In the second part of China Trade Monitor's interview with Scott Kennedy, he talked about how the Chinese leadership views the relationship with the United States and sees its non-market policies in the context of bilateral trade relations. Kennedy is senior adviser and Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies (CSIS), a think tank based in Washington DC.
The first part of the interview is here.
CTM: I know you recently visited China. From what I have seen, the Chinese government has been fairly muted in terms of its policy toward the US, and it has not really taken a lot of action toward the US as retaliation. When you were traveling in China, did you get a sense of what is China's policy toward the US now?
Kennedy: I could talk about this from a couple of ways. First, broadly speaking, China's leading policymakers, and those that have influence around them, share several viewpoints. There's not a consensus in China as a whole, but those that have significant influence over policy have a consensus. They view the United States as having ill motives towards China, wanting to contain China, limit its development, undermine the Communist Party's monopoly on power. I think they view the US actions since 2017 as the sole source of the decline in the relationship, and believe that China is blameless in the growing frictions that we face.
In addition, they think that China is winning in this contest, that the Chinese system is better, more durable. China's political system is more stable. That the US is a declining empire, which is simply trying to keep itself on top even though its economy is facing significant troubles because of the gap between rich and poor, social fragmentation reflected in crime, and a horrible response to the pandemic. And [China feels] that time is on China's side.
And lastly, in their view, they can't trust the Biden administration, and they think it's unlikely the Biden administration would reach a deal that would provide significant reassurance to China on any of its core interests. And that even if the Biden administration would shake hands with Chinese leaders, a deal would be undone either by Congress or by a future American president, who would not behold themselves to an agreement the Biden ministration would reach. Because the US is basically lost, there's no longer consensus in the United States about defending the liberal international order, and all of its elements, including an open international economy.
So that's broadly where the Chinese sit, and think that they are doing nothing wrong, and the US is totally unjustified in the types of measures that it's been imposing. And to me, that reflects a total lack of self-awareness about why there is concern with China in the first place.
And yes, China has not retaliated in response to the technology restrictions that the US has imposed, and others are following along with. It has only retaliated on diplomatic restrictions, journalists, embassies or consulates and the like. Nevertheless, China has maintained and fortified a non-market economy that plays by different rules and has ongoing consequences for different industries around the world. So China is the world's largest user of industrial policy spending. We documented that in a report that we published in May called "Red Ink." So the status quo of Chinese behavior is troubling and that is a large reason why we are seeing the US respond in the way it has.
My own view is that both sides are responsible for the decline in the relationship and their loss of confidence that a deep commercial relationship is in their best interest and [the decline has] also shaken their broader confidence in the benefits of interdependence. So to restore their confidence in having a deep bilateral relationship and interdependence, both sides have a lot of work to do. And I think that even though the US’s moves are highly explicit and visible, at the end of the day, it's probably China that needs to move further, because its economic system is more inconsistent with the liberal international economic system than the US's. Obviously the US has changed by imposing significant restrictions based on national security, and has now moved toward accepting industrial policy as a central part of governance. But these are relatively new, more recent adjustments, whereas China's are more deeply embedded in the basic constitution of its political economy.
CTM: Just a quick follow up on your point on China's retaliation. Some people believe that retaliation will come at some point. What do you expect in this regard? So far they have brought the issue to the WTO. Do you expect more actions, or do you think that's what the Chinese government will do for now, and then they're going to wait to see what the WTO says?
Kennedy: I think the likelihood of direct retaliation against individual American companies or industries is relatively low because China has a weak hand. If it were to highly restrict Apple's business in China, that would lead to the closure of Foxconn's factory in Zhengzhou and elsewhere, and the loss of hundreds of thousands if not millions of jobs in China. If it were to announce blatantly that it would never take another Boeing airplane, it would result in a whole variety of restrictions that would kill China's own new commercial aircraft the C919, because everything that's in that plane that keeps it in the air is American or European. And the US would immediately restrict the sharing of that technology.
And so in advanced technology, China just doesn't have many good moves to play directly in terms of retaliation. Instead, what it's doing is just doubling down on its efforts to develop its own technology alternatives, peel away support [for] US measures from US allies and companies that have a significant share of their business in China, and then hope that they can withstand these restrictions and achieve breakthroughs that allow them to continue to develop. I suppose they can take the moral high ground, which is what one would do at the WTO and Davos and other venues, but those aren't really going to solve China's problems.
CTM: You had talked about Chinese non-market policies. I wondered if you had any thoughts or insights on how the Chinese leaders see their industrial policy in the sense of how it compares to what goes on in the West. Do they see it as, "We basically do the same thing. We're just doing the same things that they are, so there really shouldn't be a problem with it." Or do they see it as, "Yes, we go a lot further, our industrial policy is more interventionist, it has higher subsidies, has greater involvement in the economy, but that's justified because we are a developing country."
Kennedy: I don't think there's a unified opinion on this. Sometimes you hear both. Everybody does it, or everyone when they're developing. Or you hear, well, the US has a whole variety of policy tools that aren't explicitly industrial policy, but they translate into that. "American monetary policy essentially provides cheap credit to everybody" would be their argument. And so if China had state-owned banks that are providing low interest loans to state-owned enterprises, and they don't have to pay it back, well, [China would argue], "it looks like it's explicit industrial policy from our financial system, but Janet Yellen is your industrial policy, or the Fed governor [is]."
I do think when you have a serious conversation with the Chinese about industrial policy, like we've done in the wake of our report, we interacted extensively with Chinese economists about this, and I talked to Chinese policymakers, I think that their view is China's a developing country. It also has a large state-owned sector and a lot of the industrial policy spending, at least that we categorize as industrial policy spending, in their mind, goes to support state enterprises, for reasons other than strengthening their competitiveness in different industries or vis-a-vis foreign companies. And so they wouldn't categorize that as industrial policy spending per se. France has a significant amount of state spending on its economy that is not really industrial policy. Government procurement, for example, in France is very large, but only a small proportion of government procurement in France is explicitly about improving the competitive position of French firms. So that is one type of argument that we've heard from the Chinese.
But I think some Chinese believe that China just needs to use whatever tools it can. It has a powerful state that can mobilize resources and leverage internationally. And therefore, Chinese industrial policy can also affect the behavior of multinationals and companies in other countries. Just look at what's happened in electric vehicles. Chinese industrial policy has had consequences, not only for the behavior of Chinese battery makers and EV makers, but for Ford and General Motors and European and Japanese companies as well.
So I think for me the underlying question that still needs to be addressed, that we don't have an answer for is, do the Chinese or anyone believe that we should have constraints on industrial policy spending? Or, the WTO claims through its agreement on subsidies and dumping that there should be limits. But it appears that China has essentially now decided that there ought to be no constraints, because they need to do so, and that others engage in industrial policy by other tools, and as a result of China's essentially reaching that conclusion, because of the scale of their economy, it is leading others to reach the same conclusion as well.
And so we have a collective action problem here, that is leading to the erosion of this original norm that industrial policy should be permitted only at certain levels under certain circumstances. And I would hope that the US and others would pursue the reestablishment of new norms about the role of the state and the economy that recognize the dangers of unmitigated unrestrained activity. The G7 has mentioned the dangers of going down this road, and the OECD and others are also doing research and talking about the dangers of industrial policy. But right now, it seems that the direction that different governments are moving is to keep up with others. So we're seeing that in semiconductors and other industries and so we may end up in a place where states are playing a much greater role in their economies than anyone would have individually chosen on their own.