CHAPTER SIX
The day China overtook the West
THESE CONTENTIOUS METALS HAVE LAID BARE A BATTLE OF INVENTION. Today, nations are competing for the brightest minds and most innovative start-ups, and want to claim ownership of the most outstanding patents to epitomise their culture and genius. New technologies promote a certain economic and societal model or lens through which to view the world. China knows this. Through its industrial rare metals strategy, it is betting heavily on scientific development, encouraging the creativity of its people, and ultimately cultivating an alternative civilisation model to the tenets dictated by the West.
Chinese recipes for state-directed high-tech
The theoretical foundations of China’s intellectual emulation were laid in 1976, when Deng Xiaoping broke ranks with Mao’s agricultural ambitions to proclaim that, from then on, ‘production power lay in the sciences’.1 Subsequent leaders have perpetuated and deepened this conviction: in 2006, President Hu Jintao stated that ‘science and technology’ form ‘the central thread in the development strategy of China’;2 in 2010, the twelfth Five-Year Plan — a road map tracing the key economic strategies for the 2011–2015 period — identified as priorities seven advanced industries and just as many new-technology horizons;3 five years later, innovation and technological progress formed the centrepiece of the thirteenth Five-Year Plan (2016–2020).4 Thus, concepts that were never central to China’s history had become mantras of the state.5
To consolidate this vision, Beijing drew on the terrific competitive advantages of its economy: cheap labour from the inner provinces; cheap capital, attributable to China’s policy of devaluing the yuan; and the sheer size of the Chinese domestic market that allows significant economies of scale.6 Beijing also accelerated competing companies’ relocation of their production facilities, using partnership as its weapon. Under so-called joint ventures, foreign businesses gained access to the abovementioned competitive advantages in exchange for their technological know-how and, therefore, their patents. Beijing called this absorption and internalising of foreign technologies ‘indigenous innovation’.7
The strategy’s foundations were set out in an industrial policy document published by the Chinese government in 2006.8 An American consultant based in Beijing ironically described the document as ‘full of … good intentions and gilded rhetoric about international cooperation and friendship’.9 The reality is that China’s definition of indigenous innovation is reworking and adjusting imported technologies to develop its own technologies. ‘The plan is considered by many international technology companies as a blueprint for technology theft on a scale the world has never seen,’ a US report published in 2010 asserted. It continued: ‘With these indigenous innovation industrial policies, it is very clear that China has switched from defence to offense.’10
The Chinese applied this very tactic to rare-earth magnets: it enticed — or forced — foreign businesses onto its territory under the guise of joint ventures, and then launched a process of ‘co-innovation’ or ‘re-innovation’. This is how China purloined the technologies of Japanese and US super-magnet manufacturers.
Having reaped the benefits of the invention of others, Beijing built an ecosystem of endogenous creation to ‘move from factory to laboratory’, starting with a variety of research programs that began in the early 1980s.11 One of the most emblematic of these, the ‘863 Program’,12 was launched to make China a leader in seven leading industries, many of which are considered ‘green’.13 The more recent ‘Made in China 2025’ plan saw the creation of some forty industrial innovation hubs across the country. In 2016 alone, the Chinese state spent around US$520 million on research — less than the US, but more than Europe.14
But China has many weaknesses: relative to its population size, it has far fewer researchers than France or the UK; there remain colossal challenges to education; while rural China — a massive part of the country — is sidelined from this momentum. And does the state that has so far managed to combine state interventionism and entrepreneurial freedom run the risk of impeding innovation? More than anywhere else, the success of the innovation ecosystem hinges on administrative efficiency. But achieving this will require the government to commit to painful structural reforms with unclear outcomes. Moreover, the inertia of state-owned enterprises — a formidable part of the energy, telecommunications, and finance sectors — is no longer viable … yet often their leaders are top government officials. How will the government reform these conglomerates without creating tensions and deadlocks within the party?15
Lastly, some of China’s characteristics do little to aid its cause. While an interventionist regime may have allowed a strategic state to flourish, it leaves no room for any deviation. How can an administration that employs two million government agents to restrict online freedom of expression encourage creativity?16 A government that stymies the freedom to criticise — and therefore to think differently — nurtures a potent culture of copying, and turns the lack of inventiveness into a building block.17 ‘The Chinese have the technology, but they are stuck in an organisational and intellectual logic that dates back to 1929,’ concluded a former Western diplomat posted to Beijing.18
Be that as it may, the Chinese authorities are doomed to succeed. Furthermore, innovation, together with the logic of moving upmarket, presents the communist regime with two real, shorter-term challenges:
Astounding technological progress
These factors combined help to explain why the Communist Party has so far been so incredibly successful. ‘I was in China ten years ago. Back then, we spoke about textiles, toys, assemblies for electronic products. Quite frankly, no one could have imagined what happened next,’ admits a European journalist based in Beijing.21 China’s astounding progress in the electronics, aerospace, transport, biology, machine tools, and information technology sectors caught everyone off guard — including the upper realms of the Communist Party.22 In aerospace, China has already put a robot on the moon, and it plans to send an astronaut as well by 2036. In 2018 alone it launched some thirty-seven space missions, dethroning Russia as the US’s main competitor in the new space race.23 Beijing wants to move beyond the demand side of new technologies by trading its status of being a skills consumer for that of a skills supplier.24 In 2018, China filed a staggering 1.4 million patents — more than any other country in the world.25
And while we cry over spilt milk, the Middle Kingdom is picking up the pace: it wants to explore the still-unknown properties of rare earths to develop the applications of the future. Some of its university research programs are advanced enough to both astonish and alarm a researcher at the US Department of Defense: ‘Losing our supply chain was tragic enough. But now China is busy getting a ten-year head start on us. We could easily find ourselves without the intellectual property rights of the applications of the future that matter the most.’ China is openly pursuing this move: ‘We want to use these metals to become the world leader in technology,’ Vivian Wu said.
On 29 September 2010, Kathleen Dahlkemper, a member of the US Congress, said as much in the House of Representatives during China’s embargo of rare earths: ‘The Chinese have taken control of the rare-earths market, and we, the United States, are being overtaken.’ Her words were crucial: Dahlkemper did not say that the US’s technological advance could be reduced or diminished. She did not say that China was catching up with the world’s superpower or that the Chinese would put more and more obstacles in its way. She said that we, the West, were about to be overtaken, as is already the case in a growing number of industrial segments. In fact, Beijing has already designed a stealth fighter jet more advanced than that of its Japanese rivals.26 From 2013 to 2018, the most powerful super computer on the planet came from China.27 This earned China the title of ‘the leading IT power globally’.28 It has also put into orbit the first quantum communications satellite with reputedly impregnable encryption technology.
Above all, China has taken the lead in an impressive range of green tech. It has put its image as a polluting and polluted country behind it to stand out as the world leader in green-energy generation, the number-one manufacturer of photovoltaic systems, the global hydropower giant, the biggest investor in wind power, and the world’s largest market for clean-energy vehicles. China has also started work on a massive network of eco-responsible ‘forest cities’, including Tianjin, Dongtan Caofeidian, Wuhan, Changxindian, Taichung, and Hsinchu. Hundreds of eco-suburbs and cities are springing up. In 2018, over US$300 million29 — one-third of global funding pledged — was invested in these new industries.30
This is despite US president Barack Obama’s warning while announcing the US’s WTO complaint against China’s rare earths policy: ‘Being able to manufacture advanced batteries and hybrid cars in America is too important for us to stand by and do nothing. We’ve got to take control of our energy future and we cannot let that energy industry take root in some other country …’31 The Obama administration looks to have failed in this endeavour: by 2020, China was expected to be producing 80 to 90 per cent of electric vehicle batteries.32 With a monopoly in the production of rare metals and in the green technologies that depend on them, China intends to become the biggest green-tech-producing country. It wants to siphon green jobs away from Europe, Japan, and the US.
Economically speaking, it wants to be the outright winner of the energy and digital transition.
This ambitious ecological shift will also soothe growing tensions in China over environmental matters that have become unacceptable for the population.33 Indeed, anti-pollution protests now number between 30,000 and 50,000 every year. Whether protesting against a petrochemical complex project, such as in the city of Kunming, Yunnan, or opposing the construction of a waste incinerator, such as in Hangzhou, Zhejiang, a middle-class movement aligned with the global NIMBY (Not In My Back Yard) trend is openly rejecting the Chinese growth model. There are close to 8,000 environmental non-profits working to harness, coordinate and unify this groundswell.
‘The old development model cannot last,’ the environmentalist Ma Jun said to me. ‘We cannot continue consuming the way we do. Change is needed.’ This green movement is working to modernise the country’s growth drivers by giving preference to ‘lighter’ services and technology, such as digital technologies that have a smaller environmental impact. This will give China a greener image on the global stage, and even place Beijing as the diplomatic leader of the energy transition, thus filling the void left by the withdrawal of the United States from the Paris Accords.
The diminished West
The Chinese strategy of moving up the rare metals value chain was executed at the expense of the industrial vitality of Europe and the US. It implicitly revealed the vulnerability of the Western economic model, despite its establishment as a benchmark at the end of the Second World War.
A German academic put numbers on this reality: looking only at rare earths since 1965, the capture of the oxide market (the powders refined by Rhône-Poulenc) has led to the transfer of US$4 billion of wealth to China.34 Further up the value chain in the magnet and battery markets, this figure increases tenfold to over US$40 billion. It makes sense: there is greater value for China in capturing the downstream chain.
An Australian researcher applied this reasoning to even more advanced manufacturing sectors, such as the components industry — the assembled parts integrated into a consumer good (such as printed circuit boards, sensors, amplifiers, diodes, LEDs, thermostats, and switches).35 Following the same logic of the higher capital gain inherent in downstream industries, the transfer of wealth from the rest of the world to China is estimated to have increased tenfold to US$400 billion. The researcher then considered equipment manufacturers — the industries that produce parts that are even more sophisticated than components (in the car sector, this includes dashboards and built-in cameras; in IT, computer hard drives; in aerospace, engines and software for commercial aircraft). The amount of transferred wealth is again multiplied by ten to reach US$4,000 billion — twice France’s GDP, or the equivalent of Germany’s GDP.
The annual rare-earths market is worth a derisory US$6.5 billion — 276 times smaller than the oil market.36 But because these small metals are found in just about everything we use, this microscopic industry takes on gigantic proportions. We should also consider that neither of the two studies accounts for the loss of mining industries and end-product manufacturers (such as wind turbines, electric vehicles, and solar panels); the loss of tax revenue for governments; the impact on trade balances; or similar consequences of China moving up the value chain of other rare metals.
And what of the millions of jobs created on one side at the expense of millions lost on the other? In the US, one need only drive an hour out of Chicago along Lake Michigan to the neighbouring state of Indiana to see the disastrous effects of the Chinese battering ram on the US metallurgy industry. In the city of Gary, I met Jim Robinson, a United Steelworkers trade unionist, in his office. His cheerless face told a story of the demise of what was a thriving steel industry until the 1980s. ‘The region was so industrialised that it was called the American Ruhr!’ he recalled, in reference to Europe’s first industrial basin in western Germany. ‘It was in its heyday. No one could have imagined what we were in for.’ For its residents, Gary is ‘a wreck’: entire neighbourhoods have been abandoned; houses — their doors hanging off their hinges — are going for US$50. Every day, men and women flee this industrial ghost town ravaged by unemployment, despair, and insecurity.
Three-quarters of magnet manufacturers in the US are gone. The sector that once numbered 6,000 professionals in its ranks in the US now employs no more than 500.37 Further downstream, Japanese car manufacturer Toyota and its German competitor BMW have also moved some of their operations to China.38 Japanese conglomerate Sumitomo, the German chemical company BASF, and its companion in misfortune, Grace in the US, have taken the same route. ‘Naturally, they were drawn in by China’s cheap labour costs. But the biggest push factor for moving their factories was access to rare earths. Millions of jobs were siphoned,’ Australian academic Dudley Kingsnorth explained.39 By betting on renewables, Beijing precipitated the downfall of a fossil-fuel-based industrial order in which the West excelled in favour of a new energy system in which the West is already lagging behind. In a way, one can understand Donald Trump’s refusal to commit the US to the energy transition: he would rather preserve an oil-energy model that allowed the US to dominate the twentieth century40 than commit to going fully electric — a move he knows could be detrimental to American industry.41
France was not spared either. Arnaud Montebourg, the then minister of industry, reported as much in his op-ed piece published in a major French newspaper: ‘In 2001, a small village in Haute-Garonne, Marignac [in south-western France], painfully witnessed the loss of France’s only magnesium factory to Chinese competition. Many years later, with its monopoly on the magnesium market, China increased its production prices to a level that would have returned the French facility to profitability. In the interim, France had lost hundreds of jobs … in car and aircraft lightweighting.’42
A lack of interest in the metal-refinement industry also led, in 2013, to the liquidation of the French operations of Comptoir Lyon-Alemand, Louyot et Cie — a company specialised in processing precious metals. ‘It was the only French rare metals company,’ a former employee said. ‘Nearly 4,000 jobs were cut in 2002’ in France and globally.43 The jobs at stake in all the high-tech sectors were highly specialised, requiring advanced expertise. ‘They were the “green jobs” that would create a modern and developed economy,’ an American trade unionist added.44 With them went know-how — some of it centuries old — with ramifications for such sectors as defence, electronics, automotive, and, of course, the energies of the future. These human and social dramas add to an already bleak picture: 900,000 industrial jobs lost in France over the last fifteen years, or a 25 per cent drop in the workforce. Over the same period, the secondary sector’s contribution to France’s GDP slid four points.45 The figures are not much better in Europe and the US, where the industry made up 22 per cent and 18 per cent of GDP respectively in 2018, down 11 per cent and 12 per cent since the turn of the century.46
De-industrialisation in the United States and Europe hammered the post-war social contract, stirring up deep social turmoil and creating a hotbed for a franchise of populist parties. Donald Trump succeeded in reaching the White House because he could count on the voters in the de-industrialised states of the Rust Belt. In these swing states, where votes can tip the result of a national election, the Republican candidate vigorously denounced the anti-competitive practices of the Chinese and offshoring, and emphasised the need to protect the US from the industrial war spearheaded by Beijing. The strategy paid off, and Trump won the popular and Electoral College vote in virtually all these states, wiping out the comfortable popular-vote majority enjoyed by Hillary Clinton at the national level.
The West would have felt the pernicious effects of de-industrialisation with or without rare metals. But this economic, social, and political crisis was amplified by China’s monopoly of the resources destined to replace fossil fuels, and by its formidable strategy of absorbing the green industries reliant on rare metals. Moreover, the European model has proven ‘powerless to implement a policy that preserves its economic, technological, and social assets’, writes a Western expert, adding: ‘The survival … of European democracy … may be the last hurdle in the way of the scarcely begun emergence of Chinese industry.’47
When two world views collide
Meanwhile, China’s success has allowed it to foster a model of government that values a long game, unlike the short-sighted decisions of the West that have wrecked most of its industrial policies. This ‘authoritarian capitalism … provides encouragement to other autocratic states’, suggests an Indian academic.48 It has proved it can produce solid growth while guaranteeing political stability, thereby giving substance to the ‘Beijing consensus’ — the idea that the Chinese development model can serve as a benchmark for other emerging countries.49
This consensus opposes another, that of Washington, which has prevailed since the end of the Cold War, and by virtue of which economic growth and democratic progress are necessarily correlated. The war for rare metals — and green jobs — has therefore lifted the lid on a new ideological conflict that pits China’s principles of political organisation against those of the West.
‘A clash of civilisations is a very Western way of seeing things!’ says Zhao Tingyang. Zhao is a philosopher who became famous in China by popularising Tianxia, a concept inspired by the teachings of Confucius, which promotes the search for harmony in international relations.50 He had agreed to talk to me about the future of China’s relationship with the West. He said that the centrifugal force of globalisation ‘pushes us to become more and more interdependent, making conflict — military or economic — an undesirable option for everyone’. In this world at peace, the philosopher predicted, Tianxia will reign; it will be a new era of power led by the globalisation of communication and transport, which will unite a cosmopolitan ruling elite and share Western and Chinese values. ‘I believe this system will create peaceful interactions and better common understanding,’ he said.
At a large table laden with fine food, I met with a Chinese rare metals heavyweight who concurred. ‘The world to come is more open and cooperative,’ he said in between chopstick manoeuvres.51 A corollary to this feel-good statement is the serenity of China’s ‘panda diplomacy’, which involves gifting specimens of these giant folivores to countries with which it wishes to forge diplomatic ties. You would have to be heartless not to fawn over online videos of China’s favourite furry mammal rolling about and eating bamboo. With the panda, China seeks to convey the idea of a peaceful emergence, at all costs.
It’s tempting to believe in this, as it is to dream of an ethnically diverse world at peace. Except when the game is given away by one detail: by acquiring a strategic rare-earths company in Indiana from under America’s nose, China has whipped the covers off its impressive military program.