As investors start looking forward to a new US President next year, they are trying to assess likely policies.
Trump and his MAGA campaign have been reasonably explicit, while the Democrats have been more circumspect, but both look likely to continue the sanctions on China. And that will be a mistake.
Ever since China announced “Made in China 2025” back in 2015, the US has moved to try and squash the competitive threat from China by imposing a vast array of sanctions, mainly under the guise of “National Security”, a catchall that allows the US to circumvent their own rules.
The irony is that, like many bad policies, it is not only failing to achieve its objectives, it is actually having the very opposite effect. US sanctions are a major driver to Chinese innovation and are fuelling a “dual circulation” approach of dominating and growing domestic markets while also pushing heavily into overseas ones, not just the US and Europe, but the whole of the BRICS world. Meanwhile it is US and European consumers that are losing.
The highest profile, and most recent, sanctions have been on Electric Vehicles (EVs), where tariffs have been raised to over 100% on the dubious claims that China is somehow subsidising the manufacturing such that China has gone from nowhere, to becoming the biggest car exporter in the world, with a particular emphasis on EVs.
The reality is that China has invested heavily in robotics, built a powerful eco-system around batteries and is benefiting from significant network effects. It has also allowed thousands of EV start-ups to blossom and most of them to fail, then invested heavily in the winners. Very capitalist.
By contrast, the west continues to subsidise and protect a small range of large incumbent manufacturers. China dominates in renewables mainly because it wants to reduce its dependence on imported energy and, in the case of EVs, to reduce roadside pollution. But it sees renewables as part of a transition to new technologies and will continue to use fossil fuels.
The sanctions mean little to the US, where China has a very small market share, but are very important in Europe, where, under pressure from the US, the EU has also increased tariffs, denying consumers access to affordable EVs at the same time it is trying to force them to buy them.
Similarly with solar panels—also a mandated product by the Climate Change arm of Government—where the low cost solar panels from China are attracting tariffs, and the price is being forced higher by the lobbying side of government. Win-win for China, lose-lose for Europe.
However, the more interesting point is not that the West are penalising their own consumers, but that the sanctions are driving the very innovation that the US fears in the first place and that the rest of the world is being drawn into the low cost, higher efficiency world of BRICS. Western companies might be safe behind their new tariff walls, but they are losing rapidly in the rest of the world. Something their share prices may not be reflecting.
Take Nvidia, the AI darling that has recently been driving the Nasdaq and the S&P500 almost single handedly. It’s a great story, but behind the scenes its market share in China is under threat from Huawei, whose Ascend 910B chip is already better than the fastest one Nvidia is currently allowed to sell in China, such that Nvidia is cutting prices. It is also said to be close in performance to that of the flagship (not allowed in China) A100.
Nine months ago, experts said it would take five to 10 years for China to catch up. Apple is similarly struggling, not just with Huawei, but also Xiaomi, who some have noticed not only make phones and other consumer goods, but also make an EV that looks remarkably similar to the Porsche Taycan, with similar specifications, performance, range and so on. The main difference is that the Xiaomi costs $100,000 less.
Investors spent ages waiting for an Apple Car, then noticed that “the Apple of China” has built one. They may not sell many in Europe, but they are making it very hard for Porsche to sell elsewhere. As for Amazon and Microsoft, they have no presence in China, nor are they likely to get one.
Similarly, with the US having pushed Dutch cutting-edge Chip Equipment manufacturer ASML to restrict sales to China, scientific papers have appeared to show that China has developed something called an ACCEL chip, which uses photons rather than UV lithography to create the chips.
While not suitable for all uses, the ACCEL chip is applicable in things like facial recognition and self-driving cars incorporating AI. And not only is it apparently three thousand times faster than the A100, even more astonishing is that it uses four million times less power.
The latter is particularly important given that AI is seen as a massively power hungry development, but it also brings us to power itself. China is currently transitioning its energy mix aiming at “peak CO2” by 2030, just as Ed Miliband and the Green Leap Forward plan for the UK is for the quixotic target of Net Zero by the same date.
This Chinese transition involves solar and wind, but in places like the Gobi desert and Mongolia, where the sun shines and the wind blows, and not on prime arable land in East Anglia or Dorset.
The Chinese also recognise that in the absence of mass storage technology, these renewables need fossil fuel back up, which is why they continue to build coal fired power stations. They use coal because they have plenty of it and don’t want to import more natural gas than they have to and are also looking at unconventional gas and fracking at the same time as the UK are banning it.
Additionally, China is at the cutting-edge of all the developments around nuclear power, including small modular nuclear, molten salt reactors and the use of Thorium rather than just Uranium. The west is doing little or any of this. In China, all energy options are on the table, whereas in the UK and most of Europe almost none of them are.
The new US administration are likely to continue with these bad policies, the more interesting question will be if they can take the Europeans with them.
