Chinese Economy, Prof John Troxell

I'm professor Jeff Troxel I work in the Strategic Studies Institute I have been here at the Army War College for about 18 years in that capacity I've taught an elective on the economics of national security and so over the years I got involved in expanding that a little bit to to delve into the Chinese economy so I've been given a lecture on the Chinese economy for about nine years eight to nine years and a lot has changed in that time so now in addition to being in the Strategic Studies Institute I'm also a proud affiliate of seminar 16 alright so I had to get that plug in there so I got my paid audiences here so I appreciate that now the other thing that I've done this this past year there's a team of four faculty members in 15 highly engaged students that spend a year you know we've got a couple folks here in the crowd from that that's been a year examining US strategy visa vie asia-pacific and so that's another part of this China talk and some updated issues that I've included in this current version of the presentation in fact ten days ago we came back from a week-long visit to China Beijing and Shanghai talking with some of the top think tanks as well as a couple of their top universities counterparts in those organizations about us-china relationships and I've reflected some of that in this updated pitch now are there any economists in the group anybody brave enough to claim they're an economist okay I likewise and not an economist I mean I've been working this issue but I don't have a PhD in economics or any of that sort of thing so if we have any real tough questions we'll have to defer them to somebody else but it won't be necessarily me but you all know why God created economists correct no no so weather forecasters wouldn't feel so bad so so that's that's that that's the one joke of the presentation so if you didn't like that when I'm sorry you know you might as well go find another another spot okay we got a lot of ground to cover so let me go through this probably fairly rapidly because I want to give some time for for Q&A as we get into this now if you're interested in China presumably or you wouldn't be here there's so much out there written about China and so this is just you know a collection of some of the latest books out there and you see it's the full spectrum from China is going to dominate the world - China's on the verge of collapse this presentation is going to be somewhat in the middle you know sort of reflecting some of these authors that are here in the middle and so my view is China is probably going to muddle through and they've got a lot of muddling to do and so we're going to talk about that and hopefully that will come out as as we go along here okay so here's the agenda we're going to start with context I think context is really very important if you want to understand a strategic issue of any import I think you need to know the context and so we're going to start with context a little bit about geopolitics do economics the rise of China and some comparative economics and I know that'll put everybody to sleep but it won't be that long but it's very important when you when you think about this and then I'm going to spend time just talking about one issue trade I think that's the issue that the president Trump is really highlighted some challenges will then broaden it back out again to look at some overall challenges that China faces and then come up with the US response so one of the things to think about you know this is our see if I get into pop up here our late great strategists Yogi Bear the future ain't what it used to be and so when you think about the us-china relationship that clearly holds I mean I've said just in the last eight or nine years that I've been given this lecture the situation has changed pretty dramatically and you can go back another decade prior to that and it's really changed a lot so there are a couple points that I want to make just right up front the relationship America's relationship with China I think is going to define the 21st century I mean this is the two great powers right now and I think it's going to define the 21st century and relations are going to be much more subtle and dynamic than a lot of people may think so this is Yogi Bear it's very dynamic the future ain't what it used to be and then the final point and I think this is very important too and we're sort of going to close out with this there's nothing inevitable about either China's rise or the outcome of this competition US and China not being inevitable and I know there's a lot of there's a lot of discussion out there well maybe there is all right so geopolitics and I see I've got my good friend and colleague dr. David lye in the group and he's done a lot of writing on the power transition and you see power transition is noted down here and that's a lot of what the concern is here's the United States status quo power and you've got the rise of China and what does that for tell in terms of the international order in terms of international relations so we spent a lot of time at the War College reading this guy through Sidda T's about the Polynesian or the peloponnesian at the Polynesian the Peloponnesian War and so he's got this quote here about the rise of Athens in the fear that it inspired in Sparta and that made war inevitable so that's known as the lucida T's trap so you've got this power transition at work the rising power is going to threaten the status quo power war is going to result so lots of examples the guns of August 1914 the rise of Germany threatens the status quo power Great Britain World War one breaks out Graham Allison's got a brand new book out just recently published and he's talking about destined for war examples about the lucidity strap so we're going to see how that plays out now the fear of China I think is sort of captured in this little cover from the Economist magazine and I think this fear is largely driven by economics and we're going to come to that but this is not only do we fear China but we also think China cheats we don't trust China and so I that that's a problem when we think about try to manage this relationship so this China cheats poster here came from the 2008 Democratic primary in Pennsylvania the last big primary between Hillary Clinton and Barack Obama and so a lot of discussion about China and trade and all these kind of issues so this is the notion here from Leslie Gelb Gelb that this is what nations fear they fear Chinese influence as a result of economic power even Graham Allison in his recent book says yes you know the up going a little bit faster here but the aggravating the possible march toward war is China's economic growth so my argument in this presentation is is going to be that geopolitics is certainly very important but we need to focus on this relationship if we're really interested in managing the rise of China managing the relationship between the US and China we need to focus on geo-economics the use of economic interest in support of national interest and I think that's where we're going to come and and we'll talk about this lots of challenges in doing that but I think there are major opportunities for us when we focus on it from that perspective all right so let's talk about the rise of China so picture's worth a thousand words those of us who went to China 10 days or came back from Shanghai we got to see this so anybody in the audience been to Shanghai okay so you know what's coming so this is 1990 depending on when you've been there 1990 looking from the Bund across to the pudong area of China and here it is 20 years later 20 years later same shot essentially so there it is 20 years the rise of China and that's what it looks like so in that period of time about 700 million 700 million Chinese have moved out of extreme poverty 300 million Chinese have moved in the middle class there are a million millionaires in China it's the world's second largest economy and a 15 fold increase in their economy ten percent growth over three decades that's the rise of China in a picture now here it is in a chart so we see that red line there and we see that China certainly increased their position and now this is a projection when you look out here but this is this is the upward tick and so there's some key you know time period here where we see this rise of China and some key dates so 1976 so what's the best thing that Mao did for China he died and got out of the way now that's a theory I know not everybody may appreciate that but 1979 the end gel pen comes in and he starts the reform process 1989 Tiananmen Square so this is not an economic event but it's a huge political event obviously Tiananmen Square followed closely by various color revolutions in the former Soviet Socialist Republics so a major of major interest to the leadership in China so just you know keep that in mind you think about that context 1997 the Asian financial crisis big deal in Southeast Asia not just Southeast Asia I mean it affected countries Malaysia Indonesia Thailand started in Thailand all the way to Korea and it really caused in that region of the world to include China a little bit of discomfort about our international financial institutions the IMF the World Bank the Asian Development Bank they eventually they eventually came to the rescue of these countries but they imposed very draconian conditions 2001 China enters the World Trade Organization 2008 the global financial crisis this is a big this a big turning point this 2008 timeframe and if you recall back to David lies power transition you know maybe we're moving into the stage 2 now where where China's power is viewe China's economic power is viewed but not only is China rising but this is a huge hit to capitalism the u.s. capitalist model the Washington Consensus about how countries are supposed to operate now the thought is well maybe the Washington Consensus isn't so good at because look what happened and this all started in the u.s. maybe there's something like a Beijing consensus so maybe state control of the economy is not such a bad thing the other thing that this does is this causes in the Chinese mind but you know a Chinese strategist says well you know maybe maybe our day is going to arrive where we can overtake the United States a lot sooner than we thought so 2008 is a big a big point to think about okay here's a little bit of econ 101 and I know you've all had econ 101 near and dear to your heart so GDP gross domestic product it's made up of consumption investment government spending and net exports so here's what it looks like for the US and China so US largest economy in the world lots of consumption and a little bit of investment you know substantial amount of government spending and right now we've got a trade imbalance current account deficit here's China you know notice the difference so this line up here for the United States is very typical of developed nations high-income nations we are based on consumption based economies most of our economic activity is based on consumption China not so much China is out people would argue is out of balance from that particular perspective so let me show you a couple of other statistics here a population you know much much different scale we'll talk a little bit about demographics eventually and the GDP per capita is much different as well so when we think about China you know so this is reflected in this investment China's investment portion of its GDP has gone up tremendously as a result of the 2008 financial crisis China had a bigger stimulus fiscal stimulus for investment than we did the United States and you knows all this political concern about our fiscal investment in United States China had more so investment is up household spending down another big difference it doesn't show up but you can you can derive it here if consumption is way down savings is extremely high in China they're saving a lot part of that is they're not spending a whole lot on social services so the Chinese have got to save for their old age save for their for their health care and those kind of things so there are some differences there all right let me talk about this dual identity and the two aspects of the dual identity the first is as shown here actually from a purchasing power parity perspective which represents relative prices in countries so if you got a poorer country the relative prices are lower in that country so they are income goes further so in a purchasing power perspective China is already the number one economy so that's a developed nation but this is this extreme poverty rate I mentioned 7 over 700 million Chinese out of extreme poverty and now here we are 2010 12% Wow I mean that's a great looking chart 12% of 1.4 billion is more than half of our entire population so this dual identity is China is a developed nation and it's a developing nation so China will argue that we still need to have some special consideration given to our developing status a lot of that played out in the Paris Accord Paris climate Accords and we're not going to necessarily get into that today but that's that's the first dual identity so the second dual identity is I mentioned the reforms in 1979 so China reforms its economy and they start to move capitalism with Chinese characteristics so you have a private sector the private sector grows and that that attributes a lot to that growth that I showed earlier on the Chinese economy but they also have a very large state sector of the economy so the dual identity is a private market-based economy and a state based economy state-controlled economy lots of state-owned enterprises lots of excess capacity and an increasing debt problem in the banking industry the banking industry is essentially all controlled by China ok one more thing to talk about here political economy so when you think about political economy that's sort of the notion that how does a nation-state decide how to allocate resources is there going to rely on the market or is it going to rely on the state the government so the United States most developing nations most Western nations we rely primarily on the market I know there's a lot of government regulation there's a lot of government policies but primarily market based China not so much China is still as I mentioned that dual identity the state sector the state control even the state control of the private sector in China is pretty tremendous the the Communist Party of China has got representatives and a lot of these private firms and so there's still an awful lot of control so the number one charge for the gping is to keep the Communist Party of China in control in command the legitimacy right now comes largely from the performance of the economy but if there's any kind of discussion between RKO we're going to go towards economic issues or security issues Security's always going to get the call all right so that's your comparative economics and it's important to sort of remember this for context all right let's talk about trade ok so here we go there's trade you know I think it's really interesting when you look at this cartoon Secretary of Commerce Ross and the newly confirmed US Trade Representative light light is er have both argued that the number one thing we should do in trade is do no harm so I don't know about this cartoon and doing no harm but ok so here's what the president said now this is in the campaign this is campaign rhetoric so this is his tweet up here you know the robbing us blind trade deficits they're stealing our jobs it's just terrible and here's what we're going to do we're going to narrow the trade deficit we're going to create jobs so this trade is trade deficit as the metric but it's creating jobs it's what it's all about and we're going to talk about that withdrawal from TPP trans-pacific partnership apply tariffs and China of course is a currency manipulator we all know that terrible folks actually that's probably how he would say it in a tweet just terrible but at any rate okay so here we go let's by the way none of this is new so when we think about campaign rhetoric and trade issues in the United States I mean for the entire 21st century you know all 17 years of that actually going back another decade we've been talking about trade issues in our major presidential campaigns so there's nothing new here in reality over the years all right all right so let's talk about trade so we're going to talk about China and the first thing on the supply side and so this was the concern you know the concern to people hey oh wow China enters the WTO in 2001 exports take off and it becomes the world's workshop and what happens to the United States our current account deficit our trade imbalance goes into the tank so that's the argument that's the concern that we have with China about this huge imbalance in trade last year 2016 three hundred forty six billion dollars that's actually an improvement over 2015 it's about twenty billion dollars less of a deficit than it was in 2015 they are our number three export markets for the United States so that doesn't compare with this column here but that's still an awful lot of exports that we do annually with China and they are number one source of imports now a couple things to mitigate that picture right there first of all you know when you look at this chart over here yeah we've got a huge trade imbalance with China but over the Latin know since 1990 we've had a huge trade imbalance with the Pacific Basin or the Pacific Rim country so back here most of this blue column represented any guesses Japan so really you know you look at the top here in our trade imbalance with the Pacific Rim is about what it's been for you know a quarter of a century but it's just sort of excuse me shifted from other nations Japan Taiwan Korea whatever to China so that mitigates it a little bit the other thing to consider is this a lot of those exports that we get from China are coming from foreign invested enterprises not all US but a lot of US firms are invested in China they're making products and they are in turn in exporting them to the United States if you look at high-technology exports about 82 percent of them come from foreign invested enterprises and so that there's a little bit of mitigation there you know this is this globally integrated economy at work here okay so let me talk a little bit about manufacturing I'm going to I'm going to introduce the issue here and then we're going to come back to it in a little bit the smiley curve I don't know if any of you familiar with the smiley curve I was first introduced the smiley curve reading james Fallows in the Atlantic Monthly and so the argument is that the money in manufacturing is on the upper ends of the smile it's the brand it's the ideas the design and then it's the sales and the contracts down here manufacturing and assembly you know you're just putting the pieces together no real money in that so what's happened in 21st century manufacturing is that manufacturing is now commodity it's been disaggregated supply chains and China just happens to be the location for final assembly but there's no not much value in the final assembly and so what that generates when you think about trade statistics here's an example and a lot of you are probably familiar with this so this is Apple and the iPhone so this is the global supply network for Apple so it's designed in California United States bits and pieces that go into the iPhone come from all over the world Asia Europe goes to China for final assembly gets shipped across the world so what that equates to for the United States they imported you know this data that is from 2009 they exported 11 million iPhones in the United States that's an export value of two point or 2.0 billion so that adds to our trade deficit but when you consider that ninety six point four percent of the value comes from someplace else instead of a two billion dollar deficit to China it really should only be about a seventy three point five million the statistics can really drive a different type of analysis so the OECD the Organization of Economic Cooperation Development and the World Trade Organization they've done analysis and they said you know the US trade deficit with China should actually be about thirty five percent less than what it appears in the current statistics so the Trump administration can claim victory we've already decreased the trade deficit by thirty five percent but that's just a way to think about this because the the new way globalization and global manufacturing has changed so much the statistics doesn't come up with it or kept up with all right so the other that was supply-side now let's look a little bit about demand side so demand side everybody wants to be in on the China market emerging markets have more consumers than the United States the spending spree in China and we got to see that when we were there for a week clearly well-off in Beijing and Shanghai and then this notion here the ten trillion dollar prize and the argument on the ten trillion dollar prize that's consumer spending between the rising middle class in China and India everybody wants to be in that market so we've got some supply-side issues in terms of where things are made but we want to be in on the demand side as well okay so there's manufacturing competition we're in a competition with China we know that this is this fear of China and China now is the largest or is the largest manufacturing nation in the world so we've seen that they've overtaken us several years ago however the wage benefit that China has has used to its advantage the is disappearing wages are going up in China so the cost of labor is going up significantly in China and that's going to have an impact so we've got this notion of manufacturing Renaissance in the United States and you can just sort of read through some of the stuff you know the energy revolution is huge in America in terms of driving down cost so that offshoring and out is becoming reshoring to a certain extent so that's one notion one notion united states we're doing pretty good here you know China you know China reads the same stuff that we read so in 2015 China you know China knows what the smiley curve is all about they don't want to just be down there being metal bangers and putting stuff together with not a whole lot of value-added they want to get in this innovation deal and we're going to come back to this issue in a little bit 2015 they came up with China 2025 and really what they're pushing here is not so much made in China but made by China so they're trying to get up in the innovation areas in the higher parts of the global production chains so they're working it so the competition is is hard at work here there's good news and bad news for the United States we talk about the third Industrial Revolution the new Industrial Revolution all this adaptive manufacturing 3d printer it's collaborative manufacturing automation and you look at this chart here you know us as an advantage in it so that's the good news in fact a recent report from Duluth and to says that by 2020 the projection is the United States is going to regain the number one spot now this is the projection whether or not it happens in the next three years but it just tells you how competitive this is that's the good news the bad news is people say that in the future factories are going to have two employees they're going to have one one person man or woman and a dog and the person is there to feed the dog the dog is there to keep the person away from the machines so the bad news is about this manufacturing this third Industrial Revolution or the fourth Industrial Revolution and this new manufacturing coming back to the United States it doesn't have men jobs and a lot of people talk about that so yeah trade has a huge impact on employment but not nearly as much as Adam ation Automation is what's really driven down manufacturing jobs in the United States we are manufacturing about four times as much as we did in the 1960s 1970s and we're doing it with less than a quarter of the labor we're manufacturing almost as much as China and we're doing it with about 10 percent of the labor that China has so automation is the key when you think about manufacturing so as a society we need to come to grips with that to a certain extent okay when you talk about when you talk about trade and the president currency manipulation is another issue here we're not going to spend a whole lot of time we got any foreign exchange traders out there didn't think you'd want to raise your hand on that one but that's a tough one okay so we're not going to spend a whole lot of time on on currency manipulation let's just get to the bottom line so the Treasury Department puts out by annually in April in October generally this report on foreign exchange rates foreign exchange policies are made in major trading parts incidentally this is an excellent report to give you a good summary on what's going on in the macroeconomics in the United States as well as globally very good report so a lot of people were anticipating ok this is the first one from the Trump administration they are surely going to say that China is a currency manipulator well not so fast so here's what they said nobody is currently manipulating their currency that meets the standards here China's current account surplus is in fact decreasing so things are getting better from the standpoint of that's huge surplus at China head in in the 2010 time frame it was about 10% of their GDP now it's down to 1.8 percent that's shown there in fact China is actually intervene intervening in the exchange markets but they're doing it to strengthen the RMB not to devalue it so that's one of those things be careful what you ask for we always say in the United States your currency to be market-based but if it was market-based the international markets right now are down on China on their currency so the currency would devalue that makes Chinese exports that much cheaper so oh but we don't mind China intervening in their currency market when they're trying to strengthen the currency so it's not necessarily an issue right now so that's currency manipulation okay so let's talk let's broaden it out a little bit China's economy so this is the issue here in terms of China's got a lot of problems people trying to figure out is it going to be a soft landing or a hard landing it's going to be a landing is going to be soft or hard so this is a report from Rashard Sharma who's the chief global strategist at Morgan Stanley he says China is now a threat to the United States not because it is strong but because it is fragile so that's just something to think about in terms of what happens if the Chinese economy crashes what happens if things don't go so well in China so this is the the growth growth projections the projection here from just a couple years ago is that China's growth is going to decrease fairly dramatically and become very similar to United States I mean if it becomes a developed nation a richer nation its rate of growth is automatically going to decrease they can't keep up at the ten percent are now the 6.5 percent and the statistics people say that in a PRC one of their top manufacturing industries is statistics so there's a lot of thought about you know can we trust these numbers so this is the official number about 6 close to 7 percent the unofficial number has it down below 5% so China's growth is decelerating that's a huge issue for the Chinese economy some of that's driven by this other notion here this is the key concept of this particular presentation the middle income trap so the middle income trap says that China this is how China grew this Asian development model they took advantage of low hanging fruit low skilled labour low wages low-tech manufacturing exports the bank's mobilized resources for investment because the state owns all the banks and they grew very rapidly and now they're into this you know they're into this middle income level but the World Bank did a study they did it in conjunction with China it's it's the studies China 2030 and they looked at a hundred and one countries that hit the middle income level in 1960 and by 2008 so that's you know almost 50 years later only 13 of those 101 countries moved into a high-income status so the middle income trap I guess it's like a sand trap you get in it and you can't get out and so China now is facing the middle income trap and so how do they get out of the trap now there's some nations that have made it and we can talk about that perhaps in QA what some of the thought is there but what that means is you know we've talked about the u.s. rebalance to Asia Pacific you know Secretary Clinton announced it President Obama talked that I mean that was one of the things that we were doing in our special project this year what about the rebalance the rebalance of the Chinese economy is even more important and so they've got to go from from an economy that was based on if you remember that econ 101 investment capital investment they've got to go to more consumption so what do you do how do you get more consumption from your people from your population where you got to increase wages well you increase rate wages and now you're your manufacturing is less competitive but that's what you got to do you also got to provide more social services so they're saving less if you have a 50% savings rate that's not going to increase consumption so what you end up doing is the ordinary Chinese and small businesses need to benefit disproportionately from these reforms that's really hard to do now China knows all about this zgp knows about this I mean all their technocrats no technocrats know all about this and so this is this notion about the man who must change China this is a brief or a quote from The New Yorker from a couple years ago and you see what the thought process is there ambassador john huntsman who was the former ambassador of china and the current chairman of the atlantic council he said this about ZG thing he says Gigi ping wakes up every morning and his number one priority is domestic stability remember that political economy thing we talked about if he can't keep one point four billion people calm employed at peace the whole system falls apart so that's his concern his concern is the strength of the economy and they're trying lots of different things to try to get things going you know they talk to talk about the size of role for the market loosen capital controls all these kind of things and they're struggling so these are some of the broad challenges that they have and when's the bubble gonna burst I mean you know that's what the Time magazine cover is all about demographics the one to four problem they've recently relaxed the one-child policy but it's going to take time for that to permeate through their demographic profile so you have one child supports two parents supports four grandparents that's tough on that one child you know we know how hard it is when we look at our social security projections and we figure out that wow there are fewer and fewer workers supporting all the retirees so that's a huge demographic problem that they have pollution is is a tremendous problem and I think you've probably all read about that inequality is growing in China urbanization the social reform corruption all of those things compound the problems that the Chinese government has in making those economic reforms so this is just a little bit about this comprehensive economic reform some of the social reforms you know they've got the suku system there that essentially in order to get social services in an urban environment you've got to have a pass you've got to have like a passport that says you're from that city if you're a migrant into that urbanization process and in all these big factories that have been built but you don't have a pass you don't get any social services so they're trying to change that but it's really expensive for these local governments to now have to pay for all that at the same time that's happened in your middle class is growing larger and larger putting more and more demands on assistants so they've got a lot of issues debt Moody's just recently within the last couple weeks downgraded their sovereign debt level and that's some of the things that they talked about we're concerned about their growth we're concerned about the liabilities that are on the system China says don't worry about it I think we can handle it but that is something that everybody's watching the debt okay so what do we do about it just a couple minutes to talk about the US response to all of this to the trade considerations to these macro problems that we talked about so we got this high-stakes poker game this is from an economist from a couple years ago President Obama and he's playing poker was easy being and Putin well we got a new player in the game and and so we're going to see how this how this works out and so my argument now is in this high-stakes game you know we got to apply this geo-economics this is the way we ought to approach this relationship us-china relationship and so we need to use our economic instruments to promote national interest trade investment monetary policy it's not a zero-sum game and this needs to be more from a cooperative approach so that's geo-economics now remember what are they playing here you know they're playing high-stakes poker they're not playing solitaire right so China has a voice in this too this is not just the United States trying to figure out what the international order is going to be we've got other big nations out there that are thinking about what the international order should be so China uses the term strategic economy and they talk about employing their financial resources to gain influence to increase their influences lots of examples I mean you go back to 2012 and the rare earth issue with Japan banana boycott against the Philippines and just recently you know the US what do we do you know security move we put fad a fad battery in South Korea to guard against the North Korean missiles so what does China do China boycotts latte because latte provided the golf course for us to put the fad battery so that's economic you know that strategic economy some people would say that's economic warfare so the Chinese are in the game we got to get in the game so and we're off to a decent start you know this was the Marla go visit in April between our two presidents and they came up with the us-china comprehensive dialogue I mean I just love these administrations so the Bush administration Bush 43 had the strategic economic dialogue President Obama comes in he says we got changed the name so it became the strategic and economic dialogue and now President Trump says oh we don't I don't want any of that stuff so we're going to have a comprehensive dialogue well whatever you call it anyway so they're off to a start and so you got all that campaign rhetoric you got the trade war threats that the president sort of laid out there and now we've got those comprehensibly you can see what the four pillars are you know this is some of the cybersecurity stuff that mr. singer was talking about today the comprehensive economic dialogue in May the 10th of May so several weeks ago and the Chinese were all over this when we visited China and talked to them this 100-day plan was a big deal for them say hey we're making progress here and this was just announced by secretary Ross commerce here's what he says about China relations pretty interesting when you when you think about that quote when you think about how bad things were during the campaign and how things started out a little bit rocky when now evidently we're doing great and this is part of this 10-point plan or 100-day plan four points so we're making progress I mean there is some progress there and so that should be encouraging and now they're talking about let's go for a one-year plan maybe maybe go for a free trade agreement with China that would be pretty tough but we've been working for years and years on a bilateral investment treaty so maybe that's a little bit easier reciprocity level playing field that's what we're after okay but there's other competition out there geo-economic and so we got these multilateral trade agreements and so there's three that are over here the TPP the trans-pacific partnership then there's the regional comprehensive genomic partnership that doesn't include the United States that sort of talked about as the Chinese counter to the TPP but really the origin of the our step is ASEAN and then we got the free trade area the Asia Pacific you know that's sort of a long shot so TPP an economic program does it have geo strategic implications absolutely so here's former Secretary of Defense you know you know you pass a TPP and that's like giving me another carrier in the Asia Pacific well not so fast you know this is one of those campaign promises that the president stuck with TPP is gone and and I think we should shed it here because I think that's my personal view I know Jeff Ezeiza sitting there wrote a paper about the economic issues in asia-pacific and he shares a few but let's not lose all heart I think there's some residuals that could come out of this you know the president says I don't want multilateral trade deals but I'm willing to make all kinds of bilateral deals and so you know he met with Prime Minister Abe a maybe there's the possibility for a US Japan free-trade agreement you know the hard negotiating has been done because Japan in the US were in the TPP so that negotiation has been done so now we just gotta continue to pull that off as a bilateral agreement the president just met the beginning of this week with the prime minister of Vietnam and so you can see some of the language here you know we got trade deals going on this guy's doing a great job particularly in categories and trade and other things so maybe we can knit something together with some of these other nations we already have a free trade agreement with Korea Australia and Singapore so you know we've we've got we're playing in that arena and so maybe it's not all bad and then I think this is pretty interesting down here the administration just sent to Congress their guidance on how they're going to renegotiate NAFTA and a lot of the provisions came from the TPP comprehensive trade agreement high standards all these different areas so maybe we're going to capture some of that work Secretary of Commerce Ross who's the head is the point man for trade in this administration recently said you know I think maybe we can make the TTIP work so the TTIP is a transatlantic trade and investment partnership it's sort of a counterpart the European US EU counterpart to the TPP so maybe we can salvage some of this multilateral stuff and there was recently a meeting of the TPP eleven in Hanoi in our US Trade Representative was there and so there's there's still talk going on so we might be able to salvage some things from the TPP here's another issue about geo-economics one belt one Road or the belt road initiative and so this is the big trillion dollar or infrastructure investment plan that China has put on the table came out in 2013 and now it's really gotten a lot of press a lot of emphasis from zgp this is his major international initiative and there's lots of reasons behind it you know it's initially oh it's their pivot to the west so initially you know this is the belt the land routes and this is the road I know that doesn't necessarily make sense but the maritime routes or the road and the belts are that are the land routes and so there's lots of reasons why they're doing this absorb excess capacity of all those zombie state-owned enterprises that we talked about that's one of the things but the geo strategic component and that's something to be concerned about too but you know China is not the only one there's huge needs for infrastructure in this in this region of the world so when you come across this I found it's pretty fascinating you know South Korea has got a plan India has got a plan Japan of course has a plan and a song has got a plan so everybody wants to build infrastructure so it may not be such a bad thing for us to cooperate with China on certain aspects of the one belt one Road because they're all after the same thing but we got to be careful so 13 14 may in Beijing they had this belt and road form now it's funny that the US representatives say oh yeah the belt and Road form the acronym for that is be a RF barf you know it's actually we got to take a little bit more serious than that so this was the bridge that they were creating there in Beijing and so this is the statement that president reshipping makes about the belt in robe form and the one belt one road it's going to foster a new type of international relations win-win cooperation globalization he's talked about it being globalization - oh this is the this is the way forward cooperative relationships and we're going to create a new international security framework so the red flags ought to go up when we think about this you know that's the geostrategic component so we got to play in this game so what do we do about it u.s. options I think we got to either we either we push back real hard trade war protectionism containment grudgingly support the international order or we do something like this inclusive economic order enforce the rules use geo economic tools and enhance the foundations of economic US economic strength so there's another recent book that came out that talked about did they get this thing to click economic interdependence of war so that there's one thing you should figure out our two economies are really NIC pretty tightly together on those trade relationship on those investment relationships and so this author says that because of that interdependence nations won't go to war as long as you consider these three things this trade expectation Theory avoid trade security spiral so if China feels threatened by Malacca the Straits of Malacca which they probably do because the US Navy is out there patrolling the Straits of Malacca and all of their oil from the Persian Gulf comes through that Strait of Malacca if they really feel threatened by that then that's going to increase the potential for conflict think back to you know 1940 1941 US Japan when the United States starts to clamp down on oil exports to Japan on scrap steel going to Japan now Japan's trade expectation is that wow you know you know we can't count on unite on up getting that stuff because the United States is going to is going to stop it so war becomes the results in 1941 we got to have a cooperative attitude no containment and that develops a positive long-term view and so that should work out so that's the thought about this interdependence if we do cooperate and I think it's in our interest to do that and so this notion here Tom Friedman in his book the world is flat makes the argument about the Dell theory of conflict prevention in his first book on the economy the Lexus and the olive tree excellent book on globalization by the way so if you're looking for a good book I mean and he's a great writer he's a you know that's what he does he's a journalist so that was the McDonald's Theory conflict prevention you tune new to know two nations will go to war if they had McDonald's well he had to scrap that theory because we bombed Serbia and Belgrade headed head of McDonald's at that time so now he's come up with the Dell theory of conflict prevention and this ties in with what we've talked about these integrated supply chains mutual assured production no two nations can afford to go to war with each other if they are involved in these integrated supply chains we got to rely on our strengths we got to fight through this you know we got all this stuff in our favor you know if you want to be a leader of a major country the u.s. or China and you're looking at economic issues we got a lot of huge economic issues in the United States but we are much much better shape I mean that's the argument that I've been making and hopefully you recognize that we are much much better shape than is China in terms of the huge issues that China faces alright so here's the final exam so just sort of skim through that US economy comatose current slump remains Longo's dislocations jobs down debt overhang all this kind of stuff with banking collapse real estate depression you know so when was that somebody knows somebody must have been in my earlier lecture 1990 to see if we got it here 1992 what we concerned about Japan okay here's the coming war with Japan so that was our big economic competitor the Soviet Union is gone Japan's our huge economic competitor this is what it looked like Wow look at that 71% of our GDP Japan's eating our lunch Toyota all that stuff well it didn't play out that way did it you know Japan hits a financial crisis a banking crisis and now Japan's in a deep slump you know two decades worth of a slump I'm not saying that's going to happen to China but that's just this notion that nothing is inevitable all right so we just got a couple minutes before I got to send you back up the seminar what are your questions Jeff if I can jump in here um demographics so the assumption was that when trying to relax their one-child policy that their birth rate would go up that is not proved to be the case I mean your number there 1.5 is still below replacement level so the implications of that economically and then from your most recent trip can you talk about what is the PLA say about the 140 years of one-child policy how that contributes to their ability to wage war I mean I mean demographics is a huge problem for them I mean the other thing that's that we didn't talk about but they've got this huge gender imbalance so if you're a Chinese couple and you're relying on this one child to take care of you what do you want to have do you want to have a little baby boy or do you want to have a little baby girl oh by the way you want your family name to continue so you want to have a little baby boy so the other thing about this demographic thing is they've got a huge imbalance of more men and fewer women and the demographers that I've read said they don't know how that's going to work out they've never seen a population you know demographic you know pyramid that looks that way that's so out of balance so that's one issue a second issue that's related to that you know if you got one dear son in your family now this is this is a concern but you know I don't want to over blow it but it's the last thing you want to do is send and send that young man off to war and risk his life someplace so but you know like I said it I don't want to overplay that but that's a concern but but also this demographic so they're working age population is already decreasing so you think about this huge labor advantage that China has but because of their their pyramid the demographic pyramid their working age population is already on the decrease now it's nothing like Japan Japan's areal from a demographic perspective Japan's a real basket case so it's a problem now so they've relaxed the one-child policy and I know that you know the one-child policy wasn't necessarily sacrosanct anyway but it's going to take a while and this is what the argument is for the society to decide oh we want bigger families you know you just don't turn that on a dime because people are living the style that they've gotten used to now and drive a nice fancy German cars and all this other kind of stuff and they're sending kids off to nice schools in the United States and it becomes a lot more expensive you know it's one thing to do that for one child it's a lot more expensive to do it for two so it's going to take a time for that to work its way through the system so it's a big constraint for them demographics what else yes sir so in the event of war with China assuming all trade immediately stopped who would get hurt worse how would that play out well you know there's the interest it be interesting to sort of figure that one out there's been some discussion you know when the Trump administration was coming in there was a lot of this talk about a trade war so we're going to have this trade war forty five percent tariffs currency manipulation all that kind of stuff and then the thought okay who's going to suffer more so I don't know you know so the analysis is not too deep into that but generally the thought is that China would suffer more than the United States because the United States you know you just look at you look at the the figures there for our current account balance our trade deficit is 0.5 percent of our economy so trade is important for us but not necessarily that important and particularly the bilateral trade you know that that would take it you know that would that would cause a hit but not nearly as much as the amount of trade you know the exports that go from China to the United States a much bigger share of their economy so the thought is that it would hurt China more then you've got this I mean if you really want to play it out I mean is this Malacca Straits thing and if the US Navy you know if we're really in a war with China and the US Navy decides to shut down the Malacca Straits that's a huge huge problem I mean that's not not unlike Japan at the outbreak of World War two in terms of their dependence on importing energy one of the reasons behind the one belt one Road they're trying to build pipelines are trying to build other access for energy imports to come into China that don't have to go through the Malacca Straits so I think I think you know if push came to shove we'd probably have the upper hand on it but we don't want to do that I mean you know we are you know we want to grow our economy so our economy would take a hit it's just that it wouldn't be quite as big as as China's in my view by the way I forgot to mention the disclaimer upfront you know everything I said here is my thoughts that doesn't represent the army the Department of saying the Army War College and and certainly some of my colleagues over in SSI right David no okay so what else we got we got time for maybe two more questions there in the back um I just want to build upon what you are saying about the fertility with women becoming more educated they're going to delay childbirth and we see that in any developing nation so I don't necessarily agree I don't think the desire to have a male child to pass on the name will supersede the delayed fertility option or for a woman to decide to have a child later she gets her education and there's a certain forced retirement that happens in China earlier for women so now she may only have 20 years in you know potentially to work so I think that could very well counterbalance that and I think you will see possibly that that fertility rate to still be below 2.0 for a very very long time so I think that's that's a great observation and I think that's the concern that they have I mean you know that you know as a strategist and I don't think we talked about it too much at the War College but as a strategist when you're thinking globally demographics is really an important subject to figure out you know the demographic profile of these various countries and to take that into consideration so you know but they do have that huge imbalance and so there's a lot of thought I know every day that we were in China there was an article in the China Daily the English language Chinese paper that was talking about trafficking of women from Vietnam into China and to try to adjust some of those kind of things so pretty interesting yes sir yeah I'm going to point out something I haven't heard here and that's the morbidity and mortality statistics for China so the demographic issue also needs to address address the end of life and disease states in China China really has no effective health care delivery system outside of government-run hospitals as a matter of fact they also have a cultural time bomb they are a nation of smokers per capita ah again this is not a negative comment but I want to point out that the if you look at American Chinese smokers they have a much higher likelihood of getting a lung cancer there is a genetic component here and quite frankly the rate of lung cancer specifically non-small-cell lung cancer is phenomenal these folks have no way of dealing with stage 4 lung cancer which is how these people present a diagnosis so you know you know does that relate to your 1 to 4 problem well you know realistically the four problem will will be quick the two problem may be a big a bigger issue but you know I visited there I have an idea of the health care system I am a doc and I it is mind-boggling tonight where they are in terms of health care delivery thanks for that that's that's a great observation and like I said I mean there are huge social problems that China needs to overcome and so when we were when we were there one of the comments that came from talking to the economists in the US Embassy said that you know his projection is that in the not-too-distant future China is going to have a guns versus butter problem you know we're looking at well China has got their second aircraft carrier on the way and they're building this blue water Navy and they're modernizing and they're spending more and more on defense well they are some people say about half of what they spend on defense is for internal security but they're starting to face a lot of these social issues I mean I mentioned pollution and so that's a great observation on health care and so the society is starting as I mentioned they're getting wealthier moving into the middle class they want better services they want better health care they want to end this pollution so the government's got a response so it's going to cost money to respond to those kind of things and so that's this thought that eventually they're going to run into a guns versus butter problem in terms of how they're going to allocate resources and that's just going to have an impact so lots of issues out there from the Chinese economy thanks for your attention and I've got to release you back to your seminars or I'll be in a lot of trouble

Channel: USArmyWarCollege

Views: 3,662

Rating: 4.5238094 out of 5

Keywords: Defense strategy, contemporary risk managemtn, US Army War College, usawc, troxell

Id: H6HOfoK0ddk

Length: 59min 55sec (3595 seconds)

Published: Tue Jun 13 2017