Yukon Huang: Trading Blows: The US-China Trade War

you it's my pleasure to have Yukon Wang with us this evening he is a scholar of note who understands economics quite well as you heard he has a distinguished career at the World Bank and is currently with the Carnegie organization and at the Carnegie Endowment for international peace and last year he wrote a book called is it the China conundrum is that the title cracking the China conundrum because we do have so many questions about this nation this 1.4 billion depending on who's counting size nation with these economic trends that are of note and interestingly when dr. Huang wrote his book which came out last year after right at the end of the 2016 election he made the prediction that given the trends both in China and in the United States and with the leadership that seemed to be arising the politics of it that China in the United States inevitably would enter into a trade war it seems you were right so could you perhaps start this evening and again welcome and explain what led you to believe that we were going to enter into this now very real trade war well you begin with this vision of what China and America are all about and the idea is that they're quite different as countries but we now have a situation where the leadership is quite similar so President Xi Jinping and President Trump have a lot of similarities you have the America first from our side from China the China dream President Trump was elected with a very strong populist agenda Xi Jinping is a very strong nationalist agenda they both have a vision of where they want the country to go they both wanted more assertive policies therefore it's a given we're trans coming from and we're America whoever we are at and part of the book is saying that a increase in economic intentions is more or less inevitable right well and so in fact that inevitability has come to pass we've seen the imposition of quite significant tariffs from the side of the United States of course the president argues that these are mirroring and that there is a search for reciprocity but as we sit here tonight there is a truce in this particular trade war that you predict it would be coming what can we look for and and maybe you can analyze a bit the the trade war itself and its justification perhaps well what's interesting because the outcome of this recent agreement led to a surge in the markets so let's go back and ask what was really agreed upon and what was greed upon was a ceasefire that is there would be no more hostile acts toward each other there was no full agreement on the problem just an agreement that in nine days the problem will be discussed so the first interesting point is why a mark is so positive about a problem which not yet been solved the framework has not been detailed okay all you've done is shoved it out 90 more days so what the markets are telling us is they don't like trade wars everyone loses the trade were consumers lose producers lose markets hate the uncertainty of a trade war so I guess the first point I would make is the markets are telling us that a trade war is counterproductive and they're hoping that will just go away but of course the issue is will go away I guess the other point I was basically saying is people are asking then what should be done is this trade were necessary and I would say it's not necessary there are real issues between America and China but a trade war does not dress them and then we talked about the inevitability a bit earlier yes so you have a kind of productive trade war and a necessary trade war but Ronna CLE inevitable trade war and the key issue then is how does the US and China sort this out in the future well if you ask the president he believes the president United States that is he believes that this is something that is winnable and that in fact the pressure starting with a maximal approach to negotiations is something that will inevitably force the Chinese side and President Xi Jingping into concessions that are favorable or at least from the president of the United States perspective mirroring of the types of trade policies that have been pursued in and in an American perspective have been exploiting of a world trade reality that has favored ultimately the Chinese mm-hmm well the question of whether a trade war is a good tactic that America can use to win if you think about it history showing us that no trade war turns out to be successful from either side everyone loses why is it that everyone loses well think about this when he let me 200 billion dollars of tariffs on Chinese products coming in what are you essentially doing you're essentially asking American consumers and American companies to pay more yes okay so how could Americans think they're winning because consumers had to pay more businesses have to pay more okay then I try to decide of course prices are higher so Chinese producers lose you don't see any winners out of this process now some people would say well what about the iron and steel or aluminum companies where the tariffs are gone up and that's there are a few companies who actually the profits are surged but there was a relatively very small percentage of the producers well aluminum steel iron ore they're used by everybody so that you as automobile makers are actually starting to suffer people who use these products start to suffer they far outnumber those who benefit in essence a trade where doesn't win but the question is does this put pressure does this put pressure on China to negotiate and I think the answer is probably won't succeed that pressure is not a big issue for much higher perspective ten years ago trade was 70% of China's economy it was what I call more trade dependent today it's below 40 percent it's relatively independent anymore trade doesn't generate growth in China people have this mistaken view that because there's such a big exporting nation and they trade a lot that that's the reason why they grew so rapidly in fact trade is generating negative growth for China for the last several years it's not a trade promoter growth coming from consumption investment not from trade so a trade were just ranged losses but it doesn't really actually damage China in some fundamental sense I mean the best example is the iPhone and this is the symbol of the trade war the iPhone is made in China all Apple's products are made in China where aren't they making it here and what I want is for Apple to produce the phones here so that $800 iPhone that everyone has that should be produced in America and Americans will benefit workers will benefit the problem is that of that $800 iPhone only $25 of that goes to Chinese in terms of the assembly $350 goes to South Korea Japan Taiwan for the components $400 goes to Apple incredible profit margin that benefits Americans so here if you are slapping a tariff on these iPhones made in China you don't really hurt the Chinese and one of the great ironies of a trade war is that 60% of China's exports to America are actually managed and controlled by American companies okay so that's a great great irony here actually you end up actually hitting American companies you think about this issue about tariffs on cars take a look at General Motors for example that's the predominant American manufacturer how many people realize that General Motors sells more cars in China than it sells in America okay so we have a fundamental problem take Intel high-tech major producer of semiconductors critical technology here's the problem 80% of Intel's products are bought by China suppose you told Intel I don't want you to be selling your high-tech goods to China anymore whose Intel gonna sell this to and this is what I call the big issue you think this trade work and put pressure on key industries but very unpredictable who was actually affected in the end many American concerns are actually more affected I mean that iPhone is made by Chinese workers in China they're paid $2 an hour ok suppose you brought it back here and decided you'd had to basically paid workers 25 dollars an hour even then how many people want to slave away you know in a factory assembling iPhones and very few so I think part of this issue in the trade war is the irony is this really not about trade this is the great irony headlines always us tire trade war tariffs everyone said supposed to be about trade and the answer isn't about trade actually because trade isn't actually the problem America has benefited a lot from imports of relatively inexpensive consumer goods from China and that's improve the living standards here it's also allowed people to save more and spend but the tremendous advantage that China has is not in manufactured goods it's in services and agricultural commodities so when you look about what China offer to America to Trump in Argentina basically say I'm gonna buy more natural gas I'm gonna borrow more soybeans I can't buy more high-tech goods because you won't sell them to me this is all fascinating right and and you know the there are others who would argue that some of this history is of course one that has been lopsided because if we talk about trade for example when you talked about some of these goods well the argument would then be well during this era when China was in fact relying on its exports and on its trade there was a fair amount of dumping going on with the for instance steel and aluminum when they were developing these goods that were being exported whether they were in the technology realm or elsewhere not only were they manufacturing at a very low cost labour costs which was beneficial clearly to everyone in this room and to American consumers overall but in the process there was a fair amount of IP theft in that if you wanted a foreign technology company or anyone who had intellectual property of any sort to be able to participate in the economy in China whether its market access or even just being able to manufacture well you had to partner with a Chinese company in order to be able to operate within the structure of the Chinese state and so when you look at it from and take these arguments then there is the there is the argument of fairness and which is one the President of the United States is currently raising on a regular basis and quite loudly and perhaps even in ways that that have overtones of threat to them but but you can see how in fact there are there is an argument to be made that in fact there was this long arc of non reciprocity unfairness that has allowed for now China of course to become a service exporter and for the United States as you've just described it to be a provider of commodities rather than of those products that are high value so how do you then try to balance this because it seems to be that the argument that's being made today is we're just trying to right the ship I think your description of the issue of unfairness is correct there is a general perception in America that China's economic policies are unfair and this needs to be addressed and I think that our aspects of China's policies which are unfair and need to be dealt with but they're not trade out policies actually let's go back to the perception one perception is that Trey's unfair because China's wages are so low how can America compete with China's workforce when they're paid so little but here's the interesting thing wages today in China are seven times as high as they were ten years ago okay so maybe they had low wages ten or fifteen years ago but today they're not so low anymore they're lower than they're higher than the Philippines in Thailand Malaysia no one complains so how can it be that way just go up seven hundred percent but China still in terms of trade competitive and the answer of course its proclivities going up a lot and why infrastructure and of course this is a major debate here in America sure how much should we spend on infrastructure or try to spend enormous amount how much is enormous they this forty five percent of their income a large chunk of that is an infrastructure forty five percent investment rate here in America only invest seventeen percent of our economy and hardly anything in infrastructure so the solution the problem really the trade the advantages didn't come from what I call low wages it came from productivity increase but let's go back to the common perception of the contraception is that America has a huge trade deficit and that China was responsible and then very few people are Comus so I always have a tough time trying to explain to him is this true or not true so I go back and look at history when did America's trade deficit become a huge issue and the answer is around 1999 year 2000 America's trade deficit became enormous and it stated enormous for three or four or five years and the 9/11 helped boost that up because the government security military experiences went up a lot so America's trade problems surfaced between 1999 and 2003 and for then let's look at China back then China did not have a trade surplus it did not have a significant trace of us at all how could it be causing America's trade deficit when China the lien generator surplus now actually today the interesting issue here is America's trade deficit is getting larger it's getting much larger because the US budget is deficits gained much larger what about China China's trade deficit has disappeared he's likely to run a current account deficit next year so how can try to be causing America's trade problems today when China is not even generating a trade surplus okay but here's the here's a funny issue though China may not be generating an overall trade surplus but it has a huge surplus of America and the answer to that of course is it must have a huge deficit with somebody else that offsets this and the answer it does the commodity producers East Asia Japan South Korea Taiwan huge deficits but then a surplus with the West because the West buys that consumer goods China gets the raw materials the parts from other countries China is in balance but the West is in deficit but here's the interesting issue why is it that Europe doesn't have a huge trade deficit but America does a global financial crisis both countries had similar trade deficits but Europe no longer but America it has a significant one and that reason is very simple you're basically solve this budget problem it brought his budget into balance because of the global financial crisis whereas here in America we have not done that so we continue to have a trade deficit problem Europe no longer does you're generating huge surpluses but think about this this really has nothing to do with China it really has to do with the country's own policies so that's why I say this issue of us-china trade war it's not about trade we can solve the trade problem here in America very simply if we just bring our budget government budget into balance we don't have a deficit but the unfairness issue is out there yeah and that's not a trade issue it's a question of unfair investment practices right restrictions on companies coming into America to operate and they feel like they don't have full liberty to produce what they want and establish companies in a way they would like to and I think that is a legitimate complaint as particularly strong in services what is America's strength America's strength is services financial services entertainment service medias his medical services engineering services insurance is everything this is where China's very restrictive American firms are handicapped but think about this this has nothing to do with manufacturing it's nothing to do with industrial jobs it's not about lumina and laurels it's about services this is where China really should liberalize it is unfair to restrict American investment but I will also add a a comma footnote suppose trying to liberalized okay open I'm gonna try and imagine that particular scenario so all this foreign money from American starts to go into China investing because it now has access to market what's good to happen to America's trade deficit it's gonna get worse because all these American companies gonna go to China invest and produce something and they start to export it back to America so the great irony is if Trump gets his way if we solve this unfairness issue the thing that drove this whole problem of trade deficit actually gets worse okay and I think this is the great irony that people wonder reasons why this problem hasn't been solved because people realize one's not about trade seconds is about services and foreign investment but if you solve that what do you do about the trade issue it becomes a little bit worse well it's it's fascinating because really if those markets were to open up then then of course the expectation is that there would be other types of benefits and that investment would then be also generated in a way that would perhaps offset some of these rising deficits isn't that right well I think that that way it would help if you asked or encouraged more Chinese for investment to come to America because when it comes to America I creates jobs here right but just think we're trying to do we're actually trying to tighten Chinese foreign investment coming in yes things like sophia's and theirs and for those of you who don't know what Cepheus is maybe you can explain most if is the inner government panel with scrutinizes for investment to see whether there are some security concerns and I think this is entirely legitimate there are errors activities where you would want to make sure the foreign investment does not get into security issues which would be detrimental to Americans interest but there's lots of other areas well when China was trying to buy Smithfield ham people said that's a security issue okay for those bacon lovers there but here's the point here is one of the things that's occurring today is that America is tightening up the restrictions on Chinese investment coming here so they're tightening up their money coming here for asking them to loosen it for us to go there I'm balanced therefore more money's gonna go out and come in and I don't think that's it actually America's interest fully what you want actually is I would call a level playing field for both sides and I think that is a goal that both sides should work toward and their ways to achieve this but right now tariffs tariffs is sort of like the worst means of trying to address this concern yeah and and they and you make a very good point that in fact and I think you've made a made it clear to everyone here that it's not about trained in fact that it is this unfairness of investment practices and policies and so getting to that level playing field has been difficult in fact it seems that the opposite has been happening through policies the centralized policies of the Chinese government and of Xi Jingping wanting to dominate certain industries making sure that his China dream in the China 2025 which is achieving dominance in certain specific fields including artificial intelligence and other areas of global of global importance will not bring us to this level of playing field so the argument of course at least with this current administration is then you have to use what tools you do have which are the trade tool so it may be the imperfect tool for a problem that it's not actually seeking to solve but rather trying to solve a different problem through using this as a means to to get there I think you raised a very good point can you justify this tariffs and the trade war as a tactical means because we cannot find alternative means that could address this issue I think that it begins by trying to figure out what the issue is you know and then figuring out whether we have an instrument to address it and then you mentioned a very good point that there is concern about this China made in China 2025 which was implemented or instituted in 2015 in some ways it's kind of ironic statement because people would say I thought everything was already made in China make anymore in China or what the trying to do is to make more high-tech products so identify strategic sectors industries and it says they'd like to produce some more and this report is cited something like 80 times in America's a study outlining the basis of the trade war basically we do not like this it is it's likely to lower America's competitive innovative advantages it's an issue of a rising power challenging the technological supremacy of the dominant power and this is a big issue this is part of what I call the inevitability and then the issue becomes well everybody every country has the right to be or want to be more innovative and technologically advanced for countries in rich country one does the question is that China's not doing it fairly and this I think is a little legitimate concerns and the general concern is that China subsidizes industries and this is unfair and so what I talk about is the issue would be do we in America subsidize our industries or not 100 billion dollars a year are spent by local garments in America to attract investments to their areas so Amazon was shopping around for a second headquarters Washington Virginia where I live in Washington you have to offer tax benefits free land everything else to get them to come football team wants to move everyone offers a free stadium and everything else so we spent hard billion dollars localities yeah let's stop doing that huh some people say this is unfair I see comments I don't think it's a good thing actually I don't think low calories should be competing with each other but we do Toyota moves to a factory in Tennessee they provide all sorts of subsidies okay but we also do this through the federal government tax system and programs we subsidize new industries those are the audience for example who buy electric cars star solar panels in their houses geothermal heating systems you get a huge tax write-off to encourage you to buy these products then companies get a huge depreciation allowance to produce them so that's how we subsidize and we subsidize over the place now here's the problem when you go to the Chinese and say you are not doing where you're supporting unfairly your industries you should be doing what we do here's what we do we do it through the tax system largely through deductions local governments providing funding and China will sub sorry our people don't pay taxes okay our households don't file returns okay we don't have deductions I cut me don't have depreciation schedules which are clearer and confident how can we subsidize our industries our system is remember very developing country we have a per capita GDP of 9000 your per-capita GDP is 60,000 your people weren't very familiar with tax systems incentives we don't so we subsidize through land transfers and we subsidize through credit flows through the banking system and we the America would not do this first of our banks are all private their banks are largely state so you have a fundamental problem it's not the principle of subsidies which is actually wrong or unfair it's that we have different ways of doing it and then when you think about it your question is how do you solve it I don't know how you solve it I was looking for an answer you can't solve this you could you could only solve it by saying both sides should stop subsidizing yeah ok ok I'm good with that ok and I think I could be good with that there practical matter you have to start at home also yeah well and you really you raise this issue of the purr of the type of structures that are true of of both sides as well right which is on the one hand you have state-owned banks and state-owned enterprise and on the other you have shareholder owned industry from the most part right and and so that raises the question of course that are more that are that is more strategic which is do you have industries that are necessarily aligned with the state agenda and an estate strategic geopolitical interest or do you have industries that are actually seeking a profit have a profit motive at its at its core and returning shareholder value as the driving motivation towards which can often go counter to national strategic interests so I think that that it sometimes feels like we're comparing apples to oranges in that when you when you are dealing with a state-owned enterprise whether it's a question of subsidy or not the alignment of those institutions with the state is so perfect or if it's not will be made to be perfect versus one which is wholly independent and and is trying to take advantage of whatever subsidies may exist but not necessarily returning to the state its its strategic interests right I think you've nailed a another issue which I think is difficult to resolve the dominance of the state is ownership and running of enterprises and activities in China and compare that with us here in America where we basically say the market should dictate and operate it and that changes the way the c-calm is run it changes accountability it even has what I would call a major influence on whether or not democracies or preserves or systems evolve or don't evolve and I think it's a big issue here's what you get from a Chinese perspective however and in my book I write about this actually China and America have a similar kind of a problem our companies in America are too big to fail and they're getting bigger and bigger weathers in the internet business when the banking system where the companies companies are fading out and disappearing and being bought out and we have a problem here America because as it was with the Carson sector we can't let them fail we have to figure out how to regulate them promote them China this is a different problem it's state enterprises are so big they're too big to manage ok they become uncontrollable they go overseas and do various things and the government doesn't even know what they're doing anymore so I think both countries have a problem in terms of size but the nature of ownership changes it so if we still have a problem in America and saying what happens to the financial banking sector gets such that there's only one or two banks in the whole country and we're getting there what happens if a Facebook or Google and other dominates the whole sector yeah ok where Amazon takes over all our distribution activities ok I don't know the answer that but here's what China says I see that America is becoming bigger and bigger and bigger and getting more concentrated yeah ok and I've tried to catch up so I'm going to try to support getting big and of course that means preserving the state entities ownership yeah so here's the huge challenge for China can I do this does it make sense or I'll become inefficient and the problem of course is these state comes in China they're too big to manage and they're starting to lose too much money so it is an issue is a conflict between America and us the solution again is not so obvious right and we hope that that conflict does not then you know enter into this expectation by some that a Thucydides trap would then lead us not so much into a trade war but rather into a shooting world that would in fact be military rather than financial you know you you raised an important question as you as you talked about this because you said well what do you do when there's consolidation in the marketplace and as we're seeing and as you raised with these very large organizations like Facebook which are much larger than you have a GDP or have a financial statement that's much larger than GDP of many nations and the answer of course has been that traditionally in the United States after you go through a fair amount of pain and suffering with these organizations consolidating you have regulation and you have antitrust actions and we haven't yet achieved that but it sounds at least currently that those noises are being made in Washington that that recognition is occurring but that for example should China have similar problems which is large unmanageable institutions and structures will there be a regulatory imposition will there be the attempt at antitrust or do those structures actually get reinforced to grow and become singularly important and by the state and and by the leadership I think that's a fundamental difference the challenge in America is regulation yes what's the proper way to regulate utilities regulate these internet these companies are getting too big and as you say it is a discussion it is being addressed but if you don't have exactly the answer yet no the signal will come up with it by the end of the evening you have the security issues you have this issue whether individuals own the information does the government own the information the companies own the information now you have the Chinese system where the state owns everything right okay so regulation is not the key issue the Reg issue for them is I own I manage it my the problem in China how do I get an adequate return to society from my ownership they have not achieved that fully and this is when you look at the policy agenda for the Xi Jinping's government I think the number one unresolved issue now this gets caught up in the trade war okay the trade war sees these state managed companies and sees this as part of the unfairness issue that these companies owned by the state marriage by the state how can American companies compete with them and my answer to this question is that is an issue but it's not actually the trade war issue these state companies in China account for 10 percent of America's of China's exports they're a non-factor in this trade war but people think actually it's the target remember the bulk of the products coming from China to America they're actually mayor managed by American companies not by Chinese companies so we'll stop talking about trade as the problem is and we'll really focus on some of these other fundamental internal issues that are true of China and and you know one of the things that I think we often have a hard time understanding is the whatever domestic contradictions may exist or the inability of the state to deliver a return on the investment of the Chinese people to the people and we see that whether it be in the inequalities that exists within the economics of the of the state and the the inequities that exist in the populace with the very rich and the very poor as well undeveloped areas of the country but these are these are things that we often are not exposed to because it is such a large state it is it is so complex it is dominantly uni ethnic right it is dominantly a Han Chinese population so there are we don't have the complexity of the diversity of the United States in its populace but nonetheless we can't extrapolate in any generalized way about about the Chinese state when we look at it from the outside because of these complexities you know at this time of the of our discussion when I usually turn to the audience questions and try to weave them into anything that I'm really interested in and but we'll talk about we've gotten some interesting questions some very specific you know we have a number of people who work in the high-tech field who are probably in the audience and one of the questions is how will China's investments in the semiconductor industry affect us-china dynamics here's the problem semiconductor industry is seeing is one of America's great strengths yeah and I think it's probably rightly seen by American policymakers as less too strictly an economic issue but also a security issue because semiconductors are used in so many in so many ways that they have both security and economic concerns the problem however is that America Sudi China is the major consumer of semiconductors it purchases about 7080 percent of the semiconductors made and made in the US right you were talking about Intel earlier it's therefore unrealistic actually to think that a country which buys 70% of something doesn't have a capacity to manufacture some of it especially when it is the manufacturing industrial growth so slowly what trines been trying to do is to try to get in at the lower ends Intel as a factory in China it's transferring knowledge to produce basic semiconductors and other things but not the high tech the high tech research and development of Intel's best is done only in two places here in the United States and in Israel otherwise they will not do it anywhere else because of security concerns I think the trend that will continue is that China will put a lot of effort into developing semiconductor industries it's going to be extremely expensive and difficult is becoming a big source of controversy because America in the last we have in the last couple months started to make put a prohibition on the export of the equipment which is used to make semiconductors okay and this is a big issue because there are there companies in China the only equipment they use are American equipment so they'll go out of business if they don't have access from this right so the key issue this trade war is not actually going to be this tariff rate or those kinds of things it's going to be policies like that controls on exports which if implemented could actually wipe out major companies in China okay and then from a Chinese perspective that's a big security issue how could I be so vulnerable to outside suppliers of something which is so integral to my economy so I am going to wrap up investment and every means to get the knowledge to do so and this is I think is a huge question coming up well you know it relates to another question that we have here from the audience which is as we look at these industries evolving and trying to protect themselves and making sure that they can survive within China part of what has been occurring has been the acquisition of intellectual property both by legal means and by illicit means and the question from the audience is what is your suggestion for the United States to deal with the intellectual property theft issue with China well I think we should first try to clarify that theft of intellectual property is illegal and should not be allowed and I think China would agree with this so when you talk about the criticism that China steals the answer is if china steals it should be penalize you should take them to the courts there are courts for this purpose now realistically if you talk about a lot of this cases which are small they're going to be prosecuted in courts in China and the accusation before was the Chinese courts were not fair or they're too slow or if they you won a case you didn't get paid enough and I think that that's certainly a legitimate concern here's the problem so-called neutral strong courts were established in Beijing Shanghai and Shenzhen only two years ago so you're not talking about a history of being able to deal with these kinds of cases but you're fundamentally talking about change in choices that they're willing to deal with this so after - two years ago they established in these streets major cities last year they broaden it to ten so they're now about a dozen courts dealing with IPR theft issues in China which I would say a vast improvement still need a lot of work now here's the interesting case ten years ago eighty percent of the cases would be brought by foreigners accusing Chinese of theft today most of the cases are Chinese accusing Chinese of theft that's one fundamental important difference the second thing I think is interesting is ninety percent of the cases were foreigners file a claim they win that wasn't the case ten years ago so China would say I've got a problem I'm trying to resolve it but I can't solve it immediately and we will operate an illegal system realize how difficult it is to revamp and change your whole court system to solve a problem so it's not something that's neglected it's something that has to be addressed but cannot be solved instantaneously sure and you know and I think some of the industry might say well you know I'm loath to go to a court because of the repercussions of actually calling out a Chinese partner and risking my distribution my partnership my business really within the country so would be conservative and we'd have to really consider seriously taking legal action and and and it's not always these black and white cases either right where we have this case of outright theft often these areas are much grayer where it's a intellectual property acquisition or the handing over through partnership of intellectual property that's being used by an industry I can I recently read about a particular case where Chinese investors had come to the United States and we're looking at early-stage technology companies putting in deposit looking for an a serious investment making sure that during the due diligence they were exposed to everything that they would like to see to make sure that the technology was going to be of interest to them demanding a fair amount of of transparency from the company that they were about to acquire and then at the end were unable to make the investment all right calling force majeure saying that the Chinese state won't let me export the money by the way because of force majeure because I'm not allowed to export the money and to invest in this company I actually I want my deposit back as well okay and so so there are these there's a spectrum of how one can actually acquire intellectual property that isn't necessarily going in at night breaking into somebody's file box and then stealing the chip and I think that is the issue it's not the theft it's these other aspects yeah the thing about here we live in San Francisco you go down Silicon Valley what is Silicon Valley it's a bunch of office buildings it's an industry which is built on transfer technology startups build up and establish a new technology what happens next it's sold to somebody that's a transfer that's considered good whether they have a joint venture arrangement mergers forced transfer technology is the key to this state it's the key to America's growth so there's nothing wrong with this now let's take a close up further is there forced transfer of Technology in America I don't talk about this voluntary collaboration the answer is yes a hostile takeover we have companies to take over another company by buying all out and I come he doesn't want to sell but they eventually have to or something happens hostile takeovers are also part of the competitive seeing in America so whether it's a voluntary joint venture or a hostile transfers occur and that's why America grows and we accept that as good for innovation right it's great if it's a four in one nation but more difficult more difficult and strategically much more threatening so in my book I talk about America who was the first great innovator in America Francis Cabot Lowell Harvard graduate hundred years ago he established the Industrial Revolution in America right how did he do it he went to England when he got to England what is he fine he realized that England was wealthy because they had the power loom made it wealthier than France Germany everything else only England had it if you worked in the power loom sector in England you were not allowed to travel for fear losing the secret to the power loom so what did Frances have a little do he spent six months he's brilliant he went around there he memorized it he put in his head he came back to lo Massachusetts reproduced the entire factory launched the Industrial Revolution so if you google Francis Cabot Lowell on the wiki wiki leaks Wiki Wikipedia that WikiLeaks yeah he will be called America's first great innovator right he's also America's first great IPR thief yes okay and that history shows that everybody steals now here's the problem if you're poor you steal from countries with you're richer if you're the richest you don't find anybody steal from because you have all the things so and Intel doesn't steal in feel creates because this is the the top now this is the problem I think this is a really tricky issue should we encourage the transfer of technology or IPR knowledge from rich countries to poor countries that's the question because for rich countries develop it they have to develop but they already have it they're not going to get it from a poor country the way events so they develop it poor countries don't they don't spend enough in R&D then I capable of it they tend to get it legally or illegally alright so this question of unfairness depends upon whether we think this is good or bad that rich countries transfer technology to poor countries should we discourage it control it restrict it and the question is is there actually is there an internationally recognized principle guiding this because fairness requires some kind of a norm right so Google WTO every member of WTO has signed on to a statement and surprisingly enough there's a statement about technology transfer surprises not surprisingly practically no one's ever read it what this statement says it says rich countries are obligated to provide every incentive to transfer technology to poor countries obligated now we accuse China for unfairness because they do it so well okay but here's then the problem is China a poor country he's trying to develop a country so actually the debate about unfairness is really not about unfairness it's about whether China is a developing country or developed China claims is developing its income is one sixth out of America America claims that China is not a developing country they would claim trying to America Judy they were playing to China as a developed country so when you go when Americans when Chinese and American negotiators get together the American ago she or say to the Chinese I see a very rich country with some poor people and the Chinese will say we're actually a very poor country with a lot of with a fair number of rich people okay and that's the debate because if China not a developing country it no longer sort of like benefits from this kind of philosophy that you want to encourage the transfer technology to them right well then of course the complexity of all of this is that you know back in lols day you could you required six months away now it's really just two clicks away right I mean it really is just a matter of seconds rather than months and and dissipates that whatever competitive advantage may have existed during that right nology transfer I mean which allowed for the new technologies to be evolved in like but that but your question is really relevant and it's key and it's something that was brought up by a number of the questioners here as well is China a developing country or a developed country I you know those of us who live in California know that a fifth of our populace lives under the poverty line it is in fact also in many ways facing some of the very same issues that are faced by China and so not to the same degree of course and the answer I think when you ask this question is China developing or a developed country the answer is both because it is in fact both of those things you brought up WTO and and one of our questioners here says even a stop clock is Right twice a day this is from John Navis isn't Trump right that the WTO is badly in need of reform and you know along those lines since we're gonna talk about WTO maybe we'll talk we'll talk about TPP next because but but let's talk about WTO it's rare I get to sit with a banker who actually understands this stuff so why don't you tell us if if WTO is broken and means reformed WTO is like one of those institutions where you say it's terrible it's out of date but we have nothing better huh huh so you have to work with it but working with it is difficult to change something you have to get everyone to agree so how do you get everyone to agree this world very very difficult in terms of the us-china trade war dispute WTO is not useful because the problems we've just been discussing are not covered in WTO the concept of unfairness just as I said the dead BTO actually says in there yes you should encourage the transfer right but the issue is then is China developing and developed country now here's the issue WTO basically when trying to join China joined under a so called asterik it was actually recognized as not exactly developing not exactly developed and that is what it is it is not really developed it's not really a developing country but what is China that really makes it different is actually it's just so darn big if it was split up into 20 it'd be like a South Korea or something it would be an issue Singapore Singapore generates a huge trade surplus every single year forever no one cares it's so small so it's big and the second thing is its state is still dominant now there's no other country like this state dominated and so big it's not actually a WTO issue in some sense because I don't think I need to change the whole WTO if I do it doesn't really affect these other countries too much right it's really a China issue so WTO is one route but cumbersome right okay so as you began in the beginning is how do you address these issues and I think we've talked about the issues a little bit more yes the answer is there are ways actually to address this issue and it's not through a tariff we were actually discussing these issues with China through a bilateral investment treaty because as I said earlier the issue is actually about investment yeah okay why is it you don't see a single headline or anything that talks about a bilateral investment treaty the answer is because it was an Obama era initiative and President Trump doesn't want to touch anything has nothing to do Abama but that treaty specifically talked exactly about these issues and the question would be China wasn't moving fast enough would they move more rapidly and I think the answer would be they need to move more rapidly and what is the pressure that you actually do here's some of things you could actually do you could insist upon equal treatment in certain areas okay that if you're going to restrict this guy stuff right will restrict your activity over here and let's talk about what that means that's what you could do that's not a tariff that's basically talking about the issue this is a hand okay you're talking about joint ventures you have joint ventures which encourages a foreign firm to work with a Chinese firm and it creates unnecessary pressures for technology to be transferred and that's unfair okay so why not just say abolish that need for a required joint venture deal so you can choose whether you want to now what would happen most American companies would say I wanted you in venture take General Motors chair owners earns most of its profits in China right it has a joint venture okay what jerem lawyers give up that joint measured not at all because it needs a distribution outlet and everything else they can't afford is that was it so here's the point 10 years ago 90% of Americans investment going into China went through a joint venture today only 20% it's not very significant anymore now 10% probably is the bare minimum because if you are in a security area or some area where is naturally important it's reasonable for country to say I want you to work with a local counterpart but there's a 10% of what I call required your adventure which I say it's just not worth it anymore so I've my recommendation to the Chinese government is just don't have this requirement okay and then when people accuse you of forced transfer you can easily say I'm not forcing anybody they don't have to forward you want venture at all okay so how can you accuse me of it and I just think it the political cost in America of perceiving China's being unfair just isn't worth the hassle of having this requirement for a joint venture well it's it these are all very good points and I think in your litany of things that concern those in the West and the United States in particular when we look at how investment is being made and how operate how the state operates is the concern that some of the societal and political norms that are established in China that are being projected upon industries that are operating within that country are now being globalized right and these include whether or not certain websites or newspapers or others must take a perspective that is a dominantly Beijing oriented perspective and I'll use the example of one of the major hotel chains that recently I solved in the labor problems but didn't solve its China problem when it recognized or identified Taiwan as being a separate entity than the People's Republic of China so the idea that in fact Chinese norms and Chinese perspectives can be imposed upon institutions that are that are American or German or others and so I think there's a great fear mmm and and it seems though quite justified fear that there is this forced movement towards an acceptance of Beijing norms my view about this is is it overblown worried mmm-hmm ok I was born in China if I came over to America when I was five so I've lived in Washington for half a century and it might my my point about the the Chinese norms in America norms I've lived in both countries down from long periods of time and I and I say to myself here in America I think we're far too sophisticated knowledgeable to be influenced by some of these Chinese practices which people think are ideologically you know going to shift us I don't think they're actually trying very hard either actually they're more likely be successful in trying to establish culinary Institute's and Confucius Institutes I don't think anyone is going to be be be persuaded by something what I call the ideological messages that come out of there China's basic position is I'm not here to change your political system and here in America there are people who don't accept that they think they are but I don't think they are their basic view is there are different systems and none of them are very perfect but we each have our own what I do want is a recognition that we can collaborate and get along in a world where there are different systems so I don't want to actually force mana on yours nor do I want you to force yours online now I think that this is getting tougher why is this particular view getting tougher now why is it generate more attention than it was 10 or 15 years ago part of it is I think the south try to see the disputes where tries assertiveness gives a sense that they want to do something more and that's something more make it Strang America's foreign policies it's the one belt one road we're trying to try to build these bridges all through Central Asia to Europe and the issue here being do these initiatives have longer political strategic interests which threaten America's way of life or thinking and I think sitting here in Washington I can understand this very easily um when I go to China I look around I said my gosh I don't think anyone there is really thinking about their care isn't in the minds of anybody okay I think that therefore it's an exaggerated but a legitimate concern and then the question is how do you deal with this and here's where I think it comes up in the trade war because the third war leg of the trade war in terms of how you respond to it is this issue of should America start to disengage from China you know separate our economies our relationships because of this concern that you mentioned that they're trying to spread this and I would say that is really just illogical yeah okay and in fact there is a report that just came out recently and was released in Washington DC was co-sponsored by my host organization the Hoover Institution and in fact I was a part of the working group and task force which does not call for a break from engagement but rather calls for what is referred to as constructive vigilance which is an understanding that there needs to be more transparency greater integrity and reciprocity those are the three main points that are sought in this new approach towards the relationship with China and yet again we're not talking about trade wars and within this because it really is about these fundamental issues that we're that the United States is looking for let me go back to one more question here from our audience and this is one where I'm gonna ask you to look into your crystal ball fast-forward 20 to 30 years what is the us-china relationship going to look like and to somebody win because that's what the president likes to talk about is winning you know I'm not a foreign policy expert or international relations I'm an economist so I look at all these issues from an economic perspective and then I try to get a foreign policy bent I think is something to me which is interesting right now we had this tremendous amount of tensions is it coincidental why does it occur now so I have a graph of my book which traces the share of global production of America Europe and China and if you think about it China always talks about long-term right so 200 years ago China accounted for 35 percent of global production huge by 1980 that 35 percent fell to 3 percent the sharpest decline we've ever seen but over 200 years so 1988 China accounts for 3% of the global production American here by the way are accounting for about 20-25 percent each 1980 so China starts to grow very rapidly today its share is 17 percent of global production it's exactly the same as American Europe this year ok so these three entities have exactly the same share of global production today now graph trade exports and imports is a share of the total by coincidence Europe US China exactly the same today ok so no wonder if you're experiencing this sense of tension economic rising power threatening America is real it's an issue so then your question is fast forward well it'll be like in 2030 okay so here's China growing a six and a half but let's assume it's not going to grow at six and a half that's too high so some China grows at four for the next 12 15 years okay American Europe grows at two and a half which is a solid rate China's share global production will be 25% Americas and Europe's will fall down to about 12 so it'll be twice as large in purchasing power terms so that's the alarming thing of the people who are interested in global politics gosh China's gonna be here we're gonna be here it's gonna be a problem but here's the problem the size of the economy does not determine your political or strategic power it's actually a per capita GDP that's the quality of your institutions your soft power your military strength it's not this overall size its how deep and sophisticated you are as a country okay here's something people don't realize a China which grows at twice the rate of America tries per capita GDP gap with America continues to get wider it doesn't narrow an America that grows at two-and-a-half percent a year which is solid in my view will perpetuate its global economic dominance and security its military is soft power for the foreseeable future so for America living here in America the key issue in America is to make sure that we continue to grow at a reasonable rate that we spend it properly they be continue to innovate and build our tent you don't have to worry about a rising China you know what I call true power sensitive that's why I think this war is inevitable but unnecessary okay and the threat if you make it a threat it's sort of like far-fetched threat and those who are my military colleagues realize that there is no way that China and military sense can be competitive in foreseeable future but the quality of the institution's the soft power the innovation those kinds of ideas you're talking about a gap that spans more maybe 50 60 70 years not a five-year issue but here we are all intersecting today very logical that people feels the pressures crystal ball head and then ask what do we do about it okay I think that is a legitimate debate doctor UConn Wong thank you so much it's been really fascinating you've contextualized [Applause] [Music]

Channel: World Affairs

Views: 430,220

Rating: 4.546392 out of 5

Keywords: World, Affairs, trade, china, united states, economy, trump, business, tariff, asia, technology, war

Id: _IfAzGKaSkA

Length: 62min 51sec (3771 seconds)

Published: Tue Dec 04 2018

Reddit Comments

[u/Suavecake12]

He's very articulate about some of the flaws to US approach of using tarrifs to revolve trade tensions.

This led to him to touch upon trade war as a strategy to impede Made In China 2025.

Interesting to say the least.