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Splinternet: The Balkanization Of The Internet.

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Fifty years ago this week, at 10:30 on a warm night at the University of California, Los Angeles, the first email was sent. It was a decidedly local affair. A man sat in front of a teleprinter connected to an early precursor of the internet known as Arpanet and transmitted the message “login” to a colleague in Palo Alto. The system crashed; all that arrived at the Stanford Research Institute, some 350 miles away, was a truncated “lo.”

The network has moved on dramatically from those parochial—and stuttering—origins. Now more than 200 billion emails flow around the world every day. The internet has come to represent the very embodiment of globalization—a postnational public sphere, a virtual world impervious and even hostile to the control of sovereign governments (those “weary giants of flesh and steel,” as the cyberlibertarian activist John Perry Barlow famously put it in his Declaration of the Independence of Cyberspace in 1996).

But things have been changing recently. Nicholas Negroponte, a co-founder of the MIT Media Lab, once said that national law had no place in cyberlaw. That view seems increasingly anachronistic. Across the world, nation-states have been responding to a series of crises on the internet (some real, some overstated) by asserting their authority and claiming various forms of digital sovereignty. A network that once seemed to effortlessly defy regulation is being relentlessly, and often ruthlessly, domesticated.

From firewalls to shutdowns to new data-localization laws, a specter of digital nationalism now hangs over the network. This “territorialization of the internet,” as Scott Malcomson, a technology consultant and author, calls it, is fundamentally changing its character—and perhaps even threatening its continued existence as a unified global infrastructure.

The phenomenon of digital nationalism isn’t entirely new, of course. Authoritarian governments have long sought to rein in the internet. China has been the pioneer. Its Great Firewall, which restricts what people can read and do online, has served as a model for promoting what the country calls “digital sovereignty.” China’s efforts have had a powerful demonstration effect, showing other autocrats that the internet can be effectively controlled. China has also proved that powerful tech multinationals will exchange their stated principles for market access and that limiting online globalization can spur the growth of a vibrant domestic tech industry.

Several countries have built—or are contemplating—domestic networks modeled on the Chinese example. To control contact with the outside world and suppress dissident content, Iran has set up a so-called “halal net,” North Korea has its Kwangmyong network, and earlier this year, Vladimir Putin signed a “sovereign internet bill” that would likewise set up a self-sufficient Runet. The bill also includes a “kill switch” to shut off the global network to Russian users. This is an increasingly common practice. According to the New York Times, at least a quarter of the world’s countries have temporarily shut down the internet over the past four years.

Most assertions of government authority aren’t quite so heavy-handed. Recent years have seen the emergence of a softer form of digital nationalism, evident in the proliferation of so-called data localization (or data protectionism) laws in countries as varied as Vietnam, India, Argentina, Venezuela and Nigeria. Broadly, these laws take two approaches. Some countries require that data on their citizens (or certain types of data, such as medical or financial information) must be physically stored on servers within their countries. Others allow the data to leave their borders but insist on a copy remaining domestically.

Many of the justifications cited for such laws are valid, ranging from privacy concerns to national security. But sometimes the very real failings of the internet, such as hate speech and disinformation, are co-opted to justify laws that give repressive governments a way to monitor online activity and speech. For all of the undeniable faults of the multinational tech companies, a Vietnamese or Cambodian dissident might still prefer their information to be under the control of Google or Facebook rather than their own governments.

According to a recent study by a Brussels think tank, at least 45 countries now have some version of data localization requirements in place. The trend is no longer restricted to authoritarian states. Australia, Canada, New Zealand, South Korea and Switzerland are among the countries that now restrict cross-border flows of data. The European Union’s influential General Data Protection Regulation (GDPR), while not specifically about localization, imposes such stringent obligations that it makes it hard for companies to move data across borders, thus effectively serving as a similar requirement.

The cumulative effect of all these laws is starting to be felt throughout the network. Companies that work with data in multiple jurisdictions are among the hardest hit. Peter Yared, the founder of InCountry, a San Francisco startup that helps businesses comply with international data regulations, says that companies are struggling to understand local requirements, purchase or rent servers, hire staff and deploy new software to comply with a panoply of emerging (and often fluctuating) laws. “People in compliance, information security and technical operations departments are starting to sweat a little bit right now,” he says. “It hasn’t quite hit business leaders yet that they could face large fines or be ejected out of large markets like India.”

Many of these laws are ostensibly designed to rein in Western multinationals, but bigger companies are generally better able to accommodate the resulting uncertainty than smaller ones, which lack the necessary resources. Likewise, developing countries, often at the forefront of digital nationalism, could end up being among its chief victims. Countries such as India and the Philippines have important outsourcing sectors that rely on a unified global information network. Their moves to set up roadblocks on that network could come back to haunt them.

The great risk is that digital nationalism will Balkanize the internet, breaking it up into a patchwork of incompatible and irreconcilable fiefs. To an extent, this scenario, sometimes referred to as Splinternet, is already happening at the level of content and services. China’s population (around a fifth of humanity) does not have access to Wikipedia, Facebook and most of Google. When the EU’s GDPR first came into effect, many American media companies decided that the safest course of action, at least temporarily, was simply to stop offering their content to European consumers.

This Balkanization also could play out in the internet’s underlying core technical infrastructure. Over the last decade, several countries, citing cultural sensitivities, have considered banning or otherwise restricting the .xxx top-level domain name (generally used for pornography), raising the prospect that the internet’s naming system could eventually fracture. Responding to Edward Snowden’s revelations about U.S. spying, Brazil mooted the idea of building a separate undersea cable link to the EU to bypass existing internet infrastructure. And recent debates at the Engineering Task Force, a key internet standards committee, have sometimes been tense. In the lead-up to the introduction last year of a new security standard, representatives who wanted to maintain a backdoor for government agencies clashed with those advocating more robust encryption.

None of these debates has so far managed to shake the underlying foundations of the network, but the prospect of a technical Splinternet is no longer as inconceivable as it once was. In the decades ahead, we may look back wistfully to a time when data could move freely across the globe, without virtual customs or immigration checkpoints.

The internet was never just a technology or an engine of globalization. It was, at its core, an idea. Stefaan Verhulst, a co-founder of the GovLab at New York University (a think tank where I am a senior fellow), argues that, in its early days, the internet was very much a project of classical liberalism, embedded with “ideals like human rights, freedom of expression and free trade. If you care about those notions, then internet fragmentation is a problem.”

Like classical liberalism, the internet may also be a good idea in urgent need of updating. Much as the individualism and freedom of classical liberalism have been distorted into the inequalities and ethical transgressions of modern capitalism, so the internet’s culture of “permissionless innovation” has been abused, transformed into the centralized, controlled network of today. The original dream of an unfettered global public sphere is probably over. Understanding why that happened is the first step to reclaiming at least part of the original vision and to mitigating the most damaging effects of digital nationalism.

It’s no coincidence that the rise of digital nationalism corresponds with a similar resurgence of its offline variety. A technology community that has long prided itself on its radical difference, its apartness, turns out to be susceptible to many of the trends that influence the world at large. Over the last decade or so, the internet has suffered the same distortions of wealth and power—and the same resulting resentments—that have spurred the rise of illiberal nationalism and populism. Google today accounts for around 90% of online searches around the world; Facebook and Google together draw an estimated 84% of global advertising dollars (excluding China). Amazon accounts for 49% of online spending in the U.S., and Alibaba claims 60% in China. This was not the original dream.

Many of the anxieties to which this consolidation of power has given rise are legitimate; some are spurious and are used to advance ulterior motives. It has all been fertile ground for digital nationalism. When governments call for regulation to combat fake news, they tap into real concerns over the unaccountable power of social media; they also open up avenues for censorship. When developing countries insist on keeping their citizens’ data to combat “data colonization,” they raise genuine issues about the Western, especially American, bias of the internet; they also create backdoors to eavesdrop on citizens and erect barriers to protect local commercial interests. Modern nationalism, as the Harvard sociologist Bart Bonikowski has noted, depends on the widespread “mobilization of resentment”; this is true of both its digital and offline variants.

It turns out that the way to deal with offline and online nationalism may be quite similar: Restore a sense of inclusiveness and fair play, flatten some of the sharpest inequalities and rediscover and stress the principles that made the network so inspiring (and radically creative) in the first place. As it happens, there is a tool kit, both existing and emerging, to do some of this.

Mr. Verhulst, from the GovLab at NYU, argues that laws and principles from a previous era should be updated for the 21st century, by applying telecom universal service obligations to broadband, for example, and diversity and equal-time rules (sometimes applied to radio and television) to large news and social media networks. “It’s not like we don’t know how to go about this,” he says. “We just have to be more creative and think of what we can learn from models that were used in the past.” Competition law is another area that has received a lot of attention, specifically the need to update its provisions to take account of the (nominally) free business models practiced by many digital companies.

Another idea is to develop “club”- or “zone”-based approaches to running the internet—discrete, interconnecting blocs whose nation-members would make commitments to liberal principles like free trade, privacy and freedom of expression. Such blocs would be a far cry from the original vision of a single global network. But adherents, like Geoff Mulgan, the former head of Nesta, a British innovation foundation, argue that such “coalitions of the willing” are the best way to arrest the continuing fragmentation of the network. “I don’t see what the alternative is,” Mr. Mulgan says. “The old global vision is breaking up.”

The question is no longer whether national governments should have a say but what form their authority will take and how it will ultimately shape the network. In the old vision, nation-states were the enemy of innovation and freedom. Those were the Wild West days, and it is understandable that internet purists—and many average users—are nostalgic for them.

But things have changed a lot since that first email was sent in California. Amid the creeping nationalism and illiberalism of today, we may no longer have the luxury of rejecting governance and governments. Fifty years after the birth of the internet, it may well be that national governments, wielding enlightened regulation, are the last best hope for maintaining a network that is—at least relatively—open and free.

Mr. Kapur is a senior fellow at the GovLab at New York University. This article first appeared at wsj.com

Like Most Things In Government, Anti-Trust Policy Is Terribly Misguided.

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By all indications merger and acquisition activity is on the rise. In the first five months of 2019 companies announced over $1 trillion in mergers and acquisitions, a 14% increase from the same period in 2018. This is generally good for the economy, the consumer, and the shareholders as all Americans are set to benefit from the economies of scale, the increased innovation, lower prices and stronger stock market returns that generally accompanies this kind of activity.

While it is difficult to pinpoint one specific reason for the increase in corporate consolidations, recent developments including the president’s tax reform bill, large corporate cash reserves and strong equity and debt markets may all be contributing to this flurry of activity. The need to maintain our technological edge in the face of growing global competition is another.

The United States is quickly losing its research and development edge against the rest of the world, a key metric of economic success. In 1960 the United States accounted for over two-thirds of all R&D activity. Since then the total U.S. share of R&D has fallen to 28% and is risk at of greater decline as foreign competitors put a strong emphasis on developing new technologies.

Over the past two decades China, for example, has emerged as a global science and technology leader. Since 2000 China’s share of global R&D more than quintupled from 4.9% to 25.1%. At this pace of growth they could well soon overtake American innovation. Mergers can help reverse this trend.

Pooling collective corporate resources offers economies of scale that increases capabilities and helps advance technologies. By eliminating the redundancy of fixed costs, savings can be passed down to consumers in the form of lower prices and leveraged to fund additional research and development.

Ultimately, strategic mergers ensure that companies can compete in rapidly changing markets both domestically and abroad. The Trump administration is constantly looking for ways to even the playing field against China. They have leveled tariffs against a number of imports and just recently labeled China a currency manipulator in response to their efforts to devalue the Yuan. Allowing companies to take advantage of natural synergies in order to streamline costs and make them more competitive is an underutilized tool that the administration should employ more often.

While the headlines of business pages have primarily been devoted to tech and pharmaceutical mergers recent movements in the defense and aerospace sector, specifically the proposed merger between Raytheon and United Technologies, demonstrate how strategic mergers can prove beneficial to national security as well.

Just as technology companies need to continuously compete with foreign developments so does our defense industry. U.S. defense-related R&D has fallen from 36% of global R&D to 4% today and will likely fall further as defense budgets come under additional pressure in future years. To ensure America maintains its edge against foreign adversaries the federal government will have to rely more heavily on contractors and commercial companies to leverage their integrated capabilities for cost-effective innovation.

Naysayers have been raising anti-trust concerns about the merger, arguing that joining the two companies will remove a source of competition and increase the pricing power of the new entity. But defense only accounts for 25% of United Technologies’ business and a mere 1% of the two company’s sales overlap.

Many of the most vocal critics of this proposed merger also happen to be activist investors who are motivated more by short-term profits than generating long-term value. This modus operandi is devastating to private research and development. One study, for example, found that after companies were held for a median period of 423 days by activist hedge funds, funding for R&D was cut by more than half.  Another study found that companies, under pressure from activist investors, are defensively making cuts to R&D harming long term technological innovation in the economy.

At the end of the day, commonsense mergers are essential to American competitiveness. While every merger deserves the appropriate scrutiny to allay relevant anti-trust concerns and not all will pass the sniff test, deals like the Raytheon-United Technologies merger and similar partnerships in innovation are key to ensure that America maintains its technological edge, both in the commercial and defense sectors.

Michael Busler is a professor of finance at Stockton University, where he teaches undergraduate and graduate courses in finance and economics. He obtained his doctoral degree from Drexel University.

Do We Fear That Innovation From China Will Hurt America? Heck No! Let’s Hope They Find The Cure For Cancer.

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In its March 25th edition, the New York Times estimated that more than 1.7 million people were given a cancer diagnosis last year. Think about that for a minute.

Think about the agony that fathers and mothers suffered in hearing the bad news, not to mention how excruciating it must have been for some who had to relay the bad news to worshipful children. All of this leaves out the brutality of being sick in the first place, the sleepless nights, the physical pain, the emotions, etc.

So let’s ask a simple question. What if Chinese scientists come up with a cure for cancer? Will Americans shun the cure for it somehow signaling “the fading of American pre-eminence on the world stage”? The previous question is rhetorical, but the words are real. They’re the musings of University of Pennsylvania academics Ezekiel Emanuel, Amy Gadsden and Scott Moore.

The Penn trio view “China” as a threat in consideration of the “research areas that will determine military and economic superiority in the coming decades.” That those who can predict the source of future economic growth are generally billionaires in the investment world doesn’t seem to concern these rather self-serious professor types, but that’s a digression. For now, their so-called solution so that the U.S. “can compete and win in the century ahead” is for the U.S. to “meet strength with strength, and the best way to do that is to renew a longstanding American advantage: innovation.” As readers can probably imagine, the financial fix for the alleged Chinese threat is more government spending on technology research. They believe $66.5 billion isn’t enough; that the feds need to increase the previous number by many multiples.

Actually, the federal budget for technology research is $66.5 billion too high, but that too is a digression. For now, let’s first consider this needless fear of “China” causing the U.S. to fade. It’s a laugh line.

Again, would anyone at death’s door due to cancer really care where the cure came from, and in particular with the U.S.’s future prominence in mind? Let’s be serious. To quote Deng Xiaoping, “it doesn’t matter whether the cat is black or white, so long as it catches mice.”

The simple truth is that the origin of an innovation doesn’t matter one bit. What matters is the advance, along with the profit motive that would precede an advance. No one developing that which will make us more productive (5G) or healthier (a dreamed for cancer cure) would limit its use. Nor could anyone. Particularly with products, there’s no accounting for their final destination. Assuming yet again a cancer cure developed in China, short of its creators literally hiding the advance from all would-be buyers, it would eventually reach desperate Americans. And save lives.

Would such a development cause the U.S. to fade? Certainly not. Humans are the drivers of progress, so imagine if cancer deaths kept more humans on this earth? And in a country like the United States where free minds so often prosper. With one global problem having been solved, the living Americans could focus their live minds on new problems to fix, or technologies to improve on. Chinese achievement won’t push the U.S. down as much as the U.S. isn’t nearly as prosperous as it should be precisely because the Chinese weren’t innovating for so long.

Interesting here is that billionaire Patrick Soon-Shiong became a billionaire largely due to his development of a drug (Abraxane) that gives those suffering from Pancreatic cancer a fighting chance. Soon-Shiong is an American citizen based in Los Angeles, he was born in South Africa, but he’s the son of Chinese parents. Are we Americans shrunken because someone of Chinese origin developed Abraxane? Would the American users of it cease doing so if it had been created in Shanghai?

Implicit in the economically illiterate notion that location of innovation matters is that we’re somehow weakened when it doesn’t happen near us. But when trade is free, it’s as though all giant leaps take place next door, regardless of where they’re conceived. Most of us don’t live in Seattle or Cupertino, but we benefit from the genius of Amazon and Apple as though we do. Why would progress made in China make any difference?

As for the call for more federal spending by Ezekiel, Gadsden and Moore on “innovation,” can they really be so naïve? Missed by them is that there’s no such thing as federal investment. Figure that the wealth which enables federal largess was first created in the private sector (if anyone doubts this, just consider why Haiti’s national budget is so small relative to the U.S.’s $4.7 trillion annual outlays), and all researchers in federal employ (or reliant on federal funds) who seek answers used to not be in government.

The crucial difference between “federal” or “public” investment and private investment is that market signals govern the latter, and don’t the former. Basically bad ideas on the federal level can sometimes last forever in the figurative sense, while in the private sector bad ideas are quickly realized as profit-motivated investors cut off funds. Good. Failure that’s realized doesn’t suffocate progress as much as it’s a necessary ingredient of it.

Failure brings answers without which there can be no innovation. And what’s apparent is that the best and brightest of American companies are spending with abandon on tomorrow’s ideas despite being aware that many ideas will be expensive duds. As Andy Kessler recently put it in the same newspaper (Wall Street Journal) in which Emanuel, Gadsden and Moore placed their own monument to trite thinking, companies like Apple “spend more than $10 billion a year on research and development.”

The difference with Apple, along with relentless experimenters like Amazon, Facebook, Alphabet and Microsoft, is that they’re not so foolish as to presume to know what the future looks like. They’re not certain about the “research areas that will determine military and economic superiority in the coming decades,” and that’s why they’re spending tens of billions each year on new concepts. They experiment, and they learn from countless mistakes. Logic says to trust them, rather than academics eager to siphon precious resources out of the market-disciplined private sector, and into a public sector that isn’t required to abide the market truths so essential for progress.

So while history very much suggests that Ezekiel, Gadsden and Moore are naively parroting the same things said about “Japan” 20-30 years ago, that’s really not the point. The bigger one is that they’re not calling for innovation with their plea for more federal spending; rather they’re unwittingly seeking to hamstring it through waste of the resources without which there can be no innovation.

John Tamny is editor of RealClearMarkets, and Director of the Center for Economic Freedom at FreedomWorks.

800 million Chinese Lifted Out Of Poverty By Capitalism. What’s So Bad About That? It Doesn’t Mean Communism Is Successful.

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Among my favorite books of this decade is “How China Became Capitalist” by Nobel-laureate economist Ronald Coase and Ning Wang (2012). In addition to offering fascinating details of Beijing’s post-Mao intrigues, the authors conclude that China’s remarkable economic growth over the past four decades occurred only to the extent that China embraced capitalism.

Makes sense. If heavy- handed government direction of the economy were key to economic growth, China’s economy under Mao would have been the envy of the world rather than a historic calamity. Not until the spread within China of capitalist institutions such as private property and competitive markets did that country’s economy boom.

And boom it did! The World Bank estimates that since 1978 the number of people in China who have been lifted out of poverty is 800 million.

Yet China’s government remains, at least in name, communist. And while far less brutal than during Mao’s reign, it continues to be authoritarian.

This mix in modern China of an intrusive state with relatively free and competitive markets sows confusion. Unaware of the facts conveyed by Coase and Wang, many people mistakenly suppose that China owes its economic success to politicians and mandarins concentrated in Beijing rather than to entrepreneurs and merchants spread throughout the country.

One especially unfortunate consequence of this confusion is the belief that as President Xi Jinping ramps up Beijing’s control over the economy with industrial policies, China will become a dangerous economic rival of the United States.

Among those haunted by this baseless fear is Republican Sen. Marco Rubio of Florida, who calls for us Americans to meet Beijing’s industrial policies with industrial policies of our own. That Rubio and  many other Republicans are stricken with this fear is remarkable. They apparently have gulped down whole the core belief of progressive Democrats that government bureaucrats can outperform free markets.

Rubio and others who tremble with this fear of China should, as my students say, chill. In their efforts to strengthen the Chinese economy through more government control, officials in Beijing are destined to fail.

History is filled with dire warnings of this or that powerful government using extensive controls to propel its economy to a new level of wow. What history is not filed with are actual examples of economies being so propelled. Quite the opposite.

Whenever genuine and sustained economic growth has occurred in reality, that growth was rooted in free, competitive markets combined with respect for private property and a toleration for innovation and change.

Government economic planning undermines these vital institutions and attitudes. Industries that receive subsidies and protection are those that are politically prominent or fashionable. They’re seldom the industries that have a promising future absent the favors bestowed on them by the state.

Making matters worse is the fact that these favors weaken rather than fortify these industries. Born from privileges and protected from competition, firms in these industries have little incentive to become efficient at any task other than begging the government for additional privileges and protection.Such firms do not become awesome global competitors.

And on top of these ills is this problem: All resources diverted to favored industries are diverted away from other industries, including those that would otherwise have grown into  dynamic and successful participants in the world economy.

America’s best response to Chinese industrial policy is to move in the opposite direction by freeing our markets even further.

Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va.

China’s Most Dangerous Export Is Anti-Market Ideology. And Americans Are Buying It.

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BNN/Bloomberg in Canada recently carried the live feed of Chinese President Xi Jinping’s speech marking the 40th anniversary of China’s 1978 “Reform and Opening” policy shift — non-stop and commercial-free through 85 minutes of prime time.

Eighty-five minutes is a long time to spend on a political leader who delivers messages with all the charisma of a novice radio announcer reading a script he’d never seen before. But there was much to learn from Xi’s speech to 10,000 Communist Party members and observers crammed in disciplined rows into Beijing’s Great Hall of the People.

After the speech, immediate commentary focused on reading the Chinese tea leaves in search of relevance to global trade, stock market reaction, economic growth and power politics within China.

Missed in these reactions was a more important issue. The West’s greatest China risk is not trade or military threats. The greatest risk China poses to the relatively free-market private-enterprise West is ideological — a risk embedded in Xi’s description of how China rose from poverty to become a world economic power by aggressively pursuing state interventionism and control policies.

China’s most dangerous export isn’t Huawei’s 5G networks or subsidized steel production. Xi’s message to the world on live television was that statism works and managerial socialism is the road to prosperity. The threat is all the more real since Xi’s basic message has come to be accepted by most of China’s economic competitors and many of the world’s intellectuals and commentators.

Here’s a typical view , courtesy of just one British academic: “The non-democratic and authoritarian political regime in China has meant that it has been possible to embrace western-style free market economics while maintaining control over the political system. In many ways, the planned economy of China (where the state controls economic activity rather than private business) has accelerated economic growth because the government has controlled all decision-making.”

The possibility that China has created a new economic model with global potential dominated a recent series of commentaries in The Economist: “Is China’s growth model a threat to free-market economics?”

Such perspectives rewrite economic theory and history. China is supposedly doing so well economically — in trade, technology, investment — because of government control and intervention, subsidies and favoritism. Versions of this thinking have taken hold in North American political and economic circles. The claim that the free-market U.S. is losing ground to statist China motivates many who back U.S. President Donald Trump’s trade war with China.

If the world comes to believe that narrative, then the West is in much greater trouble than whatever risk it faces from Huawei’s possible threat to national security.

By accepting the idea that China’s success is a function of direct government manipulation of investment, banking, currency values, corporate strategies, industry formation and labor markets, the West is essentially endorsing China’s ideological schemes. Attributing China’s rise to state control means accepting President Xi’s 40th anniversary description of the “unprecedented miracle” of China’s surge.

What was even more disconcerting about Xi’s 85-minute drone was his frequent adoption of the jargon and spin used by many Western and Canadian management and economic consultants. China needed “supply-side structures” and “co-ordinated strategies” to foster “innovative, co-ordinated, green and open development.” China needs “sustainable development” and “institution building” and a “broad range of democratic rights that are tangible, meaningful and practical.”

This is statism wrapped in managerial bafflegab ripped from reports issued by the world’s leading management consulting firms and the jargon of Western policy activists that influence policy in Canada and elsewhere.

Those around the world watching Xi’s speech, including Canadians, were exposed to a complex blend of explicitly authoritarian ideologies that Xi claimed led to China’s great economic resurgence.

China’s success, said Xi, is the product of vigilant control exercised by the Communist Party of China along with its continued adherence to radical interventionist principles. “Chinese communists are duty bound to develop Marxism in the 21st century and adapt it to the Chinese context,” said Xi. This, he said, is China’s historic mission — to update Marxism and Leninism and the thoughts of Mao Zedong to create “socialism with Chinese characteristics” — a national slogan he repeated more than three-dozen times.

Xi’s central message is that China’s new Marxist/Leninist/Maoist/statist model, updated with market-based reforms, has delivered China out of poverty and turned the formerly destitute totalitarian country into a global economic powerhouse. In the forty years between 1978 and 2018, China’s GDP soared more than two-thousand fold, Xi said. Foreign trade has risen from virtually zero to US$4 trillion a year and China’s share of global output has jumped from 1.8 per cent to 15.2 per cent.

Xi mentioned the opening of China to greater market forces occasionally, but only as backdrop to the core statist message. Over 40 years, China went from “the traditional system of a planned economy to the open system of a socialist market economy and to reform that enabled the market to play a decisive role in resource allocation and for the government to play a better role.”

Public ownership remains a priority, with the Communist Party holding ultimate control to apply “the basic principles of scientific socialism,” he said. “It is by upholding the centralized and unified leadership of the Party that that we have been able to achieve the historical transformation” of the Chinese economy.

Market forces can be deployed, he said, but with a statist purpose. “We must give full play to the decisive role of the market in resource allocation,” Xi said. But the reason for giving the market “full play” was to “better leverage the role of the government.”

The real power behind China’s economic emergence is not state control but the explosive impact of opening part of the Chinese economy to free markets and private enterprise. A few years ago, Adam Smith Institute fellow Tim Worstall wrote in Forbes that “China is the most viciously free market economy on the planet right now.”

That seems a little over the top, but the reality is that China’s 40-year growth boom lacks a cohesive and convincing analysis. That is all the more reason to be wary of a growing consensus around Xi Jinping’s view that the world needs more government economic control and management.

This article first appeared in Financial Post, 12-20-18.

Trump’s Escalating Trade War Is Striking a Blow to “Craftrepreneurs”

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As Trump continues to wage a trade war against China, American-run businesses continue to suffer the consequences. But now, thanks to a new set of proposed tariffs, entrepreneurs, consumers, and charitable organizations could be in real trouble.

Already, the administration has levied tariffs on over $50 billion worth of Chinese imports. And the effects are being felt. Recently, American motorcycle company Harley Davidson announced that it will be moving some of its manufacturing abroad in order to recuperate from the increased prices on Chinese goods. Since many of the raw materials used to construct the bikes come from China, the new tariffs caused a major increase in manufacturing costs. And like many American companies, Harley Davidson was faced with having to either push that cost increase to the consumer by raising prices or bear the brunt of these tariffs and risk possible financial ruin.

But as if this wasn’t bad enough on its own, the Trump administration just proposed another round of tariffs on an additional $200 billion worth of Chinese goods. This comes in addition to the second round that went into effect at the end of August. But unlike the other tariffs, which focused mostly on raw materials used to make cars or, in the case of Harley Davidson, motorcycles, the new tariffs are expected to deal a blow to an entirely new consumer market. 

Tariffs and “Craftrepreneurs”

Of the 6,031 items on the new list of Chinese items to be taxed, over 500 of them are craft supplies sold in stores throughout the United States. Popsicle sticks and yarn might not seem like important items, but the craft industry is more lucrative and more important to the American economy than one might think. In fact, some might be shocked to learn that the craft supply industry accounted for over $44 billion of economic activity in 2016 alone. But there is something even more fascinating about this industry: its consumer base.

According to a testimony given last week by JOANN Fabric and Craft Stores CEO, Jill Soltau, 90 percent of the items purchased by consumers in its store are turned into other finished projects. This seems obvious enough given that it is a craft supply store. But what JOANN customers are doing with these finished products is where the story gets interesting.

For some of JOANN’s customers, these items are turned into finished craft projects that are then sold at farmers markets, local boutiques, or on sites like Etsy. If Trump’s new tariffs are put into place, many of these “craftrepreneurs” will be unable to afford the materials needed to construct their finished merchandise. And for those who depend on selling these crafts for their livelihood, this could mean major trouble.

Trump has repeatedly said that these tariffs have been imposed to teach China a lesson, but American businesses are the ones who are dealing with the negative consequences. And in addition to the entrepreneurs who sell crafts, these new tariffs also spell trouble for small craft supply stores as well.

While JOANN’s is a household name, most American craft supply retailers are independently run mom-and-pop stores. Many of which are in the heart of the Midwest and run by female business owners who cannot afford to pay more for their product. In order to make up for the increased costs of getting supplies from China, many of these business owners will be forced to lay off employees or increase the consumer prices. Additionally, this could ultimately lead to smaller businesses having to close their doors forever. Either way you look at it, these Tariffs are harming entrepreneurs, the very backbone of America.

Trade Wars Negatively Impact American Charities 

But entrepreneurs aren’t the only ones caught in the crossfires of this escalating trade war. During her testimony, Soltau also explained the impact these tariffs will have on American charities.

She said:

“Approximately one out of three items made by JOANN’s customers is given away to military veterans, the hospitalized, the poor and the underprivileged.  We know that 7 million fleece blankets and 10 million quilts are donated by our customers each year to Project Linus, church groups, veteran support groups and other charitable organizations.”

But once Trump’s new tariffs are enacted, the costs of the supplies needed to make quilts and blanket will be increased by around 25 percent, according to JOANN’s estimates. This means that many volunteers will be unable to afford to make as many blankets and quilts as they could before. One of the charities mentioned above, Project Linus, is a group who specialized in giving comforting, security blankets to sick, hospitalized children. But if the costs to make these items increase, this means fewer children receiving blankets that bring them a great deal of cheer.

Trade wars are nasty games where nobody wins and everybody loses. Trump should put a stop to this before more entrepreneurs, consumers, and charities suffer needlessly.

Individuals Need to Practice Constant Vigilance against the State

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There can be no doubt that tech is empowering the individual. From securing our email and keeping our digital correspondence safe from government surveillance through encryption, to blockchain being used to ensure that elections are protected against government corruption, tech is restoring the balance of power between us and the state.

But as great as things may appear to be getting, it is important to remember that when we are up against a foe as formidable as the state, we must practice constant vigilance. And the latest Bitcoin news to come out of China is a perfect example of what we are up against.

The Chinese Crypto Community Gets Dealt a Blow

According to the Managing Director of Dhanua Capital, a California-based venture capital fund, Dovey Wan, the Chinese government just gave an official order to ban all cryptocurrency related commercial activities. A ban on all crypto trading and exchanges was already put into effect earlier this summer. When the first bans went into place, the Chinese government expressed concerns over the crypto world merging with the world of finance and insisted that only government-issued currency is permitted. But this new ban takes things even further.

Rather than restricting actual cryptocurrency transactions, this new ban prohibits the spreading of information related to cryptocurrencies and blockchain. WeChat, one of China’s most popular messaging apps, has already been asked to terminate the accounts of crypto news outlets. Within the first few days of the new rules going into effect, eight crypto news outlets had had their accounts closed on WeChat. The Cyberspace Administration of China cited a violation of new policies as the primary reason.

The new rule came as a result of the Cyberspace Administration’s “Temporary Regulations on the Development and Management of Public Information Services for Instant Messaging Tools” guidelines, which were instituted in early August.

These new rules are completely dystopian in nature and seek to control the actions of individuals as is evidenced by an excerpt taken from the new law, which reads:

“Users of instant messaging tools serving in public information service activities shall abide by relevant laws and regulations. For instant messaging service users who violate the agreement, the instant messaging service provider shall take measures such as warning, restriction, suspension, and closure until the account is closed, and save the relevant records and fulfill the obligation to report to the relevant competent authority.”

WeChat’s parent company, Tencent, stated that the accounts were shut down because they were “suspected of publishing information related to ICOs [initial coin offerings] and speculations on cryptocurrency trading.” The new rule forces private messaging services, like WeChat, to comply and also sites “national interests” as a reason for the new crackdown.

The Fight Continues

Many of us believe, and rightfully so, that blockchain and cryptocurrencies can help individuals maintain a balance of power with the government. But China’s attempts to block not only blockchain-related activities but actual news and information is downright terrifying. But it is also a sign that governments truly fear the potential blockchain and cryptocurrencies hold for a decentralized future.

It is likely that China will not be the only government to take such extreme measures against crypto-related activities, but just because we receive pushback from the powers that be does not mean we should abandon our quest altogether.

Write for CFI