What is China’s Grand Strategy?

good evening everyone and welcome to the Heritage Foundation for the first of our two annual Russell Kirk lectures I'm Arthur mellon research fellow and associate director of the Kenneth Simon Center for principles and politics at the Heritage Foundation before the 2016 presidential election only some DC insiders and a handful of others were concerned about China remember when a few years ago Mitt Romney had called Russia our biggest geopolitical foe remember how the Obama administration so-called pivot to Asia took China to be a paper tiger president Trump initiated the popular awakening for a decade the public along with a handful of powerful voices throughout the country we're willing to look the other way while trying to expanded in clever and novel ways often at the expense of our nation's interests many have wanted to believe that mysterious forces will somehow guide the modern world towards peace and prosperity or that America will forever remain strong and preeminent indulging in such dreams we have been giving away our comparative advantages to China what did we get in return cheap commercial goods and credit but for commercial societies like ours intellectual property and scientific innovations are our comparative advantages as we are not really capable of waging long-term Wars the word strategy is endlessly thrown around in Washington we are all told to think strategically and when we do wind up actually being granular and unimaginative we are not trained to think about the psychology of global ambitions and the plans to accomplish them but tonight I hope we can begin to understand China's end goal what does China hope to accomplish and how will it do it finally and most importantly for us what does this all mean for America and there is no better person than David Goldman to help us do this as many of you know David Goldman is behind the Spengler column at the age of x under that pseudonym he's written some 300 essays on so many topics the death of nations Islam's confrontation with modernity classical music existential theology as he as he has explained his core thesis is that the response of nations to their own mortality is the key to understanding the great events of our time goldman has published two books both of which I would highly recommend the first is how civilizations die and a collection of essays called it's not the end of the world it's just the end of you during the course of a fascinating career he has among others among other things worked as the global head of debt research for Bank of America and the global head of credit strategy for credit Swiss he has consulted the National Security Council during the Reagan administration he's advised post communist governments in Russia and Nicaragua he's published peer review papers on philosophy music mathematics he's taught music I mean this is so varied it's remarkable he's taught music in two in two universities in New York and he has been as many of you probably know the senior editor at first things David will speak for about 3035 minutes and then he will field questions from the audience please help me in welcoming David Goldman thank you for that extremely generous introduction I'd first like to express my gratitude to the Heritage Foundation for the opportunity to speak to you about China's challenge to the United States so we invited to give a Russell Kirk lecture at Heritage is it great honored to be invited back as is humbling and the two questions I'd like to address tonight are simply what is China want and what should the United States do about it president Trump summed up China's intentions quite well in a May 19th interview with Steve Hilton of Fox News who asked him a lot of people say that China wants to replace the US or the superpower the president responded it's not going to happen with me Hilton persisted do you believe that's their intention Trump replied yes I do why wouldn't it be they're very ambitious people they're very smart there are great people it's a great culture but China's notion of what it means to be the world superpower is different from ours and it begs examination earlier this month dr. Kiran Skinner they had a policy planning at the State Department had this to say I quote in China we have an economic competitor we have an ideological competitor one that really does seek a kind of global reach that many of us didn't expect a couple of decades ago and I think it's also striking that it's the first time that we will have a great power competitor that is not Caucasian as Victor David Hanson commented on these remarks Japan was in fact a great power competitor and a formidable one from its crushing defeat of Russia in 1905 to the end of the second world war to put the present situation in context Japan's GDP in 1940 was the fifth of Americas and its population only half of ours China's GDP is roughly the same as ours in terms of purchasing power parity it's 25% larger according to the IMF in nominal dollar terms it's 30 percent smaller so roughly on parity its population is nearly 5 times that of ours China's investment in frontier technology exceeds America's by a wide margin it also graduates four times as many stem bachelor's degrees and twice as many doctorates and that gap is widening a third of new labor market entrants and China have bachelor's degrees and a third of those are in engineering today the two economies are of roughly equal size but China is growing twice as fast President Trump has said repeatedly that our economy is to end well well China's economy is doing badly he's misinformed the perception that China is weak is widespread in Washington and evidently contributed to the recent breakdown in trade negotiations that is a strategic miscalculation in my view that may have baleful consequences China fears nothing but America's technological edge and that edge is rotating at an alarming pace but dr. Skinner is broadly correct we have never engaged a strategic rival with resources and skills on this scale today's situation is radically different in another respect in America and China we observe the confrontation of the national and the imperial principle in its purest form America is history's most successful nation state its premises the sanctity of the individual the heritage of the English Protestants who were the 17th century envisioned a biblical Republic when I last had the privilege of addressing you three years ago I spoke about our unifying political culture and it's ever-present theme of the individuals pilgrimage towards Redemption our sense of the sacred and every citizen has proven a stronger and more enduring bond than the ethnocentric nationalisms of the old world China is the oldest and despite intermittent breakdowns the most successful empire in history subjecting the interest of the individual to the imperatives of the state unlike America China never assimilated the scores of ethnicities who comprise its enormous population instead it orders them into an imperial system ruled by a centralized elite and communicates by a system of imperial ideograms rather than a common spoken language it maintains a ruthless meritocracy that filters talent by standardized examinations it has always viewed its people as a resource for imperial power rather than and a congregation of individuals with sacred rights within living memory at a sacrificed frightful numbers of its own people the Imperial Order is perpetually at risk of fracture and the succession of dynasties is interrupted by episodes of internecine war and unimaginable suffering but the imperial system perpetually restores itself because the Chinese have had no alternative to work to warlords and anarchy most Chinese will tell you we need an emperor otherwise we'll kill each other two threats haunt the nightmares of every Chinese dynasty the rebel province supported by foreign intervention that occasions the overthrow of the dynasty and the fractured the Empire that is why China will go to war over minor objectives the South China Sea it follows the proverb kill the chicken while the monkey watches China is in effect saying that it will if it will fight for a tolls in the South China Sea off for tre will look fight for Taiwan the Communist Party of China has established an imperial dynasty in which a committee of mandarins rules in place of a biological imperial family it surely ranks among China's most successful dynasties between 1979 and 2018 China's GDP per capita rose nearly 50 fold in current US dollars none of its predecessors had so strong a claim on the Mandate of Heaven as the sign ologist francesco c she observes this is a golden age for the chinese the first Chon in China's 5,000 year history were none need fear death by famine or war China's imperial model differs fundamentally from that of Japan during the first half of the 20th century Japan Stowe strove for ethnic homogeneity while China is ethnically diverse and inclusive that is a strength as well as a weakness the clearest embodiment of Chinese Imperial strategy is the entity that is now at the epicenter of sino-american tension namely Huawei Technologies as investment bank were employed by a Chinese firm between 90 2013-2016 I had occasion to observe Huawei's operations firsthand and work with some of its senior executives Huawei is not a Chinese company it's instead an imperial hoard 50,000 of its 190,000 employees or Western most of these are engaged in research and development while we drove had competitors and hire their best engineers it has attracted many of the world's best researchers by funding R&T institutes in more than 20 countries it spends almost twice as much on R&D than the combined spending of its two closest competitors Nokia and Ericsson what does this unique ancient dynasty want in the 21st century it surely does not want to replace the United States as the world superpower on president Trump's watch it has neither the capacity nor the competence to wage a global war and terrorism to protect sea lanes to manage Russia's ambitions in Europe and the Middle East and in general to exercise the responsibilities of a dominant superpower it's happy to gestate a new sino centric economic order under the umbrella of American power Chinese planners speak privately as 2035 as the breakout the earth when China will be so powerful that no one can oppose it the communist dynasty wants to restore China to the dominant position it held in the world economy during most of recorded history in 1700 China produced 1/3 of the world's economic output while the UK France and Germany together comprise less than 15% China fused the 19th and 20th centuries as a passing aberration the corrupt infectious Qin Dynasty permitted a century of humiliation from the First Opium War of 1848 to the Communist revolution in 1949 and China's leaders are determined to avoid the errors of the past and make the world a child of the world's hegemonic power eventually their economic and military components to the strategy China's economic strategy has two prongs the first is technological supremacy let me emphasize that China could not care less about tariffs on furniture or laptops or toys from the United States the second is the export of the Chinese model two countries inhabited by 2 billion people and their absorption into a Chinese economic Empire this is embodied in the belton Road initiative which proposes nothing less than the thoroughgoing economic transformation of the global south along Chinese lines China devotes vast state resources to critical technologies including for example fifth-generation broadband and at its applications quantum computing quantum communications artificial intelligence and gene sequencing China understands that silicon is the military power of the 21st century what steel was the military power of the 19th century the state council in 2014 called for China to achieve world leadership and semiconductors by 2030 and projected $118 of investments over the next five years whatever plans China had before the present technology war became obsolete in April 2000 18 with the United States suspended exports of handset chips to ZTE and virtually shut the company down the Chinese government then put virtually unlimited resources into the hands of the semiconductor industry particularly Huawei and China's progress towards self-sufficiency in hai and semiconductors has been nothing less than astonishing China's chip designs now rival those of Qualcomm Nvidia and Intel China's sprint up the learning curve and chip design and manufacturing has been in my view the biggest economic surprise of the past several years we should make no mistake the semiconductor industry is the king on the chessboard China's military strategy centers an areal denial and deterrence its surface to ship missiles can force American aircraft carriers to deploy very far from its coast vitiating America's superiority and military aircraft it has the capacity to blind or destroy American satellites with lasers and missiles it has developed hypervelocity missiles against which no defense presently exists and which can target American aircraft carriers as well as the American mainland with nuclear warheads it is acquired Russia's s500 air defense system with a range to sweep the skies over Taiwan it has some less publicized capabilities for example I cold on the CEO of a Chinese tech company that my colleagues had taken public at his office in Shenzhen and pulled out his iPhone and showed me an app the Apple is a map of the South China Sea with hundreds of little blinking dots he said every dot is the position speed and condition of the motor of a ship in the South China Sea every ship in the South China Sea I asked where he got the data said we have hundreds of balloons tethered to merchant vessels by coaxial cable doing what satellites can do but better and if there's a war where satellites are destroyed we'll still have a hundred percent coverage of our own coast but the PLA does not do is just as revealing the People's Liberation Army has nearly a million soldiers it spends about $1,500 to equip e to them we spend over $17,000 it owns no ground attack aircraft like the American a 10 or the Soviet su-25 frog foot its capacity to put boots on the ground outside its borders is very limited that's not surprising try to reach its present frontiers more or less under the Tang Dynasty 1300 years ago it's not prepared to march on its neighbors to be sure China has about 30,000 Marines and an additional 50,000 amphibious Li trained mechanized infantry which is enough to successfully invade Taiwan it has the capacity to lift them across the Taiwan Straits it has more ships than the United States though vastly inferior tonnage its objective is not to engage the superior American fleet in conventional naval battles but to secure its growing overseas assets and to achieve supremacy in coastal waters China's military investment supports its growing economic reach overseas American observers mistakenly believe that China is playing a sort of global monopoly gain securing ports and other logistical nodes to control trade routes with a hotel in Somalia and a hotel in Sri Lanka and so forth China's overseas strategy has many facets including securing supplies of energy and raw materials but a central objective is to transform the economies of the global south on the Chinese model it wants to if I can coin a term to sino form countries with a combined population of two billion from Southeast Asia to Eastern Europe and extending to Latin America China understands the disruptive power of mobile broadband and its ability to transform the daily life of people now immured in backwardness and isolation and linked them to a global marketplace configured by Chinese technology Chinese industrial organization and Chinese finance the rise of the Chinese economy is the most momentous event in modern economic history and the Chinese intend to propagate this model globally the prospective transformation is breathtaking Sokol developing countries generally don't develop most people work as an assistance plot with poor implements or they sit in a market stall waiting for someone to come along and buy a liter of cooking oil they have no capital no productivity they basically sit around most of the day and do very little they don't pay taxes so the government doesn't have money to spend on infrastructure and you have a vicious circle of poverty informal employment which basically means impoverished capital deprived employment in the global south ranges from 55 percent in Mexico to 85 percent in India what globalization has accomplished under Western auspices is a pale shadow over the sino centric world would do this is not necessarily a bad thing per se but I do not wish to see China emerge as a dominant superpower as a result that's the essence of the belt and Road initiative Huawei is both the spearhead of Chinese overseas expansion as well as an organizational model for the execution of that expansion the Chinese economic model is the extreme version of the model that began with Japan's restoration to power of the Meiji Dynasty in 1868 and then replicated by South Korea and Taiwan move subsistence farmers to the cities build factories for them to work in well it's G per capita GDP rose 35 times in the last 40 years China moved 550 million people from the countryside to the cities and it built the equivalent of all the cities in Europe to house them a new Liverpool and New Glasgow a new Naples a new Stockholm and it built 80,000 miles of superhighway and 18,000 miles of high-speed train to move them about modernization in China is not the Enclave of the small middle class as in most of the developing world but a movement that reaches into the capillaries of society intrapreneurs in Chinese villages connect to the world market through mobile broadband sell their products and buy supplies and the only Baba platform and obtain credit from microfinance in platforms information and capital flow down to the roots of the economy and products flow back up to the world market China has ripped out traditional society by the roots in its own country and it will do so everywhere else if given the opportunity meanwhile China's economic relationship the United States has changed radically during the past decade between 1979 and 2009 China depended on the US consumer in 2009 exports had reached 36 percent of China's GDP after the world financial crisis China was convinced that the American consumer would no longer be the great support of world demand and it undertook to drastically reduce export dependency so it's sheriff GDP in exports has fallen to 18% half of what it was in 2009 its exports the US are now only five percent of its manufacturing and they represent mostly lower value-added industries about half involve assembly of consumer electronics from components they import from Taiwan and elsewhere during the past decade China has sought to sift these industries to low-wage countries like Vietnam high tariffs and Chinese goods with only compelled China to do faster and with more friction and discomfort what they have wanted to do all along Chinese ask me why is Trump trying to protect the industries that we want to get rid of a sudden reduction of US imports from China would require China to find alternative employment for millions of semi-skilled workers that's a management headache but it's not an existential threat there's a popular current of thinking in the United States that has been predicting the collapse of China for the past two decades it hasn't happened and it won't we have chronically underestimated China the way Russia underestimated the Japanese in 1904 the United States and British underestimated the Japanese before Pearl Harbor and Singapore another school of thought held that economic liberalisation inevitably would lead political change that's whistling in the dark we can't change China from the outside and it won't oblige us by collapsing of its own weight parenthetically China's debt to GDP ratio is the same as ours about 250 percent of GDP the difference is that most of the Chinese debt is owed by the government to itself as a consequence of spending on infrastructure where do we stand in the United States now two weeks ago I joined a group of China watchers at the committee for president the danger meeting in New York alongside Steve Bannon Steve remarked that American corporations are unregistered Chinese foreign agents and that Wall Street is China's investor relations department that's a bit exaggerated but there's a disturbing element of truth it's an ill wind that blows nobody good we talk about China's damage to the United States economy but cheap Chinese electronics imports helped support the valuation of US tech companies which has risen by 13 trillion dollars in the past 10 years American corporations has chewed capital intensive investments and invested in software and an apps that made Silicon very rich indeed we remonstrate with the Chinese about force technology transfers but we have more to fear from voluntary transfers most American corporations can't wait to transfer technology to the Chinese in return for privileged access to the Chinese market to paraphrase Leon Trotsky you may not be interested in industrial policy but Industrial Policy is interested in you the Asian model treats capital intensive industry as infrastructure it supports chip foundries with public funds the way we subsidize sports arenas the Asian model began as I said with Japan's Meiji Restoration now Japan China South Korea and Taiwan subsidize capital intensive industry with the result that virtually all high-tech products every one of them invented in the United States are manufactured in Asia all the technology is the digital age integrated circuit sensors displays lasers the internet were invented in America with research support by the Defense Department NASA and other government agencies America has stopped investing in capital intensive high-tech production and there's virtually zero venture capital going into anything to do with manufacturing the result is disastrous America share of semiconductor manufacturing fell from 25 percent in 2011 to less than 10 percent in 2018 in five years industry sources projected will be less than five percent a country that cannot produce its own integrated circuits can't defend itself in the AIDS of smart weapons and I am a free trader and a free market tier except when it comes to national security and here there's a national security override we require elements of industrial policy as a matter of national security China's up spending the United States in quantum computing which might be the most important technology of this century it spent 11 billion dollars to build a single research facility and Hefei with a budget by contrast the US government is allocated 1.2 billion for quantum computing over the next five years China remains behind the US and many key areas of technology but it's catching up fast in the last several years for example China landed a probe of the Dark Side of the Moon developed the first successful quantum communications satellite created a 2,000 kilometer long quantum communication network between Beijing and sang Shanghai and build some of the world's fastest supercomputers and of course is now the leader in fifth-generation mobile broadband China's investment in education parallels its investment in high-tech industry today China graduates four times as many stem bachelor's degrees as the u.s. twice as many doctoral degrees and it continues to gain a third of Chinese students major in engineering versus only 7% in the United States and many of those are Chinese foreign students the most frightening thing is that 80% of all doctoral candidates in computer science and electrical engineering are foreign students and the majority of those are Chinese most of them return to China what we've done in the past 20 years is to use our best universities to train the world's best faculty in frontier technology areas in China there's now a sharp drop-off for Chinese applications to study in the United States because the Chinese no longer have to come to study with the professors who taught the professor's they have back home in China we have less to fear today from China stealing existing US technology than from Chinese invention of new technologies for the first time since Sputnik a foreign rival is leapfrog the United States in this case 5g broadband China spends perhaps an order of magnitude more than we do in quantum computing as I mentioned and we've responded much too late to the challenge the United States congealed and threatened its allies to exclude Huawei from the rollout of 5g broadband and received the humilliate rebuff parenthetically a colleague of mine at Asia Times recently interviewed government minister of one of the largest European countries he said you don't have an American company that competes with Huawei you don't produce 5g equipment you tell us to go to Ericsson and Nokia Scandinavia there are second-rate companies who exist because while we let's them exist so we don't have an alternative and we don't understand what the United States wants from us as I mentioned China made spectacular progress at establishing a self-sufficiency in high-end computer chips a recent Japanese study reports that Wobblies handset chips are equal to or better than apples now we've recently had an executive order which may or may not depending on whether it's rescinded cut off access to American components the Huawei the industry exports we've consulted and Huawei itself believed that if they can make their own silicon reverse engineering the various smaller parts or a source in them elsewhere is not going to be particularly difficult to do American analysts tend to deprecated China's ability to innovate I'm reminded of the siege of Baghdad in 1258 when the Mongols on their ponies were there bows and arrows surrounded Baghdad with its 15-foot thick stone walls and abbasid caliph he didn't really have to worry about them except the Mongols brought with him a thousand Chinese siege engineers the Chinese engineers knocked down the walls within three weeks and the Mongols end of the city and killed everybody in it I mentioned that what did I mention that while it was 50,000 foreign employees now China is exporting this model to the rest of the global south it's much more complicated than Western press accounts typically portray China for example is accused of setting debt traps do you lock it's neighbors into financial control that's exaggerated for example sri lanka sold its Hambantota port to china in payment of debts outstanding but in fact only 10% of Sri Lanka is debt is owed to the Chinese most of that is unconfessed in their terms Sri Lanka got a salt into its own debt trap before China came along what China wants is not a financial relationship that gives the control it wants the it wants to make two billion people into tenant farmers of the Chinese Empire Chinese planners are thinking a generation ahead the scarcest resource in the world is going to be labor particularly workers who could read an instruction manual learns skilled jobs and show up for work on time virtually all of the world's population growth during the 21st century will take place in sub-saharan Africa and Pakistan the problem is that the productive parts of the world are all aging together there are plenty of young people in the world but low education levels abysmal infrastructure and political instability sidelined the regions where population growth is most rapid China's own labor force stopped growing by a couple of years ago so China wants first dibs on the productive labor of the world as its labor force declines as inevitably will it will replace it with investments in the doulton Road initiative harnessing the labor of billions of others China's offer to the global south is persuasive I'll tell you a personal story about this in my capacity as an investment banker I brought Mexico's ambassador to China to hua ways headquarters in Shenzhen several years ago we went through the exhibition hole which is three times the size of the Air and Space Museum in Washington after three hours of looking at their various exhibits the Huawei people sat us down in an amphitheater and a fellow got up with a PowerPoint and he said you Mexicans have a big economy but very low broadband penetration your economy is backward because broadband is expensive and hard to get let us build a national broadband network for you then you could become a great enriched economy just like China will bring an e-commerce will bring an Alibaba will bring in Baidu will bring in microfinance will make you like China and you'll be rich you sounded a bit like the Borg will assimilate you resistance is futile nothing came of it at the time but Huawei is now building an actual broadband network in Mexico and Brazil and Baidu intents that are financed in all of the e-commerce startups the good news is that the prospects for a quantum jump in productivity in the developing world are very good the bad news is that China is positioning itself to reap the harvest of this productivity China wants to be the dominant supplier investor and technology provider in the region by contrast the United States has drifted towards the export profile of a Brazil with strengthen the agriculture and energy but weakness and high technology manufacturing and exports in Europe China's most enthusiastic collaborators are the nationalist governments of Italy Poland Hungary Czech Republic who seek Chinese leverage against European community and brussels italy's populist government was the first to sign on to first in the g7 dishonor to China's belt and road initiative the poles are best friend in Europe have as their premier national product an enormous Airport 40 miles east of Warsaw which they intend to be Europe's air fête hub to the Belkin Road initiative Frankfurt in London can't expand so the poles are going to be the air freight hub and link it to a new railroad line that built to China it's the fate of small countries to orbit large ones and to the extent that American economic power declines they will never they will inevitably be attracted to China including our best friends ten years ago the United States could have shut down the export-dependent Chinese economy with tariff barriers but not today five years ago the United States could have crippled Huawei by depriving it of components but not today restrictions and component sales to Huawei will not impede the rollout of 5g in Europe as leaders of Germany France and the Netherlands all said publicly in the last several days without offering better technology we can't hold China back we may not even be able to delay it America is in the uncharacteristic position of attempting to use our influence to prevent a rival from doing something that we do not propose to do ourselves that's a strategy which to my knowledge has never succeeded at any time in any place in recorded history we should look back instead to our victory over the Soviet Union in the Cold War a victory that confounded the conventional wisdom of the late 1970s that saw America and decline back then we devoted 1.3 percent of our GDP the equivalent of 260 billion in today's dollars to basic research now federal funding of research and development is fallen by half and a lot of that is fluff like you know climate change research I proposed the following steps is exemplary first we've got to force key high-tech industry particularly semiconductor fabrication back onshore a Nathan that can't produce its own semiconductors can't protect itself can't be a global power we should have export controls in a high-tech I'm not as worried about forced technology transfers as about American corporations standing in line to give their technology away we should change Defense Department budget priorities to emphasize war winning advanced technologies rather than legacy systems we don't need as many carriers in f-35s we need drone swarms we need a new national defense education which I was an hour passed after Sputnik which created an entire generation of engineers we should collaborate with Japan South Korea and India to provide an alternative to the doulton road initiatives China is arrogant and bullying at its handling of its trading partners it's not well-liked and if there were an alternative many would be thrilled to work with us we should engineer a brain drain of China's most talented scientific cadre we can't change China's political system by controlling the Communist Party for its reprehensible practices well we can deprive it of the talents of some of its most creative independent and freedom-loving minds china can innovate we can innovate better the American alliance of defense driven research and private entrepreneurship created the digital age something no other country could have accomplished we can astonish the world again but only if we summon all of our national resources do so that's the longer-term solutions what happens in the short run we can escalate the present trade in technology war with China with considerable collateral damage to the world economy we have no guarantee of victory in such a short term confrontation China has been preparing for such a contingency for the past ten years all our trade war probably would damage the president's position in the 2020 election and I want to make clear I'm an always trump ER and I very much want to see him reelected alternatively we can agree to an armistice and what promises to be a very long war and return to the policies that ensure that victory in the past we've underestimated the Chinese let them discover that they've underestimated us without thank you very much for your attention good evening [Applause] we've got 20 minutes for questions I'd be allotted to take them sir is there a microphone I started to read but I didn't finish yet the Nicholas lardy book the state strikes back where he predicts that the government is taking a bigger and bigger share in Chinese economy which is going to be as you already denied but debunk this theory and another theory of Chinese slowdown what do you think of this book thinking the great Chinese slowdown has been predicted for 20 years and it hasn't come if you look at the details of what China is doing China for example installs more robots than the United States and Europe combined it's still increasing the productivity of its population by moving very large numbers the people from countryside to city it is rapidly modernizing its industrial production the biggest problem China has in terms of growth is that it has a generation of people who came from the country to the city 20 years ago when there when they were young they're now in their 40s they've been working in semi skilled jobs and there's really no place for them to go so they're parked in state-owned industries which are unproductive and often require subsidies and that's a drag on Chinese productivity so it will take a while for Chinese reforms to redeploy those people to other jobs services have been growing at the expense of manufacturing there are entire new cities in the center of China that American tourists that are heard of with 20 million people that are the center of China's rapid economic growth so I don't believe that there is any parent obstacle to Chinese economic growth I think there are management problems and China will comfortably be able to maintain a five six percent economic growth for another decade which means its economy roughly doubles over that period you well there's always a political risk that the so-called Chinese left-wing will arrest China's development but I think it's extremely unlikely because Chinese Communist Party has as a principle objective staying in power it'll stay in power if it can continue to meet the aspirations of the citizens and it won't do that by going back to methods which nearly destroyed it during the Great Leap Forward and the Cultural Revolution so I'm not privy to the deliberations of the Politburo but I think that's a very unlikely outcome Steve Brian Hughes to run the export controls office at Pentagon has written about this and I think that a great deal of sense that there are a lot of technologies we simply don't want to let them have katie mcfarland the other day pointed out that during the Cold War we wouldn't even let the Russians by a Xerox machine they were still using mimeograph s-- when communism fell so there are a lot of technologies that we simply don't want to let the Chinese have it's not a matter I mean Silicon Valley can say what it wants but there are a lot of things you're not going to get from the Europeans there are things we can't stop them from getting for example machines for chip design you can bar for the United States but you can also buy them from Zeman's in Germany and I very much doubt the Germans could be cajoled or threatened into cutting off exports to China Siemens has been in joint ventures with Huawei since 2000 for 15 years so that's not going to happen well we could certainly slow them down but the most important thing is to do better than they do produce better products it's a very poor strategy to try to stop someone else from doing something that they do better than you you can throw your weight around but your weight will never be enough to stop them we need to unleash American innovation and drive their products out of the market by producing better ones well now everybody imitates everybody else and the Bessemer process and steel was invented by Sir Charles Bessemer not by you know not by Andrew Carnegie the light bulb was invented by a British physicist not by Thomas Edison industrial espionage is vastly overrated somebody gets in a plane with a briefcase full of blueprints and flies to Beijing and people can look at the blueprints that's not really the issue if you set up a factory you've got a bunch of engineers who learn to do the process then you hire them away and they can do it for somebody else you learn by creating the team that does the entire process that's that's how technology really is transferred which means you don't want to let American companies do certain kinds of things at all for example I wouldn't let Boeing produce aircraft in China that would be an example of something I'd stop I'm much more concerned though about new technology I'll give you an example semiconductor manufacturing the latest Taiwan Semiconductor Manufacturing chip fabrication plan will cost twenty billion dollars that's an astonishing Sun for a single Factory might be the most expensive factory in history don't quote me on that but it's certainly way up there these are you know enormous presses there are there's research at MIT which uses an application of quantum mechanics to grow Crysta to grow circuits as opposed to squishing the material down into them which had costs tiny fraction of what that does it would wipe out you know several hundred billion dollars of investment so we when we have the level of R&D that we had during the Reagan years we don't know exactly what we're going to get out of it for example the process for tip manufacturing which became standard CMOS chip manufacturing was invented well it theoretically by Fairchild but RCA labs perfected it because someone at Pentagon decided they wanted fighter pilots to do weather forecasts in the cockpit and they needed a lighter faster ship so the RCA guys came up with this process which became the standards and ship manufacturing in 1976 by 1978 it was used for lookdown braider and f-15s and by 1982 the Israelis demonstrated at the baked evaluator key shooter that this and other avionic advances could wipe out the Russian advantage and surf surface-to-air missiles and that's what finally that was the first death knell of communism so I don't know exactly which technologies are going to succeed I know certain things we absolutely must develop like quantum computing but the most important thing is to recreate the network of corporate laboratories defense defense agencies which fund basic research national laboratories universities which we had in the 1980s and which made us the wonder of the world sir we talk about what we should do but when I look about what happened like I look at like Bell Labs for instance Nokia the remnants of bellcore the research arm of the baby bells Erickson SEMATECH I guess still exist but don't know I mean that it was our reaction to the semiconductor issue in the 80s I mean even our influence with with economic development of third world countries like OPIC and USTDA it doesn't seem like it's enough I mean what why did we allow ourselves to get into the situation in the first place well I think the answer is the clinton peace dividend after the fall of communism we were so strong that we couldn't imagine that we would ever need to do anything militarily again we would just sit there so the whole federal research and development effort was built down vastly that was under clinton we owe this we also as walter mcdu of University of Pennsylvania recently wrote in a superb essay for law and liberty we also saw that NATO should be like a social welfare organization as opposed to a military organization that everybody should join kind of like UNESCO you know UNESCO was blue uniforms or something so and that was disastrous then we had the Bush administration of which I was been a very severe critic from the beginning president Trump estimates that we spent seven trillion dollars chasing the phantom of nation-building around the world I don't know if that's the right number but it was trillions and at the same time we vastly neglected basic R&D we just couldn't do both at the same time we made a terribly poor choice we received we got nothing but a lot of heartache and humiliation for our investment in nation building we built no nations and meanwhile we neglected our basic industry and our technology so corporations who no longer had the relationship with the federal government would subsidize their basic R&D moved out of it the other thing that happened is the Chinese pushed us out of it the Asians have always subsidized capital intensive industry that's the Asian model Japanese did it in 1900 it's not new the difference is China is 1.4 billion people they're gigantic the gravitational pull of that Chinese subsidy chased all American money out of hardware into software out of capital intensive into so called capital light investments how do you deal with that well we can go to the Chinese and say change your economic system horrible tax furniture or whatever or well I'm exaggerating silently I don't believe we can force the Chinese to change their system that's in the Asian system since 1868 they don't know any other way to run a business so we've got to do some things on our own and that will in some cases require subsidies the way we give subsidies to defense companies I hate subsidies they the corruption at least in efficiencies the wrong way to do things but in a national security situation sometimes you do things in a suboptimal way having the Marines close engage and destroy is not exactly an economic value-added proposition either but you do it for national security reasons sir could you speak to the currency and the strategy that the Chinese have yes absolutely the Chinese would like to see the RMB become a global reserve currency and challenge the dollar they are very cautious about moving in that direction they have created RMB payment networks which roughly doubled their volume in the last couple of years that's very useful for countries subdued sanctions like Russia Iran Turkey and so forth so they basically run the equivalent of a little money laundering operation at RMB on the side benefiting from the difficulties that sanctioned countries have using the dollar based payment system what do you want to keep your checking account in a Chinese bank in R & B well obviously not not that as German motors the other does Eamon's now that is Mitsubishi so that until such a time that China develops a capital market which is free and open and efficient you can't have a reserve currency because people don't want to keep their reserves in your currency that I want to hold your balances there but over the next 10 to 15 years the Chinese certainly want to move in that direction one of the areas of market opening that they're most eager to do is the financial sector JP Morgan Goldman Sachs Blackrock all of these companies can't wait to get into China I mean this is the savings of a billion and a half people vastly profitable business the Chinese want Western expertise in managing of banking and asset management system to help them advance towards this goal so it is a significant threat to the knighted States over the long term I think many accounts of Chinese intentions to make the RMB into a reserve currency have been alarmist because it's much more difficult than a matter of you know signing a few laws you have to gain the confidence of the world in terms of the armies present value it's definitely in China's interests not to let it fluctuate to much they don't want to depreciate it aggressively because they want to keep confidence in their capital markets so they've depreciated it a bit which helps take some of the edge off the tariffs but I don't think they will allow to depreciate seriously if they can possibly avoid it and since they've got well over two trillion dollars of reserves they have caught a war chest so I don't think the RMB in the short term is gonna be very volatile sure one two three four so okay first yes I'm personally very interested in the in the rise of China and the effects that it's had on its own people investing in real estate in the United States and the effects that that has had on my generation and I'd like to know your opinion on a matter of Chinese citizens investing in residential real estate around the world well during the great housing bubble of 1998 to 2008 the United States ran a current account deficit each year about six hundred billion dollars it was enormous and the whole world was fluffed with savings Chinese were enormous savers and many others not just the Chinese I was at that point ahead of debt research for Bank of America and we sold vast amounts of mortgage-backed securities to the Chinese who thought gee this is safest houses this helped create a bubble in housing in the United States supported some very bad credit decisions in order to create these bonds that we could sell to the Chinese we dragooned every drunk off the street we could and put a mortgage in front of the MacGuffin decided I mean we lowered credit standards who did outrageous things as bankers it's one of the reasons that left the industry so that created a housing bubble which pushed your generation out of the housing market pushed housing out of reach so it had a terrible consequence for you that is a bit different than the personal investments of Chinese and real estate around the world as my old boss at reorient group Johnson Co once told me every generation of Chinese for the past thousand years has been expropriated so we all want to keep some money outside of China and real estate is viewed as a safe investment those flows have diminished a great deal partly because the Chinese have been effective in putting exchange country capital controls on and I think the effect is much diminished since the 1980s next question was in order um I was curious because I've seen a bunch of blowback from other Asian countries like Japan um with China's gaining power and trying to become a hegemony my question is um what role do you think that those countries will play in helping either hinder postpone or prevent the potential hegemony that China can get in the next coming decades I think the Japanese are keeping their powder very dry they're being very cautious for example let's say hypothetically we had a war with the United States interdite of energy supplies to China they could do that but since every barrel of oil that goes in the Persian Gulf goes through the South China Sea not a barrel of oil would reach Japan either so the last thing Japan wants is a conflict which in the US and China because collateral damage would be catastrophic the Japanese and Chinese don't like each other Japanese certainly are prepared to develop nuclear weapons very quickly they have the developer they're investing in their own defense but at the same time the Chinese market is usually important to them and I think they are opportunistically lying back waiting to see who wins and what kind of deal they have to make if the United States is strong and assertive I think the Japanese will certainly be on our side Japan has more foreign assets than China Japan certainly could be the major funder of an alternative to the Chinese belton Road initiative along with South Korea which is extremely active in foreign investments in Southeast Asia to some extent India though India is more challenged because it really has its own internal development problems to deal with before it expands overseas so I certainly think there would be potential if we had a clear policy to ensure American hegemony but since our policy has been very uncertain everybody is gaming us I think that's the simple way to put it sir-sir it was another question Eric yeah okay there and then in front sorry what do you make the cephus review process as it currently stands is it effective do you expect that it'll be effective in the future and is it the kind of direction you'd like to see United States going in terms of try to put some control over what products end up in Chinese hands I think the committee and for investment in the US has been better under Trump that it was under Obama it's improved a great deal I'm less concerned about Chinese investment in the US than I am about US export of technology to China but these are you know obviously similar things I'm for an extremely tough policy I would try to deny China access to key technology either by investing in u.s. or by American companies operating in China but that will only work if we're simultaneously investing in better technologies on our own it's a matter of ephah of offense and defense defense at best delays your enemy you win by offense in front we've won one work wonderful reception okay just across the hall I apologize please join us there ask your question there [Applause]

Channel: The Heritage Foundation

Views: 272,882

Rating: 4.4054499 out of 5

Keywords: China, Grand Strategy, Belt and Road Initiative, Heritage Foundation, David P. Goldman

Id: qx-7Q3HEbDM

Length: 61min 35sec (3695 seconds)

Published: Thu May 23 2019

Reddit Comments

[u/fake_n00b]

This guy doesn't underestimate China, and calls for the US to be a better competitor by investing more in capital intensive high tech manufacturing and basic science research. His analysis is spot on about China's strategy and ambitions.

Another China expert at this level or possibly even better is Kevin Rudd (former Australian prime Minister). I recommend watching his talks as well.

If this is the level of analysis they share in a public forum, I can only imagine the detailed advice they give in a closed session.