Transcript: Analyzing Trump’s Trade Policy with China
U.S.-China Workshop: Prudent or Protectionist?
Analyzing Trump’s Trade Policy with China
September 17, 2018
Hal Brands is the Henry A. Kissinger Distinguished Professor of Global Affairs at the Johns Hopkins School of Advanced International Studies (SAIS) and a Senior Fellow at the Center for Strategic and Budgetary Assessments (CSBA). He is the author and editor of several books, including “Making the Unipolar Moment: U.S. Foreign Policy and the Rise of the Post-Cold War Order”, “What Good is Grand Strategy?” “Power and Purpose in American Statecraft from Harry S. Truman to George W. Bush”, “Latin America’s Cold War,” “From Berlin to Baghdad: America’s Search for Purpose in the Post-Cold War World”, and “The Power of the Past: History and Statecraft”.
In 2016, Brands served as special assistant to the secretary of defense for strategic planning, and has been a Council on Foreign Relations international affairs fellow. He has also consulted with a range of government offices and agencies in the intelligence and national security communities. He blogs for Shadow Government at ForeignPolicy.com and is a frequent contributor to Bloomberg View.
Brands received his B.A. from Stanford University and his Ph.D. from Yale University. He previously worked as an assistant and associate professor at Duke University’s Sanford School of Public Policy, and as a researcher at the Institute for Defense Analyses. He lives in Maryland with his wife and two children.
Frank Lavin is the CEO and founder of Export Now, a U.S. firm that operates e-commerce stores in China for international brands. Established in 2010, Export Now is the largest off-shore operator of China e-commerce stores, helping brands from around the world in strategy and operations. In government, Lavin served as under secretary for international trade at the U.S. Department of Commerce from 2005-2007. In that capacity, Lavin served as lead trade negotiator for both China and India and was the senior policy official in the department responsible for commercial policy, export promotion, and trade negotiations across the globe. Lavin was U.S. Ambassador to the Republic of Singapore from 2001-05, where his duties included helping negotiate the U.S.-Singapore Free Trade Agreement. Previously, Lavin served in the George H.W. Bush and Reagan administrations, working in the Department of Commerce, Department of State, National Security Council, and White House. Lavin served as director of the White House Office of Political Affairs from 1987-89. In the private sector, Lavin served in senior finance and management positions in Hong Kong and Singapore with Edelman, Bank of America and Citibank.
He is a columnist for Forbes.com and has been published in The New York Times, The Washington Post, The Wall Street Journal, Foreign Affairs, Foreign Policy, and other periodicals. Lavin is the co-author of “Export Now: Five Keys to Entering New Markets.” He also authored a World War II history book, “Home Front to Battlefront.”
Lavin earned a B.S. from the Georgetown School of Foreign Service; an M.S. in Chinese Language and History from Georgetown; an M.A. in International Relations and International Economics from the Johns Hopkins School of Advanced International Studies; and an M.B.A. in Finance at the University of Pennsylvania Wharton School.
Noel Murray (moderator) is director of the Walter Schmid Center for International Business and associate professor of marketing at Chapman University. His areas of expertise include international marketing, cross-cultural issues in marketing communications and advertising strategy.
His research has been widely published in leading academic journals including, Journal of Personality & Social Psychology, Academy of Management Journal, Journal of Advertising and Journal of Public Policy & Marketing. His research on advertising disclosure has been profiled in The Los Angeles Times and in Media Life Magazine.
Murray plays an active role in the Academy of Marketing Science and has recently served as congress co-chair at the World Marketing Congress in Malta. His business affiliation experience includes Digital Computer, Inc., Irish State Merchant Bank, Apple Computer and Bank of Ireland.
Murray earned is B.A. in Business Administration from the University of Limerick, M.B.A. from the University of Bridgeport, and Ph.D from Pennsylvania State University.
Noel Murray: Okay. Thank you, Jonathan. First of all, I’d like to thank Jonathan for setting up this wonderful event this evening. Thank you, Jonathan. And most especially, to all of you who’ve taken time out of your busy schedules to come here this evening. We have a very topical issue in front of us tonight, and the topic is “President Trump’s Trade Policy, Is It Prudent or Is It Protectionist?”
Hal, you’ve written a recent book on this issue, “Grand Strategy In The Age of Trump,” and I wonder if maybe you could spend a little bit of time setting the stage, maybe talking about grand strategy in the age of Obama and Bush before we get to Trump. And then perhaps tell us a little bit about what you see is Trump’s grand strategy for Asia, or as some people have questioned it, a little bit more like trying to find an ant’s foot on a black stone on a moonless night. So, maybe you could get us started off.
Hal Brands: Sure. So, I think maybe I’ll actually start even a little bit farther back than Obama and Bush. And just to generalize a little bit, I think maybe the proper historical background for thinking about Donald Trump and what he represents in American foreign policy, is what’s sometimes called the post-war tradition, post-war being post World War II of American foreign policy.
And although there have been many, many differences, both between and even within administrations when it comes to U.S. foreign policy over the past 70 years, there’s also been at a very high level agreement on basically what the United States was trying to achieve in the world, and in a very broad sense, how it was trying to do so. And so the conclusion that American policymakers came to after World War Two was that the world was fundamentally interdependent, and so the United States could not be prosperous in a world that was ravaged by a depression. It could not be secure in a world that was dominated by dictators, or destabilized by war.
And so the United States undertook to foster an international system that would be congenial to its own interests and values. And that entailed a lot of things, but it entailed, primarily, things like trying to stabilize key regions around the globe through forward military deployments, through the conclusion of alliances with countries in Western Europe and East Asia, and elsewhere. It involved the promotion of more or less free trade as a way of facilitating the movement of global goods and later capital. And it involved, generally, although not always, having a preference for the spread of democratic values and human rights.
And so there’ve been lots of variations over the years, but I think most American presidents would have basically agreed that that’s what they were trying to do, which I think brings us to grand strategy in the age of Trump. And I think that what we’ve seen so far has been a clash within the Trump administration over what American strategy should be.
The president, I think, has a fairly clear worldview that dates back at least 30 years, and it basically boils down to the fact that he is deeply skeptical of a lot of the things the United States has done in the world since World War Two. He thinks that the United States gets a bad deal out of promoting free trade because other countries pursue unfair economic practices and erode our manufacturing base. He doesn’t like American alliances because he thinks that they allow free riding on the part of countries that could easily defend themselves if they were willing to invest enough. He seems to have less of an attachment, either ideological, or moral, or geopolitical to the promotion of democratic values and human rights abroad.
And so I think the president himself actually reflects a pretty significant departure from the post-war tradition, but he’s surrounded by advisors, and he is constrained by a Congress that is still largely internationalist in nature. And so what we’ve seen over the first two years, almost, of his presidency is sort of a yoyoing back and forth, as the president will assert his preferences on say getting out of the Trans-Pacific Partnership and in some cases then the advisors will push back in terms of trying to get the United States to actually deepen its involvement with NATO and things like that. And so that that’s why it often appears that there’s a certain degree of incoherence in the president’s strategy, because there are two very conflicting worldviews at work.
So, with respect to China in particular, I think since the end of the Cold War, each American administration has pursued a strategy that was something…that was very sort of called in a very ugly fashion “Congagement.” Half containment, half engagement. So, on the one hand, we wanted to integrate China into the existing international system, show them that they could become prosperous and influential within that system so they would buy into it.
On the other hand, we wanted to maintain a favorable balance of power in the western Pacific so that they wouldn’t be able to destabilize the regional order or the broader international order.
President from has put some interesting twists on that policy. So, on the one hand, he has clearly concluded that economic integration with China has been a bad thing, in the sense that it has eroded the American manufacturing base, and he believes China has…with some good reason, has pursued a number of unfair trade practices. And so he’s more hawkish on trade issues than any previous president of the past 40 years, certainly.
He seems to care less about sort of the geo political competition with China than many of his advisors do, so I don’t think the president is deeply concerned over what happened in the South China Sea, for instance, but at the same time he needs China to deliver North Korea, or at least, this is how he perceives it. He needs the Chinese to help him push the North Koreans to make a deal on their nuclear program. And so there’s an interesting mishmash of influences at work in his China policy. How that policy looks on any given day depends on which of those issues are sort of at the surface.
Noel Murray: Okay, maybe Frank, you know, as you know, when I visit China and some of its neighbors like Vietnam with our Chaplain business students, oftentimes recently, they communicate the sense that maybe they feel a little abandoned by the administration. I’m thinking particularly in terms of the TPP, the Trans-Pacific Partnership, which would have been a NAFTA-like trade arrangement that would have included Japan and the United States, and approximately 10 smaller south east Asian nations.
You played a major role in the negotiation of the free trade area agreement with Singapore. What’s your sense of the decision by the United States not to engage in our Asian allies other than China? Do you think that was a good decision, do you think that was a poor decision?
Frank Lavin: Well, thanks, Noel, for the question and leading us today. Look, I put it in context with Hal’s point that U.S. trade policy in the modern era has been characterized by uneven liberalization. The tendency has been toward liberalizing, but there’s been pauses and starts in that process. But there’s never really been in the modern era since U.S. entered to GATT 1947, helped establish it, there’s never really been retrogression. So, there’s been pauses and then more liberalization. And this liberalization has taken place primarily multi-lateral through GATT rounds and then WTO, the successor agency.
When we joined the GATT, U.S. effective tariff rates were about 40%, now it’s under four percent. So, significant liberalization across 70 years, but also with cumulative, I think we ended up with something like 23 free trade agreements on top of that. So, you put that all together, there’s rather significant internationalization of U.S. economy.
But these steps always came with some degree of political controversy, or political discussion. And in the public sphere in the United States, there have been in recent decades the sort of ongoing debate between economic rationalism and economic nationalism, that do we want market economics which will give us the best outcomes in terms of allocation of resources and economic growth because overall, prosperity is enhanced through respecting the market, or do we want to make exceptions of that occasionally and look at some kind of interventionist policy where some industries might be protected, where there might be some other distortions of the market?
And there’s a range of issues given for, such as the defense industrial base. We’ve got to keep…ship building capacity is invoked, or even things like environmental protection. We don’t want to simply empower polluting countries, the countries might have lower environmental standards than the United States, by sourcing material from them.
So, there’s…various reasons are given. But historically, the dominant view was always toward market economics, towards incremental liberalization. And that debate goes on today. The main exception, the main difference with the Trump presidency and his predecessors is that historically, it’s always been the leader, the president, who helped lead the way for liberalization, and constituencies that didn’t support that were always subordinate.
Now, this is sort of somewhat at an inversion, that this is the first time in the modern era, I think you have to go back to the 1920s to find a United States president whose starting position is trade is bad. That, I mean, depending how you define Obama because Obama echoed some of the Trump tendencies, but Obama modified them when he came into office.
So, you remember, Obama ran as a candidate saying, “I’m going to renegotiate NAFTA,” and he came into office saying, “We’ve got to stop the Korean free trade, and we’ve got to renegotiate it.” So, very similar in some respects to Trump, but I would say Obama significantly trimmed his sales on some of the anti-trade rhetoric once he came into office, and as you observe, he went ahead with the TPP 11 Country Free Trade Agreement, which Trump came out against.
But interestingly, if we go back to the 2016 campaign, Noel, I think you’d say Trump reflected that moment, because what was striking, I think, at that time, was the person who to my mind rhetorically sort of led the charge against TPP was Bernie Sanders. He said this trade is harmful to the United States. Which very Trump in rhetoric we’re being sort of cheated by it, there’s a distribution effect, we can’t introduce these trade agreements. Hillary Clinton, who interestingly, was one of the authors of GBP, came out against it as well and said, “I’m against it too,” and Trump joined in. So, there was a national mood at that time two years ago that said, “Look, on balance we believe as a country that trade has higher costs than benefit.” So, it’s a real change in U.S. position over 70 years.
Noel Murray: Right. So, let’s get back to the central question. So, the central question tonight is, is President Trump’s trade policy, is it prudent or protectionist? In some ways, that’s a very Western way of asking a question, right? Isn’t A or is it B? An eastern influence way of asking the question would ask, could it be A and B? And that is, could it be prudent and protectionist? And I guess what I’m asking is, is there a role for protectionism in today’s contemporary era of globalization, you think?
Frank Lavin: I think the temptations of protectionism and the ability to get it wrong with protectionism vastly exceed the ability to get it right.
Noel Murray: Right.
Frank Lavin: And that if you’re sort of arrogating to the government the ability to pick winners, you’re also telling the government that it’s picking losers. And I think what we’ve seen so far in the Trump administration, you know, unfortunately proves the point that we’ve renegotiated the South Korea free trade agreement, some minor adjustments, but to my mind, those have been worse for the United States. And we’ve renegotiated NAFTA, given some somewhat minor renegotiation, but it’s hurt the United States. If you decrease the…I’m sorry, increase the national components that are required for automobiles, I think Trump is sort of a classic protectionist to say, “I’m creating jobs,” and requiring auto companies to locate jobs in United States.
I think most economists, I’m putting myself in that group, most trade professionals would say, “You’re hurting U.S. auto industry, and you’re costing more jobs than you’re creating.” What we’ve been able to say historically is that the best place in the world to locate your automobile production is the United States, in part because a U.S. auto manufacturer can source from any place in the world. So, the U.S. auto manufacturer find the best technology in the world, the best components in the world. Some of it might be made domestically, some of it not. But we in the United States will capture the value of that production because of global sourcing.
Trump says that’s wrong, that is a bad policy. We’ve got to have people localize production, and that will create more jobs. Say, well, it’s gonna create some jobs, but what you’re telling all automobile manufacturers in the world is don’t put your facility in the United States, because you won’t be able to respect global efficiencies. So, I call that in an essay “The hubcaps forever theory of manufacturing.”
The good news is you’ve now forced the U.S. manufacturers to bring hubcap production back to the United States. The bad news is you now have a more expensive and less efficient automobile platform. So, significant percentage of components of our exports are imported components. So, you want those to be as inexpensive as possible so that we’re globally competitive. That I think Trump’s in a different place than what I just articulated.
Noel Murray: Right. So, when Jonathan introduced the issue before us tonight, one of the things he pointed to is the $375 billion trade deficit that we have with China. President Trump has been very clear that he believes that this is unsustainable. When you talk to the Chinese, they will often say, “Well, you know, we do a lot of labor intensive activities and we export them to the United States, you export to us high technology and agricultural products. What we’d really like to get our hands on are a lot of things that you limit in terms of exports due to export control.” And they to a point to sectors like aerospace and aircraft industry.
Do they have a point when they say that some of the trade deficit is due to the fact that we have all these very stringent controls that seem much more stringent than, let’s say, Germany’s?
Hal Brands: So, I think they have a point to an extent in the sense that, you know, we do have more export controls particularly of what are called “Dual use goods.” So, goods that could have a military application with respect to China. And so anytime you’re limiting the potential for a certain category of exports that’s going to have an impact on the trade balance. But there’s a very good reason we do that, and it goes to the complexity of the U.S. China relationship, which is that China is an incredibly important trade and economic partner of the United States.
Put very frankly, it’s also a military competitor of the United States and a military threat to many U.S. allies in the Asia Pacific. And so the balance that we have had to strike has been trying to draw China into the international economy, and we’ve succeeded in many ways in doing that, but limiting their ability to develop military power that will enable them to challenge our interests in the Asia Pacific and beyond. And so the categories of goods that you’re talking about fit right in that category.
So, yes, in a narrow sense that they have a point, but I think that to lift those restrictions, while it might have very modest impact on the trade balance, would be counterproductive in other senses, from an American perspective.
Noel Murray: Right. So, follow up question to that. When China wants to acquire a new technology, let’s say it’s the latest technology in terms of safety and automobiles, they have a choice, right? They can develop that capability domestically, or they can go to Sweden and they can purchase Valvo, right? A lot of the high technology areas that we do not sell to them, the Chinese company has been very active, at least in the last two to three years, in buying small high technology German firms. Is that something we should be concerned about, do you think? The acquisition strategy of technology from our allies. Frank, maybe if you…
Frank Lavin: The western governments and the NATO governments put into place export control mechanisms because of Cold War requirements. It was designed regarding the Soviets. Those are still all in place, there’s still all hold. I think what you’re referring to is not so much necessarily a security concern, but sort of commercial exploitation. Can an investor, by purchasing technology, reap considerable benefits they wouldn’t have been able to maybe synthesize that technology themselves. And perhaps that technology has considerable commercial benefits that the originator of the technology didn’t fully appreciate?
So, it’s almost a kind of commercial arbitrage that maybe there’s some on-the-shelf technology, so to speak, in Germany or the United States that isn’t being widely adapted and they require someone else. But I would say that’s open market competition. That everybody has the right to that. If it’s not under export control, anybody can purchase automobile safety technology and use that if they will.
In some respects such as gig economy applications payment systems in China, I would say autonomous vehicles, but I would say some of the driving apps in China are more advanced or more sophisticated than the United States, and they might have a regulatory environment which allows these to be used. So, I wouldn’t be surprised if some technology is more rapidly adapted in China. But I think in general, you’re going to see it more rapidly adapted in the west.
Noel Murray: Right. Right. So, in terms of this thorny trade issues that won’t go away, this $375 billion that we have, how much confidence can we have in trade statistics? Like for example, take the iPhone, many of us have an iPhone in our pockets here tonight. That iPhone alone, that single item counts for about two billion dollars’ worth of our trade deficit, right? But really mostly what happens at that Foxconn factory is about 120 relatively low-skilled laborers put those component parts together that come from Japan, and Germany, and Taiwan, and the United States. It’s exported out of Shenzhen or Hong Kong, and we get to tribute the full value of that iPhone to China when more than 60% of the value is American marketing, American ingenuity and software, American intellectual property.
I guess my basic question is, do trade statistics today reflect the reality of the global economy in terms of, you know, complex supply chains?
Frank Lavin: Well, Noel, I think you make a good point, and I’d say there’s a reason why trade policy in the United States has historically not been built around balance of trade That we would say, in general, the balance of trade is not a useful indicator as to whether your trading partner is being fair or unfair. Somebody you trade with could be perfectly fair and you could be running a trade deficit with that party, somebody could be perfectly unfair, and you could be running a surplus. It simply says who’s buying more than they’re selling.
So, it’s not a good indicator, is probably somebody in this room, or everyone in this room, shops and buys groceries, but in the end it runs a trade deficit with the supermarket. But that does not imply that supermarket is cheating or abusing you but there’s probably somebody in this room or probably several people in this room who either come from a farm industry or agribusiness, and they actually sell a fair amount to that same supermarket. They’re running the surplus with that supermarket. But again, it has no bearing on…it doesn’t imply that anybody is exploiting, or cheating, or taking advantage of the relationship.
So, the fact that the United States tends to source its T-Shirts from China while Wal-Mart does socks and T-Shirts, doesn’t mean that China is somehow cheating us or exploiting us.
Now, to finish the discussion, because I don’t think Trump is that simplistic, I think he’s saying that’s fair enough, but we don’t get access in China for higher value products we make, like automobiles and other precision engineering and so forth. So, nobody is cheating us by selling us socks and T-Shirts, but we are being cheated in a sense by not having full access of the China market.
By the way, I think that’s a reasonable criticism, but I take that away from the numbers. It has nothing to do with the numbers, are you buying or selling more? It just has to do with market access.
Noel Murray: Right. Right.
Hal Brands: If I can just add one thing.
Noel Murray: Yeah.
Hal Brands: I think it’s, you know, it’s a very simplistic way of thinking about, to add to the metaphor you’re talking about, is each and every one of us runs a large trade surplus with our employer every year, in the sense that, you know, they buy more from us that we buy from them. That doesn’t mean it’s an unfair relationship.
The second point, I would say, is that I think, you know, you raise the issue of the iPhone, which is essentially credited to China’s account of the trade surplus, even though that doesn’t necessarily reflect the reality of it.
Frank Lavin: Right.
Hal Brands: It’s also important, you know, we talk a lot about the trade balance in goods. There’s also the balance in services, and that one, if you look at that, is much more favorable to the United States. We export about four times as much in services to China as they do to us, and so it’s another way in which the statistics are a bit misleading.
Noel Murray: To add to that issue, obviously, the media seems very obsessed with trade issues, right? But there’s something else that happens, and it’s a very important part of globalization. And that sees vast flows of money in terms of foreign direct investment and capital flow. So, for example, again, a couple of weeks ago when I was in Shanghai, which is one of the towns you work out of, which your business export now, right?
Frank Lavin: True.
Noel Murray: You know, there’s a wonderful General Motors facility there in Shanghai that’s, you know, world class, right? And that has very little to do with flows of widgets back and forth, but has a lot to do with foreign direct investment and having access to the market. Next door in Disney, they have this incredible investment in Shanghai, it’s the Disney investment, right? Six billion dollars.
Frank Lavin: True.
Noel Murray: By the way, the best “Pirates Of The Caribbean” ride anywhere in the world, for those of you who are Disney people. Should we be more concerned, or at least just as concerned with these financial flows as we are with simple trade statistics? You know, obviously, the Chinese have invested a lot in U.S. treasuries. One of the fears is that, you know, if they get upset with us on these trade issues, they may take their trillion dollars in our treasuries, and up and go, and our dollar would plummet. Maybe if you could talk to these broader, you know, financial flows that are not just trade in widgets.
Frank Lavin: Well, look, my philosophical background is sort of consistent with what Hal articulated in his opening comments, that open societies move ahead and close societies stagnate. And that means you wanna be open to ideas, you wanna be open in trade, and you wanna be open in investment.
One of the elements of America that makes America work, makes the economy work, makes society work, is that I think we can more or less state validly that America is the best place in the world to have an idea. If you have an idea in America, you can commercialize it, you can protect it, you can manufacture it, you can finance it, you can distribute it, you can monetize it.
And it might be a crazy idea, but as you were suggesting with tech, a crazy idea today becomes adapted tomorrow. It might be something experimental, it might have a limited appeal, but we’re a culture that respects the innovator, respects the disrupter, and the whole society moves ahead because not every idea will be a crazy idea. Some will make our lives better and be a, whether it’s robotics or new pharmaceuticals, or other innovations that help all of us. So that is part of the magic of America.
But what that means is you better allow for trade, you better allow people to buy and sell according to market requirements, and you better allow for investment. There’s a reason why more BMWs are made in America than in Germany, because this is a great place to make BMWs. And why is it a great place to make BMWs is for a variety of reasons. But don’t kill that goose that lays the golden egg.
As long as we keep doing things right, we’ll be able to attract inward investment, we’ll be able to grow, and we become sort of the leading hub for experimental activity and economic innovation in the world. We’re still in that place, but if you close yourself off, there are countries that went down this path over the last few decades because they thought, “We’ve got a great position. We’re a pretty successful economy, what we need to do is close ourselves off.” And I think most notably, Japan, that said, “We don’t really have to participate in the world economy. We’ve got it figured out.” Well, that economy hasn’t grown in 30 years, right?
France did somewhat similar activity, said, “We don’t need these cross-border investment. We don’t need the challenge that comes from trade. We’ve got it all figured out.” Well, their economy hasn’t grown in two decades. So, I’d say, be careful about going down that path.
Noel Murray: Right.
Hal Brands: I want to maybe add a couple of points here. I mean, I think I would pile on, on I think a wonderful point that Frank made about closed societies being the ones that stagnate. And ironically, the country that best demonstrates the perils that this is China. Six hundred years ago China was in some ways the most powerful country in the world, then it turned inward for a prolonged period and fell into one of the most pronounced declines in the history of modern politics.
Maybe just to drill down on one thing you mentioned, you mentioned the issue of China holding American debt. And I think this is kind of a hot button issue. And I think that this is one where it’s a bit more complicated than that it’s often made out to be. So, in theory, China holding a lot of American debt would provide some economic strategic leverage. And people will sometimes talk about a scenario in which the United States and China get into a dispute over Taiwan or the South China Sea, and the Chinese dump or threaten to dump a large amount of American treasuries and sort of try to take down the American economy.
I actually think that’s fairly unrealistic, because the Chinese would take a bath from doing so as well. That doesn’t mean that they might not do it if the regime were particularly desperate in a confrontation over Taiwan or something like that. But I think the threat of that is often overblown in sort of the popular media.
But the thing I would also point out is that the fact that China buys so much American debt actually has the effect of subsidizing, among other things, American military power. It allows us to run budget deficits that we couldn’t have run otherwise, which we can use to finance things like a global military presence. And so there’s been a lot of talk about how the United States has in some ways subsidized China’s military buildup by sort of brokering China’s insertion into the international economy and promoting the openness that has allowed China to progress so rapidly. But it works the other way as well, and I think it goes to the point that Frank was making, that these economic relationships tend to be more complicated than they look at first glance.
Noel Murray: So, one of the central tenants of the Trump administration’s accusations of unfair trade policies of China is that it’s costing us good U.S. manufacturing jobs. Now, in China today, they have a very ambitious strategy, it’s called The China 2025 plan, and the goal is very clear, to make China a super manufacturer of the world, including the latest of advanced technology, digitalization and overseas production, creating global supply chains and creating global Chinese household brand names.
In terms of that strategy, is that a strategy that we should fear for the future, or should we make peace with it in the same way that maybe it seems like we made peace with the Japanese in the 1980s when they became super manufacturers of cars and we found a way to live with that?
Frank Lavin: Look, I would say regardless of how successful or unsuccessful China is with this sort of industrial policy, it’s picking winners. We’ve identified 10 sort of industry clusters that we think define the future, and we’re gonna put resources behind it. They might get some success out of it, I think they’re also likely to overshoot with some sectors and overinvest. And then you can sort of misallocate.
You can decide robotics. Well, yes that’s a safe bet as it’s said, but you can easily go down the wrong path with robotics because it’s government funding. The question is no longer what’s the best solution, the question is who’s best at getting the government grants? So, you can go down the wrong path even if you sort of had the right answer to the big question, it is robotics. You can say we’re funding a model that just isn’t applicable the way some other model.
In any event, I would say the policy response from the United States is the same regardless of how successful or unsuccessful. This doesn’t mean the policy response should be, we need our economy to perform the best it can regardless, and we need to have the best international connectivity we can get regardless. So, if China didn’t exist, or if China is 100% successful on 2025, we would still say those two things, how do we help the U.S. economy make a transition toward advanced manufacturing? How do we help the U.S. economy perform at its peak so that it can compete effectively with friends and neighbors? How do we help the U.S. economy harness what other trading parties have to offer in terms of components, industrial input, supplies and so forth? And how do we help U.S. companies reach those markets, right?
So, we wanna do all those things regardless of what Japan is doing, or China’s doing, or India is doing. We want this economy to form peak. So, I would say one component of this I think Trump’s done very well, which is let’s get those marginal tax rates down so U.S. manufacturing, U.S. productivity can command some kind of return so you get investment, you get economic growth. That’s one part.
But one part I think he deserves criticism, to say listen, we have some opportunities to move ahead on some of these trade issues and improve our trade relations with other countries that play by the rules. That was TPP.
Noel Murray: Right.
Frank Lavin: This is perhaps some initiative of the European Union. We’re not there yet. But those would be areas where I would try to move ahead if I were advising the current president. Let’s go back and see what we can salvage in Asia, and let’s move ahead with the European…
Now, President Trump, to his credit, has had meetings with the European Union leadership and said in principle, we want some kind of free trade agreement with Europe. But Obama said the same thing. and George W. Bush said the same thing, “We haven’t formally started trade talks yet,” so that’d be one path to go down.
Noel Murray: Okay.
Hal Brands: I would say, I mean, I think there are a handful of areas of genuine concern with respect to Made in China 2025, and other things. And so, if you’re looking at, you know, technologies that have potentially transformative military implications like artificial intelligence, for instance, then it is legitimate to worry about what will happen if China manages to be successful in becoming the world leader in AI.
But I think, as Frank said, the solution to that isn’t to think of, you know, what are the ways in which we can stop Made in China 2025, but the ways to deal with that are, you know, how can we best set the conditions for research and development and innovation in artificial intelligence in the United States, and how can we best harness that where there’s a military dimension for that so that the Pentagon can access it?
I think there’s, you know, there’s a separate set of issues where there are reasons to be concerned about whether economic integration with China is a good thing. And so, I often think about this from a defense perspective, and the example that I like to give is that, if God forbid, the United States and China ever got into a war, one thing we would need a lot of is torpedoes. Torpedoes would play a big role in the U.S. China military confrontation.
The torpedoes that we buy are sourced with components that come from China. That’s a problem. If you’re running out of torpedoes on day three of a war, and you can’t get more of them without buying components that come from China, you’re in a tough spot. And so I think there is a need to sort of sit down from a national security perspective and say, “Look, we don’t want to close off America from an economic perspective. We don’t wanna fundamentally disrupt the relationship with China, because it’s proven so profitable for us as well. But there are areas in which we may have a national security interest in pursuing some very focused and limited de-integration with China economically, to make sure that we can source things that make critical contributions to our own national security.”
Frank Lavin: No argument there. Let me give an example of what I think we’re both talking about. With automobile safety, we have a field called tele-metrics, which are sensing devices: when you back up and you get a beep. Well, these are becoming more and more sophisticated with built-in cameras in your dash, now cameras in your rearview mirror. The ability to sense, is that an object or a living creature that you’re getting near? And cars now have the ability to talk to each other and share information, that if this intersection is dangerous, if we have more accidents reported at this intersection, all cars know that, and you can get a warning light, right? So, cars have their own logic, their own AI.
If the United States, and the E.U., and Japan agree on standards of tele-metrics, that’s 80% of global automobile production. I mean, we know what will happen. The Koreans will say, “Sure, sign me up.” Other folks will say, “Sign me up,” and then it’s a very simple message to China, but it’s basically, a friendly message. We’ve sorted it out. We’ve harmonized it. There’s a global standard, you’re free to join. You’re free to join, because we’ve worked it all out, right?
So, the point is there’s a huge incentive for the United States to work with friends. Find areas of common interest and sort through these kind of problems. U.S. manufacturings are enhanced, and our ability to be global competitive is enhanced.
So, there’s enormous opportunity there, but the wrong thing to do is to say, “I don’t trust anyone. I don’t like anyone. I’m not gonna work with anyone,” because I can tell you what China is doing right now, they’re talking with the Japanese and the Europeans, and they’re saying, “We’ve got a pretty good standard for tele-metrics, why don’t you adapt our standards?” And we’ll find ourselves in the outside saying, “Well, no car made in the United States now adheres to these global standards, how are we gonna export them?” So, I would say get thine act together.
Hal Brands: This is a particularly critical point. So, I actually think, and I think Frank would agree based on his comments, that the President Trump has some legitimate gripes about Chinese trade and economic practices. And you can make the argument. You can make a principle argument that the United States needs a somewhat harder nose negotiating stance vis-à-vis China to resolve those issues to our satisfaction.
But if you believe that, it makes no sense to start trade wars with U.S. allies in the Asia Pacific and in Europe. It makes no sense to strain those relationships, because you’re simply crippling your own ability to generate international leverage in terms of creating the united front that might be more effective in securing changes in Chinese behavior.
And so, certainly, TPP was a step…the withdrawal from CPP was a step back [inaudible 00:40:39], but the fact that this administration leveled the steel and aluminum tariffs, not just on China, but on a range of American allies, I think is particularly damaging in this regard.
Noel Murray: So, speaking of the issue of trust, let’s talk about intellectual property rights, right? So, a little over 150 years ago Charles Dickens complained bitterly about those scofflaw cousins across the Atlantic that were ripping off his novels, serializing them in these newspapers and he wasn’t getting a penny in royalties, right? A lot has changed in 150 years, right?
A central part of our problems with China is the allegations of theft of intellectual property rights. When you talk to U.S. firms in China, they’ll talk about the Chinese unfairly using the certification process, for example in pharmaceuticals, their version of the Food and Drug Administration, to dig out our intellectual property rights, or even joint ventures, which are state-owned companies whereas a condition for the joint venture they’ll ask for access to that technology.
So, my question is, in the present dispute about intellectual property, what would the off ramp look like if we were solving this problem? Like, weren’t we supposed to have solved this problem like 17 years ago when China joined the WTO? Why are we still talking about it today?
Frank Lavin: Yeah, I’m very sympathetic to Trump administration criticism of Chinese IP production. By the way, I’d also note that China has solved significant portions of it, which is so to speak, the retail IP that you’re not going to find today where you could find 10 years ago in China, which is factories making knockoff Nike shoes, or knockoff Levi jeans. So you had sort of large scale piracy with the retail goods. That is in force now, and you’ve got protection, and Nike will have the same sort of squad of, what are they called? Phantom shoppers or secret shoppers running around China that they have running around Europe, running around the U.S., to see are people selling legitimate Nike products or not, and we can take you to court.
So, there has been significant improvement on the retail side. But on the industrial side, you’re completely correct. There’s a lot of leakage, or theft, or piracy, or whatever you wanna call it, and it’s harmful to U.S. interests. I think Trump’s right to put a spotlight on that and to seek improvement, but part of the…
So, you know, I think he’s done a reasonably good job of sort of blowing the whistle, if you will, and saying these are the problems. I think he’s done a reasonably bad job of saying, “This is what we seek,” or, “These are some of the solutions to it.” What we’d wanna seek is the same legal recourse in China that U.S. firms have in Europe and Japan and elsewhere so that if somebody copies an industrial process, that you have a legal action against those folks. Well, typically in China, we don’t. So, if China wants to play a leadership role in the international economic community, it behooves them to play by these rules, and they’re not there yet.
So, I would say that’s a key area of focus for the United States.
Noel Murray: So, you and your consulting firm, Export Now, you advise a lot of medium size U.S. companies, particularly breaking into consumer packaged goods markets and digital play in China. When we visit China with our Chapman students, oftentimes we’ll visit law firms there, and they’ll talk again and again of U.S. companies blissfully blundering into China without doing basic due diligence under partner, something they’d never not do at home, right? Not taking basic steps to register their patents and their trademarks, not doing due diligence on who’s ripping them off and going to courts.
You know, to what extent do some U.S. firms operating in China need to take personal responsibilities for these actions as opposed to complaining and running to our Department of Commerce after the horse has bolted out of the gate?
Frank Lavin: Noel, I think that’s a key point. There’s gonna be some folks in this room who grew up in a town, or at a time where they never locked their front door, and they never had to lock up a bike. I grew up in a town where you never heard of what a bike lock was, and you’d never think of a bike being stolen. This is a preposterous idea.
Now, everybody here I assume, has a bike lock. Or you could say, “This never happened to be in my life.” I was just talking with a medical technical innovator who says, “I’ve got a hospital in Beijing I’m working with on this,” and I said, “This can get stolen. This can be reverse engineered, you’ve got to find a way to make sure the part of this which is proprietary is with you at all times.” And he says, “I lock it up in the lab overnight,” I said, “I would not do that. I would not lock up…” If you’ve spent three years of your life inventing this thing and you think might be worth just millions of dollars, I would not leave it locked up in somebody’s lab overnight, I’ll tell you that. I would un-assemble that thing and I’d put it in my suitcase and take it back with me.
I mean, you’ve just got to develop habits to protect yourself that you don’t necessarily need in the United States or other countries. So, be careful. I remember talking with a major US glass manufacturer that had improved some kind of flute glass technology. So, they, you know, presumably have the best glass manufacturing technology around. And they said, “We have a JV in China.” And I said, “Why would your partner not steal from you?” And he said, “Well, why would they steal from me?” And I said, “Well, if they don’t steal from you, they only get half the profits because they’re partners, but if they do steal from you, they get all the profits.”
So, it strikes me that’s a pretty good argument to steal from somebody, right? And he said, “Sure enough.” The partner opened up their own facility across the street those with their technology. I said, “Well, it makes a lot of sense. I mean, you know, it’s nothing personal just business.” But why should I share anything with you if I can just take it all myself? I mean, it strikes me as a reasonable outcome. That’s not how most people do business, but most of us live in a repeated iteration exercise, in an end some exercise, meaning if you ask what disciplines business behavior, part of what disciplines business behavior and why we’re, you know, more or less we hope moral and legal, and I think what we hope is that because we’re gonna…this is iterative. It takes place every week, or every day, or every month. I’m always buying from you. I’m buying a million dollars of product from you every month, and I’m giving you a million dollars every month. So, that disciplines you because it’s an iterative sort of ongoing permanent process. In fact, what you’re gonna do to me after a few months is come and say, “Let’s have lunch,” and say, “Why don’t you buy two million dollars of product every month, because you’re a good guy?” and I’ll say, “That sounds like a really good idea, because business is growing.”
So, the point is you have this win-win dynamic that is self-disciplining. But to take it to China, if I say, “You know what? I’m only going to see you once in my life. I am never going to see you again.” What possible value is there in me being fair to you? That really sounds like a dumb idea. And in fact, you’re pretty wealthy and you’re pretty naïve, and you’re a foreigner anyhow. So, it sounds to me like I have to do whatever I can pick your pocket, that’s just my personal view. I mean, it’s business, nothing personal.
So, there are a lot of Americans who wander into China with that kind of view, right?
Noel Murray: Right.
Frank Lavin: So, I would say, be careful. Be careful about what you do. And one thing we always look at in our little business is tell me what international market you’re currently in, because if you’re already saying, “Look, I’ve been overseas for 10 years, I’m in six different markets and a third of my business comes from overseas,” all right, you’ve got some internal sophistication that business practices in different markets are different, and some are nonstandard. And at some point, somebody might ask you for a bribe, at some point somebody might suggest something illegal, and at some point weird things can happen, right? So, you’ve at least developed a system to deal with this, right?
But if you’ve never done that, I wouldn’t go to China. I’d say, “Why don’t you start in Canada and Mexico where you have some kind of management capabilities? There is proximity. There’s some familiarity, you have at least some natural strengths.” And I think China, you know, we say everything is possible in China, but nothing is easy. So, start someplace else and then come call us.
Noel Murray: Okay. So, maybe one last question because I know Jonathan would like to make sure we save some time to open up some questions to the floor. But Hal and Frank today did a wonderful tour with Jonathan through the Nixon Library, and we spent some time on the Vietnam exhibit. And I think most people would probably say that most of the lessons we learn from Vietnam were probably cultural, right? We really didn’t understand our standing power, we didn’t understand the motivations of sovereignty and nationality.
Next week it’s thought that the Trump administration may impose another 10% tariff on an additional $200 billion worth of Chinese imports. And I guess my question is, is Xi Jingping now in his new role as Emperor for life, is his political system better designed to fight this trade war for the long term? Are we naive to assume that he will fold just because he’s gonna feel the pain a little bit more than we do? \
Hal Brands: I think there’s two dimensions of this. I think part of it has to do with Xi’s position within China, and I think he is making the calculation that he has consolidated power to a sufficient degree that he has sort of the capital to go into an extended period of difficulties with the United States on trade. And he doesn’t necessarily have the incentive to settle quickly, even though China is in many ways more vulnerable than the United States to a breakdown in the trade relationship, precisely because of the imbalance in the trade account.
But I think the second calculation that he’s making is a bit more interesting, actually. And he’s making the bet that China’s authoritarian system will be better able to withstand the pain of a trade war than America’s democratic system. Because the Chinese government doesn’t have to be as responsive to complaints of the electorate in the near term as the U.S. government does. China’s government has more leeway to reallocate resources to prop up sectors that are struggling if need be, and they’re clearly making the calculation that the American political system cannot replicate that performance.
And if you look at what China has done in the confrontation so far, they have used the openness of the American political system as a way of targeting particular pressure points. Raising tariffs on Kentucky bourbon, all right? Who’s from Kentucky? Mitch McConnell. They’re trying to use particular points of entry into the American system to put pressure on the United States to back down. And they are making the calculation that China will be better able to handle this confrontation. We’ll find out if they’re right, but it’s very interesting with respect to what it reveals, I think, about China’s strategic calculus going into this episode.
Noel Murray: Thank you. Frank?
Frank Lavin: When I was involved in the trade negotiations, one truth that we always respected is you can get something from the other party. You can get what you want, or most of what you want, from the other party. But that other side has to also be able to declare victory. Whether they’ve got something, or they’re just sort of saying they’ve got something, or they’re saying we’re gonna do this all along, that’s up to them, how they position it. But these negotiations are gonna come to an end at some point, and your negotiator is gonna walk out of the room, and their negotiator is gonna walk out of the room, and the U.S. side is gonna say, “Well, we basically got what we want, and we made a lot of progress.”
But the other guy has got to be able to say the same thing. So, you have to always give him some leeway to be able to say that. And if your public position is what these trade negotiations are all about is we’re right and you’re wrong, and that defines the world today, and what I need you to do is to publicly say you’re wrong and you’re going to fix it and you’re gonna move my way, you’ve not painted him into a corner, you’ve painted yourself into a corner. Because that person can’t move.
A friend on the state council in China, the cabinet in China said, [Foreign Language 00:53:58] “We, in China, also have politics. No Chinese leader can come out and say we were wrong, we were wrong, but now we’re gonna be good. We’re gonna fix what’s broken, and we’re gonna do what you want us to do.” By the way, I think no one can say that in any political dynamic. No one can say that.
So, I think Trump has done a good job of dialing up the temperature. Maybe I wouldn’t quite do it, tactically, what he’s done. But he’s put the spotlight on the issues, and he’s injected friction. So, not bad for a curtain raiser. But now you have to be able to have an end game as well. You have to say, “What are you gonna get out of this?” and the only way you’re gonna get to the finish line is if your Chinese counterpart can come out and say, “This is good for China as well.”
So, when we were in negotiations, we would say things like, “Look, there’s an asymmetry in auto tariffs. U.S. has 2.5% auto tariff, China is 10 times, 25% on auto tariffs.” We said, “Yeah, this is, of course, unfair to U.S. manufacturers, but it’s unfair to China. It’s unfair to every Chinese consumer, and it doesn’t allow your economy to benefit from competition. So, the real losers of high tariffs are the countries that maintain the high tariffs.
So, you’re not doing this because I’m asking you to do it, you’re doing this because you need your own economy to move ahead. So, allow the other guy to get the benefit from this move, even though United States is also a beneficiary of this move. And that’s why I think you get resolution of this. I don’t think rhetorically in terms of position, that’s what we’ve done constructively over the last few months.
Noel Murray: Okay, great. Well, I think it’s time to open up the floor, Jon, right? \
Jonathan Movroydis: Sure.
Noel Murray: To some questions.
Jonathan Movroydis: Thank you very much. The panelists have agreed to answer your questions. I’d like to first start off by asking, given the upcoming midterm elections, do you think there’s any domestic political or commercial pressures that could alter the Trump administrations trade policy?
Frank Lavin: But my view is that will come to surface, but it can take several months. So, some of the, especially this new round of tariffs he goes 10% against $200 billion, which I think he’s gonna do, that will hurt U.S. jobs, U.S. competitiveness. It will cause some unhappiness in parts of the U.S. economy, but it could take several months to bubble up.
Hal Brands: Yeah, and just further to that point, I mean, I think most political scientists who study the elections and voting patterns would tell you that Americans’ voting preferences tend to be sort of locked in by around Labor Day for a November election. And so, it may be that unless something very dramatic happens in the relationship very shortly, that it wouldn’t affect the midterms in any case.
Jonathan Movroydis: We have a question right here.
Audience Member: Good evening. One of you made an interesting comment, I believe it was you, Professor, about Vietnam. You used the word “Cultural” we didn’t understand. A few years ago I had the opportunity to spend three months in Beijing at a university, with the Dean, with other professors. I even stayed on the campus, and they took me to meetings where there were some higher level national education leaders, etc.
I saw the copyright theft in front of my eyes at the market where it was to them, as simple as a DVD that you could buy for a buck and a half. And it was as good as anything you could see in a theater. They’d clearly stolen our movies. Their actions in the South East Seas, my understanding is they’re building those islands. My understanding is that’s internationally illegal, but I can’t say that’s true.
And now, recently, China has cracked down on religion. They have now gone out and reminded the people, “You are supposed to be atheist. We are a communist society, and to be a communist, you have to be atheist.” And that goes back to Karl Marx and Vladimir Lenin. They’re tearing down churches, ripping down crosses, doing harm to people.
So, to me, when I put together the ignoring the world with those islands, their open and willing theft of our technology and wisdom, and now how they treat people, I think sometimes, culturally, we tend to forget, as the dean told me on my last day there, he said so many people don’t remember China is a communist country and we do what we’re told to do. Should all trade issues be driven by dollars or should we not consider those that actions that China is taking that’s harming people?
Frank Lavin: I think it’s a great question. By the way, I more or less agree with your description as well. There are certainly geo political issues. United States is very uncomfortable with China’s during the South China Sea. There’s been a retrogression in what we call civic society. For example, just this year was promulgated that communist party members may not belong to a church, may not belong to organized religion, where over decades, that had been tolerated even if not encouraged, it was at least said that’s your personal business.
So, you say, well, we would say that’s retrogression. You know, and you’re trampling on people’s personal freedom. And there’s still, look, there’s still some piracy going. I don’t think it’s where it was, but you’ll find it. So, I think those are all reasonable comments, but then you really framed in terms of very good question, does our engagement with China, you know, is it worth it? Is it to U.S.’s benefit?
My view is you have to ask the question along these lines. All of these tendencies are there, does working with China or engaging with China help them move in a constructive fashion or not? In my view, overwhelmingly, the answer is yes. You’re still gonna have these tendencies. You’re still gonna have them, these sort of behavioral issues or these policy points of disagreement.
But you’re also building a middle class, you’re building international awareness, you’re building kind of sophistication that we believe over time, helps a society perform the way you can work with. And by the way, if you look at China any single day, it can be a very frustrating place to work. If you look at over five or 10 years, you say, there’s been enormous change.
If you go back to, forgive me for this, but if you go back to the cultural evolution a few decades ago, it was North Korea. It was an impoverished nation that was implacably hostile to the United States. This is the back to the purpose of this institution, and Nixon’s opening to China, is to say, how does it help the United States to have a China that is permanently an isolationist, permanently embittered against the West? How does that help us?
And of course, we’ve got to have a little courage to engage with a country that’s fundamentally hostile to us. Here you have the guy who came to political prominence by being sort of the prototypical anti-communist, sitting down with the most famous communist revolutionary of his era. So, you had the whole Nixon Mao meeting. But I think it was enormously helpful for United States to undertake that kind of outreach.
And there’s been a considerable movement in China over these last few decades. But I’ll tell you, we will regularly find China to be frustrated. I’ll put your point in a different way. Of all the major economies in the world, of all the major powers in the world, China remains the one with which we have the least in common. So, we look around the world and we say, “We just don’t have these issues with France. We don’t have these issues with Japan, why do we have…?” well, it’s a different political system. Some of it is cultural, but some of it is Leninism. You’re absolutely right. But my view is there’s no choice but to continue engagement. And if you look at where we’ve gone on our relationship over the last 30 years, you’d say Nixon made the right call. Let’s keep this going despite the frustration you articulated.
Hal Brands: I’ve to just make two brief points on this. So, one, I think the thesis of American policy toward China since the 1970s, particularly since the Cold War, has been yes, China has a retrograde political system that engages in lots of practices that we don’t like. But by engaging economically and diplomatically with China, we will gradually promote political liberalization within China. As China gets richer, it will develop a middle class, that middle class will want greater political rights to go along with its economic status. Eventually, you’ll get political change.
I don’t know that that thesis is wrong, and I think as Frank points out, there has been enormous progress. But the progress has not manifested as quickly as I think many Americans thought it would. I think if you’d asked many Americans in the early 1990s, in the aftermath of Tiananmen Square, would China still be a one-party dictatorship 25, 30 years later? They would say no. No, democracy would have come to China by then.
And so it may be that the thesis that this engagement will promote constructive change in China in a political sense over the long term. And maybe that thesis is still right, but it just hasn’t manifested sort of quickly enough to avoid the problems that we’re facing now.
The second point I would make is I think, you know, I think what I really liked about your question is that you sort of outlined the geo political challenges in the relationship, the ideological or moral challenges in the relationship, and the economic challenges in the relationship. And the reason why the U.S. debate about China has changed, I think in the past couple of years, is that people have started to see China as a comprehensive threat, or a comprehensive challenge.
It’s a challenge to U.S. geopolitical interests in the Asia Pacific and beyond. It’s a threat to U.S. economic competitiveness in a number of ways that we’ve talked about. And in some ways, it’s a threat to the dominance of democratic values and human rights around the world, not simply because China continues to use repressive practices at home, but because it’s become more and more active in, essentially, promoting authoritarianism abroad and shoring up dictatorships everywhere from Southeast Asia to Latin America, and exporting the tools of repression.
And so this isn’t to say that the U.S. and China are destined for war, or that they’re destined for enduring hostility. But I think what has become clear is that there are multiple dimensions of competition and friction in the relationship, and that’s what’s making the relationship particularly difficult today.
Jonathan Movroydis: We’ve a question on second row.
Audience Member: Yeah, two quick questions. First, I’m wondering whether previous presidential administrations were wrong, particularly the most recent Bush administration, we’re wrong in not declaring China a currency manipulator and thereby confronting the problem of Chinese mercantilism at an earlier stage.
My second point is this, going back to the very first comments made by Professor Brand. I’m struck in all the commentary about, you know, Trump pulling down the pillars of the post-war order. There seems to be an amnesia about the president who this library honors, actually started pulling down at the pillar of the Bretton Woods Accords when he shut the gold window for the U.S. Treasury.
In trustee president, perhaps of the Nixon administrations, justification boiled down to, well, things change and it’s no longer in U.S. interest. I’m wondering if commentators on Trump’s foreign policy are forgiving this president.
Hal Brands: So, I’ll briefly address the second point. If you look at any presidency of the post-war period, you can find greater or lesser examples of presidents undertaking behavior that seems at all odds with sort of the way that we often describe the post-war order. So, yeah, the Nixon administration pulls out, basically destroys the Bretton Woods system. The Reagan administration talks about free trade but uses targeted economic sanctions, targeted protectionism, 301 sanctions to try to bring about better trade deals and to resolve trade disputes with, you know, the European community and a variety of other actors. And you can go on down the list.
I think what I would still maintain, though, is that each of these presidents and each of these administrations still had a basic commitment to the idea that the United States would do best in a positive-some international environment in which we did well by helping others do well. And just point out more specifically, that the end of Bretton Woods did not bring about a long term resort to protectionism. It actually helped liberate global capital flows and helped unleash the beginnings of what we now think of as modern day globalization.
And so I would say that on the whole, even though there are exceptions, but then there are ambiguities, exceptions, nuances, within every administration, every administration was basically committed to what I described as the post-war project. I think what’s different about this administration is that the president, and I’ll separate the president from the people around him, and I’ll separate the president even from some of the policies the administration has pursued. The president doesn’t have that same commitment. And I think that’s what makes him different in the post war era.
Jonathan Movroydis: We have a question right here.
Audience Member: Thank you. Well, yeah, the question, to broaden that same question he’s about to ask, we have a currency system that still has a dependency on other nations to invest in our currency. China owns all its debt. There’s no one outside. The value of their currency is based on what they say it is, and it works.
In our country, yes, they own $1.4 trillion of our debt, but the fact is that they used to own $2.4 trillion dollars’ worth of our debt. They’re slowly weeded out. Now, what have we done with the money they have helped us build? We have multiplied it by tenfold with debt. We’re so overcrowded with debt today that when the rates continue going up to the level where it can’t be refinanced, who’s gonna buy that? Who’s going to bail them out? We can’t bail them out. China could do a takeover with much less expense than a war by simply buying that defaulted debt to keep this country rolling.
We’re seeing a currency transfer now and protectionism through our real estate industry right here in California. Who’s buying these mega apartment buildings that are empty? But they’re actually owned but they’re owned by people who wanna keep the Juan and the Renminbi value alive by moving it into U.S. So, we got a problem with the currency.
And the other problem I see is education. We graduate 100,000 chemistry majors in PhDs last year. China does 10 times that amount. Our education system is not keeping up with world standards. I’m worried that our technology ability could be lessened by the drop in our credibility of our educational system. Can we always be the technology leaders if our education system doesn’t maintain international standards? Those are the two questions I had.
Frank Lavin: Well, there’s a lot of substantive points in those two questions. On the first question, you began with the discussion of the deficit, and I think I agree with your premise that U.S. has been chronically running deficits over several decades, where quite significant, there’s this furious debate in the first year of the Reagan administration sort of by 38 years because the deficit might go from $50 billion to $100 billion. There’s this furious probably to Bob Dole’s, and everybody, just I mean, but boy you’re saying this is a different planet we’re talking about. If that’s true, you know, we would give anything today to say, “Can we get the deficit back to $100 billion? That would be the best performing, you know, year we’ve had in those 38 years.
So, there’s been a lot of spending, and unfortunately, it’s to the point where the deficit then becomes structural or virtually structural, that the ability to restrain any growth is very limited. And if you want a view of a friend in politics and you want him to lose reelection, have him call for any kind of reduced spending or even keeping spending growth consistent with inflation. You will get a howl of pain on their proposal.
Pick out the post office in America that has the fewest visitors in the course of a year. There’s got to be someplace in rural North Dakota that gets one person a month coming in and say, “Maybe we can close this post office,” you will have protesters outside your office saying that you need to be fired for suggesting something like that. So, the point is we have very limited ability to put any discipline on this. I think you’re right, it puts us in a bad…I’m not, again, if China exists or didn’t exist, it’s bad discipline and it’s going to hurt U.S. economic growth if you run these kind of deficits.
But I think you’ve got to have some kind of change in the U.S. budgeting process so that people can exercise some discipline in this system, and they get the system on some bit of a diet so we can, you know, correct this problem. But we’re not there yet.
Look, I don’t think China is going to play games with their currency and their currency holdings offshore, because they lose as much as they gain with that. So, they’re allocating their currency wisely, it seems to me, to get the best return from it. And U.S. dollar holdings are the deepest set of instruments you can use, so it’s no surprise to me that that’s where it is. It’s not gonna be in Swiss francs. It’s not gonna be Australian dollars. It’s gonna be in U.S. dollars, because that’s where there’s liquidity, right?
And look, if they’re using some of this money the way the Japanese did a few decades ago to overpay for real estate and buying empty apartment buildings, I say hallelujah. You’re helping us out, buy all the empty apartment buildings you want. Japanese bought Pebble Beach. They bought the Empire State Building. And look, some Americans were very unhappy with this. They said, “You know, I’d view this as a huge win for the United States. There’s a real estate bubble going on. You’re paying far too much for Pebble Beach. You’re paying far too much for the Empire State Building, but I’ll take your money. I mean, you’re not gonna tow Pebble Beach back to Japan are you? So, I mean, it’s still there.” So, I never had a problem with that.
But there’s gonna be some people have anxiety about, I thought real estate is a very safe thing to sell to foreigners because it’s still here, but.
Hal Brands: I mean, I would just say, I also would agree with the premise about deficit spending. And again, I tend to come with this from sort of the foreign policy perspective as opposed to the economic perspective, not that those two things are necessarily mutually incompatible. But if you think about, notwithstanding my comments earlier, you know, will the United States be able to sustain the level of military spending over the next 50 years that’s required to maintain its global position?
Well, the answer may well be, no, at some point, if we get to the point where American deficit and essentially, paying the interest on the debt becomes so significant that it starts crowding out other forms of spending. Now, this is one of these things where in an economic sense, the answer to this question isn’t that difficult.
If you were to adjust in entitlement spending, if you were to raise taxes, you could find plenty of money to pay for everything the United States needs to do. As Frank says, this tends to be politically very difficult. So what is the political forcing function that usually comes along and forces us to deal with particularly challenging questions? It’s a crisis of some sort. It’s a crisis that makes clear that the short term pain of deferring the problem is now so severe that you actually have to deal with it.
Ideally, it would be better if we could address these questions before the crisis hits, but I see relatively little chance of that right now. This may or may not be a silver lining, but I think the crisis is actually closer than we expect, because if you look at the trends, some of the trust funds that underpin Social Security, that underpin Medicare or Medicaid are gonna run dry within the next decade or so. So that will force us to confront this problem in one way or another.
Jonathan Movroydis: We have a question right here.
Audience Member: With the president sort of moving towards protectionism, the Chinese have actually begun to embrace free trade. It’s been projected by around, I think, 2020 that the Chinese economy would actually be worth 10 trillion more than the American economy. And my question is if, hypothetically, China were to become the leader of free trade in the in the world, do you think they’ll be able to uphold this kind of international standard of free trade knowing all the difficulties within the Chinese system directly?
Hal Brands: So, I think the Chinese have done a very good job managing the global politics of the rise of President Trump. You know, Xi Jinping went to Davos in early 2017 and portrayed China, which is still a relatively mercantilistic power, as sort of the chief defender of the open international economic order, and notwithstanding the irony of that claim, got a fair amount of plaudits for it.
Now, in fairness, I think that most observers around the world are fairly sophisticated. So, the Europeans for instance, have their own complaints about China’s economic practices, and are probably not taken in by this rouse, but nonetheless, what I worry about with respect to the Trump administration’s policies is that if we pursue the path of economic confrontation with our allies and our competitors simultaneously, we may give them incentives to work together as a way of stymieing us.
And so we’re already seeing the initial signs of this. The E.U. and the Chinese have started coordinating a bit more in the WTO to protect that organization from what they perceive to be the Trump administration’s indifference or outright hostility to that body. And so you could see more tactical cooperation of that sort, which could eventually add up and have a strategic effect.
Frank Lavin: I’ll just add to that point, and I very much agree with what Hal has just articulated. Look, in diplomacy, victory and outcomes take place at the margin. You rarely have an absolute victory, but you can have a relative victory, relative success. So, United States has historically enjoyed pretty strong relative success in the element that’s called soft power, that United States model and ethos, United States is viewed as a friendly or benign power, and one with which many people around the world have some connectivity. You know, every single kid in Asia who wants to go to either UCLA or USC, I can tell you that.
Noel Murray: Or Chapman.
Frank Lavin: And Chapman. Chapman, definitely. Chapman, definitely. And I’ll tell you something, if you run around, you know, I did graduate work in Taiwan, every single kid there did go to USC or UCLA, or Chapman. I mean, not just people running companies, but people in parliament, people in the cabinet, people who are television journalists. You know, the amount of U.S. cultural reach, and the sort of respect or warm feelings folks across Asia have for U.S. model is deep and enormously helpful to the United States.
But my fear is that is decaying at the margin. And it has to do with the image U.S. puts forward. It has to do with the openness of U.S. society. So, I would, again, if I were speaking to leadership in Washington, I would say, “Please be mindful of that.” Nobody around the world woke up today saying, “I wish my country were more like China.” Nobody said that, although they’ll say in the same breath, “Boy, China has really impressive economic growths.” So, that’s not bad. That’s something we might be able to learn from.
And then I’d also say in the same breath, “China has increasing military reach capabilities. Whether we like it or not, it’s a fact of life, and we have to accommodate or respond to this fact, right?” So, those are drivers, but it’s very different than the first point, which is the soft power that, you know, United States is a cool country. And a lot of interesting things and people come out of United States, so whatever you think about politics of the United States, there’s a lot of interesting things taking place there. So, it’s still my sort of cultural and emotional reference point for what’s going on in the world today.
So, I would say don’t let that atrophy, don’t throw that away. That gives us an enormous amount of reach and friendship, relationships around the world. And other powers such as China just don’t have that, right? So, be very careful with, we’re at a point where the leader of China can stand up and claim that he stands for an open society and a more inclusive world, and our leaders stand up and say we’re kind of against that. Watch out. Watch out. We are giving away a structural advantage we’ve long cherished and nourished.
Jonathan Movroydis: We have a question right here.
Audience Member: Yes, my question pretty much follows on from that. Historically, America has had technological superiority. And I wonder whether we’re witnessing a Trojan horse approach by the Chinese. They have established Confucius sentence across the universities, many of whose students it’s questionable what their loyalties are. They’re acquiring technological skills which they can then take back to China, and now we’re seeing the lawsuit against Harvard where we may change so that the proportion of Asian students is greatly increased. What are your feelings about this?
Hal Brands: I would say that in general, the fact that the United States educates such a large portion of the most ambitious and intelligent students from abroad is a great economic, it’s a great strategic advantage from the United States, because we get a chance to interact with these people early in their lives, we get a chance to observe some of the sort of the soft power pull factors that Frank just talked about.
I think that, you know, there are legitimate grounds for concern if say, we are educating sort of STEM PhDs who are then going back to a country that’s a geo-political competitor and using the education and the skills they got to help make that country a more fearsome competitor. But I think the answer to that was not necessarily to close off American universities to foreign students or to Chinese students, it’s to do more to try to keep the ones who come here, here over the long term, so that they can add as they do, to the vibrancy and attractiveness of American society.
The Confucius Institutes issue I think is a somewhat different one. I think the Confucius Institutes issue is problematic in the sense that, you know, these are often secret…in the past, they’d often been secret agreements between the Chinese government and the university in question. There’s some fairly strong evidence to suggest that these are institutions that try to present themselves as being independent or academic, but they actually have a political mission in terms of sort of supporting the Chinese government’s line. And so I think at the very least, there needs to be much more transparency surrounding these agreements and did the role that these institutions play. And that’s one where actually, I think we’re getting there. I think that issue has had the spot put on it, and there are some things in train that are going to address that issue.
Frank Lavin: I would just comment, there’s two things going on at once. And they can conflate, and one is China is getting its game up with international communications. They’re doing more of it. They’re doing it better. They’re putting more resources behind it. And that in itself, I don’t view is intrinsically a problem, even just the People’s Daily having an English language website and they print Xi Jinping’s speeches. I say that’s what you’d expect them to do, and that can even be helpful to help us understand what they’re saying. So, that sort of transparent communications.
Simultaneous with that, other countries, maybe China but certainly other countries, are doing nontransparent social media activities with front organizations, or misleading names, or titles, or all sorts of crazy things on the internet which is deliberately designed to undermine U.S. policy for it. And it’s done through subterfuge. I mean, it’s a camouflaged organization with a hostile intent, and I think there needs to be a lot more work done and I’d say, thank God for the FBI, and we just need to get a lot deeper into that space, because there’s no question we go back to the 2016 elections that we had fabricated groups in the middle of our campaign making all sorts of allegations of cases organizations that turned out to be contrived and turned out to be foreign funded. And there’s reports from Britain that this was done during the Brexit, campaign Sweden just had elections two weeks ago. They had that same operation over there.
So, I’d we’re just in an era where this is going to take place, and we need to have a defensive mechanisms in place to expose and stop this kind of manipulation.
Jonathan Movroydis: We have time for one more question. I just want to remind everyone that Frank Levin will be here tomorrow to talk about his new book, “Home front To The Battlefront.” That’ll be at seven p.m., so I hope you all can attend. This is the final question.
Devon Nixon: Well, gentlemen, thank you again for coming here this evening. My name is Devon Nixon, so President Nixon was my great uncle, my dad’s Don Nixon. But I’ve been living in Shanghai for the last 10 years. Just real quickly to just two of the gentlemen’s points here, just from my perspective being out across the big pond, with regards to the debt holding where the debt dropped, there’s actually more of a government to government agreement where the U.S. requested that because our two economies are so intertwined, that if someone wants to mess with the U.S. economy they can mess with China and vice versa.
And then with regards to the other gentleman, the currency manipulation. I think that’s more of a political thing to go rah, rah, rah, for the people to get behind them. What I’ve seen on the ground over there is the great increase in labor costs, which directly impact the cost of these goods that have been sold here in the U.S. So, the currency is more of a balance there from what the general understanding is. It’s not, I think, such a big impact, just different system.
But my question for you, gentlemen, is recently, I believe some laws shifted and reshaping of AI Tarr earlier, the military, but also CFIUS where there’s a big clampdown that expand definition of what the U.S. government can prevent investment from foreign sources China, into the U.S. even if someone’s just say, a Chinese passport holder, seeing how you feel the long term implications of mitigating the investment the United States might be. Thank you.
Frank Lavin: Well, I worked with CFIUS when I was in the Commerce Department. I think it’s a necessary body. This is a body that reviews foreign investment in the United States. Now, I can’t speak to what changes have been made recently. I’ve been out of government for 10 years. But the principle that any government, every country the world has the right to review inward investment, and if there are security implications, you have the right to stop it. It strikes me as a very sound principle.
But I’d say by the same token, the other side of the coin is if you wanna invest here in a normal commercial undertaking, go for. And that’s no different than McDonald’s being maybe the largest food operation in China, or Kentucky Fried Chicken maybe rivaling McDonald’s, or Starbucks being the largest coffee chain, or Marriott being the largest hotel. I mean, they’re saying, you know, though that kind of cross border investment is good all around, and I certainly don’t object if a Chinese hotel chains says, “We’re gonna put some hotels up at Los Angeles.” I’d say that’s good news.
So there ought to be sort of policy integrity in the CFIUS process where people can demarcate, is this investment with national security implications, somebody is trying to buy a telecommunications system, a software company, or something that…a payment system that we might not be comfortable with, or is it simply ordinary commercial activity would say have at it? And I can’t, you know, go into details with the current proposals.
Hal Brands: I would just say, I think in a lot of ways, this change is a natural one, and it was a long time coming in the sense that, you know, as the U.S. relationship with China has gotten more conflicted in recent years, it’s natural that we would take a different approach to investment by a country that’s increasingly seeing us as a challenge or a competitor than one that we might see as sort of a democracy in the making, or a close ally, or something like that.
And moreover, I think that this is grappling with the fact that China has pursued a very deliberate policy of economic state craft premised on, in some cases, investing in or buying up critical infrastructure in overseas countries, investing in the high tech sectors and things like that with national security implications.
And so I think what the recent changes were trying to do was essentially trying to recalibrate the restrictions on investment to catch up with where the relationship has gone. But, again, I would just say that, you know, all things in moderation, and that. So, you want this to be a targeted and focused approach, as opposed to sort of a shotgun approach, which would be counterproductive for all the reasons that Frank explained.
Jonathan Movroydis: Thank you very much, gentlemen. Please, give them a round of applause. Please check back for future events at nixonfoundation.org. Again, Frank Lavin will be here tomorrow so please, visit us then. Thank you very much, and we’ll see you next time.