There’s a constant drumbeat of news around here about how China got a ten-year jump on battery electric vehicles, using their centralized control mechanisms to boost local enterprise and technology. But the same centralized power also led them to enact a “Zero COVID” policy that made the average Chinese citizen dive under the mattress with all their yuan. Can the rest of the world use this conflict to upend China’s advantage? One banker/economist thinks so.

Plus, we’re gonna look at UAW negotiations because the situation with Ford continues to get fascinating, with Fain tossing a Ford deal in the trash but not, notably, tossing Ford under the bus along with Stellantis and GM.

Countering China’s Advantage Requires A Big Rethink

I’m gonna have to start this dense Friday section with an admission that the article comes from a banker/economist named Adam Posen who is a tad controversial and a person I don’t always agree with. He’s been critical of Bidenomics in a way that’s pretty thoughtful but sort of hand-waves away the deep and entrenched political difficulties. Still, that’s half the fun of being an economist, so it’s hard to be too bothered by this habit.

Plus, when you ignore the extreme difficulties of our political moment, you come up with some real fun ideas.

I agree with Posen that, frankly, we should probably do something (like a carbon tax) that doesn’t reward individual players or technologies but leaves the door open to whatever company or idea can most quickly address the climate crisis. Instead, with the IRA and CHIPS Act, we’ve basically taken the apparent anti-China fervor of one legislator (Sen. Joe Manchin) and the general Bidenesque desire to save a specific type of job (union workers who live in PA, MI, WI, and other swing states) and used to it try to pump money into EVs and American companies.

This is why, overnight, Teslas suddenly became way cheaper and Hyundai EVs way more expensive. If your main objective is to fight climate change then you don’t really care as much if that tech comes from Vietnam or Stuttgart or even Guangzhou. Obviously, America cares a lot. One of the through-lines from the Trump Administration to the Biden Administration is a tough-nosed approach to China.

Does it have to be this way? Posen has column in the recent Foreign Affairs in which he points out, correctly, that China kinda messed up its own economy and it’s not coming back anytime soon:

What has become clear is that the first quarter of 2020, which saw the onset of COVID, was a point of no return for Chinese economic behavior, which began shifting in 2015, when the state extended its control: since then, bank deposits as a share of GDP have risen by an enormous 50 percent and are staying at that high level. Private-sector consumption of durable goods is down by around a third versus early 2015, continuing to decline since reopening rather than reflecting pent-up demand. Private investment is even weaker, down by a historic two-thirds since the first quarter of 2015, including a decrease of 25 percent since the pandemic started. And both these key forms of private-sector investment continue to trend still further downward.

Posen goes on to point out that being an autocratic regime, the deal the Chinese Communist Party has with the average Chinese citizen is “No politics, no problem.” Basically, if you don’t go in the streets and protest you can keep your business, make some money, and mostly do what you want. COVID was a Wile E. Coyote-looking-down-after-running-off-the-cliff moment and the entire country has responded by holding on to its money. Companies have slowed their investment. The whole place is pretty grim right now, economically.

When an entrenched autocratic regime violates the “no politics, no problem” deal, the economic ramifications are pervasive. Faced with uncertainty beyond their control, people try to self-insure. They hold on to their cash; they invest and spend less than they used to, especially on illiquid assets such as automobiles, small business equipment and facilities, and real estate. Their heightened risk aversion and greater precautionary savings act as a drag on growth, rather like what happens in the aftermath of a financial crisis.

Meanwhile, the government’s ability to steer the economy and protect it from macroeconomic shocks diminishes. Since people know that a given policy could be enforced arbitrarily, that it might be expanded one day and reversed the next, they become less responsive to stimulus plans and the like.

So what does this have to do with electric cars and the economy? What if, instead of being extremely protectionist against China and freaking out over Chinese plants in America, we instead welcomed the investment of Chinese businesses and individuals and welcomed the immigration of skilled Chinese scientists? America benefited greatly from the influx of German and Eastern European labor during and after the Second World War. We could do that again. Plus, rather than reward the Chinese government, it could potentially weaken them. Again, from the lengthy article:

The United States should welcome those savings, along with Chinese businesses, investors, students, and workers who leave in search of greener pastures. But current policies, enacted by both the Trump and the Biden administrations, do the opposite. They seek to close off American universities and companies to Chinese students and workers. They restrict inward foreign investment and capital inflows, and they discourage Chinese companies from moving into the U.S. and allied economies, whether for production or for research and development. They reduce downward pressure on the yuan and diminish, in the eyes of ordinary Chinese people, the contrast between their government’s conduct and that of the United States. These policies should be reversed.

Definitely read the whole article because Posen points out that, of course, we need to be careful about national security and restrict certain investments on those grounds. He also says that we don’t necessarily need to reduce trade barriers (though he clearly wishes we would), but can still undermine the Chinese government and economy by welcoming an inflow of money and tech that will only cause China to be more autocratic and thus look, in the eyes of its citizens, worse than it does right now.

This could help the United States close the EV gap by bringing battery tech, scientists, and investment into the American EV industry.

It’s a wild reach and I don’t see the United States suddenly reversing this policy, especially with an election on the horizon. Still, it’s an interesting thought, and I don’t wonder if we’ll start seeing companies with less anti-China political rhetoric take up some of the slack.

Slovakia Welcomes Chinese Investment

What a weird coincidence! It’s almost as if I was waiting for something like this to happen to bring this point up in a TMD. Reuters has an exclusive report that Chinese battery company Gotion High Tech, which is already partnered with VW, is buying a 25% stake in a Slovak battery company called Inobot.

Inobat said the investment will provide it access to Gotion’s research and development, as well as to the Chinese battery maker’s raw materials including lithium, and to cell production and recycling capabilities. This will accelerate the Slovak startup’s path to mass production.

“Through our joint efforts, we aim to develop and manufacture batteries that will find their way into countless households in Europe,” Gotion CEO Li Zhen said in a statement.

It’s also worth noting that Ford and Gotion are teaming up on a Michigan plant soon.

Ford Calls Out Ford In An Extremely Performative Way

I pointed out earlier this week that Ford seemed, more than any other automaker, like it was in the best position to secure a deal with a suddenly more militant United Auto Workers union in the face of a potential strike.

We’ve finally got Ford’s opening offer and it’s a start. You can read the whole thing here. Here are the highlights:

After extensive negotiations, Ford has presented a generous offer on the upcoming contract that would provide our hourly employees with 15% guaranteed combined wage increases and lump sums, and improved benefits over the life of the contract.

Wages (including overtime) and lump sum bonuses for Ford’s UAW-represented hourly workers would increase from $78,000 on average in 2022 to $92,000 in the first year of the contract.

On top of $92,000 in wages and bonuses, workers would receive health care coverage worth $17,500 and other benefits worth an additional $20,500 in the first year. Health care for permanent UAW-represented hourly employees would continue to rank in the top 1% of all employer-sponsored medical plans for lowest employee cost sharing.

Full-time permanent Ford employees at the top wage rate could be paid $98,000 – from wages, cost-of-living adjustment bonus, ratification bonus, profit sharing and overtime – in the first year alone.

The big thing to note here, I think, is that Ford is agreeing to get rid of two-tier wages, which the UAW hates, and is willing to give workers a decent amount of money. The catch with Ford, though, is that a lot of the money is in lump sums instead of regular increases tied to the cost of living.

How did Fein respond? He pulled out the trash can. His favorite prop. Seriously, no one has loved banging on a trash can this much since my beloved World Series Champion 2017 Houston Astros.

“UAW family, I know this update is infur-iur-ating. And believe me when I say I’m fed up,” he railed on his livestream. “And one thing I want to tell you is, this trashcan is overflowing with the bullshit The Big 3 continue to peddle.”

LOL. Is this an act? Does Fein want a strike or is he playing tough just to get his union members to believe him when he ultimately makes a deal? I’m not sure, but something else interesting happened yesterday.

The UAW Files Unfair Labor Practice Charges Against GM And Stellantis… But Not Ford

The other big news from the UAW yesterday was that Fain also said the UAW filed charges against Stellantis and GM for not trying to come to a deal. Who didn’t get thrown under the bus? Ford.

Here’s how those companies responded to The Detroit News:

“Stellantis has not received the filing but is shocked by Mr. Fain’s claims that we have not bargained in good faith. This is a claim with no basis in fact, and we are disappointed to learn that Mr. Fain is more focused on filing frivolous legal charges than on actual bargaining,” spokesperson Jodi Tinson said in a statement. “We will vigorously defend this charge when the time comes, but right now, we are more focused on continuing to bargain in good faith for a new agreement. We will not allow Mr. Fain’s tactics to distract us from that important work to secure the future for our employees.”

Gerald Johnson, GM’s executive vice president of global manufacturing, said in a statement that the Detroit automaker also is “surprised by and strongly refutes the NLRB charge filed by the International UAW. We believe it has no merit and is an insult to the bargaining committees. We have been hyper-focused on negotiating directly and in good faith with the UAW and are making progress. The pace of negotiations is based on how quickly both parties resolve nearly 1,000 UAW demands, including more than 90 presented this week. Our goal remains the same — to achieve an agreement without a disruption that rewards our team members and protects the future of the entire GM team.”

Because Fain is new and because we’re in this extremely weird, post-pandemic economy it’s difficult to know for sure what’s going on here. Fain could really be serious and could see a massive strike as the only way to secure long-term benefits. The companies probably do see a serious existential threat in not being able to compete on wages with basically everyone else. This could be unsolvable and take down the Biden Administration and The Big Three and the economy.

Or, maybe, this is just theater.

The Big Question

Should we follow Posen’s advice and, you know, chill it on the anti-China rhetoric for a bit and welcome in their sweet, sweet yuan? Or is this just another way for an ever-expanding China to reach further into the United States?

Photos: UAW, Gotion/VW, BYD