Macron China trip worsens the split in the West

This is Iain Martin’s weekly newsletter, exclusively for Reaction subscribers.

Guochao is the trend in China denoting the behaviour of young consumers who buy local luxury brands rather than French or Italian labels. “They’re China’s Generation Z and they’re shaking up shopping,” according to a Bloomberg report.

There are signs that the 270m Chinese consumers from Generation Z – defined as those born in or after the late 1990s – are prepared to buy their nation’s own brands. Some patriotic and nationalistic youngsters do not like being lectured by Western firms such as Nike over human rights. The company was among those that suffered a backlash when it expressed concerns about forced labour in China and abuses against the Uighars.

Nike’s latest filings this month show sales are rising again in China, so there are clearly enough Chinese consumers prepared to overlook the political dimension when it comes to making purchases. Still, the Covid lockdown dip in sales in China, the boycotts of Western firms two years ago, and the existence of Chinese firms wanting to eat the lunch of Western corporations means there is a commercial battle underway and a lot of money at stake.

A recent report by PwC estimates that by 2025 the luxury market in China will total $112bn and account for a quarter of the global industry, making China the leader in luxury, a bigger market than Europe and America.  

It is not difficult to work out why France’s mighty luxury goods companies might regard that growth as an opportunity and the possibility of guochao (China buying local) as a potential problem.

LVMH, France’s mega-corporation encompassing fashion, wine, spirits, perfume and watches, had global revenues of €53.7 billion in 2019. In 2022, after a Covid dip, it was €79.2 billion. Asia, including China, accounts for 30% of revenue. Japan is another 7% on top of that. To put that in context, sales in France accounted for only 8% of revenue last year, and the rest of Europe only 16%. Business is booming in Asia.

China’s reopening post-Covid is a great opportunity for French firms such as LVMH to do even better. If there is a boom they will benefit. If there is a war over Taiwan there will be no boom, or not in luxury goods anyway.

This is the backdrop to President Macron’s controversial visit to China a week ago. He said – in effect – that Europe should pursue its own interests on China and not be dragged along by the US towards confrontation.

Commercial interest is not the sole explanation for France seeking better relations with China, of course. Macron likes to make bold statements with an intellectual flavour. His conviction that Europe should pursue “strategic autonomy” – not relying too much on the US for defence, security and trade – is in the tradition of French policy since the Second World War. Although President de Gaulle was anti-Communist, in the Cold War France stayed one step removed from the main alliance. In 1966 France remained in NATO but withdrew from the integrated command. NATO headquarters moved to Brussels in 1967 and US European command left France too.

Commerce is a perfectly valid factor in French political calculations today. Companies want to make money. Profitable companies create jobs and pay taxes at home, which can then be spent on public services and pensions. Coincidentally, French protestors breached the LVMH office in Paris this week during clashes over the President’s pension reforms. 

Since Macron’s China trip and his interviews on the way home explaining what he was up to, there has been much debate about how to decode his remarks. Sophisticates competed to point out that Macron (read properly in French) did not say quite what he was reported as saying in the non-French media. He wasn’t diverging as much as claimed from European policy towards China.  

The flaw in that argument is that international politics is perhaps 50% communication. Macron and his team must, or should, have known that the line he pushed and the hype around his trip would shape perceptions and trouble allies in Europe and beyond. By illustrating to China that the West is split he risks weakening the concept of deterrence, which is the best hope of avoiding a conflict. Now China can continue to prod Taiwan, and prepare for invasion, knowing that the democracies disagree fundamentally on how to respond.

It fell to Germany’s Foreign Minister Anna Baerbock, on her own trip to China this week, to speak robustly for many other European states. She warned the Chinese government: “A military escalation in the Taiwan Strait, through which 50 percent of world trade flows every day, would be a horror scenario for the entire world… The shock wave of such a world economic crisis would also hit China and Germany as special trading nations. We are therefore watching the increasing tensions in the Taiwan Strait with great concern. Conflicts can only be resolved peacefully. A unilateral and violent change in the status quo would not be acceptable to us as Europeans.”

I wonder to what extent the US electoral cycle was on Macron’s mind when he went to China. If the next President of the United States is Donald Trump, or another leader with an at best lukewarm commitment to Ukraine, then Macron’s concept of European strategic autonomy will become more fashionable. The problem is that the concept is a mirage. Most European governments do not spend anything like enough on defence, even after Ukraine. Poland is leading the way, aiming to ramp up defence spending to 4% of GDP this year and the Czech government is increasing spending to 2% of GDP.

Russia may look weak now. If the conflict turns in Ukraine and Moscow gets military aid from China in the next few years that could change. On that basis alone, European countries need to rebuild their defences, fast, as an insurance policy.

But Europe rests on NATO, the be all and end all of defence and security in the European neighbourhood. And NATO rests on American spending and firepower. Even under Trump last time, when he dissed the alliance in public, American commitments increased. Europe is not autonomous and we had better hope America stays fully engaged.

What Liz Truss got right and wrong

Liz Truss gave the Margaret Thatcher lecture in Washington this week, at the conservative think tank Heritage. There was very little reflection on what went wrong during her tenure as Prime Minister, other than in the Q&A discussion post-lecture. I watched it all, out of historical curiosity.

What’s baffling, or infuriating, about the former Prime Minister’s position is that quite a bit of what she says is on one level right. Britain has a growth and productivity problem. Taxes are too high. The state is getting too large across the West. The democracies need to stick together. Freedom is important.

Great, but anything a leader wants to attempt in power on taxation or reform is always contingent on politics. It’s all for nothing, it’s just think tanking, unless the leader is skilled at government. Success involves working out what is possible and feasible within the constraints of the moment. That’s why Margaret Thatcher was until 1987 strategically bold but tactically cautious, taking her time and always worrying about the limitations of her power. When Nigel Lawson as Financial Secretary to the Treasury in 1979 wanted to abolish exchange controls, the rules limiting how much money could flow out of the country, she was cautious and had to be persuaded it would not lead to disaster in the markets.

Truss complains that the IMF denounced her mini-Budget, making the autumn 2022 markets emergency worse. What did the Truss team think the IMF was going to do when on day one in power she fired the senior official at the Treasury Tom Scholar? As she and her Chancellor Kwasi Kwarteng were reminded in advance, Scholar used to be on the board of the IMF and the World Bank. He’s a veteran who knows that international crowd. When Truss whacked Scholar the IMF was always going to have its revenge on his behalf. And so it did. This is elementary politics. Politicians complaining about being beaten at politics is ridiculous.

What I’m watching (spoiler alert)

Succession. I feel bad having suggested to a colleague that he should write a piece about the series losing its way. Episode two was a meandering mess, with too much emphasis on gags. Then episode three landed, and what a belter it was.

My colleague’s sceptical piece still stands though. His point about endings was that great works often fizzle out when the author or artist can’t work out how to bring it to dramatic completion. Anthony Powell’s roman-fleuve Dance to the Music of Time collapses in volume twelve. The final novel is ridiculously poor. Evelyn Waugh’s Brideshead Revisited (wrongly described as his masterpiece) fades away. 

The thesis does not always hold.

The Beatles knew about the importance of endings from the start of their recording career. Twist and Shout was recorded in one take as the final song on their debut album. The final track on Revolver was Tomorrow Never Knows, which opened the door to a new world of audio-sensory perception. Sergeant Pepper closed with a single, striking E-major chord played on three pianos and a harmonium, fading away over forty or so seconds. They disappear with The End, on Abbey Road, and the cheeky, short, British postscript Her Majesty. And then the band is gone.  

The writers of Succession faced a challenge finishing their great work. They have chosen (look away now if you haven’t seen it) to end things early in episode three, which aired on Monday in the UK. The remaining seven episodes will now be a mere postscript. With Logan gone does anyone care which of the children gets to run the business? In the hours after his death, as the children prepared a statement to supposedly calm the markets, it seemed without his presence like just another company floating on the sea of global investor sentiment. Succession after his death seemed smaller, like just another television series.

What I’m reading

Declaration of interest – my colleague Tim Marshall writes a weekly column for Reaction subscribers. That’s not why I’m reading his new book and it’s not why I’m enjoying it so much. The Future of Geography: How Power and Politics in Space will change our World is enlightening, energising and worrying. As he says: “Each time humanity has ventured  into a new domain it has brought war with it. Shipbuilding brought warships. Aeroplanes brought fighter planes and bombers. Space is no different.”

I’ll have more on Tim’s new book in the next few weeks. Hopefully I can persuade him to talk to Reaction subscribers (the reintroduction of the podcast by the Reaction team is long overdue). We’ll also try to source some signed copies of the book for subscribers.