic Forum event held in Tianjin, China
According to CNBC's Evelyn Cheng, reporting from the mainland, Li Keqiang did not single out the ongoing trade war with the U.S. as a reason for those "greater difficulties". 

President Trump slapped tariffs on $200 billion worth of Chinese imports this week. 

It was largely expected by the market. 

The only positive to come out of the latest round of duties was that the tariff dropped from 25% to 10%, opening room for further negotiations before the end of the month. 

If China does not bend, then the market should not be surprised if tariffs rise to 25%.
Wilbur Ross, President Trump's Commerce Secretary, said yesterday that the goal of the trade war was not to keep tariffs in place, but to institute fair trade with China. 

China-U.S. trade policies are decades old and were created to help China rise from dollar a day poverty, and become a source of cheap labor. 

Those days are coming to an end. 

Many manufacturers are vacating China in favor of other emerging Asian countries. 

The trade war is a bummer for China as it is rearranging supply chains, and punishing the A-shares.
China's A-shares are down nearly 30% from the highs of Jan. 26 while the S&P 500 is up. 

China's bear market has weighed heavily on emerging markets overall. 

The MSCI Emerging Markets Index is not quite in bear territory, but is off 18.6% from its high point in late January.
The Trump Administration has blamed China for weakening its currency on purpose.

The currency has actually been holding steady for months now and any value under 7 is more likely by the market to be considered a strong yuan rather than a weak one.
Li Keqiang denied that the central bank was manipulating its currency.
"We are seeing that (Asian forex) traders feel more comfortable about China’s comments on currency devaluation and this has bolstered the Asian equity market," says Naeem Aslam, chief market strategist for ThinkMarkets in London and a Forbes contributor.
When it comes to this trade war fight, China is against the ropes. 

The latest round saw both the U.S. and China's responses ($60 billion more in tariffs) not as severe as the market expected, giving investors yet another reason to hope for the best.
"I don’t think this trade war is any scarier today than it already was," says Scott Clemons, chief investment strategist for Brown Brothers Harriman (BBH). 

"But it's certainly scarier for the Chinese than it is for us. If you have a GDP growing at 4% like we do, then this is the time to do go after them. I might be in a minority opinion on this, but I think Trade advisor, Peter Navarro’s instincts are right on China. They have a large, thriving economy and are benefiting from old trade policies. I really think the Chinese know that."
The Bank for International Settlements, deemed the "central bank of central banks", came out last month to add their two cents to the trade war debate at Jackson Hole.
They warned that tariffs could push up U.S. consumer prices, effectively erasing tax cuts, and requiring higher interest rates.

Investors sit in front of an electronic stock board at a securities brokerage in Shanghai. The bear market is actually opening the eyes of foreign investors who think China is too cheap to ignore, despite the ongoing trade war. 

This argument is now sounding like a broken record.
Meanwhile, the S&P 500 continues to press higher. 

As tired as this bull run is getting, the U.S. equity market is clobbering China. The index is poised to test 3000.

"A ‘melt-up’ rather than a ‘melt-down’ might actually be the next market scenario," says Neil MacKinnon, an economist for VTB Capital.
China is so beat up that it might start actually looking like a bargain for long-term investors, taking Shanghai and Shenzhen indexes out of bear territory.
Ironically, Chinese leaders were at the World Economic Forum once again touting the benefits of "free" trade. 

This from the largest closed economy in the world.
"It is essential that we uphold the basic principles of multilateralism and free trade," Keqiang said at the Forum this week.
Li Keqiang threw free traders in the room another meaty bone: "We believe that these rules have first and foremost benefited the progress of all mankind. And for any existing problems, they need to be worked out through consultation. No unilateralism will offer a viable solution," he says, forgetting that China is not yet a free market.
It's getting there.
Some speculate that the pressure the current U.S. Administration is putting on Beijing will take precedent long after President Trump is gone. 

They see this as a means to disrupt the Chinese Communist Party. 

And divide Asian loyalties between Beijing and Washington.
Clemons at BBH thinks China is under pressure to open important markets.
"I think there will be a compromise," he says, citing positives for U.S. financial firms and automotive. "The inevitable end in all this is to put China on a more even playing field with the U.S.," he said, even before Wilbur Ross said the same thing this week.

Part of the trade war battle between Beijing and Washington is to weaken China's biggest multinationals currently going head-to-head with American rivals in Asia. Huawei is a huge Cisco Systems rival. Chinese got that way by unfair intellectual property laws and other predatory practices. 

China Retaliates
China’s Ministry of Commerce said they will implement tariffs between 5% and 10% on around $60 billion of American exports in response to the new U.S. restrictions.
Notably China’s four-list system had originally included tiered rates of 25%, 20%, 10% and 5% as a way to manage the impact on Chinese consumers and business. 

The collapsing of the rates to 10% and 5% is another sign that Beijing is not trying to escalate the trade war, but instead is following President Trump's lead. 

If President Trump lowers tariffs, so will Xi Jinping.
The revised tariff list shows 9,229 product-lines covered with tariffs in some form. 

Of those, the largest targets are electrical (85% of products hit by China), electronics (75%) and specialty equipment (76%), according to Panjiva research, a unit of S&P Global Market Intelligence.
"Protectionism could set off a succession of negative consequences," said Agustin Carstens, BIS general manager. 

"If all the elements were to combine, we could face a perfect storm."
So far that storm has mostly hit China's shores and mainland China shares.

A Roadmap for the Great U.S.-China Divorce

Washington needs allies if it really wants to decouple.

By Christopher Balding

As the trade war between the U.S. and China drags on with new tariffs and no end in sight, we need to ask ourselves: What do they want? 

A fundamental objective for both is to become less reliant on the other. 

The trade war should thus be reframed as a conscious uncoupling.
Behind the rhetoric from both sides lies a profound distrust. U.S. suspicion stems from two specific issues. 

China is increasingly seen as a national security threat that fails to play by the rules. 

The Trump administration’s stance has spurred debate over whether it was a mistake to allow admittance of a highly protectionist Communist country to the World Trade Organization. 

Democrats may dislike Trump’s methods, but few will disagree with his view of China as a mortal rival.
For its part, the government of Xi Jinping is concerned about China’s dependence on U.S. technology and finished manufactured products. 

The focus of its Made In China 2025 plan is to shift Chinese consumption of high-tech products away from foreign, specifically American, manufacturers and toward domestic companies.
So how will they decouple? 

There’s little historical precedent to consider how this might look. 

Two major powers have never been so closely intertwined. 

However, there are some patterns emerging. 

First, alliances are slowly evolving into more cohesive forms. 

Just as the new U.S.-Mexico agreement (likely to include Canada) seeks to divert more trade into Nafta, other countries have started reconsidering their reliance on Chinese telecom-equipment makers for the rollout of 5G wireless networks.
Second, there’s a reassessment of where key products should be made. 

The second batch of Trump’s tariffs focuses on low-end intermediate exports with the intention of reducing China’s role in the global value chain and pushing reshoring to the U.S. and other locations, as a recent Natixis report noted.
Though it’s unlikely that Apple Inc. will start making iPhones in the U.S., shifting factories to allies is probable and builds upon existing trends. 

China is no longer a low-cost producer, and both foreign and locally owned firms there are actively considering plans to relocate operations. 

As Samsung Electronics Co. has shown in Vietnam, it isn’t necessary to make a final product in a country that manufactures the specific inputs. 

Chinese exports are dominated by electronics and basic machinery that rely on global supply chains, so it’s certain many companies are reevaluating their long-term sourcing plans.
If the Trump administration is intent on shifting supply chains away from what it considers a strategic adversary, it should accelerate plans to encourage this trend. 

Trade agreements that grant allied countries special access to U.S. markets with higher-quality governance and legal systems will increase the appeal for firms of moving out of China. 

That could mean revisiting the Trans-Pacific Partnership.
Washington must also actively open its domestic markets to Africa, Latin America and emerging Asian economies in lower-skilled products, where China dominates. 

The primary competitor for Chinese export market share isn’t North Carolina but Mexico, Vietnam and South Africa. 

For an administration seeking to reduce its dependence on Chinese garment and textile exports, raising tariffs on Rwandan garment exports is self-defeating.
The U.S. and China have talked officially of resolution, but realistically, the red lines laid out by both sides make a negotiated settlement difficult to envision. 

The Trump administration requires much broader market access and more changes to China’s socialist model than Beijing is willing to grant. 

The U.S. government, with bipartisan support, is likely to pass an updated foreign investment oversight bill that targets China in all but name.
If Washington really wants to reduce its dependence, it needs better planning to trade with allied countries and must allow other emerging-market economies to benefit from its tariffs on China. 

Garment manufacturing won’t be moving from Guangdong to Georgia, but many other countries would love that business. 

Such a shift would be a strategic win in a trade war that so far has shown little planning.

Forced labor: the dirty secret of China’s prisons

The export of products made inside jails is illegal, yet they are still turning up in goods sold overseas 
By Yuan Yang in Jinxiang

At dawn the gates to the detention centre open.
A truck laden with several tonnes of freshly dug garlic bulbs enters, and disappears into the vast complex, which houses both prisoners and people awaiting trial.
For three hours, there is no movement apart from the Chinese police practising their morning drills. Then the same truck emerges from the complex, its load replaced with cloves of peeled garlic.
It drives for two hours to a depot in the central-eastern town of Jinxiang — the world’s garlic capital— which packages peeled garlic for export to India, according to a worker inside the facility.
 Prison labour is common in China, where the law states that prisoners able to work must do so — a system known as “reform through labour”.
China is home to around 2.3m prisoners and pre-trial detainees, according to the Institute for Criminal Policy Research, giving it the world’s second-largest prison population after the US. Exporting prison-produced goods is illegal under domestic and international trade laws.
Yet evidence of prison labour is present in many of China’s supply chains, from handbags to washing machines.
 “Most of the companies set up under prison provincial administration bureaus in China look, from the outside, like ordinary companies,” says Joshua Rosenzweig of Amnesty International in Hong Kong.
“Foreign corporations are in a pretty tough position to do the kind of due diligence that would be needed to identify whether their supply chains are connected to prison labour.” 

A garlic field in Jinxiang, the world's garlic capital 

Forced labour is not a new phenomenon in the country, but it is becoming more prevalent as a result of higher wages in China and the decline in the working-age population.
Manufacturers are under increasing pressure to stay competitive with Bangladesh and Vietnam.
Li Qiang head of the activist organisation China Labor Watch, says that suppliers to US retailers have told him about redirecting some of their orders to prisons in a bid to cut costs after renewed pressure on prices.
 “We have seen companies exploiting prison labour as a way of keeping costs low,” says Kenneth Kennedy, senior policy adviser on forced labour at US Immigration and Customs Enforcement.
 A spokesperson for Walmart, the world’s biggest retailer, which uses Chinese suppliers says: “We regularly assess factories and have systems in place to investigate complaints.”
Some manufacturers are also under pressure because local governments have started to enforce labour laws that restrict flexible hiring.
This has led some subcontractors to cut corners for foreign clients, who do not always have the ability to scrutinise supply chains.
 “Illegal subcontracting appears to have increased as a result of the government cracking down on the use of contract workers from 2012,” says Lesli Ligorner, partner at legal firm Morgan, Lewis & Bockius in Shanghai.
“When companies had rush orders or a lack of labour, they appear to have decided they would rather violate their supplier contract, and farm out the work to another company, than risk breaking the labour laws and be caught out by local government.”
 Companies who use forced labour reduce their wage costs to the level of paying off the prison or detention centre which keeps most, if not all, of the payment for the work, leaving workers very little, according to labour rights advocates and ex-convicts. 
In the words of the owner of a small garlic company in Jinxiang: “It means working for nothing.”

Inside a detention centre in Peixian town, 90km south of Jinxiang, detainees work on a fresh shipment of garlic bulbs, according to surveillance footage acquired by a local garlic businessman, Xu Mingju, and seen by the Financial Times. 
Some of the prisoners are awaiting trial.
Others have been convicted and will be transferred to prisons where ex-convicts say labour conditions are better, as they are more closely regulated than detention centres.
 Former prisoners say the pungent acids in the garlic can melt detainees’ fingernails, exposing stinging flesh.
Those who can no longer use their hands bite off the garlic skins with their teeth.
 Peixian’s detainees are only a fraction of those forced to work in China’s export supply chains.
Thousands of kilometres from Jinxiang, prisoners in the south-western city of Guilin made handbags once sold in Arizona, while those in the north-eastern city of Tonghua made wreaths to be exported to South Korea, say ex-prisoners interviewed by the FT.
Prisoners from Yantai, near Jinxiang in Shandong province, assemble the wiring that goes into household appliances sold worldwide.
 In Jinxiang, prison labour is an open secret.
The owners of two different shops near the Peixian Detention Centre say that at least one or two garlic trucks enter the centre every day.
A detention centre guard confirmed that the garlic truck arrived via the main gate.
In the afternoon, a rubbish cart leaves the centre filled with garlic skins, dripping grey water along the pavement.
 Good relationships with the police are essential to getting access to prison labour.
“This is the kind of thing you need to sort out with the officials,” says the owner of the small garlic company.
“It’s not the kind of service [that just] anyone can have access to.”
 Mr Xu’s photos of workers inside the detention centre show them unloading garlic bulbs and loading peeled garlic.
They also show footage from a surveillance monitor, which shows detainees sitting together in cells peeling garlic.
They wear blue bibs with numbers on the back.
On the top of the screen, red letters show crimes against the numbers of the rooms.
Cell 202: robbery, intentional bodily harm.
Cell 203: kidnapping. 205: theft.

A wholesale market in Jinxiang where garlic is packaged for export to India 

The truck that the Financial Times followed 90km back to Jinxiang carried an estimated two tonnes of peeled garlic, wrapped in mesh sacks.
It pulled into the entrance of a depot emblazoned with the characters Jinxiang Shuanglong or Jinxiang Double Dragon.
 Inside, workers using forklift trucks moved sacks of garlic around the warehouse, with no obvious separation of garlic from the various sources.
 “Our area exports peeled garlic to many countries,” the boss of Double Dragon later told the FT, posing as a garlic importer.
“Foreign demand from developed countries for peeled garlic is growing bigger and bigger, because clients want to save time.” 
He added that the company exported peeled garlic.
 But when contacted later by the FT for an official comment, Double Dragon said it did not export peeled garlic and sold only to the domestic market.
 A separate Jinxiang garlic company representative said that his company used to rely on labour from the local prison and detention centre to peel garlic for export to Japan, but that it lacked the necessary police connections to continue.
As a result, the price he charged for peeled garlic went up 50 per cent over the two years up to the end of 2017.

Jinxiang produces 80 per cent of the world’s garlic exports. 
The US, sources 80 per cent of all its fresh garlic imports from China, according to ASKCI Consulting, a trade data consultancy.
Chinese imports make up roughly 20 to 30 per cent of all garlic consumed in the US, according to US and Chinese figures.
 But it is illegal to import goods produced in part or whole by forced labour into the US.
If a complaint is raised against a foreign production site, US Customs and Border Protection (CBP) will issue a “withhold release order” — meaning that shipments from that source must be held at the border — and may also launch a criminal investigation into the importer.
Anti-dumping measures imposed after calls from the American fresh garlic-growers’ association, and in place since 2008, mean that all Chinese garlic importers face a 376 per cent duty, apart from Zhengzhou Harmoni and its US affiliate Harmoni International Spice.
US anti-dumping cases can only be initiated by domestic companies that have suffered as a result of the dumping.
The garlic association has not nominated Harmoni in its annual submission of complaints against Chinese companies.
As a result, Harmoni has never faced an anti-dumping investigation by the Department of Commerce. But after receiving allegations that Harmoni was using prison labour, the customs department detained shipments of garlic from the company in December 2016 and January 2017.
It later reversed that decision after Harmoni supplied CBP with documentation about its supply chain, according to the company.
CBP declined to comment on the case.
The use of forced labour is not, however, restricted just to the garlic industry.
It also occurs in other Chinese supply chains.
Of the 29 active withhold release orders that have been issued by the US, 23 are against Chinese sites.

A detention centre in Peixian where inmates peel garlic. Former inmates say the pungent acids in the garlic can melt detainees’ fingernails, exposing stinging flesh 

Customers have found notes, hidden by prisoners, in goods sold in the UK and US — from Christmas ornaments to socks.
One note was found by an Arizonan woman after buying a Walmart own-brand handbag last year. “Prisoners in the Yingshan Prison in Guangxi, China are working 14 hours every day,” the handwritten note read in Chinese.
“Whoever doesn’t finish his work will be beaten... Being a prisoner in China is worse than being . . . a dog in the US.”
 The letter was signed with the name of a man who was sentenced to serve 15 years in Yingshan Prison in 2012, according to local court records.
Calls to Yingshan Prison confirmed that it has a department in charge of production and sales. Walmart confirmed to the FT that it has dropped a supplier who had been sub-contracting from Yingshan Prison after investigating the issue.
But there are at least 55 prison companies whose registrations detailed all kinds of manufacturing and even construction work. 
Some explicitly had “prison” in the name, such as Jiangxi Province Prison Group.
 Others were owned by provincial prison bureaus, or were owned by the officials in charge of prison bureaus.
Many describe themselves as being in the export industry — particularly those companies in the coastal export zones of Zhejiang, Jiangsu, and Shandong.
 Neither the Peixian detention centre nor the commerce ministry responded to requests for comment on this story.
The ministry of foreign affairs declined to comment.
“Prisons are run like companies, with their own sales teams,” says Mr Li of China Labour Watch. Unlike companies, prisons do not enforce labour law.
 “We often needed to work from 5 in the morning to 9 at night so the prison is able to make more money,” says one ex-convict who served five years in jail in Tonghua, Jilin province, where he made wreaths for export to South Korea.
Another inmate, released from Yantai Prison in Shandong province last year after serving four-years, also described a 5am-8pm working day with at most one rest day each month.
 “We did nothing but work,” says the Yantai ex-prisoner, “there were no traces of life”.
The prison holds 3,000 people but, he says, he was part of a smaller team of 130 doing unskilled electronics work, bundling wires together for electronics company Weihai Ruicao, which supplies the South Korean multinational LG.
LG confirmed that Weihai Ruicao was a supplier to another LG supplier, SL Electronics.
LG has since told the FT in a statement that: “SL Electronics severed its business relationship with Weihao Ruicao when SL was unable to obtain clear proof that they were in compliance with our code of conduct.”
Multinationals often rely on a series of local intermediaries and suppliers, who have an incentive to keep their use of prison labour secret. 
Detecting its use can be extremely difficult.
Prisons do not print receipts or sign formal contracts, according to ex-prisoners, although some have sales departments that responded to telephone inquiries from the FT posing as a buyer.
 But for prisoners there is no choice.
“The incentive for the prisoner is not monetary,” says one rights advocate who asked to remain anonymous.
“Engaging in labour is a prerequisite for clemency in terms of sentence reduction or parole. Prisoners earn points for performing labour.”

Normalizing Trade Relations With China Was a Fatal Mistake

Lawmakers wanted to turn an enemy into a friend—instead, they squandered their leverage, in ways that shortchanged both nations.

By REIHAN SALAM

Chinese dictatorXi Jinping and Trump shake hands, on November 9, 2017. 

In 2000, Congress made the fateful decision to extend “permanent normal trade relations,” or PNTR, to China. 

As the economists Justin Pierce and Peter Schott have argued, the permanence of PNTR status made an enormous difference: Without PNTR, there was always a danger that China’s favorable access to the U.S. market would be revoked, which in turn deterred U.S. firms from increasing their reliance on Chinese suppliers. 

With PNTR in hand, the floodgates of investment were opened, and U.S. multinationals worked hand in glove with Beijing to create new China-centric supply chains. 

The age of “Chimerica” had begun.
PNTR was a euphemism designed to get around the fact that the traditional term for “normal trade relations” was “most-favored-nation” (MFN) tariff status, which basically meant a plain-vanilla relationship. 

A country could enter into a preferential trade agreement such as NAFTA, the accord between the United States, Mexico, and Canada—say, plain vanilla with chocolate sprinkles on top. 

But short of that, MFN status meant imports would be treated as favorably as those arriving from “the most favored nation.” 

Absurd as it might sound, this linguistic convention had meaningful political consequences. 

To argue that we ought to have normal trade relations with China was one thing. 

Sure, why not? 

To make the case that China ought to be treated as our most favored nation was a more vexing PR challenge, not least in the wake of the brutal crackdown that followed the Tiananmen Square protests in 1989.
Under the Trade Act of 1974, China was designated, alongside the Soviet Union and other socialist states, a non-market economy. 

As such, it could only be granted MFN status under certain preconditions. 

In 1980, as relations between the two countries thawed, the U.S. conditionally granted China MFN status. 

That status, however, had to be renewed annually, which gave China’s critics in Congress an annual opportunity to question the wisdom of doing so. 

Throughout the 1980s and 1990s, an alliance of economic nationalists, human-rights activists, and anti-communists sought to deny China MFN status every year. 

And every year that alliance was defeated by those who insisted that by opening the American economy to Chinese imports, the United States would gently nudge Beijing towards economic liberalism, multiparty democracy, and a rejection of hegemonic designs—predictions that haven’t been borne out.
One could argue that the final defeat for China trade hawks came not in 2000, when Congress actually passed PNTR for China, but in 1998, when lawmakers decreed that most-favored-nation status would henceforth be known as “normal trade relations.” 

Once China finally secured its anodyne-sounding PNTR status, which in turn greased the wheels for its accession to the World Trade Organization, it wasn’t long before its economy became irrevocably intertwined with that of the U.S. 

Never let it be said that language doesn’t matter.
I thought of the old PNTR debate in light of two recent developments. 

The first, of course, is Donald Trump’s ongoing effort to strong-arm the Chinese government into importing more U.S. goods and services, with an eye towards reducing America’s bilateral trade deficit. 

For now, I’ll simply say that if Trump’s aim has been to discredit the cause of combating Chinese mercantilism, a cause to which I am favorably disposed, he couldn’t have done a better job. 

But in fairness to the president, his economic diplomacy has been greatly complicated by the legacy of PNTR. 

U.S. multinationals have invested billions of dollars in the expectation that trans-Pacific trade will never face serious disruption. 

So while China’s corporate sector is invested in Beijing’s success in its latest round of brinksmanship, corporate America’s loyalties are divided. 

Even if Trump were pursuing a perfectly-crafted strategy for compelling China to end its trade abuses, that would be a difficult obstacle to overcome.
The second development, which has garnered far less attention, is the spate of recent reports on China’s intensifying repression of its Uighur minority. 

For decades, China’s central government has sought to strengthen its hold on its western territories by, among other things, encouraging the large-scale settlement of members of its Han ethnic majority in East Turkestan, homeland of the mostly Muslim Uighurs, and Tibet, with its distinctive ethno-religious heritage. 

While the fate of Tibet was once a cause célèbre, that of the Uighurs has never garnered much attention in the wider world. 

This partly reflects the extraordinary success of China’s repressive apparatus, which layers mass surveillance, mass incarceration, outright censorship, and artful media manipulation to greatly limit the flow of news and information out of East Turkestan.
Yet it is also an indirect product of PNTR. 

The annual battles over whether or not China merited MFN status naturally brought human rights issues to the fore, and gave voice to champions of the Tibetans and other marginalized, and savagely brutalized, minorities. 

The deepening of economic ties that followed PNTR had the opposite effect—rather than draw attention to all the reasons the U.S. might want to be wary of further entanglement with China, it greatly enriched those who profited from that entanglement. 

Soon research universities across the U.S. were receiving large infusions of capital from investors and entrepreneurs who were deeply interested in preserving amicable relations with China, not to mention a steady and lucrative stream of fee-paying students, many of whom were the scions of China’s nouveau-riche. 

Aspirational mothers and fathers are keen to teach their kids Mandarin, so certain are they that it is the language of the future. 

The Free Tibet T-shirts that were ubiquitous on college campuses in the 1990s, when debates over PNTR were especially fierce, are now nowhere to be seen. 

That the Uighur cause has attracted little American interest is par for the course. 

Calling for a boycott of Israel is, for campus activists of a certain stripe, practically de rigeur. 

Boycotting China, in contrast, verges on the unthinkable. 

For one, it would require feats of self-denial that no red-blooded American consumer could hope to endure.
What might the world have looked like had the U.S. never granted PNTR to China? 

One possibility is that China would have pursued an economic strategy built around fostering indigenous entrepreneurship and bettering the lives of its own workers, as it did in the 1980s. 

Instead, Beijing chose to transfer wealth from ordinary Chinese citizens to its politically powerful export sector, a path made possible by PNTR. 

China might very well have become just as rich by embracing a more balanced and humane approach to development. 

Doing so, however, would have required that its central government surrender a measure of control to its citizens. 

Rather than foster liberalism and openness in China, PNTR did exactly the opposite—creating the conditions for China’s central government to exert tighter control over the Chinese populace.
The United States, meanwhile, would have entered the age of globalization under markedly different terms: Instead of offshoring much of its industrial base to an often-hostile authoritarian power, perhaps it would have deepened its economic ties to democratizing states in Latin America, Asia, and the wider world. 

Trade with China would have proceeded apace, to be sure, but U.S. multinationals wouldn’t have felt quite as secure in locating production facilities in one of the world’s last remaining communist dictatorships, which sees economic development as a weapon in its struggle for power and influence.
There is no going back. 

We can’t rewrite history. 

A bipartisan coalition promised Americans that granting China PNTR would help ensure our prosperity and that China would soon be transformed from foe to friend, and we were foolish enough to believe them. 

The question is what we should do now. 

For starters, I propose admitting that we made a fatal mistake.

Poisoning the World

Inside Chinese food industry frauds and malpractices

Bloomberg News

A bowl of ice cream on a hot day in Shanghai gave American Mitchell Weinberg the worst bout of food poisoning he can recall. 

It also inspired the then-trade consultant to set up Inscatech — a global network of food spies.
In demand by multinational retailers and food producers, Inscatech and its agents scour supply chains around the world hunting for evidence of food industry fraud and malpractice. 

In the eight years since he founded the New York-based firm, Weinberg, 52, says China continues to be a key growth area for fraudsters as well as those developing technologies trying to counter them.
“Statistically we’re uncovering fraud about 70 percent of the time, but in China it’s very close to 100 percent,” he said. 

“It’s pervasive, it’s across food groups, and it’s anything you can possibly imagine.”

Police inspect illegal cooking oil, or "gutter oil," seized during a crackdown in Beijing in Aug. 2010.

While adulteration has been a bugbear of consumers since prehistoric wine was first diluted with saltwater, scandals in China over the past decade — from melamine-laced baby formula, to rat-meat dressed as lamb — have seen the planet’s largest food-producing and consuming nation become a hotbed of corrupted, counterfeit, and contaminated food.
Weinberg’s company is developing molecular markers and genetic fingerprints to help authenticate natural products and sort genuine foodstuffs from the fakes. 

Another approach companies are pursuing uses digital technology to track and record the provenance of food from farm to plate.
“Consumers want to know where products are from,” said Shaun Rein, managing director of China Market Research Group, citing surveys the Shanghai-based consultancy conducted with consumers and supermarket operators.

‘Business Opportunity’
Services that help companies mitigate the reputational risk that food-fraud poses is a “big growth area,” according to Rein. 

“It’s a great business opportunity,” he said. 

“It’s going to be important not just as a China play, but as a global play, because Chinese food companies are becoming part of the whole global supply chain.”
Some of the biggest food companies are backing technology that grew out of the anarchic world of crypto-currencies. 

It’s called blockchain, essentially a shared, cryptographically secure ledger of transactions.
Wal-Mart Stores Inc., the world’s largest retailer, was one of the first to get on board, just completing a trial using blockchain technology to track pork in China, where it has more than 400 stores. 

The time taken to track the meat’s supply chain was cut from 26 hours to just seconds using blockchain, and the scope of the project is being widened to other products, said Frank Yiannas, Wal-Mart’s vice president for food safety, in an interview Thursday.
Shanghai-based Zhong An Information and Technology Services Co. said in June it will use the technology to track chickens from the coop to the processing facility and on to the market or store.

Blockchain Pilot
Alibaba Group Holding Ltd., too, sees the potential for the eight-year-old technology to provide greater product integrity across its platforms, which accounted for more then 75 percent of China’s online retail sales in 2015. 

The planned blockchain project will involve the Chinese e-commerce behemoth working with food suppliers in Australia and New Zealand, as well as Australia Post and auditors PricewaterhouseCoopers LLP.
“Food fraud is a serious global issue,” said Maggie Zhou, managing director for Alibaba in Australia and New Zealand. 

“This project is the first step in creating a globally respected framework that protects the reputation of food merchants and gives consumers further confidence to purchase food online.”

Fraud costs the global food industry as much as $40 billion annually, according to John Spink, director of Michigan State University’s Food Fraud Initiative. 

In China, where the 2008 melamine milk crisis resulted in the death of at least six babies, it’s a hot-button issue compounded by the country’s growing appetite for higher quality food and swelling middle class. 

A Pew Research Center study last year found 40 percent of Chinese view food safety as a “very big problem,” up from 12 percent in 2008.

“What we have to do is reinforce our regulations to improve the transparency of the administration, for example information-sharing,” said Yongguan Zhu, director general of the Institute of Urban Environment, part of the state-funded Chinese Academy of Sciences.

Farmers pour away unsold milk in Hebei Province in Sept. 2008.
Zhu says blockchain could play an important role in improving traceability. 

Its database of records can be built like a chain and can’t be broken or re-ordered without disrupting the entire connection.

Last month, Beijing emphasized to authorities the need to be upfront in disclosing food safety issues.

“Food-fraud will always exist,” said Yongning Wu, chief scientist at the government-run China National Center For Food Safety Risk Assessment. 

Wu doesn’t see the problem disappearing.
“We can only develop technology to detect it,” he said. 

“However, fake-food producers will always update their technology to dodge inspections.” 

Wily Scammers
The wiliness of fraudsters is what makes Inscatech’s Weinberg less hopeful about blockchain. 

His firm mainly uses informants on the ground to sniff out where in the production process food-fraud is taking place, and most of his work in China is with western companies that manufacture or source product there.

Counterfeit liquor is tested at the Beijing administration for industry and commerce center in June 2007.

“The problem is the data is only as reliable as the person providing the data,” said Weinberg, who recalls seeing everything in China from synthetic eggs to fake shrimp that still sizzle in a wok. 

“In most supply chains there is one or more ‘unreliable’ data provider. This means blockchain is likely useless for protecting against food-fraud unless every piece of data is scrutinized to be accurate.”

A months-long Bloomberg investigation into the global shrimp trade last year showed how unreliable documentation had fanned an illegal transhipping scheme involving Chinese aquaculture exporters.
But blockchain is “light years” away from the system used by the global food industry today, which relies heavily on paper records, said Yiannas, Wal-Mart’s food safety chief. 

By recording the identity of those who input data into the chain, the technology removes the anonymity that has helped food-fraud to thrive, he said.
The role of humans in recording the supply chain will also diminish, said Yiannas. 

“More and more of these documents will eventually be captured in an automated way.”

China’s Food and Drug Administration didn’t immediately respond to an email requesting comment on the country’s food safety efforts.
Some companies are already bringing traceability to consumers. 

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, started putting QR codes on cans of infant formula in April, enabling buyers to verify the product’s authenticity.

Criminal Factor
The challenges for China — “the factory of the world” — are especially vast because of its size, population, multilayered administrative divisions, and “the willingness of criminals to exploit every corner that they can in order to make money,” said Michael Ellis, who ran Interpol’s trafficking in illicit goods unit until October.
At Interpol, Ellis, a former detective with Scotland Yard in London, was involved in “Opson,” an operation that led to the seizure of more than 10,000 tons and 1 million liters (264,000 gallons) of hazardous fake-food and drinks across more than 50 countries.
Without a presence to fight it, food-fraud globally “will explode,” Ellis said. 

“It will just continue to grow, and who knows where it will lead.”