Speaker 1: Pushkin from Pushkin Industries. This is Deep Background, the show
Speaker 1: where we explored the stories behind the stories in the news.
Speaker 1: I'm Noah Feldman. Welcome to this week's show, where we're
Speaker 1: going to take on the looming question of our time,
Speaker 1: trade wars. Almost no topic has been more prevalent in
Speaker 1: our public discourse since Donald Trump was elected in twenty sixteen.
Speaker 1: We've seen trade wars threatened, We've seen us pull back
Speaker 1: from trade wars, and now we seem to be back
Speaker 1: in the game again. To discuss this crucial and all
Speaker 1: important topic, I decided to turn to the person whom
Speaker 1: I learned everything that I know about trade from my
Speaker 1: trade guru, as it were, and that's my colleague at
Speaker 1: Harvard Law School, Mark wu. Mark had an important job
Speaker 1: in the Office of the United States Trade Representative. Then
Speaker 1: he decided that wasn't enough. He went to law school,
Speaker 1: He became a law professor, he got tenure at Harvard
Speaker 1: Law School, and all along the drumbeat of Mark's path
Speaker 1: breaking scholarship has been the growing challenges in the US
Speaker 1: China trade relationship and the way that those challenges would
Speaker 1: ultimately transform the nature of the international trade regime of
Speaker 1: all of the scholars that I know, I can't think
Speaker 1: of anyone else who started by saying something that left
Speaker 1: him way out on the dissenting cold side of the field,
Speaker 1: kept on saying it, kept on saying it, and then
Speaker 1: turned out to be painfully accurately and sadly right. Mark,
Speaker 1: Thank you for being here, Thanks for having me. No,
Speaker 1: I wish it were under a happier circumstances than the
Speaker 1: fact they were actually in a trade war. Now, so
Speaker 1: let's start with the question of how much of where
Speaker 1: we are is Donald Trump. All those years when you
Speaker 1: were talking about rising trade tensions between in the United States,
Speaker 1: you were not predicting there would be someone named Donald
Speaker 1: Trump who would become president, but you were predicting structural
Speaker 1: differences that you always said would lead to greater and
Speaker 1: greater conflict. Would all this have happened eventually in one
Speaker 1: way or another even if Donald Trump had not been
Speaker 1: elected president. There is an underlying structural tension in the
Speaker 1: US China relationship. So to that extent, would the economic
Speaker 1: relationship have deteriorated? I think the answer certainly yes. Would
Speaker 1: it have deteriorated in this particular way with this type
Speaker 1: of confrontation. I think that part is very much specifically
Speaker 1: Donald Trump. I don't think we'd be seeing policy conducted
Speaker 1: via tweets and sort of this whiplash left, whiplash right
Speaker 1: type of approach. That's very much a Trumpian style of
Speaker 1: approach towards taking on China, and it's something I think
Speaker 1: has really thrown the Chinese for a loop as well.
Speaker 1: We'll talk about that. How do people sitting in Beijing, sophisticated,
Speaker 1: educated people with years of experience in watching the United
Speaker 1: States and understanding international trade and a long term strategy
Speaker 1: that they were pursuing quite successfully, how do they think
Speaker 1: about the wild card or the curveball that is Donald Trump?
Speaker 1: And you talk to all of these people on a
Speaker 1: regular basis or don't violate any confidences, but give us
Speaker 1: an overview picture. Well, I think over the last decade
Speaker 1: or so, the Chinese increasingly became more sophisticated in their
Speaker 1: what they call American studies. So they thought they had
Speaker 1: the US more or less figured out, and they had,
Speaker 1: to the extent that we're talking about conventional what goes
Speaker 1: on within the Beltway, right, they thought there are these
Speaker 1: structural issues, but they can be managed. Was an example
Speaker 1: of the structurature they thought they could. So, for example,
Speaker 1: they know that there are job losses happening in the US.
Speaker 1: They know that some of that is due to the
Speaker 1: fact that jobs are moving to China because of offshoring
Speaker 1: and so forth. They know that there's going to be
Speaker 1: a political backlash against that. But they thought they could
Speaker 1: control that because you can certainly align the US business
Speaker 1: community in a way that they have gains from the
Speaker 1: growing Chinese market. You have farm purchases from certain states
Speaker 1: they're politically important. You have ways of trying to win
Speaker 1: over our hearts and minds by making certain types of
Speaker 1: investments and states that are the industrializing. So they thought,
Speaker 1: you know, people can sense that there's a China threat,
Speaker 1: but that threat doesn't have to seem as ominous. And
Speaker 1: they were making friends and creating a certain type of alliances.
Speaker 1: But they hadn't anticipated, much like most Americans hadn't anticipated
Speaker 1: the scale of the populist backlash and that it would
Speaker 1: take the form of Donald Trump. So I think it's
Speaker 1: really thrown them for a loop. Is that because they
Speaker 1: overplayed their hand. I mean, as you said, they had
Speaker 1: a strategy and during the Clinton Bush and Obama administrations.
Speaker 1: It worked pretty well. There were people who were mad
Speaker 1: at China, but they were peripheral. China wasn't identified publicly
Speaker 1: as the great threat to the United States, and then,
Speaker 1: as you say, we got Donald Trump. I mean, there
Speaker 1: was one sort of cosmic way of looking at it.
Speaker 1: It says they couldn't have gotten away without forever, and
Speaker 1: they didn't. I think it'll be interesting to see how
Speaker 1: history judges this. You could look to say that that's
Speaker 1: the case, and maybe they tried to push too far,
Speaker 1: too fast. But I think this is a bit like
Speaker 1: asking the questions the Democratic Party not do enough after
Speaker 1: the two thousand and eight financial crisis. It's hard to
Speaker 1: say with hindsight. Right, on the one hand, the economy
Speaker 1: got better, I mean, one hand, the economy got better.
Speaker 1: On one hand, right, China created a lot of win
Speaker 1: win situations, especially for US business. It helped keep the
Speaker 1: global economy afloat after the financial crisis. It became the
Speaker 1: largest market for many goods. Lots of people did well,
Speaker 1: either directly through their businesses in China or more indirectly
Speaker 1: through through their pension funds investing in certain firms that
Speaker 1: made quite a bit in China, and there are displaced
Speaker 1: pockets of people who suffered tremendously as or resolved this.
Speaker 1: But they thought they had that under control. Right. So
Speaker 1: now you're sitting there in Chinese government circles, You've got
Speaker 1: this Trump phenomenon to deal with. We're struggling here to
Speaker 1: make sense of it. How do they make sense of it?
Speaker 1: Do they think of it as on the whole, as
Speaker 1: a temporary phenomenon of temporary deviation, or do they think, no,
Speaker 1: this is the way of the future, at least with
Speaker 1: respect to US China relations. So, on the one hand,
Speaker 1: I think they're struggling to figure out the same question
Speaker 1: that we're struggling figure out here in the United States.
Speaker 1: They're trying to figure out is this just another couple
Speaker 1: of more months until sanity returns or are we going
Speaker 1: to have another four years of Donald Trump? And so
Speaker 1: that's the same question that we're sitting here in United
Speaker 1: States trying to figure out. So you don't think they
Speaker 1: have a better or a clearer or more thoughtful of
Speaker 1: you than we do. No, But I think what the
Speaker 1: recent trade war has made much clearer to them is
Speaker 1: that this is surfaced earlier than they thought it would
Speaker 1: but sooner in that's what has surfaced earlier, the fact
Speaker 1: that the US would see arising China as a threat.
Speaker 1: I see. I think many of them thought, evankfully, sooner
Speaker 1: or later the Americans war going to come to some sense.
Speaker 1: They would feel uncomfortable with the fact that the US
Speaker 1: is being pushed out of parts of the Western Pacific
Speaker 1: or being displaced as the most important. But they thought
Speaker 1: they had five or ten more years before before it happened.
Speaker 1: So let's talk about the content of the trade war now.
Speaker 1: And I want to start by asking you a question
Speaker 1: that troubles me very much. So if you move in
Speaker 1: mainstream democratic circles, then for many years, the background assumption,
Speaker 1: certainly through let's say the Bill Clinton years and into
Speaker 1: the Obama years too, the background assumption of thoughtful making
Speaker 1: liberal democrats was international trade is good. They basically thought
Speaker 1: that on the whole, more open trade rules served the
Speaker 1: United States made our economy more competitive, that the rising
Speaker 1: tide lifted all boats. If you ask them about countries
Speaker 1: that were raising people out of poverty by virtue of trade,
Speaker 1: like China, they would say, well, that's great. It's nice
Speaker 1: that people are being brought out of poverty. Now, in
Speaker 1: the last cycle of election, certainly going back to twenty sixteen,
Speaker 1: Democrats and especially the more left wing of the Democratic
Speaker 1: Party started rethinking that question quite seriously. They began to
Speaker 1: question NAFTA in various ways. They began to question the
Speaker 1: expansion of US liberal trade treaties with Asia. And that
Speaker 1: didn't bring in the Hillary Clinton wing of the party initially,
Speaker 1: but it did bring in the Bernie Sanders bring of
Speaker 1: the party. Donald Trump got elected, and now the Democratic
Speaker 1: Party is moving even more in the direction of greater protectionism.
Speaker 1: So the question that troubles me is is Trump a
Speaker 1: little bit right? Is there something to be said despite
Speaker 1: all of our I think justifiable horror at Trump on
Speaker 1: moral grounds, did Trump get something right? Or is he
Speaker 1: getting something right something which is overlapping with some parts
Speaker 1: of the Democratic Party with respect to the significant downsides
Speaker 1: of the US China trade relationship as it is currently configured.
Speaker 1: I think the answer to that is yes, I think
Speaker 1: there is something to be said about the diagnosis of
Speaker 1: structural tensions in this relationship is accurate. The question is
Speaker 1: whether or not the prescription that the doctor is offering
Speaker 1: is the right prescription. Well, let's start with the sickness,
Speaker 1: before we get before we get to the cure, let's
Speaker 1: dive into the sickness. I mean, it's it can't just
Speaker 1: be Donald Trump's formulation, which is, oh my goodness, there's
Speaker 1: a trade deficit. I'm not even totally clear that Trump
Speaker 1: gets what a trade deficit actually is. So what is
Speaker 1: the thing that's the problem for you? So I think
Speaker 1: we should be clear about this, right. I think most
Speaker 1: people think the deficit is not the right barometer. So
Speaker 1: to the extent the Trump white House is talking about that,
Speaker 1: I think that's not correct, right. I think also to
Speaker 1: the extent that what Trump is just to be clear
Speaker 1: for listeners, that the Trump white House is basically saying
Speaker 1: we buy more Chinese stuff than China buys our stuff.
Speaker 1: And that's, after all, what a trade deficit amounts to.
Speaker 1: And most mainstream observers of trade, economists, scholars and others
Speaker 1: think that who buys more stuff is not the only
Speaker 1: or the most relevant measure, right, And that's because supply
Speaker 1: chains are complicated, the accounting isn't quite correct. All this
Speaker 1: stuff we can nerd out about, but more importantly, this
Speaker 1: is deepackground you're allowed to hern out for a bit,
Speaker 1: but more importantly, right, the deficits and reflections of different
Speaker 1: types of saving traits. And so the fact that you know,
Speaker 1: we are the reserve currency and the fact that we
Speaker 1: have instance savings rates means that inevitably, right, this is
Speaker 1: going to show up in this type of account. So
Speaker 1: we save less money on the average than many Asian
Speaker 1: Increasian countries save. And yet many people all over the
Speaker 1: world put their earnings into dollars because dollars a reserve currency,
Speaker 1: and so that's always going to turn up looking like
Speaker 1: a trade deficit. Yeah, and just a question of whether
Speaker 1: that deficit is with which country, and it could be
Speaker 1: artificially larger with one country than another, because say, for example,
Speaker 1: with an iPod, right with the last place it gets
Speaker 1: assembled is in China and it gets shipped over the US.
Speaker 1: Think they made the iPod anymore? Mark? Sorry, iPhone, let's
Speaker 1: retape that part. I thought it was funny. Go ahead,
Speaker 1: So let's take the iPhone right, the last place that
Speaker 1: they assemble all that is in China. When it gets
Speaker 1: shipped over the US. All that is going to count
Speaker 1: against the trade deficit there, even though many of the
Speaker 1: component parts come from Korea. Taime one, Japan, parts of Europe,
Speaker 1: even parts of the United States, rights, and even though
Speaker 1: Apple is an American company exactly right, which is presumably
Speaker 1: gaining a huge percentage of the profits relative to anybody
Speaker 1: else in the supply chain. So I think the way
Speaker 1: the administration is talking about how to measure this trade
Speaker 1: wars are easy to win and all that, that's not
Speaker 1: quite right. But let's talk a little bit about some
Speaker 1: of the things they did. I think get right. Please.
Speaker 1: So I think there's two parts that we should disagreeate here.
Speaker 1: One is it's a widely recognized truism amongst economists right
Speaker 1: that free trade does expand the pie makes everybody better off.
Speaker 1: And the basic theory is, if we're trading, it's to
Speaker 1: make us each better off. Otherwise, if I didn't think
Speaker 1: it would make me better off, I wouldn't trade with you.
Speaker 1: If you didn't think it was making you better off,
Speaker 1: you wouldn't trade with me. And presumably you do some
Speaker 1: things better than I do. I do certain things that
Speaker 1: better than you do. So we each take advantage of
Speaker 1: our comparative advantages and then we trade this with each other.
Speaker 1: So thank you, Adam Smith. That widely recognizes as truism.
Speaker 1: Then there's a question of amongst that pie that's grown,
Speaker 1: are we sharing this fairly with our fellow countrymen. So
Speaker 1: I think this is a part that both Donald Trump,
Speaker 1: as well as the progressive wing of the Democratic Party
Speaker 1: and increasingly much of the Democrat Party is now saying no,
Speaker 1: or it's certain greedy bastards took too big a slice
Speaker 1: of that that they may and they aren't distributing it.
Speaker 1: But the solutions that Donald Trump has for how to
Speaker 1: deal with this, right, we need to have more tax
Speaker 1: cuts to stimulate growth to sort of filter all this down,
Speaker 1: compared to the solutions that Bernie Sanders has and all
Speaker 1: that are very very different. But so I think there's
Speaker 1: but I mean, just to be clear, Mark, are you
Speaker 1: saying that the income inequality piece is one of the
Speaker 1: things that Trump is getting right? I mean, I don't
Speaker 1: dispute that income in equality is a hugely important issue,
Speaker 1: but I also don't really hear that from Trump. No.
Speaker 1: I think the part that I'm talking about is I
Speaker 1: think both the left and the right are saying the
Speaker 1: free trade right expanded the overall national GDP, but it
Speaker 1: made only some richer than other, A small fraction of
Speaker 1: Americans much wealthier than others, and it made a very
Speaker 1: small portion much wealthier, right, And did it make some
Speaker 1: people much worse off as well? It made it certainly
Speaker 1: made some people worse off. Some people it's just marginal, right,
Speaker 1: because it made you a little bit worse off in
Speaker 1: terms of putting downward wage. Pretty sure. By the other hand,
Speaker 1: you got cheaper consumer goods so that you could buy,
Speaker 1: So it's a bit of a wash. But for some people,
Speaker 1: they lost their jobs, and they were in communities that
Speaker 1: lost a large portion of their jobs, and then that
Speaker 1: then turned into different types of spillover effects onto the
Speaker 1: service economy that then had certain effects into an OPII crisis.
Speaker 1: And so far then these are quite concentrated communities and
Speaker 1: made those communities much worse off. So then one point
Speaker 1: on which you're giving Trump credit is identifying the idea
Speaker 1: that there are some parts of the United States, you know,
Speaker 1: we can imagine them as being in the rust belt
Speaker 1: or other de industrialized places where the spiral of destruction
Speaker 1: really was generated by relatively free trade between the US
Speaker 1: and China. Yes, but I think we should be clear
Speaker 1: to say the effect of technology on that is actually
Speaker 1: as large if not much larger than trade, right, But
Speaker 1: there is this phenomenon that's happening, and it's this double
Speaker 1: whammy of technological change as well as globalization that's expanding
Speaker 1: the pie for everyone. Just like technology right increases all
Speaker 1: of our productivity, but it's having a concentrated cost. And
Speaker 1: so I think that part is correct, and we haven't
Speaker 1: quite figured out how we're going to deal with those
Speaker 1: types of concentrated costs, as well as the fact that
Speaker 1: for some people it's really been just a wash or
Speaker 1: a slight negative cost. And so I think that's one
Speaker 1: part that's great. There's another part, which is to say,
Speaker 1: even though we're trading with one another and it's expanding
Speaker 1: both of our pie, are we each getting our own
Speaker 1: fair share? And I think here's another part where both
Speaker 1: the Trump folks in the White House today as well
Speaker 1: as many mainstream Democrats or Republicans would also agree to
Speaker 1: say that even though it's lifted both sides, overall, the
Speaker 1: Chinese are getting unjust desserts. So this is the China
Speaker 1: is not playing fair version of the story. I'm fascinated
Speaker 1: by this and I want to go deeply into it. So,
Speaker 1: first of all, you're saying you think you do buy that.
Speaker 1: In part, I think there is definitely a mere cantilist,
Speaker 1: beggar thy neighbor type of policy. Those are fancy words.
Speaker 1: Part of it goes a little bit like this. Right,
Speaker 1: So there's too much steel all around the world in
Speaker 1: the free market system, some of those would go bankrupt.
Speaker 1: Some of the companies that make that steal would go
Speaker 1: bankrupt yep. Over the course of time, some of that
Speaker 1: production was shut down. People would lose your jobs overall this,
Speaker 1: but eventually you get to a stable level steel production yep.
Speaker 1: Basic theory of capitalists. So overproduce, lose your shirt. So
Speaker 1: this all works a certain way, but some and the
Speaker 1: thing this is what the Chinese government has done is
Speaker 1: to say, well, we want to manage the flow of unemployment.
Speaker 1: And part of this is for domestic stability purposes. Right
Speaker 1: If you have all of a sudden, a couple hundred
Speaker 1: thousand steelworkers of work right away, they're going to be disgruntled.
Speaker 1: This is going to be constrained certain parts of the country.
Speaker 1: So we want to manage this flow. So we can
Speaker 1: because we also control the banks, we can direct the
Speaker 1: banks to continue lending to some of these firms even
Speaker 1: though they aren't all that profitable and so forth, they
Speaker 1: don't have to fire their employers. They're engaging in certain
Speaker 1: types of subsidies. So if that's the case, well, eventually
Speaker 1: this is a hydro system. It has to equalize itself out.
Speaker 1: So these steel companies aren't going out of business, then
Speaker 1: more steel companies in the rest of the world are
Speaker 1: going out of business. And so this is where the market.
Speaker 1: If everyone behaved according to market principles, it would spread
Speaker 1: this pain equally. But if one party is not behaving
Speaker 1: in quarities market principles and other sides are absorbing much
Speaker 1: more of this. So we're seeing this type of effect, right,
Speaker 1: This is a begger than neighbor type of effect than
Speaker 1: the Chinese will say, well, it's begger than neighbor, just
Speaker 1: to be clear, because if there's too much steal, someone's
Speaker 1: got to lose jobs in a steel mill. The question
Speaker 1: is in which country will that happen? And if it
Speaker 1: doesn't happen in China, then you're they're beggaring their neighbors
Speaker 1: in other countries exactly. So let me let me push
Speaker 1: back a little bit here. Maybe push back is the
Speaker 1: wrong word, but just to ask Mark, isn't this what countries,
Speaker 1: including the United States, have often done in crises. I mean,
Speaker 1: if you think of the Great Depression, you know, the
Speaker 1: United States tried to engage in interventions to try to
Speaker 1: keep people in work because people were losing jobs at
Speaker 1: a rate that was devastating to the overall economy. Or
Speaker 1: even to think much more recently, think of the bailout
Speaker 1: of the big banks after the two thousand and eight
Speaker 1: financial crisis. I mean, isn't that really isn't bailing out
Speaker 1: a big bank the same thing as bailing out the
Speaker 1: steel mill. So knowing there, you're sounding exactly like what
Speaker 1: the Chinese response to this is, right, They're sort of saying, well,
Speaker 1: we did this, but if you thought this was a
Speaker 1: good policy, you could do it yourself too. And but
Speaker 1: if everyone I'm not just saying you could do yourself,
Speaker 1: I'm saying we have done it. I mean, why wasn't
Speaker 1: the bailout of the banks in this sense of those
Speaker 1: REUS based banks. The first the w Bush administration and
Speaker 1: then the Obama administration thought that if those banks went
Speaker 1: down there would be huge knock on effects for the economy.
Speaker 1: They were worried about the consequences of that, and so
Speaker 1: the government engaged in a bailout to prop up those
Speaker 1: those banks. I mean, from an economist perspective, is there
Speaker 1: a meaningful difference between that and the propping up of
Speaker 1: steel mills. So the difference is this, if you look
Speaker 1: at just amb right, they might look very similar, but
Speaker 1: the difference is they're at least amongst the Western liberal economies.
Speaker 1: There's a sense of we only do this in times
Speaker 1: of dire financial crises, and when we do, we only
Speaker 1: do it on a very small, temporary basis, and when
Speaker 1: we've consulted with everyone else around the world to sort
Speaker 1: of say we all need to engage in this type
Speaker 1: of thing to sort of keep the global economy afloat, right.
Speaker 1: I think we asked the Chinese. I don't think we
Speaker 1: asked the Chinese. Well, we certainly did have a G
Speaker 1: seven and G twenty coordination process financial crisis. We're trying
Speaker 1: we actually we're trying to So we were trying to
Speaker 1: sort of say, like, what the difference here is what,
Speaker 1: or at least what Americans and Europeans and Japanese would say,
Speaker 1: is we're not trying to do this on a day
Speaker 1: and day out basis in the interest of getting ahead
Speaker 1: faster and catching up with you and getting our share,
Speaker 1: getting more of our share, And there is no we
Speaker 1: only do it when we look like we're going to
Speaker 1: fall desperately. I mean, if I were the you know,
Speaker 1: the Chinese responding here, my reaction would be, that doesn't
Speaker 1: make it better, that makes it worse. You're saying, you
Speaker 1: guys only do it on a large scale, in a
Speaker 1: coword needed way when you really have to do it. Well,
Speaker 1: we're going to do it on a much softer, smaller
Speaker 1: scale and a consistent basis so that we don't have
Speaker 1: a crisis like you had. I mean, that sounds a
Speaker 1: lot more prudent, doesn't it. Well, they even say this, right,
Speaker 1: they'll say, well, look, we spend the same amount of money.
Speaker 1: It's just better we spend it keeping people going to
Speaker 1: work every day and they feel meaningfully productive. Right. You
Speaker 1: spend it on the back end, you lay them all off,
Speaker 1: and then you have to deal with it through higher
Speaker 1: healthcare costs when they're yeh. And we gave it to
Speaker 1: rich people because we gave it to on the whole,
Speaker 1: because we gave it to investors and large financials. So
Speaker 1: I think the Chinese feel as though, in some ways
Speaker 1: for the West is pointing its fingers and saying, right,
Speaker 1: will you have one model of dealing with it, we
Speaker 1: have a different model of dealing but they're both equally
Speaker 1: Just why are you pointing fingers at us? But I
Speaker 1: think there is a sense here in the US and
Speaker 1: elsewhere that what they're engaging in is a wholesale attempt
Speaker 1: to take more than they deserve based on the competition principles,
Speaker 1: and this ties in not just the subsidies, is one
Speaker 1: part of it, right, But there's another type of begger
Speaker 1: than neighbor, which is, just if we give you access
Speaker 1: to our markets, but you don't give us access to
Speaker 1: your markets that we can sell more in and you
Speaker 1: can't sell as much out, and you have as protected
Speaker 1: domestic market that you have outsize profits from and so forth.
Speaker 1: So that's a different right. So this argument seems more
Speaker 1: powerful to me. So say another word about this. I mean,
Speaker 1: in the context of the bailouts, you know, they bail
Speaker 1: out one way, we bail out one way. I guess
Speaker 1: we'd have to compare the total amounts of those bailouts
Speaker 1: to try to make a comparison. But I'm not super
Speaker 1: sympathetic to the argument that there's a big difference between
Speaker 1: our bailouts and theirs. On the other hand, access to
Speaker 1: this thing you're talking about now, access to markets, There
Speaker 1: should be symmetry, right, If we give access, we should
Speaker 1: get access that seems symmetrical and fair in some deep way.
Speaker 1: Is there in fact truly different ential access at this point?
Speaker 1: I mean, is it true, as one would think just
Speaker 1: from thinking about it casually, that there's plenty of access
Speaker 1: to our markets, but we really can't access a lot
Speaker 1: of Chinese markets. Absolutely, our average tariff rights are much
Speaker 1: lower than theirs, even before, even after the trade war started. Well,
Speaker 1: I think certainly before the trade war. Now it depends
Speaker 1: on whether we go up to twenty five percent tariffs
Speaker 1: and how large a vass were. That difference is quickly narrowing, right,
Speaker 1: And part of the Trump message has been look, it
Speaker 1: should be reciprocal. And if you're the same as your text,
Speaker 1: if you're not going to lower, then we're going to
Speaker 1: raise ours. Right, It's not just this, it's that's good
Speaker 1: in your opinion, that's not so unreasonable. Well, there's a
Speaker 1: different way of looking at it, which is the Chinese
Speaker 1: way of looking at it, which is to say, look,
Speaker 1: we all negotiated to a certain level, and you agreed
Speaker 1: to this level in exchange for letting us in sore.
Speaker 1: You negotiate it to this deal, and now you're reneging
Speaker 1: on it. So is that the way it is an
Speaker 1: Internet negotiations? I mean, nothing is forever, right, Well, you
Speaker 1: and I negotiate a contract and then the contract doesn't
Speaker 1: work for one of us, we renegotiate the contract. Yeah,
Speaker 1: but the Chinese view is right. The Chinese view here
Speaker 1: is there's a way to renegotiate that that doesn't involve
Speaker 1: once I sort of tearing it all up. But I
Speaker 1: think regardless of whether you agree with the Chinese view
Speaker 1: on this, which is to say you have legal obligations,
Speaker 1: we had legal obligations. You're negotiators, just didn't negotiate this
Speaker 1: right level. And the US view of is saying we expected,
Speaker 1: over the course of time, as you became more powerful
Speaker 1: that you would right unilaterally lower some of these as
Speaker 1: other countries have done, and you have it right. So
Speaker 1: there's differently different, two different points of view on this.
Speaker 1: But I do think here right there is an asymmetry
Speaker 1: in terms of the market access and then, particularly when
Speaker 1: you think about investment restrictions, there are many more industries
Speaker 1: that are open right to China in the US. In
Speaker 1: the US, China can come and buy a business or
Speaker 1: invest in a business, and we can't do the same
Speaker 1: in China. And I think when you come part with
Speaker 1: other countries Brazil, India and so forth, right, the Chinese
Speaker 1: market is much more close than even those countries. So
Speaker 1: it's not even one of those they desire to say
Speaker 1: it's one of the most closed markets in the world. Yes,
Speaker 1: I think certainly the OECD investment restrictions would suggest this is,
Speaker 1: but it's very asymmetrical. It's not to say all industries
Speaker 1: are closed, right, And this is one difference between China
Speaker 1: and Japan. You go to China, you see foreign brands
Speaker 1: all over the place. You see right people driving foreign cars,
Speaker 1: buying foreign luxury goods and so forth. But there is
Speaker 1: this difference when it comes to the strategic industry that
Speaker 1: they're interested in capturing. Right, there are formal and informal
Speaker 1: restrictions in place. And what are examples of that high
Speaker 1: tech so cloud computing for example, Right, this is an
Speaker 1: industry that Amazon is which is a dominant player in
Speaker 1: the US is not able to get in your or
Speaker 1: if you are able to getting you've got a partner
Speaker 1: with a joint venture with a Chinese company, right, And
Speaker 1: this is part of the concern on the technology front,
Speaker 1: is if you have to engage in the joint venture,
Speaker 1: then eventually some of that technology is going to leak
Speaker 1: over to your joint venture partner. Sometimes they're going to
Speaker 1: then eventually dissolve the joint venture they get what they want,
Speaker 1: and so on and so forth. So that leads me
Speaker 1: to the next the next big Trump point that it
Speaker 1: also sounds like you're the generally sympathetic too, or that
Speaker 1: we ought to be generally sympathetic too, which is the
Speaker 1: claim that when it comes to intellectual property the technological
Speaker 1: secrets that give you an advantage and get you ahead,
Speaker 1: that China is also not playing fair. Well. Again, here
Speaker 1: it depends on what your view affair is, right. But
Speaker 1: if your view is that, you know, if you've got
Speaker 1: big size and you can play one player off of
Speaker 1: another in order to get more of their technology and
Speaker 1: so forth, that's a view affair, right, then yeah, the rules.
Speaker 1: But let's take a more intuit let's take a more
Speaker 1: intuitive vie affair, I mean the more intuitive view affair. So, well, actually,
Speaker 1: what about theft properly? I mean, I assume that China
Speaker 1: doesn't say publicly we deny that there is such a
Speaker 1: thing as intellectual property rights. They don't say that they
Speaker 1: in principle acknowledge that there is such a thing as
Speaker 1: intellectual property rights. Of course, so if we take that
Speaker 1: as our starting place, I mean, you know, we could
Speaker 1: have all property as theft argument and say that there
Speaker 1: shouldn't be rights in intellectual property. But let's just assume
Speaker 1: that there are such rights. Since the United States says so,
Speaker 1: China says so, most countries say so. Is China systematically enabling,
Speaker 1: either to the government or through private actors, there the
Speaker 1: theft of intellectual property rights from foreign and especially American businesses.
Speaker 1: I think there is definitely theft occurring from China. The
Speaker 1: question is how much of that is simply the government
Speaker 1: actively encouraging this versus turning up line I when it
Speaker 1: knows that the phenomena exists versus this is what Chinese
Speaker 1: would skillfully do. Regardless that division, I think is more
Speaker 1: difficult to discern, but certainly there is or if you
Speaker 1: look at right, where are most of the counterfeit goods
Speaker 1: made in the world today. Where are many of the
Speaker 1: cyber intrusions happening that commercial firms and so forth that
Speaker 1: we know about, right, Where is their greater pressure made
Speaker 1: on foreign companies to actually transfer technology? Now you can
Speaker 1: argue whether that a business choice that certain companies are
Speaker 1: making or not, but certainly with regards to the first two, right,
Speaker 1: that is active theft, and that's a thing that is
Speaker 1: a phenomena that is happening. So let me ask you
Speaker 1: about that, because it's been a lot in the news
Speaker 1: because at the moment when it looked as though, at
Speaker 1: least to many outside observers, a deal to end the
Speaker 1: trade war was imminent, the Trump administration insisted on the
Speaker 1: Chinese government enacting into law stronger intellectual property protections than
Speaker 1: currently existed, and that appeared to be I mean, we're
Speaker 1: obviously only going from the outside, but that appeared to
Speaker 1: be the leading reason the Chinese government balked and said, no,
Speaker 1: we're not ready to sign a deal. So I guess
Speaker 1: I have several have a sequence of questions about that.
Speaker 1: The first is, do you buy I mean, I'm just
Speaker 1: giving you the standard New York Times version of what's
Speaker 1: supposed to have happened. First question is do you buy
Speaker 1: that story that that was actually the leading stumbling block.
Speaker 1: I do, But I think there's a solid nuance behind
Speaker 1: all of this. We're all about subtle Near is an issue,
Speaker 1: But the issue is less a matter of are they
Speaker 1: willing to make these changes in law or not? But
Speaker 1: more are we willing to accept to have a foreign power,
Speaker 1: especially given China's historical legacy? Are we willing to have
Speaker 1: a foreign power? Comment and tell us exactly what needs
Speaker 1: to get changed where in our own domestic laws. So
Speaker 1: there's a sovereignty question. So there's a sovereignty question. Don't
Speaker 1: tell us what laws to make. It's a question of pride,
Speaker 1: it's a question of national strengths, question of being a
Speaker 1: true sovereign We will. It's this question of saying, right,
Speaker 1: we will make these changes. Right, but we're not going
Speaker 1: to make it when you hold a gun to our
Speaker 1: head and tell us you need to change this and
Speaker 1: this and editing right. So it looks bad because it
Speaker 1: looks bad, and especially it looks bad in the history
Speaker 1: of having this century of shame and the message of
Speaker 1: Chiji Pin's era being right China's rejuvenation and rebirth and
Speaker 1: claiming it and the center. Shame refers to a long
Speaker 1: period of Western attempts to dominate through imperial power on
Speaker 1: all over the Chinese mainland, using navies, as the British did,
Speaker 1: often trying to force changes in domestic law, most famously
Speaker 1: trying to force China, which was banning opium because they
Speaker 1: had their own opioid crisis in the nineteenth century. And
Speaker 1: Britain's response to their attempt to ban opium was to say,
Speaker 1: you must accept our opium. And in fact, we're gonna
Speaker 1: invade you and force you to accept the opium, which
Speaker 1: is deepening your crisis because it makes money for us.
Speaker 1: So against the backdrop of that shame China saying no more. Okay,
Speaker 1: that's super helpful, Mark. But now here's my question that
Speaker 1: I've been dying to ask you. Imagine you're the Trump administration.
Speaker 1: You understand that in China the rule of law is
Speaker 1: a hit or miss game. Right. Sometimes when laws are
Speaker 1: passed there listened to, but sometimes they aren't. More or less,
Speaker 1: the Chinese Communist Party makes sure that when it comes
Speaker 1: to the fundamental policy decisions, they will come out in
Speaker 1: court magically the way the party would like them to
Speaker 1: come out. And in fact, this is even enshrined in
Speaker 1: the Chinese constitution, which puts the party above the law.
Speaker 1: They're not hiding this fact. Okay, So that's the way
Speaker 1: things work in China. Now you're the Trump administration and
Speaker 1: you say, China, what we need you to do is
Speaker 1: change your laws, and then the Chinese say, well, that
Speaker 1: goes against our sovereignty. Why on earth, this is my
Speaker 1: question to Mark, Why on earth would the Trump administration
Speaker 1: insist on the change in laws when a the Chinese
Speaker 1: don't want to do it, but be if they change
Speaker 1: their laws, there's no reason to think that would work.
Speaker 1: They could change their laws and just get around them.
Speaker 1: So is this keeps me up at night? So tell
Speaker 1: me to explain, explain what's happening. So this gets at
Speaker 1: the second bit of the nuance, and I think this
Speaker 1: is actually where the impast lies. And this is why
Speaker 1: I was hitting at the issue with changing the laws
Speaker 1: is not a matter of the Chinese saying we're not
Speaker 1: willing to have these laws on the books, right, It's
Speaker 1: a sovereignty issue. The issue for the American side is
Speaker 1: I think they're not thinking of this as a magic
Speaker 1: bullet that's going to solve the IP theft isssue, or
Speaker 1: the market access issue and so forth. What they want
Speaker 1: to do is to force this so that the Chinese
Speaker 1: are publicly acknowledging this, because some of these problems are
Speaker 1: not the central government right pushing this down. But it's
Speaker 1: a huge country and so it's local governments right saying, well,
Speaker 1: we're getting instructions that we need to develop a high
Speaker 1: tech industry here. How do we do this? Right? And
Speaker 1: so having this on the books is helpful for committing
Speaker 1: to the local government. No, look, the central government explicitly
Speaker 1: prohibits you from holding up a certain license in exchange
Speaker 1: for right certain technology being transferred. So I think that's
Speaker 1: where it's useful. But they're not thinking this is going
Speaker 1: to be a magic bullet. Well, they think is a
Speaker 1: magic bullet or the Democli sword hangover it is the
Speaker 1: fact that there are still tariffs in place, and so
Speaker 1: unless we see effects from this, the tariffs aren't coming off.
Speaker 1: And the Chinese are saying, well, for giving you all this,
Speaker 1: but you're not going to take off the tariffs until
Speaker 1: we give you even more and even more, aren't we
Speaker 1: just giving you something for nothing, and so the hang
Speaker 1: up in the negotiations, right, it's not just it's not just.
Speaker 1: It's about whether the signal will be sent and whether
Speaker 1: the deal would involve the Trump administration keeping the tariffs
Speaker 1: hanging over the heads of China until change camp. And
Speaker 1: I think the fact is the Americans will have to
Speaker 1: give something, so they'll take some portion of some tariffs off,
Speaker 1: but they want to keep a significant portion, and the
Speaker 1: Chinese want them all to come off, and then saying, well,
Speaker 1: if we violate determine, then you could put it on,
Speaker 1: but it needs to be a fair process that can
Speaker 1: go both ways. So you're killing me, Mark, because what
Speaker 1: you're leading me to is to wonder, you know, maybe
Speaker 1: the Trump administration's approach of playing super hardball then is
Speaker 1: not so unreasonable. You know. The Chinese government is saying
Speaker 1: that it's a sovereignty issue, but really they don't want
Speaker 1: to send a message to their provinces that they really
Speaker 1: want to put an end to holding up of deals
Speaker 1: or intellectual property theft or other problems. This is very
Speaker 1: important to the US economy. It's a question of fairness
Speaker 1: and without a hardball. Now, I'm going to sound as
Speaker 1: trumpy as I can sound without hardball. China is not
Speaker 1: going to blink. They play hardball, We play hardball. That's
Speaker 1: exactly where we're at. The question is right now, both
Speaker 1: sides are kind of saying like, well, who can be
Speaker 1: more patient? Who's got more to lose here? And I
Speaker 1: think the Trump administration is saying, well, you can play
Speaker 1: hardball with you for a while, China, because we all
Speaker 1: know that you're more dependent on us than we are
Speaker 1: on you, and the Chinese ors for us saying well,
Speaker 1: we know, you know, Americans, it just takes one dip
Speaker 1: in the stock market before right you're gonna sort of say, okay,
Speaker 1: we cry uncle now and we'll take off a greater
Speaker 1: portion of these tariffs. And so, you know, I think
Speaker 1: this is where we're at right now in terms of
Speaker 1: the negotiations. There's a famous article by a political scientist
Speaker 1: about why wars ever happened? And if I'm not mistakenly,
Speaker 1: it's by a guy called James Furon, and the article
Speaker 1: basically says this, why do we ever go to war?
Speaker 1: I mean, we look at each other. I've got my army,
Speaker 1: you've got your army. We should both know who's going
Speaker 1: to win, and the fighting is going to be super bloody.
Speaker 1: So once we figured out who's gonna win, why don't
Speaker 1: if you've got a better army, why don't I just
Speaker 1: give up? And if I've got a better army, why
Speaker 1: don't you just give up? And what he says is
Speaker 1: the reason people actually fight the wars is there's actually
Speaker 1: information asymmetry. I don't know exactly how strong you are.
Speaker 1: You don't know exactly how strong I am. And the
Speaker 1: only way here's the brutal part, the only way we
Speaker 1: can find it out is by actually fighting the war
Speaker 1: and seeing who wins. And that's why wars are fought
Speaker 1: according to this theory. I mean, it's a little simplified,
Speaker 1: but it's if it's true, it's deep and profound. Is
Speaker 1: that what's going on here? I mean, are we in
Speaker 1: a situation where each side credibly thinks the US and
Speaker 1: China each credibly think that they can win the trade war,
Speaker 1: And the only way we can know who's got a
Speaker 1: better negotiating position is by actually fighting the war and
Speaker 1: paying the huge price that each side might pay along
Speaker 1: the way. I think what's actually going on is both
Speaker 1: sides realize we're engaged in a if not decade long,
Speaker 1: then at least a generational strategic rivalry between the two sides.
Speaker 1: But both sides are not quite sure about the others
Speaker 1: ability to sort of persevere. Right, the Chinese look at
Speaker 1: the Americans to say, the Americans aren't making the necessary investments,
Speaker 1: they're overstretching their own resources. Clearly, re recognize their dominant
Speaker 1: military power. Clearly they're technologically advanced over us, right, but
Speaker 1: there we just have to be patient and over a
Speaker 1: course of time we will catch up to them. So
Speaker 1: they're looking at the we're the turtle or the tortoise,
Speaker 1: they're the hair, and trying to say we'll wait them out,
Speaker 1: and so histories on our side. So their goal here
Speaker 1: is not necessarily to win a trade war, right, It's
Speaker 1: to get back to a piece that will allow them
Speaker 1: to continue to wait out the Americans. I think on
Speaker 1: the American side, you're looking at the Chinese system, and
Speaker 1: for many years people just believe there's no way an
Speaker 1: authoritarian regime can have a growing middle class with greater
Speaker 1: access to technology and still continue to this type of
Speaker 1: system in place. Sooner or later, especially with the demographic
Speaker 1: challenges that China has especially with some of the resource challenges, right,
Speaker 1: not enough oil, not enough water, and so on, so
Speaker 1: worth right, sooner or later this thing is gonna go
Speaker 1: belly up, the same way we saw with Japan and
Speaker 1: others and so forth. So we just need to sort
Speaker 1: of constructively, impatiently engage and sooner or later China is
Speaker 1: going to change. So profit is not part of your
Speaker 1: job description, mark, but I'm going to ask you to
Speaker 1: profit sign anyway. Who's right? Who's going to win this one?
Speaker 1: So this is the this is the big question, and
Speaker 1: it's not clear right now because it depends upon choices
Speaker 1: that each side makes. Right. So if we can look
Speaker 1: at the Chinese diagnosis of America's weaknesses, and we can say,
Speaker 1: to some extent they're correct. Right, America isn't investing enough
Speaker 1: in itself, it's overstructing into resources, and it's engaged in
Speaker 1: all this domestic political turmoil between the two sides rather
Speaker 1: than actually fixing its own problems. So it's question of
Speaker 1: whether or not America can get back to work to
Speaker 1: tackle its own economic and social challenges. Right. And on
Speaker 1: the Chinese side, you know, you can look at the
Speaker 1: American diagnosis of what's happening in China and say, you know,
Speaker 1: these trends are all true, but can the party state
Speaker 1: dynamically evolve over the course of time to deal with
Speaker 1: these types of challenges. No one knows. So no one
Speaker 1: really knows. That's why I say it's not really about
Speaker 1: this immediate trade war. And once I trying to one
Speaker 1: up itself over the other, I think this immediate trade
Speaker 1: war is just a skirmish in a decade. And then
Speaker 1: what we're doing is setting the terms of this competition,
Speaker 1: because once I want to say, well, we should still
Speaker 1: continue to dance with each other, but see who makes
Speaker 1: the right calls in the long term investments, and other
Speaker 1: side saying well, if we're going to be rivals to
Speaker 1: begin with, maybe we shouldn't be as closely integrated. And
Speaker 1: that's a debate that's happening I think inside the US,
Speaker 1: not just within the Trump administration, but within the US
Speaker 1: palty overall, right, And on the Chinese side, they're looking
Speaker 1: at this and saying, well, if this is going to
Speaker 1: be a rival that's going to keep us down, why
Speaker 1: are we so closely locked in with them? Yeah, So,
Speaker 1: in that sense, this is a battle in what I
Speaker 1: called a few years ago in a book that I
Speaker 1: wrote on this very much with your guidance and help
Speaker 1: cool war, a long term struggle between the US and China,
Speaker 1: which is deeply about competing national interests, but at least
Speaker 1: so far has been done more or less without firing
Speaker 1: any shots, and which traditionally involved close cooperation on trade.
Speaker 1: What's going on now in this latest phase is that
Speaker 1: there's a lessening of that degree of cooperation and a
Speaker 1: use of trade as a more active tool of a
Speaker 1: more active tool of conflict between the countries. Let me
Speaker 1: ask a question in another hypothetical form. Imagine that the
Speaker 1: trade war continues to the rest of the Trump administration,
Speaker 1: and the US does raise tariffs very significantly on China,
Speaker 1: and we're up to a twenty five percent level, and
Speaker 1: that continues, let's say, up through the twenty twenty election. Now,
Speaker 1: imagine a Democrat is elected. Let's imagine that that Democrat
Speaker 1: takes office in January of twenty twenty one. Is there
Speaker 1: any way politically that a Democrat under those circumstances, who
Speaker 1: wanted to end the trade war by making some sort
Speaker 1: of concessions to China could do that even if she
Speaker 1: wanted to or even if he wanted to, would that
Speaker 1: even be an option? I mean, of course you might
Speaker 1: also elect someone who wants to stay the course. But
Speaker 1: you know, you run for office against Donald Trump, you
Speaker 1: want to say what he's doing wrong. One thing you
Speaker 1: might say by running is he's getting the trade war
Speaker 1: all wrong. Could a Democrat credibly do that? Or would
Speaker 1: that just look like, Okay, we're ending the war by losing.
Speaker 1: I can't see it happening unless the Chinese really developed
Speaker 1: such a deep grudge with Donald Trump that they say,
Speaker 1: we've got more cards, more games, we're willing to put
Speaker 1: on a table. We just don't want to give it
Speaker 1: to this guy because we don't like them, but we'll
Speaker 1: give it. They might want to give coverage to the
Speaker 1: next person. Yes, they might say a new person is elected,
Speaker 1: now we're going to be nicer to you, and then
Speaker 1: offered some but nowhere near all of what you know
Speaker 1: the U s should want. So we might see something
Speaker 1: like that. But then you've got to ask your question,
Speaker 1: if you're the new Democratic president, how big does that
Speaker 1: pot need to be in order for you to take
Speaker 1: the political risk to accept that. And so here's where
Speaker 1: I think the structural issues really do come into play.
Speaker 1: I just see that we are edited in past where
Speaker 1: a lot of what the Democrats would want would be
Speaker 1: the structural, transformational changes that I just can't see the
Speaker 1: Chinese anteing up. But what I do predict will be
Speaker 1: different in the Democratic administration is that Europe, Japan, others
Speaker 1: will be more willing to cooperate with the Democratic administration
Speaker 1: to greater extent than they have so far because those
Speaker 1: processes are happening today. What about before the election? Can
Speaker 1: Trump blink or can Trump not blink at all? He
Speaker 1: can certainly blink and say that you know what he's
Speaker 1: gotten more than anyone else ever gotten. It's incredible, It's
Speaker 1: better than what anyone else has ever gotten. I mean,
Speaker 1: I think it could be the case. Right he'll say,
Speaker 1: you know, look, the Chinese now gave back what they
Speaker 1: took away. We you and I don't know what he's
Speaker 1: purporting was taken away at the table. So you know
Speaker 1: that at some point he might just decide, oh yeah, now,
Speaker 1: I'm back to remember a couple months ago he was
Speaker 1: talking about this is the greatest deal ever. So I
Speaker 1: think it's definitely possible that we could see a deal
Speaker 1: going into the election. And then he'll say, look, my
Speaker 1: hardball tactics got me more than anyone was ever able
Speaker 1: to do with the Chinese, so I think it's possible
Speaker 1: as well. Mark, Thank you, you, as usual made me
Speaker 1: feel more scared about the potential for a longer range
Speaker 1: conflict than I otherwise would have. But you've at least
Speaker 1: given me the gift to the end of saying there's
Speaker 1: some prospect of the resolution of the conflict. And above all,
Speaker 1: thank you for educating me and for making me think.
Speaker 1: I really appreciate your being here. Thank you, Thank you, Noah,
Speaker 1: and the feeling is very much mutual. Deep Background is
Speaker 1: brought to you by Pushkin Industries. Our producer is Lydia Gencott,
Speaker 1: with engineering by Jason Gambrell and Jason Rostkowski. Our showrunner
Speaker 1: is Sophie mckibbon. Our theme music is composed by Luis
Speaker 1: GERA special thanks to the Pushkin Brass, Malcolm Gladwell, Jacob
Speaker 1: Weisberg and Mia Lobel. I'm Noah Feldman. You can follow
Speaker 1: me on Twitter at Noah R. Feldman. This is Deep
Speaker 1: Background