China and the United States: Governing a Contentious Bilateral Trade and Investment Relationship

This is the second session of the "The United States and World Trade: Future Directions" symposium. 

This symposium brings together distinguished trade leaders and innovative thinkers to address the trade policies of the United States and their international implications in North America and East Asia, as well as the possible effects on the global trade architecture and the World Trade Organization. 

YUAN: Well, welcome to the second session of today’s Council on Foreign Relations symposium on “The United States and World Trade: Future Directions.” This session is titled “China and The United States: Governing a Contentious Bilateral Trade and Bilateral Relationship.”

I’m Sharon Yuan. I’m the managing partner and general counsel at the Asia Group, and I have with me today three distinguished panelists. Let me go ahead and start introducing from my right.

Scott Kennedy, who is the deputy director, the Freeman Chair in China Studies and the director of the Project on Chinese Business and Political Economy.

I have Wei Liang, who is the professor from Middlebury Institute of International Studies at Monterey, and she’s the co-editor of China and Global Trade Governance.

And then we have David Dollar, who is the senior fellow for Foreign Policy, Global Economy, and Development and the John L. Thorton China Center at the Brookings Institution. So, thank you.

Thought we would start out today talking a little bit about three areas, and first a little bit about just what’s going on in China. Obviously, we’ve got the 19th Party Congress coming up starting on Wednesday, where, by all accounts, President Xi will emerge stronger than ever, and further solidifying his authority and position. Also, we know that he will deliver his work report, where he will set the agenda for the next five years and his priorities for China.

So maybe with that, if I could turn to David and Scott first, get your thoughts on, you know, what that means for the bilateral relationship, what can we expect going forward as it relates to challenges, reforms for our priorities here in the U.S. and for our companies.

David.

DOLLAR: Great pleasure to be here. As Sharon said, the 19th Party Congress will start on Wednesday. I think it’s a very important event for China and U.S.-China relations. About a week later the new Standing Committee of the Politburo will walk out on stage. It will probably be seven men. There’s never been a woman on the Standing Committee. They might reduce the number. And a lot of uncertainty about what’s going to happen, except the one certainty is Xi Jinping will be number one. He’ll be the party secretary, president of the country.

A lot of uncertainty about the rest of the lineup. A lot of speculation. If they follow succession norms, it will be a fairly balanced Standing Committee with three members from the so-called Communist Youth League Faction and four people, including Xi Jinping, around his own group. But there are rumors that he might run the table, push Li Keqiang out of the way, keep Wang Qishan on and bring him in as premier. We’re not going to go into a lot of detail about this, but a lot of different scenarios.

Interesting question is, it may not matter that much. These so-called factions in China do not really map into policy in any meaningful way. You know, it’s hard to say who the reformists are among these different groups. My own thought is that if we get that relatively balanced Standing Committee, that’s probably the best for reform, because Chinese leaders know what needs to be done. You know, I’m sure we’ll see in the work report a general description of the need to open up the economy more, to rein in the growth of credit, to modernize state enterprises. I think everyone knows what needs to be done. Typically, the work report would not go into the kind of detail that would be useful for us. So I think it really sets the stage, and then it will be critical to see what happens over the next few months. I wouldn’t expect dramatic reform, but there’s been a real stagnation in Chinese reform for a long time. Probably this new leadership will at least move ahead modestly on the reform agenda, and that will definitely create new opportunities for U.S. firms and U.S. workers.

KENNEDY: I agree with everything David said. I’m going to be—take a little more pessimistic attitude. I guess if I was the Chinese leaders or Xi Jinping, I’d be very optimistic, because I think Xi Jinping gives himself a high grade and he’s going to run the table most likely. I’d be very surprised if we get the balanced outcome that David suggests.

And I think, you know, prior to the 18th Party Congress, in 2011, the World Bank and the Chinese think tank issued a report called the “China 2030 Report,” which was essentially a blueprint for economic reform, liberal reform. And then we had the third plenum, and then they decided not to implement any of that stuff. And so the World Bank is now working on another report with the Development Research commission—Center, this think tank in Beijing called—new drivers of growth. It’s supposed to lay out in more detail a liberal reform package, but I don’t think they’ll follow that either.

I think we’re really at the age of—you know, dawn of an era which I would call the closing of opening and reform in China. Not that China is not continuing to engage in economic reforms or engaging in international trade, but they’re doing more so on their own terms: much more state intervention of the economy domestically, and trying to set the terms of trade and investment with the rest of the world rather than integrating on the globe’s terms. I think the basic priorities are probably going to be, number one, financial stability, state-owned enterprise reform, which is going to be about chucking the zombies but making the SOEs that stay much stronger and more powerful domestically and internationally; continue with this high-tech push, times 10, so a lot more money for everything from electric vehicles to robotics. And then I think we’re going to see more attention to rural China and the huge problems that rural China faces. Ninety-eight percent of Chinese in urban China go to high school. Thirty percent of Chinese in rural China go to high school. That’s a huge gap. No country with a gap like that has ever escaped the middle-income trap, so I think that’s going to be part of the package.

YUAN: Just to follow up real quickly on the high-tech focus, how does that play into, or maybe in your opinion, doesn’t play into opening up further?

KENNEDY: Well, certainly globalization has been critical to China’s economic reforms over all, and certainly its drive into high tech, its ability to attract foreign investment that comes with technology and management, its ability to send students abroad to get training, workers, hire them back, or opening R&D: that’s all part of a global process that China has benefited from and needs to continue to do.

On the other hand, China’s goal of moving up the technology ladder using leverage of its market to do so, means that it’s going to set even more difficult terms for multinationals. Foreign investment in China used to be about 15 percent of total investment. It’s now under 3 percent of total investment in China. So, from a structural point of view, the globe has less of a say on influencing China domestically. So I think it’s—we’re going to have to be much smarter. I don’t think this is written in stone. There’s things that diplomats and companies can do. But the challenge of dealing with China across these issues is going to be larger than it’s ever been, because Xi Jinping is on his game, the Communist Party is on their game, and so we have to be up our game as well.

YUAN: Well, speaking of, maybe we can then turn a little bit to our focus here in the United States. The administration’s approach early on was focused on engagement, high-level engagement starting with Mar-a-Lago, the visit of Xi Jinping to the United States, then of course it was the hundred-days action plan and the early harvest, as well as the inaugural meeting of the comprehensive economic dialogue here in the United States, which I think we can talk a little bit about as to whether or not that—how that played out. Then more recently, it’s been more of a confrontational, unilateral approach with the launch of the investigations under the Section 232 into steel and aluminum imports, whether or not those constitute a national security threat, as well as the launch of the Section 301 of the investigation on various Chinese intellectual property practices, including forced technology transfer.

And then now we’ve got coming up the president’s trip to Asia with a two-day stop in China. So what do we think is going to happen there? How’s the administration going to balance the approaches that they’ve taken to date? What do we think the Chinese are going to do in response?

Maybe we’ll start with Wei?

LIANG: Sure. Talking about the U.S.-China bilateral trip relations, especially under the new Trump administration, there are lots of discussions in China like how to respond to it. But starting from the first concern, which is that many, you know, people in China, they feel like they haven’t really seen overarching strategy, so it is really hard to respond in a more systemic way.

And the other thing is the bilateral negotiations, the 100-day plan, we have seen some progress, but those are all very small and specific market opening promises made by China. And I think at this stage, if the current administration continues to stick with the bilateral negotiations, it’s very likely that the U.S. will be able to get more those kind of specific small market opening commitments from China, and those are really the areas that China’s willing to make the concessions.

However, if we think about the structural problems, like the one David and Scott just mentioned, for example, the SOEs, the industrial policies, the government subsidies and the government promotion for the innovations and the lack of the IPR protections, those are really not the areas that can easily be done through the bilateral negotiations, say, before Trump or during President Trump’s visit to China because it’s—it requires a fundamental reform that the Chinese government today doesn’t consider as a priority for their domestic policy.

DOLLAR: I very much agree with the thrust of the idea that the bilateral negotiation is likely to lead to a lot of small measures, what we might call small ball, in a baseball metaphor. And I think that the current administration has shown a preference for bilateral negotiation and bilateral deals. I think, frankly, it was a big mistake to pull out of the Trans-Pacific Partnership. We have a lot of legitimate concerns with China. It’s not going to be easy to deal with them. China is a powerful country over which we have very little leverage. Developing this multilateral approach through the Trans-Pacific Partnership, you know, that was setting standards in IPR, state enterprises, setting the standards for the kind of agreement we’d like to eventually have with China. So I think walking away from that was a big mistake. And as we negotiate bilaterally, you know, China is going to do a few things that it sees in its interest.

I think I’m not quite as pessimistic as Scott. You know, I think they have a mixed strategy. They’ve got some sectors they want to protect and develop, where we’re going to continue to have problems. I think they’re ready to open up some other sectors. So I wouldn’t be surprised if when Trump goes there, Xi Jinping may very well be ready with a couple of measures, which still I would view as small, but would signify opening up some of the closed parts of the economy. Remember, our exports to China are growing at 15 percent per year. So the business community, they have a lot of concerns, but they’re also making money, and they would like to see the relationship improve. They don’t want to see a trade war between the United States and China.

KENNEDY: Yeah, I think just in terms of domestic reforms, Chen Yun, who was a senior Chinese leader in the Mao era and early reform era, had this birdcage theory of reform, which is you allow a little bit of liberalization, but you keep it inside this planned system. And I think Chen Yun, not Mao is probably in Xi Jinping’s right breast pocket of how he’s thinking about things. So we’ll see some small things, but they’re not letting this bird out of the cage, is what I would expect.

You know, prior to the Trump administration I think, you know, we thought that integration was going to work with China, and I think largely it did. And but from Clinton to Bush to Obama, that consistency I think bore a lot of fruit. And I think now we’re looking back, unfairly regretful. But Xi Jinping’s really different, and you need a different approach. And so you’ve got to use the type of dialogue and multilateral engagement that we used before. And you also have to use the leverage that the United States has. China’s got a lot of leverage, but we not ought to forget that the United States does as well. And so that means being willing, if things don’t work out, to potentially use some of these unilateral tools. But we need to do strategically. I think—I’m an all-of-the-above strategy kind of person and, you know, my worry is that we’re going to have—we’re going to use some of these sticks, maybe not before the summit or during this trip, but it’s going to make things more difficult rather than less difficult. And then we’ll long for those long lists that came out of the S&ED where people said these are all small ball, but in fact you had lots and lots of balls that then added up to something.

YUAN: I would agree with that.

KENNEDY: So any case.

YUAN: Well, let me—I mean, let me push all the panelists a little bit on this further. So there’s a question as to whether or not in fact the administration will take this more incremental or small ball approach, as you all characterized it, as they go forward, and in particular, I mean, this message that they’re sending with respect to engagement, doing these bilateral negotiations, and then at the same time taking on these unilateral actions.

What do we—what do you all think will happen going forward if, in fact, even assuming for a second that they choose to pursue this more incremental approach, at the same time do in fact start to use some of these sticks, Scott, as you called it. What do you think is going to be the response? Let’s play this out a little bit.

KENNEDY: Sure. I think if the U.S., based on 301 investigation for example, which gives the president a wide degree of latitude—there’s just about anything that you can do after you go through the steps of the U.S. trade representative, reporting to the president and engaging in five minutes of negotiation with the Chinese, if you decide that you’re going to just go unilateral. I think they could pick some things which are related to IPR, but I think actually probably the more likely thing is to look for other more convenient types of tools that are less likely to run into a WTO challenge, but bigger things, for example, related to investment. I think if we don’t work with our allies, then that’s going to—the Chinese are going to feel more willing and comfortable to retaliate, and then we’re going to have to think of the step after that and the step after that. And I don’t know if we’ve thought that way. You know, are we going to be willing to absorb the cost? Have we communicated with industry enough to get them in so that they will have some buy-in to accept this? So it could look good to Trump’s base in the first effort, but then after a while it may look particularly difficult, and then we’re going to look for some kind of exit strategy.

YUAN: David.

DOLLAR: So up until recently I’d been assuming rationality would prevail, you know, and that—and I think six months to a year down the road the U.S. is going to face kind of a tough decision about China. I think, you know, the 301 investigation is going to reveal a lot of appalling practices, some of which are WTO-consistent. But, you know, the U.S. is unhappy about a lot of these things. I don’t think China is going to do very much to make the U.S. happy, and so then the U.S. will be faced with choices. Does it really want to do some harsh protectionist measures or does it want to do some small things? Up till recently, I assumed the business community and other stakeholders would push the U.S. to just take small measures. But the earlier discussion today about closing down NAFTA, that was pretty disturbing. You know, I was sitting in the office—in the audience. So I would say let’s keep an eye on that. I mean, if the U.S. withdraws from NAFTA, then that suggests that we’re heading down, you know, a more protectionist road. If on the other hand we get a reasonable compromise on NAFTA, the U.S. economy continues to do fairly well, it’s hard to see why you would pick this fight within China when there are so many other issues that are important.

YUAN: Wei.

LIANG: Yeah, I agree, and I really think, you know, the best way is to ask strategically about what the U.S. wants from China. And again, if it’s market access, it’s easier. If it’s about the structural reform, it’s difficult. And Xi Jinping is in a position that—you know, a very good position if he wants to push forward the economic reform agenda, but it’s by no means, like, really on top of his agenda. And also, I think what David just mentioned, that the retreat of the U.S. from the TPP actually released lots of pressure for Xi Jinping domestically, because during the TPP negotiation, lots of policy debate within China which was to really strengthen the RCEP negotiation, and that’s another parallel negotiation in the region of Asia Pacific. And it seems like Chinese negotiators at that—during that period of time when the TPP negotiation was ongoing, the Chinese negotiators were more willing to make the concessions, to push forward the RCEP negotiation. But today that has been, you know, stagnated again. So the lack of the domestic urgency, the lack of the external pressure, I think that will make the future of China’s further market opening more difficult.

YUAN: I agree with the focus on what China’s more likely to be able to do, which is, you know, smaller incremental market accesses compared to the larger structural reform, much of which is really the focus is the 301 investigation and some of these other issues that the administration is focused on. The other area that they have identified, though, is the trade deficit. You hear that across the board, whether it is in the context of China or Korea and the U.S. free trade agreement, even the context of NAFTA and reducing the trade deficit. Have you all thought about that a little bit, in terms of how that could be spun into the conversation a little bit more to produce a more favorable outcome for both sides?

DOLLAR: Well, first, as the first panel discussed, you know, focusing on bilateral merchandise.

YUAN: Yeah, I’m not saying—suggesting that but—(laughs).

DOLLAR: No, I know you—I know you know this, Sharon.

It doesn’t really make sense. So the U.S. does have a large bilateral imbalance with China. If you do the analysis in value-added terms, that cut it about in half. So it’s still—it’s $200 billion in value-added terms. It’s still a relatively large number, but small compared to the U.S. economy and the Chinese economy.

So I think most economists would say, looking at the overall trade balance makes some sense. You know, China’s overall current account surplus has come down below 2 percent of GDP. So it’s hard to see China as part of any global problem of imbalances. The most recent IMF analysis says imbalances are now a problem among rich countries. You know, the U.S. does have a very large deficit. Germany has a very large surplus. Japan has a very large surplus. It’s primarily a problem among rich countries. And it’s a macro issue. So if we care about it, what we need to do is save more, and the easiest way to do that would be to raise taxes. So when we talk about cutting taxes, that’s almost certainly going to increase our overall trade deficit and then probably some part of that will be our bilateral trade deficit with China. So I think—I’m afraid that’s a bad road. And at the moment, right, the trade deficit so far this year is, you know, up over last year, and cutting taxes would frankly exacerbate that.

KENNEDY: I’ll just say another great idea would be to have a recession. (Laughter.) That would certainly slow consumption and stuff from China. So once you get on this track of trying to figure out how to reduce bilateral balances, then you think of a whole lot of crazy, nutty ideas. Sorry for spawning that one. (Laughter.)

But I do think—I mean, I expect, you know, whenever the president has met face-to-face with another leader, it’s always been the positive, lighter side, right? So when the president goes to Asia, he’s more likely to personally want to do that. And so he’s going to go with a large trade mission, right, and he’s going to ink a lot of deals, at least announce a lot of deals which he previously—and those will look like they—and they move the needle a little bit. And of course, if the Chinese wanted to, they could intervene in currency markets and, you know, strengthen the renminbi and, you know, so they could—you know, we could have—versus the dollar, not just against others. So if you wanted to just play games with it, you could do those things. But we’re supposed to want a free, liberal economy, not these managed outcomes.

LIANG: I want to follow up and make two additional points. One is actually what David mentioned. If you look at the bilateral deficit, a more accurate way to capture this, it’s a deficit between the United States and Asia. So China has been deeply integrated into this regional production network. So if we ever want to consider cutting the deficit, we’re going to really do something significantly to touch this regional production network. And of course, that will also affect the economic interests of the U.S. alliance in the region, including Japan, South Korea, and Singapore. So it’s not easy.

And my second point is that actually the Chinese government, especially after the year 2008, has tried very hard to kind of ease the tension between the U.S. and China specifically to the trade deficit, by developing the alternative markets. All the regional efforts, i.e. the One Belt One Road Initiative, one of the main goals actually is really to lead the overcapacity in China to the developing regions in Central Asia, South Asia.

YUAN: Well, this leads us to our third topic that we’d talked about, which is global governance and the role of China and the United States. Obviously, as our speakers have already talked about today, two very different approaches from the two countries. On the U.S. side we have the withdrawal from TPP, as well as raising concerns about our current bilateral trade agreements, as well as the role of the World Trade Organization. On the side of the Chinese, they’re embracing RCEP, as well as the Belt and Road Initiative and the WTO. So I wanted to get—I know both Scott and Wei, you’ve spent quite a bit of time on this. Maybe, Scott, you would like to start first?

KENNEDY: Sure. We collaborated. We actually just had a book that came out from Rutledge called “Global Governance in China: The Dragon’s Learning Curve.” I don’t know how we thought of the word “dragon” to go in, but nevertheless, it seemed like a good idea at the time. (Laughter.) I promise we won’t ever do that again. (Laughter.)

Q: (Off mic.)

KENNEDY: Yes, probably.

But, I mean, China’s—in some areas of global governance actually stubbornly a defender of the status quo, and in other places it’s pushing tweaks and some reforms, in other areas it’s pushing quite strong alternatives to existing rules and some new institutions. So it depends on—its interests vary. It’s—wants more voice. It wants more influence in the say of those rules.

And, you know, when Xi Jinping spoke at Davos in January, the contrast between his speech, the lack of an American presence, and then what was going on in our political system, and as we continue to see, it’s quite divergent. I think China’s punching above its weight. We are punching below our weight, in terms of global governance. And we need to change that.

I think that if we just sort of highlight to me what’s the biggest issue now, it has to do globally with the relationship between trade, technology, and labor. Certainly, as David pointed out, in terms of value-added and who benefits, certainly American companies benefit a lot more than what the bilateral trade balance shows, but those are mainly benefits that accrue to the corporations and management and investors, and there’s big challenges for workers. And the WTO and other institutions haven’t sufficiently addressed that. It’s just seen as a domestic sideline issue that members are supposed to deal with rather than a central part.

And connected to this is Chinese industrial policy. Chinese industrial policy is relatively unconstrained. And as it continues to chug along and move forward, that’s going to put more pressure on the distribution of where products are made. And we can say, yes, we like cheaper solar, we like cheaper wind. But if—and we do have a lot of folks working in renewables now. But the distribution of labor is going to be largely affected, and I think that’s an area where the U.S. needs to work with China and many—and the WTO and others to figure out new rules of the game. I think that’s going to be a critical battleground in the next few years.

LIANG: Yes, I agree. And I just want to share a little bit of Chinese perspective in terms of China’s role in the global trade governance. When China first joined the WTO in 2001, China was very enthusiastic about its membership. And arguably, China has become the largest beneficiary of this—of its WTO membership because today if we look at the trade profile, China has become the largest merchandise trading country in the world, accounting for 12 percent of the world’s total trade in goods. And since then, China has achieved a lot, but also a lot of—you know, at the same time, the problem is that there is a very strong sense of frustration. Like, China has been treated as a second-class member. So the paradox here is the largest trading country in the world has been treated unfairly in the WTO.

And one of the key issues is the nonmarket economy status, which the Chinese negotiators agreed upon its WTO accession that China would be treated as a nonmarket economy for 15 years, and that class should be expired in December 2016. But until today, all the major trading partners of China—U.S., EU, Japan, Canada—have refused to automatically acknowledge China as a market economy. Of course, that will affect directly the antidumping investigation. For example, last year, China—it was a record year for China because in one year, China was targeted by 27 countries for 119, you know, cases, investigations, antidumping investigations. So China cannot wait to get its market economy status so that in the future antidumping investigations China will be treated as a market economy and the China press would be utilized in the investigation.

But indirectly, it also has something to do with the status. After 15 years, China has implemented most of its WTO commitments, but I have to say not all of them. For example, the GTA negotiation China hasn’t finished yet. So the sense of frustration is that, you know, if China cannot play a—cannot be treated fairly in the WTO, then China will have to develop, you know, other alternatives.

DOLLAR: I think open it up to—

KENNEDY: Yeah, I think let’s give people a chance, huh?

YUAN: Well, at this time, let’s go ahead, then, and invite members for questions. If you could please wait for the microphone and limit yourself to one question. And just as a reminder, this is on the record. So—

Q: (Off mic)—Johns Hopkins University.

I wanted to ask the panelists whether they think that China’s WTO accession unequivocally says that the market economy status should be given after 15 years.

And then a real economy question: Do they think that China is a market economy?

MONEY: Sharon, you’re the best person to answer number one. She’s a lawyer, you know? (Laughter.)

YUAN: Dave, why don’t we—why don’t we have you start first?

MONEY: I really prefer to defer to the lawyer.

So what I’ve heard—what I’ve heard from Americans involved in the negotiation is this was part of the U.S.-China agreement. But what I’ve heard from lawyers is there’s nothing written down. So you’re kind of—if that’s true, then you’re kind of left with, you know, do you believe these stories, that this is what the United States committed to, and is it more important to follow through on our word than to recognize China.

To the second part of the question, you know, I think in these trade areas it’s really hard to see China as a market economy at this stage.

YUAN: No, I think to follow up on David’s point, if you take a look at the legal text of the accession protocol and the working party report, there is nothing in there, from my own personal perspective, that would suggest that it was automatically granted to them after a certain period, but rather at that point in time they would be evaluated based on their status.

Other questions. Gentleman in the front.

Q: Thank you. Hello, is this on? Yeah. Stephen Keane (ph).

You’re all talking about trade issues in a very logical way, balancing one trade issue against another. I compliment you for that, but I’m not sure if it’s appropriate in today’s environment. Isn’t really the situation with North Korea and the United States far more important in terms of determining how China and the United States will deal with all the issues you’ve raised?

MONEY: Well, I’ll just start quickly. In my view, the DPRK issue is much more important than these bilateral trade issues between China and the United States. And so if we could get, you know, really excellent cooperation from China in dealing with DPRK, I’d be willing to forget about a lot of these trade issues, to be frank. China’s been a pretty good player recently, reducing trade, but I think their number one priority is not to squeeze Kim Jong Un so hard that that regime collapses. So we don’t have yet what I would consider, you know, really excellent U.S.-Chinese cooperation on DPRK.

KENNEDY: I’d say balance is needed now more than ever, even if it’s not as popular as ever. And just to follow up on what David was saying, I think we’re—you could give China everything, you could transfer all American jobs to China, a hundred percent of solar market, electric vehicle market—you could give them everything—and that doesn’t mean that they’re going to agree with us on everything on North Korea. I think those two for them are basically relatively separate, tactically connected. But strategically, China’s going to do on North Korea what’s in China’s core interests, and maintaining a buffer is more important than denuclearization at this time. And so I think there’s only so far. So I still think that we can take issues that you care most about, David, and push the Chinese on them, if we’re—if we do it in a strategic, coordinated fashion.

LIANG: I agree. Actually, I feel that there’s so much China is willing to do regarding to trade. There’s so much China’s willing to do regarding to the North Korea crisis.

YUAN: The woman in the back.

Q: Hi. Thanks. I’m Ana Swanson with The New York Times.

I wanted to ask, do you think the administration is trying to develop a more unified China strategy? And it seems they are really concerned with structural issues that lead to China flooding the market with various commodities. Is there a trade measure that the U.S. can use that would actually help deal with that?

KENNEDY: Yes, I think the short answer is yes. I think they are trying to develop a strategy. There have been a variety of working groups and committees inside the administration to develop one. And I think that they are also, though, pulled along by events. And because they accepted the Mar-a-Lago meeting in early April, that kind of got in the way of giving them enough time to think coherently without some imminent deadline where they had to, you know, act in a certain way at that time. And so—and they’ve always been playing catchup, and so there’s not enough time now between now and the Trump visit to fully do that and vet things so that once the train has left the station, it’s really hard—been hard for them to catch up.

I do not think that there is any silver bullet. There’s not just one thing that U.S. could do unilaterally that will fix this. Yes, you get the Chinese attention. You’d get it all the way at the top. But you may not get the attention that you like. You might not get the answer that you like. This is going to be a multistage game. We should be working with our allies on this. Just as one little example, two of the three world’s largest electric battery makers are Samsung and LG. The other is Panasonic. This year, Samsung and LG have sold a total of zero electric batteries to China. Why? Because of THAAD and because it also helps Chinese industrial policy. South Korea should be standing right alongside us and want to deal with some of these challenges with China. But because we are talking about withdrawing from KORUS and have the same level of attention to so many different trade issues, it makes it difficult for us to find allies, which is what you need to deal with the challenge the size of China.

Q: How important the role of renminbi internationalization plays in establishing the Chinese global governance, and would that have an impact on U.S. trade deficit since if the RMB appreciate? That might ease the trade deficit with U.S., or does that impact U.S. adversely?

YUAN: But can you also introduce yourself and—

Q: I’m a(n) ITED student in Middlebury Institute of International Studies. I’m a student for Professor Liang.

DOLLAR: Right. So China’s had a campaign to promote the internationalization of their currency, the renminbi, for a number of years, and for a while it seemed to be going pretty quickly. They’ve focused in particular on, you know, getting a certain amount of trade denominated in Chinese yuan and settled in Chinese yuan, and that grew for a while. But I think we know now that that was a period where everyone expected the renminbi to appreciate, and so lots of agents were happy to work in renminbi, and then that world came to an end about two years ago. So China’s share of global payments has actually been declining over the last two years. And it’s very small. It’s something like maybe 2 percent. And the Chinese yuan is not an important investment instrument because they have a closed capital account. So I think it’s a long-term agenda. In my view, the United States should be supportive of a long-term agenda of RMB internationalization because to actually do it, you’d have to strengthen shareholder rights, you’d have to strengthen property rights and adjudication. You’d have to deepen the financial system. You’d have to eventually open up the capital account. You know, these are all long-term institutional changes that I think would be good for China and for the world. You know, I’m named David Dollar, and I’m not really worried about my namesake diminishing in importance, OK? (Laughter.) And we’ve got Sharon Yuan over there. (Laughter.) I promised you we wouldn’t make any yuan-dollar jokes, but, you know, sorry, a question came up from the audience.

YUAN: Just couldn’t help it. Just couldn’t help it.

DOLLAR: So if they pursue that agenda gradually, I don’t see that that creates any problems for the United States. You know, there’s really nothing that they can do in the short run with the exchange rate that’s going to have a big effect, you know, on these imbalances. So I’m happy that that exchange rate issue has kind of receded, because the level of the Chinese exchange rate right now seems appropriate. The IMF thinks it’s not unfairly valued. And as I said, their overall trade surplus is about less than 2 percent of GDP. So it’s kind of hard to argue about their overall situation.

YUAN: Thanks, David.

Q: Rick Gilmore, GIC Group. It’s an agribusiness company. We have an office in Beijing.

My question is, the two largest Chinese investments in the United States were in the agro sector: Smithfield and Syngenta. Although Syngenta is a Swiss company, most of its assets are in the United States. In both instances, and under the Obama administration, the CFIUS mechanism was not invoked—it was invoked, but it was not—it was approved.

What do you as panelists see the role of CFIUS to be in the Trump administration as a lever of any kind in terms of foreign investment? And admittedly, there’s been a shift as far as China’s concerned in terms of its export of foreign—export of capital for foreign direct investment. But apart from that, there’s still strategic assets here, particularly in the sector I know, in agro, that the China investors are very interested in. So I’d be interested to have you address the question of the mechanism of CFIUS and its strategic role so far as you see it being used in the Trump administration. Thank you.

DOLLAR: So I think the CFIUS by statute is supposed to focus pretty narrowly on national security issues involved in mergers and acquisitions. In my own personal judgment, they made the right call on Smithfield and Syngenta because I don’t see it as a threat to U.S. national security that Chinese entities have purchased these assets. Recently, CFIUS stopped an acquisition of a semiconductor firm. That happened both under Obama and now under Trump. So, so far, it seems consistent.

But there are a number of decisions coming along, including Ant Financial buying MoneyGram. I think Scaramucci’s hedge fund, someone’s put in a bid for that. So there are going to be a series of decisions in the next six months or so. My reading is that the normal practice would be to approve these transactions. So we’re going to learn quickly if the Trump administration has a different approach.

You know, my own view is we should stick to statue and focus narrowly on national security. We’re very unhappy that China is coming in and buying a lot of stuff and we can’t go there and buy firms. That’s a real issue. Congress may want to deal with that. You know, I’m on record as saying let’s stop Chinese state enterprises from making acquisitions in the United States. That would require an act of Congress. So I can see dealing with the issue, but I think trying to change CFIUS’ mandate, particularly without congressional action, I think, frankly, that would be illegal.

LIANG: OK, I agree. And I also think that the ongoing—the bilateral investment treaty is also addressing this problem. The problem is that we are really not making any significant progress on the negotiation.

And the issue itself is very important only because starting from last year, China’s outbound foreign investment has already exceeded the inflow of the foreign investments. So lots of Chinese companies followed the government’s strategy to go out and that they want to invest in the developed countries to acquire technology and brand names and market share. And that of course will involve lots of high-tech companies, because it doesn’t make sense for the manufacturing companies to invest in the U.S. now. So then CFIUS plays a role and also has raised great concerns in China when the Chinese companies make the decision should they invest in the U.S. or Canada or Australia.

KENNEDY: There’s a World Trade Organization. There’s no world investment organization. WTO deals with a narrow aspect of investment with regard to forced transfer of technology, when you make a deal, and says that shouldn’t occur. But I think the lack of rules on investment means that in issues related to national security there’s no global standards. It’s each country to their own. And it means for standard vanilla investments that, again, each country is on their own, whatever rules that they want. And I think in both areas there’s lots of pressure domestically to turn up the heat on national security concerns, to expand CFIUS, to cover greenfield investments or very small-scale things that wouldn’t usually raise a red flag. I think people are talking about deemed exports. So Americans who have a lot of high technology, have worked for some company, being hired away by their Chinese competitors, people are—so I think we’re going to continue to see that play out. And that is not just a Trump era issue. That’s something that has been boiling for a while.

On the other side of things, on just standard commercial investment that doesn’t raise national security concerns, because there’s no rules of the road, when China joined the WTO, we were all thinking about trade. We weren’t thinking about China as a source of outbound investment like it is now. And so without any clear rules, that’s why we’ve gravitated to this idea of reciprocity, looking for some source of fairness in the absence of rules. So either we’re going to need to develop rules globally, come up with clear rules bilaterally—and perhaps the BIT is where we eventually end up—but without those, without some clear guidance, these are just going to be political fights one after the other, and we’ll be arguing about whether we should—you know, ham and bacon should be, you know, open to Chinese investment.

YUAN: Thank you.

The gentleman in the front.

Q: Hi, Michael Pillsbury, Hudson Institute.

I’m surprised—I wanted to go back to Scott Kennedy’s initial comment that the World Bank study—joint with China, I thought—2030 is now not going to be implemented. I thought that was quite a wonderful study, especially the color graphics with the 30 megacities, long list of reforms.

There’s a theory I’ve heard recently in Beijing I wanted to give all four of you, including Sharon, a chance to comment on. After Xi Jinping consolidates, basically next week, then the reformers will have their chance, and the new strong powerful Xi Jinping, with his advisers, is—they’re all secret reformers, and they want to go back to the China 2030 list of reforms, and the others the IMF has proposed. Is that not considered politically correct anymore to think about the great dream of after Xi consolidates, he will do all these good things? Is that considered incorrect now?

DOLLAR: OK, so I’ll start with that. So I think many of my Chinese friend would endorse a certain version of that, you know, which is that after this Party Congress there will be some acceleration of reform, you know, more on the macro side: reining in the excessive credit and some fiscal reform.

But Xi Jinping’s vision of state enterprise reform is not our vision of state enterprise reform. It doesn’t seem consistent with that World Bank report. You know, they really—you probably heard this joke: China always talks about reform in openness, but they seem to be aiming for reform without openness, OK, in the next period. So, you know, so I think you could see some acceleration, but not an endorsement of that kind of liberal vision you had in that report.

And I think the problem—the problem with the kind of idea that you threw out, which, you know, the trial balloon you’re testing, is that it’s really hard to see Xi Jinping as the reformer in this. So, what? We think that this faction around Li Keqiang and Wang Yang and others, we think that they weren’t involved in reform? But they have a long personal history of being involved in some reform. So I have trouble seeing the Xi Jinping faction as the reform faction.

And then I also wouldn’t exaggerate the reform credentials of the other side. That’s why, for me, if you get a balanced Standing Committee, you need this vast bureaucracy to implement reform. I think the best outcome is probably a harmonious Standing Committee. If Xi Jinping runs the table, there’s going to be a lot of unhappiness throughout the Chinese bureaucracy. You could get a lot of kind of low-level guerilla action against the kind of reforms that they need to take.

KENNEDY: I would just say, you know, Chinese people don’t have middle names, as you know. But if they did, Xi Jinping’s would be “control,” right? (Laughter.) Every aspect of governance is centered around increasing control. So maybe there’s some secret plan that we don’t know about over the next century that China has to control the world by liberalizing, but I think it’s probably unlikely. Again, he could surprise us. I would say, you know—and I know that some of the reformers and advisers around him who are hoping that that side of him comes out. I think actually he’s already assumed enough power that if he had wanted to be more liberal, he could have done it with facing very little political consequences already. You know, maybe simply, you know, getting his name written in a party constitution and things like that will make him feel, you know, better—and he’s highly risk-averse—and then we’ll be surprised. I just think it’s unlikely.

LIANG: Yeah, I think lots of people—I mean, the reformers in China, they share the same hope, and only because the next stage of the economic reform is kind of long overdue. The last time we saw the significant reform, that was really the far-reaching commitments China made upon its WTO accession. And all the free-trade agreements negotiation China has concluded so far are relatively shallow in terms of the issue areas included, and many of them are not WTO-plus.

So, yes, lots of people are talking about it, especially during the period, the one China created the Shanghai special free-trade zone, and also during the TPP negotiation, like, you know, if the U.S. is doing it in the region, China should do it, too. But now I don’t really see any sense of the urgency that this is something, you know, that has a top priority for Xi Jinping. But I think everyone—I mean, lots of people would be very happy to see that happen.

YUAN: Yeah, I would agree. I mean, I think what David said about reform being very different for President Xi than it is for us, is key; that, you know, maybe they will open further. Maybe they will liberalize. But my sense is that it would probably be to private Chinese companies first before it is to foreign companies.

And as we—as I was actually listening to the panelists, kind of went back to when we first saw the third party—the third plenum, and the decisions, and where the idea that the market would play more of a decisive role and the idea that these contradictions, these inherent contradictions. And that goes to Scott’s point about control, is how do you go about doing that, letting the market play more of a role—any kind of role, decisive or otherwise—and still be able to maintain full control. And so I think that is ultimately going to be more of the challenge going forward is, these much-needed structural reforms that will be critical to China moving out of the middle-income trap and avoiding that, but still nonetheless being able to move forward on the plan that Xi has done in the past five years

Other questions? The gentleman in the red tie.

Q: Thanks. Marty Weiss at CRS.

One of the things that was striking at the Bank and Fund meetings last week was the level of public support and the volume of the support for the Belt and Road Initiative. This is cynical, but what does this say, if anything, about U.S. influence in norm-setting in the region after U.S. withdrawal from TPP? But I guess more specifically on the Belt and Road, what do you see as the kind of key policy issues that—you know, that you’re looking at and, you know, is this current administration engaged on them or prepared to engage?

DOLLAR: Well, I would say China is becoming a bigger and bigger player in the IMF and the World Bank, and so it’s not surprising that the senior technocrats are going to take seriously this Chinese initiative. You know, I think we should take the Belt and Road seriously, but a lot of the press coverage, frankly, has exaggerated what’s happening so far. China seems to be lending about $40 billion per year for infrastructure in other countries, and frankly, it doesn’t have much of a geographic footprint. You know, Africa is getting a lot of the lending, which is good for Africa. Latin America’s getting a lot of the lending. So there doesn’t seem to be a Chinese master plan to fund this. It’s a more kind of in line with China’s economic condition. It’s got quite a bit of excess saving. It’s got unemployed construction companies. It’s putting a lot of those to work in parts of the developing world. If it’s done in the right, you know, environment, I think in countries with reasonably good governance, it’s likely to generate good infrastructure and good results, but they’re also funding countries like Sudan, Venezuela, Angola, Pakistan, and probably you’re not going to get such good results there. This is mostly commercial money, so there is the risk that these countries will start getting into debt distress. But we actually haven’t seen that so far. It’s a relatively recent initiative.

LIANG: Yes, I think that the Belt and Road Initiative, it’s still too new for us to make any kind of serious evaluation. And infrastructure building by no means I think it’s really well-needed in the developing countries. So I think Chinese government really picked something that China is very good at, you know, and also that is well-needed in among the developing countries. So if the Chinese government is going to invest more in the years to come, I think that will be welcomed by the developing world. And also, I think they will work very—and complement really with the World Bank and other regional development banks, because if you look at the current practice, actually the AIB is emphasizing very much, you know, making the lending criteria consistent with the ADB and other regional banks, and supervised by the World Bank.

YUAN: The gentleman in the back.

Q: Hi. Zhenhua Lu, South China Morning Post.

I want to know what would come out of President Trump’s Asia visit, especially in China on economic issues? As we know, the two sides only delivered a(n) initial agreement on 100-day plan, but the Comprehensive Economic Dialogue without no agreement, and press conference is canceled. So, on this background, what would we expect from Xi-Trump summit on economic issues?

And, second, it seems that Section 301 investigation tops the economic agenda of the summit. Isn’t U.S. going to demand China to terminate or eliminate the technology transfer policy or any other kind of demand in terms of intellectual property? Thanks.

KENNEDY: Sure. You know, again, I expect this summit to try to emphasize the positive. I think it’s typical of the president. And, you know, China’s obviously going to roll out the red carpet, and all the way up to the Great Wall—literally—and the president might get some ideas from what he sees about what he might do on out southern broader with that. (Laughter.) And so I would expect a lot of discussion of Texas while he’s in northern Beijing. You never know. He’s—someone’s got to actually give him the real history of the Great Wall—because it wasn’t so great. (Laughter.)

But the—you know, I expect primarily to see deal making, announce deals and investments. The CED, it’s an open question. Does the CED still exist? Will they announce its continuation? I think it’s—yes, what happened July 19th, I think people still aren’t clear where things stand.

I think if there’s one area where there’s some possibility of breakthrough—and I’d welcome anyone else’s input on this—in terms of market opening, it has to do with—and this was discussed at the hearing for the—that they held on 301 last week—with regard to investment caps in China in a variety of different sectors, that the existence of those investment caps, the requirements for joint ventures, create leverage for the Chinese to demand tech transfer, and so not only—so eliminating those, the scope of them, the number of sectors that are covered would not only give greater market access to American and foreign companies to operate how they’d like to. It’d also reduce the pressure to share technology in a coerced manner. And so I don’t see the Chinese eliminating that in one struck with a pen, but I could see potentially in one or two sectors some progress that they might be able to announce and then gradually and put—that is something that they could do—still, again, thinking about the birdcage, one area where there could be some progress, especially in areas where there’s some successful Chinese companies already.

YUAN: Great. Thanks, Scott.

There’s a gentleman all the way in the back.

Q: Hi, it’s Shawn Donnan from The Financial Times.

I just wanted to build on something that you said, David, about China playing a bigger role in the IMF and the World Bank. At the meetings last week, those of us who were there heard President Xi get quoted a lot more than President Trump, which was pretty striking. Also saw the U.S. for the first time kind of lay out a bit of a reform agenda for the IMF and the Bank, and lending by the Bank to middle-income countries.

Just wondering how that bigger presence is going to be manifested, and whether just you share this view that the Trump administration is just going to accelerate that process.

DOLLAR: Right. So I think China’s rise is kind of a natural phenomenon. In some ways, they’re just moving back to the share of the world economy they had 200 years ago, you know? But they are going to continue to increase their share of the world economy. They’re very likely to be the largest economy in the world within 10 years or so. So it’s natural that they’re playing a bigger role in these institutions.

I think they’re frustrated at the pace with which they’re getting more influence in these institutions, and that’s one reason they started AIB, was it was a bit of a hedge. You know, I think it’s actually a positive development, and it’s cooperating well with the World Bank, but it certainly, you know, gives China a little bit of a hedge.

You know, as you say now, it does seem that the Trump administration is kind of picking a fight with China about, you know, how these multilateral banks like the World Bank and, you know, implicitly AIB, though the U.S. is not a member—you know, how they should operate. I think the membership is broadly supportive of the World Bank lending to middle-income countries. You know, it lends at commercial interest rates and makes a profit dealing with middle-income countries. Most of the China program is focused on environmental issues. So it strikes me as kind of an odd fight to pick, to suggest that these institutions should pull back from dealing with middle-income countries. So either you target it at China—which of course is going to make the Chinese unhappy—or you make it more general, you know, but Brazil still borrows from the World Bank, India’s rapidly on its way to being a middle-income country, some of the Southeast Asian countries. So I guess I don’t really support the idea of the World Bank pulling out of middle-income countries when there are a lot of important environmental and social and economic challenges in those countries. So I think the current system where the money is very, very concessional for poor countries and the money is roughly commercial for middle-income countries, I think that system has worked well, and that Chinese would certainly like to see a continuation and an expansion of this kind of system.

YUAN: We’re quickly wrapping up now, so I just wanted to give our panelists any final concluding, very quick remarks before we need.

DOLLAR: I’m done, I’m done.

YUAN: Wei, anything further? No?

KENNEDY: I’m good.

YUAN: Great. Well, thanks to the panelists and to everyone. This concludes session two, and lunch will be right outside. (Applause.) Thank you.

(END)