A new report reveals how U.S. companies’ Faustian bargain with the Chinese Communist Party has endangered all of us.

Communist China kicked off the Beijing Winter Olympics on Friday, giving the Chinese Communist Party a center stage to broadcast its propaganda to a worldwide audience for two weeks. What will be hard to miss at the Olympics are the logos of some of our nation’s best-known companies, which remind us of their shameless kowtowing to Beijing for the sake of their bottom line.

A new, comprehensive report by the Victims of Communism Memorial Foundation, titled “Corporate Complicity Scorecard,” reveals what these companies have traded away and how much their Faustian bargain with the CCP has endangered all of us.

According to the VOC report, these American companies’ complicity endangers everyone else for several reasons. It exposes U.S. indus­trial supply chains to China’s forced labor and other human rights atrocities. It empowers a strategic competitor while hollowing out U.S. industrial capacity. It also makes U.S. industry a conduit for the Chinese gov­ernment’s vast information collection (i.e., surveillance programs). Lastly, it makes U.S. industry a channel for Chinese influence and pro­paganda abroad.

All eight companies’ complicity is also endangering their long-term survival because through the “Made in China 2025” initiative, the Chinese government has been developing domestic competitors, intending to become “self-reliant” in strategically essential technologies. Shockingly, these American companies seem to fail to recognize that their technology transfers and billions of dollar investment in China will end up creating their own eventual replacements in this market.

Furthermore, some of these companies have engaged “in political lobbying in the U.S. in ways that ultimately serves Beijing’s interests while potentially undermining the values and principles that undergird the western democratic order.”

Intel sent a letter earlier this year to suppliers advising them not to source from Xinjiang, without mentioning either forced labor or genocide committed by the CCP against Uyghur Muslims and other minorities in the region. Still, the company promptly apologized to China after its letter drew backlash from state media and Chinese nationalists.

The VOC report provides insights into Intel’s engagement in China. The company has a prominent presence in the country, including 17 campuses, at least two production sites, and “a series of innovation and R&D centers across China.” The company has built extensive ties to Chinese government agencies. For instance, the company has partnered with the Chinese Academy of Sciences Institute of Automation (CASIA), a “core contributor to China’s military and military-civil fusion programs.”

Intel also collaborated with China’s Ministry of Industry and Information (MIIT), a “leading state entity charged with implementing China’s military-civil fusion national strategy.” The report finds “Intel executives continue to engage with MIIT rep­resentatives in fields relevant to military-civil fusion, even as tensions between the US government and China escalate and risks posed by Beijing’s military-civil fusion strategy become more evident.”

Intel’s partnership with Chinese companies is also problematic. The company is a long-time major supplier to Hikvision, a Chinese state-owned manufacturer and sup­plier of surveillance equipment. The two companies launched a com­prehensive partnership in artificial intelligence in 2017.

The VOC report also finds that “Intel technology was being used in surveillance systems in Xinjiang” and “Intel had invested in and provided technologies to a company embedded in Xinjiang and supported by the Chinese Ministry of Public Security.” Intel essentially plays a critical role in enabling the Chinese government to build a digital prison in Xinjiang and monitor every move by millions of Uyghur Muslims.

Microsoft Also Gets an ‘F’

Microsoft also received a grade of “F.” The VOC report finds that “Microsoft has a significant, and growing, network of innovation centers, data centers, joint laboratories, and other technology hubs in China. Many of these have been established in partnership with the Chinese government or gov­ernment-tied entities.”

For example, Microsoft has built at least 10 data centers in China, all operated by a local Chinese partner, 21Vianet. In compliance with China’s data security laws, all data collected at these centers are accessible to the Chinese government.

Microsoft has also partnered with Chinese companies to tailor its products to meet the Chinese government’s needs. A 2021 report from Top10VPN found that many Chinese government surveillance and censorship organs “use Windows prod­ucts in their security and surveillance systems.”

Like Intel, Microsoft has established strategic cooperation agreements with Chinese companies that “the US government has identified as tied to the Chinese military or as an export restriction concern.” For example, one of Microsoft’s strategic partners is Dajing Innovations (DJI), a leader in civilian drones and imaging technology. The Trump administration put DJI on the Department of Commerce’s sanctioned Entity List in 2020. Microsoft has yet to sever its business ties with DJI.

At least three Chinese suppliers of Microsoft were found to involve forced labor in Xinjiang. However, Microsoft has maintained business relationships with these suppliers. In addition, the company continues to invest in R&D in China “even as tensions between the US and China escalate—and Beijing’s technological ambi­tions have become broadly recognized as posing risks for global human rights and security.”

Why GE Received an ‘F’

GE is the third company that receives an “F.” Similar to Intel and Microsoft, GE’s many partnerships in China “appear to involve technology-sharing, including with core players in China’s military, military-civil fusion, and surveillance system. Those partnerships have also granted military-tied Chinese players positions of leverage in GE’s supply chains, critical to both America’s national security and its manufac­turing base.”

Since GE is also a key contractor for the U.S. Department of Defense, these partnerships and technology-sharing agreements are especially troubling.

Losing Strategy

The VOC report gave the other five companies slightly better scores than “F.” But make no mistake, all of these companies have similarly “supported Beijing’s military modernization, the surveillance state, and human rights violations in exchange for access to China’s market.”

As the great power competition between the U.S. and China intensifies, corporations cannot pretend this is business as usual. Whether they like it or not, corporations are increasingly at the center of the Sino-U.S. geopolitical conflict. These American companies should never forget what made them successful in the first place.

In the words of former Attorney General William Barr, American companies are beneficiaries of “the American free enterprise system, the rule of law, and the security afforded by America’s economic, technological, and military strength.” China’s authoritarian regime is not a “hospitable one for institutions that depend on free markets, free trade, or the free exchange of ideas,” Barr said.

The VOC scorecard reminds these American companies that acquiescing to Beijing is a lose-lose strategy and will endanger all of us in the long run.

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This article was published in The Federalist and is reproduced with permission.

The financial markets swooned in January in response to the statements and growing perceptions that central banks must soon begin the painful task of slowing inflation. The old saw on Wall Street is, “as goes January, so goes the year.”  If so, we are in for a very volatile year.

The irony is, of course, it was those very central banks by their own actions, and their politically motivated maneuvering, which freed legislators around the world from the painful tasks of keeping a rational budget.  If markets had to absorb all the debt created by governments, and if that debt were not purchased by central banks, rates would already be higher than they are now.

As it is, the bellwether 10 year US Treasury yield has swiftly moved up about a half percent in the past months or so,  even before the Federal Reserve has officially started tightening.

This is a product of bipartisan failure. One of the serious deficiencies of the Trump Administration is he did not deal squarely with the deficit issue when he had the opportunity. In his defense, it has been quite some time since the Republican Party was the party of fiscal rectitude and sound money.  We are not sure even today if those attitudes are all that prevalent even among those who support the MAGA agenda.

To be sure, the Covid crisis added some momentum to the already accelerating debt problem, but Democrats seized on the crisis to ram through additional programs which had little to do with Covid relief.  It had more to do with their socialist agenda. Now we have a national debt crossing above $30 Trillion.

And it was a choice, largely accepted by both parties to address the Covid crisis through lockdowns, which created economic turmoil. We now know, based on the recent study released by Johns Hopkins, that we suffered grave economic damage with very little to show in terms of reduced mortality. It is true though, that Republicans were earlier to move away from lockdown while Democrat-dominated areas still embrace the concept.

Further, many other nations copied the lockdown modality and some like  China, Germany, Austria, Australia, and New Zealand went even further than the US.

Like other sectors of society, we did not understand at first exactly what we were facing when the Chinese virus hit our shores. But at The Prickly Pear, we always mentioned we were opposed to lockdowns measures because we felt it was ignorant of the many trade-offs and was anti-democratic to its core. We think the Johns Hopkins study recently released vindicates our position and that of countries like Sweden and American Republican governors and mayors who exercised lockdown with a much lighter touch.

But as they say, “it is what it is.” World leaders chose Fauci’s lockdown and huge bailout spending based on deficit finance. Covid did not do this rather we did it to ourselves. This added huge amounts of debt to an already teetering debt structure built after the 2008 financial crisis bailouts and more socialist programs. Now, we must all face the consequences.

The Economist recently ran a study on what minor increases in interest rates will have on the global economy, given this overhang of debt. They looked at 58 of the world’s largest economies and attempted to derive an estimate of what the global interest bill would be under various interest rate scenarios.

It is important to understand their numbers are based on the very unusual and historically unprecedented condition of not only almost zero interest rates but negative rates on a huge swath of the world’s bonded indebtedness.

At present, the Economist estimates the current interest rate tab to be $10 trillion dollars or about 12% of global GDP. To give you some measure of scale, the total of US output is in the range of $23 trillion.

However, since the global debt burden is now 355% of GDP, and is much larger than it was during the inflation crisis of the 1970s, any incremental increases in rates will have a magnified effect on the economy. The boomerang effect of pushing growth through debt issuance is that the whole debt structure becomes much more sensitive to small changes in rates. They estimate that just a one percent change in rates translates to a jump to a $16 Trillion global interest payment. That is a 60% change from where we are today! A two percent increase in rates pushes the global interest tab to $20 Trillion, a doubling of current costs.

The higher the debt payments, the less money available for investment or consumption. This will prove to be equivalent to the nutritional issues faced by a hungry snake that is swallowing its own tail.

The more debt, the less growth. The less growth, the lower the ability to service the expanding debt.

Moreover,  the structure of the welfare state itself magnifies the risk. If the economy slows, less revenue flows to the state, just when more people start making additional claims on welfare state programs such as food stamps, rent subsidies, and unemployment insurance. Thus, fiscal deficits during recession grow and they must be financed by the private sector, by the Fed, or more money printed out of thin air.

As the economy slows, debt may well become unstable, as some marginal borrowers will likely be unable to service interest and principal payments, triggering more welfare state bailouts for “favored” businesses like autos, airlines, and banks.

Interest rates serve like traffic lights, directing the flow of capital. Projects that look favorable under one interest rate do not look the same under another.  Economists call this the misallocation of capital.  In part, that is what recession does.  It corrects errors made during the boom phase.  However, if the government constantly intervenes, those misallocations of capital accumulate like the dead under brush in a forest.  If enough dry undergrowth is allowed to accumulate, any economic or political spark can set off a conflagration hard to contain.

We are not sure where this leads us since this level of debt and the extremely low-interest rate regime has no real historic precedent. Push rates up to even “normal” historical levels, and the global debt burden soars, sucking more money out of productive activity. But if you don’t push rates higher, inflation can wipe out both the middle and lower classes of society, leading to political instability and perhaps violence.  Inflation acts as a compound interest curve in reverse.  If inflation were to stay in the present range of 7%, the value of money will fall in half in just 10 years.  Try to plan a retirement around that!

It has long been felt by the dominant economics profession, that the free market was unstable and that balanced budgets and a gold standard put governments in a bind to deal with an economic crisis. Better to have large central planning agencies like the Fed and Treasury Department, guiding the economy with the input of giant international corporations. Davos man knows best!

Well, we have had more than a half-century now of depreciating money, chronic budget deficits, and active central planning by government and its “experts.”. As James Grant has put it, we have substituted the Ph.D. standard for the quiet automatic discipline of the gold standard.

The risk now is, central planners have created a situation where either a debt crisis, an inflation crisis, or both, will engulf us.

How far do interest rates need to go to choke off inflation?  How high do they go before interest costs undermine growth?

It looks like we will soon find out.