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Allies & Adversaries…

Dr Jiong Gong – the Professor of Economics at University of International Business & Economics, Beijing – recently delivered a speech on Sino-American relations at a conference organised by Frankfurt-based Schiller Institute in Morristown, New Jersey. The Boundless Ocean of Politics has received a copy of his speech from the German Institute.
The Speech:
Dear Ms Helga Zepp-LaRouche, leaders of the Schiller Institute, ladies and gentlemen,
It is a great honour to be invited to the Schiller Institute‘s conference in Morristown, New Jersey, a beautiful North Jersey town that I am so familiar with. Not far from this hotel is the Morristown Green. Take the second exit onto South Street. Drive for less than two miles to arrive at 445, South Street. That is the complex where I used to go every weekday for seven years until 2001, when I was a research scientist at the Bell Communications Research Inc.
Today, I am in China, teaching economics at the University of International Business and Economics, located in Beijing. In a way, my personal experiences – both in the US and in China – testify to the extent of how our two great nations are interconnected and our two great economies are intertwined.


Dr Jiong Gong

I want to start off by giving you an assessment of the current status of the Sino-US relations. First, as we all know that we are unfortunately engaged in a trade war. Official tariffs were first slapped on USD 34 billion worth of Chinese exports on July 6, two days after America’s Independence Day. Rounds of tariffs ensued on both sides, until the two Presidents met at the G20 Summit in Argentina on December 1, 2018, where a truce was reached so as to leave some more time for further negotiations. China committed to buy several billion dollar worth of American agricultural and energy products, including some immediately, while the US side promised to postpone the uplifting of tariff rate from 10% to 25% for 90 days. Three rounds of negotiations have taken place so far in Washington DC and in Beijing. Just yesterday a round of talk was concluded with the American delegation led by US Trade Representative Ambassador Lighthizer and Treasury Secretary Steven Mnuchin, who were also well received by Chinese President Xi Jinping, which is a very good sign. According to US President Donald Trump’s tweet, the talk has gone extremely well. I am less concerned about the prospect of reaching a trade deal here.
As the largest trading nation and the second largest economy, China cannot afford going back to an old world severed from the global system of trade and capital investment. On the American side, although there are people close to the President who view these destructive tariffs as the ultimate means intended for a total decoupling strategy, I believe at least President Trump thinks differently and he needs this what he describes as the largest trade deal ever in history, according to the published transcript in Washington Post of a private telephone conversation with Bob Woodward, before Woodward’s (Fear) book came out. After three rounds of ministerial level talks, there will still be some thorny issues left to be haggled over personally by President Trump and President Xi, such that both sides can somehow declare victory. It may happen before March 1 the deadline, or it may be a few weeks after. This is not a big deal.


President Xi

But, I am more concerned about the overall Sino-US relations. Aside from the prospect of reaching a historic trade deal, this relationship is facing long-term difficulties that impose great constraint on our further economic relations. At the surface, our dispute appears to be about America’s trade deficit with China, which reached USD 375 billion in 2017, according to the US statistics, but what lies at the heart of the matter, as we all know it, is America’s concern for the rise of China’s comprehensive national power, including economic power, soft power in Chinese vocabulary, sharp power in American vocabulary, or whatever definition of power scholars can come up with. And I venture to take a step further in stating that the heart of the heart of the matter is Washington’s concern for losing its technology edge to China, and perhaps more importantly, what America perceives as the reasons behind this trend.
The American narrative, which is in wide consensus across aisles in the Congress, is that China is able to progress quickly mostly because of the notion of a state-steered capitalism, for things like industrial policy, state subsidies, support of state-owned enterprises, and other contentious structural issues. About technology and innovation, China advances mostly because of IPR theft and coercion.


President Trump

Although all these issues are of concern to Washington, by far the most important issue is with respect to technology and innovation. In that regard, keeping a technology edge is vital for maintaining good American jobs and its defence supremacy.
Fair enough… I think it is indeed a legitimate demand that respect for IPR should constitute an indispensable component of fair and just global competition, both among companies and among nations. Matt Pottinger, the Senior Director for Asian Affairs at the National Security Council, famously said about the competition between China and the US. I quote, “In the US, competition is not a four-letter word. But I am not sure a nation can climb up the technology ladder by just theft and coercion. I have visited dozens of companies in China who have never gone through technology transfers of any kind but are now thriving on global markets. For example, Sany Heavy Industry’s CTO told me that it is indigenous from day one, and innovation on its own has always been in the company’s gene. But notwithstanding whether all of these IPR related accusations are true or not, let’s talk about ways to address the American concerns so as for the two great nations to avoid the kind of Thucydides trap we have tragically seen in history.
Today, America labels China as a competitor, a rival, an adversary state. It hasn’t been elevated to the enemy status yet. Let me quote one paragraph in the latest 2019 National Intelligence Strategy report put out by Dan Coats, the current Director of National Intelligence leading the intelligence community of 16 federal agencies. He said: “Chinese military modernisation and continued pursuit of economic aion and beyond remain a concern, though opportunities exist to work with Beijing on issues of mutual concern, such as North Korean aggression and continued pursuit of nuclear and ballistic missile technology.

That though statement puts our relations still on a hopeful footing. The paragraph about Russia doesn’t have that though. The prospect of China taking over the US as the largest economy and the accompanying comprehensive power scares a lot of people in Washington. But allow me to question the validity underlying America’s concern for China’s rise as an economist. In economics, there is this convergence theory postulating the growth rates for advanced economies will eventually converge, and the size of the economy is essentially driven by population size. Currently, China is still growing faster than the US, which is a bit over 6%, about 2% more than the US’ GDP growth rate. But, I don’t see the days of over 6% growth rate in China is going to last very long. We are going to quickly enter the 5% growth rate territory. The trend in population is even more revealing that China is most likely to decline, while the US is absolutely rising. By 2050, the US population, with a higher birth rate and aided by immigration, is likely to increase to close to 500 million, while China’s population is likely to decline to near 1 billion. So, over a long period of time if we are patient enough and forward-looking enough, I am not convinced that China is going to take over the US in any significant way. What I see is a picture of convergence in terms of economic power in light of the economic and demographic trends in both countries. What I see at most is a bipolar world, if we will ever reach there, where China and the US are probably comparable in most aspects of power metrics. And to be honest, believe me, even this scenario is many many years away.
The second American concern is with respect to the issue of the Chinese development model in competition with America’s cherished free-market model. That is of course the issue of the Beijing Consensus versus the Washington Consensus. China has its own constraint in interactions with the world due to its unique political and economic system. But, I don’t believe that Beijing intends to promote its model worldwide as it exported revolution in the 1970s, which as we all know turned out to be a total fiasco. China learned that lesson and it won’t export ideology anymore.

I may further draw historic inspirations to instill some more confidence in this view. Chinese history is indisputably more of a history of a victim of aggression than aggression. Even during the time when the Chinese fleet ruled supreme on the high seas, we never had a wicked design on land our ships reached. Under the rule of China’s Ming Dynasty (within 30 years starting from 1405), a royal court official – Zheng He – led seven maritime voyages across the South-east Asian region, through the Strait of Malacca into the Indian Ocean, and went as far as the Kenya coastal areas of Africa. This is 87 years earlier than Christopher Columbus’ historic voyage to the Caribbean. While Columbus sailed with three ships, Zheng Hes fleet consisted of 317 ships with about 28,000 crewmen altogether. We did not colonise places we reached with sugar and coffee plantations based on African slavery, even though our ships were at least four times larger than those of Christopher Columbus’, the size of our fleet was a hundred times larger than that of Christopher Columbus’ and our voyage was taken 87 years earlier than Christopher Columbus. And yes, we had reached Africa, too.
The regime in Beijing is not interested in competing with America globally on spread of ideology. And, I want to take a step further by postulating audaciously that the ideological differences embedded in Beijing consensus and Washington consensus are grossly exaggerated.
The Chinese development model, as first heralded by Mr Deng Xiaoping, is flexible, adaptive and largely de-emphasising ideological penchant in the first place. In fact, someone even goes as far as claiming the China development model is essentially having no model. My own conclusion is that the Chinese development model mostly encompasses the following five aspects: role of the state which entails industrial policy and the SOE phenomenon; FDI-exports duo; priority on economic development at all costs; institutions for efficient but not necessarily liberal governance; and finally the flexible, incremental and experimental approach to introducing reforms.

If one compares the above aspects of the Chinese development model with the American ideological core values, there are actually more things in common than in differences. I take Sociologist Robin Williams’ analysis of American ideological core values as an example. He listed the following: freedom, individualism, idealising what is practical, volunteerism, mobility, patriotism, progress and American dream. The way I see it, the only thing that is fundamentally difficult to reconcile is with respect to the notion of freedom. So, if I am successful in convincing you, the Sino-US relationship is devoid of ideological competition, and what is left of the American concern got to be in areas of geopolitics driven by realpolitik. And, the very foundation of that in essence is an economic competition story. But a quick review of history highlights the fact that the American and the Chinese economies are fundamentally intertwined, and fundamentally complementary toward each other in nature. The north Pacific trading network, also involving Japan and South Korea, forms the world’s largest global value chain. China’s economic success is partially a story of success of corporate China’s participation in this America-led global value chain.
In addition, corporate America’s operations in China represent approximately a USD 400 billion commercial interest. About 40% of China’s exports are associated with foreign multinationals. The majority of the top 20 list of the largest exporters in China is either OEMs of corporate America or corporate America itself. The Chinese and American economies are complementary because of natural and human resource endowments, respectively. America’s agricultural and energy products are highly competitive in global markets and so is its end of the high-tech sectors. China’s efficient manufacturing contributes to the low prices at Walmart and Amazon. Adding goods and services together, the trade flow across the Pacific represents close to USD 800 billion of commercial interests to a potential level that they jointly become one. Is this wonderful hypothetical company an American company? Or is it a Chinese company? It doesn’t matter. I would call it a global company, in the age of globalisation.

China could also benefit from being selective in its industrial policy objectives. Industrial policy is controversial in the economic academic community. But one has to concede that America has its own fair share of industrial policy that is only different in scale, but not in substance from China’s. For example, the US has the DARPA programme – its world-renowned national laboratories under the Department of Energy, the massive research funding from the National Institutes of Health and the many grants from the National Science Foundation programmes. A few days ago, President Trump signed an executive order to promote artificial intelligence development. That smacks every bit of industrial policy. Having said that, I think it does not hurt China’s interests in focusing on a policy objective of excelling in select areas as opposed to being mediocre in all things. For example, the US prides in Boeing airplanes, while China prides in high speed railway. Some Washington think-tank accuses China for being innovation autarky. But, if an autarkical approach is to be avoided, strategic trust needs to be established between the two sides for the long term. And in this regard, recent actions from Washington regarding Huawei, especially the intelligence and the defence complex wings of the executive branch, are very disappointing. Huawei may have made mistakes in the past in other areas, but there has never been a shred of evidence that the company is engaged in intelligence and espionage work for the Chinese government.
Washington’s conviction by hypothesis is built on a statute in China, called Intelligence Law, Article 7, which says that corporate entities in China have the obligation to co-operate with the government intelligence agencies. But, there is a higher Constitution in China that says that the government protects private companies’ interests. Huawei’s CEO Ren Zhenfei said very clearly that he would never put his customers’ interests ahead of anything else, and his statement does have a legal basis, which is what I am talking about – the point that the Chinese government, according to the Constitution, should never put Huawei in harm’s way on the global market.

Another dimension of escaping the economic Thucydides Trap is along the market geographic dimension. Corporate America usually does not go to Africa. Corporate America is limited in presence in South America, South Asia and Southeast Asia. Its strength is in European and the North American markets. I have always advised corporate China executives to go to Africa, to go to South America, and to those places where there are more opportunities than competition. By a friendly geographic division of the global market, corporate China and corporate America can both thrive on their own.
Last, I want to talk about the Belt and Road initiative and its potential implications for Chinese investment in the US. Foreign Direct Investment (FDI) between the two countries strengthens our economic relations, serving as an additional layer of ballast to our overall relations. In terms of foreign direct investment, (so far) it is predominantly a one-way street from America to China. This is all understandable given the developed economy stature here vis-à-vis China. But in more recent years, more and more Chinese capital is interested in the US, particularly in the South, in states – like North Carolina, South Carolina and Georgia – where costs of land and utilities are cheaper than in China and the labour cost is quite reasonable. This is particularly true in the context of the new economic geography theory, which predicts a migration pattern of industrial manufacturing clustering.

Historically, it migrated from Europe to the North America and then to Japan and South Korea, and then to China. It has been in China for over 30 long years, such that we are starting to see a wave of outward FDI out of China, much like corporate America’s off-shoring movement in the 1990s. You would like to see some of this corporate China’s (off-shoring) capital as part of (re-shoring) back to the US, as many of those companies are active participants of the global value chain networks encompassing the North Pacific.
Chinese capital investment in this country can also be in the area of infrastructure investment against the context of President Trump’s ‘Make America Great Again’ campaign. This is President Trump’s hallmark campaign slogan. But, so far, we haven’t seen many actions and details coming out of the administration about the infrastructure build-out, other than that Wall on the southern border. President Trump said that would be his focus in the second half of his term. We will see…

Infrastructure build-out is a great strength of Chinese companies. For those of you who visited China, you can tell how much of a great stride China has made over the years. Now, this has spread to the Belt and Road initiative. But there is much confusion, misunderstanding, misinformation and even malicious attack of the Belt and Road initiative. This is not a geopolitical play to promote sphere of influence. This is not intended for power projection. The Belt and Road Initiative is truly motivated by seeking mutual commercial interests as opposed to promoting an ideology in competition with America. This point has been repeatedly emphasised by the Chinese government.
China has a huge foreign exchange reserve sitting idle here in the US and Bank of China, and other major commercial banks from China are now flush with dollar cash and other dollar-denominated liquid assets, totaling over USD 3 trillion, mostly in the form of holdings in US treasury bills and bonds. This money can be readily used for Chinese investors to participate in America’s infrastructure boom. By that, I mean Chinese investors can participate in those infrastructure projects as active equity investors, and maybe contractors or suppliers at the same time.


China’s Belt & Road Initiative

Call it belt-and-road. Call it America-belt-and-road. It doesn’t matter, as long as China’s current account trade surplus can be somehow transformed into a capital account stock, in the form of money invested in America as permanent equity shareholders, and more importantly permanent stakeholders of a stable and prosperous Sino-US economic relationship. This could be a win-win model for both countries.
In conclusion, I am optimistic about the short-term trade negotiations, but worried about the poisonous political atmosphere in Washington regarding China in the long run. There are those political factions in the US, those on the right representing the defence industrial complex and the intelligence community, and those on the left for a phantom ideological crusade, who are bent on making China public enemy No 1 in the US. This is deplorable, to say the least.
Fortunately, President Trump doesn’t seem to be part of it. A good relationship between our two countries, albeit being competitive in nature as long as it is peaceful competition, is indeed fundamentally in the American interest.

Thank you very much for the opportunity and wish you all Great Success!!!

Boundless Ocean of Politics has received the copy of Dr Jiong’s speech from Dr Christopher Lewis of Schiller Institute.


Dr Christopher Lewis

Editor’s note: The views and opinions expressed in this article are the author’s and do not necessarily represent the views and opinions of Boundless Ocean of Politics. Boundless Ocean of Politics makes no representation, warranty or guarantee as to the accuracy or completeness of the information contained in any News, Research, Analysis or Opinion provided in this article. Under no circumstances will Boundless Ocean of Politics, its employees, agents or affiliates be held liable by any person or entity for decisions made or actions taken by any person or entity that relies upon the information provided in this article.

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