As the President of the US-China Business Council (USCBC) and former U.S. Deputy Assistant Secretary for China, his remarks set the stage for the remainder of our conference, reflecting on the current state of the bilateral relationship - including the economic policy landscape and key events to watch for in relevant political shifts.
Good afternoon, everyone. It is a pleasure to join you at WIM 2022. I regret that due to previous commitments, I am in California and thus unable to join you in Manhattan. Nothing would give me greater pleasure than to be with you today. The theme of the conference, exploring unchartered waters, the future of the United States and China collaboration and investment, could not be more timely or important. And I wish your conference every success.
I think that my role today is to talk about the stack of the United States and China relations. But I would also like to make some comments or share some views about technology because that is really at the heart. It pains me to say that the overall bilateral relationship could be described as chronic tension. And not only that it is trending towards worse, not better. The United States government describes China as a “Strategic Competitor”. The Chinese government does not like this characterization. The Chinese government certainly vigorously competes across every domain of foreign policy in a comprehensive if not strategic manner. It would be easy, at this stage, to point fingers and assign blame. But that is not very helpful. So rather, what I would like to do is try to approach the subject from an analytical and systemic point of view in a manner that I hope informs your later discussion.
Many of you will be familiar with the Thucydides Trap as explored by Harvard Scholar Graham Allison. I think that is a good framework to look at the relationship. China is a rising power. So, the rise of China in the United States has created a situation that political scientists like to call a “Security Dilemma.” It means that party A takes a defensive step, but that is interpreted as offensive by party B. Therefore, party B takes its own defensive step, which is interpreted as offensive by party A. And this could lead to a vicious cycle of action and counteraction. I believe that is about where we are in the relationship between the United States and China today.
There are two other political science terms that I think are helpful in describing the relationship. There is a balance of power maneuvering by virtually every country in the world to counteract China’s rise and the resulting political tension. Virtually every other country in the world is trying to accommodate the tension that they cannot otherwise avoid. Therefore, China’s rise, in other words, has created a global reaction – sometimes good, sometimes bad. But every country is employing a combined strategy of hedging their risks and then bandwagoning when possible to maximize their economic games. Do not ask other countries to choose either the United States or China. They will almost always choose both and hedge or bandwagon as appropriate. But the global impact of this balance of power maneuvering by virtually every other country in the world is extremely fluid and dynamic. And watching the balance of power play out in the context of the Thucydides Trap, indeed, makes for dramatic theater.
Unfortunately, Covid-19 and Ukraine make a bad situation worse, bilaterally, regionally, and globally. From an epidemiological perspective, Covid-19 is not so different from the SARS of 2003. However, the management of this crisis by virtually all governments around the world has created personal tragedy and economic hardship. And it is going to take a long time to work through the system bilaterally, domestically, and internationally. We are nowhere close to a reckoning on the subject. China’s implementation of the “Dynamic 0 Covid policy” or strategy has clearly saved many lives. But it is creating additional ongoing economic uncertainty, and there is no obvious end in sight. Russia’s invasion of Ukraine is also a cause of tremendous friction without any ends in sight. I think that historians, when they look back at 2022, will note that Russia-Ukraine War was on February 24, 2022. It is 20 days after China and Russia signed an agreement on February 4, 2022, and right before the Olympics that pledged “partnership without limits.” This agreement and the subsequent invasion changed the world in a quite profound manner, adding instability and uncertainty to investors and technology companies. Thus far, I would rush to say that China has been scrupulous and has not allowed Chinese banks or Chinese companies to violate the Western sanctions imposed on Russia. And I, for one, am very grateful to see that. But as we all know, the war is not over, and the pressures are building. It is clear, at least in my view, that, despite the fact that China is respecting the sanctions received, it is also simultaneously living up to its agreement with Russia on February 4, 2022. Both the United States and the EU are watching the China relationship very closely. And the United States and EU will jointly react if China prolongs the war with material support to Mr. Putin. We must all be concerned, especially technology companies and financial companies, about any new round of sanctions associated with the war in Ukraine.
Where does this leave us? If there were an economist visiting the planet Earth from outer space, and that interstellar economist took a lot at the statistical relationship between the United States and China, he would see an economic relationship as described by the Statistics. That is synergistic – interdependent, mutually beneficial, dynamic, and intimately intertwined. The relationship is far from decoupled. Our economists from interstellar space would note that there is about USD 2 billion per day across the Pacific Ocean in trading goods – about 1.4 billion from China to the United States and about 500 million from the United States to China. Services trade, and trade in data, would add another 200 million also across the Pacific Ocean. In addition to an extremely robust trade relationship, cross-border investments are also very richly distributed, with less than USD 1 trillion in foreign direct investment and another USD 4 trillion or USD 5 trillion in portfolio investment. I suspect any economists from interstellar space would grumble about how poor the investment statistics are. But that is another story. It is hard to count cross-border investment flows. If you look at flows rather than stocks, last year was a great year for American exports to China, with American goods exported to China increasing by 21% in 2021 on top of a 17% increase in goods exports in 2020. Therefore, that is a 38% increase in American exports over the last two years. Honestly, it is hard to beat that. But despite the enormous benefits that both the economists receive due to the bilateral trade and investment relationship, clearly not all those well. Donald Trump might have started the formal trade war, which still continues of course. But the tensions, the lack of conviviality, the lack of trust, and the breakdown in communication are well perceived by Donald Trump.
Again, no use in pointing fingers. Let us try and look at this from a systemic perspective. When China joined the WTO in 2001, the Director General of the WTO at that time was a tie gentleman by the name of Supachai Panitchpakdi. He is now deceased. But at that time, he asked a very wistful but important question: Would not the WTO be able to survive China’s entry into the organization? I am sorry that Supachai is no longer with us. But I think that if he was alive, he would rephrase the question: Would the WTO be able to survive the United States and China’s mutual trade and diplomatic hostility? And the answer to that question is not yet known. But it does not look great. I would say that if you were looking for a specific turning point in the bilateral relationship, and indeed in overall Chinese economic and foreign policy, it would come with that turning point, which would be the great financial recession – of 2008-2009. At that point, the Chinese government began to take policies that really began to diverge from the global norm. And certainly, that would be true in the economic and in the trade space. So, all of our Chinese friends in the room will be familiar with the expression “国进民退”, or “The State advances and civil society retreats”. And I think that all of our Chinese friends in the room today would probably agree that this expression’s tendencies are even more apparent in contemporary China today. And I have to say that that is not something that China’s trading partners welcome.
I think that it is fair to say that both countries, the United States and China, are not living up to their WTO treaty commitments and are engaging the trading policies that clearly violate the spirit and probably the letter of the WTO. Neither country is keeping its commitments to the other. As a result, the entire trade architecture is fraying. We recently had a good WTO ministerial in Geneva. They were able to patch this up in parts. I am happy to talk about that. But the problems are profound. And nowhere is truer than in the case of technology and innovation. So we should recall that the WTO was written by the liberal democracies in Europe, North America, Japan, Australia, and New Zealand many years ago. The document reflects western democratic liberal values and norms. China joined the club later. And it was not a party to the original drafting or the original agreement. Moreover, the technical issues that you are talking about today are not even imagined by the original drafters of the WTO. Let us just take stock here. The Internet did not exist at that time. We had not discovered the double helix. We did not understand climate change and renewable energy. It just was not a thing when the WTO was originally written. And thus, the WTO agreement is silent on most of the issues that you will be discussing today. So, there are no global WTO rules to the road or technology cooperation between the Americans and Chinese companies. There are no rules to the road for competition between American and Chinese companies in the technology and innovation space. And more difficult yet is that there is no way to enforce these rules, even if they did exist. And that is a problem. You are going to have to rely on domestic laws, rules, regulations, and norms in both the United States and China. And they are not very consistent even when you do not consider Europe and third markets. So I wish that it were the case that technology competition and cooperation rules were simply a matter of technocrats sitting down in Geneva. That would be simple to address. It would also be great if we could just sit down and write the rules. But it is not so simple. Because of the systematic and even strategic rivalry that I spoke of earlier between the two governments, there are strenuous efforts by both governments to achieve superiority or even dominance in multiple fields of technology. Both governments wish to avoid dependency upon the other. The President of China is very explicit about this when he talks to Chinese audiences. He emphasizes over and over the themes of technological self-reliance, energy self-reliance, and food self-reliance. Unfortunately, nothing could be further from the ethos of the WTO. The WTO is not about self-reliance. It is about interdependence. But by focusing on the technology side, every effort in China has been put into place by the Chinese Government to achieve the goals of technology self-reliance. So my organization, the United States China Business Council, has cataloged over one hundred industrial policies that aim to restrict imports and assist Chinese exports in the technology area. The Chinese Government is dedicating vast sums of money to that goal. According to Barry Norton, a wonderful economist at UCSD, as much as 11% of China’s GDP has been set aside for industrial policy subsidies. That is over USD 1.1 trillion. That research has been corroborated by other researchers. According to Scott Kennedy of the Center for Strategic and International Studies in Washington, China spends as much as 4% of the GDP every year on industrial subsidies. And that number is four or five times larger as a percentage of GDP. Then the next most aggressive country, which would be Korea, spends about 1% of its GDP on industrial subsidies. That is a lot of money.