On the Souring of Sino-American Relations
Remarks to the Committee of 100
Ambassador Chas W. Freeman, Jr. (USFS, Ret.)
Senior Fellow, Watson Institute for International and Public Affairs, Brown University
Santa Clara, California, 5 May 2018
I am honored to stand before you this morning to discuss US-China relations. It’s a challenge to speak on a subject so many here know so much about, and to do so at a moment of such radical inflection in the relationship. But Sino-American relations are a matter of great importance to all in our country, and especially to Americans of Chinese heritage. A candid discussion of the deterioration of those relations and its implications could hardly be more timely.
No great power relationship has been as volatile as that between the United States and China. Over just the past eight decades, the two countries have been allies against Imperial Japan, suffered the disillusionment of civil war in China, fought each other on the battlefields of Korea and later – by proxy – in Vietnam, faced off in the Taiwan Strait, worked together to contain the Soviet Union and defeat its invasion of Afghanistan, become amazingly interdependent economically, attempted diplomatic cooperation in Korea, and jostled each other in the South China Sea. Chinese autocracy has always been anathema to Americans, yet we have managed to cooperate in ways that have changed each other’s destinies for the better. Now we are at another turning point on the twisting path of our relationship.
The United States and China are each too globalized and dynamic to contain, too big and influential to ignore, and too successful and entangled with each other to divorce without bankrupting ourselves and all associated with us. America is here to stay as a great power. China is back as one. It seems likely to become ever more wealthy, technologically advanced, internationally prominent, and militarily powerful. What should America do about the progressive eclipse of our primacy by a rising China?
The Trump administration has decided that the answer is to pick a fight – to confront China both militarily and economically. The administration is dominated by xenophobes and protectionists as well as military officers and chicken-hawk militarists. It seeks to use tariffs, quotas, visa restrictions, and aggressive oversight of business transactions to punish China for past intellectual property theft, to cripple its industrial policies, and to prevent its rise as a technological power and military competitor. In its National Security and Defense Strategies, the administration reoriented military planning toward combat with the rapidly modernizing People’s Liberation Army (PLA) and bracketed China with Russia as a threat to the global primacy of liberal democratic values.
Members of the Trump cabinet have echoed demagogues on both the left and right in demonizing China. This Committee rightly condemned FBI Director Christopher Wray’s recent suggestion that all Chinese – “professors, scientists, students” studying and working in the United States in “basically every discipline” – should be regarded as potential gatherers of intelligence for the Chinese government. Unfortunately, Director Wray’s comments accurately reflect the anti-China mood that now prevails in Washington. They were duly applauded by some prominent members of the House and Senate. (As participants in the political life of our country, you should be taking names.)
American history shows that rivalry with foreign powers often leads to the persecution of minorities stereotypically associated with them by nativists. Think of German-Americans in World War I, Japanese-Americans in World War II, and anyone prepared to say a kind word about either China or Russia in the first half of the Cold War. Our political elite has now embraced a cartoonish vision of China as an economic pickpocket, military predator, and would-be exporter of authoritarianism. There is a serious risk that both Chinese immigrants and Americans of Chinese heritage are about to be subjected to intensified racial profiling and discrimination. In some respects, this is already happening.
I don’t think anyone should expect Beijing or Taipei to avoid doing things that appear to invite such injustices. In my experience, each is happy to exploit its overseas kith and kin, but neither gives much thought to the impact of its policies and actions on so-called “overseas Chinese.” None of us can choose our ethnicity, but all of us stand to lose if we are singled out for it. It is up to all of us, as Americans, to combat homegrown prejudices ourselves. Given the record of the Trump administration on the rights of immigrants and ethnic minorities, we cannot look to it for help.
This is why, before I discuss the probable course of US-China relations and its international implications, I feel obliged to urge solidarity in support of the rule of law in our country. It is imperative that we denounce policies built on prejudice. But that will not be enough. Chinese-Americans need to join other groups and individuals in active defense of the Bill of Rights against its nativist detractors.
Those seated in this hall are among the most illustrious members of the Chinese-American community. In your own interest and in that of Americans of all ethnicities, if you have the means, consider giving generously to organizations that can be counted upon to defend the civil liberties of unpopular minorities in our country. Your freedoms are inextricably entangled with those of every other American. And they are about to require major reinforcement in the courts.
A spiraling xenophobia dominates our politics. Fear by many white Americans of lost status and control in a country that is ever more socially and racially diverse drives it. This fear coincides and resonates with the national perceptions that the United States is no longer able always to have its way abroad and that China is displacing the United States from its century-old status at the apex of world and Indo-Pacific affairs. Xenophobia thus easily becomes Sinophobia, causing disgruntled Americans to blame China for our society’s socioeconomic discontents – the structural and technological changes that are squeezing our middle class and shifting jobs out of manufacturing into services – and to attribute our country’s diminished clout overseas also to China.
To appease American malaise and to deal with a wealthier and more powerful China, President Trump is experimenting with economic theories that appear to have been crowd-sourced to right-wing talk radio and know-nothing TV. He is also increasing deficit spending to prepare for possible war with China. His administration is attempting to impose a self-centered, economic nationalist agenda – the bigoted bilateralism of “America First” – on a globalized world economy. If China really has any desire to overturn the liberal rule-bound international order – which I doubt – it had better move quickly before the Trump administration aces it out by finishing the job. The administration is destroying the global dispute-resolution mechanisms previous generations of Americans labored to create, and replacing them with mercantilism, government-managed trade, and economic warfare.
China was once the implacable enemy of capitalism. It is now its most efficient practitioner. Most Americans believe our grievances about Chinese trade and investment practices are justified. But we are not going to convince China — or, for that matter, the rest of the world — of this by demolishing the multilateral norms that govern international economic interactions. Our bluster and bullying make us, not the Chinese, appear to be the malefactor. We are alienating natural allies in an international effort to change Chinese behavior. No matter who’s right or wrong, we need to ask ourselves what will result from our application of mercantilist theories to China and other great powers with which we have trade deficits. And what will a more aggressive military posture toward China produce?
Let me briefly set aside the military dimension of US-China rivalry to first address bilateral tensions over trade, investment, and economic growth. Bear with me as I explore the basics of the dismal science for the next ten minutes.
I believe that Washington has misdiagnosed our trade problems, that its remedies for them won’t work, and that what it is doing will harm the United States and other countries as much or more than it does China.
For the past 43 years, the United States has consumed more than it has saved. 互通有无 – trading what we have more of than we need for what we want but don’t have enough of – makes sense. Importing more than we export has elevated our standard of living, not just our national debt. Overall, in 2017, Americans bought $568 billion more abroad than we sold. As usual, we paid for this trade imbalance by printing little green paper portraits of dead presidents. Foreigners, including Chinese and Japanese, mostly reinvest these dollars in the United States or loan them back to us through purchases of our national debt. By the end of last year, the United States Treasury owed foreign lenders $7.8 trillion – equivalent to 40 percent of our GDP.
The fact that we Americans consume more than we produce means that we have a trade deficit. The fact that we spend more than we save means we need to borrow money from foreigners. So we have a balance of payments deficit. Ironically, the Trump administration has just taken steps guaranteed to increase both these deficits. It has reduced tax revenues and boosted deficit spending, mostly on military research, development, and procurement. These actions take the national savings rate even lower while inflating domestic demand for goods and services. They cause imports to surge.
Increased American consumption born of an overstimulated economy explains why China’s trade surplus with the United States is again rising even as its surplus with the rest of the world falls. Unless Americans boost our national savings rate by hiking taxes or cut our consumption by falling into recession, our overall trade deficit is sure to bloat. If China does not meet the stepped up consumer demand in our economy, American businessmen will find partners in other countries that will.
China did not cut American’s taxes or boost our defense spending. Our own political establishment did. But bigoted bilateralism will ensure that we blame China, not ourselves, for the consequences of our fiscal profligacy.
The Trump administration is convinced it can restore American manufacturing jobs by de-globalizing the U.S. economy. To this end, it is trying to take down global production and supply chains, a great many of which center on China. Production chains are the transnational equivalent of assembly lines – another industrial revolution. They divide work into segments and let those who can produce each segment most efficiently do so. This leverages comparative advantage to bring prices down and quality up. The highest wages go to those who add the most value in the production and assembly process. Those who manage production and supply chains do best. A lot of them are American.
There are two predictions out there about what smashing production chains involving China will accomplish: one by 99.99 percent of the world’s economists and the other by Peter Navarro, the author of “Death by China,” an inflammatory tract that won him renown among white nationalists and that endeared him to Donald Trump. As our president is fond of saying, we will see what happens. I don’t think it’s going to be anything good.
Limiting Chinese imports by imposing tariffs or quotas will not make the United States a more efficient producer of anything, though it may make China less competitive in the U.S. market. Tariffs and quotas will raise U.S. consumer prices at least until American companies find others who can produce as efficiently as their current Chinese suppliers can. Tariffs and quotas will push up the price of imports and generate inflation. By making Chinese components of U.S. manufactures more expensive, they will also raise prices for domestic purchasers, make some U.S. producers uncompetitive, depress U.S. exports, shift outsourcing to foreign suppliers outside China, and erase many more jobs in the United States than they create.
Managed trade – meaning the manipulation of bilateral trade balances by the imposition of tariffs and quotas – is what we have accused the Chinese government of doing. We have now made it our own objective. Managed trade substitutes political judgments for market forces. It engages the government not just in setting broad policies but in regulating specific trade and investment transactions. It displaces the predictability of market economics with the uncertainties of politics. As such, it is a politician’s delight and a businessman’s nightmare. Managed trade allows office-seekers to grandstand on national security issues to the detriment of American entrepreneurs, companies, and shareholders.
Key members of the original gang [原班人马] that stopped Japan’s economic growth in its tracks in the 1980s are back. This time they are trying to prevent China from becoming a peer competitor in dual-use technology. This is what the multi-year ban on transactions with ZTE is about. But export bans are seriously counterproductive.
The ZTE ban demonstrates to China, Chinese companies, and others that that they cannot rely on production chains that involve American partners. It has bolstered the Chinese case for making an even greater effort to promote indigenous innovation and self-sufficiency. We are already seeing evidence that the administration’s approach to choking off the flow of technology to China will weaken American companies by curtailing their exports, damaging their long-term prospects in foreign markets, and fostering the rise of competitors for market domination not just of the Chinese market (which is typically the world’s largest) but in third country markets as well.
China now accounts for over one-fourth of the world’s manufacturing. In terms of its production of goods, the Chinese economy is already about one-and-one-half times the size of ours. It is only when services are added in that the American economy is larger. China is by far the largest market for industrial components. Chinese subsidiaries of American companies sold something like $250 billion in the Chinese domestic market last year. We may be in the process of writing off that market without much, if any, discussion of the long-term implications of doing so for our economic prosperity.
Political Washington seems to see technology as a thing, not a process; as something static, rather than dynamic; as capable of being sequestered rather than dependent on collaboration with others for its development; and as monopolizable by Americans rather than replicable by foreigners who are aware of its possibilities. Maybe technology was once something we Americans had and Chinese didn’t, but that has not been true for some time. I don’t need to tell anyone here in Silicon Valley what a mess an approach based on such misconceptions will make of U.S. technological leadership.
By 2025, China will have more scientists, technologists, engineers, and mathematicians than all of the OECD member countries combined. Isolating ourselves from the largest pool of STEM workers in the world will not be good for us. Autarky (derided in Chinese as 闭门造车) was not a sound strategy for China under Mao. It is not a sound strategy for America under Trump.
This brings me to a final point on economic ideology. Like most of the American plutocracy, senior members of the Trump administration condemn industrial policies as simultaneously (1) unworkable and (2) unfairly successful. The obvious contradiction this stance embraces aside, it denies the historic success of America’s own industrial policies, many of them under the auspices of our powerful military-industrial complex. Visionary funding from American taxpayers and a government-friendly private sector were essential to enable the development of early manufacturing, canals, railroads, water supplies, radio, television, the aerospace industry, computers, semiconductors, interstate highways, nuclear power, imaging technology, pharmaceuticals, communications and weather satellites, the internet, GPS navigation, solar power, fracking, genetics, and space launch industries, among other fixtures of contemporary life.
We may well be able to persuade China to modify specific elements of its approach but it is not going to abandon the overall reliance on industrial policies that has propelled it to renewed wealth and power. The answer to Chinese industrial policies is not sabotage but a combination of incentives to boost our own competitiveness in the industries of the future and negotiated changes in Chinese policies that we and other countries find objectionable.
Arguing that governments should not favor sectors of their economies with the greatest potential over others is absurd, especially when those making such arguments are engaged in imposing tariffs and quotas that benefit existing industries in their own countries. It is entirely appropriate – and very American – for government to decide what sorts of economic activities will have access to tax breaks and subsidies, and then let entrepreneurs have at them.
Industrial polices and tax subsidies remain key drivers of French, German, Japanese, and Korean growth. Whining about foreign use of such policies while somewhat ineffectually relying on them ourselves is unlikely to get us anywhere. To get others to change their ways, we are going to have to be willing to change ours. Give and take, not bullying, is the true art of the deal.
Chinese scientists have just cloned monkeys. In the new world disorder, American xenophobes seem determined to conspire with Chinese and Russian nationalists to clone the Cold War. But the clone is likely to be bigger, tougher, and harder to finish off than the monster it foolishly replicates. And, in some ways, as the FBI has just reminded us, it could be nastier.
Let us stipulate that the Chinese Communist Party rules China with the somewhat unenthusiastic consent of the Chinese people. Chinese tolerate the Party notwithstanding its ideology, which is uninspiring, not to say dispiriting, and its history of criminally injurious policies under Mao. The Chinese people’s allegiance does not rest on the Party’s victory in the Chinese civil war, which is incomplete. Chinese accept the Party’s rule because there is no apparent alternative to it and because they have an historically well-founded fear of anarchy, war, and foreign oppression.
But, when all is said and done, the Party’s legitimacy rests on its demonstrated ability to deliver rising standards of living and international prestige. China’s middle class is rapidly expanding (as ours contracts). Chinese are proud to live in a country that can no longer be pushed around. The Trump administration is now attacking both these pillars of the party-state in China. Not surprisingly, some in China see this as an existential American challenge.
As if to buttress this interpretation, the United States is signaling an intention to dismantle the diplomatic fictions that have facilitated Beijing’s commitment to peaceful resolution of the Taiwan issue. The steady addition of elements of “officiality” to the U.S. relationship with Taiwan in violates the American undertakings that enabled the 1979 normalization of relations with China. It risks a return to pre-normalization Chinese policies aimed at “liberating” Taiwan through the use of force.
Chinese warnings and shows of force against Taiwan are escalating. I do not need to explain to this audience how American military challenges to Chinese claims in the South China Sea, solidarity with Japan on the issue of sovereignty over the 钓鱼岛 / Senkaku Archipelago, and sympathy for Tibetan nationalism are seen in Beijing. The administration’s indifference to China’s anxieties is a reminder that the greatest vulnerabilities of any nation are the blind spots that its arrogance creates.
A few weeks ago, as he has before, George Koo skillfully took down some of the now rampant anti-China narrative in an op-ed in the Asia Times. In a few minutes, I look forward to participating in a panel chaired by George. The panel will examine the causes of American disquiet about Chinese trading and investment practices in detail. The beginning of wisdom in foreign relations is the objective diagnosis of disputes to enable joint efforts to address them.
It does not take a “very stable genius” to understand that the U.S. relationship with China is now under severe stress. If China joins those in the United States now succumbing to their darker instincts, no one will “win.” All will lose. The Trump administration is currently on a course that will not only exacerbate our problems with China but risk its transformation into an active adversary – possibly even an enemy – of our country. Considerable damage has already been done. Restoring mutual confidence will not be easy. Despite their professed mutual regard, Xi Jinping is not China; nor is Donald Trump America. We are talking about potential conflict between nuclear powers that have yet to develop procedures for escalation control. This is not reassuring. But it is not too late to change course.
There are many reasons for the United States to seek cooperative relations with a rising China. The world and both countries have much to gain from such a relationship. Conversely, a return to Sino-American enmity will endanger both peoples as well as others. Few would disagree that the way Americans and Chinese handle our interactions, including our disagreements, will determine the course of world history. I believe it may also decide whether we Americans secure the blessings of liberty to ourselves and our posterity. Sino-American relations are too important to be left to passionate nationalists on either side.