Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3: I'm Joe Wisenthal, and I'm Tracy Alloway.
Speaker 2: Tracy, you know, when it comes to US trade tensions
Speaker 2: with China, obviously there are a number of people they
Speaker 2: sort of reach back for the fear and the anxiety
Speaker 2: of trade with Japan in the eighties. But I have
Speaker 2: to say, like, I don't actually know much about that.
Speaker 2: I wasn't paying that much attention to trade policy when
Speaker 2: I was seven years old or nine years old and stuff.
Speaker 3: That's very disappointing, even though I'm aware.
Speaker 2: I know, even though I'm aware that that was a thing,
Speaker 2: and probably some of the concerns, particularly about automobiles specifically
Speaker 2: and the threat to Detroit and all that was popular
Speaker 2: the way it is popular now, Like, I actually know
Speaker 2: very little of it.
Speaker 3: Don't you watch movies from the nineteen eighties. There are
Speaker 3: quite a few villains from nineteen eighties cult classic movies
Speaker 3: that end up being Japanese businessmen. And I do remember
Speaker 3: some pop culture zeitgeiste moments from the Big Fear that
Speaker 3: Japan Inc. Was going to eat the US economy. For instance,
Speaker 3: there was that famous photo of I think it was
Speaker 3: a bunch of congressmen smashing like a radio or a
Speaker 3: TV or something in Washington in the late nineteen eighties.
Speaker 3: Do you remember seeing that, which you can imagine. So
Speaker 3: the idea was the US feels threatened by Japan's dominance
Speaker 3: in certain primarily consumer electronic goods back then, but also
Speaker 3: increasingly in computers, and so a bunch of politicians went
Speaker 3: out and started smashing those publicly to make a statement.
Speaker 3: That hasn't happened with China just yet, but you could
Speaker 3: imagine something like that being done today, but it would
Speaker 3: be with Chinese solar panels or something like that.
Speaker 2: Oh, I'm looking at the photo. They smashed a boombox
Speaker 2: right in front of the cavalon.
Speaker 3: You can't get much more in nineteen eighties than smashing
Speaker 3: a Japanese boombox.
Speaker 2: This photo goes, it goes hard. As the kids say,
Speaker 2: it's quite a photo. But you're right, And I do
Speaker 2: remember the pop culture elements, and you know, movies like
Speaker 2: Falling Down or the Villain in Back to the Future too.
Speaker 2: I think it was, or maybe whatever, So I remember,
Speaker 2: well what I certainly don't remember how it resolved or
Speaker 2: why it faded or why you know, I know a
Speaker 2: little bit, but not really like what the ultimate was there,
Speaker 2: how similar it actually was, because yeah, I sure that
Speaker 2: you know, it's one thing with boomboxes and cars, but
Speaker 2: obviously there seems to be, at least in US policy circles,
Speaker 2: this big national security element that dovetails with some of
Speaker 2: the concerns about cars and solar and stuff like that.
Speaker 2: And of course, when speaking of analogies, you know, we've
Speaker 2: also talked about the history with the real estate bubble
Speaker 2: and bust. We've talked with Richard kob about the similarities
Speaker 2: of the real estate boom that Japan had and the
Speaker 2: bust that subsequently followed, and there may be parallels there,
Speaker 2: but I definitely feel like I need to wrap my
Speaker 2: head around even further about how useful or not some
Speaker 2: of these historical patterns are.
Speaker 3: Absolutely. The other thing I would say is it is
Speaker 3: remarkable in some respect that the commonality between Biden and
Speaker 3: Trump is being tough on China trade. Right, That is
Speaker 3: a common thread, And so no matter what happens in November,
Speaker 3: it seems reasonable to expect that these trade tensions are
Speaker 3: going to continue in one way or another. So I
Speaker 3: definitely think it's worth talking about totally.
Speaker 2: This is really an important element, and I'm glad you
Speaker 2: brought it up, which is the complete Washington consensus. It
Speaker 2: would seem at this point where there doesn't seem to
Speaker 2: be any disagreement about the basic notion that we have
Speaker 2: to do something on trade, that we have to amp
Speaker 2: up the national security as whatever it is with respect
Speaker 2: to China has become completely conventional wisdom of both parties.
Speaker 2: And you know, when something is conventional wisdom like that,
Speaker 2: it's probably good to question some things.
Speaker 3: Absolutely, let's do it, all right.
Speaker 2: I'm excited. We really do have the perfect guest today,
Speaker 2: someone I don't believe we've ever had on the podcast before,
Speaker 2: but someone who's work and writing I've admired and read
Speaker 2: for a really long time. Really excited to be chatting
Speaker 2: with Stephen Roach. He's a senior fellow at Yale Law School,
Speaker 2: former chairman of Morgan Stanley Asia and has been talking
Speaker 2: a lot about this topic for years and years and
Speaker 2: has been warning about what he sees as the errors
Speaker 2: of our current approach to China. So, Stephen, thank you
Speaker 2: so much for coming on.
Speaker 4: Odd lots well, great to be with you, Joe and Tracy.
Speaker 4: I'm astonished at how young the two of you are.
Speaker 5: Thank you don't know, what's.
Speaker 4: Any firsthand knowledge of what it was like to live
Speaker 4: in an era where Japan was our main economic enemy.
Speaker 3: But well, I was out in the nineteen eighties, so
Speaker 3: maybe I missed out on it because I was on
Speaker 3: the other side. Japan in the nineteen eighties was great.
Speaker 3: I gotta say just this.
Speaker 4: One background note. I mean, I taught a seminar at
Speaker 4: Yale for twelve years called the Lessons of Japan, and
Speaker 4: in that seminar I went through in great detail what
Speaker 4: happened to what at the time was Asia's first major
Speaker 4: growth engine, the rise in the Fall, and how that
Speaker 4: came into the crosshairs of American economic and political policy.
Speaker 4: And that was just the first half of the course.
Speaker 4: The second half of the course was to look at
Speaker 4: those lessons to see how they applied to other economies
Speaker 4: around the world. And you know, in keeping with your
Speaker 4: pithy introduction, you know, the main candidate was China. So
Speaker 4: how much of the China story has an antecedent in
Speaker 4: our experience with is a very very important question. And
Speaker 4: I'm delighted to talk to.
Speaker 5: You about fantastic.
Speaker 2: You know, one thing I remember at the time, and
Speaker 2: I guess by this point I was eleven years old.
Speaker 2: I remember George H. W. Bush vomiting onto the lap
Speaker 2: of the former Prime minister while on some you know visit.
Speaker 2: Well what happened? I mean, the story is so big,
Speaker 2: As you mentioned, it was a whole lecture series that
Speaker 2: you did over years at Yale. But like, how did
Speaker 2: that end? Because I remember, like some of the anxiety
Speaker 2: about cars from when I was ten or nine or whatever,
Speaker 2: and they're eating or lunch and stuff like that. But
Speaker 2: and then you know, by the mid nineties it did
Speaker 2: not seem to be a thing that people were talking
Speaker 2: about as much. How did I guess, in the minds
Speaker 2: of the America or in the literal economics did that end?
Speaker 2: What happened? How did that fade?
Speaker 4: You alluded to the auto area that was a major
Speaker 4: issue of contention that we've negotiated some voluntary export restraints
Speaker 4: on Japan. And then Japan, who you know, we had
Speaker 4: a very close security relationship with which is of course
Speaker 4: very different than our current situation with China. Japan was
Speaker 4: eager to shift some of its domestic auto production into
Speaker 4: the United States through building and investing in American made facilities,
Speaker 4: using American workers, And so we all ended up buying
Speaker 4: Japanese cars, but you know, they were produced in the
Speaker 4: United States. But I think the endgame was quite tough
Speaker 4: for Japan. You know, Japan went from a growth miracle
Speaker 4: to a growth bust, went through arguably three lost decades
Speaker 4: of neo economic stagnation, a considerable amount of which was
Speaker 4: an outgrowth of the currency policy that we and other
Speaker 4: developed nations.
Speaker 5: On Japan.
Speaker 4: They voluntarily agreed to it, but that triggered a series
Speaker 4: of policy blunders that led to acid bubbles. And you said,
Speaker 4: you spoke with Richard Ko the balance sheet recession that
Speaker 4: he's written so eloquently about that really left Japan flat
Speaker 4: on its back for as I said, nearly three lost decades.
Speaker 4: So Japan did an end around in moving production to
Speaker 4: the US and then was effectively neutered as an economic
Speaker 4: power by these lost decades. And so it didn't end
Speaker 4: all that well for Japan.
Speaker 3: Maybe we could step back for a second, because the
Speaker 3: thing that I'm unclear on with the Japan US business
Speaker 3: rivalry of the nineteen eighties is and you touched on
Speaker 3: this Stephen already. But there was there is a security
Speaker 3: alliance in place between the US and Japan. I mean,
Speaker 3: the has lots of military bases in Japan. I grew
Speaker 3: up on one of those. So how was it that
Speaker 3: Japan's industry and technology was viewed as such an enormous
Speaker 3: threat for the US, even if they were military and
Speaker 3: strategic allies. That's the one thing I don't get.
Speaker 4: Well, that's a fair point. The main issue in the
Speaker 4: United States at that point was I think a total
Speaker 4: misunderstanding of international economics. We had a large trade deficit
Speaker 4: as a nation, and we came out of a horrible
Speaker 4: recession in the early eighties that continued even in the
Speaker 4: face of economic recovery, to leave our manufacturing sector under pressure.
Speaker 4: The manufacturing recession continued well into the mid nineteen eighties,
Speaker 4: even though the overall economic recovery was progressing nice. Our
Speaker 4: politicians figured out that the main culprit in the manufacturing
Speaker 4: recession was this thing that they didn't understand, but it
Speaker 4: was a trade deficit, and the biggest piece of the
Speaker 4: trade deficit was with Japan. They were highly critical of Japan.
Speaker 4: The politicians were for unfair trading practices, for running an
Speaker 4: undervalued currency, the yen in their case, and for basically
Speaker 4: eating our lunch in terms of putting pressure on our
Speaker 4: companies and our workers and our communities. You noted in
Speaker 4: your intro that you know, there was a boombox that
Speaker 4: was destroyed. There were a number of other highly public
Speaker 4: episodes of destroying Japanese cars. There was even an unfortunate instance,
Speaker 4: you know, in the late nineteen eighties where two displaced
Speaker 4: laid off auto workers assaulted and ultimately murdered a Chinese
Speaker 4: American in the late eighties, not being able to mistake
Speaker 4: the difference between the two nationalities. So it wasn't a
Speaker 4: particularly pretty period, but it unmasked a really critical misunderstanding
Speaker 4: of the role that trade plays in an economy that
Speaker 4: was evident in Japan, that is even more evident than
Speaker 4: today in China, and that is, the US has trade
Speaker 4: deficits with many countries, and it's wrong to single out
Speaker 4: one country in an effort to eliminate the trade deficit.
Speaker 4: You can't do it because our multilateral trade deficit, that
Speaker 4: a trade deficit with many countries is an outgrowth of
Speaker 4: our shortfall of domestic savings. When nations don't save and
Speaker 4: they want to grow, they import surplus savings from abroad,
Speaker 4: and they run what's called a balance of payments deficit
Speaker 4: that gives rise to a multilateral trade deficit with many
Speaker 4: many nations. So fast forward to today. In twenty twenty three,
Speaker 4: we ran trade deficits with one hundred and six countries.
Speaker 4: China was the largest, although it has come down. There's
Speaker 4: a share of our overall trade deficit because of the
Speaker 4: tariffs that were imposed and sustained from Trump to Biden.
Speaker 4: But if you take China out of the equation, it
Speaker 4: still leaves you with one hundred and five other countries
Speaker 4: that we ran deficits with last year. So we tried
Speaker 4: the japan recipe on China. We put huge tariffs on China.
Speaker 4: The Chinese piece of the overall merchandised trade deficit, which
Speaker 4: peaked out a little below fifty percent in twenty fifteen,
Speaker 4: has since come down to a little below thirty percent.
Speaker 4: So you say, wow, that's a great strategy, and Trump
Speaker 4: would say, see my policy work. But we didn't boost
Speaker 4: our domestic savings because we run these massive budget deficits.
Speaker 4: So all that happened was the Chinese piece went somewhere else,
Speaker 4: and that somewhere else were countries like Mexico, Vietnam, Canada, Korea, Taiwan, India, Ireland,
Speaker 4: and even Germany. In large part, these countries are higher
Speaker 4: cost producers, so the trade shifted from a low cost
Speaker 4: producer like China to higher cost producers, which ends up
Speaker 4: taxing American workers. So the policy reflects a total misunderstanding
Speaker 4: of the way that international economics works in the context
Speaker 4: of our saving short US economy.
Speaker 2: So I want to obviously get into more soon about
Speaker 2: the current conditions and the mistakes that you believe we're
Speaker 2: making with respect to China. But you know, going back
Speaker 2: to the parallels between China and Japan, and there's something
Speaker 2: we talked with Richard Coo about is like they had
Speaker 2: this real estate bubble and for Japan the aftermath is
Speaker 2: really bad, multiple lost decades. And you know, obviously there
Speaker 2: are a lot of academics and policy makers in China
Speaker 2: today looking at that experience and hoping to avoid similar
Speaker 2: loss decades after as they tried to control their own
Speaker 2: real estate bubble, which is something they've done. I mean,
Speaker 2: when you tell the story of what happened with US
Speaker 2: and Japan, I listened to that and say, actually, it
Speaker 2: seems like it turned out fairly well from the US perspective,
Speaker 2: but that it turned out very badly from the Japanese perspective.
Speaker 2: Had they not acquiesced in the same way to our
Speaker 2: desire for export restrictions or building some of their vehicles
Speaker 2: in the US, would that have allowed the country to
Speaker 2: move from manufacturing to a robust industrial power in a
Speaker 2: more stable manner that didn't result in so many lost years.
Speaker 5: It's a fair point.
Speaker 4: Japan had an economic model that it developed in the
Speaker 4: aftermath of the total destruction of its economy during World
Speaker 4: War Two that was very focused on boosting economic growth
Speaker 4: through arts largely supported by a cheap or undervalued currency.
Speaker 4: We called them on that. There was a currency agreement
Speaker 4: in the mid eighties and the so called Plaza Accord
Speaker 4: that forced the Japanese to revalue their currency. They panicked
Speaker 4: over this threat to their economic model, and the Ministry
Speaker 4: of Finance, which controlled the Central Bank as well as
Speaker 4: the foreign exchange policy, basically ordered the Bank of Japan
Speaker 4: to slash domestic interest rates. And that's what boosted asset
Speaker 4: bubbles in equities and property, and when they burst.
Speaker 5: Is all bubbles. Do you know?
Speaker 4: The rest is history, one lost decade followed by another.
Speaker 4: So this policy that was imposed from the outside on
Speaker 4: Japan was not without consequences for other policy choices they made.
Speaker 4: By no means was that the sole source of the
Speaker 4: lost decade, As I teach it in my seminar. There
Speaker 4: are many, many sources, but that was clearly an important
Speaker 4: part of their story.
Speaker 3: Talk to us about the Chinese economy now, and in particular,
Speaker 3: how you would characterize trade relations between the US and China.
Speaker 3: What are you seeing?
Speaker 4: Well, the Chinese economy is in difficult shape right now.
Speaker 4: It's facing a number of short term headwinds brought about
Speaker 4: by the property crisis, which is very Japanese like, and
Speaker 4: also financial problems amongst many of their local governments. And
Speaker 4: that a combination of issues that certainly led to a
Speaker 4: significant slowing of the Chinese economy relative to this historic
Speaker 4: thirty plus years of ten percent growth. And yet you
Speaker 4: know that is only part of the problem. China is
Speaker 4: afflicted by a number of structural problems, not the least
Speaker 4: of which is declining population, especially the working age piece
Speaker 4: of the population, and weak productivity. What we learned from
Speaker 4: Japan and this is very relevant for China, is when
Speaker 4: the demography works against you is it certainly did and
Speaker 4: continues to do so in Japan. You've got to have
Speaker 4: strong productivity to offset that. You've got to get more
Speaker 4: out of the surviving workforce, otherwise your growth will weaken,
Speaker 4: and it has done that in Japan now for three
Speaker 4: decades plus. China's got a similar problem. It's population is
Speaker 4: now declining. We knew this was coming because of their
Speaker 4: unsustainable one child family planning policy, but it's come sooner
Speaker 4: than we thought. And their productivity problems are actually worse
Speaker 4: right now than they were in the nineties in Japan.
Speaker 4: So you know, China's got some structural issues on top
Speaker 4: of the cyclical problems. US China trade relations your second question.
Speaker 4: You know, the relationship is in the worst shape it's
Speaker 4: been in since the US championed China's membership in joining
Speaker 4: the WTO in late two thousand and one. We've had
Speaker 4: tariffs initiated by Trump and sustained under Biden, who is
Speaker 4: tightened the news further through sanctions and through making every
Speaker 4: conceivable effort to contain Chinese technology under the guise of
Speaker 4: national security risks, which as you pointed out earlier, were
Speaker 4: not a serious consideration with Japan in the nineteen eighties.
Speaker 2: So that is obviously does seem like a pretty big difference.
Speaker 2: And when I think about the tensions between the US
Speaker 2: and China, there seems to be the national security concerns,
Speaker 2: the concerns that Chinese exporters are going to undermine American
Speaker 2: industrial powerhouses, whether we're talking chips, planes, cars, solar powers, whatever,
Speaker 2: and then the synthesis of the two, which is, well,
Speaker 2: if we continue to let our industrial companies weaken, then
Speaker 2: that also has security concerns directly due to our ability
Speaker 2: to manufacture things like weaponry or whatever else from a
Speaker 2: national security standpoint. So maybe the way i'd ask you
Speaker 2: is setting aside trade, do you consider the national security
Speaker 2: concerns real or is this something that has been more
Speaker 2: ginned up in the head of policymakers in DC. Should
Speaker 2: it inform how we trade with China.
Speaker 4: I think that there has been a lot of exaggeration
Speaker 4: of the so called security threat from China. Certainly, they
Speaker 4: are moving ahead aggressively in the area of technological change
Speaker 4: and innovation, and they're applying these breakthroughs to their military
Speaker 4: capabilities as you would expect any leading power to do.
Speaker 4: But I think personally, I've looked at a lot of
Speaker 4: this very carefully wrote about it in my last book
Speaker 4: called Accidental Conflict, or I lay out the thesis that
Speaker 4: a lot of the national security concerns that have been
Speaker 4: expressed by politicians and by executive branch officials, either in
Speaker 4: the Trump or the Biden administration, are false narratives based
Speaker 4: on the presumption of intent on the part of China.
Speaker 4: They cannot really be validated. I mean, just take electric vehicles.
Speaker 4: I mean, we had the spectacle of a Commerce Secretary
Speaker 4: Jeana Raimondo warning that if China was, for some motive
Speaker 4: that she was unable to articulate, felt like it, they
Speaker 4: could transform Chinese made evs, presuming that they were allowed
Speaker 4: to be sold in the US into vehicular weapons of
Speaker 4: mass destruction. And there's just absolutely no credible evidence of that.
Speaker 4: And you could argue the same thing with respect to
Speaker 4: and I have Huawei on five G telecommunications, even TikTok
Speaker 4: in terms of the allegations that TikTok as you know, corrupted,
Speaker 4: you know, the minds of innocent young teenagers. We've got
Speaker 4: concerns that have been raised over dock loading cranes that
Speaker 4: are made in China, that you know, with the flick
Speaker 4: of a switch, that the Chinese could disable all of
Speaker 4: our dock loading infrastructure. You have an FBI director of
Speaker 4: Christopher Ray, who's been negative on China as long as
Speaker 4: I can remember, who's absolutely convinced that in China has
Speaker 4: a stranglehold on America's utility infrastructure. And again, with just
Speaker 4: a flip of a switch from Beijing, our entire public
Speaker 4: utility system won't come to a halt. Our politicians are
Speaker 4: eager and aggressive to warn of consequences based on the
Speaker 4: presumption of intent that they have not been able and
Speaker 4: are unwilling to validate. And I know that's an unpopular
Speaker 4: view to hold in this bipartisan era of what I've
Speaker 4: called sinophobia. But I've never seen in my adult lifetime
Speaker 4: an adversary that's been so vilified as we are now
Speaker 4: vilifying the Chinese.
Speaker 5: So I find it very worrisome.
Speaker 3: My sense of some of the concerns is that they
Speaker 3: have more to do with the strategic importance of certain
Speaker 3: industries and the idea that well, if something were to
Speaker 3: happen with China, you know, for instance, if it were
Speaker 3: to invade Taiwan, the assumption would be that the US
Speaker 3: is cut off from Chinese exports, or at least they
Speaker 3: would be disrupted in some way, And so it might
Speaker 3: be desirable from the US's economic and national security perspective
Speaker 3: to build out your own strategically important industries, so things
Speaker 3: like batteries, semiconductors, maybe even solar panels. So I guess
Speaker 3: I always thought they were coming at it from more
Speaker 3: of an autarchy point of view rather than a vehicular
Speaker 3: weapons of mass destruction point of view.
Speaker 4: There's some of that tracy, I will every nation wants
Speaker 4: to be able to stand on its own and not
Speaker 4: be strategically reliant on others, especially on a nation who
Speaker 4: has a different ideology, who you feel has been engaging
Speaker 4: in activities, whether it's with respect to Taiwan, the South
Speaker 4: China Sea, the partnership with Russia, who have to be
Speaker 4: prosecuting a criminal war in Ukraine. So yeah, that's certainly
Speaker 4: a part of the political equation. And you know, the
Speaker 4: idea of being strategically reliant on production a whole is good.
Speaker 4: But this just gets back to my economic lesson that
Speaker 4: I tried to teach you guys.
Speaker 5: Earlier on.
Speaker 4: You know, if we want to be strategically reliance on
Speaker 4: our own production, then we have to be able to
Speaker 4: save more at home and reduce our tendency to run
Speaker 4: these trade deficits which create this linkage with overseas production.
Speaker 4: I gave you some of the numbers. I mean, you know,
Speaker 4: we've cut our trade deficit with China, so you can
Speaker 4: arguably say that, you know, we have made some progress
Speaker 4: and at least weaning ourselves from the Chinese, but you know,
Speaker 4: we've shifted our alliance to other countries. Our overall trade
Speaker 4: deficit is bigger today, a lot bigger today than it
Speaker 4: was when the Trump tariffs were imposed on China in
Speaker 4: twenty eighteen. So you know, you've got a good point,
Speaker 4: But it just the numbers just don't add up. And
Speaker 4: the point you're making on strategy and its role in
Speaker 4: shaping national defense, how do you stretch that to the
Speaker 4: outright ban of TikTok? I mean, I have a hard
Speaker 4: time with it.
Speaker 2: What happens if we go down this route, because like
Speaker 2: Tracy said, it's consensus. It's probably the case that if
Speaker 2: we get another Trump presidency, we will see policy titan
Speaker 2: or harden even further against China. What worries you about
Speaker 2: this trajectory? How does it go bad?
Speaker 4: Well, again, I'm not trying to sell my book because
Speaker 4: you know it's it's been out for a while. But
Speaker 4: I did write a book called Accidental Conflict, and.
Speaker 5: That doesn't good.
Speaker 4: Time to argue in the book, Joe is Look, both
Speaker 4: nations are prone to politically expedient false narrative. Is that
Speaker 4: they've framed about the other, and that has really poisoned
Speaker 4: their relationship. We don't trust the Chinese for a second,
Speaker 4: and they don't trust us either. They are convinced that
Speaker 4: we want to bring them down. There's certainly a lot
Speaker 4: of evidence that supports their view as well. And so
Speaker 4: when you have this relationship that's gone from initially back
Speaker 4: in the nineties and early two thousands, from a relationship
Speaker 4: built on mutual trust to now a relationship that's built
Speaker 4: on mutual distrust, it doesn't take much of a spark
Speaker 4: to trigger a very worrisome escalation that could lead to
Speaker 4: outright war. That's why I wrote this book, and I
Speaker 4: subscribe to the notion that was articulated by the late
Speaker 4: Henry Kissinger a number of years ago. Actually at a
Speaker 4: Bloomberg Conference where he said, I think it was back
Speaker 4: in twenty nineteen that the US and China were in
Speaker 4: the early stages of a new Cold war. He described
Speaker 4: them as being in the foothills of a new Cold war.
Speaker 4: And you know, before he died, he said, you know
Speaker 4: they're they're at a higher elevation now. It's a very
Speaker 4: worrisome development and cold wars. When you've got two nations
Speaker 4: acting in an adversarial position, both focused on national security
Speaker 4: and building up their defense capabilities, you know, you can
Speaker 4: come very close and possibly even get into the realm
Speaker 4: of a kinetic, outright war. We came certainly close with
Speaker 4: the Cuban missile crisis in nineteen sixty one. And you know,
Speaker 4: if there was an accident, you know, at an invasion
Speaker 4: of Taiwan or something in the South China Sea, there's
Speaker 4: no telling where that could go. So I think the
Speaker 4: time to take these concerns seriously is now, before.
Speaker 5: It is too late.
Speaker 4: We've got to come up with a better way, a
Speaker 4: new way to frame our relationship with China to avoid
Speaker 4: the specter of accidental conflict. And I write about that.
Speaker 4: I have my own approach that I articulate in the
Speaker 4: book that I'm again not trying to sell on this podcast,
Speaker 4: but read chapter fourteen and you'll all right see in
Speaker 4: all of its core detail.
Speaker 3: Stephen, you know you mentioned earlier structural imbalances or weaknesses
Speaker 3: in China's economy, and you've obviously been analyzing China's economy
Speaker 3: for a very long time at this point. One of
Speaker 3: the things that you hear sometimes is people talk about
Speaker 3: the need for China to boost domestic consumption, so, you know,
Speaker 3: rather than export all the goods that it makes to
Speaker 3: the US, maybe it could sell more of those into
Speaker 3: the country and that could aid with development and all
Speaker 3: of that. And then I have to say, we're recording
Speaker 3: this right before the Third Plenum, which I think is
Speaker 3: scheduled to take place from July fifteenth to eighteenth, and
Speaker 3: this is the big political event on the CCP calendar.
Speaker 3: It's held every five years, and one would expect to
Speaker 3: get a better sense of the economic direction that the
Speaker 3: party wants to take China from this event. And in
Speaker 3: the run up to the Planum, one thing we keep
Speaker 3: hearing is Chinese officials say over and over again that
Speaker 3: they're focused on export led growth and they want to
Speaker 3: boost manufacturing, and they're very committed to the export sector.
Speaker 3: And I guess my question is why, because it seems
Speaker 3: like there's maybe not a consensus, but there is strong
Speaker 3: feeling ex China that, you know, Chinese exports are problematic
Speaker 3: in various ways. There are European countries that are actively
Speaker 3: trying to get away from things like Chinese electric vehicles
Speaker 3: and stuff like that. Why does China remain committed to
Speaker 3: manufacturing as a source of growth.
Speaker 4: The short answer to your question is they're good at it.
Speaker 4: It's part of their central planning legacy to support strategically
Speaker 4: and with financial resources, manufacturing led growth on the supply
Speaker 4: side of their economy. They're bad at being able to
Speaker 4: stimulate internal private consumption. The only demand they're good at
Speaker 4: stimulating is, you know, the demand for new investment and
Speaker 4: infrastructure and the building the manufacturing capacity underpins their export machine.
Speaker 4: I have given I can't even count how many lectures
Speaker 4: I've given inside of China since the year in two
Speaker 4: thousand and seven on the imperatives of consumer led rebouncing.
Speaker 4: I've given lectures at universities, I've given lectures to the government,
Speaker 4: to senior leaders. I gave a series of them in
Speaker 4: a last month again, and you talk about the third Planum,
Speaker 4: which starts in a few days. You know, it is
Speaker 4: my favorite item on the agenda that I would hope
Speaker 4: they would embrace. But I'm convinced they're not going to
Speaker 4: do it because you know, these third plans, and I've
Speaker 4: studied them back to nineteen seventy eight, these third planems
Speaker 4: are more about ideology and governance than they are about
Speaker 4: really coming up with creative new policies to address thorny
Speaker 4: problems like consumption or you know, industrial policy or productivity
Speaker 4: or the like. So I understand the fact that everybody
Speaker 4: is waiting for, you know, a clear signal that China
Speaker 4: is going to move the needle on consumer demand. You know,
Speaker 4: you're talking to somebody who's been arguing that for a
Speaker 4: long long time.
Speaker 5: I just don't see.
Speaker 4: You're going to get it at this upcoming third pluint.
Speaker 2: I want to actually just go back to one thing
Speaker 2: you said earlier, which is that if we are serious
Speaker 2: as a country about building up more strategic capacity in
Speaker 2: various industries like cars or chips or whatever else, that
Speaker 2: ultimately tariffs are not really the way to do it.
Speaker 2: That we'd have to build up our domestic savings grow
Speaker 2: less or buy less from abroad, or have less demand
Speaker 2: for goods from abroad. We've done some things in the
Speaker 2: US to boost domestic capacity, the Chipsack Inflation Reduction Act.
Speaker 2: What actually moves the dial from a increasing domestic savings standpoint?
Speaker 2: What policy allows that to happen?
Speaker 4: No, the most important thing, Joe, is just to reduce
Speaker 4: our budget deficits. And of course we're going exactly the
Speaker 4: wrong way. Trump and Biden alike have done more damage
Speaker 4: to the long term budget deficit and federal debt trajectory
Speaker 4: than all of our previous presidents combined. But when you
Speaker 4: boost domestic savings by cutting your budget deficit, by definition,
Speaker 4: you are less reliant on surplus savings from abroad and
Speaker 4: on the trade deficits. You need to give you the
Speaker 4: capital that provides the access to that surplus savings from abroad.
Speaker 4: So number one thing to do is make a meaningful
Speaker 4: progress on the budget deficit, and do it sooner rather
Speaker 4: or later, and use the proceeds to invest at home
Speaker 4: in research and development and in building domestic infrastructure. We've got,
Speaker 4: you know, a bipartisan infrastructure bill that was enacted by
Speaker 4: the Biden administration that's taken a step in that direction,
Speaker 4: but we need a lot more in the way of
Speaker 4: modernized infrastructure than that bill is going to provide. And finally,
Speaker 4: you know, use the windfall of boosting domestic saving to
Speaker 4: invest in human capital, which we sorely need given the
Speaker 4: status of our secondary and in some cases educational system.
Speaker 4: So there's a lot that we can do, but politically
Speaker 4: it's not attractive and not palatable to a short term
Speaker 4: focused American politicians.
Speaker 3: Stephen, you wrote recently what we in the journalism business
Speaker 3: might call a punchy column in the Financial Time Times
Speaker 3: with the headline it pains me to say Hong Kong
Speaker 3: is over and this created quite a stir within Hong
Speaker 3: Kong and maybe even beyond. Can you talk to us
Speaker 3: a little bit about what your recent interactions with Chinese
Speaker 3: officials and at various events in China have actually been, like.
Speaker 5: Well, they've been different, Tracy.
Speaker 4: I mean, I'm historically known as a good guy in China,
Speaker 4: and you know, a member of the in crowd in
Speaker 4: Hong Kong. I lived in Hong Kong for a number
Speaker 4: of years when I was the chairman of Morgan Stanley Asia.
Speaker 5: I love the city.
Speaker 4: And you know right now, I'm I won't say I'm
Speaker 4: public enemy number one, but I'm on their you know,
Speaker 4: their top ten lists of sort of despicable commentators. What
Speaker 4: I wrote in the FT in February is that you know,
Speaker 4: the Hong Kong that we've known for a years, that
Speaker 4: and loved and admired, is no longer a sustainable way
Speaker 4: to view this city state going forward. And I cited
Speaker 4: three reasons for that. One, the Hong Kong economy is
Speaker 4: tied very tightly to the ups and downs of the
Speaker 4: Chinese economy. China's in a slowdown for reasons we've talked
Speaker 4: about earlier on this podcast, and so is Hong Kong.
Speaker 4: And the slowing in both economies over the past dozen
Speaker 4: years has been identical to the tenth of a percentage point.
Speaker 4: And so if you don't have a rebound in the
Speaker 4: Chinese economy, you're not going to get one in Hong Kong. Secondly,
Speaker 4: the US China conflict, Hong Kong is caught right in
Speaker 4: the crossfire. America is putting pressure on its trading partners
Speaker 4: to embrace the friends shoring, and that diverts trade away
Speaker 4: from China and Hong Kong and Hong Kong's a very
Speaker 4: trade dependent city state. And thirdly politics, I mean, you know,
Speaker 4: there are massive demonstrations in Hong Kong in late twenty nineteen.
Speaker 4: Beijing imposed the National Security Law on Hong Kong in
Speaker 4: early twenty twenty, and Hong Kong followed suit with its
Speaker 4: own National Security law a few months ago, in March
Speaker 4: of twenty twenty four, the so called Article twenty three.
Speaker 4: And so the political environment is really very chilling in
Speaker 4: Hong Kong right now, and the idea that this is
Speaker 4: an autonomous city state that has been so resilient in
Speaker 4: the past, I just don't think that's going to happen
Speaker 4: again this time. And I worry in particular about the
Speaker 4: economic linkages, but also the erosion of the rule of law. Recently,
Speaker 4: one of Hong Kong's senior justices from the UK the
Speaker 4: court system, the Final Appeals Court, which is the highest court,
Speaker 4: has a unique system of also having foreign and domestic judges.
Speaker 4: One of them resigned, a gentleman by the name of
Speaker 4: Jonathan Sumption, and he wrote an article on the ft
Speaker 4: in jerman talking about the brave dangers to the rule.
Speaker 5: Of law in Hong Kong.
Speaker 4: And was warning of a new strain of what he
Speaker 4: called judicial patriotism. That doesn't sound like to me a
Speaker 4: rule of law that is reflective of the autonomous values
Speaker 4: of Hong Kong. So look, I've talked about these things.
Speaker 4: They talked about them in China. They were so uncomfortable
Speaker 4: refused to let me speak at this year's China Development Forum.
Speaker 4: I gave an address on the same topic more recently
Speaker 4: to the Foreign Correspondence Club in Hong Kong, and they
Speaker 4: sort of chased me out of town. The politicians unleashed
Speaker 4: almost everything they can in terms of at hominem attacks
Speaker 4: on me. And you know, I'm looking forward to going back,
Speaker 4: provided I can get guarantees of safe travel in both
Speaker 4: directions on my next trip.
Speaker 3: Do you want to go back?
Speaker 5: Yeah?
Speaker 4: No. I love Hong Kong, and I relished the opportunity
Speaker 4: to engage in constructive criticism and free and open debate,
Speaker 4: and I was actually able to do that.
Speaker 5: A few weeks ago. I gave a.
Speaker 4: Talk at the Agency Society, had a number of private meetings,
Speaker 4: and then I had this very public speech at the
Speaker 4: Foreign Correspondence It caused a lot of controversy, and I'm
Speaker 4: sort of borrowing a page from the script of John
Speaker 4: Lewis trying to make some.
Speaker 2: Good trouble Stevid.
Speaker 3: If I could ask just one more question so you
Speaker 3: know again you are obviously an expert in the China economy.
Speaker 3: You've been studying it for a long time. I think
Speaker 3: you talked about studying the Planums since the nineteen seventies,
Speaker 3: which is an extraordinary breadth of career. Could you talk
Speaker 3: about what's been the most surprising to you over the
Speaker 3: years in terms of China's economic policy. Is there one
Speaker 3: thing that sticks out to you that has come as
Speaker 3: a shock?
Speaker 4: Yeah, I think fair question, Tracy. I mean I go
Speaker 4: back to the Third Planum of two thy thirteen. She
Speaker 4: and Payn had been in office for one year. Most
Speaker 4: of us, myself included, thought he was going to be
Speaker 4: cut out of the same cloth of his father, who
Speaker 4: was a leading reformer in the eighties and nineties in
Speaker 4: Goandong Province, and Sheijinping had the opportunity in the third
Speaker 4: Plenum of November of twenty thirteen to demonstrate his commitment
Speaker 4: to getting on with the reforms, reforms which it stalled
Speaker 4: out under his predecessor, Ahujin Tao. And you know China
Speaker 4: went into this three day meeting back in November of
Speaker 4: twenty thirteen. The meetings concluded with a quote decision document
Speaker 4: that listed over three hundred individual reforms, and we were
Speaker 4: convinced that China was on a spectacular path of renewed
Speaker 4: reform and opening up market based economic activity.
Speaker 5: And it never happened, and.
Speaker 4: The appointment of Ahijianping's third Plenteum of twenty thirteen.
Speaker 5: Probably you know, my greatest.
Speaker 4: Surprise and disconcerting development. The reforms that we were hoping
Speaker 4: to take China to the next place as a market
Speaker 4: based system that we in the West would be more
Speaker 4: comfortable with never materialized. The initially focused on an anti
Speaker 4: corruption campaign, which then took on a far greater focus
Speaker 4: on control and a shift to a more backward looking ideology,
Speaker 4: emphasizing sort of a leader centric model of a Chinese
Speaker 4: governance which has deep roots in the history of China.
Speaker 4: A couple of years later, we started hearing nothing but
Speaker 4: Hijin Ping fought as a general concept guiding this new
Speaker 4: ideology constant and continual continued reference. Ping is a core leader.
Speaker 4: The consensus leadership model, which had been carefully assembled by dungshaping,
Speaker 4: which had a regular plan of succession after two to
Speaker 4: five year leadership plans, was eliminated. Chi Jinping is now
Speaker 4: in his third five year leadership model. So the big
Speaker 4: surprise of the big shock is just the one to
Speaker 4: eighty that's happened for China under the fifth generation leader
Speaker 4: Shijin Ping.
Speaker 2: Stephen Roach, such a pleasure to finally chat with you
Speaker 2: and to hear your perspective. Thank you so much for
Speaker 2: coming on the podcast.
Speaker 4: That was fantastic, My pleasure, great to talk to you,
Speaker 4: and thank you for your great question.
Speaker 2: Tracy. I really enjoyed that conversation, and I guess there
Speaker 2: were big picture two things that sort of like struck me.
Speaker 2: Is like, a, you don't get to talk to a
Speaker 2: lot of people who have really studied China's economy.
Speaker 4: For a time.
Speaker 3: I know when Stephen was like, I've been studying plan
Speaker 3: him since what was it, nineteen seventy eight, seventy nine,
Speaker 3: that was, yeah, those are credentials totally.
Speaker 2: And then the other thing that you don't get very
Speaker 2: much is people who are critical of China in some ways,
Speaker 2: which Steven is and you particularly talked about it in
Speaker 2: the last answer with the turn, he identified under a
Speaker 2: shushin ping, but who also think it's a mistake for
Speaker 2: the US to raise tensions, right, because typically those two
Speaker 2: views frequently go hand in hand. You identify concerning aspects
Speaker 2: of the current leadership, and you say, therefore, the United
Speaker 2: States needs to ratchet up tensions or ratchet up trade
Speaker 2: restrictions or military restrictions, etc.
Speaker 3: And so it's.
Speaker 2: Refreshing to hear someone who identifies some of those concerns
Speaker 2: but also doesn't think that the current approach is productive.
Speaker 3: There's that old journalism maxim that if one side is
Speaker 3: mad at you and the other side is happy, you
Speaker 3: probably haven't done a good job. But if everyone is
Speaker 3: mad at you, then you're probably going in the right direction.
Speaker 5: Yeah.
Speaker 3: I found that really interesting. I mean, I will say,
Speaker 3: in hindsight, the trade tensions with Japan seem kind of outrageous,
Speaker 3: and it is funny looking at some of the like
Speaker 3: old nineteen eighties movies, reading some old you know, pop
Speaker 3: boilers from the eighties and nineties where the characters are
Speaker 3: Japanese businessmen who are going to assassinate the US economy,
Speaker 3: it does seem ridiculous. I do think the military rivalry
Speaker 3: is probably a key difference between what's happening in China
Speaker 3: and Japan right now. I do think that you can't
Speaker 3: entirely dismiss the experience of the pandemic, where we did
Speaker 3: see certain important Chinese exports suddenly cut off from the
Speaker 3: US economy, and so there is sort of a natural
Speaker 3: response there to say, well, wait a second, maybe we
Speaker 3: do want to build up some domestic capacity and some
Speaker 3: resilience in key things like semiconductors. I get that, But
Speaker 3: it is also true that America benefits enormously from Chinese exports. Yeah,
Speaker 3: we all like having access to cheap consumer goods at
Speaker 3: a time when green transition seems to be very important.
Speaker 3: I imagine we want access to cheap and bountiful solar panels,
Speaker 3: many of which come from China. So yeah, I can
Speaker 3: see where Steven's coming from totally.
Speaker 2: It also is just interesting, and again think about some
Speaker 2: of our conversations with Richard Ku, the degree to which, okay,
Speaker 2: because everybody saw how the Japan story played out, almost
Speaker 2: certainly not going to play out the same way, and
Speaker 2: as Steven mentioned, perhaps Japan made a pretty fatal mistake
Speaker 2: when it agreed to limit exports and to agreed to
Speaker 2: build more toyotas and so forth on American soil, and
Speaker 2: then it had its bust. And of course, so obviously
Speaker 2: Chinese policymakers are going to study that, and they're going
Speaker 2: to study the sort of unilateral dismantling of the Soviet Union,
Speaker 2: and they're going to study the property bubble that collapse.
Speaker 2: So it's almost like there is no way it's going
Speaker 2: to play out the same way this time, just because
Speaker 2: of so much observation of history.
Speaker 3: Well, and also going back to what's been said before
Speaker 3: the plan, it does seem like Chinese policy makers are
Speaker 3: so far committed to that export led growth, right. We
Speaker 3: haven't seen any rhetoric about like, oh, we're going to
Speaker 3: start transforming our economy and that sort of thing. It's
Speaker 3: all very much focused on doing what they have been doing,
Speaker 3: just maybe in a better way. So that's interesting. Shall
Speaker 3: we leave it there.
Speaker 2: Let's leave it there.
Speaker 3: This has been another episode of the Audlots podcast. I'm
Speaker 3: Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2: I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow Stephen Roach. He's at s Roach Underscore Econ Follow
Speaker 2: our producers Carman Rodriguez at Kerman Arman Dashel Bennett at
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