Theses on China, þe U.S., Political-Economic Systems, Global Value Chains, & þe Relationship

My notes from a trans-Pacific interview...

Theses on the U.S.-China Relationship:

1. The foundation of China-US relations is grounded in the relationship of the people. That relationship has been and is strongly positive. Yes, Americans were very fearful of immigration from China in the generations around 1900. But American people were firmly opposed Western European colonialism over China in the years before World War I.

2. The American people were firmly opposed to Japanese colonialism in the late 1930s—that opposition, and the consequent oil embargo imposed against Japan, lay behind Japan’s attack on Pearl Harbor and the U.S. entry into World War II in the Pacific.

3. Furthermore, American’s willingness to engage with the Chinese market and welcome imports after Deng Xiaoping’s ascendence to paramount leadership played an immensely powerful role in fostering China’s economic development. The people of America are, by and large, truly heartened by China’s enormous strides since the 1940s and the 1970s.

4. Moreover, the U.S.-China interdependent economic parnership brings enormous value to both sides. Both countries are vastly richer as a result. However…:

5. How is the substantial surplus from the U.S.-China economic relationship to be distributed? There is a complete consensus in the United States that America receives too small and China too large a share of the surplus, and that it thus needs to be redivided. But we must not lose sight of the scale of the surplus and its overall benefit for both, even as disagreements about surplus division continue.

6. Neither country has the best, flawless political-economic system for managing the challenges of the 21st century. I very strongly believe that that United States’s system is far superior—although itself very far from perfect. Its defects are, in my view, outweighed by just one of China’s governance problems: the emperor-selection problem.

7. The emperor-selection problem. Remember that there is no historical episode ever of an empire having more than five non-catastrophic emperors in a row. The year 96 to year 180 reigns of the Roman emperors from Nerva to Marcus Aurelius were bookended by Domitian and Commodus. To that we now, in these days of modern medicine, added the emperor-senility problem.

8. Division of the surplus is a normal problem in international relations, and it is to be handled by normal diplomacy, with both sides recognizing the extraordinary value of the goose whose golden eggs are being distributed.

9. Arguments over political-economic systems are potentially much more fraught. Soviet Union paramount leader Nikita Khrushchev has some wise words for us from 1959 advocating for peaceful coexistence and denouncing war remain relevant: “Peaceful, friendly and mutually beneficial relations with all countries, irrespective of their social systems… is the only correct policy…. We are ready to cooperate sincerely with all states which want to live in peace and friendship… ready to meet them half way, to make concessions and compromises…. The peoples want peace; they want to live as good neighbors; they want cooperation, not confrontation…. Let us pool our efforts in order to put an end to the arms race, eliminate the threat of war, ensure peaceful coexistence among states with different social systems, create favorable conditions for peaceful economic competition among them, and solve all disputes at the negotiating table…”

10. The most dangerous disagreements between countries arise when each believes they have strong legitimate interests at stake. Those must be managed to prevent disruption of an economically beneficial relationship or, worse, catastrophically destructive war. Thus wise leaders heed Khrushchev’s advice to make concessions and compromises, and meet negotiating partners half-way.

11. The U.S. government is currently very alarmed at its uncertainty of the extent of Xi Jinping’s foreknowledge of Vladimir Putin’s imminent attack on Ukraine when Xi announced his “no limits” partnership with Putin’s. The most significant step that could be taken to improve Chinese-American nations would be for Xi Jinping to join the European Union and America in full support of Ukraine.

12. They would then jointly pressure Muscovy to end its invasion, retreat its armies, and acquiesce in meaningful security guarantees for Ukraine given the utter worthlessness of the security guarantee Putin in 2004 provided to independent Ukraine within its late-Soviet period borders.

13. The CHIPS and the IRA Acts are aimed primarily at revitalizing the U.S. domestic economy and increasing the rate of growth of American prosperity.

14. But with the fraught international situation created by Putin’s attack on Ukraine and Xi Jinping’s adventuristic “no limits” partnership with Putin, the U.S. President and Congress added two more goals: (1) retard the acquisition by the PLA of advanced information technologies with potential military applications, and (2) sharply reduce the potential leverage China may acquire to weaponize economic interdependence in a way adverse to U.S., European, and Pacific Rim security interests.

15. The U.S. has been a bigger loser from the trade war launched by Donald Trump than China has been. Unfortunately, one trade-war tariffs are imposed, backing away from them becomes a very difficult domestic political operation given the interests of those who have taken actions in reliance on those tariffs.

16. Finally, the arguments made by Laura Tyson and others to Bill Clinton in the 1990s about the U.S.’s historical responsibility to assist China in achieving economic prosperity as rapidly and fully as possible remains relevant. The rapid economic and social progress China has made since 1976 is heartening, and the U.S. takes pride in the role it has played in facilitating this transformation.

17. Most importantly, we need a sense of calm. The world is progressing in all of our favor, despite hurdles that currently seem enormous. With sufficient time, solutions to all contentious questions that both the U.S. and China consider involve their clashing legitimate interests will become obvious. Thus we must all seek to delay decisions and actions on contentious matters for as long as possible.

18. And here we should heed the advice of the estimable George F. Kennan that he gave in 1947 at the outset of the Cold War between the U.S. and the USSR. Kennan believed the U.S. could not win the Cold War by rollback, containment, espionage, or military adventurism. Kennan believed the U.S. could win the Cold War only by becoming a superior version of itself, and that that was where America should focus the overwhelming proportion of its energies. He was right.

19. If you view China and America as engaged in some sort of struggle, the only way either can win is through self-improvement to become the best possible version of itself. Any other strategy will lead to a loss, and quite possibly both will be losers.

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Theses on the Economic & Political Problems of China:

1. One cannot help but be concerned about the magnitude of the economic disparities across China. Consider: (1) roughly 100 million people living in major growth hubs such as Shanghai, the Pearl River Delta, and Beijing—although that is largely political—have an average productivity level on par with Spain, and outstanding technological capabilities, surpassing those of two or three Spains combined; (2) roughly 300 million people elsewhere along the coasts living a life similar to Poland in terms of productivity and prosperity, entwined in global value chains in a way similar to how Poland is linked to Germany’s advanced industrial export economy; and (3) a staggering billion people residing in the country’s interior lead lives comparable to those in Bolivia, regions that benefitted massively from Deng Xiaoping’s family-farm responsibility program but have not shared equally in growing prosperity since. This stark regional inequality always strikes me when I visit China

2. This situation is of significant concern to the Chinese government. Attempts like the dual-circulation initiative have attempted to shift some wealth from coastal regions to the interior by enabling the latter to thrive as suppliers to the most prosperous coastal enterprises. Yet when I talk to Chang-Tai Hsieh, I come away with the impression that China’s coastal regions are still much more profoundly economically integrated with the rest of the Pacific Rim than with the interior. These attempts seem to have failed.

3. It is really unhelpful and destructive to recklessly engage in adventuristic partnerships with unpredictable dictators who initiate major military ventures.

4. I have grave concerns about the future of China’s economic growth. China needs to rebalance its economy toward consumption and away from construction, and needs to do so in a way that does not devastate the funding of local Chinese governments. Squaring this circle is a technocratic problem that needs to be solved by the Chinese government, and yet has not been.

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Theses on the Economic & Political Problems of America:

1. Most of America’s problems would melt away if only we could be confident that America would never again elect a president like Donald Trump.

2. Most of America’s problems would melt away if the Republican Party could reform itself so that it would refuse to endorse Donald Trump, or other candidates of his ilk.

3. Trump’s presidency has reminded us of the initial concerns at America’s founding surrounding mass democracy—the fears that democratic governance and decision-making was an inescapable road to disorder, chaos, and misgovernment.

4. Founding fathers James Madison and Alexander Hamilton argued that advances in the science of government allowed post-Mediæval democratic governance to escape the traps into which democracies had fallen in the past. Trump’s election makes one wonder. Citizens of the United States should be genuinely concerned and motivated to contemplate reforms for its political system

5. It is sane to wonder whether bureaucratic succession should play a larger role in selecting leaders than it does in America—that we should have more rule by technocrats chosen by the most knowledgeable technocrats of the previous generation.

6. Consider: Had Donald Trump wished to win a trade war against China, he would have ratified the TPP and then negotiated with China from a position of strength with the other TPP members behind him, and thus with considerable leverage. Instead, he blew up the TPP and then attempted to launch a trade war with China with no supporting points of leverage at all. And his enablers—USTR Robert Lighthizer comes to mind—were all too cowardly and cynical to point out that his policy was incoherent and destructive. And so Trump lost his trade war.

7. The election of leaders ill-prepared, undisciplined, and simply not competent to make sound decisions is not limited to the U.S. with Donald Trump. We also saw it in Britain with Boris Johnson.

8. Historically, the driving forces behind the United States’s economic growth have been fourfold: natural resources, scientific and technological creativity, labor immigration, and the immigration of ideas with entrepreneurs. Up until 1950 the U.S. had a unique combination of all four of these as a powerful wind at its back. Since 1945 the resources of the U.S. have no longer been anything special, but the others have been a powerful wind at its back.

9. With the election of Donald Trump and the transformation of the Republican Party that fears the what the future, and especially immigration, will bring, America may well cease to be in any way exceptional. If Republicans make America hostile to immigrant labor, immigrant entrepreneurs, and foreign-developed ideas, the only thing that will make the United States exceptional will be its technological-scientific establishment—and that will not long survive as anything special.

10. Thus whether America will remain in any sense an exceptional nation depends on whether the Republican Party either retransforms itself into something new or is rendered irrelevant as a faction affecting economic policy.

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Theses on Global Supply Chains:

1. There is consensus in the wake of the recent COVID plague that our supply chains need to be made more robust.

2. We now recognize that the just-in-time global economy premised on maximum efficiency is too vulnerable to destructive shocks.

3. Rather than believing our highly efficient manufacturing and transportation technologies would allow us to always and everywhere locate production at the most efficient point, we now recognize that we need to buy “insurance” against complexity and risks—that we need more robust supply chains

4. We must distribute our productive operations globally to make us less susceptible to political, climate, military, supply, and plague shocks.

5. Plus there are the national security concerns of “weaponized interdepence” to consider. No country wants to be so reliant on another as an essential supplier or customer as to be unable to adequately pursue its own security interests.

6. On the other hand, unweaponized interdependence can essentially render war impossible. And that is a very good thing. Consider that no part of earth was more subject to the destructive scourge of war than the Rhine River Valley between –113 and 1945. Yet with the coming of the European Union there has been—exceptionally—no army crossing the Rhine for 78 years.

7. Yesterday was my wife’s birthday, and so we bought her an iPhone 14 Plus, a truly remarkable device that could not be produced in a decoupled economy. Its design, production, and use requires the resources and energy of hardware chip designers and software engineers in Cupertino, the worldwide ecologic applications developers, the impressive productivity of the Shenzhen Pearl River Delta industrial complex, the excellent chip manufacturers of the Taiwan Semiconductor Manufacturing Corporation, and the semiconductor production machine designers and producers of ASML in the Netherlands and Applied Materials in San Jose. To decouple would sabotage the capability to manufacture such an extraordinary device at such a ridiculously low price given its capabilities.

8. Describing the adjustment of global supply chains as they involve China and America as not “decoupling” but “derisking” is much more than a rhetorical shift. Remember Master Kung’s advice with respect to the rectification of names—calling things what they are, rather than what they are not. “Decoupling” the U.S. and Chinese economies would be an immensely immiserizing mistake. “Derisking” is simply common sense. Both need to pursue the second. Neither should pursue the first.

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Theses on Manufacturing & Communities of Engineering Practice:

1. Once upon a time, a robust manufacturing sector brought two significant benefits to an economy: good jobs for blue-collar workers, and communities of engineers to push technology forward.

2. Good jobs for blue-collar workers. Manufacturing used to provide an immense source of high productivity employment for individuals without extensive formal education who could use the standard human capacity for manipulating objects and understanding contexts—our brains, eyes, and hands—that make people without unusual talents or arduous education highly productive. Manufacturing thus used to propel us toward greater income, a higher degree of prosperity, plus an egalitarian distribution of wealth.

3. Communities of engineering practice. A strong manufacturing sector fostered and fosters a vibrant community of engineers needed to maintain, adjust, and innovate the machinery. Such an engineering community turns out to be crucial for propelling technological advancement. Consider the case of Shenzhen. At the end of the 1970s 1970s, Xi Jinping’s father was tasked with curbing mass migration to Hong Kong from the Pearl River Delta. He created Shenzhen, inviting in the entrepreneurial classes of Hong Kong and Taiwan Island. They started manufacturing in the Special Economic Zone using the readily available productive labor force. And look at it now. In the first generation, mere assembly work by unskilled workers. Now, a powerful engineering powerhouse—the world’s prime location for creating and improving small, low-power micro-electronic devices. This development cycle showcases how a strong manufacturing sector can spawn a community of engineering practice, subsequently leading to technological progress.

4. he United States made major policy errors from the 1980s onwards, failing to give sufficient attention to cultivating these engineering communities.

5. Recent economic data on manufacturing construction, however, suggests a very positive new trend from the CHIPS and IRA Acts.

6. Will the U.S. succeed in rebuilding manufacturing and associated engineering communities? Morris Chang, former chairman of Taiwan Semiconductor Manufacturing Corporation, who had a long career at Texas Instruments before relocating to the island of Taiwan, expresses skepticism. He believes that TSMC’s investments in the United States, while aimed at de-risking and global knowledge diffusion, will not be fully successful. He blames “culture”. I disagree. I tend to believe that people are people, everywhere in the world. I believe that it is the incentives to value education and skills presented by their economic system that guide actions. And so I think the U.S. can rebuild.

7. However, with respect to good jobs for blue-collar workers, the future will not be like the past. Our manufacturing assembly robots have become too efficient. While a strong manufacturing sector still serves as the soil for cultivating engineering communities, it no longer provides as many high productivity jobs for people with limited skills or education.

8. Manufacturing will play a less significant role in the future, it remains essential.