How China’s tech sector is challenging the world - Part 2

it's not my pleasure to bring to the stage three good friends chun-li Craig Alan and David dollar who will provide commentary on Rebecca's work and while they are getting set up I would like to just make one public service announcement about the event that will take place here at Brookings tomorrow with Winston Lord in conversation with stroke Talbots eye Winston Lord has recently written a book that is a sort of a meditation on his life's work in the de Plank field and he will share that book with us tomorrow Thank You Ryan well first of all thank you to Vega for that really very rich presentation more or less you present a US or Western views about this very important subject but your research is really based on your solid understanding of what's going on in China so it is really fascinating to see you know so much information presented and as we know that today in this town there's some important meeting and trade negotiation whether they can cut the trade the deal we still do not know but I think in everyone's minds fair to say there's some even more challenging issues such as tech tech war or the tensions or competition in this area so we are fortunate to have the two leading scholars Chinese economy and both of them work in the US government and both of them also spending years in Chinese US Embassy in Beijing and both of them also work for when your case for the Commerce Department and negotiation with Chinese in Davis the case in the Treasury Department and also that Craig is currently the president of very important institution us-china Business Council play a crucial role in the bilateral relationship in this important front and we're so fortunate to have you and also have your organization as co-host for our event now first that need each of you to speak for like five to seven minutes then I won't do some discussion and also we'll have the questions from the audience so maybe start with Greg okay well thank you very much for the opportunity to be here Thank You Chun thank you David Thank You Ryan and thank you very much Rebecca and thanks to all of you for for being here I enjoyed a Rebecca's book enormously and it was like going to a museum in a place I kinda heard a lot about and I kind of knew a little bit about but I didn't really know any of the details and so with her book and the profiles in the book I got a much better understanding of how these companies fit together how their history the individual niches that they have occupied within a very fascinating ecosystem which is indeed very different to ours and the more you learn about this especially if you're even for the China hands and it's even worse if you're an old China Han because you don't have the high tech side and the Internet and the digital side as much it is a fascinating museum with many really interesting companies and individuals who are playing a role on the world stage a very important role on the world stage and as time goes by I think that what we're seeing is that the interaction between these companies and these individuals with many American companies also is shaping a very dynamic environment so this is going to be the the most dynamically evolving tech ecosystem in the world and it is interfacing with American tech ecosystem in a very unusual manner one of the things I learned from Rebecca's book it was how much Chinese investment had been sprinkled into American high-technology and how much and Rebecca went through this in the her presentation about how much American money had been sprinkled not sprinkled but really deeply rooted in in Chinese in the Chinese ecosystem but the rules of the road between the United States and China how do our technology companies cooperate how do they our technology companies compete it's all very much up in the air as the WTO largely is silent on many of these issues I come from a Japan background and much of the debate that I hear in Washington these days is very reminiscent of Japan thirty years ago and if we recall back to those days companies like Sony or Hitachi or Toshiba or Mitsubishi Panasonic etc we're about to take over the world and under of course Metis tutelage and the role that meaty played at that time is vaguely reminiscent of made in China twenty twenty-five today and I will argue that the demographics the culture the industrial structure a lot of the entrepreneurial drive is actually very similar but it turned out history shows us that Metis and involvement in high-tech in Japan was actually not really very helpful and indeed the high-tech Japanese companies that did emerge from that freight companies like Kyocera and Sony and others are were largely successful despite metis help rather than because of Mickey's help and I suspect something similar is happening here with the Chinese entrepreneurial companies I don't think Wang Xin or Alibaba or Jack Ma or Pony ma or the others are waiting for made in China 2025 instructions they're not they're moving ahead and the Chinese private sector is very particularly these these innovative companies are innovative despite many of the much of the support of the government and so I would advise the Chinese government really to look at the Japanese model when you do have a lot of government support the history in Japan shows us that that the problem of a Galapagos Syndrome can it can come come forth and be a real problem and that is that that that technology is developed in Japan for Japanese sake and it becomes unexplored able and I suspect that that is a threat that the Chinese government and Chinese companies should look at very carefully because if this company if this technology is not welcome elsewhere then the rest of the world is going to congeal around other technologies my final comment is that when you look at US and China high tech it is remarkable to me that how incredibly integrated synergistic interdependent the two the two high-tech sectors are and it is also remarkable to me how indeed both governments are uneasy with that integration and are actively taking measures to reduce that level of integration particularly in national security sensitive areas and the Chinese side is certainly trying to reduce foreign inputs into their critical information infrastructure programs such as Indonesia indigenous innovation technology self-reliance re innovation or the multi level protection scheme and I could go on and on are our schemes to keep out of foreign technologies and that what is that if not for the coupling from the claw technology innovation system particularly the American version I would also argue that made in China 2025 is WTO illegal probably across five chapters of the WTO and thus it's understandable that the Chinese have kind of put that on the back burner but publicly but have the programs and has a support gone away III think we have every right to be skeptical about that and demand that the Chinese meet their WTO obligations and that is a subject that as chung referred to ambassador light hi sir is hard at work at probably right now also I think that the Chinese government could do a much better job at bringing in its bringing its policies on SOS standards subsidies technology innovation into better WTO compliance now on the US side there's also certainly a head of steam behind the decoupling program and I think that the expanded interpretation of our export control law and the clarification of our sophia's project is really a blunt form of of decoupling it is designed for that purpose so earlier this week Secretary of Commerce Wilbur Ross stated that the Department of Commerce would put hikvision on its entities list because of human rights violations and I'm not here to debate the merit of the of the call but I think that it is reasonable and and historically accurate to say that this is the first time ever that human rights violations has been used as a as a rationale for putting a company on the entities list and the Treasury Department under Treasury Department's epheus the expanded Cepheus regulations are also a clear signal that has fed into the rapid reduction of Chinese investment in high-technology and elsewhere that we have seen Chinese investment to the United States is down 80 percent and if you particularly if you're a poor American and an economically depressed area that would not be something to be happy about I suspect that under the new regulations especially with regard to PII or personal identifiable information and cross-border data flows that this technology integration which has benefitted the global innovation ecosystem enormous Lee in my view is going to be changing so I think that Rebecca's book has given us a wonderful snapshot really of where we are the profiles are magnificent and I think that we should recall our history of the last 40 years of engagement and collaboration which has led to enormous successes for both the Chinese and the American economy in the global innovation space but I worry that this might become a thing of the past thank you Davey thank you very much it's a great pleasure to be here I really enjoyed Rebecca's book you know we hear about all these companies I travel to China regularly we're familiar with all of them it was great to get a lot of background about their origin about some of the technology transfers financial flows so I really enjoyed the book very much I want to introduce three points into the discussion first like Craig I was impressed at how much integration there is between US and Chinese innovation so when you think about the flows of people technology money it's really quite extensive in both directions and I would argue we have a pretty successful open innovation system in which both the United States and China and frankly the rest of the world is prospering now we benefit when China invents technologies I don't think we'd be happy if they monopolized all advanced technologies but that's never happened in history frankly even when the United States was the power so as long as we're both inventing technologies I think this is a potentially a mutually prosperous world now I would say that given that for the United States to be actively cutting ourselves off from Chinese innovation and technology I personally think this is a big mistake you know I think it's gonna lead to a slowdown in our own innovation and productivity growth I think China is a real challenge that's one thing that comes through from reading these stories this is a serious challenge for the United States but to me the logical response to that is to do our own homework right so we have various weaknesses in the United States a lot of our innovation comes from immigrants we need to reform our system of immigrants we should be getting more students we should be giving out more green cards right so we should be creating you know a friendly environment for the world and then we need to improve our infrastructure and education and we're not doing as much R&D proportionally as we used to so there's a lot of homework for the United States to do there's a danger in this moment that it becomes easy to criticize China blame China and focus our action on discriminating against Chinese companies or as Chinese students for example these measures are not likely to make the u.s. prosperous and I worry mostly that they really distract from the serious homework that we need to do now the second point I want to make is that while I think China is a serious challenge and there are a lot of great stories we should not imagine that China is 10 feet tall so there's some very impressive successes documented in this book but for me as a macro economist it's really striking that it doesn't seem to have much effect on the overall Chinese economy you know we don't see the effect China's economy is slowed down you know before the trade war ever was an idea the Chinese economy was slowing down very dramatically it's growing about half the rate it was growing just a few years ago some slowdown is natural but this extreme slowdown you know this is really quite worrisome and there are a lot of signals of problems in China the massive buildup in debt relative to GDP for example and I don't want to get too technical but you know we economists like to look in particular a total factor productivity growth how much you're producing out of a given bundle of capital labor and not only is that slowdown in China it's actually become negative in the last few years so every year China produces less with the same amount of resources that's the macro economy and given the real innovation that we're talking about it suggests that the Chinese economy is extremely dualistic that there have to be highly inefficient backward sectors that coexist with some of this innovation and modern sectors that we're talking about now the third and last point kind of follows naturally from my second point when I look at the dualism I see very much the difference between the private sector and the state sector most of this innovation that Rebecca is talking about is from private firms we can argue a little bit about how private exactly highway is but there is a large private sector in China it produces 95 percent of patents so most of the innovation comes from private firms but most of the credit in the banking system goes to state-owned enterprises so a lot of this dualism is this mismatch between China is financing the losers and it's not really financing the winners and I think that I agree with with Craig the China should make its industrial policy WTO consistent but ironically I actually think this is gonna be a big benefit for China because I think this this program a lot of which is aimed at state enterprises aerospace is a good example China doesn't have much hope in aerospace because it's dominated by a big Chinese state enterprise where you get things dominated by big Chinese state enterprises you tend not to get innovation so it actually helped China to be WTO consistent in the sense of not providing benefits to the state enterprises opening up the economy more if you're going to have incentives for particular technology the rational thing is to make those available to all the players in the market so I just want to end by saying that I think while a lot of impressive things are happening in China China does face these very serious challenges that I alluded to at least indirectly in terms of state enterprises and the build-up of debt the United States as I said I think we face very serious challenges challenges in terms of maintaining an innovation culture and an open economy open society in the United States the happy outcome is both of us do our homework and then you're going to get a world with lots of innovation and growing prosperity and of course other parts of the world are important too when we talk to you as China it's easy to implicitly be a little bit insulting to Europe and other players but you know the US and China are the two big sources of innovation in the world right now and if that continues and if we have an open innovation system that's our best hope for having a prosperous stable world thank you that's great well most of you clearly put Arabic has excellent book in the broad contacts in assessing the future trajectory about the tech world and especially two major powers and also linked to the policy debates going on in Washington DC now let me ask us three quick questions for both of you the first one actually is for gray Creek that you made a comparison between China and Japan of course there's some similarities in democratically and otherwise well I would just a push to present a different perspective arguing that comparison could be misleading demographically China's population the ten-time of Japan we talk about e-commerce this is very important factor talk about urbanization China is only 60 percent of urbanization Japan is probably 99 percent and talk about aging Society yes most countries are facing serious challenges whether it's a different level but on the other hand I mean China despite because of these Democratic changes but I also plus the fact that MIT Lee is only the you know one aspect of Japan's developer and the China's you know state-owned enterprises and the China's political system really have the mobilizing power which Japan have a far less and finally the relationship between China and Japan with United States is completely different United States has autumn leverage to inference Japan shaped Japan but China is already in the stage as you see that the kind of attention that they got competition so maybe also play in China favor so this is my first question could you answer respond let me finish my question the second foot David I really appreciate you put a more balanced view should neither overstay to underestimate so my view is I think you publish here the tech war was a decoupling from us I is a big challenge for hallway but I think that Huawei probably strong enough to survive but probably not strong enough to kick us out of that of the game so this is the probability I think you would agree but um my portraits what they are the last point you mention 10 years ago actually Rebecca said that we did not talk about the innovation actually I would say five years ago we really did not talk about China's innovation ten years ago we did not even know there's a private company IT that is so powerful at that time the dominant IT dominate by China Mobile you know there's no space for like tension in others but wolf saddened I know things change now p80 dominated at least the most innovative sector and also innovation become a real challenge so my point is that maybe sometimes that kind of who assumed the things that of course there's China has a lot of problems I agree with you but even in the aerospace you know I see the point that they talk about that state dominated is not a problem but even that industries just rapid the development I mean China is the country can land in the far side of the Moon you're not his they cannot no can she cannot does that achieve something you know it's not urge the Chinese copying us in certain area crucial area 5 g 6g you know AI could undermine American strength this is my sole question last question for both of you decoupling technology decoupling it's very much it happening but of course some of the American prominent former decision-makers and economists or experts on China like a Hank Paulson and also ambassador's house Freeman jr. both said the technological decoupling sounds like a hurt in China but actually hurt the US I want you to comment on Oh Deb you okay so let me start out on Japan and like any model it's not exactly the same but are there parallel from which we could draw inferences and I believe that there are many parallels it's not to say then it will have the same outcome but these are things that are interesting to watch I think that in along with the demographics and the cultural similarities which we don't need to go into I would note two things firstly in my view anyway both economies are too centrally managed meeti had far too much power in Japan over industrial investment and tried to lead it a various way that is similar to goo machine boom or the Ministry of Information and Industry and that over centralization of authority I think is a cultural analog between China and Japan and I think that it will ultimately hurt Chinese growth and one way of saying this is what what's more important growth or control and in the case of in the case of me T and M IIT I think that they come out well we need more control but you're you only get that control by giving up growth and allowing the free market to work and at least so far as I'm concerned in both Japan and in China that that excessive centralization is a real problem the second analog that I think is very interesting to look at but is worthy of exploring is the analog between the K debts and the SOE or the state-owned enterprise in my view they're both very similar in in many respects they both have ties to the party they both have ties to the banks they both have our very large they're both very poorly managed they both both waste enormous amounts of capital at one point we tried to enumerate all the subsidiaries of China petroleum and we stopped at around 1500 because it became clear that there were almost an infinite number and that there is no way to manage this and I would argue that that's very similar to the Japanese Kotetsu now it's changed in the chaotzu case I would say that the Chinese are going in the wrong direction on this of over centralization Oh party dominance over government demands over regular regulation and I the Chinese economy is going to pay a price to the extent that that's true so let me pause there and turn it over to the real economist and I'm happy to comment on decoupling okay so that it my response to the second question is that you know big economy like the United States or China these are just unimaginably complex and you just have to think about so many different sectors so many different occupations so in either case you can have very impressive productivity growth in a few select areas right but it doesn't necessarily have a powerful effect on the whole economy we actually have the same problem in the US you know we have these allegedly high-tech firms out there in Silicon Valley but they seemed not to have had much effect on the overall economy and I think it's probably just that we have so many different sectors so for example the biggest sector in the United States now is healthcare okay and parts of it are actually fabulously efficient but parts of it or not it's a hard area to reform the financing of it is a huge controversy in the United States so I so John I realized that China's made this tremendous advance in some these areas we're talking about but on average Chinese at about one-quarter of us productivity that's an average across all sectors and activities and I can think we can expect the u.s. is not going to go backwards right maybe we won't go forward very much but we're not gonna go backwards so to catch up to the United States China has to quadruple productivity and just historically no one's done that for a whole economy except over long periods of time you know China's was that it would started out at four percent of US productivity you know it's gone from 4 percent to 25 percent in 40 years it's not you know it's likely to take many decades for it to get to us productivity level get close and you know that would be looking and then it's likely that that would reflect China being the world beater in a bunch of areas and then lagging modestly behind the US and other areas and it could get close to us productivity on average but but you know I think we're still you know III and this point by saying don't forget that the 25 percent of US productivity that that's the average for the whole economy my last question for you why don't you go first okay I you know decoupling I I think is while it is unstated by the administration I would say that both governments are are pursuing policies that at least will have the effect of if not the intent of decoupling and I think that when you look at the national security concerns both countries have very legitimate national security concerns I I think that also that there may be a tendency to exaggerate those concerns and if that is the case an exaggeration will lead to an over response to the the threat and I think that I see that in China all the time am seeing it in the United States as well and I worry that decoupling could go beyond the national security areas to include many many other areas so the case of Huawei is a very interesting case I won't opine on it except to say that there are legitimate national security concerns in the telecom space I think that we would all recognize that but I also see moves to ban Chinese electric vehicles from a private Chinese company and I think it would be a gross exaggeration to say that that would be a national security threat I also see moves in the Congress to ban Chinese active pharmaceutical ingredients from coming into the United States on quote-unquote national security grounds and I think that that should be questioned are we really safer having our api's coming from India or a third country I think that that's a very hard argument to make so well our national security should be paramount I think that exaggerating our national security is very much not in our national security and a deliberate exaggeration of the national security will lead to an over over response that will be echoed on the other side and I think that we're caught in that echo chamber of exaggeration that is will have a profound effect on the global innovation ecosystem and ultimately on our national security exact to state that our economic security is our national security and then expand that to include everything from the other country is profoundly mistaken thank you yes I largely agree with Craig side just briefly and I think you know it's kind of really serious technology decoupling between the US and China it's definitely gonna be bad for both economies it's certainly gonna be bad for the United States I'm skeptical that our big firms would even go along with this to be perfectly honest you know China is a big fast-growing market it's putting out 5 million stem graduates per year you know our firms want to do research there they want to be involved there they want to have partnerships I think if we try to pursue this a lot of our firms they'll you know they'll develop subsidiaries they'll find a legal way around this you know so I don't think they're gonna follow us down this road but we'll end up isolating our domestic economy to some extent and we'll end up paying a price for that just had you know to decouple you got to be a couple and we're not a couple and what we have seen is once a Chinese company is put on the entities list which requires American companies to stop providing them with their US exports our Japanese and European and Korean friends are in the door as the Americans are leaving the Europeans and Japanese are happy to take over that business and and how does that help our national security does not not lead to a diminution of our national security I think being in the market and and being active in that market is a way to to ensure our national security abandoning that market are walking away from it for reasons that are are mandated by the government but which no other government recognizes seems to be to me to be an own-goal shooting the the the basket into the wrong shooting the I shouldn't bring up an NBA and that was a profoundly mistaken there was a soccer Wow Thank You Bozek Craig and David for so thoughtfully answering my questions so the floors open we only have ten minutes we probably take a few question together and please first introduce yourself and young man yeah hello my name is Sohail I'm a recent graduate of the Fletcher School of Law and Diplomacy up in Boston and I'm an Indian citizen my question is directed to mr. Craig Allen though I would appreciate comments from the other discussants as well I do agree that and I think most of us would agree here that there is a lot of exaggeration when it comes to the fears regarding Chinese business interests in the u.s. however there have also been very credible reports of espionage and other mal mal intense mal intended actions by Chinese companies though perhaps we can agree that the current response might be a bit too heavy-handed what would you recommend the appropriate response would be okay more Cushing's gentlemen yeah thank you very much I want to thank the panel and mrs. Fannin for a great presentation I'm mrs. Fannin mentioned the banth Pelton Road initiative in terms of economics and trade which is the subject of this largely the subject of this book I served in the state to play in the State Department in the national security and intelligence communities so I'd like to have the any answer you have on the Merkel s mercantilist intent of this Felton Road initiative in terms of the international influence of the PRC great any more passion yes yes hi thank you again for the excellent panel discussion today my question actually has to do Vietnam so in in light of recent events between China in the u.s. to what extent do you think Vietnam can actually benefit from the supply chain relocation and what policies do you think its government needs to pursue to put itself in the best position possible yeah actually this is rolling means that the my colleague a daily also running a podcast it's called Darla in a sense and one of the recent episodes is about Vietnam I guess and he just visited Vietnam and so we have three questions and the first one for you maybe to a meek and the second one you can also help shed light there are certainly a second in the third also Davis expertise so I I would agree with the assumption that there are many malign activities I think that we should accept that as a useful presence I would say however that we need tall walls around the narrow garden rather than a trip wire around the whole farm or around the whole city and what I see when we are talking about the banning of Chinese active pharmaceutical ingredients or buses because that are built in Los Angeles is putting up a tripwire around the small area I think that also so the the issue is where is our true national security concerns and defining that different people could have different reasonable people could have reasonable definitions but I would argue it's not buses and I would argue it's not a api's the other thing that I think is that we should think about right is the use of the law of the export control laws for apparently competitive purposes now the history behind the export control laws is so that we don't export machinery or equipment or technology to be used to make a nuclear bomb or other weapons of mass destruction we don't wish to export those products and that's why we have the law but if the law is to be used to slow down other countries or other companies competitive industries then that is an expansion of that law that is quite profound and if we are to use that law as the Secretary of Commerce just said two days ago to protect human rights again that is a profound expansion of our export control laws into territory that we've never seen before and I think it's similar to the 232 on on steel and aluminum on national security purposes in a manner that secretary mattis at the time did not support so let us be careful by the over definition by the by the by the wholesale use of that national security terms to get away with what are what may be essentially policies taken for commercial purposes on Belton Road a Belton Road is enormous I would agree with the premise of your argument that it is made mostly to benefit Chinese SOS and other companies I would agree with the premise of your argument that it is profoundly political and that it is using the loans for the most part to elites in a manner that certainly helps the Chinese companies that may over the longer term provide complications to the receiving country now that said the money that the China and the expertise it's not only money it's a lot of expertise since the Chinese are offering it is very welcome in Central Asia and in Africa and elsewhere this is money to build infrastructure that is very much needed I think that the recipient countries should be very concerned about having the digital belton Road for example put into their into their markets at what price comes at very cheap loan for the telecom infrastructure or the software or the the smart cities and I would encourage robust democratic debate on that subject for all of the recipient countries just so just very briefly on Vietnam I was able to talk to private sector and government officials they all push back against the idea that Vietnam was a big winner from this trade war their exports to the US are up very significantly this year but their imports from China are up by almost exactly the same amount and view you could cynically say some of that is just relabeling stuff but I think it's not mostly that I think you know we talked about value chains we often ignore the fact that China is at lots of different positions along many value chains and what's happening is the final labor intensely labor intensive assembly is moving to places like Vietnam but China is still producing an enormous amount of content basically so China is now exporting components to Vietnam and Vietnam is assembling them they're coming to the u.s. they're doing it and run around the tariffs that's one more reason why the tariffs are a dumb strategy and it's a little bit beneficial for Vietnam it generates a small amount of value-added but it doesn't really generate that much and now they're worried the United States is going to turn its its trade war weapons against Vietnam because their exports are going up in their trade surplus with the United States and then just if you asked what Vietnam can do the striking difference between China and Vietnam and both of these countries the exports come from multinational firms but in China most of the value-added comes from domestic private sector and Vietnam has not built those backwardly klinken jizz it doesn't have a big formal domestic private sector it's got foreign firms it's got state enterprises like China but it doesn't have the private enterprises the formal private sector you find in China great before concluding the panel I just want to remind you two things when is that the Rebecca will be very kindly signed a book and in outside of the room secondly tomorrow ambassador Winston law would not follow the most distinguished strategies thinkers we'll talk about Kissinger on Kissinger the new book he wrote talked about the American leadership and diplomacy and the making of foreign policy sounds like a very timely topic and particularly with what do we need so when o'clock tomorrow afternoon so let me ask you the audience really I'm impressed by your via comments to join me to thank our panelists thanks for watching be sure to LIKE and subscribe for more videos from Brookings [Music]

Channel: Brookings Institution

Views: 38,909

Rating: 4.3281655 out of 5

Keywords: Brookings Institution, China, U.S., U.S.-Chinese relations, Rebecca Fannin, Xi Jinping, Donald Trump, Craig Allen, David Dollar, Cheng Li

Id: PZyxCILDA8c

Length: 44min 50sec (2690 seconds)

Published: Fri Oct 11 2019