Article 43

 

Thursday, October 04, 2018

Bad Moon Rising Part 74 - Infrastructure Cyber-Threat III

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The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. Companies

The attack by Chinese spies reached almost 30 U.S. companies, including Amazon and Apple, by compromising Americas technology supply chain, according to extensive interviews with government and corporate sources.

By Jordan Robertson and Michael Riley
Bloomberg
October 4,2018

In 2015, Amazon.com Inc. began quietly evaluating a startup called Elemental Technologies, a potential acquisition to help with a major expansion of its streaming video service, known today as Amazon Prime Video. Based in Portland, Ore., Elemental made software for compressing massive video files and formatting them for different devices. Its technology had helped stream the Olympic Games online, communicate with the International Space Station, and funnel drone footage to the Central Intelligence Agency. Elemental’s national security contracts weren’t the main reason for the proposed acquisition, but they fit nicely with Amazon’s government businesses, such as the highly secure cloud that Amazon Web Services (AWS) was building for the CIA.

To help with due diligence, AWS, which was overseeing the prospective acquisition, hired a third-party company to scrutinize Elemental’s security, according to one person familiar with the process. The first pass uncovered troubling issues, prompting AWS to take a closer look at Elemental’s main product: the expensive servers that customers installed in their networks to handle the video compression. These servers were assembled for Elemental by Super Micro Computer Inc., a San Jose-based company (commonly known as Supermicro) that’s also one of the world’s biggest suppliers of server motherboards, the fiberglass-mounted clusters of chips and capacitors that act as the neurons of data centers large and small. In late spring of 2015, Elementa’s staff boxed up several servers and sent them to Ontario, Canada, for the third-party security company to test, the person says.

Nested on the servers motherboards, the testers found a tiny microchip, not much bigger than a grain of rice, that WASN"T PART OF the boards original design. Amazon reported the discovery to U.S. authorities, sending a shudder through the intelligence community. Elemental’s servers could be found in Department of Defense data centers, the CIA’s drone operations, and the onboard networks of Navy warships. And Elemental was just one of hundreds of Supermicro customers.

During the ensuing top-secret probe, which remains open more than three years later, investigators determined that the chips allowed the attackers to create a stealth doorway into any network that included the altered machines. Multiple people familiar with the matter say investigators found that the chips had been inserted at factories run by manufacturing subcontractors in China.

This attack was SOMETHING GRAVER than the software-based incidents the world has GROWN ACCUSTOMED to seeing. HARDWARE hacks are more difficult to pull off and potentially more devastating, promising the kind of long-term, stealth access that spy agencies are willing to invest millions of dollars and many years to get.

“Having a well-done, nation-state-level hardware implant surface would be like witnessing a unicorn jumping over a rainbow”

There are two ways for spies to alter the guts of computer equipment. One, known as interdiction, consists of manipulating devices as they’re in transit from manufacturer to customer. This approach is favored by U.S. spy agencies, according to documents leaked by former National Security Agency contractor Edward Snowden. The other method involves seeding changes from the very beginning.

One country in particular has an advantage executing this kind of attack: China, which by some estimates makes 75 percent of the worlds mobile phones and 90 percent of its PCs. Still, to actually accomplish a seeding attack would mean developing a deep understanding of a productҒs design, manipulating components at the factory, and ensuring that the doctored devices made it through the global logistics chain to the desired location - a feat akin to throwing a stick in the Yangtze River upstream from Shanghai and ensuring that it washes ashore in Seattle. җHaving a well-done, nation-state-level hardware implant surface would be like witnessing a unicorn jumping over a rainbow, says Joe Grand, a hardware hacker and the founder of Grand Idea Studio Inc. “Hardware is just so far off the radar, its almost treated like black magic.”

But that’s just what U.S. investigators found: The chips had been inserted during the manufacturing process, two officials say, by operatives from a unit of the People’s Liberation Army. In Supermicro, Chinas spies appear to have found a perfect conduit for what U.S. officials now describe as the most significant supply chain attack known to have been carried out against American companies.

One official says investigators found that it eventually affected almost 30 companies, including a major bank, government contractors, and the worldӒs most valuable company, Apple Inc. Apple was an important Supermicro customer and had planned to order more than 30,000 of its servers in two years for a new global network of data centers. Three senior insiders at Apple say that in the summer of 2015, it, too, found malicious chips on Supermicro motherboards. Apple severed ties with Supermicro the following year, for what it described as unrelated reasons.

In emailed statements, Amazon (which announced its acquisition of Elemental in September 2015), Apple, and Supermicro disputed summaries of Bloomberg Businessweeks reporting."It’s untrue that AWS knew about a supply chain compromise, an issue with malicious chips, or hardware modifications when acquiring Elemental,” Amazon wrote. On this we can be very clear: “Apple has never found malicious chips, hardware manipulations or vulnerabilities purposely planted in any server,” Apple wrote. “We remain unaware of any such investigation,” wrote a spokesman for Supermicro, Perry Hayes. The Chinese government didn’t directly address questions about manipulation of Supermicro servers, issuing a statement that read, in part, “Supply chain safety in cyberspace is an issue of common concern, and China is also a victim.” The FBI and the Office of the Director of National Intelligence, representing the CIA and NSA, declined to comment.

The companies’ denials are countered by six current and former senior national security officials, who = in conversations that began during the Obama administration and continued under the Trump administration - detailed the discovery of the chips and the governments investigation. One of those officials and two people inside AWS provided extensive information on how the attack played out at Elemental and Amazon; the official and one of the insiders also described Amazon’s cooperation with the government investigation. In addition to the three Apple insiders, four of the six U.S. officials confirmed that Apple was a victim. In all, 17 people confirmed the manipulation of Supermicros hardware and other elements of the attacks. The sources were granted anonymity because of the sensitive, and in some cases classified, nature of the information.

One government official says China’s goal was long-term access to high-value corporate secrets and sensitive government networks. No consumer data is known to have been stolen.

The ramifications of the attack continue to play out. The Trump administration has made computer and networking hardware, including motherboards, a focus of its latest round of trade sanctions against China, and White House officials have made it clear they think companies will begin shifting their supply chains to other countries as a result. Such a shift might assuage officials who have been warning for years about the security of the supply chain - even though they’ve never disclosed a major reason for their concerns.

Back in 2006, three engineers in Oregon had a clever idea. Demand for mobile video was about to explode, and they predicted that broadcasters would be desperate to transform programs designed to fit TV screens into the various formats needed for viewing on smartphones, laptops, and other devices. To meet the anticipated demand, the engineers started Elemental Technologies, assembling what one former adviser to the company calls a genius team to writecode that would adapt the superfast graphics chips being produced for high-end video-gaming machines. The resulting software dramatically reduced the time it took to process large video files. Elemental then loaded the software onto custom-built servers emblazoned with its leprechaun-green logos.

Elemental servers sold for as much as $100,000 each, at profit margins of as high as 70 percent, according to a former adviser to the company. Two of Elementals biggest early clients were the Mormon church, which used the technology to beam sermons to congregations around the world, and the adult film industry, which did not.

Elemental also started working with American spy agencies. In 2009 the company announced a development partnership with In-Q-Tel Inc., the CIA’s investment arm, a deal that paved the way for Elemental servers to be used in national security missions across the U.S. government. Public documents, including the company’s own promotional materials, show that the servers have been used inside Department of Defense data centers to process drone and surveillance-camera footage, on Navy warships to transmit feeds of airborne missions, and inside government buildings to enable secure videoconferencing. NASA, both houses of Congress, and the Department of Homeland Security have also been customers. This portfolio made Elemental a target for foreign adversaries.

Supermicro had been an obvious choice to build Elemental’s servers. Headquartered north of San Joses airport, up a smoggy stretch of Interstate 880, the company was founded by Charles Liang, a Taiwanese engineer who attended graduate school in Texas and then moved west to start Supermicro with his wife in 1993. Silicon Valley was then embracing outsourcing, forging a pathway from Taiwanese, and later Chinese, factories to American consumers, and Liang added a comforting advantage: Supermicro’s motherboards would be engineered mostly in San Jose, close to the company’s biggest clients, even if the products were manufactured overseas.

Today, Supermicro sells more server motherboards than almost anyone else. It also dominates the $1 billion market for boards used in special-purpose computers, from MRI machines to weapons systems. Its motherboards can be found in made-to-order server setups at banks, hedge funds, cloud computing providers, and web-hosting services, among other places. Supermicro has assembly facilities in California, the Netherlands, and Taiwan, but its motherboardsҒits core productare nearly all manufactured by contractors in China.

The company’s pitch to customers hinges on unmatched customization, made possible by hundreds of full-time engineers and a catalog encompassing more than 600 designs. The majority of its workforce in San Jose is Taiwanese or Chinese, and Mandarin is the preferred language, with hanzi filling the whiteboards, according to six former employees. Chinese pastries are delivered every week, and many routine calls are done twice, once for English-only workers and again in Mandarin. The latter are more productive, according to people whove been on both. These overseas ties, especially the widespread use of Mandarin, would have made it easier for China to gain an understanding of Supermicro’s operations and potentially to infiltrate the company. (A U.S. official says the governments probe is still examining whether spies were planted inside Supermicro or other American companies to aid the attack.)

With more than 900 customers in 100 countries by 2015, Supermicro offered inroads to a bountiful collection of sensitive targets. “Think of Supermicro as the Microsoft of the hardware world,” says a former U.S. intelligence official whoss studied Supermicro and its business model. Attacking Supermicro motherboards is like attacking Windows. It’s like attacking the whole world.

The security of the global technology supply chain had been compromised, even if consumers and most companies didn’t know it yet

Well before evidence of the attack surfaced inside the networks of U.S. companies, American intelligence sources were reporting that Chinas spies had plans to introduce malicious microchips into the supply chain. The sources weren’t specific, according to a person familiar with the information they provided, and millions of motherboards are shipped into the U.S. annually. But in the first half of 2014, a different person briefed on high-level discussions says, intelligence officials went to the White House with something more concrete: China’s >a href="http://article43.com/index.php?/weblog/bad_moon_rising_71/" rel="nofollow">MILITARY</a> was preparing to insert the chips into Supermicro motherboards bound for U.S. companies.

The specificity of the information was remarkable, but so were the challenges it posed. Issuing a broad warning to Supermicro’s customers could have crippled the company, a major American hardware maker, and it wasn’t clear from the intelligence whom the operation was targeting or what its ultimate aims were. Plus, without confirmation that anyone had been attacked, the FBI was limited in how it could respond. The White House requested periodic updates as information came in, the person familiar with the discussions says.

Apple made its discovery of suspicious chips inside Supermicro servers around May 2015, after detecting odd network activity and firmware problems, according to a person familiar with the timeline. Two of the senior Apple insiders say the company reported the incident to the FBI but kept details about what it had detected tightly held, even internally. Government investigators were still chasing clues on their own when Amazon made its discovery and gave them access to sabotaged hardware, according to one U.S. official. This created an invaluable opportunity for intelligence agencies and the FBI - by then running a full investigation led by its cyber- and counterintelligence teams - to see what the chips looked like and how they worked.

The chips on Elemental servers were designed to be as inconspicuous as possible, according to one person who saw a detailed report prepared for Amazon by its third-party security contractor, as well as a second person who saw digital photos and X-ray images of the chips incorporated into a later report prepared by Amazon’s security team. Gray or off-white in color, they looked more like signal conditioning couplers, another common motherboard component, than microchips, and so they were unlikely to be detectable without specialized equipment. Depending on the board model, the chips varied slightly in size, suggesting that the attackers had supplied different factories with different batches.

Officials familiar with the investigation say the primary role of implants such as these is to open doors that other attackers can go through. “Hardware attacks are about access,” as one former senior official puts it. In simplified terms, the implants on Supermicro hardware manipulated the core operating instructions that tell the server what to do as data move across a motherboard, two people familiar with the chips operation say. This happened at a crucial moment, as small bits of the operating system were being stored in the board’s temporary memory en route to the servers central processor, the CPU. The implant was placed on the board in a way that allowed it to effectively edit this information queue, injecting its own code or altering the order of the instructions the CPU was meant to follow. Deviously small changes could create disastrous effects.

Since the implants were small, the amount of code they contained was small as well. But they were capable of doing two very important things: telling the device to communicate with one of several anonymous computers elsewhere on the internet that were loaded with more complex code; and preparing the deviceҒs operating system to accept this new code. The illicit chips could do all this because they were connected to the baseboard management controller, a kind of superchip that administrators use to remotely log in to problematic servers, giving them access to the most sensitive code even on machines that have crashed or are turned off.

This system could let the attackers alter how the device functioned, line by line, however they wanted, leaving no one the wiser. To understand the power that would give them, take this hypothetical example: Somewhere in the Linux operating system, which runs in many servers, is code that authorizes a user by verifying a typed password against a stored encrypted one. An implanted chip can alter part of that code so the server wont check for a passwordҒand presto! A secure machine is open to any and all users. A chip can also steal encryption keys for secure communications, block security updates that would neutralize the attack, and open up new pathways to the internet. Should some anomaly be noticed, it would likely be cast as an unexplained oddity. The hardware opens whatever door it wants, says Joe FitzPatrick, founder of Hardware Security Resources LLC, a company that trains cybersecurity professionals in hardware hacking techniques.

U.S. officials had caught China experimenting with hardware tampering before, but they’d never seen anything of this scale and ambition. The security of the global technology supply chain had been compromised, even if consumers and most companies didn’t know it yet. What remained for investigators to learn was how the attackers had so thoroughly infiltrated Supermicros production processesand how many doors they’d opened into American targets.

Unlike software-based hacks, hardware manipulation creates a real-world trail. Components leave a wake of shipping manifests and invoices. Boards have serial numbers that trace to specific factories. To track the corrupted chips to their source, U.S. intelligence agencies began following Supermicro’s serpentine supply chain in reverse, a person briefed on evidence gathered during the probe says.

As recently as 2016, according to DigiTimes, a news site specializing in supply chain research, Supermicro had three primary manufacturers constructing its motherboards, two headquartered in Taiwan and one in Shanghai. When such suppliers are choked with big orders, they sometimes parcel out work to subcontractors. In order to get further down the trail, U.S. spy agencies drew on the prodigious tools at their disposal. They sifted through communications intercepts, tapped informants in Taiwan and China, even tracked key individuals through their phones, according to the person briefed on evidence gathered during the probe. Eventually, that person says, they traced the malicious chips to four subcontracting factories that had been building Supermicro motherboards for at least two years.

As the agents monitored interactions among Chinese officials, motherboard manufacturers, and middlemen, they glimpsed how the seeding process worked. In some cases, plant managers were approached by people who claimed to represent Supermicro or who held positions suggesting a connection to the government. The middlemen would request changes to the motherboards original designs, initially offering bribes in conjunction with their unusual requests. If that didnҒt work, they threatened factory managers with inspections that could shut down their plants. Once arrangements were in place, the middlemen would organize delivery of the chips to the factories.

The investigators concluded that this intricate scheme was the work of a Peoples Liberation Army unit specializing in hardware attacks, according to two people briefed on its activities. The existence of this group has never been revealed before, but one official says, ҒWeve been tracking these guys for longer than weҒd like to admit. The unit is believed to focus on high-priority targets, including advanced commercial technology and the computers of rival militaries. In past attacks, it targeted the designs for high-performance computer chips and computing systems of large U.S. internet providers

Provided details of Businessweek’s reporting, China’s Ministry of Foreign Affairs sent a statement that said “China is a resolute defender of cybersecurity.” The ministry added that in 2011, China proposed international guarantees on hardware security along with other members of the Shanghai Cooperation Organization, a regional security body. The statement concluded, ӒWe hope parties make less gratuitous accusations and suspicions but conduct more constructive talk and collaboration so that we can work together in building a peaceful, safe, open, cooperative and orderly cyberspace.

The Supermicro attack was on another order entirely from earlier episodes attributed to the PLA. It threatened to have reached a dizzying array of end users, with some vital ones in the mix. Apple, for its part, has used Supermicro hardware in its data centers sporadically for years, but the relationship intensified after 2013, when Apple acquired a startup called Topsy Labs, which created superfast technology for indexing and searching vast troves of internet content. By 2014, the startup was put to work building small data centers in or near major global cities. This project, known internally as Ledbelly, was designed to make the search function for Appleғs voice assistant, Siri, faster, according to the three senior Apple insiders.

Documents seen by Businessweek show that in 2014, Apple planned to order more than 6,000 Supermicro servers for installation in 17 locations, including Amsterdam, Chicago, Hong Kong, Los Angeles, New York, San Jose, Singapore, and Tokyo, plus 4,000 servers for its existing North Carolina and Oregon data centers. Those orders were supposed to double, to 20,000, by 2015. Ledbelly made Apple an important Supermicro customer at the exact same time the PLA was found to be manipulating the vendors hardware.

Project delays and early performance problems meant that around 7,000 Supermicro servers were humming in Appleԓs network by the time the companys security team found the added chips. Because Apple didnԒt, according to a U.S. official, provide government investigators with access to its facilities or the tampered hardware, the extent of the attack there remained outside their view.

American investigators eventually figured out who else had been hit. Since the implanted chips were designed to ping anonymous computers on the internet for further instructions, operatives could hack those computers to identify others whod been affected. Although the investigators couldn’t be sure they’d found every victim, a person familiar with the U.S. probe says they ultimately concluded that the number was almost 30 companies.

That left the question of whom to notify and how. U.S. officials had been warning for years that hardware made by two Chinese telecommunications giants, Huawei Corp. and ZTE Corp., was subject to Chinese government manipulation. (Both Huawei and ZTE have said no such tampering has occurred.) But a similar public alertregarding a U.S. company was out of the question. Instead, officials reached out to a small number of important Supermicro customers. One executive of a large web-hosting company says the message he took away from the exchange was clear: Supermicro’s hardware couldn’t be trusted."ҒThats been the nudge to everyone - get that crap out,” the person says.

Amazon, for its part, began acquisition talks with an Elemental competitor, but according to one person familiar with Amazon’s deliberations, it reversed course in the summer of 2015 after learning that Elemental’s board was nearing a deal with another buyer. Amazon announced its acquisition of Elemental in September 2015, in a transaction whose value one person familiar with the deal places at $350 million. Multiple sources say that Amazon intended to move Elemental’s software to AWSs cloud, whose chips, motherboards, and servers are typically designed in-house and built by factories that Amazon contracts from directly.

A notable exception was AWS’s data centers inside China, which were filled with Supermicro-built servers, according to two people with knowledge of AWSs operations there. Mindful of the Elemental findings, Amazon’s security team conducted its own investigation into AWSs Beijing facilities and found altered motherboards there as well, including more sophisticated designs than theyҒd previously encountered. In one case, the malicious chips were thin enough that theyd been embedded between the layers of fiberglass onto which the other components were attached, according to one person who saw pictures of the chips. That generation of chips was smaller than a sharpened pencil tip, the person says. (Amazon denies that AWS knew of servers found in China containing malicious chips.)

China has long been known to monitor banks, manufacturers, and ordinary citizens on its own soil, and the main customers of AWSҒs China cloud were domestic companies or foreign entities with operations there. Still, the fact that the country appeared to be conducting those operations inside Amazons cloud presented the company with a Gordian knot. Its security team determined that it would be difficult to quietly remove the equipment and that, even if they could devise a way, doing so would alertthe attackers that the chips had been found, according to a person familiar with the companyҒs probe. Instead, the team developed a method of monitoring the chips. In the ensuing months, they detected brief check-in communications between the attackers and the sabotaged servers but didnt see any attempts to remove data. That likely meant either that the attackers were saving the chips for a later operation or that theyҒd infiltrated other parts of the network before the monitoring began. Neither possibility was reassuring.

When in 2016 the Chinese government was about to pass a new cybersecurity law - seen by many outside the country as a pretext to give authorities wider access to sensitive data - Amazon decided to act, the person familiar with the company’s probe says. In August it transferred operational control of its Beijing data center to its local partner, Beijing Sinnet, a move the companies said was needed to comply with the incoming law. The following November, Amazon sold the entire infrastructure to Beijing Sinnet for about $300 million. The person familiar with Amazon’s probe casts the sale as a choice to hack off the diseased limb.

As for Apple, one of the three senior insiders says that in the summer of 2015, a few weeks after it identified the malicious chips, the company started removing all Supermicro servers from its data centers, a process Apple referred to internally as “going to zero.” Every Supermicro server, all 7,000 or so, was replaced in a matter of weeks, the senior insider says. (Apple denies that any servers were removed.) In 2016, Apple informed Supermicro that it was severing their relationship entirelya decision a spokesman for Apple ascribed in response to Businessweek’s questions to an unrelated and relatively minor security incident.

That August, Supermicros CEO, Liang, revealed that the company had lost two major customers. Although he didnҒt name them, one was later identified in news reports as Apple. He blamed competition, but his explanation was vague. When customers asked for lower price, our people did not respond quickly enough,Ғ he said on a conference call with analysts. Hayes, the Supermicro spokesman, says the company has never been notified of the existence of malicious chips on its motherboards by either customers or U.S. law enforcement.

Concurrent with the illicit chips discovery in 2015 and the unfolding investigation, Supermicro has been plagued by an accounting problem, which the company characterizes as an issue related to the timing of certain revenue recognition. After missing two deadlines to file quarterly and annual reports required by regulators, Supermicro was delisted from the Nasdaq on Aug. 23 of this year. It marked an extraordinary stumble for a company whose annual revenue had risen sharply in the previous four years, from a reported $1.5 billion in 2014 to a projected $3.2 billion this year.

One Friday in late September 2015, President Barack Obama and Chinese President Xi Jinping appeared together at the White House for an hourlong press conference headlined by a landmark deal on cybersecurity. After months of negotiations, the U.S. had extracted from China a grand promise: It would no longer support the theft by hackers of U.S. intellectual property to benefit Chinese companies. Left out of those pronouncements, according to a person familiar with discussions among senior officials across the U.S. government, was the White House’s deep concern that China was willing to offer this concession because it was already developing far more advanced and surreptitious forms of hacking founded on its near monopoly of the technology supply chain.

In the weeks after the agreement was announced, the U.S. government quietly raised the alarm with several dozen tech executives and investors at a small, invite-only meeting in McLean, Va., organized by the Pentagon. According to someone who was present, Defense Department officials briefed the technologists on a recent attack and asked them to think about creating commercial products that could detect hardware implants. Attendees werent told the name of the hardware maker involved, but it was clear to at least some in the room that it was Supermicro, the person says.

THE PROBLEM under discussion was’t just technological. It spoke to decisions made decades ago to send advanced production work to Southeast Asia. In the intervening years, low-cost Chinese manufacturing had come to underpin the business models of many of Americas largest technology companies. Early on, Apple, for instance, made many of its most sophisticated electronics domestically. Then in 1992, it closed a state-of-the-art plant for motherboard and computer assembly in Fremont, Calif., and sent much of that work overseas.

Over the decades, the security of the supply chain became an article of faith despite repeated warnings by Western officials. A belief formed that China was unlikely to jeopardize its position as workshop to the world by letting its spies meddle in its factories. That left the decision about where to build commercial systems resting largely on where capacity was greatest and cheapest. “You end up with a classic SATAN’S BARGAIN,” one former U.S. official says. You can have less supply than you want and guarantee it’s secure, or you can have the supply you need, but there will be risk. Every organization has accepted the second proposition.

In the three years since the briefing in McLean, no commercially viable way to detect attacks like the one on Supermicro’s motherboards has emerged - or has looked likely to emerge. Few companies have the resources of Apple and Amazon, and it took some luck even for them to spot the problem. “This stuff is at the cutting edge of the cutting edge, and there is no easy technological solution,” one of the people present in McLean says. “You have to invest in things that the world wants. You cannot invest in things that the world is not ready to accept yet.”

Bloomberg LP has been a Supermicro customer. According to a Bloomberg LP spokesperson, the company has found no evidence to suggest that it has been affected by the hardware issues raised in the article.

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Posted by Elvis on 10/04/18 •
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Thursday, September 27, 2018

Bad Moon Rising Part 73 - Trade Wars

image: yen

While the United States is DYING FROM WITHIN:

Made in China 2025 is a blueprint for transforming the country from a labor-intensive economy that makes toys and clothes into one that engineers advanced products like robots and electric cars. The Trump administration views it as an attempt to steal U.S. technology and control cutting-edge industries.

President Trump started a trade war with China last month.

The only people that are GOING TO GET HURT are you and me.  Now that they don’t have to compete, the American capitalists competing with China will just raise prices

[China] hit back against the US unilateral moves with tit-for-tat tariffs on a long list of US products; on the other hand, China improved its defensive posture by reinforcing its manufacturing sector, which is the backbone of the economy.

US protectionist measures won’t hurt China, but will serve as an external catalyst for China’s industrial upgrading that will make the country a manufacturing superpower.

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Trump’s Tariffs on Chinese Imports Are Actually a Tax on the US Middle Class

By Dan Baker
Truthout
September 24, 2018

In his escalating trade war with China, Donald Trump is acting increasingly like Captain Queeg in the CAINE MUTINY. He has imposed a 10 percent tariff on $200 billion in US imports from China, a rate he proposes to increase to 25 percent at the start of the next year. He also is threatening tariffs on the rest of our imports from China, an additional $300 billion in goods and services.

The straight arithmetic tells us that 10 percent of $200 billion is $20 billion on an annual basis. If this rises to 25 percent next year, the tariffs would be $50 billion. If we add in 10 percent tariffs on another $300 billion, that comes to $30 billion, bringing the total to $80 billion.

While Trump talks as though he thinks his tariffs are taxing China, they aren’t. Most immediately, they are a tax on US households. The full $80 billion would come to a bit less than $600 per household.

It is true that the tariffs will not be passed on dollar for dollar. Some companies will decide it’s better to see their profit market squeezed than pass on the full price increase. This means that Apple and Nike may not raise the price for the iPhone and running shoes by the full amount of the tariff.

In that case, a portion of the tax will be borne by US companies manufacturing items in China. This is fine, since corporate profits are near record highs as a share of GDP. But, this is still not taxing China.

There will be some spillovers where either Chinese companies importing items to the US end up with less money or Chinese suppliers selling to US companies are forced to accept less money, but there is little doubt that the bulk of the tariff will be borne by the US. Trump is effectively proposing one of the largest tax increases on the middle class in memory.

The higher taxes paid by households in the United States could still be a reasonable policy if Trump were pursuing an important and winnable goal. In fact, during his campaign he repeatedly attacked China’s currency policy and insisted he would make changing it a top priority from the first day he was in office.

China’s currency policy is an important issue. If the dollar were 20 percent lower against the Chinese currency, it would go far toward reducing our trade deficit. As a first approximation, it would make Chinese goods and services 20 percent more expensive for people in the United States, and US goods and services 20 percent cheaper for people living in China.

This sort of change in currency values is also likely a winnable goal. China had been raising the value of its currency relative to the dollar over the last decade. This is one reason its trade surplus has fallen so sharply from almost 10 percent of GDP in 2007 to just over 1 percent of GDP today.

Presumably, Trump could have gotten China to agree to a schedule of further increases in the value of the Chinese yuan. China would certainly not agree to a big jump in the value of its currency overnight, which would be disruptive to its economy, but a substantial rise over a period of two to three years would be very manageable for China.

But currency seems to have disappeared from Trump’s agenda now that he is actually in a position to do something. Instead, we get a set of poorly specified and frequently shifting complaints against China.

Trade is not about one country winning and another country losing. Interests within some countries win, while others lose. When millions of manufacturing workers in the Midwest were losing their jobs in the last decade, US corporations that were importing items made in China - like General Motors, Apple, and Walmart were winning. This simple and obvious point seems completely lost on Donald Trump, who seems to think that the balance of imports and exports is a scorecard.

This Trumpian confusion must be kept front and center in understanding Trumps trade wars. While lowering the value of the dollar and reducing the trade deficit in manufactured goods would benefit most US workers, the items on Trump’s agenda largely go the other way. He continually rants about China stealing our intellectual property.

If China pays Microsoft, Pfizer and Boeing more money for their intellectual property claims, it will lead to a larger trade deficit on manufactured goods. That story is good for people who own lots of stock in these companies, but bad news for most everyone else.

So in Donald Trump’s trade war with China, most of us can look forward to paying higher taxes. If he somehow manages to win (and not just claim victory over nothing), it will mean more money for shareholders and fewer US jobs in manufacturing. This is not a good story for the country’s workers.

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Posted by Elvis on 09/27/18 •
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Monday, September 10, 2018

Fake Recovery

image labor force participation september 2018

See that chart above?  It’s not a pretty picture.

It’s the CIVILIAN LABOR FORCE PARTICIPATION RATE that shows in one easy-to-understand graph the PERCENTAGE OF AMERICAN adults that are working.

Remember the JOBLESS RECOVERY they pushed on us five years ago? What the heck is THAT supposed to be?

Today we may as well call it a fake recovery, because there still is no recovery, yet it’s all over the news that the economy has NEVER BEEN BETTER.

It’s more of the SAME FICTION I’ve been reading and reporting about for years - PROPAGANDA AMERICAN STYLE.

Check out some of the headlines.

PRESIDENT TRUMP:

“Great financial numbers being announced on an almost daily basis. Economy has never been better, jobs at best point in history.”

U.S. DEPARTMENT OF LABOR:

“The August jobs report shows continued, strong job growth with 201,000 jobs created and an unemployment rate holding at 3.9%.  More than 4 million jobs have been created since November 2016.  Since 1970, the unemployment rate has registered below 4% just nine times; four of those months have been recorded during 2018.

“It is remarkable to see steady positive news regarding job growth month after month.”

REUTERS:

The number of Americans filing new claims for unemployment aid fell to near a 49-year low last week and private payrolls rose steadily in August, pointing to sustained labor market strength that should continue to underpin economic growth.

WALL STREET JOURNAL:

Now, recruiters say, the tightest job market in decades has left employers looking to tamp down hiring costs with three options: Offer more money upfront, LOWER THEIR STANDARDS or retrain current staff in coding, procurement or other necessary skills.

Let’s look at some more charts BEFORE WE BELIEVE the DOL and Reuters news reports.

LONG-TERM UNEMPLOYMENT is still over 20% of the total unemployed - that’s almost one in four unemployed that’s jobless over 27 weeks.  (Soon after that they STOP LOOKING, AREN’T COUNTED as unemployed anymore, and move into the NOT IN THE LABOR FORCE category)

image: BLS table a-12 September 2018

The LONG-TERM UNEMPLOYMENT rate is easy to calculate because the BLS breaks down the statistics each month in the EMPLOYMENT SITUATION SUMMARY. The number of people who have been unemployed for 27 weeks or more is in TABLE A-12. It also calculates the percentage they make up of the total unemployed. This table gives you the data for the previous three months, seasonally adjusted. It also allows you to compare the last two months and year-over-year, not seasonally adjusted.
- Failure, March 15, 2018

How many are out of work (and counted as not in the labor force) that want a job?

More than 20 years ago:

image: bls chart people that want full time job

IF JOBS WERE SO PLENTIFUL - long-term unemployment wouldn’t even be a vocabulary word, never mind over 20%, and employers would be banging on our doors begging us to work for them.

We need over 200k new jobs per month to keep up with POPULATION GROWTH. And DECENT jobs to be reasonably happy.

image: gig economy

I didn’t even touch on the GIG ECONOMY that’s turning us all into SERFS - on track to be near HALF OUR WORKFORCE in a few years.

As usual - the complete story isn’t what THE NEWS is telling us.

image: no longer counted as unemployed

More Jobs Fictions

By Paul Craig Roberts
September 7, 2018

According to today’s payroll jobs report from the Bureau of Labor Statistics, the economy created 200,000 new jobs in August. These jobs, assuming that they exist, are reported to be in low paid domestic service jobs such as transporting and selling goods, ambulatory health care services, and waiting tables and mixing drinks. There are none in manufacturing or in the “high tech” clean fingernail jobs that neoliberal economists promised the American work force in exchange for letting the industrial and manufacturing jobs go to Asia.

The great mystery is how these jobs can possibly have been created when the Bureau of Labor Statistics HOUSEHOLD DATA (TABLE A) reports that the civilian labor force declined by 469,000 in August from the level in the previous month (July); that employment declined by 423,000 in August from the previous month; and that 692,000 Americans dropped out of the labor force in August. Year over year (August 2017-August 2018) 1,531,000 Americans have left the labor force. This is inconsistent with a booming economy at full employment.

It is not explained how during August the Household Survey found unemployment to rise by 423,000 and the work force to shrink by 692,000 for a total of 1,115,000 missing working people, but the economy created 200,000 new payroll jobs.

According to the financial presstitutes, we have a booming economy and labor shortages stemming from a 3.9% unemployment rate, which if it were real would probably be the lowest in my lifetime. Economists are puzzled why there is no upward pressure on wages when there are not enough workers to go around. All of this mystery is due to the fact that the unemployment rate does NOT COUNT workers who CANNOT FIND JOBS and have dropped out of the work force. If an unemployed person has not looked for a job in the past four weeks, the unemployed person is NOT COUNTED as unemployed.

The EMPLOYMENT SITUATION SUMMARY states that there are 4.4 million workers who are involuntary part-time workers because they cannot find full time jobs. So we have a booming economy in which there are more workers than full time jobs!

The Employment Situation Summary also says that there are 1.4 million workers who are not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

The financial presstitutes are not doing their job. All the financial presstitutes do is to print the headline on the press release that is handed to them - 200,000 new jobs in August.

Consequently, considering all the contradictions in the BLS data and the inaccurate measure of unemployment, we really have no idea of the STATE OF THE ECONOMY.

SOURCE

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Labor has lost much in past four decades: Fed threatens recent gains

By Mark Weisbrot
Tribune News Service
September 8, 2018

The vast majority of Americans who need to work for a living still have a long way to go before they recover what they have lost over the past four decades.

The real inflation-adjusted median wage is only about 10 percent above what it was in 1979.

As economist Dean Baker has noted, we can also see part of this transformation of the United States into a more shamefully unequal society if we look at the distribution of national income between profits and labor.

If not for this redistribution from wages to profits from 2000-2016, the average worker today would have an additional $4,000 per year in annual income.

This historic redistribution of income and wealth was the result of choices made by our political leaders and decision-makers. Among them:

They chose to maintain higher levels of unemployment and interest rates than necessary.

They subjected workers to increasingly harsh international competition while protecting highly paid professionals and CEOs.

They increased protectionism for patent holders, including pharmaceutical companies who charge tens of thousands of dollars for cancer drugs that would sell for a small fraction of these prices in competitive markets.

They changed labor law so that unions bargaining power would be reduced to levels not seen for most of the 20th century.

The Trump administration claims that workers’ long night is over, as evidenced by the current headline unemployment rate of 3.9 percent; and that it is responsible for the historically low unemployment.

But this reduction in unemployment is the continuation of an economic recovery that began under the Obama administration, and is overwhelming the result of policy decisions by the Federal Reserve, not the president or Congress.

Beginning in December 2008, the Fed kept short-term interest rates near zero for seven years and also created trillions of dollars during much of this period to push down long-term rates.

The Fed is the main determinant of the rate of unemployment; but what the Fed giveth, the Fed taketh way. The Fed began to reverse these policies in 2015; it has raised rates twice this year and is expected to raise them two more times before the year is over.

The Fed has had no valid reason for these interest rate hikes. The Fed targets an inflation rate of 2 percent, but its preferred measure of inflation is still at 1.9 percent. And inflation has been below target for almost all of the past 9 years.

Most Americans dont know this, but when the Fed raises interest rates it is intentionally slowing the rate of job creation, in order make unemployment higher than it would otherwise be; and thereby putting downward pressure on wages.

Since World War II, the Fed has caused all of the recessions in the US except for the last two, which were caused by the bursting of the stock market bubble in 2000 and then the housing bubble in 2007.

Most immediately, the Fed threatens to reverse much of the gains in employment that we have made in the current economic expansion, even though real wages did not even grow over the past year.

For the longer term, Trump and his congressional allies have moved to continue the march towards greater inequality: for example with the tax give-away to corporations and the rich and Trump’s selection of anti-labor and right-wing judges for the federal courts, increasing inequality in education, and other policies.

Reversing labors losses over the past four decades will therefore require blocking the Fed from increasing unemployment - or worse, tipping the economy into recession and then undoing some of the structural changes that have created such obscene levels of inequality.

SOURCE

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Trump’s Fake Boom: Growing Despair Amidst Insecure Economic Recovery

By David Rosen
Counterpunch
August 31, 2018

It’s now almost a decade since the last fiscal crisis, launching what was dubbed the “Great Recession.” It wreaked havoc on the U.S. banking system and the housing market, leaving millions of Americans is desperate free-fall.  While many conventional economic indicators suggest that the economy has rebounded, a significant portion of the American public feel stuck, their futures looking bleak.

On August 6th, Pres. Trump tweeted, “Great financial numbers being announced on an almost daily basis. Economy has never been better, jobs at best point in history.” So, with such good news, why do an increasing number of Americans feel un-well?

Two recent studies point to the deepening despair shared by many Americans and unacknowledged by Trump and the mainstream media. The Federal Reserve study, REPORT IN THE ECONOMIC WELL_BEING OF U.S. HOUSEHOLDS IN 2017 [LOCAL COPY] and the GALLUP-SHARECARE WELL-BEING INDEX - detail this despair in complementary ways.  Taken together, they paint a disturbing picture of the suffering being endured by Americans, especially the nations most vulnerable.

While Trump seeks to dismiss all challenges to his empty bluster as “fake news,” there is a growing perception among Americans that the once proudly proclaimed “American Dream is over.” This perception is shared by critics of capitalism and some mainstream pundits as well as (incoherently) by those who back Trump and his call to “make America great again” - with its emphasis on “again,” a wish for what was once but nevermore.

The Federal Reserve report champions the slow economic recovery that’s marked the decade following the Great Recession. It notes that “fewer people are finding it difficult to get by, or just getting by, then was the case five years ago.  This decline in financial hardship is consistent with the decline in the national unemployment rate over this period.”

However, it warns - two in five Americans don’t have enough savings to cover a $400 emergency expense, and one in four don’t feel they are “at least doing OK financially.” It adds, more than one in five said they weren’t able to pay the current months bills in full, and more than one in four said they skipped necessary medical care last year because they couldn’t afford it.  These are signs of the decline in well-being.

The Gallup-Sharecare study was initiated in 2008 to gauge the overall well-being of adult Americans.  It’s a comprehensive poll involving interviews with more than 160,000 adults from all 50 states.  Its most recent 2017 survey found that between 2016 and 2017, the overall well-being score dropped 0.6 points, to 61.5 from 62.1.  As Gallup declares, “this decline is both statistically significant and meaningfully large.”

The Gallup-Sharecare study identifies a range of factors that make up its well-being metrics, including: experiencing significant worry, little interest or pleasure in doing things, clinical diagnoses of depression, daily physical pain, a decline in having someone who encourages you to be healthy and dissatisfaction with ones standard of living (compared to peers). Other symptoms of decline in well-being include unmanageable debt as well as increased obesity, drug addiction (e.g., opioids) and alcoholism.

Both the Fed and Gallup-Sharecare studies identify those suffering the greatest loss of well-being. The Gallup-Sharecare study notes: “Women have had a substantial 1.1-point drop in their Well-Being Index score, while the score for men is unchanged.”

The Fed adds: “Across the four major racial and ethnic groups, well-being has dropped the most among blacks and Hispanics, although it has also come down to a lesser degree among whites and Asians.” And it warns: “Americans living in lower-income households saw a significant drop in well-being, while their higher-income counterparts saw a smaller decrease, no change or a slight increase.”

The Fed furthers this perception, arguing, “The overall positive trend in self-reported well-being masks some notable differences across groups.” Adding, “More education is associated with greater economic well-being; however, at each education level, blacks and Hispanics are worse off than whites.”

Most revealing, the Fed finds that whites with only a high school degree are more likely to report doing okay financially than blacks or Hispanics with some college education or an associate degree. It concludes, “this pattern, combined with the fact that blacks and Hispanics typically have completed less education, results in substantially lower overall economic well-being for black and Hispanic adults.”

Gallup-Sharecare report makes sadly clear that many of those experiencing the decline in their sense of well-being are supporters of Trump and the Republicans.  Some 21 states witnessed significant declines in their relative well-being, including many Ӕred states strongly supportive of Trump.  Among those suffering the largest declines in the ostensible well-being are Arkansas, Indiana, Louisiana, Mississippi, Nevada, Ohio, Oklahoma, Rhode Island and West Virginia; West Virginia had the lowest level of well-being.

Not asked by either the Fed or Gallup-Sharecare studies was what are the consequences of the loss of well-being?  In particular, whether the decline in well-being breads rage, a deeply-personal sense of revenge toward those who ostensibly ended their American Dream?

SOURCE

Posted by Elvis on 09/10/18 •
Section Dying America • Section Workplace
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Boom Bust

image: dying america

This Story Is A Perfect Example Of The Economic Despair That Most American Families Are Enduring In This “Booming Economy”

By Michael Snyder
The Economic Collapse Blog
September 9, 2018

The middle class in America is being systematically eviscerated right in front of our eyes.  I don’t normally do this, but today I want to share with you an email that was recently sent to me by a reader.  I asked for permission to share her story with all of you, because I think that it will be encouraging for a lot of people out there to understand that they aren’t alone.  In this supposedly booming economy, millions upon millions of American families are barely making it from month to month even though they are working as hard as they possibly can.  But because the mainstream media has been endlessly touting good economic news for the last several years, many of those that are struggling end up believing that something must be wrong with them since they aren’t participating in all of the prosperity.  But of course the truth is that almost all of the economic rewards have been going to the very top of the economic pyramid.  Meanwhile, the middle class CONTINUES TO SHRINK and more families fall into poverty with each passing month.

As you read the email that I am about to share with you, there are several things that I want you to notice.

#1 These people ARE NOT LAZY.  The husband has a good job for the area in which they live, and the wife is working very hard to bring in some online income as she takes care of the kids.  So neither of them would be considered to be unemployed.

#2 They are also very frugal.  They have cut expenses as far as they can, and they are still not able to make ends meet.

#3 They are being crushed by MEDICAL BILLS.  Our HEALTHCARE SYSTEM is a completely and total nightmare, and there are no solutions in sight.  Thanks to the Democrats, soaring health insurance premiums are absolutely crushing middle class families.  And the Republicans have had almost two years to try to fix things, and they have completely failed to get anything done.  Shame on all of them.

#4 Almost everyone that they know is on government assistance, and so far they have resisted the urge to follow suit.  Right now, more than 100 million Americans receive assistance from the government every month, and we are rapidly being transformed into a full-blown socialist nation.

I could say so much more, but let me get right to the email.  This story really touched my heart, and I know that it will touch your heart as well

I and my husband have been reading your blog for five or six years now. So many of your articles sound just like us, and I just wanted to share our situation and perspective as conservative Christians who were actually taught Biblical handling of money. Hopefully it will help you with your writing!

Unlike most millennials, we came into marriage with no debt and a decent savings. We have always lived on a strict budget that usually doesn’t include clothing or eating out; most of the time it doesn’t even include saving! We have never used credit cards. I am very frugal, shopping by what’s on sale, buying in bulk, cooking from scratch, and often doing without. We eat beans more than anything else. We own one vehicle, and half the time have to borrow a car from family because ours breaks down and we don’t have the money to fix it.

WE WORK HARD. My husband works for the county more than full time, and makes quite a bit more than most jobs in our area (minimum wage is 8.25 here), but a third of his check goes straight to taxes. I worked outside the home before we had children, and now have a blog and an online business that make a few hundred a month on average. We also work hard growing a large garden and keeping a few animals for food.

Unfortunately we just can’t make ends meet. We’ve used up all of our savings and haven’t been able to replace it. Family members are giving us $500-$1000 every month. We’ve both been in the hospital a few times for injury and illness, and each time costs thousands of dollars. We spent our tax return this year on medical bills, and still owe thousands to the local hospital.

We see what is going on in this country, and around the world, and we want to be prepared, but instead of getting ahead we just get more and more behind. We’ve already sold everything that was worth anything.

After taxes, the biggest expense that is killing us is insurance. All the types of insurance that are mandatory or just seem like a necessity now health insurance, car insurance, insurance for our mobile home and rental property (required by our landlord), life insurance that is necessary with my husband’s job.

Medical bills are next on the list - WHO CAN AFFORD TO GO TO A DOCTOR NOWADAYS, even with insurance? We do everything possible to avoid doctor visits, even having our last child at home without a midwife even though I am considered high risk. Sometimes emergencies happen though, and going to the doctor just isn’t avoidable.

Pretty much all of our friends and co-workers are getting government help every month. Honestly wed be a lot better off if we did to, but we don’t want to. Its not the government’’s job to take care of everybody.

But really, what are we supposed to do? Is there anything we can do to fix the mess our economy is in? Is there anything people like us can do to get out of this situation, or is it just a hopeless downward spiral that’s going to get worse and worse till we are living under a bridge?

I wrote her back and tried to encourage her.  No matter how bad things seem to be in life, there is always a way to turn things around if you just keep on fighting.

And things could turn around for America too, but we would have to be willing to fundamentally change our ways, and at this moment there are no indications that this will happen any time soon.

I get accused of being all about doom and gloom, but in my latest book I set forth a detailed prescription for what we need to do to turn things around.  And I ran for Congress on a platform of positive solutions, but that message didn’t resonate enough with the voters.

Inexplicably, most Americans seem to like the status quo even though the system is literally coming apart at the seams all around us.

What we have been doing as a nation does not work, it is not sustainable, and it has become exceedingly clear that a day of reckoning is rapidly approaching.  At this point it is so obvious that even the mainstream media is starting to warn of imminent economic disaster.

For years, many of us have been warning what would happen if we did not change our ways, and we have been trying to offer alternative solutions, but most Americans continue to embrace the current system and believe that it will be able to survive despite all of the evidence to the contrary.

In the end, it is probably going to take a complete and utter collapse of the CURRENT SYSTEM before most people will wake up, and that is something that nobody will enjoy.

SOURCE

Posted by Elvis on 09/10/18 •
Section Dying America
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Sunday, September 09, 2018

Bad Moon Rising Part 72 - Made In China 2025

image: china flag

Beijing must prepare counterattack for Washington’s effort to restrain high-tech development

By Hu Weijia
Global Times
September 6, 2018

Washington’s trade dispute with Beijing doesn’t seem to have helped the US stave off its chronic illness of running a trade deficit - at least not yet. The US trade deficit rose to a five-month high in July as exports sank 1 percent from June to $211.08 billion.

As for China, its July exports rose 12.2 percent year-on-year despite fresh US tariffs. China’s economy seems to show more resilience than that of the US amid escalating trade friction. Why? China’s industrial competitiveness may be one reason. In the short term, US consumers can hardly find alternative products to those made in China, so the impact of US tariffs was less than expected.

In the first round of Sino-US trade friction, China’s strategy has been proved to be effective. On the one hand, China hit back against the US’ unilateral moves with tit-for-tat tariffs on a long list of US products; on the other hand, China improved its defensive posture by reinforcing its manufacturing sector, which is the backbone of the economy.

The government is working to make China’s business environment more appealing to manufacturers and looking at fiscal policies that support upgrading its manufacturing sector. China’s huge trade surplus is primarily based on mechanical and electrical products. As long as its manufacturing sector remains competitive, China’s exports won’t tumble. The country is able to handle the pressure of trade tensions if it sticks to its established strategies.

It’s possible that the trade dispute will become a long-lasting conflict. In the second round of trade tensions, China is likely to focus more on manufacturing transformation.

China’s economy is in a critical period in terms of restructuring. Amid escalating trade friction, China has no choice but to pursue a path of independent innovation and overcome the challenges it faces in manufacturing transformation. US protectionist measures won’t hurt China, but will serve as an external catalyst for China’s industrial upgrading that will make the country a manufacturing superpower.

In August, South China’s Guangdong Province released a plan aiming to realize 150 billion yuan ($21.8 billion) worth of investments annually in strategic and emerging industries during the 2018-20 period. China has to be prepared to counterattack US efforts to restrain the rise of China’s high-technology industries.

SOURCE

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How “Made in China 2025” became the real threat in a trade war

By Jessica Meyers
LA Times
April 24, 2018

China unveiled its plan to dominate the world’s most crucial technologies with little international fanfare, another vague, guiding principle in the labyrinth of Communist Party bureaucracy.

Three years later, it’s at the core of a trade dispute with Washington that threatens to upend the global economy.

Made in China 2025 is a blueprint for transforming the country from a labor-intensive economy that makes toys and clothes into one that engineers advanced products like robots and electric cars. The Trump administration views it as an attempt to steal U.S. technology and control cutting-edge industries.

Officials aimed to temper the initiative this month when they announced potential tariffs on $50 billion in goods. But Chinese leaders consider the plan key to the country’s development and refuse to alter its course.

“China is trying to achieve a clear goal and America wants to stop it,” said Andrew Polk, co-founder of Trivium/China, a Beijing research firm. “And that’s where the competition is.”

Here’s what China 2025 is all about and what it means for the trade war:

What’s the objective?

The plan funnels billions into 10 industries, everything from biopharmaceuticals to aerospace and telecom devices. It calls for 70% of related materials and parts to be made domestically within a decade. A separate documentdetails China’s strategy to lead in artificial intelligence by 2030.

Officials modeled Made in China after a German initiative called Industrie 4.0, which envisions greater automation in manufacturing and “intelligent factories” that operate with wireless sensors. They didn’t have much choice. The world’s biggest population is aging and rising wages are sending low-tech factories to other countries.

“The labor supply is decreasing,” said Ashley Qian Wan, China economist for Bloomberg Economics in Beijing. “And that’s going to be a big problem for China.”

Why does China care about this so much?

When President Kennedy vowed in 1961 to send a man to the moon, more than 30 million people in China had just starved to death. People’s Republic founder Mao Tse-tung closed universities for a decade while researchers invented the Internet in Silicon Valley. China sees itself as simply trying to catch up.

The country developed its first bullet train last year, a 248 mph vehicle named Fuxing, or rejuvenation. Engineers also built the country’s first homegrown jetliner, an initial step toward filling Beijing’s crowded airport with planes from China rather than America’s Boeing or Europe’s Airbus.

Officials portray the initiative as transparent and open to foreign companies. They dispel notions that it will monopolize domestic markets. America’s dismissal of the plan reinforces a party narrative that the U.S. seeks to undermine China’s resurgence.

“We have good reasons to question the legality and legitimacy of many actions taken by the U.S. on the grounds of national security, like its plan to impose high tariffs on many industries of Made in China 2025,” Chinese Foreign Ministry spokeswoman Hua Chunying told reporters this month. “Clearly, they are targeting something else.”

Why is the U.S. concerned about it?

The Trump administration frets about the way China aims to achieve its 2025 ambitions. American businesses have long complained about the sacrifices they make to operate in the world’s largest market, including requirements to partner with domestic companies and hand over trade secrets.

Officials fear these techniques will make it impossible for U.S. companies to compete in the world’s most critical fields. They also worry massive Chinese government subsidies will lead to a global glut of products that push down prices and hurt U.S. businesses.

“There are things China listed and said, ‘We’re going to take technology, spend several hundred billion dollars, and dominate the world,’” U.S. Trade Representative Robert Lighthizer told senators at a March hearing. “And these are things that if China dominates the world, it’s bad for America.”

A lengthy U.S. report on China’s intellectual property theft which led to the most recent potential tariffs 0 mentioned the plan more than 100 times. Officials are exploring multiple ways to restrict Chinese investment in key industries. The administration recently banned ZTE, China’s second-largest maker of telecom equipment, from buying American technology.

“Consensus is growing in Washington that the U.S. is in a race with China for technical leadership,” Arthur Kroeber, managing director of Beijing research firm Gavekal Dragonomics, said he recently told clients. And some think “economic cold war is the answer.”

Is the Trump administration right?

President Xi Jinping recently told a room full of global investors that China would further open its economy. Officials last week said they would phase out rules that require car manufacturers like General Motors to find a local partner before opening factories in China. They plan to end foreign ownership requirements on electric vehicle makers this year.

This wouldn’t mark the first time authorities vowed to shed their protectionist shield. The European Union Chamber of Commerce in China complained last year that foreign businesses were suffering from “promise fatigue.”

The problem is China’s high-tech ambitions include “plans to use instruments such as subsidized credit and market access restrictions,” said David Dollar, a senior fellow at the Brookings Institution and former U.S. Treasury official in China. “It makes sense for the U.S. to oppose this practice.”

But Chinese officials see an irony in efforts that try to maintain America’s chokehold on innovation. Hua, the Foreign Ministry spokeswoman, likened the U.S. to a “bully only it can have high tech and others cannot.”

Neither side looks willing to bend. Recent talks to de-escalate the trade dispute reportedly collapsed over the 2025 plan.

“China views the overall system as inherently unfair because it was created by the current dominant power,” Trivium’s Polk said. “America should stop complaining and start designing its own industrial policy to counter China.”

SOURCE

Posted by Elvis on 09/09/18 •
Section Bad Moon Rising
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