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China’s Sweeping Crackdown on Big Tech Is a Wake-Up Call

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China’s Sweeping Crackdown on Big Tech Is a Wake-Up Call

Communism is back baby.
Photo: CHINE NOUVELLE/SIPA/Shutterstock

The tech giants have grown so powerful that they’ve become a threat to the market’s dynamism and the state’s sovereignty. The gig workers have grown so tired of receiving low wages and no benefits that they’re going on strike. Inequality has grown so vast it’s starting to threaten social stability.

The ever-rising costs of health care, housing, and education are depressing middle-class living standards — and thus, birth rates. For high-quality schools, families will need to purchase property in selected jurisdictions. Political unrest is fueled by the disparate economic fortunes of rural and urban areas. Even as the nation faces pressing investment needs and game-changing technological opportunities, the private sector is funneling capital toward the creation of productivity-reducing social-media apps and socially useless financial speculation.

This is a long list of American economic issues. It also includes a number of Chinese economic problems.

There is no parity between the world’s top two powers. The U.S. is a fading hegemon, while China is still a middle-income country; the former’s per-capita GDP remains 6.5 times greater than the latter’s. China faces economic challenges that America doesn’t (i.e. It is possible to escape the so-called “middle-income trap”Transitioning from export-led to consumer-driven growth. The two countries share many of the same economic problems. There is a growing gap between Chinese and American approaches to alleviating these problems. This growing divergence could have devastating implications for U.S. and Chinese relations, as well American domestic policies.

It may not be surprising that a communist state is also the most laissez-faire among all Western liberal democracies, and thus approaches economic management in a different way. China’s tolerance for free enterprise has declined over the past year.

Xi’s ongoing crackdown on big tech is the most conspicuous manifestation of this shift. For decades, Beijing had emulated Silicon Valley’s model of innovation, cultivating tech firms that first mimicked — and then, in some respects, surpassed — Palo Alto’s champions. These companies brought prestige to their country and foreign capital. Like their American models, however, China’s tech giants also subverted regulations, abused consumer data, and engaged in anti-competitive practices. What’s more, some won themselves legions of admirers who had more reverence for their power and services than for those of the state.

Jack Ma, the founder of the ecommerce giant Alibaba. Multi-billionaire English teacher. “Daddy Ma” is an aspirational icon to millions of Chinese citizens and a global symbol of his nation’s entrepreneurial gifts. The celebrity businessman used his megaphone last October to challenge the government’s policies. In an address to the Bund Financial Summit, Ma lambasted the government’s “outdated supervision”Argument that the excessively strict capital requirements of financial markets reflect a lack of confidence in those markets. “pawnshop mentality”This stifles entrepreneurs.

When America’s superstar firms challenge their government’s regulatory sovereignty, Uncle Sam will often rewrite the law books to fit their tastes. Washington can expect to be in a populist mood and will lash out at C-SPAN. A long investigation might also ensue that could result in a small fine.

Ma and Ant Group, his fin-tech firm, were the subject of a Chinese Communist Party’s (CCP) different approach. Days before Ma’s company was set to go public (in the largest IPO in world history), the China Securities Regulatory Commission summoned the billionaire to a meeting. The commission informed Ma that many of his firm’s defining features were illegal. The lending platform will have to adhere to the same capital and leverage restrictions as traditional banks. Ant would be required to update the government on its progress towards achieving its objectives. “rectification.” Any new initiatives would need regulators’ rubber stamp.

Ant’s IPO was abruptly canceled. The company’s value dropped by $70 billion. Ma was almost invisible to the public. In April, the government hit Alibaba, Ant’s parent company, with a $2.8 billion fine for antitrust violations. And Xi Jinping’s big tech crackdown had only just begun.

Ant and Tencent both had large user bases due to the success of their digital-payment apps. However, their valuations were based on the possibility of converting these users into more profitable financial services like asset management or lending. This was forbidden by the government “improper links”Antitrust concerns prevent the interconnection of disparate businesses. To further prevent tech giants from leveraging network effects into market dominance, regulators prohibited firms from blocking links to other companies’ sites and products on their platforms, and ordered Tencent’s music division to forfeit its exclusive streaming contracts.

Beijing introduced new data privacy protections to Chinese consumers. Under the Personal Information Protection Law, tech firms must secure users’ consent before collecting their information and allow users to withdraw that consent at will. The law also requires tech companies to get the government’s approval before transferring Chinese citizens’ data to foreign territories.

Didi, China’s top ride-hailing service, flouted the government’s concern for data protection. The company was asked by regulators to postpone its IPO in America to allow for a thorough investigation into its security network. Didi declined; China’s Uber went public in June. Days later, the government barred new users from signing up for Didi and had it removed from all of the nation’s app stores. The firm’s shares swiftly plummeted.

Meituan, China’s largest food-delivery app, attracted public ire for exploiting its workforce and strong-arming food vendors into exclusivity agreements. The government opened an antitrust investigation into the practice. It ordered the company to pay its workers the minimum wage in their area, give them social insurance and make delivery deadlines more flexible. Meituan lost $60 billion in market value.

Regulators saved their best knives for the edtech sector. China’s cultural commitment to education, combined with the gargantuan gap in living standards between those who test into its meritocratic elite and those who do not, had created a vast market for online tutoring companies. Such startups have raised more than $10 billion since 2020. Last week, Xi’s government prohibited such firms from going public, accepting foreign investment, and … making profits. This means that China has outlawed one its fastest-growing industries in a matter of minutes.

These actions shocked commentators and investors. The CCP’s brand of capitalism had never been Milton Friedman’s. However, it was decades ago that the party displayed these communist characteristics. Most confounding was that Xi’s government wasn’t just interfering in markets to a novel degree but was doing so in a manner that helped U.S. tech firms retain their supremacy over Chinese rivals. Beijing was slaughtering its own “unicorns.”

Surprise at the scope of Xi’s regulatory campaign is understandable. It is more difficult to understand its reasoning.

Xi announced late last year that 2021 would be the start of a new era. “new development phase,”One that would be privileged national security “common prosperity,”social stability and unfettered growth. The government’s crackdown on big tech is consistent with that vision.

The crushing of Ant Group’s IPO may have had a retributive element. The firm had a huge financial empire that was built on the facilitation of easy lending practices, with very little oversight. Even under the Western capitalist paradigm, regulatory intervention was justifiable. China did not exterminate Ant. However, investors still value the small firm at $150 Billion.

The antitrust case against Tencent, Alibaba, and Google was also stronger than that against Amazon and Google. As Martin Chorzempa of the Peterson Institute notes, Tencent had barred users of WeChat from sending links to Alibaba’s e-commerce sites, while both giants had coerced smaller merchants into signing exclusivity deals in order to gain access to their platforms. Chinese regulators took similar countermeasures to those taken by Capitol Hill populists. And much the same can be said of China’s confrontation with its food-delivery industry. Beijing’s antitrust offensive is more exceptional in its swiftness and scale than in its substance.

It is a different matter when the entire online tutoring industry is suddenly liquidated. So profound a contravention of capital’s prerogatives is unimaginable in the United States. But it is of a piece with Xi’s new development model — or, as Bloomberg has described it, his pivot to “progressive authoritarianism.”

China’s biggest problem is the inequality in education. Parents in low-income and rural areas resent their children’s relatively poor prospects for upward mobility. Middle-class parents in major cities, meanwhile, find themselves locked in a kind of arms race, exhausting their household budgets in order to keep pace with their peers’ spending on private tutors. These discontents were capitalized by the edtech industry, sometimes through fraud and misleading advertisements. However, even the most ethical of these companies still funded more education-related out-of-pocket expenditures. And that development doesn’t just threaten the CCP’s near-term political standing, but also China’s long-term economic and geopolitical strength.

Thanks in part to the one-child policy’s legacy, China faces a looming demographic crisis. Absent a surge in birth rates, the country’s population in 2100 will be about half its current size. A relatively small prime-age workforce will be needed to support a huge elderly population. To preempt these headwinds to China’s ascent, the CCP has pivoted from the one-child policy to a relatively pro-natalist stance. Yet it’s lifting of the former rule in 2015 did not yield its desired baby boom. Instead, the nation’s exorbitant child-rearing costs helped keep birth rates low.

The most visible component of a larger push to reduce household education expenditure (and therefore political disquiet, and obstacles to family growth) is the crackdown on tutoring. Nonprofit tutoring firms cannot hold lessons during summer vacations or holidays. The state also has a ban on capital investment in education services. It also plans to reduce education inequality through expanding a pilot program that rotates principals and teachers between schools.

All of this to say, Xi has not sabotaged his tech sector in a suicidal act or self-aggrandizement. The Chinese state subordinates the growth and profitability the digital economy to greater national goals.

This objective appears to be reducing the platform economy to channel capital and talent to high-tech manufacturing. Private investors prefer tech companies that are consumer-facing to industrial production. This is a good thing. Globalization has made it more difficult for manufacturers to compete with each other. However, social media firms are able to survive without much help from network effects. Manufacturing requires large investments in fixed capital and cooperation from large labor forces. With very few resources, dominant internet platforms can make huge profits. As The Wall Street Journal’s Greg Ip notes, Facebook boasts 11 times the market value of the semiconductor manufacturer Micron Technology, even as it employs only 50 percent more people.

But the profit signal isn’t necessarily the wisest steward of economic development. The platform economy generates monopoly rentals for capital owners. However, the social value of its products is often questionable. When Micron Technology gets better at manufacturing semiconductors, a critical input for myriad electronic devices — from smartphones to medical equipment — becomes more abundant. As Facebook becomes more adept at encouraging user engagement, workers are less productive and more depressed.

In a speech last year, Xi made clear that he does not share private capital’s reverence for the digital economy, declaring, “It must be recognized that the real economy is the foundation, and the various manufacturing industries cannot be abandoned.”This is the ethos of state policy. China has not been wagering war on its tech sector if one narrowly defines it. Tencent and Alibaba both have been subject to antitrust regulators’ ire, but Chinese manufacturers of computer chips, batteries for electric cars, and telecommunications equipment have had subsidies and protection.

Whether Xi’s “new development phase”It is not clear that the government will be able to succeed on its own terms. To date, the government’s efforts to promote “common prosperity”Look at it as if you are doing something. Forcing tutoring firms to operate as nonprofits will do little to narrow gaps in educational opportunities or ease middle-class families’ financial burdens. Requiring gig companies to pay the minimum wage will not make China’s income distribution any less of an indictment of its putative Marxism. In the past, shared prosperity was rarely achieved without a strong, independent labor movement. And brutally suppressing such movements is one of the less-touted pillars of Xi’s “progressive authoritarianism.”

This said, the U.S. government’s response to its analogous economic challenges has been similarly inadequate. The Biden administration has ramped up regulatory oversight of Silicon Valley’s titans. But monopolistic tech firms (with unorganized labor forces) still wield outsize power over America’s economy and politics. Meanwhile, America’s education system is riddled with inequality and rent-seeking. Children from wealthy suburbs have better-resourced schools that those in disinvested urban centres. This class divide still maps tightly onto America’s racial one; by some measures, the nation’s schools are more segregated today than they were in 1990. At the same time, extortionary tuition rates have saddled college graduates with unprecedented debt burdens and driven up the typical American family’s education costs by 180 percent since 1995.

American capitalism’s capacity for concentrating income and wealth remains robust. Its ability prudently to direct productive investment is less evident. Over the past 40 years, our private sector’s interest in long-term fixed investment has declined, while its appetite for short-term speculation greatly expanded. Investors will still take on risks with well-educated white entrepreneurs who have disruptive visions to secure monopoly rents. But “the free-enterprise system”It has been unable to properly finance green technologies, antibiotics, or a variety of socially critical ends. It has also perennially failed to generate remunerative employment for millions of the nation’s would-be workers. Instead, we have been operating the U.S. economic system at a far lower level of productivity for decades, leading to millions of unemployment among marginalized workers.

This mode of governance is often fatalistic. Margaret Thatcher famously defended neoliberalism based on the following: “there is no alternative.” If Chinese policy continues in its current direction, however, liberal capitalism will face its most serious challenge since the Soviet Union’s collapse.

The exigencies of “great power competition” have led Washington to emulate aspects of Beijing’s model. The United States Innovation and Competition Act, which passed the Senate on a bipartisan basis earlier this year, invests $250 billion into a de facto American industrial policy: Rather than trying to delegitimize China’s subsidization of its manufacturing sector on free-trade grounds, the U.S. is now subsidizing its own semiconductor industry. At the same time, the Biden administration is pushing for a far more sweeping set of interventions in America’s political economy, in the name of preventing China from “eating our lunch.”

Whether the imperative to compete with China will serve as America’s long-sought “moral equivalent of war” — binding the nation and legitimizing the economic planning necessary for affecting decarbonization and reviving shared prosperity, at no cost to world peace — or whether it will put us on the path to nuclear conflagration (or to a future that lies somewhere between those two extremes) cannot be known.

However, it seems that there is an alternative to business as usual. In the context of ecological crisis and wrenching inequality, “progressive authoritarianism,”Its ostensible ability to instantly redirect economic activity in defiance to moneyed interests is likely to be appealing. If liberal democracies do not prove themselves capable of redressing capitalism’s discontents and climatic warming, the “end of history”American people might not find it a happy life.

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