Latest / China Considered / Beyond the Data: China’s Economy with Leland Miller

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Beyond the Data: China’s Economy with Leland Miller · China Considered

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>> Elizabeth Economy: Welcome to China Considered.
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I'm Liz Economy, Hargrove, Senior Fellow and Co-Director of the Program on US,
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China and the World at the Hoover Institution at Stanford University.
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Today I have with me Leland Miller.
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Leland is an expert on the Chinese economy, on US China relations, and
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is the co founder and CEO of China Beige Book,
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which I think has become over the past 15 years, the Go to guide for anyone who
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wants to understand what's going on inside the Chinese economy in real time.
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Welcome, Leland.
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>> Leland Miller: Thanks, Liz.
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Glad to be here.
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>> Elizabeth Economy: Great to have you.
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So let's just start with a little bit of a description of what China Beige Book is
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all about.
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You began it, I guess, 15 years ago.
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>> Leland Miller: That's right.
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>> Elizabeth Economy: You know, it's really, I think, as I said,
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the go to guide for people who want to know how, what's happening, you know,
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almost on a daily basis.
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I think you do monthly updates at this point, but you really have, I think,
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a unique resource for people.
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Tell us a little bit about why you started it and what it's all about.
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>> Leland Miller: Well, you know, when, when I started this back in 2010,
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really, markets weren't asking for another product on China.
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They weren't asking for better information on China to their detriment.
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Because I think what the idea was is they said, do we believe Chinese statistics?
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Maybe not.
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Do we think that they're accurate?
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No, but directionally they gotta be correct and it's good enough.
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It's a black box economy, they're a bunch of Chinese communists,
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you're not gonna get the real story no matter what you do.
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So anything is good enough, we don't really need something new.
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And interesting,
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when we started China Beige Book there was a lot of pushback on what we were doing.
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They said, you know what, it actually complicates the picture for you to tell us
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what's really going on because markets react to what the official picture is.
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So if you're telling us what's really happening and
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Beijing painting this beautiful picture something else.
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Markets typically, you know, typically react to the official picture,
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which is echoed by the World bank and the IMF and, and a lot of large traders.
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And so it might actually hurt us to know what's really going on.
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I think that sort of view fell apart as you got into the Xi Jinping era and
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the economy slowed down.
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You started to have credit crises and capital outflow, panics and
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other things like that.
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None of these were foreshadowed by what was happening in official data.
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No weakness showed something was about to fall off.
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A Cliff.
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So I think as we got in there, it was about five years in, six years in,
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people really started to understand that you need a check on
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what the Chinese government's doing.
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You can't just, you know, even if you buy into what they're saying,
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I don't think there's anybody out there who still does.
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You know, it's just not enough information.
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You're not getting enough granular information,
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you're not understanding credit trends.
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You're not understanding government stimulus policies and what they're doing,
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fiscal and monetary stimulus, labor market inflation.
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You need a broader picture and you need one that reflects something that's
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more than just, you know, big state owned firms in tier one cities.
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And that's often what Chinese data reflect.
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You know, during COVID when we were leaving,
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you know, we were with the Chinese economy shut down in 2020 and then it
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emerged the Chinese government announced 2.6, 2.7% GDP growth year on year.
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Absolutely impossible, coming off a quarter which the economy shut down.
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Now that may have been very true for like a handful of state owned businesses
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in Beijing and Shanghai and Guangdong, but it wasn't true for the Chinese.
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So what we wanted to do at China Beige Book is paint a picture of the entire
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economy.
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We wanted to go across all the regions, all the key sectors.
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We wanted to track state firms and private firms, we wanted to track large firms and
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small firms.
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We wanted to track all the different dynamics and not just growth, credit,
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shadow credit, the labor market, inflation,
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all these baskets which were really important.
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And by that we were able to tell the story of all the different Chinas and
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all the different China's in aggregate tell the story about China.
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But what it did was allow us to paint a picture of what's really going on in China
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that was divorced from this idea that China was growing at this
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beautiful steady rate or eventually a very steadily but stable declining rate.
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Everything was beautiful.
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There were never negative prints.
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And I think that when we got into the Trump years, it became more important,
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we got into COVID, it became more important.
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And so now I think people utilize China Beige Book as a way of
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just understanding China.
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In addition, official data instead of official data, it doesn't matter.
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They need to know more because this is an extremely large and
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important bilateral relationship.
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>> Elizabeth Economy: Right?
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So I have to say from the outset, I think I've known you for a long time and
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I remember when you started chucking, I thought it was brilliant.
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I never thought it was a problem.
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I'm all in favor of getting, you know, real data.
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>> Leland Miller: But you were one of the few ones though,
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I'll tell you one of the few,
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because the most people we went to said, look, you want to be part of this?
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You want to help us on this?
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Do you want to have.
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And people were like, you can't do it, it's impossible, no.
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Very few people actually said, you know, this is doable.
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And you know, the small group that we went forward with said, we maybe we
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could do this, maybe we can, but if you can do this, it's a game changer.
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>> Elizabeth Economy: Totally. >> Leland Miller: Really low odds, so
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I think we were quite lucky.
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>> Elizabeth Economy: But, but just say a little bit more about the data that you
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actually collect and how you are still managing to do it.
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Because, you know, we've certainly seen over the past,
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I'd say three to five years in particular,
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a real effort by the Chinese government to constrain the sort of range of data that
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outside experts have access to, even actually people inside China.
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So how do you collect your data and
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are you still able to get the kind of data that you did 15 years ago today?
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>> Leland Miller: Yeah, we survey thousands and thousands of corporates and
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we want to make sure that it's representative of China.
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Like I said, it's not representative of a key region, a key city,
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a key cohort like state firms or, or large firms.
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And we survey across China to get this information.
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We always get the question, how are you still able to continue?
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Isn't this sensitive?
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Of course there's a sensitivity there.
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But I think what we did over time is show that we are calling balls and strikes.
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Regardless of what we are in our personal capacity back home,
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at China Beige Book we're calling balls and strikes.
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We're not bulls, we're not bears, we're just calling the data as we see it.
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And for a long time, people thought of us through the bare lens because we were
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saying over and over, I mean, way early during the great financial crisis when
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things were still high and still Quite good in 2012 and
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some of the succeeding years because of all the big stimulus, we were saying,
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look, the Chinese economy is, here's all the vulnerabilities, here's what's
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happening in the credit markets, here's what's happening in terms of loan demand,
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here's what's happening in terms of all these other dynamics.
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The Chinese economy is headed to much, much, much, much slower.
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And it doesn't matter what they do, best case scenario, worst case scenario, and
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we showed that through our data and explained why.
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But I think for a long time people said, these guys are such bears.
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You know, Beijing's out there calling 8% GDP every single quarter.
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And these guys are saying, it's much lower, they must be bears.
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But the handful of times where markets got really, really worried about China and
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you start hearing that China collapsed stuff on CNBC and Bloomberg and, you know,
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you started to, to, you know, investors rushed for the exit, we sat there and
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said, look, here's what the data show.
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And in August 2015, for instance, when the whole world was panicked that China was
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collapsing, we were the only ones who would come out and say,
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actually, nothing's going on right now.
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Our data are about the same as they were last quarter.
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Yes, manufacturing's much worse, the PMI scare people, but
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services a little bit better.
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And so we told a nuanced story.
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So half the time where there's all these collapse panic,
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actually, all the time there's the collapse panics,
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we're out there saying, that's not what's actually happening.
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China's not collapsing, it's not going to collapse.
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So I think that over time we showed that we're truly calling balls and strikes.
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Sometimes we're much more bearish than what the government is showing,
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sometimes we're more bullish.
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And our data actually recently has been a bit more bullish after being quite a lot
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more negative than official data from.
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For a while. So it go, it ebbs and flows.
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The key here is if you're the Chinese government and
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you're not acknowledging big weakness, then you're also not able to,
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to recognize or at least show real improvements.
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You can't show the bounce back.
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So if everything's stable.
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You never see the downside, but you never see the upside too.
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So sometimes our data are actually better than official data,
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sometimes they're worse.
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But in any case, we're honest brokers on that.
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And I think that there's a, there's a certain amount of respect for that.
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>> Elizabeth Economy: That's great. So I want to,
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I do want to dig into the data a little bit, but let's start again.
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Because you have such a long time horizon and so much experience looking at
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the Chinese economy, let's just start by looking back a little bit,
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maybe eight to 10 years or even if you want, B.C.
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jinping, and just give us a sense of the overall trajectory of the Chinese economy.
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How do you see this economy, you know, developing over the past decade or so?
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And you know, we hear a lot about the middle income trap.
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And is China going to be able to escape the middle income trap?
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What's your sense for where the Chinese economy has been, you know, where it is,
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where it's going?
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>> Leland Miller: Well, I think there's a couple points there.
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So the first is the economy is growing very fast, but
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it was growing from a relatively small base.
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So you saw these improvements year after year.
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And of course that kind of growth gets harder as you get bigger.
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But the other thing was the Chinese economy was governed very differently
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a decade ago than it is now.
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You read the GDP numbers and they've always been historically beautiful and
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stable.
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And the key part of that is anything the Chinese government predicted always came
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to pass.
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And it wasn't because these guys are economic magicians, and
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it wasn't because they're prognosticators of legendary status.
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It was because GDP was created in a way that they would grow at a certain level
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organically, let's say it's 5%.
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They had a 8% GDP target for that year or that quarter.
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And then they just juiced the economy through stimulus,
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typically through the property sector, by just extending lots and lots of credit.
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And then they would hit their target.
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So the targets were always hit.
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And that was the way the system ran.
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Now it was funny because China watching a decade ago
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used to be this complete fraud where people who would walk, you know,
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run around predicting the GDP that the government would predict.
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Maybe they got in, you know, maybe they read the Chinese press,
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they had contacts at Chinese think tanks.
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They knew the number was going to be forecast before it was released.
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They came out to their clients, usually at banks, and said, hey look,
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we think China's going to grow at 7.8%.
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China would then grow at 7.8% because it became the official number.
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And everyone walked around the room high fiving themselves, saying, look,
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we're really good at this.
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And so this was this fraudulent exercise for many years now.
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It changed under Xi because eventually Xi, once he got into power,
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had his power solidified and got through some of the anti corruption stuff,
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said this model doesn't work for us anymore.
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We can't do this forever or we're going to be creating enormous vulnerabilities for
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the party, much less the economy in the state.
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So we need to change this.
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We need to slow things down.
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And what we've seen in spurts over the last five years, three years, et cetera,
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has been a move away from the idea that they need to have high levels of growth,
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that the idea is slower, healthier growth.
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The social compact the party used to have of the people was we'll deliver you high
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levels of growth and we're going to make everybody rich.
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And eventually that became impossible because the bad debt built up
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in the economy and it was changed around 2021 or so.
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You saw that in some of the campaigns, cracking down on billionaires and
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the tech crackdowns and other things, Common prosperity campaign, et cetera.
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They moved away from the old social compact too.
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We're going to deliver slower, healthier growth and
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we're going to distribute the wealth more evenly.
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And so the idea here was we're not gonna target these extraordinarily high levels
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of growth.
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We're not going to worry about growth for growth's sake quite so much.
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There is a little bit of a political sensitivity there.
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But what we're going to do is we're going to try to build a stronger China.
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And what that's moved over the last several years has been this incredible
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emphasis on national security priorities instead of growth for growth's sake.
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That's building up a domestic chip ecosystem.
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It's supply chain diversification, it's building up the military,
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it's all these, it's lessening the reliance on the US dollar payment system
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because the entire Chinese economy is in some ways built on the US dollar.
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They've got all these vulnerabilities that's what keeps Xi Jinping up at night?
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So more and more the economy has been moved towards growing at slower rates.
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They're not worried about the rate as long as it doesn't create a problem.
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A spiral downward and they're moving towards a completely economic parent,
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different economic paradigm, which is slower, healthier growth,
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focus on the national security and try to get the debt under control within limits.
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>> Elizabeth Economy: Okay, so
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I think that takes us nicely into looking at what's taking place on the ground.
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And I'm wondering, you said slower, healthier growth,
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but is the securitization of the Chinese economy and sort of that effort
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to develop a fortress China with a lot more, in some ways autarky.
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Right. A lot more, you know,
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independence around economic independence around food and energy,
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you know, and technology, is that actually healthier?
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It's definitely produced slower growth.
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But could you really characterize that as healthier growth?
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>> Leland Miller: Not really, most of it it's not.
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I think where they, what they,
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where they get better grades is the fact that the economy, they talked for how long
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about a transition from an investment led economy to a consumption led economy.
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They did cut the investment, they just never shifted to consumption.
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So they get, they get plaudits for what they did on investment, but
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they get a failing grade for what they did on consumption.
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And the property sector, this has been an impossible task.
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So Wall Street Journal, we're totally on the opposite side of Wall Street Journal.
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A lot of our other friends who look at what's happening in China's property
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sector and say it's chaos, it's falling, everything's falling apart.
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You know, this shows the bankruptcy of the Chinese communist system.
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You know, there's a lot of things that show the bankruptcy of the Chinese
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communist system.
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I don't think this is one of them because what they're trying to do is stage manage
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a massive diminution of the property sector as a growth driver for
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China's economy.
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So if you have something that's driving maybe 25% of growth and
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you maybe high single digits, whatever the number might be, you know,
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you can start and ramp up the, the, you know,
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the tightening of credit throughout the property sector in the broader economy.
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But you can't just do that in a linear path or the bottom will fall out because
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y 60, 70%, whatever it might be, household assets in China are property.
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If you just see your property prices go down every single month and
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a straight line down, you're going to have a problem.
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And that's actually what happened Last fall, I think you got to a low point where
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the Chinese government saw consumer sentiment falling off a cliff,
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investor sentiment falling off a cliff,
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corporate sentiment, which we track, is falling off a cliff.
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And it had the potential to create this doom confidence loop where everything
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starts falling, which is why they stepped in with something that wasn't as big
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as everyone thought it would be, but it was certainly louder and
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it did do a bunch of stuff to set a floor on the economy.
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So I think that the idea here is not that they have stepped up and done all these
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healthy things, the economy, they have moved into the property sector,
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which is one of the big problems they've had.
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This is a multi year, many, many, many year process.
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The idea that it's over or almost over, it's a three year process,
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it's total nonsense.
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They're gonna have to work on this over and over and over and over and over again.
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And the way you do it is, you know, you tighten credit, you tighten credit,
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you tighten credit.
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And then when things are starting to get problematic, then you have to step in and
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what the way we described this, starting in about 2020 or 2021 was, you C the herd,
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C the herd C the herd ventilate.
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And what that means is they're trying to take out these weak zombie firms inside
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the property sector.
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You call the herd, you call the herd, call the herd.
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But when you get to the flow freezes up,
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the stronger industry players are starting to weaken and have real problems.
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It looks like property stress can flow outside the property sector,
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the broader economy, then you start Step in, you ventilate,
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you give more credit access to these firms.
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But what's been so impressive about what Beijing has done,
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is it then they have not gone back for years and years and years.
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They say they would do something, they tighten up, and then they panic and
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they go the other direction.
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The property sector story has been for years and years and years, tight, tight,
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tight, ventilate.
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But then they go right back to the tightening cycle.
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So you can actually see this on our credit data.
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And they, they, they take care of the problem and they continue to tighten,
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continue to tighten, continue to tighten.
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Ventilate a little bit.
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Continue to tighten, continue to tighten.
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Now, we're in a ventilation cycle right now with property.
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It's why it's cyclically bouncing back.
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But from a structural standpoint, they're trying to
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do this just not in a straight line because that would cause potential panic.
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So this is an extraordinarily difficult task to manage.
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The fact that they have had the wherewithal to continue it despite all
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the pain, I think that is actually one of the facets of healthier growth.
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>> Elizabeth Economy: Right. And I think, you know,
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I took a peek at your most recent data, and
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it looks like what you're talking about is happening right now.
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Right? So housing starts are up,
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new borrowing is up, so credit is up.
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So I think maybe, as you say,
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we're seeing a little bit of an upward trajectory in the sector.
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You know, one thing that occurred to me, though,
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is, you know, we've seen President Xi talk about moving away from the property and
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toward, you know, the three news and, you know,
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sort of the energy sector with regard to new energy and battery storage.
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And a little bit, to my mind, it sounded like he was getting prepared to repeat
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some of the same problems that they had with the property sector,
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which is to say, you know, go all in an investment, you know,
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push local governments to invest in, you know, these new industries.
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Is it your sense?
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And then you're going to end up with the same problem that you had in the property
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sector, which is a degree of, you know, over capacity,
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which you still have in the property sector.
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But do you see that happening again?
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Do you see China repeating that?
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Or do you think what China's investing in now is ultimately has the potential to be
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more productive than the real estate sector, that somehow these investing in
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these industries is then going to gin up the economy further?
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So do you see it as a repeat, or
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do you see this as something fundamentally new and smarter?
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>> Leland Miller: I think it's both.
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I think it's both.
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Because clearly what they're doing is they're throwing a lot of money at
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the problem.
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You saw that with EVs.
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There's a lot of talk about how great EVs are in China.
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They're fantastic, they're cheap, they're advanced.
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That happened because the sector was in a, is, was in a, you know,
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protected cocoon for about a decade.
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They had consumer subsidies, producer subsidies.
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They had,
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they built up this massive ecosystem now that they sort of liberalize the sector.
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You're seeing battery companies and, and EV companies and everyone who supplies
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those types of firms, they're all dying right now because there's a price war.
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And so what are they going to do?
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They got to find new markets and they're going outward.
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So I think Xi Jinping is comfortable with the fact that they're throwing this money
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because they don't want to be reliant on technology inputs from the West.
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They also want to dominate the fourth Industrial revolution,
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as is said quite often, which means they have to produce this stuff.
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They're going to brute force it.
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That's the Chinese Communist Party way.
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But I think that the problem comes not from what they're doing, but
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where this is leading us.
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You know, right now, you know, China has the largest trade surplus in history.
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They have the largest goods trade surplus in history.
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The bilateral, you know, relationship.
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The United States is, is a trillion dollars a year in terms, in terms of the,
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the, the trade surplus China has.
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It's the mo.
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Sorry, the broader, the broader trade surplus is it a trillion?
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Is it a trade.
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China is the largest single component of that.
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So which, what you have right now is a dynamic where China has
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been a manufacturing powerhouse before.
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During COVID it ramped it up, ramped it up,
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ramped it up because of a lot of dynamics of supply chains during COVID.
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So the manufacturing sector went like gangbusters throughout COVID and
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increased its share.
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And now you're at a point where Xi Jinping comes out in 2024 and says,
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we're going to double down on our double down through something called new quality
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productive forces.
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And what we're going to do through that is we're going to have a whole of government
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effort to manufacture more, to produce more, to export more, and
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especially on advanced technology, we're going to dominate the world on this.
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Now, this comes at a time where they're already dominating the share of global
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manufacturing.
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If you look at some of the statistics that the UN has put out,
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that the numbers keep going like this, this causes trade friction.
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Now, it's not just because Trump is our president.
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I think any American president, I think, would have a political reaction to this.
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Certainly both parties don't like what's happening in the trade relationship.
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It's happening in the eu.
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It's happening Brazil, South Africa, Southeast Asia, all these other places
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where Chinese overcapacity threatens to take out domestic indust back home.
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So I think that the problem here is not that Xi Jinping isn't willing to
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push forward this manufacturing plan, et cetera, it's that there is a,
20:49
that there's going to be a political reaction from having doubled down and
20:53
doubled down again globally.
20:55
And they're just simply not going to allow for
20:58
Chinese EVs to take over all domestic markets.
21:01
They're not going to allow Chinese, you know,
21:03
legacy chips to flood across the world.
21:05
There will be a political reaction.
21:06
Some of that will be tariffs, some will be export controls and other things.
21:09
But I think that's where this has become very problematic.
21:13
It's become problematic because there's going to be a political reaction to what
21:16
Xi Jinping is doing at home.
21:17
And that has just started right now in the early days of the Trump administration and
21:21
with the European Union.
21:22
>> Elizabeth Economy: Okay, great.
21:23
So I want to come back to this in a minute, but
21:25
let's just sort of wrap up with the domestic economy.
21:27
So as you're looking at the Chinese economy and you see some, some signs,
21:32
some positive signs, is the private sector in China coming back?
21:36
I mean, is there a sense, is there a new confidence in the private sector?
21:41
Because we'd seen, and
21:42
you mentioned sort of the crackdown on big tech in China a couple of years ago.
21:47
You know, we've seen gradually the private sector recede in China,
21:50
which I don't think is anything that anybody expected, you know, 10 or
21:54
15 years ago when you started China Beige Book,
21:57
we thought that the private sector was expanding and the state was receding.
22:01
So do we see now a newfound confidence coming out of the private sector?
22:05
And with that, do you anticipate that, you know, multinationals from
22:09
the United States and elsewhere will start to come back and start investing in China?
22:13
Because another consequence of Xi Jinping's approach to
22:17
the Chinese economy has been, and other issues, you know, of course,
22:21
as well, geopolitical tensions has been that foreign direct investment in China
22:26
has largely dried up over the past few years.
22:28
So do you see some knock on effects that will actually propel the Chinese
22:33
economy even, you know, faster and
22:36
more forward as a result of the steps that she's been taking more recently?
22:42
>> Leland Miller: Yeah, I don't think so.
22:44
So the issue with private firms is, and this happened pre Covid, but
22:48
it really ramped up during the days of COVID zero.
22:51
Private firms don't want to invest their future.
22:53
You know, we have all these growth metrics where we track whether,
22:56
whether profits are going up in revenue and headline metrics, et cetera.
22:59
But the under the rate, under the hood metrics are really important.
23:03
Are they investing?
23:04
Are they hiring, Are they borrowing?
23:05
And what we've seen from that for years now from private firms has been very,
23:09
very disappointing.
23:10
Now there was a little bit of bounce up recently and we're wondering, you know,
23:13
is that part of a trend?
23:15
Have things cyclically bottomed and they're bouncing back up?
23:18
It doesn't look like it.
23:19
It's unclear though.
23:21
But I think the bigger issue is that private firms,
23:23
I think look at the horizon and I don't think they like what they see.
23:27
They're seeing slowing growth, they're seeing international headwinds,
23:31
they're seeing Xi Jinping's push to centralize everything and
23:35
more responsibility on state owned firms at the disadvantage of private firms.
23:39
So I don't think their trends are particularly healthy or optimistic.
23:43
And I don't think private firms in China feel particularly good right now when you
23:48
have things that hit the headlines like deep seek and people get excited about
23:53
individual private firms or individual Chinese technological advances.
23:57
And so you do have foreign investor money.
23:59
Flood in to big Chinese tech companies and saying, well, maybe everything's changed.
24:04
I don't think that that's what's happening.
24:06
From a broad perspective, you may have some very,
24:09
very sophisticated impressive Chinese technology firms.
24:12
You do, and maybe some of those are attracting greater inflows.
24:15
But I think from a broader perspective, if you're looking from outside of China into
24:19
China, you're not seeing a particularly appetizing situation.
24:22
And part of that's because of what Xi Jinping is doing at home, cracking down on
24:26
foreign firms, absence of rule of law, which has always been the case in China.
24:30
All these other, you're, but you're, trade frictions, etc.
24:34
You're not liking that from an investor standpoint.
24:36
But if you're a private firm trying to dodge all this stuff at home,
24:39
you're not particularly happy either.
24:41
So look, there's, there is the possibility that something happens, something
24:45
bigger and maybe US-China trade tensions lessen significantly for some reason.
24:50
And so the trade, the horizon looks better from a trade perspective and
24:54
from a geopolitical perspective.
24:55
And Xi Jinping does bigger stimulus and
24:57
he talks about providing more to private firms and
25:00
actually follows through for the first time, and which he says it all the time.
25:04
They never do it, they never really do it.
25:06
So it's not impossible that you see this type of reversal.
25:10
I don't think it's happening right now.
25:11
I don't think the trends that we're seeing either domestically in China or, or
25:15
outside of China looking in are particularly conducive to having
25:19
a positive view on private firms in China.
25:21
>> Elizabeth Economy: Okay, so that kind of is a good segue into our
25:24
discussion of the Three T's, Trump, tariffs, and trade.
25:29
[LAUGH] So let's just spend a minute on the tariffs.
25:33
And we saw President Trump actually follow through
25:38
with 10% tariffs across all Chinese goods.
25:43
And the Chinese had their countermeasures, some tariffs,
25:48
some export controls, a target on Google.
25:52
So where do you see this heading?
25:55
Is this a movie we've seen before?
25:57
Because clearly, obviously,
25:59
we saw President Trump begin with the tariffs in during his first term.
26:03
We saw President Biden continue.
26:04
He didn't actually lower any of the tariffs or take them off completely,
26:09
but actually put some new tariffs on in particular sectors,
26:14
especially around clean tech.
26:16
And now we're back at it.
26:17
I mean, is this just gonna continue ad nauseam?
26:22
Is just this represent just a complete lack of creativity on the part of
26:27
the United States [LAUGH] in terms of how we can deal with what is a legitimate
26:32
set of issues with regard to our trade relationship with China?
26:36
What do you see happening here?
26:40
>> Leland Miller: I think markets as a whole have been flummoxed in the early
26:42
days of the Trump administration because they don't know what to expect.
26:45
And they took all their lessons from Trump term one and
26:48
most of those were the wrong lessons.
26:50
So if you look at the way that the first administration ran,
26:54
they were figuring things out.
26:56
Most of the tariff battles were about getting to a deal.
26:58
They were tariffs for negotiating leverage.
27:00
And I think that is why coming into the second term so
27:04
many people were out there saying he doesn't really mean this stuff.
27:08
He's not gonna really do the big stuff.
27:10
It's all to get a deal.
27:11
He's not gonna follow through.
27:12
And of course, Trump sent a lot of his top emissaries who became
27:15
the Commerce Secretary, the Treasury Secretary, and
27:18
others out onto financial media to say those types of things.
27:21
They said, this, these are, these are tools for bigger deals.
27:24
There's a little bit to, something to that, but it's, it's, it, it's by and
27:28
large wrong.
27:29
So I think the way to look at tariffs is that there are several different reasons
27:32
for, for why the Trump administration will push tariffs forward.
27:35
The smallest of all of them is what was happened with Mexico and
27:38
Canada, which is they're negotiating leverage.
27:41
So Trump does not necessarily want a long term battle with, with the Mexico and
27:46
Canada.
27:46
He has a priority on fentanyl, which is 1A and illegal immigration, which is 1B.
27:50
He wanted to threaten big tariffs, get the Mexicans and
27:53
the Canadians to do certain things.
27:55
It's not at all clear whether he communicated those to them, clearly, but
27:59
he wanted to do certain things and then call them off.
28:02
He wanted to get a success story here on Mexico and Canada.
28:06
But I think because of the early experience of Mexico and Canada, markets
28:10
are reading the wrong lesson into what the rest of the term is gonna look like.
28:14
There are two other reasons to have tariffs.
28:16
If you're, if you're the Trump White House trying to push them forward,
28:20
one is to use them to restructure economic relationships.
28:23
There's a idea that other companies are, other countries are cheating,
28:27
that they're being unfair.
28:29
There's no reciprocity.
28:29
We're hearing that, that, that word a lot now.
28:32
And they want to restructure economic Relationships, but
28:34
also the domestic economy.
28:36
So the idea of setting up a tariff wall and then cutting tariffs for domestic
28:40
manufacturers and bringing back, bringing back more production, you know, rewarding
28:44
workers, rewarding taxpayers, et cetera, that's the economic component of this.
28:49
The other part of this is they want tariffs to be paid for, for the, for
28:53
tax cuts.
28:54
And you can't do that through bilateral, through bilateral tariffs.
28:57
You need a broader type of tariff to apply,
28:59
some sort of global tariff to bring in sufficient revenue.
29:02
That's where all of this is going.
29:04
Now, where, in what order, what sequence?
29:07
That's always the big question, because there is a plan and there has been a plan,
29:11
and the plan is just whatever Trump decides he wants to change the plan to
29:14
that particular day.
29:16
So right now, would anyone have said that China would have gotten off
29:20
easiest in the early going and maybe Canada the hardest and the EU next?
29:24
That wasn't necessarily the way I heard it was gonna be scripted out, but
29:27
that's the way we're going right now.
29:29
I think the 10% tariffs on China, for instance, are negligible.
29:33
I think they're sort of a best case scenario for China, if you see Mexico,
29:36
Canada tariffs, because, yes, they don't want 10% tariffs on their goods.
29:40
But if they can have a 10% tariff and Mexico and Canada,
29:44
who are the rival producers, have a 25% tariff,
29:47
that is going to shift the trade deficit even larger onto Chinese production.
29:52
So we're gonna be buying more from China with a 25% Mexico Canada tariff and
29:56
a 10% China tariff.
29:57
So I think Beijing right now is saying, I don't know what's going on, but
30:01
let's just let this play out.
30:02
It's certainly not a worst case scenario for us.
30:05
I think we're gonna move to Europe next.
30:06
I think we're talking about the global tariffs and the latest iteration of that
30:09
is this reciprocal tariff where they're working on.
30:12
But I think that the big takeaway here is that tariffs are gonna play a much more
30:16
fundamental role in the economic strategy of this administration.
30:20
There's this idea that if Trump sees a 2% fall at the stock market,
30:23
he'll get scared off and run the other direction.
30:25
That's not gonna happen this time around.
30:27
They have much more desire to push forward a broader tariff program.
30:32
They want to completely change these international relationships bilaterally
30:36
and multilaterally.
30:37
So I think we're gonna be seeing a lot of this tariff talk going forward.
30:40
And I think that one of the lessons that I think Trump brought out,
30:44
maybe not lessons, maybe his regret from his first term is if you listen to so
30:48
many of these advisors around him telling him, back off, don't go too hard.
30:52
He doesn't have to run for reelection again.
30:55
I think that he's gonna go hard until something really, really,
30:58
really stops him to push back or he succeeds in what he wants.
31:01
>> Elizabeth Economy: So you're actually making these tariffs sound strategic,
31:06
as though there's a comprehensive, well thought out plan.
31:10
It do you mean to convey that.
31:13
>> Leland Miller: There is a well thought out plan?
31:15
Now you could say the plan is a good one or a bad one and
31:17
you could say that let's do.
31:18
>> Elizabeth Economy: That then let's do that.
31:20
Is the plan a good one or a bad one in your opinion?
31:24
>> Leland Miller: I think if done right this, so I spent a lot of time around
31:28
economists and I was presenting on this issue last week.
31:32
And every economist in the room is just tearing their hair out saying tariffs
31:35
are bad, they'll raise the costs, blah, blah, blah.
31:38
Fair, you have to worry about this.
31:40
And there are certain things you can't really do from a sequencing perspective,
31:44
like tariff Mexico heavy at the same time you tariff China heavy,
31:47
or you're gonna have enormous inflationary pressure building.
31:51
You can't do a universal tariff.
31:53
You can do it at a certain level, but
31:54
if you do it at more of a level you don't have an exemption,
31:56
then you're going to also have inflationary pressure.
31:58
So this could be done wrong.
31:59
It could Create inflation.
32:00
It could undo everything they want to do.
32:02
If you look at this strategically,
32:04
then there are a lot of things that this can accomplish.
32:07
Mexico and Canada, you, hopefully you get out of this with an agreement,
32:10
they're going to, they're going to, they're going to battle again in,
32:13
you know, if, probably not a month from now, but certainly into 2026
32:17
when USMCA is revised so there'll be more tiffs between the Mexican Canadians,
32:20
but for the most part, take that out of there.
32:23
Don't, don't have that.
32:24
No ruffled feathers as, as, as much as you can.
32:27
Look, if you look at China, there needs to be more of a, of a strategic plan to, how,
32:31
how to make sure the supply chains need to be diversified outside of China.
32:35
You know, the biggest, the biggest issue right now is not just technology and
32:39
all these other issues.
32:40
We have flooding, potentially flooding in the United States, either now or
32:43
next year or the year after that.
32:44
Whether it's EVs or it's batteries or it's legacy chips.
32:48
The biggest issue is supply chains that are reliant on China and
32:51
that they could cut off pharmaceuticals, antibiotics in particular.
32:55
As long as you allow leverage over another country to be able to have these,
33:00
you have nothing.
33:02
So I think that being smarter, doing much harder,
33:04
much more of a push against China in terms of supply chain diversification,
33:09
using tariffs when necessary, using export controls or
33:12
investment restrictions as necessary, I think that is a very thoughtful plan.
33:16
And then when you look at the eu,
33:18
everyone says, you can't have the fight with the eu.
33:20
Look, here's the problem with the eu.
33:22
The EU is a bureaucratic mess.
33:24
It's anti innovation, has no capital markets, it won't defend itself.
33:28
If Trump went at Europe in a way and said, here's what we need from you,
33:33
I think 2/3 of the Europeans would say thank you, Trump on this.
33:37
They'd say, thank you, Trump.
33:38
Now, that doesn't mean it's going to be done nicely and
33:40
it doesn't mean there's not going to be ruffled feathers there.
33:42
But if you think if the end of this was a push to release the fiscal
33:47
breaks in the eu, particularly by rolling Germany, you pushed for
33:51
weapons to be able to be paid for outside the restrictions of borrowing.
33:57
So you actually could fund yourself sufficient weaponry to be able to defend
34:01
your own continent, you were moving closer to some sort of capital markets
34:06
union where you could actually fund innovation at the ground level.
34:10
In Europe, you could see a Europe two or three years from now, that's saying,
34:14
you know what?
34:14
We really don't wanna say thank you, Trump, but, man,
34:17
he pushed us to do some things we otherwise wouldn't have been able to do
34:20
because Germany's this stodgy bear in the middle that just sits there with his arms
34:24
crossed and won't let any development happen.
34:26
So if you get to that point and then you have an agreement between the,
34:29
between Europe and the United States, can you move to China in concert and say,
34:33
here are things we are going to not just unite on, but actually coordinate?
34:37
Whether it's export controls, whether it's investment restrictions,
34:40
whether it's inbound investment, whether it's trade,
34:43
you have the ability to have a much more powerful transatlantic relationship if you
34:46
get some of this stuff out of the way early on.
34:49
And so, look, things will happen in one direction, and they may be great or
34:54
not, but the idea that this is not a plan that can be done if sequenced right and
35:00
laid out, there are some strong prospects there.
35:03
So we'll have to see what the reality is.
35:05
But the theory behind it isn't as cockamamy as a lot of people are trying to
35:08
make it out to be.
35:09
>> Elizabeth Economy: Okay, well,
35:09
I'm definitely having you back on to evaluate the, the success of this,
35:14
because I have to say, generally, I find you very compelling.
35:18
Not sure I'm buying this one right now as I'm watching everything unfold, but
35:23
maybe that's just a lack of strategic foresight on my part.
35:27
All right, let me just ask you about one more thing, which is the Panama Canal.
35:31
I just can't resist, I mean, is President Trump has come in hot and heavy [LAUGH].
35:37
I think it's even within the first two weeks of his administration talking about
35:42
Chinese influence in Panama and
35:44
specifically targeting what he sees as control over the Panama Canal.
35:48
As far as I know, we have not had any issue with the transit of our ships and
35:54
goods through the Panama Canal to date.
35:57
It is true that at both ends of the Panama Canal,
36:01
the ports are managed by Hutchinson, which is a Hong Kong private port company.
36:08
You know, was this a smart play?
36:11
Was, you know, what, what was this all about?
36:14
Why Panama?
36:15
You know, right from the get go.
36:18
>> Leland Miller: It's about sort of a Newman Row doctrine.
36:20
I think there's a lot of concern in this administration and broadly in the national
36:24
security community that we are not doing enough in our near abroad,
36:27
we're not doing enough to defend against Chinese influence in South America.
36:30
We're not doing enough to defend waterways.
36:32
So I think that Panama Canal always been interesting because there's such a heavy
36:36
Chinese presence there.
36:37
And they do some things.
36:38
Is Belt and Road that big a deal when some of these countries draw?
36:42
Well, it's sending the wrong signal, certainly.
36:44
So I think that what there is right now is this concerted effort at
36:48
the beginning of the administration to say, enough,
36:51
you know, we're now taking this stuff back again.
36:54
Is it done in the nicest way possible?
36:56
No. Is it done tenderly?
36:59
No, but it's, I think that the message behind it is,
37:03
we are worried about our near abroad.
37:05
We're worried about Chinese control of strategic waterways.
37:08
This is why Greenland is coming to focus.
37:11
It's about enough is enough is enough with the Chinese doing things in our
37:14
hemisphere, and we're going to start pushing back against that as a priority.
37:18
So I think what you have to look at here is a strategy,
37:21
you can critique the tactics, but I think the strategy itself is sound in
37:25
that we have been too lethargic on pushing back against Chinese influence and
37:29
Chinese movements for a long time.
37:31
And I think that's where this is going.
37:33
>> Elizabeth Economy: We could have such a much bigger debate on this.
37:35
I, I do think, frankly, that there are smarter ways to go about this.
37:40
We could, you know, join, for example, you know, the UN Convention on Law of the Sea
37:44
and, and therefore have access to things like seabed mining, which we now don't and
37:49
are allowing the Chinese control.
37:51
And we're trying to think about big plays over the next decade and more.
37:55
I think that's what we ought to be looking at rather than talking about
38:00
taking over Greenland and Panama Canal, which, by the way [INAUDIBLE].
38:05
>> Leland Miller: Focus on the street strategy,
38:06
I'm not defending some of the tactics, but, yes.
38:08
>> Elizabeth Economy: Okay, okay, [LAUGH] I mean,
38:10
I think we're probably in broad agreement on the overall sense of needing to
38:14
compete more effectively against China and with the Belt and Road, maybe,
38:19
yes, as you say, a difference on the nature of the tactics.
38:23
So I always end up with a couple of just quick, quick questions.
38:27
And so, number one, and I think you're going to have a great
38:30
answer to this one because you've already started to talk about this.
38:34
If you were sitting in the White House right now, and frankly,
38:37
I kind of wish you were, what would you advise
38:40
President Trump as you're looking at the US China trade relationship?
38:44
What might you suggest he do differently or in addition to what he's been doing?
38:50
>> Leland Miller: I think my biggest advice regarding the trade relationship is
38:54
make sure the trade relationship isn't the sum total of the US China economic
38:58
strategy.
38:59
I think we need to look outside of trade.
39:00
Now. President Trump is going to do
39:02
what President Trump wants on trade and tariffs.
39:03
This is something that's, like,
39:05
fundamental to the way he thinks about the world.
39:07
So steering him away from any type of things like that,
39:09
I think is not particularly a fruitful approach.
39:12
But I think that the better way to look at this and what I have advised this
39:16
administration to do, is to try to have a more comprehensive strategy towards China.
39:21
I think the reason that we on both sides of the aisle have failed in the past is
39:25
every time somebody pushes one thing, it comes at the expense of another program.
39:30
So if you have a focus on export controls, then something else gets minimized.
39:34
You have a focus on investment restrictions,
39:36
then something else gets minimized.
39:38
And so we're trying to hit that target,
39:40
and we're trying to hit that target instead of coming across and saying,
39:43
what do we need to do in order to have a smarter US China economic strategy.
39:47
Now, I'm a commissioner on the US China Commission and
39:50
anything I say is not reflective, of course, of what the Commission thinks.
39:54
But what we did do last year is have this hearing that I co chaired on key economic
39:58
strategies towards China.
40:00
China leveling the playing field.
40:01
And the idea behind it was we need to think of a way to figure out where
40:05
the vulnerabilities in the relationship are and
40:07
go at those in a concerted ways with allies and partners.
40:11
Make sure we have thoughtful trade,
40:13
make sure we have thoughtful technology controls to make sure that we're
40:17
not providing the inputs for the PLA to build an army to kill us.
40:20
Let's make sure we have investment restrictions so
40:23
that all these funds that we refuse to identify and
40:25
track as a US Government don't end up flowing to the party, to the military,
40:28
to someone else, and going places we don't want to, to build up Chinese technology,
40:32
to build up the Chinese military, to build up the party, whatever it might be.
40:36
So I think you need some of these defensive measures put into place on
40:40
trade, on technology, on investment.
40:42
At the same time, you need to be worried about what's happening back home.
40:45
We have enormous supply chain vulnerabilities to China.
40:48
And we have a deindustrialized economy that is in really, really bad shape.
40:52
We don't have the ability to build ships anymore, we don't have the ability to
40:55
build icebreakers or we don't have the ability to build a lot of things anymore.
40:58
We need to build up our manufacturing prowess here.
41:01
And it's not just in the United States, it'll be with allies and
41:04
partners in cahoots.
41:04
But we need to have an offensive defensive plan that's an integrated comprehensive
41:09
strategy on China.
41:10
If we do that, then that means we don't have to have some sort of, you know,
41:14
build ourselves into a crisis.
41:16
It means we're not going to have to, you know,
41:19
throw every anti China thing against the wall and see what sticks.
41:23
You figure out what the real vulnerabilities are for the United States,
41:25
this relationship, and what opportunities we should be taking advantage of.
41:28
Focus on those three to five things and then build out from there and
41:32
have an integrated economic security strategy for
41:35
the United States that's principally based on our long term competition with China.
41:39
I think that there's a possibility the administration moves towards this.
41:43
I think there's also a possibility that tariffs end up taking all the oxygen
41:46
out of the room, which is why it's really important that people with sort
41:50
of a nuanced take on keep pushing, keep pushing,
41:52
keep pushing for people in charge to be doing the more sensible thing.
41:56
>> Elizabeth Economy: So I think that's really terrific.
41:58
And I guess in that vein we've seen.
42:01
I'm just going to push you a little bit.
42:02
We've seen Just over the past week to two, the moves to shutter USAID and
42:08
of course, hits on other organizations.
42:12
And I sit on the board of the National Endowment for Democracy, so
42:15
let me put that out there.
42:16
But those are organizations that are kind of frontline proactive in terms
42:21
of bolstering US presence on the ground,
42:24
whether it could be in technology training.
42:27
But really helping to support democracy across the world.
42:33
And in many respects, therefore being,
42:36
I think, fundamental to our competition with China.
42:39
Is that the kind of thing that we ought to be thinking about also in terms of
42:43
a comprehensive strategy with regard to, to China?
42:46
Or do you see those as fundamentally divorced?
42:50
>> Leland Miller: No, those are important facets of the strategy as well.
42:55
I think the problem here is that again, I defend the strategy,
42:59
not all the tactics I agree with.
43:02
And I think that what's happening right now are some huge broad strokes,
43:06
big headline moves.
43:07
And I think the next year or so we'll be walking back from some of those things.
43:10
They're going to look closely at some of the things that USAID funded and
43:13
they're going to say, my gosh, we got to get rid of those.
43:16
And then they're going to look at other things, say, hey, you know,
43:18
that maybe is a pretty good idea.
43:20
This is focusing on the Chinese Communist Party in a way that maybe other think
43:24
tanks and the government itself can't do.
43:26
So I think it's about getting past this initial burst of sort of headline,
43:31
you know, politics, and then moving into figuring out exactly the way that we
43:36
need to fund some of these things.
43:39
I know very few China experts, you know, in the government or
43:42
out right now who think that taking away all these things is a good idea, but
43:46
it's happening as part of a broader sweep.
43:48
So the hope is that the bad stuff gets swept away, the good stuff gets retained,
43:53
maybe through another mechanism.
43:55
But yeah, I think, I think that's right.
43:56
This is, again, the strategy makes sense, the tactics need some work, and I think
44:00
that's the hope going forward that that's, that's going to be the improvement.
44:04
>> Elizabeth Economy: Okay, fingers crossed on that.
44:06
Just quickly, like, what book or article is kind of your favorite that
44:10
you would recommend that maybe people don't really know about?
44:14
>> Leland Miller: So I have a hard time with this because I spend so
44:16
much time on China.
44:17
I read a lot less, a lot fewer China books than I used to.
44:21
I spent a lot of time reading technical stuff on semiconductors and quantum and
44:24
biotech right now.
44:26
But you know, what I advised some of our younger analysts to do is go back and
44:31
Read some of the classics on Mao and Deng Xiaoping and
44:34
see how we got to where we were.
44:36
I don't think you can do China policy, even as someone who's entering
44:39
the field right now with a lot of technical expertise,
44:41
if you don't understand the Cultural Revolution.
44:43
You don't understand the Long March, Cultural Revolution, Great Leap Forward,
44:47
and all these important parts of how we got to where China is right now.
44:50
It's also important in understanding Xi's mindset, since Xi was purged,
44:54
that his family was purged and then he sort of went through all this.
44:57
So, I mean, I usually recommend two books, it might surprise you.
45:02
One of them, my favorite biography of Mao is the Jung Chang book,
45:09
sorry, I'm getting my two books confused.
45:14
One of them was a ghost, that's by Jung Chang, what was that called?
45:17
It's about three generations of women in China.
45:20
>> Elizabeth Economy: Sure, Wild Swans.
45:21
>> Leland Miller: Wild Swans, I think that-
45:22
>> Elizabeth Economy: Absolutely one of my
45:23
favorite books as well.
45:24
>> Leland Miller: My gosh. >> Elizabeth Economy: Absolutely.
45:25
>> Leland Miller: I thought that's fantastic.
45:26
It surprises people that I recommend that to everybody.
45:29
I'm with you on that.
45:30
The other is not by Jung Chang, although she did some work on Mao.
45:35
I like the Mao book by, was it Li Zhisui, who was Mao's doctor?
45:40
>> Elizabeth Economy: [LAUGH] That one was-
45:41
>> Leland Miller: That was a lot of fun.
45:43
>> Elizabeth Economy: Yes, that was a great read.
45:44
>> Leland Miller: Now there's a bunch of Mao books and a bunch of Dunn books and
45:47
they're all quite good.
45:48
But my recommendation would be that get a couple books that are modern.
45:53
I know you put out some great ones in the last decade or so that people should read.
45:58
But in addition to doing the reading on what US China relations are right now and
46:02
how we got here, go back and read the fundamental stuff from the 70s and
46:06
the 80s and the 90s.
46:08
That's really how we got here.
46:09
And that would be my recommendation for people trying to get in the China field
46:13
that maybe didn't have a background in Chinese history originally.
46:16
>> Elizabeth Economy: All right, I agree.
46:17
I think those are two of my all time favorite books.
46:19
So I'm with you on that last question.
46:23
Likelihood that we have another Nixon Mao moment with Trump and
46:27
Xi Jinping with President Trump and President Xi.
46:31
Do you see a breakthrough in the relationship in President Trump's
46:35
second term?
46:38
>> Leland Miller: I don't see a Nixon moment.
46:41
If you're asking whether we could move towards a phase two deal, we could.
46:45
Because all of this depends on what Trump asks from China.
46:50
If he's asking to buy commodities, he's asking for a share in TikTok.
46:54
He's asking things that are more transactional in nature.
46:56
Beijing will give that to him in a heartbeat.
46:58
They may make him work for it.
47:00
But that's absolutely, could be some sort of next, next, you know, separate deal.
47:04
If the idea is we're going to move towards a phase two deal as it
47:07
used to be described, which is we're going to fundamentally force a restructuring of
47:11
the Chinese economy, then I don't think that we can get there easily
47:14
because we're never going to be able to tell China to restructure.
47:17
What we could do is we could put the economic strategies in place via
47:21
tariffs and tariff rate quotas, through export controls,
47:24
through investment restrictions, through supply chain diversification,
47:28
all these other things to make this restructuring happen,
47:31
because we have such leverage in the economy as the big consumer base.
47:35
So I think we can make some of these structural things happen if we're willing
47:38
to take some pain.
47:39
But the idea that we're going to come to some grand agreement,
47:42
I think that Trump could come to a phase two deal, but I think there'd be enormous
47:46
pressure throughout the rest of the term to say, is that it, Is that good enough?
47:50
Are we doing what we need to do?
47:52
So I think there'd be enormous pressure for them not to be it.
47:54
So I'm not going to say that there can't be a deal.
47:57
I just don't think there could be a Nixon moment, a Nixon-Mao moment.
48:00
>> Elizabeth Economy: Great, and I agree with you, and
48:02
I think you might want to add in, to work with our allies and
48:04
partners on this, right?
48:05
Because I think you said that at the outset as well, that this is having them
48:09
on- Fundamental, this is- In order to restructure the Chinese economy.
48:13
That's probably too big a job for just the United States.
48:17
>> Leland Miller: It's fundamental, and I feel so strongly about this.
48:20
If you look at the hearing that I was talking about economic strategies,
48:24
on Xi economic strategies for China, we had a bunch of panels.
48:27
The last panel was completely on allies and partners and
48:30
how to coordinate your strategy.
48:32
So you get maximum oomph for your export controls, maximum oomph for your trade and
48:37
tariffs, maximum oomph for your investment restrictions.
48:40
It's extremely important.
48:41
The tension here is that most of our allies and
48:44
partners don't want to do what we want to do.
48:47
Some of them want to do some of it, some want to do none of it.
48:49
So how do we get there without causing some pain in the meantime?
48:54
And I think that's the problem that President Trump is left with.
48:57
How do we get, how do we get from A to D and
49:00
not go through some problems in B and C?
49:03
I think we can, but I think that there's going to be some turbulence in B and C,
49:08
so we will visit it together someday [LAUGH].
49:10
>> Elizabeth Economy: [LAUGH] On that note, I can't thank you enough, Leland.
49:13
You know, I had in mind sort of narrow discussion on Chinese economy and
49:18
US China trade relationship, and you've just, I think, you know,
49:22
opened the aperture in some really fascinating ways.
49:25
So thank you for coming on.
49:27
And like I said, I'm going to have you back on again so
49:30
that we can revisit some of your predictions and see where we stand.
49:35
>> Leland Miller: It's my pleasure.
49:36
Happy to do it.
49:37
>> Elizabeth Economy: If you enjoyed this podcast and want to hear more reasoned
49:40
discourse and debate on China, I encourage you to subscribe to China Considered via
49:44
The Hoover Institution YouTube channel or podcast platform of your choice.
49:48
In our next program, I'll be speaking with Chris Walker, who is the Vice President
49:51
for Studies and Analysis at the National Endowment for Democracy.
49:54
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