Exploring the Future of US-China Relations, Part 1

i'm jim haskell senior portfolio strategist earlier this autumn we collaborated with one of our clients on a multi-part exploration of u.s china relations i'm excited to introduce a three-part series that will run over the next couple of weeks on the different dimensions of the u.s china relationship and their implications for investors joining me in this series are three people with extensive experience in the u.s china realm i welcome ray dalio our founder and co-cio kevin rudd the former prime minister of australia and david mccormick our ceo and a former senior official in the treasury and commerce departments as well as the national security council in the george w bush administration the conversations you will see in this series are drawn from a video cast with ray kevin and david and from a live session with our client which was captured on audio excerpts from these two sessions will make up the content for this series throughout this series you will hear us refer to three different scenarios for how the relationship could evolve first a high friction scenario similar to the current path of increased tensions second a lower friction scenario wherein the two countries reaches sort of detente and third an unlikely scenario marked by major reforms to china's policies and a return to the engagement model of the past decades in this installment ray kevin and david discuss the arc of the u.s china relationship how we got to this point and where we might go from here in part two of the series ray kevin and david will survey the domains of economic competition between the u.s and china and they will consider how trade technology and capital control policies may change in the coming decade and finally part three will look at the different dimensions of u.s china tensions on global markets and the implications for investors ray and kevin will discuss how chinese economic policy may evolve and ray will explore the importance of diversification and what that means in this new environment we hope you enjoy the series on this most important topic to set the stage for this discussion of the u.s china relationship i'd like to begin by considering how we even got to the current moment and ray i'd like to begin with you would you please put china's current position in context how does xi jinping fit into the arc of china's development he is an extension of many different forces that have been into place over um china's 4 000 his year history and how empires and dynasties rise and decline they have in their heads on understanding of that process and so the top-down model is one that is somewhat similar to other dynasties and an emperor rising and going through the arc of a dynasty you have to view she's power as just a part of that arc and that arc is the greatest force um and it's what everyone agrees that they're pursuing so you have to have that in your mind so when we say ch where will china be uh 10 years from now they understand in the dang era in that era it was to um gain um financial and other strengths without being threatening to the outside world to do that quietly in an unthreatening way which continued pretty much until 2008 they could be threatening then things happened populism our own problems in the united states and in the world um loss of jobs to chinese and such things produced a um a attention as well as their development became obvious and they became stronger and so we have under xi a um a country which is now more powerful and uh will continue to be more powerful and will operate in a manner that's consistent with that power david what is the arc of the relationship from america's perspective in many ways if you go back a decade or more policymakers on the u.s side from from both sides of the aisle republicans and democrats really move forward hoping and pursuing a course that was most akin to your third scenario the idea that um by engaging with china in a responsible way trying to bring china into the global economy uh trying to bring china into the global leadership and partnership um uh in many institutions around the world that would be a way to help accelerate uh china's introduction into a free market uh the free market economy in china and the global and integrated member of the global economy more broadly that would lead to much more introduction of free market principles in the economy and that would be a really force for good in terms of mitigating the risk of of military adventurism geopolitical conflict and also uh there was a bet really that uh this would lead to further liberalization within china um from uh from a human rights democracy kind of perspective so that was the that was the aspiration and u.s policy was more or less aligned uh with the idea of trying to encourage and sent uh that transition and if we fast forward from that time 10 15 years ago multiple administrations even through the obama administration i think what we found is uh the relationship china in particular and the relationship in general is moving in the other directions in other words it's moving away from the third scenario though of course that's still a possibility and more towards the second scenario and possibly as you describe in your introduction the first scenario and there are many drivers of that which i'm i'm hoping we'll discuss in this conversation one of which is the one you started with which is the ccp and the evolution in the ccp and i think importantly the introduction of president xi and and president xi sort of brought forward a point of view uh on the world and a point of view on china's role in the world that had a certain set of implications around technology leadership around sovereignty uh around the kind of economy that china would have uh the combination of sort of top-down economic management with also a hybrid of free market principles and and that has been one of the reasons that china has evolved the way it has in the conflict between the united states and china is taking on additional momentum let's shift our gaze to the future and consider how the u.s china relationship may evolve over the coming decade and what the high friction and data scenarios might look like assuming that the united states and china continue to compete at some level what would you expect the relationship to look like in the year 2030 would it change materially from where we are today you can't break up facets of this evolution so um let's say that the conflict with the united states um you know has there are five different types of wars that we have with trade war a technology award geopolitical war possibly a capital war and a military war all of this you has to be viewed in the everything has to be viewed in the context of what is the development of a dynasty or an empire this one beginning in 1949 and its overall trajectory you have to understand that then you come down to shorter and shorter time frames which by the way they plan for what's the tw you were about in october we're going to see the 2035 plan and so so you have all these plans um that they then plan for but it's all within that arc so you can't divide those pieces up and understand them well you have to understand the ark and then see each of those pieces as part of that arc if i would take let's say the next five years and take the 10 years i'd just like to paint the picture in a holistic way right now we are intertwined and as a result in this war they understand and we understand that there's an emergence of a great power challenging an existing power and each of them has their own set of circumstances so what what i would say is when we look at that um china has passed the point largely as passing the point of dependence on the united states in the way that it had before for example on technology there was the development of their technologies on top of our technologies and we're intertwined and so the circumstances that we face now are because we're intertwined and that's where we are as you go to five and ten years into the future you are either in that intervening period gonna have one hell of a fight or you're going to have them become much more self-sufficient and more expansive around the world uh because um like right now um everybody knows that they don't want to be interdependent and so the chinese will be building uh technologies that will get them independent and that'll range from everything from semiconductors to um gps to um a clearing system a financial clearing system so as one envisions where we are going to be in five or ten years the most likely scenario is you're going to have not only a most more um powerful uh china but you're also going to have a more um independent china and you're going to have less power on the part of the united states to be able to squeeze them the way the united states can squeeze them nowadays yeah well it's it's an interesting it's an interesting question the way i think about the relationship is a continuum the u.s china relationship there will be some areas that are global goods that progress uh absolutely by necessity requires uh the collaboration of the united states and china and without that there won't be progress global climate change is an example weapons of mass destruction proliferation of nuclear weapons and so forth might be another there are areas where we will compete and increasingly that's the case and those areas of competition are largely in these emergent technologies uh that have winner-take-all dynamics have huge implications from a economic perspective from a national security perspective things like artificial intelligence and quantum science some advances in microbiology genome breakthroughs that is uh those are areas where we i suspect will increasingly compete and then there will be areas that we're going to have you know fundamental uh disagreements uh taiwan as an example human rights is another example and where you are on the continuum of cooperation versus conflict in those different areas is is somewhat reflected in your scenario in your scenarios in the first session kevin followed up on david's comments about the continuum of competition and explored the possibility of the united states and china reaching daetan what could lead to such a situation and what it might look like well i've advocated various frameworks for they taunt between china and the united states myself since about 2015 within a framework of what i've described as a a policy of constructive realism what do i mean by that as a framework for the future being realist about where these two countries will never agree and constructing red lines consistent with the period of daytime between the soviet union united states and decades gone by while in other domains concluding that various levels of competition and or collaboration can continue but in the absence of the risk of all-out war that's the nature of dayton so therefore what we're looking at is uh various forms of shall we say conventional red lines which would need to be drawn around the u.s china relationship and in a mature relationship you could begin to draw such red lines around the south china sea you could begin to draw such red lines around taiwan you could begin to draw such red lines around the east china sea um beyond that i'm not sure what additional red lines would be drawn other than in cyber in space which are critical and outside the red lines under a strategic competition scenario you could say everything else is competitive in security terms in foreign policy terms and ideological terms and economic terms and technological terms and the rest um but you may also choose as the united states and soviet union did even in the cold war to combine and collaborate for example in global global campaigns against polio in areas of global public health collaboration so i think those would be the sort of disciplines which would apply to a dayton red line strategic competition strategic collaboration spectrum under such a scenario looking to the geostrategic balance in asia i asked david to describe america's interests in the region and to consider whether the us would accept the chinese sphere of influence taking hold you know i think it's a i think it's a challenging question but um i don't think there's places that we would consciously let um the chinese sphere take hold um without from a u.s perspective without with without deep consideration because um each and every move and counter move uh begins to set a precedent and so forth you know the the the beginning point is the premise that the united states is a pacific nation um that we have huge interest in the pacific that we play an enormously important role of stability um both from a commercial economic standpoint and also from a military standpoint in the region and that we take that responsibility which is go on beyond just protecting us interest um uh directly but protecting the interest of our kia allies like japan uh australia and so forth and so a strategy of incrementalism that allows for a concession here on this island or a concession there or you know some challenge of of the law of the sea principles that allows u.s carriers or u.s subs to exercise their independence in certain parts of the pacific those compromises are of great significance not so much because some little empty island in the middle of nowhere makes that much different strategically but because the present that's established by not responding is is deeply problematic and so um you know that's not a black and white thing there's choices and there's clarity of claims in each of the different cases and but there's no doubt that china's thinking very holistically about two things one is how to build a capability a sea based capability uh in the pacific and in particular the taiwanese straits and the south china sea that has you know enormous defensive capability and and power projection capability there's that i think that's indisputable and the second thing um that's indisputable is that on a number of these fronts it's advancing an agenda of territorial acknowledgement slash expansion and so how to handle that in a way that recognizes the severity of the precedent but also is wary of the of the risk of escalation is a real balancing act for any administration but i don't think one would come into it thinking what concessions are we willing to make because each one of those has follow-on effect in the second session kevin outlined his view of how chinese leadership thinks about the geostrategic environment and the balance of power with the united states the audio recording of his contents is what follows the three things that chinese have in their matrix one the balance of military power which dave has spoken about effectively that will in china's estimate change more decisively in their direction by about the mid 2020s maybe the end of the 2020s but they want to be also ahead of the curve of the american as it were built back the second criteria in the matrix is this dollar dependency in the international financial system and therefore watching what they're doing in terms of dollar exposure with treasuries watching what they're doing in terms of the exchange rate watching what they're doing in terms of capital account liberalizations are one for another is a critical second witness here and the third thing they are worried about in the matrix is semiconductors which at present they see is the third ultimate anchoring point of american power therefore watching what happens in this space and if we align these three lines and see a convergence or crossover point between the three of them in a fairly decisive way by mid to late 2020s that's a time when we should be getting acutely concerned ray david given all that we've discussed how do you see the arc of the relationship advancing and the balance of power between the united states and china changing with time come 2030 can we know which country will be the dominant power in answering that question one has to think about the dimensions of power uh and and what they imply um so there's obviously uh economic capability economic rigor economic growth um that's that's one key factor of power there's military capability defense capability that's a second related to one and two is technology leadership because technology leadership not only applies where you are in the moment but where you're headed and in the world that we're headed into some of these emerging technologies have enormous consequences there's the strength of your values system and how that influences others in the world and how that sets the stage for how your population interacts with its government and what level of support it has and then there's alliances and partnerships around the world that are forced multipliers in power right because um if china and india are you know really close friends and have enormously successful economic relationships that is a source of power and influence in the global economy so to answer that question i think you have to really go systematically through them um i'm of the mind that um by by numbers in terms of the size of the economy china is growing very quickly and you know it's hard to predict the future but it's not unlikely at all that china will be a much larger economy than the united states in the decades that come that would make a lot of sense given its population if you think about per capita gdp or growth it's uh it's likely on a path to do that i think the question of defense uh capability and technological leadership are still very much open questions and i think it will depend a lot on what the united states does i think if it innovates and continues to do the right policies to ensure technology leadership have the right kinds of talent engaged on the right kinds of problems the right kinds of investment in r d the right kinds of innovations on the defense side i think on those two dimensions i think there's lots of possibility that the united states could very much be in a position of leadership but that will require action it's like anything else that'll require action you know a position of values and um and leadership in the world um and alliances i think that also depends on you know what we do um you know in a very biased way this is a very american-centric position i think the you know the underlying values of freedom and liberty and and what the united states was founded on is a huge strategic advantage because it gives um a level of autonomy and um and self-ruling capability to the united states that makes it much more adaptable uh over time but that's an experiment that's still in its early days um and when it's the early days we're you know only a couple hundred years into this and so uh we'll have to see but but that's a judgment that's a values judgment and on the question of alliances um i think we have a huge opportunity in part because of the value system um to continue to build on the post-world war ii institutions in some cases eliminate them and build new ones um post world war ii institutions and relationships that are a huge source of benefit in the world because you know for all its challenges this is still the number one destination united states still the number one destination in the world for people who want to uh come and and and live great lives and build a great country and so that is a source of advantage too we have to treat those alliances well we have to treat those we have to reform those institutions so um i think the by and large is that it depends on what we do in the united states we're at a particular inflection point and i think with the right policies and positions and leadership um the united states will play a very critical leadership role in the world for you know many decades to come you must look at what they're doing both countries are doing domestically as well as internationally what i'm trying to convey is kind of the trip wires or the red lines to signal if you go over them you have to pretty much think about what might be the worst case scenario and if you stay within them you can see what is more likely to be the most likely scenario which is that you don't have an intolerable scenario and so which of those paths you go on will be very important the the you know the big bad one or the um evolutionary one um the more likely one the more likely evolutionary one um is that you don't have the hot war you have a lot of confrontations and banging into each other and then you'll expect more independence in in the future and probably uh you know a more powerful stronger chinese situation because you know they're developing the innovation that's going on there the the capitalism um in uh the usage of um uh you know entrepreneurship and what shenzhen means and all of that it's um you know it's um it's it's the right path um to create development to create innovation and so on we hope you enjoyed this first installment of our series on u.s china relations in part two ray kevin and david will consider how the domains of economic competition including trade technology and capital control policies may evolve in the coming decade we look forward to sharing it with you you

Channel: Bridgewater Associates

Views: 54,091

Keywords: Kevin Rudd, Ray Dalio, David McCormick, Jim Haskel, Bridgewater Associates, US-China Relations

Id: VDdgWixCS7s

Length: 25min 1sec (1501 seconds)

Published: Fri Dec 04 2020