Henry Paulson, the 74th Secretary of Treasury and former CEO of Goldman Sachs, spoke at the Bloomberg’s New Economic Forum held on November 6-7, 2018 in Singapore. His Opening Remarks were entitled, Cross Road from a Healthy Strategic Competition Will Tip into a Full-Blown Cold War. Paulson’s astute observations on the economy and trade issues stressing the U.S. and China include the following: 1. Common interests did not yield common actions (N. Korea), 2. Disagreements on maritime rights created tension (South China Sea), 3. Opposed views on international governance (security issue), and 4. Dialogue yielded poor results (trade war has no winner) and 5. Views towards each other are diverging (hostile rhetoric).
He summarized the sentiments of the U.S. as: I. China’s 17 years in WTO still made her closed to competition, II. China requires joint venture and ownership on foreign investment and III. WTO must be reformed or modernized. The current situation is leading the two economies to decouple. The two political parties in the U.S. agree that China’s rise is at the US expense hurting American workers. Some US corporations accept the current situation by maximizing profit but jeopardizing future competitiveness. In contrast, Chinese firms can freely operate in other countries but not reciprocal. Chinese government (CCP) has strong command on all businesses, requiring private businesses to support State goal and foreign technology to become Chinese technology (indigenization process), which with its success is extending to OBOR or BRI, a central issue and a source of tension in US-China relations.
China’s sentiments can be summarized as follows: I. Chinese investments in the U.S. for job creation with no security risks are turned down by the U.S. government, II. Forty years of integration of two economies should mitigate security competition but it did not happen and III. Technology is critical for business success and is blurring the line between economic competitiveness and national security. China’s desire of technology collaboration (import and joint development) gets ignored by the U.S. and regarded as a strategic challenge thus treating China as a peer competitor with adversary policies. Unnecessary security competitiveness is bleeding into economics and businesses creating risks such as broken supply chain damaging goods, hindered investment reducing capital flow, suffocating global innovation stopping technology and people exchange and integration, all creating an economic iron curtain.
Paulson warns that decoupling or divorce between the U.S. and China is not easy because others will have a say. No country in Asia can afford to neither divorce China nor want to. No country in the world will divorce the fastest growing economy. Yet the U.S. is pursuing de-integration to protect her economy and security. Instead of a calibrated de-integration, focusing on sensitive and critical areas, the U.S. is flirting with a comprehensive de-integration attempting to disrupt all aspects of China’s internal growth and external economic relations. The bad trade policies of the U.S., for example the USMCA allowing the U.S. to veto her partner’s effort to open China’s markets through their own trade initiatives and the U.S. pulling out of PTT leaving 16 countries to form CPTPP, will drive companies and countries away from her. The U.S. in attempts to battle with allies and partners to alter Chinese behaviors may actually cause US self-isolation.
Paulson’s recommendations and suggestions offered no fresh ideas other than responding to the prevailing rhetoric rooted in the difference of political philosophies persisted in the two nations. Paulson recommended: 1. Foreign firms allowed to compete with Chinese firms on a level playing field, 2. Chinese firms run as commercial firms not as an agent of the State, allowing market to influence decisions, and responding to market and not government signals, and 3. protecting innovation and ending forced technology transfer, cyber theft and not using China’s own standards to limit competition unfairly. His suggestions to China are: 1. Do no harm (PLA Navy in the South China Sea), 2. Work constructively with the U.S. and her allies, especially on securities (e.g. N. Korea), 3. Bold to open, and 4. Honor IP protection. For the U.S.: 1. Dial down rhetoric, 2. Enlist partners to foster understanding with China, 3. Negotiate with China with clear objectives (investment agreement), and 4. Invest in America (military, economy, education, science and technology), open to the world and investment in alliances (Asia and EU). The above words ignored the causality principle of political philosophy driving economic development. The U.S. is founded on capitalism and free enterprise system with socialism adopted only as remedies for fixing her social problems. Thus private companies are encouraged to grow in a free enterprise mode allowing maximizing, retaining and distributing corporate profits to their limited shareholders and handful executives. China on the other hand is founded on socialism with a constitution placing all her people as the owner of the nation and all its assets. China did embrace capitalism in her economic reform but by no means giving up socialism. Therefore, China’s State Owned Enterprises (SOEs) are owned by China’s citizens with profits shared by the citizens not just a few stockholders and CEOs like the US corporations.
It is very important to respect and accept each nation’s political philosophy to understand her economic development plan and policies. To lessen the economic competition between the U.S. and China we must incorporate the above understanding. Asking China to abolish the SOEs when China is able to keep a high economic growth rate and elevate millions of people out of poverty per year is unreasonable. The wealth gap is a critical issue in any society and it is an acute problem in the U.S. China was poor but fair across the board before; she opened to experiment with capitalism. Now she is witnessing the phenomenon of wealth gap, partly due to corruption and partly due to capitalism. China is addressing corruption with heavy handed crack down but she must find a safe ground between growing GDP employing capitalism and free enterprise system and preventing the worsening wealth gap problem so apparent in the capitalistic world.
Free enterprises grow faster and make more returns than SOEs, but profits go to a few share holders. The Western conglomerates complain about State government’s interference in protecting its local industry but never complained when they were monopolizing an industry and market by having control in IP property (patents), industry standards and capital flow. All the criticisms on misdeeds such as industry espionage, copying technologies, trading markets for technology, etc can be found practiced by many countries before they became developed and long before China arrived on the stage of world economy. Of course, the misdeeds are misdeeds but they are not the essential issues in the U.S.-China economic competition. In fact, China is now the highest recipient of patents and leaders of many key technologies; thus China is already facing the unleveled playing fields in other rising economies. The issue is how to find win-win collaboration to lessen the inevitable competition.
The political philosophies behind economic development plans must be understood and respected. The international institutions, such as WTO, do need to be reformed from time to time to accept the changing political philosophy and economies. Such changes in big economies like the U.S. and China must be seriously studied in order to provide inputs for reform. Instead of suing each other in WTO, it is more productive to engage in a study to adopt most optimal economic development rules accommodating different political philosophies. To deal with economic competition between the U.S. and China, the two great nations must abandon their legacy rhetoric (and WTO litigation) to engage in a dialogue to understand each other’s political philosophy and changing economy. Only by accepting each nation’s freedom to adopt a political philosophy and a workable economic development plan, compromises may be found. We can use Singapore to emphasize the importance of political philosophy. Lee Kuan Yao was a brilliant leader; he led his party to create a prosperous economy. Then the people voted for his party to stay in power making Lee appearing like a dictator. But it is his political philosophy and economic development plan derived thereby that has made Singapore a prosperous nation, nothing to do with democracy. This example simply tells us to keep an open mind about political philosophy especially when it worked and created a prosperous economy for a nation. I urge the Bloomberg Economic Forum to sponsor a conference theme: Compatible Development Plan and Political Philosophy for Creating A Successful Economy.