Hongkong

The idea that Germany or Western Europe as a whole should decouple from China—the fastest-growing and most successful economy of the past fifty years—would have occurred to no-one five or six years ago, before Donald Trump launched an economic war against China.

Everything is supposed to be different after Russia invaded Ukraine in February 2022. With irresponsible naivete, the new narrative goes, Germany made itself dependent on Russia with natural gas imports through the Nordstream pipelines, believing in the fairytale of “Wandel durch Handel” – change through trade—before it was taken unawares by the Russian attack.

Now American cajoling is using the Ukraine war to decouple the German economy from its biggest trading partner. The US argues that Taiwan—which belonged to China historically and is recognized as part of China by the US along with most of the world’s nations—faces the prospect of a military invasion by the People’s Republic. On the contrary: China has repeatedly declared that only a declaration of independence by a Taiwanese regime would lead to military intervention.

Washington characterizes China as a dangerous imperialist power, arguing that Taiwan could suffer the same fate as Ukraine. Any kind of dependence on Chinese technology is therefore intolerable, especially when it comes to market-leading firms like Huawei, whose products allegedly are means of espionage and even sabotage.

Those are the risks to European industry, as Washington tells the story. But the biggest risk to Europe is being left behind by the Fourth Industrial Revolution.

Europe is struggling to decide whether it’s riskier to rely on Chinese technology, or to miss a Fourth Industrial Revolution spearheaded by China. The European Commission proposes a hard and expensive break with Chinese technology. A critical test case is the leading role of Chinese firms Huawei and ZTE in Europe’s mobile infrastructure, including 59% of Germany’s network equipment and 72% in the Netherlands.

When the United States first blacklisted Huawei in 2019, the Global Systems for Mobile Communications Association (GSMA) estimated that excluding Chinese equipment would add EUR 55 billion to the cost of installing 5G on the continent, or nearly twice the combined EUR 34 billion annual capital expenditure of the European telecom industry.

The high cost of banning Chinese equipment presents a risk to European industry, which is struggling to justify its enormous investment in 5G. But a graver risk arises from the transformative impact of the new communications technology.

Europe was a bystander in the Third Industrial Revolution—the rise of computers, telecommunications and electronics. Although America invented the signature technologies of Industry 3.0—integrated circuits, optical networks, displays, and the Internet—Europe’s expertise in mechanical, chemical and metallurgical industries ensured its continued leadership in the world economy during the past generation. But Europe can’t afford to miss the Fourth Industrial Revolution.

China has a natural advantage in the Fourth Industrial Revolution, and its leaders are determined to exploit it. As opposed to the Third Industrial Revolution—computation and communications—Industry 4.0 applies AI and high-volume data transmission to the real economy of manufacturing and logistics. With 30% of the world’s manufacturing capacity, China has a vast economic base for experimentation and refinement of real-economy applications of AI.

Productivity in the Information Technology sector has exploded. It cost more than $6 billion to store a terabyte of data in 1980, and less than $60 in 2022, a decline of eight orders of magnitude. Traditional industries, by contrast, show only incremental productivity growth. Manufacturing productivity in the US grew at an average rate of just 2.3% a year between 1988 and 2022.

The magic ingredient that links the exponential growth of IT productivity to the physical economy is Artificial Intelligence, supported by fast and high-volume data transmission. AI portends radical changes in the cost of manufacturing, warehousing and transportation. During the First Industrial Revolution, steam power reduced the cost of cotton fabric by a factor of 300. The changes in the cost structure of manufacturing during the next generation may be equally disruptive.

A point of reference is the world’s largest manufacturing industry, namely automobiles, with $3 billion in global sales. In 1908, Henry Ford defined an era of mass ownership of personal cars by pricing the Model T at $800, then America’s per capita GDP. China now produces EV’s with adequate range and power at around $10,000, that is, at China’s per capita GDP. China’s cheap but full-featured electric cars may dominate the low end of Europe’s auto market. Once China’s best-selling brand, VW’s market share has fallen, with annual sales down to 3.2 million units in 2022 from 4.2 million before COVID.

Not surprisingly, the Fourth Industrial Revolution has begun in the automotive industry, already the world’s largest user of industrial robots. Just three American manufacturing firms, according to my survey have installed private 5G networks in factories – General Motors, Ford, and the tractor giant John Deere.

According to a count by the European 5G Observatory, about sixty factories, ports and airports have built private 5G networks, prominently including automakers like Volkswagen, Porsche, Saab and Toyota.

But in China, according to the telecom giant Huawei, more than 10,000 private 5G networks are already operational, including 6,000 factories. China may not be ahead of Europe by two orders of magnitude, but it probably is a head by one order of magnitude.
In some cases, the first generation of Chinese applications of AI and 5G have lifted productivity between twofold and tenfold. The Port of Tianjin, the world’s first fully-automated facility, now uses 5G-connected smart cranes and autonomous trucks to unload large container ships in 45 minutes rather than the previous eight hours.

China’s first fully-connected 5G manufacturing plant, the Midea appliance factory in Jingzhou Province, opened in 2023 with support from China Mobile and Huawei, used 5G/AI automation to double the plant’s output.

If computation is the engine of AI, data is its fuel, and China is the Saudi Arabia of data, in the celebrated quip of venture capitalist Kai-Fu Lee. With deep supply chains and a vast amount of skilled labor—China graduates five times as many engineers annually as the United States—China has a natural advantage in designing and testing AI-driven manufacturing models. European firms are contributing to, and learning from China’s growing Fourth Industrial Revolution expertise. The industrial robot giant ABB partnered with Huawei in 2019 to create an industrial cloud in China to apply AI to a range of industrial uses.

American sanctions on sale of high-end semiconductors and chip-making equipment to China are an inconvenience, but not an insuperable obstacle for China’s industrial and logistics applications. Although large language models like Chat GPT are best trained on the k

Partnering with China entails risks, to be sure. China may leapfrog foreign firms, as it already has in some parts of the auto sector. But the risk of being left out of the Fourth Industrial Revolution may be much greater.

Equally important for Europe is the application of Fourth Industrial Revolution technology to the Global South. Digital infrastructure is transformational in countries where the majority of the population works in the so-called informal economy, without access to credit or government services, and relegated to low-productivity employment. Broadband connects individuals at the margin of the world economy to the global market, opening opportunities for entrepreneurs at the grass roots of the economy.

For Europeans who fear—with good reason—a tsunami of migrants driven from their homes by poverty and economic instability, Industry 4.0 applications to poor countries offer a prospective solution. China’s total expenditures reached $155 billion in Africa during the past 20 years. In 2021, China offered $40 billion in aid to 44 African countries, compared to $8.5 billion for the United States. China also provides far more private investment than the U.S. Between 2011 and 2020, China’s foreign direct investment in Africa was a cumulative $31 billion, vs. only $5.7 million for the United States.
Europe can’t stabilize Africa’s economy by itself, and the American presence in Africa is minimal. That is why French President Macron invited China’s Premier Li Qiang to address his June 23 conference on development financing in Paris. In the case of Africa and the Middle East, the risks to Europe of not working with China include a demographic disaster that the Europeans cannot avert on their own. Li met with Chancellor Olaf Scholz in Berlin earlier in the week.

It appears that Europe’s mood is shifting away from China risk to China opportunity. The 27 leaders of the European Community meanwhile will “resort to a soft tone on China” at their June 28-29 EU Council summit in Brussels, according to a draft resolution leaked to Politico.

“Despite their different political and economic systems, the European Union and China have a shared interest in pursuing constructive and stable relations, anchored in respect for the rules-based international order, balanced engagement and reciprocity,” the draft reads, adding that Europe “does not intend to decouple or to turn inwards,” or adopt policies “to harm China nor to thwart China’s economic progress and development.”

Uwe Parpart is editor of the online daily Asia Times - with offices in the capitals of Northeast Asia, China and Southeast Asia and in New York. Prior to journalism, he was an Asia strategist at Bank of America in Hong Kong.

David P. Goldman is economics editor of Asia Times and was previously head of fixed income research at Credit Suisse and Bank of America in New York for many years.