How does this inform decisions and risk associated with offshoring manufacturing to China?
And will the COVID-19 outbreak impact the phase one China trade deal?
In this episode, we’ll sit down with Curtis Ellis, policy director with America First Policies. He was also a senior policy advisor with Donald Trump’s 2016 presidential campaign.
This is American Thought Leaders 🇺🇸, and I’m Jan Jekielek.
Jan Jekielek: Curtis Ellis, great to have you back on American Thought Leaders.
Curtis Ellis: It’s wonderful to be back Jan.
Mr. Jekielek: Curtis, a couple of op-eds that you wrote recently caught my eye. Everyone is talking about coronavirus, or Covid-19, as it has recently been named. You looked at it through the lens of economics and disruptions in trade, which is one of your specializations. Tell me more about what you’re seeing.
Mr. Ellis: What I’m seeing is the impact the coronavirus will have on our current system of global supply chains, and what I would call globalism or corporate globalization. There has been a reigning philosophy from the Harvard Business School on down, that every corporation should be stretching out its production lines as far as possible. So we have globe-straddling multinational corporations that take the resources from country A, combine them with resources from country B, assemble them in country C, and then ship them to the markets in country D. This is actually a fairly new development in most of the history of America. You would have manufacturing done within America. They would take the resources from Minnesota, combine them with the coal in Pennsylvania, make steel in Pittsburgh, ship it to Buffalo or Detroit to make the cars that were then sold within the United States and exported to other parts of the world. Next, other countries would say, “if you want to sell American Ford automobiles in Europe, you have to make them in Europe.” So then [Americans] would make cars in Europe to sell in Europe, make cars in Japan to sell in Japan, and make cars in China to sell in China. It makes a lot of sense having production close to the consumers. However, this has transformed into global supply chains, where you marry that with the logistics arrangement of just-in-time inventory management. Companies no longer keep huge warehouses filled with raw materials, sub-components, and finished goods inventories. Everything is delivered to the factory just in time to be used in the production process [abroad], and then shipped to the next stage of production or assembly process just in time, so it keeps the carrying costs at a minimum.
What we are seeing now due to the coronavirus, is that if you have an interruption in the supply chain due to factories being closed in China, people are then unable to get to work because they are quarantined and ordered to stay in their house. We are seeing that automobile factories in South Korea have closed because they can’t get auto parts made in China. Apple computers have not only closed all their stores in China representing 15% of their global income from retail sales, but they have cut shipments of iPhones globally by 10%, because they can’t get the workforce in their plants in China to assemble the iPhones. They have a couple of other products that were supposed to come online and be available for sale around the world later this year, but the delivery date for those have slipped back because their supply chains are now largely dependent on China. There has been a disruption in production in China.
I’m asking to what degree will this affect global supply chains in a number of industries? Will it change the thinking of the management consultant business school types, and question the very premise of having global supply chains and this great logistics management superstructure? We should get back to having decentralized supply chains, and not sole-source suppliers centered in China. Let’s have production closer to the consumer once again, so America would produce more of what is consumed in America. The same would go for other countries as well.
Mr. Jekielek: The situation in Wuhan and in China is becoming more and more dire. So you are saying that this situation exposes the reality of how these chains work, and the risks associated with them?
Mr. Ellis: Right. When I was a child, one of the first aphorisms or old adages I was taught is “don’t put all your eggs in one basket.” But what we’ve seen now is companies like Apple and many other companies have put all their eggs in one basket, and that basket is China. [Companies] would try to sell it as “we are diversifying our supply chain”. But that’s an odd choice of words. They diversified it away from the United States, but what they’ve done is concentrate it in China. As I learned through watching American Thought Leaders, 90% of the ingredients that go into our medicines are sourced from China. This is a beautiful irony or horrible irony. Now that we are in the midst of this health emergency, and should it ever strike the United States, the medicine we need to cure the symptoms is coming from China.
More to the point of the coronavirus is that facemasks, gowns, and protective garments are mostly made in China. The world’s supply of facemasks is made in China. China has now declared these a strategic resource. So if some other country in the world had an outbreak on the scale that China does and needed facemasks, they very likely would not be able to get them because China is the only place they are made.
I believe that if you went to Harvard Business School, and submitted a business plan, and said “my business I’m projecting will be entirely dependent on one supplier for its existence, longevity, and ability to compete,” the professors would say, “that is a very bad idea. Go back to the drawing board.” That is very much the position we are in now. In so many industries, we have seen not only monopolization and concentration of ownership in industries, but we have also seen a concentration of production in one country, which is China. That is really a dangerous position to be in.
Back in the 1930s before World War II broke out, President Roosevelt was concerned about the concentration of ownership of the strategic industries required to produce steel, battleships, tanks, and machine guns. It was all centered around Pittsburgh because that is where the coal, steel, and machining was. All of the heavy industry that would go into defending our country in a military confrontation was consolidated in one man’s hands. Franklin thought that was a dangerous situation to be in. Currently, all of the resources to defend our country against a medical or health emergency are concentrated in China, and that’s not a good place to be.
I would hope that this virus outbreak is settled soon, that there is no great loss of life, and that everyone recovers, and is well. At the same time, I hope that the political and industrial leaders of our country take the lesson that it is not good to be dependent on one country to have so much of our productive capacity and so many of our industries dependent on Communist China as a source for goods and financial well being.
Mr. Jekielek: Especially a country—which we are increasingly realizing even in the popular consciousness—does not have America’s or frankly the free world’s best interests in mind.
Mr. Ellis: That’s right. [China] is a country which it is no exaggeration to say that they are hostile to the values of western democracy. They are the sworn enemy of western democracy. The leadership of the Chinese Communist Party has made it very clear through their propaganda organs, that they see their system of top-down authoritarian techno-surveillance and social credit scoring as a superior system to Western democracy. They see it as a system that the rest of the world should emulate. By their own words, they have positioned themselves as the sworn enemy of Western democracy. So for Western industrial democracies to make themselves dependent on a country like that is absolute foolishness.
I would also say that another thing we have learned from the coronavirus outbreak, is how matters that are considered economic, such as means of production, the investment and return on capital, and the smooth functioning of the world economy or any economic production, rests on a foundation that is outside of purely economic criteria. It rests on a foundation of good governance, open information, and reliability of information. There is a lot of economic doctrine that talks about the rational man theory, and that markets require access to information. I would say that we see now through the coronavirus outbreak, that smooth functioning of the production and economy requires openness of information. There has been a distinct lack of openness of information leading to this outbreak, and then causing disruption of the supply chains and production. So when the masters of industry, the captains of industry and the masters of the universe on Wall Street consider where they are going to invest capital, build factories, and essentially risk the future of their companies, they need to take into account governance. How is the governance in those countries? Are they open about information? Can we count on them to be honest when something bad goes wrong? Or will they be so fearful of ending up in a prison somewhere, that they’re not going to report bad things because the leader might not like to hear it. These factors will directly affect the shareholder value.
Mr. Jekielek: One thing that I noticed in one of your articles was that you said business leaders like certainty.
Mr. Ellis: Of course. Who doesn’t like certainty? That’s why we get married.
Mr. Jekielek: Working with the Chinese Communist Regime clearly introduces a large amount of uncertainty. The dangers of relying on the Chinese may be obvious to me and you, but certainly was not obvious to others. How is it that this happened?
Mr. Ellis: The ability for human beings to deceive and delude themselves is infinite. There is a doctrine that came about 150 years ago called the Cobden Knights of Great Britain. It talked about how countries that trade with each other don’t go to war with each other. If we have open free trade, that will mean the end of armies, empires, and conflict. Lions will lie down with lambs, and cats and dogs will get married. The doctrine, however, turned out to be false. It is a delusion. Much more recently, as you know Jan, the presumption of doing business with China was that as they grow more prosperous, they will become more free and develop like America. People believed that everything was going to be okay, and that China will be like Scandinavia. That has clearly not been the case.
I think every generation thinks it has the answers. But this is a different world now, people are different than they were one-hundred years ago, and we know so much better now. The basic premise of trade theory was written by David Ricardo in 1817, and it was on the principles of taxation and political economy. He has a chapter on trade theory and foreign trade, which is the doctrine of comparative advantage. The example he used was Britain and Portugal. Britain was better at producing textiles because they had a monopoly on the technology, and Portugal was better at producing wine. So rather than Portugal trying to make textiles and wine, they should just concentrate on making wines, and trade wine with Britain to get textiles, instead of Britain planting vineyards and trying to grow wine in the rainy weather of London. The idea is that Portugal should enslave their people in mills, and make all the textiles in the world and trade them for everything else. That worked well, and has been used to justify national division of labor on a global scale. However, David Ricardo says in his book that there is a huge caveat that is overlooked. He says capital will not move. Capital will stay in its country of birth. He says that the owners of capital are very reluctant to send their capital away to a strange government under new laws, of which they have no control over that capital.
Mr. Jekielek: Sounds familiar.
Mr. Ellis: A responsible owner of capital will be very reluctant to invest in another country where [the capital] is not under their direct control, and it is at the mercy of a strange government and new laws. [Ricardo] went further and said that basically, that is a good thing. He said, “I would hate to see that eroded, and I would like to see this affinity for your country of birth to remain in place.” He also says that the owners of capital should be content to earn a little less profit by investing in their own country, rather than seeking greater profit by investing abroad. So hopefully the coronavirus will show the wisdom of David Ricardo, and the owners of capital will realize that it is not a good idea to entrust your capital to a strange government with new laws, or in the case of Communist China, a very strange government with no laws.
Mr. Jekielek: Or no rule of law.
Mr. Ellis: No rule of law, or rather a shaky rule of law. The law is what we say it is today.
Mr. Jekielek: Speaking of this shaky implementation of a lie, you talk a little bit about the curious timing of the phase one trade deal in some of your recent writings, and there is actually a relationship to coronavirus. I thought that was a fascinating observation.
Mr. Ellis: What we have seen now is that Communist China has invoked something called force majeure, an act of god. This is a standard clause inserted into most contracts, saying that in case of an act of god, earthquake, or something unforeseen, this contract is null and void, and you cannot force us to live up to the contract. China has invoked that with some of the liquefied natural gas suppliers, saying “we don’t have the people to unload the tankers in our ports, so we are now declaring the contract null and void.” The French energy suppliers have rejected those claims. A similar clause exists in the phase one-China deal. There is a clause in Article 7.6, chapter seven of the agreement writes that after stipulating 200 million dollars, China will buy 200 billion dollars more in goods and services from the United States over the next two years. In a following chapter, there is a clause that says “in the event of a natural disaster, or other unforeseen event beyond the control of the parties, the party shall consult about living up to this agreement.” Some of the propaganda organs of the Chinese Communist Party have said, “well, of course, the coronavirus makes it difficult for us to comply with these purchase requirements of the deal, and we would hope the United States would understand this”.
Mr. Jekielek: Well, it sounds reasonable.
Mr. Ellis: It does. I’m not disputing that. That is an understandable thing to say, but you have to remember that the first patient was infected with the coronavirus around December 1. The Chinese authorities knew about the infection in Wuhan by the middle of December, and they reported it to the World Health Organization on December 31. They signed the China trade deal with the United States on January 15. My point is that when they signed the deal, they already knew that they had this virus problem. One could argue that they did not know the full dimensions of it, but there are many things we don’t know about China. We do know that they already knew about it, in which case, you could not say the coronavirus was unexpected. I’m just laying out the facts. [The Chinese may] try to say that this was unforeseen, [but] they did know about it when they signed the deal. They already knew they had it, they already told the World Health Organization, when there was the outbreak in Wuhan, they had already arrested doctors who reported it and they already activated their security, communication and information enforcement apparatus to stop the spread of knowledge about the virus, if not the spread of the virus itself.
Mr. Jekielek: So are you suggesting that China was disingenuous in the signing of the trade deal, and that there was an expectation of not complying with it?
Mr. Ellis: I’m just saying that we have to keep all dimensions in mind. Did they have no intention of living up to this agreement when they signed it, and is that why they had that clause in there? I’m not saying that. I don’t know, I’m just asking questions, and we have to be aware. I believe that the phase one trade agreement is a very small part of the story. The story is that worldwide production the world economy is broadly affected, and will be broadly affected in many of its dimensions, either philosophically, or directly by this virus. We are seeing the casinos in Macao have been shut. Some of the big gaming companies headquartered in America that we associate with Las Vegas, such as Wynn Resorts and Las Vegas Sands Resorts, actually make a huge amount of money in Macao, and their stocks are taking a hit. You’ve got these energy companies like Total, that can’t sell their goods in China because nobody can take them off the boat. They can’t offload [their goods]. The same is true for soybeans from Brazil, Copper from Chile, and any number of commodities. Steel production is way down because the factories aren’t taking it. Again, it’s the “just in time” logistics inventory management. Nobody is producing steel and stockpiling it for years at a time. If you’re not going to use it in a few months, you don’t make it.
Mr. Jekielek: There is no rainy day storage.
Mr. Ellis: Exactly. What China is saying is right there in the deal. “If we don’t buy it this year, we’ll buy it next year”. That’s why it’s a two-year deal. They could make that full 200 billion dollar worth of purchases in the 23rd month and still live up to the deal. Right now, they are saying that it is going to be closer to somewhere later than sooner. They never said that they are not going to live up to it, and I am not trying to say they have, but I think it is interesting. It is something to keep in mind.
Mr. Jekielek: What do you make of the fact that by all accounts at the moment, this is becoming a pandemic. It’s heading in that direction, and things are almost certainly going to get worse. And the expectation is, especially given the supply chain relationships that you described, stock markets, economies, and of course people will take a hit. Ultimately, this will take a hit on countries all over the world, but we are not really seeing that at this point, at least in the stock market. Is that what you would expect? What would you make of this?
Mr. Ellis: Well, it’s a matter of timing and how long this goes on for. A business can take it if it is a 15% reduction in sales. For example, 15% of Apple’s retail sales revenue comes from China. But 15% for how long? It’s now February, and this started in January. [Apple will be fine] if it only goes on for a few weeks or a couple of months. Each company in each industry will be [affected] differently. The sales of automobiles in China has dropped tremendously. I believe it is at 20% of what it was. For how long will this go on? If the virus and the outbreak is over by April, everybody is back to work, the supply chains are back to normal, the stores are open, and business is as usual, everything should be okay. Businesses can absorb a 15% loss for a limited amount of time, so it is a matter of how long this goes on for. That’s really the question here, and we all hope for a rapid return to normalcy. Just like what Warren G Harding promised the American people when he ran for president, “a return to normalcy”. We hope for a return to normalcy. I also hope that businesses and the captains of industry have taken the lesson that we cannot gamble everything on concentrating our supply chains in a country with such a shaky rule of law and blackbox opaque lack of transparency, in addition to its horrible human rights practices, which is Communist China.
There is this belief and hope that the virus will peter out and disappear when the warm weather comes. But you have to look at the fact that there are many cases of the virus in Singapore, and it is currently 80 degrees in Singapore. It does not seem like warm weather is necessarily the panacea that is going to cure [the coronavirus], but we don’t know for sure. Again, there are so many unknown questions because the epidemiologists and experts have not been allowed into China, and have not had access to the information they need. How contagious is the virus? Is the contagion a function of people being in a closed space? For example, flu viruses rage during the winter months. An epidemiologist can tell you about the flu virus but I’m not one, I don’t play one on TV and I didn’t sleep in a Holiday Inn last night. Is the contagion a factor of the people being in close quarters during the winter months? Is that why it’s transmitted? Or is the warm weather ambient temperature enough to kill the virus? These are questions we don’t have answers to. It would be wonderful if our people from the CDC were allowed into China, and start asking these questions.
The World Health Organization is another issue that I would like to discuss here. I desperately hope [this crisis] will end soon with minimal loss of life, long term damage, and infections. I feel that another lesson to be taken from this outbreak is that the more virulent contagion the world has to deal with is the Chinese Communist Party itself. Its lack of transparency, and its habitual secrecy. The bureaucrats and the officials desire to cover their behinds, and are afraid to report bad news because they don’t want to invoke the displeasure of the Emperor. That’s what led to this outbreak. That’s what led it to get out of hand in the first place. We’ve seen that the influence of the Chinese Communist Party and its authoritarian governance style is infecting. It goes far beyond the borders of China, similar to the virus itself, as the coronavirus has gone beyond the borders of China.
We see that the malign influence of the Chinese Communist Party is spreading throughout the United Nations. The most glaring example has been a reluctance to criticize China’s imprisonment of perhaps 2 million Uighurs in western China through internment and concentration camps. Another example is what has happened with the World Health Organization. The World Health Organization has been criticized for delaying the declaration of the global health emergency around coronavirus. You have to wonder why. It was only after Dr. Tedros went to Beijing weeks into this outbreak, did he then declare a global health emergency. This was after a big hue and cry on a global scale.
While issuing the [global health emergency], there was a caveat recommending against travel restrictions to and from China. That recommendation against travel restrictions was widely, and I would say wisely, ignored. Many countries said, “we’re not taking any chances here”.
You have to wonder, has “be nice to China” infected the World Health Organization the way it has infected the United Nations, the National Basketball Association, and many companies that depend on China for a chunk of its revenues? The World Health Organization is not widely known, and it is constantly going around the world begging for money and asking member states to contribute to its budget. It now has this very ambitious goal to promote universal health care on a global scale. I have a feeling that this project has become a second priority after the coronavirus, but it still does not have the money for its basic function. They are dependent on the kindness of strangers and the largesse of member states. I am not accusing anybody of anything, but questions have been raised, and there has been widespread criticism.
Mr. Jekielek: What strikes me is that the World Health Organization is in a difficult position with respect to China. China has a population of about 1.4 billion people, and the impact on the rest of the world, from a health perspective, is obviously considerable. But the Chinese Communist Party has a lot of strings attached to access.
Mr. Ellis: It doesn’t have strings attached, it has chains attached.
Mr. Jekielek: Exactly. I’m trying to put myself in the position of someone trying to deal with this kind of reality. It would be extremely difficult.
Mr. Ellis: That’s exactly right. This goes right back to the basic premise that the hope was, by bringing China into the family of nations, that the Chinese Communist Party would start to conform to the norms that have existed. Instead, all of those international institutions are starting to conform to the culture of the Communist Party of China, and that is very disturbing. There is a story on The Wall Street Journal about the widespread criticism of the World Trade Organization. There was a line in the story saying, “the World Trade Organization has never before had to deal with a country with the economic and political clout of China”, and I’m thinking, “yes it has, that country is called the United States of America, and it never faced a problem like this”. It’s the secrecy of the Chinese Communist system that is causing these problems, I would submit.
Mr. Jekielek: Because of this structure where Taiwan is excluded by official doctrine of the World Health Organization, China is responsible for the World Health Organization related functions of Taiwan. So Taiwan is basically dependent on China.
Mr. Ellis: Isn’t that interesting.
Mr. Jekielek: That’s very disturbing, given the lack of transparent information, and in some cases, a structural inability to get it in the first place.
Mr. Ellis: Right. These are not medical considerations. If you were to make the choice simply on medical considerations, then, of course, Taiwan would be allowed. We are talking about global public health. It is time to put politics aside, and consider what is good for the human body. So China uses its investments abroad as a lever to extract political concessions. It has invested 200 million dollars building conference centers in Ethiopia, which is the homeland of the new World Health Organization had headquarters for the Africa Center for Disease Control. They want to build the headquarters for the African Center for Disease Control in Ethiopia. The United States is objecting and telling Ethiopia to not let them do it because the headquarters will be bugged, and the Chinese Communist Party will have access to some of the most virulent pathogens on the face of the earth such as Ebola virus. That type of research will be going on in the building, and you cannot allow that to go forward.
We see that China uses its malign influence to pressure other countries to toe the line. They are using the social credit score system on their own citizens, as well as on foreign companies. They are telling companies, “you better do what the Communist Party wants, or we’re not going to let you do business.” It is exporting its style of authoritarian government around the world.
I see the Communist Party as the more virulent and perhaps more dangerous contagion. It is a pretty safe bet that whatever happens to the coronavirus in April or May of this year when the warm weather comes to Wuhan, the Chinese Communist Party is not going away in May. Though we can always hope.
Mr. Jekielek: Coronavirus is clearly taking a toll on the Chinese people and on the legitimacy of the Chinese Communist Party. It’s really interesting to me that there is this potential silver lining of exposing some of the real challenges that the Communist Party poses to the world, so that people can rethink how these relationships function for the benefit of everybody. That is coming out for me through this interview. What do you see going forward? Where do you think things should go?
Mr. Ellis: I think that is very well put. It has exposed the true nature of the Communist Chinese governance system and the dangers of it. I hope, as I’m sure all of us do, for quick abatement of this disease outbreak. And I hope that leadership in the West will take the lessons and see the dangers of putting all your eggs in one basket held by General Secretary Xi Jinping. The totalitarian, secret, opaque, self-serving, self-dealing system that is interested in one thing, which is to hold on to its own power, and subordinate the economic and medical well being of the world for that one goal. The lesson going forward that I hope people see, is that when you have these increasingly complex, interdependent systems, you are setting the stage for a massive problem on a global scale. You have cybersecurity experts always talking about having an air gap, and how you shouldn’t link all your systems together, because then they are all susceptible to infection by a computer virus.
Mr. Jekielek: They are vulnerable.
Mr. Ellis: Right. So you want to have a circuit breaker. You want to have separation. I think that we need to take that and apply that lesson to an economic scale. We need to have independence. We can’t be totally dependent on a sole source, whether it’s in China, Bella Ruess, or wherever it is. We want to the greatest degree possible to have independence and be responsible for our own well being. This does not mean cutting off other people or not trading. But there is no reason that we should be in a position where we are putting our health, economic, human well being, as well as our values at the mercy of a blatantly hostile regime, whose values are antithetical to our own. To sum it up, I hope that the captains of industry, and the political leaders in America take the lesson that we want to keep the center of gravity here in the United States, so that we can maintain our independence in an interdependent world. And not put all our eggs in the basket of a blatantly hostile regime that is not transparent, not open, and in so many ways antithetical to our own values.
Mr. Jekielek: Curtis Ellis, it was such a pleasure to speak with you again.
Mr. Ellis: Thank you.