Economic Scale Comparison: China vs Russia

• Russia's economy: $1.4 trillion GDP (world's 11th largest)
• China's economy: 10x larger than Russia's
• Russia's economy smaller than combined Korean, Brazilian, Australian, Spanish, Mexican, Canadian, Italian, and French economies

Trade Dependencies and Vulnerabilities

• Russia's trade isolation advantages:
  • Largest export market: China (13% of goods)
  • Top 8 buyers: half characterized as allies/friendly nations
  • US imports: only 5% of total
  • China imports: over 1/5 of total
  • Third place: Belarus
• China's trade exposure:
  • 1/6 of exports go to US alone
  • Second place: Hong Kong (re-export hub)
  • Major buyers: Japan, South Korea (non-NATO US allies)
  • NATO allies: Germany, Netherlands, UK
  • Much more dependent on America and allies than Russia

Australia-China Trade War Case Study (2020)

• Background:
  • 2000: 5% of Australian exports to China
  • 2020: 30% (six-fold increase)
  • Australia described as "Chinese satellite state"
• Conflict trigger: China's "14 grievances" including Australia's COVID-19 origins investigation call
• Chinese response: Tariffs, duties, bans, state-organized boycott
• Outcome: Trade rerouting occurred
  • China found new suppliers: Russia, Indonesia
  • Australia found new buyers: India, Japan, South Korea
  • Trade flows reorganized rather than eliminated

Commodity vs Advanced Technology Trade

• Commodities (easily replaceable):
  • Australia: iron, coal, beef
  • China's major imports: oil, iron, soybeans, copper
  • High demand, many possible buyers/sellers
• Advanced technology (irreplaceable):
  • Much more vulnerable to sanctions
  • Harder to find alternative suppliers

China's Critical Technology Dependencies

• Commercial aviation:
  • Domestic C919 plane requires GE (American) parts
  • No buyers outside China
  • Maximum sanctions would cause industry to "crash and burn"
  • Would force 40-year regression
• Semiconductors:
  • Imports semiconductor value equivalent to crude oil imports
  • China buys 1/4 of world's oil by value
  • $22 billion national semiconductor fund (2014) + additional investments
  • Produces only low-to-medium end chips
  • Can make microwaves/TVs but not iPhone 13s
  • Semiconductor deficit growing over time, not shrinking
  • Shortage: 300,000 semiconductor engineers
  • Current rate: 30,000 new workers/year
  • Estimated 10+ years to catch up to 2022 technology
  • Blocked from Dutch lithography machines for smallest chips

China's Geopolitical Positioning

• Xi Jinping's actions:
  • First overseas trip as president: Moscow
  • February 4, 2022: Met Putin (20 days before Ukraine invasion)
  • First in-person meeting with head of state in 2+ years
• Official stance:
  • Refuses to condemn invasion
  • Won't call it "invasion"
  • Claims "does not participate in sanctions against Russia"
• Reality:
  • Quietly participates in sanctions
  • No Chinese bank willing to risk defying American sanctions
• 2021 Anti-sanctions law:
  • Makes it illegal for Chinese nationals to comply with US sanctions against China
  • Driven by "deep-seated fear" not confidence
  • Purpose: increase cost of sanctions to make them less likely

US Economic Exposure to China

• Trade is two-way street:
  • Chinese imports = dollars for US companies
  • Many Chinese imports assembled into final US products
• S&P 500 companies with highest China sales percentage:
  • 9 of top 10: semiconductor/advanced technology suppliers
  • Exception: Wynn Resorts (Macau casinos)
  • Apple: 1/4 of revenue from China (2nd largest public company by market cap)
• US semiconductor industry risk:
  • Complete cutoff would lose $80+ billion
  • 125,000 jobs at risk
  • Loss of economies of scale
  • Would end US dominance in high tech
• Total US exposure:
  • $400 billion at risk in China
  • Decoupling would lower US GDP by estimated 2%
  • Chinese companies generate only 1/3 as much revenue in US

Decoupling Reality and Limitations

• Current trends:
  • US companies diversifying supply chains
  • Huawei, ZTE, Hong Kong officials already sanctioned
  • Decoupling will be slow, difficult, never complete
• Extreme measures limitations:
  • Total trade blockade = act of war
  • Seizing foreign exchange reserves unthinkable
  • Even Russia granted exceptions (fertilizer exports, oil to Europe)

China's Trump Card: Rare Earth Elements

• Strategic advantage:
  • Controls vast majority of rare earth elements
  • Required for smartphones to F-35s
  • 1992 Deng Xiaoping quote: "Middle East has oil, China has rare earths"