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China's Economic Miracle: Can It Continue? · China Considered

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[MUSIC]
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>> Elizabeth Economy: Welcome to China Considered, a podcast that brings fresh
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insights and informed discussion to one of the most consequential issues of our time,
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how China is changing and changing the world.
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I'm Liz Economy, Hargrove Senior Fellow and Co-director of the US China and
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the World Program at the Hoover Institution at Stanford University.
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Every two weeks I'll be joined in conversation by senior government
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officials, business leaders and prominent activists and
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authors from around the world.
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We'll discuss China's most important political and economic trends, its foreign
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policy ambitions, and its relations with the United States and other countries.
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The China Considered podcast is produced by the Hoover Institution, and
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you can subscribe to it via the Hoover Institution YouTube channel or
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your favorite podcast platform.
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Today I have with me, Dan Rosen, who is a co founder and head of the Rhodium Group,
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which for two decades has been one of the world's top
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data driven research providers and consultancies on the Chinese economy,
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as well as on issues related to energy and climate.
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Dan is the author of several books and reports on China's economy and
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on the US China economic relationship.
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He also served as Senior Advisor for
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International Economic Policy at the National Economic Council and
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National Security Council during the Clinton Administration.
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Dan, thanks so much for joining me today.
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>> Daniel Rosen: Liz, pleasure to be with you, thanks for having me.
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>> Elizabeth Economy: So I want to start with your baseline assessment of
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the Chinese economy.
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It often feels as though we're flooded with information about the Chinese economy
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and much of it's contradictory.
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What do you think are the most important things that we need to understand about
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the current conditions of the Chinese economy?
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>> Daniel Rosen: Well, yeah, it's a hard one to get started on, but
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let's do it this way.
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Let's just kind of level set what's a reasonable expectation for
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China's economic performance.
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And I think it's important to start there because there has been a political
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preferred narrative around that coming out of Beijing that is increasingly out
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of whack with what economic analysis would suggest is actually happening.
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So the official line that Beijing takes is that the economy continues to
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grow at about 5% or better a year, year on year.
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So if you have a 17 or so trillion dollar economy growing 5% a year,
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you've got the better part of a trillion dollars of
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additional activity every year being added, if that's true.
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I don't think the evidence suggests that it is true,
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although the International Monetary Fund continues to stamp that number and
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say, yep, looks good to us, but it's more and more difficult for
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most analysts to see how that can be the case.
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And I'll take three bites at that apple.
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First, there's a structural slowdown taking place.
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When an economy gets to middle income level.
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It doesn't grow, you know, 6, 7, 8% anymore.
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It naturally will slow down.
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That's just the nature of every economy we've seen in history, number one.
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Number two, China has already thrown a lot of stimulus projects at growth
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over the past couple of years since the pandemic.
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And it's, as we say, moved forward in time demand.
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So instead of an even distribution of trade-ins of automobiles or dishwashers,
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they announced big programs to do that a year ago or the year before that.
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And so that creates a cyclical slashing around where all of that was moved to
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the front of a three year period rather than being evenly distributed.
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The result of that is that today we actually should expect to see some
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subsidence in those sectors that already got these cyclicals shot in
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the arm programs in 2022, 2023, the beginning of 2024.
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And then thirdly,
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how well an economy is growing is also a function of the quality of policy making.
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Regardless of where you are in a structural kind of perspective or
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in a cyclical dynamic.
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There's the question of is government doing it well or
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are they not doing it well?
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And I think we can.
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The simplest way to speak to that is just to note that since the pandemic
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there have been many, many announced efforts to stimulate improve growth
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as there have been more and more questions about it internationally.
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And yet just a few months later, there's always another program being announced.
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So something is not working, folks are aware of that and
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it's taking a big bite out of growth.
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I would say rather than 5%,
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the economy seems to be growing somewhere between 0 and 2% right now.
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And the easiest way to substantiate that is just to look at how huge
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the numbers for stimulus that are being talked about are.
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We're talking 6 to 10 trillion renminbi.
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You don't need that much stimulus if you've got 5% growth.
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And if you back that out and ask, well, what is growth?
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If you need that much to get to your target,
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it suggests that we're not doing any better than 2%.
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We might be doing much worse.
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>> Elizabeth Economy: And we hear a lot about the drag on the Chinese economy from
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the property sector, the issues around local government debt.
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Have any of the programs that China has announced, let's say, beginning this
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past July and through until now, begun to address those in a meaningful way?
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>> Daniel Rosen: Well, if we Go back to July, you're including the delayed
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third plenary meeting statement announcement documents,
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that happened nine months after it was normally
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scheduled to happen in the Chinese political calendar.
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And when it did come out, it was, I think, in the middle,
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you know, 15,000 words or so of material.
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And none of it really changed expectations in the marketplace.
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So if you look at the behavior of investors, how they were trading
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on expectations about the things that go into property, steel,
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plate glass, aluminum for windows, all sorts of stuff that big,
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once every five years document didn't seem to move the needle very much.
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Subsequent to that, in September and then more recently,
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even coming up to last week, there have been additional
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announcements which are focused more on cutting interest rates,
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for example, and providing more liquidity.
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Really we're on the verge of having to call it quantitative easing, something
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which just a few quarters ago, Beijing insisted it was never going to do that.
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That was something that less prudent Western economies did.
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And yet that's essentially, what we see Beijing moving toward right now.
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It creates a little bit of speculative activity in the property market, but
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that's not a long term solution to anything.
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I mean, the basic reality here is that the whole complex of economic activity
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around property had come to be as much as a quarter of the total Chinese economy,
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which is just a unprecedented weight on one industry.
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We can see and we know and everyone knows that a lot of the property built
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out was never going to be really valued by people.
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It was speculative in nature.
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And while we see a little bit of property speculative activity by investors
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right now, just in the past week, it's not the kind of signal that would
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suggest that we're sort of turning the corner and coming back.
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We've worked through the property problem and we're in a healthier place right now.
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If you look at the full 2024 property sector set of indicators,
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in terms of new starts and sales of finished property,
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the year performed way underneath 2023 levels.
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2023 was a shocker that changed the narrative,
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I think everywhere about just how serious China's economic problems were.
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So whatever those 2023 problems, they were worse in property in 2024.
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At some point.
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It's gotten so bad that there's nowhere to go but up.
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And maybe we're starting to see that presently, but
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that's a weak beer, as we would say.
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>> Elizabeth Economy: And one more point or one more question on this, on this
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point, you don't think that Xi Jinping's move to basically switch from invest,
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have, you know, significant investment in the property sector to the three news,
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you know, the battery technology and EVs and, you know, energy storage and
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sort of the whole idea of AI plus putting AI throughout the economy,
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that advanced manufacturing, that moving local governments from investing
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in the property sector to these new areas,
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that that's going to do much to sort of reboot the Chinese economy.
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>> Daniel Rosen: Well, given enough time, it'll help.
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But, you know, inside the five years, we're looking, you know,
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we can look ahead to here right now, number one, the local government officials
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whose job it was to figure out which property investments to push support to
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over the past 10 or 15 years, I don't see how they're skilled to make good
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decisions about which battery manufacturers should get state support.
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And so the quality of, you know, small business lending in the American context,
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we might call it something like that, or more targeted industrial policy support,
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such as we have in the Inflation Reduction act,
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the IRA way in the US over the past two years,
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the quality of support for these new industries is not really very high.
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And if you look at even electric vehicle makers in China,
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the vast majority of them are not profitable.
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And what profitability they do have is over-dependent on exports right now,
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which I'm sure is a topic, Liz, you're gonna wanna come to in a second probably.
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But just suffice it to say that, again,
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I'm talking about the quality of policymaking being a new net
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negative to the China story rather than a net positive.
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Which just a few years ago, Beijing not being tethered by all the regulatory drag
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and due diligence and all that kind of democratic nastiness,
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which we're occasionally reminded of in the United States,
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is that a plus or a minus on their growth potential?
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Well, it has been a plus since 1979, and today we're sort of at
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the point where what used to be a tailwind has become a headwind.
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If you don't have, you know, some better governance, quality in how support is
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being doled out, you're just creating greater liabilities for the future.
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You're not actually putting some support under the economy.
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And then finally on this question of property versus the three news,
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over the past two or three years,
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10 million jobs have been lost in the property sector.
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Under nobody's good news story did the three new industries purport
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to create even, I think, a third or maybe a quarter of that many new
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jobs to make up for the hole in the economy that property left?
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>> Elizabeth Economy: That's a really interesting point.
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So given what you've described,
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obviously you think the Chinese leadership is probably moving down the wrong path.
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What should they be doing?
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I mean, we hear a lot from Western economists about the need for China to
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move away from this investment and export led growth to a consumer based economy.
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What would that look like, what would that necessitate in terms of reforms?
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And why do you think Xi Jinping and
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the rest of the Chinese leadership have resisted doing this?
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>> Daniel Rosen: Well, the ironic answer is that in the first instance,
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Xi Jinping put the right set of ideas on the table back at the beginning of his
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tenure in 2013.
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We know what the way ahead ought to look like for China because they actually wrote
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it out in great length in something called the 60 decisions in November of 2013.
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And it included all of the major elements that were necessary to put
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the economy on a better track.
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And it takes a two-day seminar to talk through all that,
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Liz, and we- >> Elizabeth Economy: Okay.
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>> Daniel Rosen: Just got a few minutes.
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>> [LAUGH] >> Daniel Rosen: But let me offer a couple
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things that are really crucial.
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A lot of them start with finance.
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Economists, when economists talk about how the economy of tomorrow comes to be,
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we talk about factors that go into creating economic assets for
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tomorrow and the incentives that decide how those assets flow.
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And China as a lower income bounce back developing country,
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had a system in which finance was pushed to heavy industrial
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manufacturing build out at very low cost of capital.
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The problem with a lot of that investment is that it doesn't create a lot of jobs.
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A modern steel mill has just a few dozen workers really after
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the construction is done, it's all, you know, technicians.
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Also, it's white collar, it's not a very labor-intensive industry.
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If you want to create a lot of jobs in an economy,
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you don't actually want to be building duplicative steel mills.
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You want to be pushing money to retail, to education services, to medical services.
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A lot of service activity.
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That's the stuff that's labor intensive and pays higher wages.
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And only by creating that wage flow to a growing middle class population
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do you really set the table for sustainable consumption that's not
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dependent on finding people to consume that are just not even available in China.
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And so that's where we are today.
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They never finish these changes.
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They stated very clearly in 2013, we need to change the incentives in
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our financial system and we need to change our center local fiscal system
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to what we tell local governments to do and how do we give them money to do it.
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Those things were identified as clear and present dangers that a decade out from
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2013, if these things weren't fixed, China would find itself in a dead end.
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And that's a quote from Xi Jinping, who was paraphrasing something Deng Xiaoping
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had said 20 years before him, okay?
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So we started to change the financial system.
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There were efforts to make it more market decisive, more market oriented.
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And that started to cause too much instability for anybody's taste.
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And so by 2015, 2016,
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the principal financial reforms that had been discussed and
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laid out were suspended, delayed tax reform was suspended and delayed.
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So the incentives to buy property didn't change.
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That was the only really thing to do with your savings for too many Chinese.
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And so there are these kind of deep questions about
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what does the finance system do?
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What kind of industries does it support,
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just strategic industries that are attractive to national security officials?
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Or does it really put the emphasis on the consumers and
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what they want down the road?
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And those problems were diagnosed, and then they were not fixed.
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And here we are, it's 2024 and these things have still not been fixed.
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And until they are, this misallocation in the system and under support for
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creating a consumer economy is just going to get worse.
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Now, China is super dependent on consumers,
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just not its own- >> [LAUGH]
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>> Daniel Rosen: Because
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way too much of its growth is coming from foreign consumers right now,
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which is creating an allergic response not just in the United States.
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The European Union has imposed tariffs on Chinese electric vehicles, surprisingly.
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And countries all over the global south as well are asking themselves,
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you know, how do I avoid just becoming a taker of Chinese products, but
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have a chance to make some things for myself as well?
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>> Elizabeth Economy: And that, to me,
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that issue of overcapacity which we've seen in other areas like solar panels and
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presumably we could see coming, you know, in the future in areas like legacy chips.
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So what we're seeing now with the EVs and the pushback,
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not only from Europe, but as you suggest, from some middle and
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emerging economies, do you think that could create a kind of feedback loop to
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the Chinese government that that would actually get them to change their policy?
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Because now it's not just the United States saying,
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stop these huge subsidies and the overcapacity that results in
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the failure of of you to develop this consumer economy at home and
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your reliance on the rest of the world.
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But now China's hearing it from a lot of other countries.
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So do you see this as potentially having, A, a negative impact on the Chinese
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economy itself with all the tariffs coming into place?
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But B, maybe changing the mindset and finally causing Xi Jinping and
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other Chinese leaders to move forward on the kinds of reforms that you've outlined?
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>> Daniel Rosen: Definitely, there's potential for that.
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For that potential to be translated into reality,
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it's gotta be more than just common concerns abroad.
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There has to actually be coordination abroad.
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So, yes, European folks in Europe, Britain, the United States, Japan,
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Australia, throughout the OECD world, even Mexico and other parts of the oecd,
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South Korea today share these concerns about these systemic inefficiencies
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in how the Chinese economy is running and the problems that creates.
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But are they really coordinating to take a kind of common action
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to put some pressure on China to prioritize domestic reform?
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Certainly they are not.
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Yet. There's been a lot of effort in that
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direction.
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I think there was pretty good sort of initial progress toward kind of
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scoping out the makings of a broader trade coalition,
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if you will, in the Biden administration.
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I don't think that had a chance to fully gel yet or
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set by the time that Trump administration starts in January.
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And I don't think there's any high expectation that Trump
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administration's gonna prioritize, solidifying the sort of
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common position on the nature of China's trade problems, right?
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And so I think from the Chinese perspective, yes,
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they are concerned with how nations around the world
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are starting to react differently to Chinese overcapacity exports.
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At the same time, given the political challenge, pain and
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difficulty and cost at home of making these necessary changes,
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it doesn't seem that Beijing is convinced yet that that's really the smart way for
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them to go for that reason because of foreign pushback, right?
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I think there's a much better reason why Beijing should immediately turn
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to a much more radical effort to address the imbalances
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in the economy that we're talking about.
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And that is, regardless of what foreigners do, this is not a sustainable path for
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China to be on.
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And they're never gonna get out of this sort of under 3% GDP trap until they deal
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more fundamentally with this sort of misallocation between sort of pushing all
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their support to their supply side at home versus their demand side.
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Which means consumers have to be the solution for
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sustainable Chinese growth into the future.
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>> Elizabeth Economy: One of the other things that the Rhodium Group does really
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well, you have your Pathfinder Report, which looks at Chinese reform,
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sort of the progress of Chinese reform across six different metrics.
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And you also track sort of the situation in terms of foreign direct investment into
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China.
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And we've seen a fall off in that over the past couple of years.
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How significant do you think that is?
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Is that something the Chinese government is worried about?
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I've certainly heard Chinese leaders saying we are open for
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business, multinationals come back.
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What do you think is the impact, the real impact of that drop in FDI into China and
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do you expect that to continue?
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>> Daniel Rosen: Yeah, well, the FDI into China is a crucial story.
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I'll make offer, offer a thought on it.
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Chinese outbound investment is also a very big story that we're tracking and
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is also important to think about for all sorts of reasons on the inbound side.
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I think by 2021, 2022, up until that point,
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I think many foreign investors were willing to be patient
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until the pandemic sort of was in the rear view mirror.
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And into 2023, there was an expectation that China was gonna get back.
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Beijing was gonna get back to addressing the necessary rebalancing between heavy
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industry and consumer future for itself, as we've been discussing.
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And there was also a sense, I think, that the economy would naturally find its way
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back to 5, 6% growth, maybe higher in a bounce back from,
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from COVID as we had seen elsewhere in the world.
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Instead, 2023 suggested the opposite,
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that the economy was really stuck in the weeds and was not going to see
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consumers were not ready to go out and kind of get back to business as usual.
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They were concerned about their jobs, income growth was poor.
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And this required a decisive response from Beijing to acknowledge
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the nature of the problem and say very clearly we get it,
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we understand that we're going to address this the right way.
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Instead, since that sort of moment of reckoning in the first half of 2023,
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the various proposals to restore growth that have come out have sort of denied
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the nature of the problem.
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And said, nope, we're gonna just stimulate a little bit here and
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there and we're gonna kinda get through this.
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We're gonna export and the world should be happy for that.
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Leaders of international companies investing in China have looked at that and
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listened to that and decided that's not going to work.
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We're not putting any more money at risk and
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we need to diversify very quickly into other economies.
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The most recent quarterly data we have is that net
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Chinese FDI flows are almost $100 billion outbound.
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That hasn't happened in all the time modern data's been kept since the 1990s.
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So this is quite a different pattern that we're seeing right now.
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Any given month you'll see a little bit of investment tick back in.
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But it's increasingly kind of speculative money rather than a long only here for
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the long term in China sort of foreign direct investment
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that was characteristic for the past three decades.
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The problem for
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China of that is that foreign direct investment is not just about the money.
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It's about creating links that allow businesses in China to
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export back to where those companies came from.
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It still brings in a lot of technological know how.
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And despite how advanced China's become in a lot of industries,
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there are still big gaps in China's technological capabilities.
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Nobody in the world can run semiconductor manufacturing equipment without
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a whole bunch of vendors from Europe, United States and
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elsewhere resident in their economy helping keep the equipment going.
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Right. So it's really quite a brave new world if
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foreign firms are on net, taking money out of the country and putting it elsewhere.
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Rather than voting with their checkbooks and staying committed.
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There's a handful of companies that are running sort of counter to that story, and
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that Creates quite a bit of confusion, I think, in the media narrative and
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headlines.
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A couple of German automakers, for example.
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But really, if you look at the sort of broad central tendency here,
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it is a lot of risk avoidance by global firms.
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And it's geopolitics is a big part of that.
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But the biggest surprise really in the present couple years has been, wow,
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the Chinese macro economy is just not as stable as we expected it to be and
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they're not doing what they need to do to stabilize that outlook.
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>> Elizabeth Economy: And you mentioned Chinese outbound investment.
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I just want to ask about that before we turn to sort of US Policy and China and
24:41
looking ahead.
24:43
But you mentioned outbound investment.
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Obviously, one of the huge sort of Chinese initiatives has been the Belt and
24:50
Road Initiative.
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Over $1 trillion reported in terms of investment in hard
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infrastructure, digital infrastructure.
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They've got that Health Silk Road, and the Green Silk Road for
25:03
environmental technologies.
25:06
What about that?
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Is that going to be impacted by, you know,
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what you've described as a pretty bleak situation for China's domestic economy?
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How is China going to sort of change, if at all it's outbound investment?
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>> Daniel Rosen: Yeah, well, so let's see.
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I mean, I think a very important starting point to look at
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the question is to note that on the past three years,
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more money of debt repayment is going from Belt and Road countries
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back to China than any new money from China is going to those countries, okay?
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So the sort of steep kind of takeoff of Chinese wherewithal financial support for
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its Belt and Road partners, that is behind us, it's kind of leveled off quite a bit.
25:58
A lot of debate inside China.
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Why are we throwing money at countries that we can't count on to stay there for
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in the future?
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A lot of the investments that were happening were in extractive industries to
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bring minerals back to China that were going into the property sector.
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So if you kind of think back to what we were talking about in terms of property,
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if that sector has been way over invested and there's not going to be as much demand
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for all those minerals and materials as we thought, then it's never going to
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be possible to pay off that debt that's been built up in Africa, Latin America,
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Australia and elsewhere in order to create so much capacity to ship iron ore.
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Iron ore dipped below $100 a ton today for
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the first time in I don't know how many years.
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And that's very much a China property story.
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So it kind of all ties together here.
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All that said, not least because of this sort of Shortfall against expectations for
26:55
the Chinese consumer.
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A lot of Chinese firms are looking for growth elsewhere and
27:00
they can see the writing on the wall.
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It's not just going to be about exports, again, for
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the reasons we've already touched on.
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And so they're hearing from their regulators in Mexico.
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Maybe if you set up a manufacturing operation here, you'd be more welcome
27:17
to stay engaged in a stream of activity that creates profits for you, right?
27:24
No surprise there.
27:25
So, tremendous amount of new Chinese greenfield investing,
27:29
building manufacturing around the world to have a plan B.
27:34
If growing China's exports quarter after quarter after quarter is
27:38
no longer a viable game plan, which I think for, you know,
27:42
if Donald Trump is to even be half trusted in terms of what he's saying,
27:47
that'll absolutely, that'll absolutely be the case.
27:50
So a lot of new drivers.
27:53
At Rhodium's website, you'll find a lot of current research, by the way, on that
27:57
topic of new patterns in China outbound investment, which are very important.
28:02
Some of that is probably what we would call trans-shipment as well.
28:06
There's not really a lot of new manufacturing happening in Mexico.
28:10
It's just Chinese exports briefly touching a third country before being
28:15
shipped on to Europe or the United States.
28:18
It doesn't take very long for
28:21
regulators to see that nowadays given technology.
28:26
And so those things are going to be sort of quick to come and quick to go, I think.
28:30
>> Elizabeth Economy: Yeah, I think that's a really important point.
28:32
Because, of course, one of the hallmarks of the Biden administration policy toward
28:38
China has been this effort to encourage US firms to diversify their supply chain.
28:43
Some of which, as you suggested earlier on, they're doing,
28:47
because it just makes smart economic sense.
28:50
But by the same token,
28:51
if what we're seeing is the Chinese firms simply relocating to other countries and
28:57
becoming parts of supply chains that otherwise would be hard to track them.
29:02
Then we're not getting the same kind of benefits from the types of activities that
29:06
the administration has been pushing forward.
29:09
>> Daniel Rosen: There's one underappreciated benefit,
29:11
benefit of that relocation,
29:12
though, that I think I've been thinking about a lot lately.
29:15
I haven't figured out exactly how we want to research it.
29:17
And that is that one of the problems with a very China heavy
29:22
production chain was that it was made way too difficult for
29:28
companies to do due diligence on their production chain.
29:33
Partners in China going into the factory, making sure that things that were being
29:38
installed in the equipment were what was supposed to be in the equipment,
29:42
and not anything else, right?
29:44
You understand what I'm talking about, these sort of security concerns.
29:47
If a Chinese firm, if that same Chinese firm has to relocate and
29:51
operate in Thailand or Mexico or Vietnam or India or somewhere else,
29:56
then that problem is resolved.
29:58
It is possible for reasonable, normal commercial due diligence on what's
30:03
happening in a production facility to be undertaken in third countries in a way
30:07
that people are no longer comfortable doing in China.
30:11
So there are some advantages to that sort of relocation,
30:15
even if it doesn't solve all of our trade balance concerns.
30:19
>> Elizabeth Economy: Yeah, I think you make an important point on the security
30:22
front, but the other element of that is on the economic coercion part.
30:27
And whether or not a firm, a Chinese firm,
30:30
that has a joint venture in Mexico or is operating a plant in Malaysia,
30:36
whether they're subject to the same types of sort of calls from Beijing,
30:43
should Beijing decide to launch a boycott again, say,
30:47
of exports or imports from Australia.
30:51
Is it possible that the Chinese government can turn off the spigot for
30:55
those firms as well, causing pain to other countries?
30:58
I think that's the other issue that you have to be concerned about when it comes
31:01
to supply chains.
31:02
We don't want China to control personal protective equipment,
31:07
right, via manufacturing in Mexico, or Malaysia, either.
31:12
I think that would just be another potential issue that we would have to
31:16
consider about the sort of relocation and trans shipment.
31:20
Okay, but let's finish up by talking about what's next.
31:25
We're about to open a new chapter on the US-China economic relationship.
31:29
And there is probably no issue of greater interest and
31:32
importance to President-elect Trump when it comes to
31:36
China than the issue of trade and investment between the two countries.
31:40
He's talked about levying 60% tariffs on China, but he's also said he welcomes
31:44
Chinese investment in the US, he has no plans to ban TikTok.
31:48
How do you see the Trump administration moving forward on the economic
31:53
relationship with China?
31:55
What do you anticipate sort of over the first 100 days that they're
31:59
gonna move Forward on.
32:01
>> Daniel Rosen: Yeah, that's great.
32:02
It's the question, Liz, and I don't think I have answers.
32:09
I have some observations that I think bear on the question, but
32:13
we're very much still in learning mode here to get a sense of
32:18
what this policy first hundred days is gonna look like I would say.
32:23
The first observation is that regardless of what the sort of big political
32:28
announcement of tariff level is, that's rolled out say 60%.
32:34
That doesn't mean that that 60% is gonna be enforced uniformly across all products.
32:41
In the Trump 1.0 policy package, there were quite a few carve
32:46
outs from the sort of top line level of tariffs imposed on products
32:51
coming into the United States and certainly on the Chinese side,
32:56
their reciprocal tariffs against the United States,
33:01
up to I think 95% of those or so friends at MOFCOM told me,
33:06
were not actually collected on products coming into China.
33:10
Quite a bit higher on the US side but
33:13
also very significant amount of sort of waiving of things.
33:17
And of course there was the de minimis rule as well, which accounted for
33:20
a huge share of US Trade.
33:22
And so first point is, whatever the big number is, don't you know,
33:26
shut down your computer and go to lunch as soon as you hear that number because
33:31
there's going to be a lot more questions that need to be answered before we
33:36
know exactly how big a bite out of business as usual it's going to take.
33:42
Number two, almost any answer to that question is gonna be macroeconomically
33:46
disruptive though [LAUGH].
33:47
We're talking now about levels of intervention in international trade.
33:53
60% with China suggestion of 10% as a starting point with the rest of the world.
34:00
Again, countries can be exempted from that,
34:03
I'm guessing if they're willing to be aligned in certain ways, we'll see, right?
34:09
But anyway, I think you implement that,
34:12
it is going to have pretty significant macroeconomic effects.
34:16
What are macroeconomic effects?
34:18
They are price instability, AKA inflation,
34:22
which we have had a taste of in the past couple years coming off the pandemic.
34:29
Former US trade representative Robert Lighthizer observed in a recent op ed
34:34
that there wasn't really much inflationary effect from Trump 1.0 tariffs,
34:39
narrowly speaking, during the period of the administration,
34:43
given that they were mostly implemented in the second half.
34:47
And then we had a pandemic that was starting to change the nature of things.
34:53
Well inside that period, we don't really know,
34:57
I think what the actual inflationary impact of something like a 60% tariff
35:01
level almost three times higher than the previous numbers used for China.
35:06
So we really need to be acutely aware of what changes
35:11
like that could do to our economic interests.
35:16
There's inflation, there is rapid shifts in investment activity.
35:22
We talked a minute ago about how problematic it is for
35:25
China that multinational companies are not sending investment and
35:30
activity into China anymore.
35:32
This kind of a delinking of the United States from international trade norms
35:37
could have a deleterious effect on investment into the United States.
35:42
At the same time, as you noted, candidate Trump surprised, I think,
35:47
his own party by saying no, actually, I'd like to see Chinese automakers
35:52
investing in the US in those niches where we don't have necessary inputs to
35:57
be competitive global electric vehicle makers, right?
36:00
So I think that's actually quite encouraging that we could put that back
36:05
in play because I think the wholesale exclusion of Chinese participation in
36:09
the US Economy is a mistake.
36:11
And we should, if possible, try to find ways to pick and
36:15
choose what is allowed in rather than just saying,
36:19
we're just gonna gratuitously cut everything off and call it a day.
36:26
>> Elizabeth Economy: Okay, so I think, great advice.
36:28
Don't press the panic button yet.
36:30
Take a little bit of a watch and wait and see.
36:34
I think it sounds like there may be some, you know,
36:36
disagreement within the Republican Party itself, as you suggest, over issues like,
36:41
you know, Chinese investment in the United States.
36:44
Maybe President Trump will, you know, find a good, a good balance moving forward.
36:48
So.
36:49
All right, fingers crossed.
36:50
All right, so let's just finish up with five quick rapid fire questions.
36:57
First, must read book or article on China that you would recommend to our listeners.
37:04
>> Daniel Rosen: I thought about this one a lot.
37:07
Liz, I think what I'm gonna offer is in the current issue of
37:10
the China Leadership Monitor, there's a piece called Peak China,
37:14
What Are China Beijing's Options Now by my partner and colleague, Dr.
37:18
Logan Wright, which I think does the best possible job of helping people see
37:23
the long sort of structural arc of China's economic growth numbers and why the sort
37:27
of slower growth Chinese future opens up a lot of strategic opportunities for other
37:32
countries to look after their economic and geopolitical interests differently.
37:37
So I'd recommend that.
37:39
>> Elizabeth Economy: Great, I think it's a brilliant and sophisticated piece.
37:42
So agree.
37:43
Job you would most want to have in a new, maybe different administration.
37:49
>> Daniel Rosen: Yeah, and you use the indefinite article A,
37:52
not the new administration, I see.
37:55
Give me a little bit of wiggle room to decide how I was gonna answer it.
37:59
If it was gonna be the incoming administration, I jokingly said to my
38:02
colleague this morning, archivist, because I thought that would be fun, Liz.
38:06
But if it were some theoretical future administration, I think it's clear
38:12
from this electoral outcome that parties on the more kind of internationalist,
38:18
progressive side of the spectrum have an awful lot to learn about
38:23
how much outreach is necessary to the full American electorate and
38:28
citizenry so that we can do a lot of educational work on why our enlightened
38:34
self interest is different than what it might seem in the short run.
38:39
And so that's gotta be an oval office priority.
38:42
Of course, I think it will be for many, many electoral cycles to come.
38:47
And while it's not a job I've traditionally held or
38:50
thought of myself as qualified for, like many people,
38:54
I feel like I need to apply myself to that challenge in the period ahead.
38:58
And so I've been thinking about something like that.
39:01
>> Elizabeth Economy: It's great, I think many of us would agree with you there.
39:05
What one thing do you wish that the Biden administration had done differently with
39:09
regard to China policy?
39:12
>> Daniel Rosen: As a China wonk and expert,
39:13
I gave the administration extremely high marks.
39:17
I thought it was very adept at getting the balance right between
39:21
domestic investment to put America back in the game in next generation
39:26
technology segments like electric vehicles and renewables,
39:30
where we had really been kind of waiting on the sidelines, frankly.
39:36
And I think that grade stands.
39:38
As a Columbia professor, I'm happy to give the easy A for that.
39:43
However, I think, you know,
39:45
the ultimate test is how well it holds up against popular opinion,
39:50
public opinion, and I think, you know, with hindsight,
39:54
we can say that much more effort needed to be put into communicating.
40:01
Why? And simplifying why our policy was good
40:03
not just for the middle class, but maybe for the lower middle class or
40:08
people who felt like they were slipping behind the middle class.
40:12
And so big lesson learned there.
40:15
And yeah, I think my answer lies in that direction.
40:20
>> Elizabeth Economy: Okay, what China issue do you think we don't know enough
40:24
about?
40:24
>> Daniel Rosen: I've kind of already been using the time with you, Liz,
40:28
to try to emphasize this.
40:30
But it is a major element of the Chinese system
40:35
that they don't air their dirty laundry in public and
40:41
their problems in public.
40:44
And so a lot of our colleagues in the China watching community over the past
40:49
decades have underappreciated the structural problems and
40:53
headwinds that China's grappling with right now.
40:56
A lot of nations that are behind China developmentally and are thinking,
41:01
what's the right system, the right kind of political economy for
41:06
them to enjoy economic development?
41:08
Poverty alleviation such as China did are over,
41:14
over estimating how well the Chinese approach is working.
41:21
And I think even in strategic America, where I've spent a little time
41:26
trying to offer analytic perspective, there's an underappreciation
41:31
of just how constraining China's past economic choices now are.
41:35
And what opportunities that opens up for a smart,
41:39
enlightened American foreign policy and economic policy going forward.
41:44
>> Elizabeth Economy: And then on a scale of 1 to 10, how likely are we to see
41:47
a Nixon Mao moment in the US China relationship in the next decade?
41:51
>> Daniel Rosen: So this one was easy for me.
41:52
It's a 1, Liz, for the simple reason that to be at
41:58
a Mao Nixon moment, if I strictly kind of speak to that.
42:03
The Chinese side of that story would need to be at a certain point in its arc where
42:09
it had exhausted other alternatives for how it saw its own interest going forward.
42:16
And unfortunately, I would say from an American perspective,
42:20
I think we're still maybe five or ten years away from Beijing seeing its
42:25
interest in some sort of detent or rapprochement with the United States.
42:30
Also, of course, the dynamic in which the United States is
42:35
the sole global hegemon, essentially.
42:38
And the guy in second place, the USSR has started to show
42:43
that it just is not going to be able to keep pace with that.
42:48
That was essential to the Mao Nixon moment.
42:51
We just don't have those circumstances geopolitically right now, I don't think.
42:55
Although I'm just an economist, so what do I know?
42:57
Maybe the geopoliticians might think differently, but I'm certainly looking for
43:04
some other grand, historic moment that we can define for the future.
43:10
It won't be a Nixon Mao, just like China's story won't be Japan's lost decade story.
43:14
It won't be the Cold War as we knew it.
43:16
It'll be new things that have characteristics and
43:20
dynamics that'll be just as important anchors to how we train generations to
43:25
come in American foreign policy and international economic policy.
43:30
But I'm at the moment concerned that we get too stuck to those old metaphors about
43:35
what worked, who's the new Kissinger, this kind of thing,
43:38
I think time to let those go and figure out what comes next.
43:43
>> Elizabeth Economy: Dan, I cannot thank you enough.
43:45
You are not just an economist.
43:47
You are really an extraordinary, I think, scholar, scholar and
43:51
expert on China and US China relations writ large.
43:54
And I really appreciate your taking the time to with us today to talk about
43:59
what's going on in the Chinese economy today.
44:03
Where it's likely to go in the future, and of course,
44:07
the question on everybody's mind, what does the US what is the US
44:12
likely to do moving forward in a Donald Trump 2.0 presidency?
44:16
If you enjoyed this podcast and want to hear more reasoned discourse and
44:20
debate on China.
44:21
I encourage you to subscribe to China Considered via
44:24
The Hoover Institution YouTube channel or podcast platform of your choice.
44:28
In the next episode, we'll continue our discussion of Chinese economy,
44:33
exploring how foreign investors are looking at China today with Joerg Wuttke,
44:37
former China Chairman of the German company, BASF,
44:40
and now partner at DGA Albright Stonebridge Group.
44:43
Thanks very much.
44:44
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