Spengler

Sino-Forming South of the Border

Central American migrants wait for food in El Paso, Texas, Wednesday, March 27, 2019, in a pen erected by U.S. Customs and Border Protection to process a surge of migrant families and unaccompanied minors. (AP Photo/Cedar Attanasio)

The following story appeared Feb. 12 in Asia TImes and remains behind the paywall. Like most newspapers, Asia Times has to charge for content to stay in business. I am releasing the article to PJ Media readers because it’s critical for us to understand what competition we face. American officials habitually dismiss China’s global infrastructure buildout as “debt trap diplomacy,” but the real story is more complicated, and more ominous. I know it, because I spent several years in the belly of the dragon. 

 

Sometime in 2015, I sat in the back of a Mexico City taxi, reading instructions from Waze to the driver. We took detours through small residential streets, zigzagged from one major artery to another, and hung risky U-turns – all of which cut half an hour from our travel time.

I had to give the directions because the driver didn’t use Waze, because, like most Mexican taxistas in 2015, he couldn’t afford the mobile broadband, which cost more in Mexico than in any other large country.

That was then. By 2020 about a third of Mexico City drivers were using the navigation app. In 2019 Mexico had 77 mobile broadband accounts per 100 people, vs. only 23 accounts in 2013. And Mexico last year had the world’s highest percentage growth in e-commerce.

This transformation had something to do with my taxi ride of 2015, at least tangentially. I had a cabinet-level meeting at Mexico’s Ministry of Telecommunications, in my then capacity as head of Americas for a Hong Kong investment banking boutique.

As I reported in my book You Will Be Assimilated: China’s Plan to Sino-Form the World, I introduced top Huawei executives to senior Mexican officials, then debating an overhaul of the country’s woefully inadequate broadband system.

Nothing happened in 2015; later that year Jack Ma acquired the boutique and within a few months fired the Western bankers. But in 2017 Mexico invited Huawei and Nokia to build a “shared network” (red compartida) for mobile broadband.

Banned from the United States, Huawei flourished in Mexico, and its broadband base stations provide service for dozens of Mexican cities, including a few that originally were assigned to Nokia. The cost of broadband service plunged and the number of subscribers more than tripled.

Waze, a luxury that only a visiting gringo could afford in 2015, now serves 2 million users per day in Mexico City alone, and Mexico has become the app’s number four market globally. Anyone who has tried to negotiate the Mexican capital’s paralytic traffic knows how much that improves quality of life.

That’s what I meant by “Sino-forming,” namely transplanting China’s infrastructure-led growth model to dozens of other countries. Chinese technology is proliferating at a startling pace through the developing world, creating enormous potential for growth. But technology isn’t enough. Corrupt and incompetent governments can ruin the most promising opportunities. Mexico provides an extreme example of both sides of the story.

I had brought Mexico’s Ambassador to Hong Kong and her team to Huawei headquarters for a tour, and, as I reported,

At the end of the tour, the Mexicans and I sat on a semicircular bench in a small amphitheater, and a young Chinese man stepped to the podium and turned on a projector. You Mexicans have a big economy, he said, but very low broadband penetration, and he showed some charts and graphs to this effect. Your economy is backward today, but you can become a great and rich economy, just like China. Let us build a national broadband network for you, he urged. Then we will bring in e-commerce and e-finance and create a whole new ecosystem that will make you a modern economy. He sounded vaguely like the Borg: We will assimilate you. Resistance is futile.

Except for the part about Mexico becoming great and rich, that’s more or less what happened. Mexico’s leftist-populist president López Obrador has turned Mexico’s political system into a “demolition derby,” as Manuel Suarez-Mier argued in a series of essays for Asia Times, leaving Mexico “a completely inept and thoroughly corrupt country of 130 million people.” But the national broadband program begun under the previous administration of Enrique Peña Nieto is one important initiative that López Obrador hasn’t ruined.

Huawei has invested $500 million in Mexico, including a cloud computing center in Guadalajara, a data and research center in Querétaro, a Huawei official told El Economista last year. “In this health crisis, new technologies arise and new ways to fight COVID-19 with 5G broadband and Artificial Intelligence. An example of this is applications that make it possible to contain the contagion of the virus using geolocation,” the Mexicna newspaper wrote. Growing Global Ecommerce Markets List | Pattern

The Mexican government rebuffed requests from Washington to exclude Huawei from its broadband. Although AT&T has removed Huawei equipment from its American networks, the US company continues to use it in its Mexican network, according to Mexican press reports, because the cost of replacing it would be prohibitive.

Mexico is less concerned than the United States about the possibility of data theft by Huawei, which this week sued the Federal Communications Commission over its claim that Huawei equipment is insecure. “What data do we have to steal?” asked a former top Mexican security official.

The news site Lapoliticaonline.com wrote in 2019, “Despite American warns, Huawei’s influence in Mexican networks is growing.” In addition to the shared network that has wired Mexico’s major cities, Huawei will take the lead in the construction of rural broadband at the government’s request.

Altan Networks, the consortium that built the shared network, nodded to American pressure by allowing Nokia to wire the cities closest to the American border, Reuters reported last year. “But limiting Huawei Technologies Co Ltd’s role was easier said than done.

While sites along the US border remain with Nokia, Huawei has since gained work in three cities in northern Mexican regions that Altan had said publicly would go to Nokia…Huawei’s northward expansion in Altan’s network, previously unreported, underscores the Chinese firm’s combination of speed, manpower and technological sophistication, Mexican telecom executives say.”

Broadband by itself doesn’t cause economic transformations, however. One gauge of the impact of broadband on economic life is the prevalence of electronic payments. In most of the industrial world, cash payments today are a small fraction of retail transactions; 10 years ago, they were the majority of all transactions. The following chart from the 2020 McKinsey Global Payments Report compares a group of developing and industrial countries:

Among the big developing countries, only China has seen cash payments fall significantly, to just 41% of total in 2020 from 99% in 2010. Elsewhere in the developing the vast majority of transactions remain in cash. In the US, by contrast, cash has fallen to 28% of total from 51% 10 years ago, and in the Netherlands to 14% from 52%.

What keeps Third World consumers in cash isn’t technology. It’s trust. Very few people pay taxes in developing countries. India for example has seven taxpayers per 100 voters, compared to 70 in the United States and nearly 100 in Sweden and Norway. Mexico and Argentina have about five taxpayers per 100 voters, while Turkey has three, according to India’s 2018 Economic Survey.

Businesses remain small and under family management, because the owners trust no-one but blood relatives with the books. Households and entrepreneurs assume that if their corrupt and rapacious government finds out that they are making money, it will find a way to expropriate it.

Most Mexicans work off the books, in the so-called informal economy, where no-one pays taxes, but no-one has access to bank loans or suppliers’ credits from established firms. Mexico doesn’t even have much of an idea where its people work; the last estimate of informal employment available from the government, was 61% of total, and that was back in 2004.

As China demonstrated, you don’t need bank accounts to get people into the electronic payments system. China is one of the world’s least-banked countries, but one of the most advanced in terms of electronic payments. Turkey, where only 3% of voters pay income taxes, is one of the most-banked countries with 1.5 bank accounts per adult.

The outcome is mixed in Mexico. The man with the PowerPoint at Huawei’s headquarters was right that the Chinese telecom giant could spread mobile broadband throughout Mexico at a low cost and improve quality of life. But it takes more than technology to lift people out of the vicious cycle of exclusion from the mainstream of economic life: It takes honest officials, a manageable tax burden and a minimum level of trust between government and governed.

“Sino-Forming” the world through infrastructure is only half a plan. What China has accomplished inside its own borders is unique in world economic history. But miracles aren’t easy to export.