Arthur Kroeber: belief

Transcript context

…Final question. Right now, the US and China are engaged in this negotiation to figure out some somewhat stable way to come back from Liberation Day. What is the most positive, plausible story of what comes out of this? My expectations for this are very low. I think the basic problem here is that we have on the US side a collection of grievances and complaints that have not coalesced into a very coherent agenda of what we want from ourselves and what we want from China. If you don't know what you yourself want and you don't know what you want from the other party, it's very hard to engage in a constructive negotiation. That's my fundamental take on where we are right now. This is a normative statement but to me, what we should be aiming for is trying to figure out what are the terms of coexistence between the US and China in the coming years and decades. The most desirable outcome would be some kind of an agreement under which we create a broader permission structure for Chinese companies to invest in the United States in a lot of these key industries that we're talking about. I think that's good for the United States because I think it is reasonable for us to try and rebuild certain aspects of our industrial manufacturing system. I think we let those atrophy too much. So selectively, it does make sense for us to try and rebuild that. Rebuilding that should incorporate the best anywhere in the world. Some of that is now coming from China. I also think—just in terms of enhancing mutual understanding and getting better communication channels—investment is even more than trade a very good communication channel because it forces you to go to the other guy's place and put down roots there and figure out how things work and figure out ways to communicate with one another. Now the obstacles to that are enormous, both because of the US narrative that this is intrinsically unsafe and because I think the Chinese will be very reluctant to allow a lot of their technology high fliers to go and set up in the US and risk having their technology leak away there too. So I'm not saying that that is easy or achievable, certainly not in a few months. This would be over the course of a year or two or three, you might be able to negotiate some terms of engagement there. The big problem that China creates for the world as a whole right now is this fact that they just are unwilling or unable to generate enough domestic demand to keep their own economy running at full steam. That's bad for their own economy. It creates a lot of friction in the rest of the world. It does contribute to the narrative that China is not really all that interested in creating a situation where everyone benefits from their growth. It's much more a “We're in this for ourselves.” It would be helpful for the world economy, helpful for the Chinese people, and helpful for general stability, if the Chinese could recognize that they need to do a lot more to promote the demand side of their economy. It can't just all be about endless investments in new technologies. I think they're coming to a point where they may be forced into that. to do a lot more to promote the demand side of their economy. It can't just all be about endless investments in new technologies. I think they're coming to a point where they may be forced into that. If you look at most of the metrics that I and my team follow of return on investment in China, they're going down. The number of zombie companies that still exist but don't even generate enough revenue to pay the interest cost and their debt, that's going up. There's a lot of pressure that's building within the Chinese system because of this obsessive concern with the supply side of the economy. They'll continue to do quite well overall in technology production, but the financial constraints are rising. They have some self-interest here in coming up with a more balanced economic model. Having some pressure from the outside to get them in that direction would be good. The final point I would make on this though is that on the US side—which is of course where I generally sit—it really is critical to have a realistic understanding of what's happening in China and how they're interacting with the rest of the world. One of the big dangers that we have in the current Trump administration strategy—which was also to some degree apparent in the Biden administration strategy—is that there is this belief that China can be contained and that you can essentially construct an alliance of countries that will stand up to China and try to constrain it with you. It's kind of a replay or dusting off of the Cold War playbook where you had the Soviet Union and the Warsaw Pact, you had the United States and NATO and all of the informal allies everywhere else. You had the blocs against each other and the bigger and more economically productive bloc won. That is just not going to work. The Chinese have seen this coming for a long time. They have long had the view that the US was going to try and constrain them. They said, “How do we get around this?” Their answer is not, “You build a bloc, I'll build a bloc against that.” Their answer is, “I will operate so that it is impossible for you to build a bloc that you want.” Look at China's international engagements. More countries have China as their number one trade partner than any other country in the world. 140 countries trade more with China than they do with the United States, which was not true during the Cold War. You go to Southeast Asia or Latin America and you say, “How would you like to join our anti-China alliance?” They will say, “No way, this makes no sense for me. I import a lot of my industrial inputs from China, a lot of my consumer goods. This is really a critical relationship. I might have some concerns about the trade balance, but I am not going to go up against this country that is now either my number one or my number two economic partner, certainly on the trade side and increasingly on the investment side.” So that is a non-viable strategy. It will never work. China has integrated itself into the global economy very successfully. This is just a fact that we need to live with.…

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