At the 2019 Aspen Security Forum, NCUSCR President Stephen Orlins and Director Anja Manuel join a panel discussion focused on the future of American business in China amid ongoing trade tensions. Recorded 7/18/19.
Speakers:
Anja Manuel Principal, RiceHadleyGates LLC
Director, National Committee on U.S.-China Relations
Stephen A. Orlins President, National Committee on U.S.-China Relations
Tom Pritzker Executive Chairman, Hyatt Hotels Corporation
Moderator:
Edward Luce U.S. National Editor, The Financial Times
TRANSCRIPT
Edward Luce: Okay. We’re going to build on the previous panel. We’re going to take it up a little bit in terms of altitude. We’re going to look at whether U.S. business can succeed in China? And as we’ve discussed before, it immediately entails the question, “What is it that U.S. business wants the American government to do on its behalf in terms of trade relations with China?”
So we have a very, very qualified panel to discuss this hugely important and, I think, underappreciated subject. Starting with Tom Prescott. Needs no introduction, a very well-known businessman, philanthropist, head of high-end hotels, many business interests in China, money-making, I believe.
And next to Tom is Anja Manuel, who is the co-founder and principal of RiceHadleyGates, LLC, a company that advises American businesses on how to navigate international waters, particularly Chinese waters, author, and former state department official. And finally, Steve Orlins, who is Head of the National Committee on U.S.-China Relations, which has been around, correct me if I’m wrong, Steve, since 1966, since before ping-pong diplomacy.
And which has always existed and still exists to promote understanding and engagement between the United States and China, something that is perhaps a little bit rarer nowadays than it was a few years ago. And so, Steve, since you’ve been in this role since 2005, you have seen a complete transformation, or at least a big transformation, in how U.S. business views China.
It used to be pretty clear that most U.S. business lobbies, chamber of commerce, business roundtable, etc. with perhaps the exception of the National Association of Manufacturers, would basically argue China’s case to some degree in Washington, argue it should be ran into the WTO, that we should be patient that globalization is going to pay off for all of us eventually.
Now, is there a business consensus? It seems to be pretty much invisible if there is one. Talk to us a little bit, set the table a little bit, about what’s changed since you became head of the National Committee on U.S.-China Relations.
Stephen Orlins: Happy to do that. There’s no question that the consensus that used to support constructive U.S.-China relations has dissipated, and the business community was the ballast of that. And it’s interesting because I, kind of, wrote down a few numbers, which makes this very surprising, which is, revenues, reported revenues, so publicly listed companies that have talked about their revenues in the greater China area of Taiwan, Hong Kong, and China: $52 billion from Apple.
General Motors sold 43% of its total car production in China. Caterpillar, $12 billion, Starbucks, $4.5 billion, opening a Starbucks almost every day. Nike, $5.2 billion, Texas Instruments, $7 billion, Qualcomm, $15.1 billion. And, Anja will point out that’s going to disappear given the Huawei situation.
So given that, why has this consensus disappeared? Why does the business community not stand up to the Trump policies, which based on polling and discussions with businesses, is destructive to their business in China, destructive to their exports? U.S. exports to China are now dropping. They were down 13% in the second quarter. So it’s clearly wrong, but they’re not standing up. And I think there are a bunch of issues and some relating to very specific actions that the Chinese government has taken.
One is just ‘promise fatigue.’ Chinese always are saying, “We’re going to do this,” and they never get around to doing it. They’ve promised market access, they’ve promised IPR protection, they’ve promised regulatory transparency, they’ve promised a level playing field, and it’s not happening. So, at some point, you get tired of it.
And what happened is, around 2015, this began to deteriorate. In 2015, remember back, President Obama and President Xi had a terrific summit meeting at the White House, and they reached agreement on a number of issues. Two of which, I think, even though one is not business-related, had an enormous effect on the perception of China.
One was actually the South China Sea. China said, “We will not militarize the islands.” It’s not a big business issue, but everybody was aware of it. And what happens if the Chinese welched on that promise? They also said, “The government is going to stop hacking into U.S. businesses.” And for a time after the summit, it did. Now, everybody says, “It has continued again. The theft of intellectual property has increased again.” So that was, kind of, almost a seminal point in the business community’s perception.
The other was Qualcomm’s acquisition of NXP. Two and a half years ago, Qualcomm entered into a…how many billions of dollars? Fifteen-billion dollar acquisition, or more than that, acquisition of NXP, which had antitrust implications. The European Union approved, the United States approved, the Japanese approved, the Koreans, despite that this was competitive with Samsung, approved, but the Chinese sat on it for 18 months.
They sat on it. They didn’t act. Clearly, this was something that should have been approved, but it affected the businesses of Chinese competitors. So they failed to act, and Qualcomm paid a $2 billion breakup fee. Two-billion dollars is not small potatoes, even to a company like Qualcomm. But what that did is it told the business community, “You’re not going to get regulatory fairness,” so that perception shifted even more.
Luce: When you say the business community, clearly there was a consensus. You’re saying there is a new consensus now in business?
Orlins: It’s a divided consensus. There are those who believe that Trump’s policies are killing their business, that we’re losing the fastest-growing consumer market in the world and they’re counterproductive, and there are those who believe that it’s terrific, that he’s shaking it up. And it’s important that the Chinese go through this structural reform, which we heard talked about in the last panel, and that they do this. So it’s okay to kind of have short-term pain for long-term gain.
Luce: So, something approaching that. Anja, you wanted to intervene.
Anja Manuel: I just want to jump in and build on what Steve said because I agree wholeheartedly. For me, the inflection point came with the Xi’s state visit to Obama in 2015. It actually happened even before Trump as much as we always like to blame President Trump. And you said it exactly right, it was ‘promise fatigue.’ So I live in Silicon Valley, I work with a lot of American tech companies.
I would say before 2015, all the questions we were getting is, “What are we doing wrong? Why are we, specific American company, not succeeding, and what can we do to help the Chinese understand that we’re on their side?” Then before Xi went to Washington, there was a dinner in Seattle, that I think maybe all of us were at, and several of…
Luce: I hosted.
Manuel: Yeah, you hosted. And several of our clients said, “How can I avoid being in the picture with Xi?” And from then on, it’s really been, “Well, it’s time for them to buck up and do what they need to do and give us market access and protection.”
Luce: So, in answer to the next question, which I don’t think I need to pose, you agree implicitly with this premise that Trump is right to call out China, that this consensus was shifting before Trump was even nominated?
Manuel: I do agree with that. I think the way he’s going about it is all wrong.
Luce: Okay. We’re going to get into the ‘all wrong.’
Orlins: I do not agree with his approach. But does China need to reform? Yes. I think the approaches that we’re taking are the exact wrong approaches. And, in the last panel, we heard talk about enabling the reformers. Bill talked about it, there still are lots and lots of reformers in China. And what the policies that we’ve adopted are disenfranchising the reformers. We are making sure that the reform that they are seeking to advocate for will not be implemented.
Luce: So, at the moment, I want to get on to Anja, and decoupling and bifurcation and all these sort of larger technological issues. But, Tom, you’ve been involved with your various businesses hired included in China for a long time, and you make money and continue to make money. Am I right?
Prescott: Yeah.
Luce: So is this…and you’re about to hire, what is it, 50,000 Chinese employees. Is there any reason for you to suppose you’re not going to continue in your sector to make money in China?
Prescott: So what I’d say to that is I think that we have alignment with Chinese interests at the moment. I think that, as China develops, we may fall out of alignment, and that’s when I’m in trouble. And so, I think if it is building a business model that has alignment with China’s interest, and then how can I make it more sustainable, and what am I going to do when it falls out of alignment with them? Because when it falls out of alignment with them, we’re in trouble.
Luce: And by alignment with them, you mean, you’re hiring 50,000 people. You’re training them, that’s good for China? And whilst that’s the case, they’ll treat you well?
Prescott: Yeah. I think that Chinese look and say, “What are you doing to contribute to our national wealth? And if you’re doing something to contribute to our national wealth that outweighs the profits you’re taking out, I’ll take it.” The moment that calculus no longer holds, then you have a different environment, and that’s true with China Inc. and that’s true with Chinese partners. And so that’s why you see such problems with the partners falling out when the dynamics change and, therefore, that alignment changes.
Luce: Okay. So Anja, a lot of the trade disputes that Trump focuses on and likes to talk about are essentially 20th-century products. They’re soybeans, they’re toys, furniture, steel, ‘aluminium,’ as I pronounce it. I believe you say aluminum, that kind of thing. You’re focused more, as I think many strategic minds on the 21st-century battle. And this fear of these predictions, a bifurcation, first made by Eric Schmidt of Google, of Alphabet, of decoupling. Is that something that you expect will happen?
Manuel: I think it’s already happening, and it’s a tectonic shift that won’t shift back, even if we get a trade deal. So you see it from toys to motherboards, which are the things that hold all the circuits that run in your computer. A third of American companies that were export-oriented have shifted production out of China in the last year. Ninety-percent of motherboards were created in China in 2017, now it’s 50%, and dropping rapidly.
And those are not small shifts. You got to find a new factory, sometimes these are huge capital investments. You’re finding new supply chains and transporting your goods around the world, so I think that doesn’t shift back very quickly, no matter what happens. And it’s for a number of reasons, depending on the industry. If you’re in toys, and apparel, you know, Chinese wages are going up, so you want to move to Vietnam and Malaysia.
By the way, almost nothing is coming back to the United States. Our own manufacturing has decreased a little bit in the past year despite the trade war. So the big winners are the other Asian economies. And if you’re in tech, you’re worried about cyber espionage, which is a real issue, you’re worried about tariffs. And so you have different reasons for moving your supply chain out depending on who you are, but it’s happening across the board.
Luce: Okay. Did you want to say something?
Prescott: Yeah, I’d like to lay some context for how business should think about what they’re going to do in China, and how the U.S. government may think about enabling the private sector, okay with that? So, I think this context is really important. So we just went to 20,000 feet, I want to go to 30,000 or 40,000 feet. The context is changing, changes under Xi, changes as their economy grows. All businesses are different.
So if you think of Uber doing business in China, it’s different than Apple, it’s different than Hyatt, it’s different than Walmart, and, therefore, you don’t have this common view because some are fed more than others in terms of their businesses. There’s been a major pivot. We used to have complementary economies. They made cheap tennis shoes, and our consumers benefited.
That’s now pivoted to a competitive environment. They want to be in high-tech. They want to compete instead of compliment. I think the important thing to think about is, we have very different histories, and cultures, and values. Margot and I worked on the culture side of China. We do archaeology, we live in the 11th century when we’re in China. It’s really important because that’s their self-identity.
Their system reflects their cultures and values, and their system is profoundly different than our system. World order, from their point of view, came from Western values. They’re the Middle Kingdom, who says that we should comply with a world order that was organized around western values? Their system is a party system, Party is over everything. It’s over their army. It’s over their government. It’s over their individual behaviors.
And they think in terms of that, and, therefore, why should we change to accommodate you? Look at our history, Middle Kingdom, look at our scale, we’re not the ones who need to change. We’re now in a world where we’re of the same scale that you are, and so let’s review who needs to change and where the adjustments come from.
Luce: It’s fair to say, isn’t it, that, in spite of these fairly different cultures and histories, China is now becoming more of the upholder of global norms in terms of supporting the WTO and in terms of not having a trade war and arguing against protectionism, maybe very mendaciously. But it’s fair to say, they are actually upholding the universal values argument in economics.
Prescott: I think that’s the rhetoric, I don’t think that’s the reality. I think they don’t comply with rule of law. Yesterday, the NATO Secretary General talked about some of the key aspects of Western values, democracy, individual. They don’t see it that way, and that’s not how they see the world. That’s not their vision of the world.
Luce: Steve.
Orlins: Yeah. I think the idea that China is not going to economically change is inconsistent with, kind of, my 40 year’s experience. I moved to China 40 years ago, almost to the day, and I’ve watched the private sector be the engine of growth. What we’re now seeing is slowing growth in China. It’s the slowest growth in 25 years. And that is substantially not because of the tariffs, it’s because of what was talked about in the earlier panel, the focus of credit to the state-owned sector rather than the private sector. So they’ve basically taken Economics 101 and thrown it out and said, “Oh, we can do this through state-owned enterprise funding.”
These people are well trained. Every economic official who sits at the higher level of China has really had a lot of experience. When they get this data, they’re going to understand that these policies are going to fail. Whatever the United States is arguing for, they’re going to have to move back towards funding the private sector because, for over 37 years, that’s where the economic growth has come from.
So regardless of what the United States is asking for, and somebody said in the last panel, that’s good for China. The reforms that we’re asking for are actually good for China. What the Chinese government is engaging in now is incumbent protection, incumbent protection, and that’s not good. It used to be great when I was an investor at Carlisle, it is not so good when you’re a consumer, when you want high-quality service, etc. So, we will actually begin to see a shift when the data is clear. And, the data is clear now, and we’re seeing green shoots. We’re actually seeing change.
Manuel: Just to jump in, and I think you hear from Chinese reformers, many of us here spend a lot of time there, that Xi Jinping isn’t listening to them just like President Trump isn’t really listening to some of his advisors. That makes this very difficult.
Orlins: Within the financial services sector, we’re seeing reform. I mean, talk to folks at Goldman Sachs, talk to Morgan Stanley, talk to UBS, talk to Chubb. They have now for years been banging on the door, and now it’s opening. Five years ago, 1% of China’s stocks were owned by foreigners, now it’s up to 4%. Because the financial regulatory folks have basically been schooled in the United States, they’ve been schooled in market economics, and they’re making these changes. It’s good for China.
Luce: And do you think that’s going to be true for technology, too?
Orlins: I think technology is a different issue because it touches on national security, right?
Luce: It’s a massive issue, right?
Orlins: It’s a massive issue.
Luce: We’re taught, you know, when we studied the Ricardian Theory of Comparative Advantage, even if your partner is closed and protectionist, you still benefit from being open. I’m not sure that applies to data. Does that apply, Anja, to artificial intelligence? We’re not just talking about economics and trade, we’re talking about national security defense systems. We’re talking about space. We’re moving from the nonzero-sum world of economics to the zero-sum world of geopolitics. How do we handle that dilemma without having a bifurcated, decoupled, de-globalized world?
Manuel: Well, here’s the problem when you talk about decoupling and tech, it’s one global web of innovation, right? So semiconductors are often designed right here in the United States, manufactured in South Korea, Taiwan, elsewhere, assembled into all of the devices in your pockets in China and then sent back here. Google has AI labs in the United States, in China, in Europe, all over the place, same with Alibaba, same with Baidu. So the idea that you can just neatly say, “This is the 1960’s, in the Soviet Union.”
And I do think a little bit, and I would talk to the Washingtonians in the room, the East Coast sees this a little bit like, “Well, we just need better export controls, and we need CFIUS to be tougher,” and we’ve done that, and there was some reform that was needed. When I see the export control regulations that are coming out now, I worry that they vastly overreach, and they will harm our own companies’ ability to innovate as much as they harm China’s.
So the idea that you’re going to just break up the global web of innovation does not make a whole lot of sense to me because the Chinese will then just innovate with the Europeans, or Google will put its AI lab in Brussels and you’ll have the Chinese engineers there. So that, to me, sounds really hard. What I think we need to be focused on, and Sue said this a little bit in the last panel, so far we’ve been all on the defensive. How do we build a moat around our technology and protect it? It’s time to work on the offensive positive, and we are good at this.
I would start with, after World War II, we created the international system that has served us enormously well on trade but also on technology, on the IAEA, on all sorts of other things. It’s time to make another such effort to set the norms for tech, which no one is doing right now. We need 5, 10 countries to get together and say, “Here’s what we’re going to say about AI and privacy. Here’s how we’re going to set the norms for cyberwar. Here’s how we’re going to think about those things.” Those efforts are non-existent. Some academics talk about them behind the scenes, but there isn’t really a whole of community effort to do it, and we need it.
Just one more point, Sue talked about STEM education. Well, on the OECD PISA rankings, China ranks 10th in science and math education in the world, and we rank a measly 31st. That’s pathetic. We can’t compete if our kids can’t do math. So there are all sorts of things that we can do domestically, China spends a lot more on government R&D than we do.
And I have to say, and I say this to all my friends in Silicon Valley, you know, in China, everything that’s developed in the private sector lab ultimately finds its way back to the government, the Communist Party in the PLA, not here. Project Maven, we couldn’t even cooperate between the Defense Department and Google on a very basic AI project. So to an extent, I would say to my friends in Silicon Valley, we have to become patriots again.
Luce: And yet Google’s Peter Thiel, pointed out the other day is cooperating with China on this Project Dragonfly, censored search engine.
Orlins: My understanding was it was canceled.
Luce: It was canceled because of its employee both were, right, Maven and… So, Tom, those are some very good suggestions from Anja about collaboration rather than bifurcation. What about Nick’s question on Trump withdrawing America from the TPP? Do you think that has enhanced America’s ability to shape how China behaves, or do you think it’s reduced it?
Prescott: Yeah. So, I think I disagree with Steve on whether they’re going to pivot to the private sector. I think, at least under Xi Jinping, right, under a new leader, it’s possible. I don’t think so under Xi. And what I would say is their economic model is a whole of government model. It’s built on scale, what are the comparative advantages of scale? So, they’re able to direct their consumer base to buy domestically, they want to go to 2025. And I think that what we’ve got to get our arms around is we have to have scale to compete with them.
So I think we used to have scale, if you went back 30, 40 years, we were the gorilla, nobody could mess with us. In the future, that’s not going to be the case. We’re going to have some scale but not as much as China. So, we need scale to compete with them to undermine that competitive advantage, and alliances, to me, are the rational way. It’s pain in the neck, but that’s the rational way to respond to China.
Luce: So that’s definitely a yes. Americans should rejoin the TPP.
Orlins: Yeah. I think it could be absolutely the single best lever that we would have to shake Chinese behavior. When China acceded to the WTO in 2001, the narrative today, the fictional narrative was that China didn’t do anything. It’s not true. From 2001 to 2006, there were enormous changes in Chinese economy to comply with what was put in the WTO accession agreement, enormous. It was only in 2006, 2007 that…read the USTR reports from those years. It was very complimentary of China’s compliance. It was only slowly it began to back away and then has been correctly pointed out, over the last three years, it’s actually going backwards.
When Bob Froman was negotiating the TPP, the Chinese government came and spoke with us, a group of, kind of, American economists in an event run by the National Committee, and said, “We believe that if the TPP is concluded, if America is part of it, we will use that to lay out a path for China to become a member of the TPP. It would be just like the WTO. It would be the path for China to reform.” And we actually went, and I won’t say who, we saw senior people in the United States government, and the view was China would be too toxic, it will be tough enough to get TPP through the Congress.
And China was so toxic that this would doom it to defeat, so we didn’t go down that path. But in my dreams, somehow at some point in the future, we have some successor to TPP. The United States is part of it or re-joins the existing TPP with some amendments, and then we lay out for the reformers in China this path to accession. Doesn’t have to be tomorrow. WTO accession occurred over 15 years, but we lay out this path and we give the Chinese the opportunity to reform.
The Chinese government is not static. Again, these are well-trained people. They will understand. And the deal that the Chinese Communist Party has with its people, “We give you economic growth, you don’t challenge our power.” And the economy is slowing enough now that, over time, it becomes a challenge and reform. And they understand this.
The leadership does understand that reform will increase economic growth, but what their president is not willing to do is to make the trade-off. You got to give up some control for this economic growth. And at this point, he’s not willing to do it. When data gets worse, and it is getting worse, that is going to change. Can I just add one little point from…?
Luce: Indeed.
Orlins: So I was in China this Sunday and had a meeting. And there’s something called the discrepancy index, which is the difference between published GDP growth figures, and what we think are actual GDP growth figures, which are defined by electricity consumption, transportation, a variety of other things, imports, exports, which kinda give a clear view of real GDP.
The Chinese always have smoothed the public numbers, but what’s happening now is that discrepancy is increasing. That growth is not 6.2% as they said on Monday. It’s probably, in some sectors, contraction. In other sectors still growing, but probably, it’s really getting close to zero. That is going to force them to make these decisions. Will we allow the private sector to reignite growth?
Manuel: So, Steve, I hope you’re right.
Orlins: I’m an optimist.
Manuel: It’s always darkest before the dawn, and I don’t see the inklings of reform yet.
Luce: I thought it was always darkest before it goes pitch black.
Manuel: It’s pitch black.
Luce: Tom, I know you wanted to…
Prescott: Yeah. So I read a paper recently from an economist at BlackRock, very interesting. It says, how is national wealth created, where’s it lie in national cash flow? And, in the old world, it was agriculture. Then we have the industrial revolution, and it was manufacturing and oil. And the world of the future is national wealth is going to be created with technology. And he then goes about trying to value different pieces of technology.
He compares just the value of GPS to all of the auto companies in the world, and says, “No. I’d rather own GPS than all the auto companies in the world.” This goes to the issue of TPP. What I worry about is I think that’s correct. I think technology is what’s going to drive national wealth. I actually think Xi Jinping understands it and has a big sign over his door that says, “It’s the economy stupid,” and that’s how he behaves. And if that’s correct on technology, then TPP has to reflect the economies of the future, not the industries of the past.
Luce: So I believe, and correct me, any of you, if I’m wrong, that we have a consensus to the next two questions, which is, Trump’s right to call this out, but wrong to pull out of the TPP, right? So, Anja, a specific question about how he’s handling the short-term negotiations. Huawei was, first of all, banned, and now Huawei is, you know, in the mix. If he can get some 20th-century trade concessions, isn’t that precisely the wrong way around?
Manuel: Yes. It is precisely the wrong way around.
Luce: Trade deficits don’t really matter that much, right?
Manuel: Well, that would be my view, most economists views. Look, honestly, I’m not privy into the private discussions of USTR. From what I’ve heard is that all of the right issues are on the table. The last panel put it very clearly, it’s going to be very difficult for China to given on the hardest issues. And those are fundamentally how they support their state-owned enterprises, very, very difficult to change the whole character. On Huawei-?
Luce: On Huawei as a tactical negotiation.
Manuel: Yes. We have the dual of the executive orders right now. And to me, it makes no sense at all. So, Huawei, I would say, is a real threat in 5G. So you can just imagine, you wouldn’t want any company, Chinese or otherwise, having all of the infrastructure that controls, not just the cell phones that you’re all carrying but the entire internet of things. And as one CEO recently put it to me, “Well, I guess that gives them the ability to shut down our electric grid or make all the self-driving cars drive off the road.”
So maybe that’s a little excessive, but the 5 GPS is really important. Not allowing Huawei to have access to our semiconductors? Harder case, really hard for semiconductor companies. Not allowing Huawei to have access to Android… Really? Doesn’t make any sense whatsoever. And so, of course, now you have an equal reaction in China where they created, in late May, an unreliable entities list, very vague, very threatening. No companies have been listed. Many American companies live in fears that they’ll be first on the unreliable entity list, and they’ll essentially be out. So it’s no way to run a trade war.
Luce: I mean, all three of you, Steve, I’d like you to…
Orlins: Yeah. I just don’t want to be on the record as in any way, shape, or form thinking that the President’s calling out China on the bilateral trade deficit makes any sense whatsoever. It’s a violation of Economics 101. Anybody who thinks bilateral trade deficits matter doesn’t understand any economics. In fact, we saw yesterday that what does matter, which is the multilateral trade, a current account surplus, the China’s current account surplus, which we used to criticize because it was up to 10% of GDP is basically going to zero, which suggests they’re not following the policies of being a protectionist economy.
Luce: Okay. So those are the hard numbers. Let’s, sort of, borrow a Joe Nye phrase. Let’s go to the soft power stuff because this is the mood music that businesses face and all three of you have experienced. On the one side, Americans are watching Canada and worrying about their next visit to China, particularly in the tech sector.
The Chinese, of course, are watching, how executives who work for Huawei or ZTE might be treated. Chinese students are worried about their visas. Trump is reported to have said, “Each Chinese student is a potential spy.” There is all kinds of stuff at the micro-level that is making people afraid. My question to each of you is, and then we’re going to get some audience questions, how important is this somewhat curdled mood music that we’re hearing on both sides? Tom?
Prescott: Yeah. It’s profoundly difficult, it creates the wrong environment in which you can’t get rational reactions to what’s going on. I would say the problem with China, the challenge is one that has to be managed. It’s not going to be solved. And when you have rhetoric along the lines of what we’re hearing, actually on both sides, it doesn’t contribute to helping to manage this bilateral relationship over time. So, there’s that. There’s another side of me, though, that echoes the guy who founded Intel, who said only the paranoid survive.
From a business person’s point of view, I live in a world of paranoia, and I think that’s healthy for me to live in a world of paranoia. Because in a competitive world, there are forces out there that are after you, and so I don’t really like the idea of national leadership using the rhetoric. On the other hand, from a business community point of view, I think we need to have a deep understanding of where these challenges are.
Luce: Anja?
Manuel: I agree. I think the mood music is very negative. And I’ve been surprised at how quickly we flipped the switch from, “Let’s manage this relationship,” to its all negative and conversely about an old Cold War. This requires a whole lot of nuance. And at the best of times, our government is terrible at that. We’re the country of John Wayne. We see good guys and bad guys, and suddenly China has become the bad guy.
I see this at Stanford, right? We have the FBI visiting us and telling us basically, “Beware of your Chinese students. They’re all spies.” Well, it is certainly true that some Chinese students in the United States are being encouraged to spy and some have, but it’s a minority. So you have to actually deal with the problem, which is real without resorting to xenophobia, which we’re in grave danger of doing, and it’s terrifying. And this is on all number of fronts.
Luce: Thank you. Steve?
Orlins: Yeah. I agree. America has won by being open, by fostering open academic environments, by fostering research and development and the consequences of, kind of, singling out Chinese, you know, for potentially being spies, the consequences that outweigh the benefits. We have other methods by which we can determine who a spy is without making it difficult for Chinese students to come to the United States. The number of denials of visas has gone up astronomically.
You know, the exposure, the firing of cancer researcher at MD Anderson, a Parkinson’s researcher at Emory Medical, and I’m just going, “Oh, my gosh, these are all Chinese, their labs are run by Chinese.” Because, they were also receiving funding from the Chinese government, which was a violation of NIH policy. But the reality is, it may have been a technical violation, but if you Google any of their articles, the first thing says, “We received funding from the Chinese government.” So they didn’t put it in their NIH application.
That’s bad, but it’s not a cause for closing down the lab. So we have this demonization of Chinese, which is dangerous, which is bad for Americans. It’s bad for our society. So we need to find ways to make sure our kids are not spying, but without going after them in this broad-based way.
Luce: I mean, but to be fair…I mean, not to be fair but to give it this large context. If you’ve got two Canadian nationals you clearly know been in any way involved in breaking any laws being locked up as a tit for tat thing, you’re going to be under pressure on the other side to reciprocate, right?
Orlins: Of course. That’s a terrible policy. That raises the question, which I always ask Chinese government officials, do you know who China’s greatest enemy is?
Luce: China.
Orlins: China.
Manuel: Simple. It’s the United States.
Orlins: Of course. That policy of locking up the Canadians is nuts.
Luce: Who’s America’s greatest enemy?
Manuel: Ourselves.
Luce: Anja, just… I was being mischievous. Tom?
Prescott: One more comment before we go to questions, and that is the conundrum, to me, in the Sino-U.S. relations is I think, going forward, economics is going to be at the core of the competition. It used to be Cold War was military and diplomatic. I think now we have to think of economics in the forefront of the competition, and we’re not good at that. U.S. government, this is outside of their zone of comfort. It’s in the private sector that this capability resides.
In China, you have whole-of-government behind that economic competition, so they have tools that we don’t have. And one of the things we really need to do is figure out a way to better align the business community with the national security and foreign policy community because right now they live in totally different worlds and don’t speak each other’s language.
Luce: I do have a final, very quick questions, and then we’ll have time for four or five from the floor, which is, my highly esteemed colleague, Martin Wolf, had a piece in the Economist the other day, entitled, “America’s looming 100-year conflict with China.” Now, the headline was a bit more dramatic than the actual piece, but what he said in it was, from the Chinese perspective, America wants to dominate or to continue to dominate. And if it fails to dominate, it will separate. My question is, if things continue on the trajectory they’re on right now, is that over the top or is that realistic? Steve?
Orlins: We’ll separate? I don’t believe it’s possible.
Luce: You don’t believe—
Orlins: It’s possible we have this decoupling in the technology sector, but not a true separation. Also, one of the things which scares me most about this visa kind of rejections that are occurring so rapidly is that one of my fundamental bases for optimism is the 350,000 Chinese students that are studying in the United States. And, that links us in such a way that we become inseparable. And if the administration can somehow stop this, well, that scares me. In the end, I think the people-to-people contacts between the United States and China are far too deep and wide than we can possibly separate.
Manuel: We are manufacturing a good chunk of this conflict, and both sides, I think, are equally responsible. You hear it with the nationalism from Xi and his senior folks, you hear it from Trump. It is not inevitable that this becomes a new crisis, not at all.
40% of the world’s middle class will reside in China by 2030, 2035. So if we want our companies to thrive, at some level, we’re going to have to be doing some business with them. The Obama Administration did a fantastic thing when they brought China into the Paris Accords at the end of 2014. By the way, China’s still in and we’re not.
There are so many areas of overlapping interest. This isn’t at all a situation like the United States and the Soviet Union where there was a very little overlap of interests. And, by the way, dividing the world into blocks where China leads one and the United States leads another one looks very ugly. I hear this all the time, when I’m in Southeast Asia, everyone says, “Please, don’t force us to choose sides, because you’d be surprised how many people will choose the Chinese side.” So, let’s hope this is still avoidable.
Luce: Tom, do you want to…?
Prescott: Yeah. So I think there are a lot of forces that will drive things in different ways. The point I would want to make is leadership matters a lot. Leadership under Xi Jinping is different than leadership under the next person or the last person. Similarly, with Trump or Obama, don’t underestimate the importance of leadership in the direction of this relationship.
Luce: An excellent point. We’ve got about 10 minutes for questions. So, please, stay where you are, and ask the question.
Audience Member 1: I’m [inaudible], German TV. I liked your comment, Anja, about the need to go on the offensive with regards to rules and standards for technology and AI. We had an interesting discussion during the Munich Security Conference where Brad Smith of Microsoft was calling for those kinds of regulations, digital Geneva Convention or the idea all of a sudden on the table again.
And there was this quote of the Chinese scientists saying, “Well, for the first time ever, these technologies give us the chance to win over liberal democracies.” So, that I think, displays what is at stake here, and my question to you would be, to all of you, since the G20 adopted the OECD principles for AI, who should be the leader in pushing forward with setting those kinds of standards and rules? What body…who in the U.S. government should and could do that?
Manuel: I’ll take it to start with. This is such a difficult issue because, as the U.S. government, we are woefully underprepared to deal with modern technologies. We don’t really have people embedded in each ministry that understand it. We regulate iteratively, so we say, “Okay, we’re here. Slap a regulation on it.” But then technology develops really rapidly, and we’re not nimble enough to take that into account. And it’s very different when you’re talking about AI versus biotech and CRISPR, and everything that’s coming down, and different technologies need different solutions.
On AI, I could imagine one way to do it. Amy Webb, who’s a computer scientist and scholar here has called for something, she calls it a Tech NATO, I wouldn’t call it that. But basically, a group of 10 countries that would get together as national countries, not under auspices of the UN and say, “Okay, we’re democracies, here’s kind of what we think the broad guidelines are. Here’s how you don’t infringe privacy. Here’s how you handle data appropriately. Here’s what you do.”
China probably wouldn’t be one of those 10 initially, but you wouldn’t exclude them. You would say, “Look, here’s the bar. Please rise to meet it.” And that’s what we’ve done with a lot of other international accords. They’re never perfect, you know. They’re always broken in some sense, but that’s how you could start. And you could have something like that on every different technology, but we’re nowhere near that. That’s wishful thinking.
Luce: Tom or Steve, would you…either Tom or Steve would like to take that question?
Orlins: No. Go next.
Prescott: I’ll just say that how you enforce compliance becomes an important part of it, that goes back to the scale issue. If we’ve got the scale that we talked about yesterday in NATO, if we’ve got the scale that Anja mentioned, you’ve got a better chance of enforcing any standards.
Luce: And so just quickly, a follow up on your answer Anja. The previous panel talked about having global rules on antitrust. Presumably, that would be one of the things you’d like to see a U.S. administration develop?
Manuel: Yeah, I know less about that, but antitrust in the tech sense to me doesn’t make a whole lot of sense because it’s the aggregation of data we’re worried about not necessarily market power. Just works in a totally different way, so we need to think about it.
Luce: You have to look towards the next administration obviously because this one is not willing to participate in those kinds of global forum.
Manuel: That’s right.
Luce: The gentleman here.
Audience Member 2: You mentioned several numbers that are interesting in terms of STEM. We’re like twenty-one or thirty-one?
Manuel: Thirty-one.
Audience Member 2: Thirty-one, and China is ten. And then you mentioned that we have 350,000 Chinese students in universities in the United States. And I was just recently aware that Li Waxin, the wealthiest man in China is building a new university for training entrepreneurs in technology. So knowing all these numbers, do you think that it’s time for us to reconsider training engineers and technicians of Chinese [origins] for China?
Orlins: Good number of them remain in the United States. So, if we had a good visa policy, which basically when you get a Ph.D. in a U.S. university, you automatically have the right to work in the United States. Fewer of them would go back to China. Under current policies, the H-1B is being more restricted, so we have more Chinese returning to China. But these Chinese students make enormous contributions to American universities, American academia, and then, ultimately. American business. So in no way, shape, or form, would I support restricting these people coming to the United States.
Audience Member 2: China has taken some of the top talent, the Chinese talent that were here, and giving them enormous sums of money to come back to China.
Orlins: It’s no question that they’re willing to fund people to go back when they graduate from, you know, the best university system in the world, they’re willing to fund them to go back and work. That’s a cost we should be willing to pay for the contributions that the other 349,000 make to U.S. society. If you go to universities and you look at TAs in the STEM fields, they’re probably a third Chinese. We wouldn’t be able to educate our own people if we lost the Chinese coming in. For reasons I don’t fully understand, Americans just have been less willing to matriculate through the STEM fields and get their PhDs.
Luce: The lady at the back there?
Jennifer Glasse: Thank you, Jennifer Glasse from Al Jazeera. Change usually brings opportunity as well. Have the Russians over the last three or four years brought business opportunities in China. Is the business community concerned about China’s Belt and Road Initiatives as it gains ports in Sri Lanka, in Djibouti, and around the world and a foothold in Europe? How are you approaching that as business?
Luce: Excellent question. Who would like to, Tom?
Manuel: Do you want to take the opportunity?
Prescott: Yeah. I’ll take a step. And Belt and Road, I think that much of the business community frankly doesn’t understand it. What you described, I understand most CEOs, it’s not in their area of direct interest. For some it is: the infrastructure guys. So, yes, it’ll bring new opportunities as you build infrastructure. There is lots of opportunities that’s been very helpful. Are there new opportunities in China coming out of the last three or four years? Yes, of course. It’s a dynamic country, it’s bringing change to the world. And as you point out, that change brings opportunity. So, undoubtedly, there are new opportunities coming out of this.
Manuel: On the tech sector, I don’t see a lot of new opportunities. Most people are retrenching. With finance, as Steve already said, a lot of new opportunities. And by the way, also with Belt and Road, increasingly, you see our financial institutions saying, “Well, maybe we could fund this road and this railroad.” That seems like a dangerous proposition to me, but they’re thinking about it.
On Belt and Road, I agree with Tom, I haven’t heard just the U.S. companies I deal with aren’t so engaged in it. And I would say just, in general, our analysis in the United States is always lagging behind a little bit. So we’re a little slow to realize how big this issue is, and that China is really doing this on a massive scale. And, it could have consequences and how beholden third-world countries are to China. But, now everyone’s talking Belt and Road and how dangerous it is. And I think, in its structure, it sows the seeds of its own destruction in a way.
So when I now go to South Africa, which was early on Belt and Road, they say, “Oh, my God, we sold the store to China. We don’t want to do that anymore.” You talk to countries in South Asia and Central Asia, and they all say, “Look at Sri Lanka and that white elephant port. We don’t want to be them.” And you see countries being more thoughtful about how they engage with China.
Prescott: One other thought and that is, I never want to work with someone who doesn’t care about profit, who doesn’t have a profit motive. And much of China’s Belt and Road is not a profit motive, and so I look at that and stay away from that world.
Luce: Yeah, just go ahead.
Audience Member 3: I’m [inaudible], from Lockheed Martin Space. We’re watching China enter into the very high-tech market of space and satellites in an aggressive fashion, particularly in the last three years taking a market share that had never been addressed by China in critical infrastructure for telecommunications from space. And they’re using Belt and Road investments to influence the acquisition decisions. Do you see a way where American and European competitors can play on a balanced playing field or is the playing field now entirely tilted?
Orlins: What our government should be doing is rather than declaring that this is dangerous, that the BRI projects are dangerous, we should be arguing for open, transparent, and fair bidding for all these projects. That what U.S. financial institutions who are trying to be involved in it are saying is, “Just make it open, fair, and transparent, and we’re good with it.” And U.S. construction companies, what I’ve been telling the Chinese government is, include a U.S. company in each of these transactions. Whatever the economic consequences are, it does wonderful things for the world’s perception of BRI.
Manuel: Steve, I would just add to that. You brought up a really important, hard point, which is that a lot of the Chinese companies are massively supported by the state. So, Huawei underbids everybody by 30% or more, and it sounds like you’re seeing the same thing in space.
Luce: We’ve got time, I think, for one more question. I did see other hand. Oh, at the back, the lady. Yeah.
Priscilla Moriuchi: Thanks, Priscilla Moriuchi with Recorded Future. So there’s been a series of laws over the past few years, National Security Laws, Cyber Security Law, for example, that have passed in China. There are these, sort of, broad, vague kind of sweeping laws, right, that have attempted to define the role of the government and the military, and the security services in, you know, tech in the business community.
So on the ground, like, what are the actual concerns for foreign businesses in China, you know, about these, sort of, newly stated obligations right to work with the intelligence and security services, you know, from the business community’s perspective? We hear a lot of discussion about possible concerns and what this could mean, right, for foreign businesses. But at this point in the development of these laws and regulations, what is the impact on foreign business, right, and how is that looking?
Manuel: Yeah. Maybe I’ll take this one.
Luce: Yeah.
Manuel: You’re right to raise the concern, and, I think, saying they’re worried about it is an understatement. These laws are so broad that the Chinese government can interpret any they want. One of them is all technology sold into China has to be secure and controllable. What does that mean? Does that mean the Chinese government has access to all of your code, to some of your code? Can you prove that it’s secure and controllable outside? Is there 100% censorship?
The answer is yes. More and more you see these laws being used differently. I’m thinking of one example, in particular, where a U.S. tech company has a JV in China. And every board meeting, their new requirements used to be, “Well, you can only own 49% in order to sell into any Chinese SOEs.” Now, you can only own 25%, so you got to sell more of your stake. So this is a really powerful lever by which the Chinese are controlling western technology companies.
Orlins: And it’s inhibiting investments. So, technology companies that might otherwise invest decide not to do it because the risk is too high. Therefore, the Chinese don’t get the benefit of this technology. Therefore, their economic growth slows these counterproductive regulations. Unfortunately, China is replete with them. I mean, I have forever argued the ban on Facebook, Google, YouTube, Twitter, The New York Times, The Wall Street Journal, Bloomberg is bad for China. It’s bad for those organizations too, but it’s bad for China. It inhibits people’s ability to do research to communicate and do all these other things.
Now, the President obviously decides he wants that level of control. But in the end, you know, the number of people who have VPNs who go around this is so significant that the control is already eroding. There were signs a couple of years ago that we might see some Chinese revision of these restrictions. Now, in the tightening and because of the tension in U.S.-China relations, this has disappeared. So one of the things that, by, kind of, demonizing China by saying it’s all bad, not having this nuanced view, we persuade the Chinese to make no concessions whatsoever because it’s going to be viewed as too favorable to the United States.
Luce: So I feel like we’ve barely cleared our throats. This is a massive and important topic, and this is just the first of many conversations I have. Please join me in thanking Tom, Anja, and Steve for a wonderful conversation.