July 11-15, 2018

China

China – Current Policy

William Duff

Foreign Policy Advisor to the Commander Admiral Aquilino
United States Pacific Fleet

China is repositioning itself in the world as a major economic and military power. As a result, its relationships in the region and with the US also are shifting. China seeks political and economic dominance in the region, while working to establish footholds in Africa and in Southeast Asia. William Duff, Foreign Policy Advisor to Admiral Aquilino, US Pacific Fleet, provided insights into the potential effects of China’s emergence on the States’ security, and described US strategies to maintain peace and stability in the region.

China’s Strategies

China is seeking to be a dominant force and wants to impose its national laws in international space, using questionable strategies to achieve this aim. “Might makes right,” is a primary Chinese military strategy, Mr. Duff reported. He cited the example of the small Fiery Cross Reef in the Spratly Islands of the South China Sea. This disputed area is claimed by China, the Republic of China (ROC/Taiwan), the Philippines, and Vietnam.

But China has the capability to occupy and control the reef. China has built it up to the size of Washington, DC and developed it as a military base of operations complete with airport and ship facilities. Such actions strain China’s relationships with its neighboring countries and also have the potential for friction and miscalculation when military forces of different countries are patrolling these disputed waters.

“Made in China 2025”

Another Chinese strategy that can have both positive and negative effects is the “Made in China 2025” economic development strategy. The Plan is calculated to vault China into global dominance of high-tech, high-profit advanced industries. To some extent, China’s neighbors can profit from the development of new markets and the sharing of technologies. However, to achieve its aim of dominance, the Chinese are willing to employ all tactics, including illegal trade practices such as intellectual property (IP) theft and industrial espionage.  This has negative repercussions in the global trading community.

“One Belt, One Road”

Another Chinese strategy to influence and control other nations is the “One Belt, One Road” plan, which is designed to establish Chinese footholds throughout Asia, Southeast Asia, and Africa. This plan provides funding, engineering, and materials from China to build infrastructure and, in the process, creates alliances, dependencies, and “tribute” states. The “quid pro quo” could be painful for recipient countries as China seeks to assert its control in these regions as the price for infrastructure development.

“One Belt, One Road” Planned Map

Importance of Security of the Seas

The importance of the region for global commerce is made explicit by this map of sea trade in the region, where the lines represent hundreds to thousands of sea journeys each year. The shipping map also depicts points of vulnerability such as the Strait of Malacca, a narrow stretch of water between the Malay Peninsula and Indonesia. From an economic and strategic perspective, the Strait of Malacca is one of the most important shipping lanes in the world. It is the main shipping channel between the Indian Ocean and the Pacific Ocean, linking major Asian economies such as India, Indonesia, Malaysia, Singapore, China, Japan, Taiwan, and South Korea. It would only take two destroyers blocking each end of the Strait of Malacca to disrupt shipping in the region and the world.

Annual Sea Journeys in the PacRim Region

The lines on the map represent sea journeys each year.
Dark lines = <100 journeys per year.  Yellow lines = >5000 journeys per year

US Pacific Command Role

Because of the critical nature of sea access and the complexities of many countries sharing the sea lanes, US allies count on US presence to maintain peace and stability in the region. The US has reassured its allies of its unflagging commitment to provide security for trade in the region by strengthening maritime alliances, expanding humanitarian efforts, and undertaking multi-lateral military training exercises.

Mr. Duff reported that the US Pacific Fleet provides enhanced Indo-Pacific security through unilateral, bilateral and multilateral military exercises that build confidence and assure our allies and partners of our commitment to a free and open Indo-Pacific. In turn, increased security enables governmental stability so that good governance, transparent rule-making, and other legislative processes function effectively. As a result, secure regions with stable governments are able to use their human and financial capital to improve prosperity. Security, stability, and prosperity go hand-in-hand.

Twenty-six nations from the PacRim and other regions are engaged in a month-long exercise of military coordination and training led by the US, called RIMPAC 2018. These cooperative exercises require, demonstrate, and strengthen participants’ commitments to shared norms, including adherence to international norms, standards, and the rule of law. Participants also commit to and practice strategies for resolving differences through negotiation rather than confrontation. China was excluded this year from RIMPAC exercises because of its violations of international norms.

Mr. Duff pointed out the importance of these exercises, noting that shared norms, standards, and respect for the rule of law are building blocks for international cooperation. These principles regulate the behavior of nations, by setting standards of conduct. Adherence to international norms can strengthen or weaken global peace and prosperity, he concluded.

China – Economics/Impending Trade Wars

Ira Kasoff, PhD

China and East Asia Foreign Policy
Former Deputy Assistant Secretary for Asia
US Department of Commerce
International Trade Administration

China is the biggest competitive threat to the US and will soon surpass the US as the largest economy in the world, Dr. Kasoff reported. The “Made in China 2025” initiative seeks to ensure Chinese domination of high-profit, high-technology industries. And China is willing to employ unscrupulous business practices such as intellectual property theft, industrial espionage, and import/export controls to ensure success. In response to these tactics, US has taken a number of measures, including imposing tariffs on Chinese imports. “We are in the early stages of what could become a full-on trade war,” Dr. Kasoff pointed out, and went on to examine possible scenarios in depth.

The Tariff Wars

Dr. Kasoff reported the progression of tariffs and retaliation between the US and China. First, the US imposed 25% tariffs on $34 billion worth of imports from China; China responded by imposing reciprocal tariffs on US soybeans, autos, and other products. Tariffs on a further $16B of Chinese products are in process, and the Trump administration announced 10% tariffs on an additional $200B of Chinese products. These will not take effect until September, following a public comment period.  President Trump has threatened tariffs possibly on the entire $500 billion of goods that China exports to us.

The Actual Trade Imbalance

The numbers can be confusing.  According to official US government statistics, our actual trade deficit with China is around $350B. The $500B that President Trump references is roughly the total of Chinese exports to the US, not the deficit. Furthermore, in high-tech imports from China like computers and electronic equipment, for example, only about half the value added in these products actually comes from China, the rest of the value is contributed in a complex supply chain with pieces coming from US, Taiwanese, and Japanese companies. Because the final product is assembled and shipped from China, the entire value is counted as an import from China even though for some products the actual value-added performed in China can be as low as 5-10% of the total.

In general, for high-tech products, roughly 40% of our bilateral trade imbalance with China comes from components made elsewhere and shipped into China for assembly, before being shipped to the US.  The real deficit with China, in terms of value added - which translates to jobs - is considerably lower than $350B.

China’s Industrial Policy

Dr. Kasoff observed that the "Made in China 2025" initiative is a greater threat than the trade imbalance. This is China’s strategy to dominate the key industries of future wealth, including artificial intelligence, robotics, self-driving and electric cars, clean energy technology, etc.  The Chinese government is investing huge sums in these emerging sectors, supporting domestic companies and restricting access to foreign companies, acquiring foreign technology thru a variety of means, some legal and some not. Beijing is making a concerted effort to acquire American technology in support of their “Made in China 2025” plan.

The US Trade Representative report criticizes China for forced technology transfers, discriminatory licensing requirements, overseas acquisitions, and illegal commercial hacking. The report states that these actions are systematically undertaken in support of Chinese industrial policy goals. Clearly, the main target of the recent US actions against China, including the tariffs, is actually the “Made in China 2025” policy.

The fear is that if the “Made in China 2025” plan succeeds, it would do for high-tech manufacturing what China did to low-cost manufacturing over the last few decades: concentrate a huge portion of global production in mainland China.

Tariffs: Effects on the US

Trade wars hurt everyone, Dr. Kasoff said. Imposing high tariffs on Chinese imports will raise prices for US consumers and also for US manufacturers who rely on Chinese inputs.  Furthermore, imposing tariffs does not guarantee that jobs will come back to the US, because US manufacturers would most likely look for other low-cost overseas suppliers.

Update: China’s retaliatory tariffs on soybeans and other agricultural products have had significant effects.  Soybeans are the second largest financially important crop in the US. In 2017, the value of soybeans grown was $41 billion, second only to corn at $48.5 billion. On July 24, the administration announced $12 billion in aid to compensate US farmers for their losses on soybeans and other agricultural products.

Tariffs: Effects on China

China has multiple strategies to lessen the effect of US tariffs.  In addition to raising tariffs on products imported from the US, they could devalue their currency, which would lower the price of their exports and thus offset to some extent the impact of the tariffs.

China could also employ retaliatory tactics such as imposing long delays on product approvals, worker visas, and licensing applications as a way of targeting US companies. Today, many US companies earn billions of dollars on products they make and sell in China. China is also the world’s largest exporter of rare earths that are crucial to the manufacture of many high-tech products. China could hold these elements hostage to impede production.

China’s ultimate weapon, though, is US debt. China holds over $1.2T of US debt, and is the biggest buyer of US treasuries. If China decreases these purchases, or begins selling down their holdings, it would push up interest rates in the US, which would deal a very serious blow to the US economy.

As tensions with the US ramp up, China also is looking to diversify and strengthen other trade relationships. For example, China and the European Union are accelerating negotiation of investment and trade deals, and recently launched a group that will work to update global trade rules to address technology policy, subsidies and other emerging irritants and preserve support for international trade.  Recently, German Chancellor Merkel and Chinese Premier Li met in Berlin and announced plans to deepen cooperation in finance, trade and investment.  They also agreed that they want to preserve the nuclear deal with Iran that the US has walked away from.

Tariffs: Effects on the International Community

Most people agree that China has benefitted from unfair trade practices, including theft of intellectual property, forced technology transfer, and restricting foreign access to key sectors of the Chinese economy. But the question is: Are tariffs an effective way to address the issue of China’s trade practices?

In fact, the US imposition of tariffs is probably not compliant with World Trade Organization (WTO) agreements, Dr. Kasoff observed, and China has already filed complaints with the WTO. If the US loses the WTO court case and ignores the WTO ruling, this would damage US and WTO credibility in the world and risk undermining the global trading system that the US worked so hard to create.

China’s is not the only WTO complaint against the US. On 1 June 2018, US tariffs entered into force for steel and aluminum imports from the EU, Canada and Mexico. The EU responded by lodging a complaint at the WTO and instituting rebalancing measures on specific US exports. Other US trading partners have responded in similar ways, raising fears that this could be the start of a full-blown trade war that would harm economic growth.

There is also a geopolitical element. North Korea's economy is heavily dependent on China - 90% of its trade goes through China or is with China. China had been increasing the pressure on North Korea to restrain its nuclear program. If the trade war continues, it will be hard to get China to cooperate with the US in pressuring North Korea to denuclearize.

“What is the off ramp and how do we get there?”

How will the US get out of this trade war? Dr. Kasoff asked. He observed that this round of tariff increases won't have a huge impact. There will be some localized pain in China and in the US, but the overall impact on both economies will be limited, so there is no strong incentive to solve this in the short term. He opined that the Administration may want to keep this issue alive through the mid-term elections. There may not be resolution until 2019, when the mid-term elections are over, and as the negative effects on US consumers start to be more apparent. “So at this point, I would say ‘stay tuned,’” he concluded.

Discussion

Sen. John Cullerton (IL): Tariffs don’t look like such a good idea. The retaliatory Chinese tariffs have had disastrous effects on Illinois and Iowa soybean farmers. But you say that President Trump will keep this going through the mid-term elections. Will tariffs hurt the President’s party in the elections?

Dr. Kasoff: The President believes trade deficits mean “The US is losing,” and there has been public support for his “Get tough on China” policy. He can argue that, although there may be some short-term pain, ultimately things will get better. Unfortunately, tariffs are not likely to lower our overall trade deficit, as importers will find other low-cost foreign suppliers, and they will not bring back jobs. A better strategy would be for the US to stay on track with our allies, by participating in the Trans-Pacific Partnership and working in conjunction with our allies to put pressure on China to clean up its trade practices.

Tom Finneran (Moderator): What is the risk that conflicts over tariffs could trigger bigger conflagrations, for example, over Taiwan?

Mr. Duff: Taiwan is a key issue. The US has not changed its stance on China since 1979 when Washington and Beijing established official diplomatic relations. The One-China Policy was first stated in the Shanghai Communiqué of 1972: "the United States acknowledges that Chinese on either side of the Taiwan Strait maintain there is but one China and that Taiwan is a part of China. The United States does not challenge that position."

Instead, the US is looking for a peaceful resolution between the two. Recently, the US Navy sent two destroyers through the Taiwan Strait on a routine mission designed to ensure that trade in the region is not interrupted. Meanwhile, Beijing has put economic pressure on its allies to stop trading with Taiwan in hopes of forcing Taiwan to acquiesce to Chinese authority.

Dr. Kasoff: Taiwan has evolved its relationship with China--from a time when there was no travel, no trade, and no contact between them--to the situation today. Now, more than 1 million Taiwanese people live in the greater Shanghai area, enormous trade and investment flows,  daily flights, tours, and constant business exchanges between the two.

The Chinese are pragmatic, and they could simply declare the Taiwan problem solved by announcing that they are reunifiedunder a "one country three system solution," where Taiwan gives up its claim to be the "Republic of China," but maintains all of its own systems. However, as time goes by this becomes less likely, as most Taiwanese are not interested in reuniting with China, and PRC leaders grow less and less patient.  And of course, China could easily strangle Taiwan militarily.

Sen. Ronald Kouchi (HI): Currently, there are 2 million Taiwanese in upper management positions in China. Both countries are changing. How does this affect US interests?

Sen. Wayne Niederhauser (UT): Based on his travels in China, Senator Niederhauser agreed that there were many changes in China. People are happier, more prosperous, and the atmosphere is less oppressive. China looks more like a democracy. Relationships with other countries are growing. Will this make China easier for the US to deal with?

Dr. Kasoff: For a long time, the conventional wisdom has been that as China started opening up since 1978-1979, and more Chinese studied and traveled abroad, more foreigners visited China, and, that China would naturally move towards greater freedom and democracy. This hasn't happened. The Chinese people really don’t believe in Marxism, but they have been willing to tolerate Communist rule as long as they have more freedom in their personal lives and a better quality of life. But in the last few years, the leadership has been more repressive, because Party leaders are worried that people may demand more freedoms as the improvements in their standard of living slows.

Mr. Duff: China’s end result of the “Made in China 2025” campaign will be a free and open economic system functioning under a restrictive, authoritarian political system. Already, the Chinese have implemented the SESAME Credit system--a broad social, political and economic rating system based on input from neighbors who report on each other. The scores give preferential access, or block access, to numerous opportunities such as education, travel, jobs, and healthcare, among others.

Sen. Eduardo Bhatia (PR): Which country poses the greatest challenge to US supremacy, Russia or China?

Mr. Duff: China is the biggest potential military threat. They are the most active with diplomacy, marketing, military gestures such as ram and sink, financial and debt warfare, bribery, and intelligence threats. They seek to undermine the international system and replace it with China’s preferred version.

Dr. Kasoff: China is the biggest competitive threat. They will soon pass the US as the largest economy in the world. But China faces many challenges including corruption, the lack of a judiciary, the demographic challenges of a rapidly aging population, pollution, etc. To cite one example, they have only 20% of the potable water needed in North China.

China is a complicated picture. On one hand, people are aware that China uses unsavory trade practices. On the other, China is the biggest and a growing market for US products and is the largest source of Foreign Direct Investment for the US.

Mr. Duff: The US is in the early stages of a global information campaign to present the evidence and share a clear picture with our allies about what competition with China really means. We need to have better education and information for everyone, including India, the EU, Mexico, and Canada, to recognize that they are in competition with China and what this entails. We need to make clear China’s questionable policies on freedom of information and of religion, on environmental issues, and their nationalistic aspirations in space, the Arctic and for fisheries.

Sen. Charles Schneider (IA): What is China’s pain threshold for tariffs? As a state-run economy, they can simply shift their buying to other countries and avoid the tariffs, as they have done by buying soybeans from Brazil.

Dr. Kasoff: China has a high pain threshold because it is an authoritarian state and can control information and dissent and subsidize industries hit by tariffs. Today, it is a little harder for China to manipulate its economy because its growth is slowing. There is some effect from the US tariffs.

However, there is little coverage of the tariffs in the Chinese media. And Chinese retaliatory measures have been restrained. China wants to position itself as the Champion of Free trade, it wants to be seen as the key supporter of free trade, the country that is taking the high road. Meanwhile, China is trying to understand what the Trump Administration wants. They have offered to buy more US products, which would help the trade deficit, but the Trump Administration has not acted on this offer. Chinese diplomats are consulting with retired US officials to try to find out what the US wants.

Mr. Duff: China has unfettered access to US officials and advisors. They discuss what the US economic and political levers are and how to manipulate them. In contrast, US advisors have absolutely no access to Chinese officials or to information.

Tom Finneran (Moderator): Will new technologies make US Navy carriers obsolete?

Mr. Duff: The way you deploy aircraft carriers today is changing. The carrier’s range is expanding and they can be used in stealth mode to launch and activate weapons remotely from many different sources. As China is developing more advanced military capabilities, the US military is developing capabilities to respond from remote locations.

Sen. Rob Bradley (FL): We have heard here that China’s goal is to delegitimize the US presence in the world; that China is an existential threat to the US. Could the Trump Administration’s policy be effective in forcing a fundamental reset of the relationship between China and the US?

Dr. Kasoff: You would need a consensus at a high level in the US government to effect a “reset” of the relations between China and the US. Today there is a lack of Asian expertise and experience in the US government, so this might not be possible.

Mr. Duff: Today’s US national security strategy has effectuated a “reset.” In the past, areas of agreement and disagreement were delinked. China and the US could agree on sea access, for example, and disagree about climate policies. Today, the administration is not compartmentalizing issues but perceives the need to attack all issues simultaneously. The Administration has introduced friction in order to change the status quo.

China has benefitted from openness from the US, Japan and the EU and, thus, has been able to bring 400 million people out of poverty and into the modern world. We now need a negotiated way to give China a seat in the world order. But China wants to swap the current system and impose its own system, that is preferentially good for China.

The US continues to be the partner of choice, as demonstrated when 36 countries participate in RIMPAC to learn interoperability with the US military. The US tariffs are creating some issues in our international relations but these other activities keep the oscillations in geopolitics damped down.

Dr. Kasoff: A major concern is that the Trump Administration’s actions in the region may be fraying the established relationships with our allies.

Speaker Biography

William Duff

William “Bill” Duff is a native of San Francisco, California, and is a 1992 graduate of the University of Southern California where he received degrees in History, Economics and Communications. He completed his maters work at the University of California, San Diego earning a master’s degree in International Economics and East Asian Security. Upon graduation, he was awarded a Presidential Management Fellowship, where he worked in the Department of State, at the United States Trade Representative, and a detail to the National Security Council.

Bill became a member of the United States Foreign Service in 2000. His assignments include Special Assistant to the Ambassador in Beijing (2000-02); Economics Officer in Tokyo (2002-04); Economic and Foreign Policy Officer and Special Assistant to the Ambassador in Bern (2006-08); Deputy of the Economic Section in Tokyo (2008-10); Foreign Policy Advisor to the Commander, U.S. Division South and U.S. Division Iraq (2010-2011); China language and Political-Economy student in Taipei; and Political-Economic Section Chief in Shanghai (2013-16). He currently is the Foreign Policy Advisor to Admiral Chris Aquilino, Commander, U.S. Pacific Fleet in Pearl Harbor, Hawaii.

Bill speaks fluent Chinese, Japanese and German. He is the recipient of numerous Department of State Superior Honor and Meritorious Honor Awards, and was recognized for his service in Iraq with the Department’s Expeditionary Service Medal and the U.S. Army’s Outstanding Civilian Service Medal.

Ira Kasoff 

Dr. Ira Kasoff is a recognized expert on Asia.  He has lived and worked extensively in the region – ten years in mainland China, eight years in Japan, eight in Hong Kong, and two in Taiwan. From 2010-13 he was Senior Counselor at APCO Worldwide, a global public affairs consultancy, and serves currently on APCO's International Advisory Council. Before joining APCO, Kasoff served as Deputy Assistant Secretary of Commerce for Asia, where he oversaw Asia trade policy for the Department, engaged in trade negotiations with officials of key counterpart governments, and served as the senior advisor on Asia to two Secretaries of Commerce, Carlos Gutierrez and Gary Locke.

From 1985 to 2007, Kasoff was a diplomat, serving seven assignments in Asia with the U.S. Commercial Service, including senior positions in the US Consulates General in Shanghai and Hong Kong and the US Embassy in Tokyo. Kasoff has also worked for the Boston Consulting Group (BCG), where he specialized in Asia business strategy. Earlier in his career Kasoff worked as the Beijing representative for Fuqua World Trade Corporation, where he arranged and oversaw manufacturing of consumer goods in China for the US market; and at the National Committee on US-China Relations, where he managed US-China exchange programs.

Dr. Kasoff received his B.A. from Harvard University in 1973, and his Ph.D. from Princeton University in 1982. Following the normalization of relations between the US and China in 1979, Kasoff was part of the first group of American scholars sent to China, spending a year doing research at Beijing University. He is the author of a book on Chinese intellectual history published by the Cambridge University Press, which has recently been translated into Chinese and published by the Shanghai Classics Publishing House.

Ira Kasoff is married to Ms. Ellen Eliasoph, CEO of Village Roadshow Asia, and has one daughter.

China is repositioning itself in the world as a major economic and military power.

The “Made in China 2025” economic development strategy is calculated to vault China into global dominance of high-tech, high-profit advanced industries.

US allies count on US presence to maintain peace and stability in the region.

Security, stability, and prosperity go hand-in-hand.

...shared norms, standards, and respect for the rule of law are building blocks for international cooperation.

We are in the early stages of what could become a full-on trade war.

President Trump has threatened tariffs possibly on the entire $500 billion of goods that China exports to us.

The real deficit with China, in terms of value added - which translates to jobs - is considerably lower than $350B.

...the "Made in China 2025" initiative is a greater threat than the trade imbalance.

The fear is that if the “Made in China 2025” plan succeeds, it would do for high-tech manufacturing what China did to low-cost manufacturing .

...imposing tariffs does not guarantee that jobs will come back to the US, because US manufacturers would most likely look for other low-cost overseas suppliers.

China’s ultimate weapon, though, is US debt. China holds over $1.2T of US debt, and is the biggest buyer of US treasuries.

As tensions with the US ramp up, China also is looking to diversify and strengthen other trade relationships.

Are tariffs an effective way to address the issue of China’s trade practices?

...the US imposition of tariffs is probably not compliant with World Trade Organization (WTO) agreements.

Sen. John Cullerton (IL)

Tom Finneran (Moderator)

Sen. Ronald Kouchi (HI)

Sen. Wayne Niederhauser (UT)

Sen. Eduardo Bhatia (PR)

Sen. Charles Schneider (IA)

William Duff

Ira Kasoff

Unfortunately, tariffs are not likely to lower our overall trade deficit, as importers will find other low-cost foreign suppliers, and they will not bring back jobs.

China is the biggest potential military threat.

China is the biggest competitive threat.

On one hand, people are aware that China uses unsavory trade practices. On the other, China is the biggest and a growing market for US products and is the largest source of Foreign Direct Investment for the US.

We need to have better education and information for everyone, including India, the EU, Mexico, and Canada, to recognize that they are in competition with China and what this entails.

China is trying to understand what the Trump Administration wants.

A major concern is that the Trump Administration’s actions in the region may be fraying the established relationships with our allies.

CONTACT

Senate Presidents’ Forum

579 Broadway

Hastings-on-Hudson, NY 10706

 

Tel: 914-693-1818

Copyright © 2018 Senate Presidents' Forum. All rights reserved.

July 11-15, 2018

China

 

China – Current Policy

William Duff

Foreign Policy Advisor to the Commander Admiral Aquilino
United States Pacific Fleet

China is repositioning itself in the world as a major economic and military power. As a result, its relationships in the region and with the US also are shifting. China seeks political and economic dominance in the region, while working to establish footholds in Africa and in Southeast Asia. William Duff, Foreign Policy Advisor to Admiral Aquilino, US Pacific Fleet, provided insights into the potential effects of China’s emergence on the States’ security, and described US strategies to maintain peace and stability in the region.

China is repositioning itself in the world as a major economic and military power.

China’s Strategies

China is seeking to be a dominant force and wants to impose its national laws in international space, using questionable strategies to achieve this aim. “Might makes right,” is a primary Chinese military strategy, Mr. Duff reported. He cited the example of the small Fiery Cross Reef in the Spratly Islands of the South China Sea. This disputed area is claimed by China, the Republic of China (ROC/Taiwan), the Philippines, and Vietnam.

But China has the capability to occupy and control the reef. China has built it up to the size of Washington, DC and developed it as a military base of operations complete with airport and ship facilities. Such actions strain China’s relationships with its neighboring countries and also have the potential for friction and miscalculation when military forces of different countries are patrolling these disputed waters.

“Made in China 2025”

Another Chinese strategy that can have both positive and negative effects is the “Made in China 2025” economic development strategy. The Plan is calculated to vault China into global dominance of high-tech, high-profit advanced industries. To some extent, China’s neighbors can profit from the development of new markets and the sharing of technologies. However, to achieve its aim of dominance, the Chinese are willing to employ all tactics, including illegal trade practices such as intellectual property (IP) theft and industrial espionage.  This has negative repercussions in the global trading community.

The “Made in China 2025” economic development strategy is calculated to vault China into global dominance of high-tech, high-profit advanced industries.

“One Belt, One Road”

Another Chinese strategy to influence and control other nations is the “One Belt, One Road” plan, which is designed to establish Chinese footholds throughout Asia, Southeast Asia, and Africa. This plan provides funding, engineering, and materials from China to build infrastructure and, in the process, creates alliances, dependencies, and “tribute” states. The “quid pro quo” could be painful for recipient countries as China seeks to assert its control in these regions as the price for infrastructure development.

“One Belt, One Road” Planned Map

Importance of Security of the Seas

The importance of the region for global commerce is made explicit by this map of sea trade in the region, where the lines represent hundreds to thousands of sea journeys each year. The shipping map also depicts points of vulnerability such as the Strait of Malacca, a narrow stretch of water between the Malay Peninsula and Indonesia. From an economic and strategic perspective, the Strait of Malacca is one of the most important shipping lanes in the world. It is the main shipping channel between the Indian Ocean and the Pacific Ocean, linking major Asian economies such as India, Indonesia, Malaysia, Singapore, China, Japan, Taiwan, and South Korea. It would only take two destroyers blocking each end of the Strait of Malacca to disrupt shipping in the region and the world.

Annual Sea Journeys in the PacRim Region

The lines on the map represent sea journeys each year.
Dark lines = <100 journeys per year.  Yellow lines = >5000 journeys per year

US Pacific Command Role

Because of the critical nature of sea access and the complexities of many countries sharing the sea lanes, US allies count on US presence to maintain peace and stability in the region. The US has reassured its allies of its unflagging commitment to provide security for trade in the region by strengthening maritime alliances, expanding humanitarian efforts, and undertaking multi-lateral military training exercises.

US allies count on US presence to maintain peace and stability in the region.

Mr. Duff reported that the US Pacific Fleet provides enhanced Indo-Pacific security through unilateral, bilateral and multilateral military exercises that build confidence and assure our allies and partners of our commitment to a free and open Indo-Pacific. In turn, increased security enables governmental stability so that good governance, transparent rule-making, and other legislative processes function effectively. As a result, secure regions with stable governments are able to use their human and financial capital to improve prosperity. Security, stability, and prosperity go hand-in-hand.

Security, stability, and prosperity go hand-in-hand.

Twenty-six nations from the PacRim and other regions are engaged in a month-long exercise of military coordination and training led by the US, called RIMPAC 2018. These cooperative exercises require, demonstrate, and strengthen participants’ commitments to shared norms, including adherence to international norms, standards, and the rule of law. Participants also commit to and practice strategies for resolving differences through negotiation rather than confrontation. China was excluded this year from RIMPAC exercises because of its violations of international norms.

Mr. Duff pointed out the importance of these exercises, noting that shared norms, standards, and respect for the rule of law are building blocks for international cooperation. These principles regulate the behavior of nations, by setting standards of conduct. Adherence to international norms can strengthen or weaken global peace and prosperity, he concluded.

...shared norms, standards, and respect for the rule of law are building blocks for international cooperation.

China – Economics/Impending
Trade Wars

Ira Kasoff, PhD

China and East Asia Foreign Policy
Former Deputy Assistant Secretary for Asia
US Department of Commerce
International Trade Administration

China is the biggest competitive threat to the US and will soon surpass the US as the largest economy in the world, Dr. Kasoff reported. The “Made in China 2025” initiative seeks to ensure Chinese domination of high-profit, high-technology industries. And China is willing to employ unscrupulous business practices such as intellectual property theft, industrial espionage, and import/export controls to ensure success. In response to these tactics, US has taken a number of measures, including imposing tariffs on Chinese imports. “We are in the early stages of what could become a full-on trade war,” Dr. Kasoff pointed out, and went on to examine possible scenarios in depth.

We are in the early stages of what could become a full-on trade war.

The Tariff Wars

Dr. Kasoff reported the progression of tariffs and retaliation between the US and China. First, the US imposed 25% tariffs on $34 billion worth of imports from China; China responded by imposing reciprocal tariffs on US soybeans, autos, and other products. Tariffs on a further $16B of Chinese products are in process, and the Trump administration announced 10% tariffs on an additional $200B of Chinese products. These will not take effect until September, following a public comment period.  President Trump has threatened tariffs possibly on the entire $500 billion of goods that China exports to us.

President Trump has threatened tariffs possibly on the entire $500 billion of goods that China exports to us.

The Actual Trade Imbalance

The numbers can be confusing.  According to official US government statistics, our actual trade deficit with China is around $350B. The $500B that President Trump references is roughly the total of Chinese exports to the US, not the deficit. Furthermore, in high-tech imports from China like computers and electronic equipment, for example, only about half the value added in these products actually comes from China, the rest of the value is contributed in a complex supply chain with pieces coming from US, Taiwanese, and Japanese companies. Because the final product is assembled and shipped from China, the entire value is counted as an import from China even though for some products the actual value-added performed in China can be as low as 5-10% of the total.

In general, for high-tech products, roughly 40% of our bilateral trade imbalance with China comes from components made elsewhere and shipped into China for assembly, before being shipped to the US.  The real deficit with China, in terms of value added - which translates to jobs - is considerably lower than $350B.

The real deficit with China, in terms of value added - which translates to jobs - is considerably lower than $350B.

China’s Industrial Policy

Dr. Kasoff observed that the "Made in China 2025" initiative is a greater threat than the trade imbalance. This is China’s strategy to dominate the key industries of future wealth, including artificial intelligence, robotics, self-driving and electric cars, clean energy technology, etc.  The Chinese government is investing huge sums in these emerging sectors, supporting domestic companies and restricting access to foreign companies, acquiring foreign technology thru a variety of means, some legal and some not. Beijing is making a concerted effort to acquire American technology in support of their “Made in China 2025” plan.

...the "Made in China 2025" initiative is a greater threat than the trade imbalance.

The US Trade Representative report criticizes China for forced technology transfers, discriminatory licensing requirements, overseas acquisitions, and illegal commercial hacking. The report states that these actions are systematically undertaken in support of Chinese industrial policy goals. Clearly, the main target of the recent US actions against China, including the tariffs, is actually the “Made in China 2025” policy.

The fear is that if the “Made in China 2025” plan succeeds, it would do for high-tech manufacturing what China did to low-cost manufacturing over the last few decades: concentrate a huge portion of global production in mainland China.

The fear is that if the “Made in China 2025” plan succeeds, it would do for high-tech manufacturing what China did to low-cost manufacturing .

Tariffs: Effects on the US

Trade wars hurt everyone, Dr. Kasoff said. Imposing high tariffs on Chinese imports will raise prices for US consumers and also for US manufacturers who rely on Chinese inputs.  Furthermore, imposing tariffs does not guarantee that jobs will come back to the US, because US manufacturers would most likely look for other low-cost overseas suppliers.

...imposing tariffs does not guarantee that jobs will come back to the US, because US manufacturers would most likely look for other low-cost overseas suppliers.

Update: China’s retaliatory tariffs on soybeans and other agricultural products have had significant effects.  Soybeans are the second largest financially important crop in the US. In 2017, the value of soybeans grown was $41 billion, second only to corn at $48.5 billion. On July 24, the administration announced $12 billion in aid to compensate US farmers for their losses on soybeans and other agricultural products.

Tariffs: Effects on China

China has multiple strategies to lessen the effect of US tariffs.  In addition to raising tariffs on products imported from the US, they could devalue their currency, which would lower the price of their exports and thus offset to some extent the impact of the tariffs.

China could also employ retaliatory tactics such as imposing long delays on product approvals, worker visas, and licensing applications as a way of targeting US companies. Today, many US companies earn billions of dollars on products they make and sell in China. China is also the world’s largest exporter of rare earths that are crucial to the manufacture of many high-tech products. China could hold these elements hostage to impede production.

China’s ultimate weapon, though, is US debt. China holds over $1.2T of US debt, and is the biggest buyer of US treasuries. If China decreases these purchases, or begins selling down their holdings, it would push up interest rates in the US, which would deal a very serious blow to the US economy.

China’s ultimate weapon, though, is US debt. China holds over $1.2T of US debt, and is the biggest buyer of US treasuries.

As tensions with the US ramp up, China also is looking to diversify and strengthen other trade relationships. For example, China and the European Union are accelerating negotiation of investment and trade deals, and recently launched a group that will work to update global trade rules to address technology policy, subsidies and other emerging irritants and preserve support for international trade.  Recently, German Chancellor Merkel and Chinese Premier Li met in Berlin and announced plans to deepen cooperation in finance, trade and investment.  They also agreed that they want to preserve the nuclear deal with Iran that the US has walked away from.

As tensions with the US ramp up, China also is looking to diversify and strengthen other trade relationships.

Tariffs: Effects on the International Community

Most people agree that China has benefitted from unfair trade practices, including theft of intellectual property, forced technology transfer, and restricting foreign access to key sectors of the Chinese economy. But the question is: Are tariffs an effective way to address the issue of China’s trade practices?

Are tariffs an effective way to address the issue of China’s trade practices?

In fact, the US imposition of tariffs is probably not compliant with World Trade Organization (WTO) agreements, Dr. Kasoff observed, and China has already filed complaints with the WTO. If the US loses the WTO court case and ignores the WTO ruling, this would damage US and WTO credibility in the world and risk undermining the global trading system that the US worked so hard to create.

...the US imposition of tariffs is probably not compliant with World Trade Organization (WTO) agreements.

China’s is not the only WTO complaint against the US. On 1 June 2018, US tariffs entered into force for steel and aluminum imports from the EU, Canada and Mexico. The EU responded by lodging a complaint at the WTO and instituting rebalancing measures on specific US exports. Other US trading partners have responded in similar ways, raising fears that this could be the start of a full-blown trade war that would harm economic growth.

There is also a geopolitical element. North Korea's economy is heavily dependent on China - 90% of its trade goes through China or is with China. China had been increasing the pressure on North Korea to restrain its nuclear program. If the trade war continues, it will be hard to get China to cooperate with the US in pressuring North Korea to denuclearize.

“What is the off ramp and how do we get there?”

How will the US get out of this trade war? Dr. Kasoff asked. He observed that this round of tariff increases won't have a huge impact. There will be some localized pain in China and in the US, but the overall impact on both economies will be limited, so there is no strong incentive to solve this in the short term. He opined that the Administration may want to keep this issue alive through the mid-term elections. There may not be resolution until 2019, when the mid-term elections are over, and as the negative effects on US consumers start to be more apparent. “So at this point, I would say ‘stay tuned,’” he concluded.

Discussion

Sen. John Cullerton (IL): Tariffs don’t look like such a good idea. The retaliatory Chinese tariffs have had disastrous effects on Illinois and Iowa soybean farmers. But you say that President Trump will keep this going through the mid-term elections. Will tariffs hurt the President’s party in the elections?

Dr. Kasoff: The President believes trade deficits mean “The US is losing,” and there has been public support for his “Get tough on China” policy. He can argue that, although there may be some short-term pain, ultimately things will get better. Unfortunately, tariffs are not likely to lower our overall trade deficit, as importers will find other low-cost foreign suppliers, and they will not bring back jobs. A better strategy would be for the US to stay on track with our allies, by participating in the Trans-Pacific Partnership and working in conjunction with our allies to put pressure on China to clean up its trade practices.

Unfortunately, tariffs are not likely to lower our overall trade deficit, as importers will find other low-cost foreign suppliers, and they will not bring back jobs.

Tom Finneran (Moderator): What is the risk that conflicts over tariffs could trigger bigger conflagrations, for example, over Taiwan?

Mr. Duff: Taiwan is a key issue. The US has not changed its stance on China since 1979 when Washington and Beijing established official diplomatic relations. The One-China Policy was first stated in the Shanghai Communiqué of 1972: "the United States acknowledges that Chinese on either side of the Taiwan Strait maintain there is but one China and that Taiwan is a part of China. The United States does not challenge that position."

Instead, the US is looking for a peaceful resolution between the two. Recently, the US Navy sent two destroyers through the Taiwan Strait on a routine mission designed to ensure that trade in the region is not interrupted. Meanwhile, Beijing has put economic pressure on its allies to stop trading with Taiwan in hopes of forcing Taiwan to acquiesce to Chinese authority.

Dr. Kasoff: Taiwan has evolved its relationship with China--from a time when there was no travel, no trade, and no contact between them--to the situation today. Now, more than 1 million Taiwanese people live in the greater Shanghai area, enormous trade and investment flows,  daily flights, tours, and constant business exchanges between the two.

The Chinese are pragmatic, and they could simply declare the Taiwan problem solved by announcing that they are reunifiedunder a "one country three system solution," where Taiwan gives up its claim to be the "Republic of China," but maintains all of its own systems. However, as time goes by this becomes less likely, as most Taiwanese are not interested in reuniting with China, and PRC leaders grow less and less patient.  And of course, China could easily strangle Taiwan militarily.

Sen. Ronald Kouchi (HI): Currently, there are 2 million Taiwanese in upper management positions in China. Both countries are changing. How does this affect US interests?

Sen. Wayne Niederhauser (UT): Based on his travels in China, Senator Niederhauser agreed that there were many changes in China. People are happier, more prosperous, and the atmosphere is less oppressive. China looks more like a democracy. Relationships with other countries are growing. Will this make China easier for the US to deal with?

Dr. Kasoff: For a long time, the conventional wisdom has been that as China started opening up since 1978-1979, and more Chinese studied and traveled abroad, more foreigners visited China, and, that China would naturally move towards greater freedom and democracy. This hasn't happened. The Chinese people really don’t believe in Marxism, but they have been willing to tolerate Communist rule as long as they have more freedom in their personal lives and a better quality of life. But in the last few years, the leadership has been more repressive, because Party leaders are worried that people may demand more freedoms as the improvements in their standard of living slows.

Mr. Duff: China’s end result of the “Made in China 2025” campaign will be a free and open economic system functioning under a restrictive, authoritarian political system. Already, the Chinese have implemented the SESAME Credit system--a broad social, political and economic rating system based on input from neighbors who report on each other. The scores give preferential access, or block access, to numerous opportunities such as education, travel, jobs, and healthcare, among others.

Sen. Eduardo Bhatia (PR): Which country poses the greatest challenge to US supremacy, Russia or China?

Mr. Duff: China is the biggest potential military threat. They are the most active with diplomacy, marketing, military gestures such as ram and sink, financial and debt warfare, bribery, and intelligence threats. They seek to undermine the international system and replace it with China’s preferred version.

China is the biggest potential military threat.

Dr. Kasoff: China is the biggest competitive threat. They will soon pass the US as the largest economy in the world. But China faces many challenges including corruption, the lack of a judiciary, the demographic challenges of a rapidly aging population, pollution, etc. To cite one example, they have only 20% of the potable water needed in North China.

China is the biggest competitive threat.

China is a complicated picture. On one hand, people are aware that China uses unsavory trade practices. On the other, China is the biggest and a growing market for US products and is the largest source of Foreign Direct Investment for the US.

On one hand, people are aware that China uses unsavory trade practices. On the other, China is the biggest and a growing market for US products and is the largest source of Foreign Direct Investment for the US.

Mr. Duff: The US is in the early stages of a global information campaign to present the evidence and share a clear picture with our allies about what competition with China really means. We need to have better education and information for everyone, including India, the EU, Mexico, and Canada, to recognize that they are in competition with China and what this entails. We need to make clear China’s questionable policies on freedom of information and of religion, on environmental issues, and their nationalistic aspirations in space, the Arctic and for fisheries.

We need to have better education and information for everyone, including India, the EU, Mexico, and Canada, to recognize that they are in competition with China and what this entails.

Sen. Charles Schneider (IA): What is China’s pain threshold for tariffs? As a state-run economy, they can simply shift their buying to other countries and avoid the tariffs, as they have done by buying soybeans from Brazil.

Dr. Kasoff: China has a high pain threshold because it is an authoritarian state and can control information and dissent and subsidize industries hit by tariffs. Today, it is a little harder for China to manipulate its economy because its growth is slowing. There is some effect from the US tariffs.

However, there is little coverage of the tariffs in the Chinese media. And Chinese retaliatory measures have been restrained. China wants to position itself as the Champion of Free trade, it wants to be seen as the key supporter of free trade, the country that is taking the high road. Meanwhile, China is trying to understand what the Trump Administration wants. They have offered to buy more US products, which would help the trade deficit, but the Trump Administration has not acted on this offer. Chinese diplomats are consulting with retired US officials to try to find out what the US wants.

China is trying to understand what the Trump Administration wants.

Mr. Duff: China has unfettered access to US officials and advisors. They discuss what the US economic and political levers are and how to manipulate them. In contrast, US advisors have absolutely no access to Chinese officials or to information.

Tom Finneran (Moderator): Will new technologies make US Navy carriers obsolete?

Mr. Duff: The way you deploy aircraft carriers today is changing. The carrier’s range is expanding and they can be used in stealth mode to launch and activate weapons remotely from many different sources. As China is developing more advanced military capabilities, the US military is developing capabilities to respond from remote locations.

Sen. Rob Bradley (FL): We have heard here that China’s goal is to delegitimize the US presence in the world; that China is an existential threat to the US. Could the Trump Administration’s policy be effective in forcing a fundamental reset of the relationship between China and the US?

Dr. Kasoff: You would need a consensus at a high level in the US government to effect a “reset” of the relations between China and the US. Today there is a lack of Asian expertise and experience in the US government, so this might not be possible.

Mr. Duff: Today’s US national security strategy has effectuated a “reset.” In the past, areas of agreement and disagreement were delinked. China and the US could agree on sea access, for example, and disagree about climate policies. Today, the administration is not compartmentalizing issues but perceives the need to attack all issues simultaneously. The Administration has introduced friction in order to change the status quo.

China has benefitted from openness from the US, Japan and the EU and, thus, has been able to bring 400 million people out of poverty and into the modern world. We now need a negotiated way to give China a seat in the world order. But China wants to swap the current system and impose its own system, that is preferentially good for China.

The US continues to be the partner of choice, as demonstrated when 36 countries participate in RIMPAC to learn interoperability with the US military. The US tariffs are creating some issues in our international relations but these other activities keep the oscillations in geopolitics damped down.

Dr. Kasoff: A major concern is that the Trump Administration’s actions in the region may be fraying the established relationships with our allies.

A major concern is that the Trump Administration’s actions in the region may be fraying the established relationships with our allies.

Speaker Biography

William Duff

William “Bill” Duff is a native of San Francisco, California, and is a 1992 graduate of the University of Southern California where he received degrees in History, Economics and Communications. He completed his maters work at the University of California, San Diego earning a master’s degree in International Economics and East Asian Security. Upon graduation, he was awarded a Presidential Management Fellowship, where he worked in the Department of State, at the United States Trade Representative, and a detail to the National Security Council.

Bill became a member of the United States Foreign Service in 2000. His assignments include Special Assistant to the Ambassador in Beijing (2000-02); Economics Officer in Tokyo (2002-04); Economic and Foreign Policy Officer and Special Assistant to the Ambassador in Bern (2006-08); Deputy of the Economic Section in Tokyo (2008-10); Foreign Policy Advisor to the Commander, U.S. Division South and U.S. Division Iraq (2010-2011); China language and Political-Economy student in Taipei; and Political-Economic Section Chief in Shanghai (2013-16). He currently is the Foreign Policy Advisor to Admiral Chris Aquilino, Commander, U.S. Pacific Fleet in Pearl Harbor, Hawaii.

Bill speaks fluent Chinese, Japanese and German. He is the recipient of numerous Department of State Superior Honor and Meritorious Honor Awards, and was recognized for his service in Iraq with the Department’s Expeditionary Service Medal and the U.S. Army’s Outstanding Civilian Service Medal.

Ira Kasoff 

Dr. Ira Kasoff is a recognized expert on Asia.  He has lived and worked extensively in the region – ten years in mainland China, eight years in Japan, eight in Hong Kong, and two in Taiwan. From 2010-13 he was Senior Counselor at APCO Worldwide, a global public affairs consultancy, and serves currently on APCO's International Advisory Council. Before joining APCO, Kasoff served as Deputy Assistant Secretary of Commerce for Asia, where he oversaw Asia trade policy for the Department, engaged in trade negotiations with officials of key counterpart governments, and served as the senior advisor on Asia to two Secretaries of Commerce, Carlos Gutierrez and Gary Locke.

From 1985 to 2007, Kasoff was a diplomat, serving seven assignments in Asia with the U.S. Commercial Service, including senior positions in the US Consulates General in Shanghai and Hong Kong and the US Embassy in Tokyo. Kasoff has also worked for the Boston Consulting Group (BCG), where he specialized in Asia business strategy. Earlier in his career Kasoff worked as the Beijing representative for Fuqua World Trade Corporation, where he arranged and oversaw manufacturing of consumer goods in China for the US market; and at the National Committee on US-China Relations, where he managed US-China exchange programs.

Dr. Kasoff received his B.A. from Harvard University in 1973, and his Ph.D. from Princeton University in 1982. Following the normalization of relations between the US and China in 1979, Kasoff was part of the first group of American scholars sent to China, spending a year doing research at Beijing University. He is the author of a book on Chinese intellectual history published by the Cambridge University Press, which has recently been translated into Chinese and published by the Shanghai Classics Publishing House.

Ira Kasoff is married to Ms. Ellen Eliasoph, CEO of Village Roadshow Asia, and has one daughter.

July 11-15, 2018

China

 

China – Current Policy

William Duff

Foreign Policy Advisor to the Commander Admiral Aquilino
United States Pacific Fleet

China is repositioning itself in the world as a major economic and military power. As a result, its relationships in the region and with the US also are shifting. China seeks political and economic dominance in the region, while working to establish footholds in Africa and in Southeast Asia. William Duff, Foreign Policy Advisor to Admiral Aquilino, US Pacific Fleet, provided insights into the potential effects of China’s emergence on the States’ security, and described US strategies to maintain peace and stability in the region.

China is repositioning itself in the world as a major economic and military power.

China’s Strategies

China is seeking to be a dominant force and wants to impose its national laws in international space, using questionable strategies to achieve this aim. “Might makes right,” is a primary Chinese military strategy, Mr. Duff reported. He cited the example of the small Fiery Cross Reef in the Spratly Islands of the South China Sea. This disputed area is claimed by China, the Republic of China (ROC/Taiwan), the Philippines, and Vietnam.

But China has the capability to occupy and control the reef. China has built it up to the size of Washington, DC and developed it as a military base of operations complete with airport and ship facilities. Such actions strain China’s relationships with its neighboring countries and also have the potential for friction and miscalculation when military forces of different countries are patrolling these disputed waters.

“Made in China 2025”

Another Chinese strategy that can have both positive and negative effects is the “Made in China 2025” economic development strategy. The Plan is calculated to vault China into global dominance of high-tech, high-profit advanced industries. To some extent, China’s neighbors can profit from the development of new markets and the sharing of technologies. However, to achieve its aim of dominance, the Chinese are willing to employ all tactics, including illegal trade practices such as intellectual property (IP) theft and industrial espionage.  This has negative repercussions in the global trading community.

The “Made in China 2025” economic development strategy is calculated to vault China into global dominance of high-tech, high-profit advanced industries.

“One Belt, One Road”

Another Chinese strategy to influence and control other nations is the “One Belt, One Road” plan, which is designed to establish Chinese footholds throughout Asia, Southeast Asia, and Africa. This plan provides funding, engineering, and materials from China to build infrastructure and, in the process, creates alliances, dependencies, and “tribute” states. The “quid pro quo” could be painful for recipient countries as China seeks to assert its control in these regions as the price for infrastructure development.

“One Belt, One Road” Planned Map

Importance of Security of the Seas

The importance of the region for global commerce is made explicit by this map of sea trade in the region, where the lines represent hundreds to thousands of sea journeys each year. The shipping map also depicts points of vulnerability such as the Strait of Malacca, a narrow stretch of water between the Malay Peninsula and Indonesia. From an economic and strategic perspective, the Strait of Malacca is one of the most important shipping lanes in the world. It is the main shipping channel between the Indian Ocean and the Pacific Ocean, linking major Asian economies such as India, Indonesia, Malaysia, Singapore, China, Japan, Taiwan, and South Korea. It would only take two destroyers blocking each end of the Strait of Malacca to disrupt shipping in the region and the world.

Annual Sea Journeys in the PacRim Region

The lines on the map represent sea journeys each year.
Dark lines = <100 journeys per year.  Yellow lines = >5000 journeys per year

US Pacific Command Role

Because of the critical nature of sea access and the complexities of many countries sharing the sea lanes, US allies count on US presence to maintain peace and stability in the region. The US has reassured its allies of its unflagging commitment to provide security for trade in the region by strengthening maritime alliances, expanding humanitarian efforts, and undertaking multi-lateral military training exercises.

US allies count on US presence to maintain peace and stability in the region.

Mr. Duff reported that the US Pacific Fleet provides enhanced Indo-Pacific security through unilateral, bilateral and multilateral military exercises that build confidence and assure our allies and partners of our commitment to a free and open Indo-Pacific. In turn, increased security enables governmental stability so that good governance, transparent rule-making, and other legislative processes function effectively. As a result, secure regions with stable governments are able to use their human and financial capital to improve prosperity. Security, stability, and prosperity go hand-in-hand.

Security, stability, and prosperity go hand-in-hand.

Twenty-six nations from the PacRim and other regions are engaged in a month-long exercise of military coordination and training led by the US, called RIMPAC 2018. These cooperative exercises require, demonstrate, and strengthen participants’ commitments to shared norms, including adherence to international norms, standards, and the rule of law. Participants also commit to and practice strategies for resolving differences through negotiation rather than confrontation. China was excluded this year from RIMPAC exercises because of its violations of international norms.

Mr. Duff pointed out the importance of these exercises, noting that shared norms, standards, and respect for the rule of law are building blocks for international cooperation. These principles regulate the behavior of nations, by setting standards of conduct. Adherence to international norms can strengthen or weaken global peace and prosperity, he concluded.

...shared norms, standards, and respect for the rule of law are building blocks for international cooperation.

China – Economics/Impending Trade Wars

Ira Kasoff, PhD

China and East Asia Foreign Policy
Former Deputy Assistant Secretary for Asia
US Department of Commerce
International Trade Administration

China is the biggest competitive threat to the US and will soon surpass the US as the largest economy in the world, Dr. Kasoff reported. The “Made in China 2025” initiative seeks to ensure Chinese domination of high-profit, high-technology industries. And China is willing to employ unscrupulous business practices such as intellectual property theft, industrial espionage, and import/export controls to ensure success. In response to these tactics, US has taken a number of measures, including imposing tariffs on Chinese imports. “We are in the early stages of what could become a full-on trade war,” Dr. Kasoff pointed out, and went on to examine possible scenarios in depth.

We are in the early stages of what could become a full-on trade war.

The Tariff Wars

Dr. Kasoff reported the progression of tariffs and retaliation between the US and China. First, the US imposed 25% tariffs on $34 billion worth of imports from China; China responded by imposing reciprocal tariffs on US soybeans, autos, and other products. Tariffs on a further $16B of Chinese products are in process, and the Trump administration announced 10% tariffs on an additional $200B of Chinese products. These will not take effect until September, following a public comment period.  President Trump has threatened tariffs possibly on the entire $500 billion of goods that China exports to us.

President Trump has threatened tariffs possibly on the entire $500 billion of goods that China exports to us.

The Actual Trade Imbalance

The numbers can be confusing.  According to official US government statistics, our actual trade deficit with China is around $350B. The $500B that President Trump references is roughly the total of Chinese exports to the US, not the deficit. Furthermore, in high-tech imports from China like computers and electronic equipment, for example, only about half the value added in these products actually comes from China, the rest of the value is contributed in a complex supply chain with pieces coming from US, Taiwanese, and Japanese companies. Because the final product is assembled and shipped from China, the entire value is counted as an import from China even though for some products the actual value-added performed in China can be as low as 5-10% of the total.

In general, for high-tech products, roughly 40% of our bilateral trade imbalance with China comes from components made elsewhere and shipped into China for assembly, before being shipped to the US.  The real deficit with China, in terms of value added - which translates to jobs - is considerably lower than $350B.

The real deficit with China, in terms of value added - which translates to jobs - is considerably lower than $350B.

China’s Industrial Policy

Dr. Kasoff observed that the "Made in China 2025" initiative is a greater threat than the trade imbalance. This is China’s strategy to dominate the key industries of future wealth, including artificial intelligence, robotics, self-driving and electric cars, clean energy technology, etc.  The Chinese government is investing huge sums in these emerging sectors, supporting domestic companies and restricting access to foreign companies, acquiring foreign technology thru a variety of means, some legal and some not. Beijing is making a concerted effort to acquire American technology in support of their “Made in China 2025” plan.

...the "Made in China 2025" initiative is a greater threat than the trade imbalance.

The US Trade Representative report criticizes China for forced technology transfers, discriminatory licensing requirements, overseas acquisitions, and illegal commercial hacking. The report states that these actions are systematically undertaken in support of Chinese industrial policy goals. Clearly, the main target of the recent US actions against China, including the tariffs, is actually the “Made in China 2025” policy.

The fear is that if the “Made in China 2025” plan succeeds, it would do for high-tech manufacturing what China did to low-cost manufacturing over the last few decades: concentrate a huge portion of global production in mainland China.

The fear is that if the “Made in China 2025” plan succeeds, it would do for high-tech manufacturing what China did to low-cost manufacturing .

Tariffs: Effects on the US

Trade wars hurt everyone, Dr. Kasoff said. Imposing high tariffs on Chinese imports will raise prices for US consumers and also for US manufacturers who rely on Chinese inputs.  Furthermore, imposing tariffs does not guarantee that jobs will come back to the US, because US manufacturers would most likely look for other low-cost overseas suppliers.

...imposing tariffs does not guarantee that jobs will come back to the US, because US manufacturers would most likely look for other low-cost overseas suppliers.

Update: China’s retaliatory tariffs on soybeans and other agricultural products have had significant effects.  Soybeans are the second largest financially important crop in the US. In 2017, the value of soybeans grown was $41 billion, second only to corn at $48.5 billion. On July 24, the administration announced $12 billion in aid to compensate US farmers for their losses on soybeans and other agricultural products.

Tariffs: Effects on China

China has multiple strategies to lessen the effect of US tariffs.  In addition to raising tariffs on products imported from the US, they could devalue their currency, which would lower the price of their exports and thus offset to some extent the impact of the tariffs.

China could also employ retaliatory tactics such as imposing long delays on product approvals, worker visas, and licensing applications as a way of targeting US companies. Today, many US companies earn billions of dollars on products they make and sell in China. China is also the world’s largest exporter of rare earths that are crucial to the manufacture of many high-tech products. China could hold these elements hostage to impede production.

China’s ultimate weapon, though, is US debt. China holds over $1.2T of US debt, and is the biggest buyer of US treasuries. If China decreases these purchases, or begins selling down their holdings, it would push up interest rates in the US, which would deal a very serious blow to the US economy.

China’s ultimate weapon, though, is US debt. China holds over $1.2T of US debt, and is the biggest buyer of US treasuries.

As tensions with the US ramp up, China also is looking to diversify and strengthen other trade relationships. For example, China and the European Union are accelerating negotiation of investment and trade deals, and recently launched a group that will work to update global trade rules to address technology policy, subsidies and other emerging irritants and preserve support for international trade.  Recently, German Chancellor Merkel and Chinese Premier Li met in Berlin and announced plans to deepen cooperation in finance, trade and investment.  They also agreed that they want to preserve the nuclear deal with Iran that the US has walked away from.

As tensions with the US ramp up, China also is looking to diversify and strengthen other trade relationships.

Tariffs: Effects on the International Community

Most people agree that China has benefitted from unfair trade practices, including theft of intellectual property, forced technology transfer, and restricting foreign access to key sectors of the Chinese economy. But the question is: Are tariffs an effective way to address the issue of China’s trade practices?

Are tariffs an effective way to address the issue of China’s trade practices?

In fact, the US imposition of tariffs is probably not compliant with World Trade Organization (WTO) agreements, Dr. Kasoff observed, and China has already filed complaints with the WTO. If the US loses the WTO court case and ignores the WTO ruling, this would damage US and WTO credibility in the world and risk undermining the global trading system that the US worked so hard to create.

...the US imposition of tariffs is probably not compliant with World Trade Organization (WTO) agreements.

China’s is not the only WTO complaint against the US. On 1 June 2018, US tariffs entered into force for steel and aluminum imports from the EU, Canada and Mexico. The EU responded by lodging a complaint at the WTO and instituting rebalancing measures on specific US exports. Other US trading partners have responded in similar ways, raising fears that this could be the start of a full-blown trade war that would harm economic growth.

There is also a geopolitical element. North Korea's economy is heavily dependent on China - 90% of its trade goes through China or is with China. China had been increasing the pressure on North Korea to restrain its nuclear program. If the trade war continues, it will be hard to get China to cooperate with the US in pressuring North Korea to denuclearize.

“What is the off ramp and how do we get there?”

How will the US get out of this trade war? Dr. Kasoff asked. He observed that this round of tariff increases won't have a huge impact. There will be some localized pain in China and in the US, but the overall impact on both economies will be limited, so there is no strong incentive to solve this in the short term. He opined that the Administration may want to keep this issue alive through the mid-term elections. There may not be resolution until 2019, when the mid-term elections are over, and as the negative effects on US consumers start to be more apparent. “So at this point, I would say ‘stay tuned,’” he concluded.

Discussion

Sen. John Cullerton (IL): Tariffs don’t look like such a good idea. The retaliatory Chinese tariffs have had disastrous effects on Illinois and Iowa soybean farmers. But you say that President Trump will keep this going through the mid-term elections. Will tariffs hurt the President’s party in the elections?

Dr. Kasoff: The President believes trade deficits mean “The US is losing,” and there has been public support for his “Get tough on China” policy. He can argue that, although there may be some short-term pain, ultimately things will get better. Unfortunately, tariffs are not likely to lower our overall trade deficit, as importers will find other low-cost foreign suppliers, and they will not bring back jobs. A better strategy would be for the US to stay on track with our allies, by participating in the Trans-Pacific Partnership and working in conjunction with our allies to put pressure on China to clean up its trade practices.

Unfortunately, tariffs are not likely to lower our overall trade deficit, as importers will find other low-cost foreign suppliers, and they will not bring back jobs.

Tom Finneran (Moderator): What is the risk that conflicts over tariffs could trigger bigger conflagrations, for example, over Taiwan?

Mr. Duff: Taiwan is a key issue. The US has not changed its stance on China since 1979 when Washington and Beijing established official diplomatic relations. The One-China Policy was first stated in the Shanghai Communiqué of 1972: "the United States acknowledges that Chinese on either side of the Taiwan Strait maintain there is but one China and that Taiwan is a part of China. The United States does not challenge that position."

Instead, the US is looking for a peaceful resolution between the two. Recently, the US Navy sent two destroyers through the Taiwan Strait on a routine mission designed to ensure that trade in the region is not interrupted. Meanwhile, Beijing has put economic pressure on its allies to stop trading with Taiwan in hopes of forcing Taiwan to acquiesce to Chinese authority.

Dr. Kasoff: Taiwan has evolved its relationship with China--from a time when there was no travel, no trade, and no contact between them--to the situation today. Now, more than 1 million Taiwanese people live in the greater Shanghai area, enormous trade and investment flows,  daily flights, tours, and constant business exchanges between the two.

The Chinese are pragmatic, and they could simply declare the Taiwan problem solved by announcing that they are reunifiedunder a "one country three system solution," where Taiwan gives up its claim to be the "Republic of China," but maintains all of its own systems. However, as time goes by this becomes less likely, as most Taiwanese are not interested in reuniting with China, and PRC leaders grow less and less patient.  And of course, China could easily strangle Taiwan militarily.

Sen. Ronald Kouchi (HI): Currently, there are 2 million Taiwanese in upper management positions in China. Both countries are changing. How does this affect US interests?

Sen. Wayne Niederhauser (UT): Based on his travels in China, Senator Niederhauser agreed that there were many changes in China. People are happier, more prosperous, and the atmosphere is less oppressive. China looks more like a democracy. Relationships with other countries are growing. Will this make China easier for the US to deal with?

Dr. Kasoff: For a long time, the conventional wisdom has been that as China started opening up since 1978-1979, and more Chinese studied and traveled abroad, more foreigners visited China, and, that China would naturally move towards greater freedom and democracy. This hasn't happened. The Chinese people really don’t believe in Marxism, but they have been willing to tolerate Communist rule as long as they have more freedom in their personal lives and a better quality of life. But in the last few years, the leadership has been more repressive, because Party leaders are worried that people may demand more freedoms as the improvements in their standard of living slows.

Mr. Duff: China’s end result of the “Made in China 2025” campaign will be a free and open economic system functioning under a restrictive, authoritarian political system. Already, the Chinese have implemented the SESAME Credit system--a broad social, political and economic rating system based on input from neighbors who report on each other. The scores give preferential access, or block access, to numerous opportunities such as education, travel, jobs, and healthcare, among others.

Sen. Eduardo Bhatia (PR): Which country poses the greatest challenge to US supremacy, Russia or China?

Mr. Duff: China is the biggest potential military threat. They are the most active with diplomacy, marketing, military gestures such as ram and sink, financial and debt warfare, bribery, and intelligence threats. They seek to undermine the international system and replace it with China’s preferred version.

China is the biggest potential military threat.

Dr. Kasoff: China is the biggest competitive threat. They will soon pass the US as the largest economy in the world. But China faces many challenges including corruption, the lack of a judiciary, the demographic challenges of a rapidly aging population, pollution, etc. To cite one example, they have only 20% of the potable water needed in North China.

China is the biggest competitive threat.

China is a complicated picture. On one hand, people are aware that China uses unsavory trade practices. On the other, China is the biggest and a growing market for US products and is the largest source of Foreign Direct Investment for the US.

On one hand, people are aware that China uses unsavory trade practices. On the other, China is the biggest and a growing market for US products and is the largest source of Foreign Direct Investment for the US.

Mr. Duff: The US is in the early stages of a global information campaign to present the evidence and share a clear picture with our allies about what competition with China really means. We need to have better education and information for everyone, including India, the EU, Mexico, and Canada, to recognize that they are in competition with China and what this entails. We need to make clear China’s questionable policies on freedom of information and of religion, on environmental issues, and their nationalistic aspirations in space, the Arctic and for fisheries.

We need to have better education and information for everyone, including India, the EU, Mexico, and Canada, to recognize that they are in competition with China and what this entails.

Sen. Charles Schneider (IA): What is China’s pain threshold for tariffs? As a state-run economy, they can simply shift their buying to other countries and avoid the tariffs, as they have done by buying soybeans from Brazil.

Dr. Kasoff: China has a high pain threshold because it is an authoritarian state and can control information and dissent and subsidize industries hit by tariffs. Today, it is a little harder for China to manipulate its economy because its growth is slowing. There is some effect from the US tariffs.

However, there is little coverage of the tariffs in the Chinese media. And Chinese retaliatory measures have been restrained. China wants to position itself as the Champion of Free trade, it wants to be seen as the key supporter of free trade, the country that is taking the high road. Meanwhile, China is trying to understand what the Trump Administration wants. They have offered to buy more US products, which would help the trade deficit, but the Trump Administration has not acted on this offer. Chinese diplomats are consulting with retired US officials to try to find out what the US wants.

China is trying to understand what the Trump Administration wants.

Mr. Duff: China has unfettered access to US officials and advisors. They discuss what the US economic and political levers are and how to manipulate them. In contrast, US advisors have absolutely no access to Chinese officials or to information.

Tom Finneran (Moderator): Will new technologies make US Navy carriers obsolete?

Mr. Duff: The way you deploy aircraft carriers today is changing. The carrier’s range is expanding and they can be used in stealth mode to launch and activate weapons remotely from many different sources. As China is developing more advanced military capabilities, the US military is developing capabilities to respond from remote locations.

Sen. Rob Bradley (FL): We have heard here that China’s goal is to delegitimize the US presence in the world; that China is an existential threat to the US. Could the Trump Administration’s policy be effective in forcing a fundamental reset of the relationship between China and the US?

Dr. Kasoff: You would need a consensus at a high level in the US government to effect a “reset” of the relations between China and the US. Today there is a lack of Asian expertise and experience in the US government, so this might not be possible.

Mr. Duff: Today’s US national security strategy has effectuated a “reset.” In the past, areas of agreement and disagreement were delinked. China and the US could agree on sea access, for example, and disagree about climate policies. Today, the administration is not compartmentalizing issues but perceives the need to attack all issues simultaneously. The Administration has introduced friction in order to change the status quo.

China has benefitted from openness from the US, Japan and the EU and, thus, has been able to bring 400 million people out of poverty and into the modern world. We now need a negotiated way to give China a seat in the world order. But China wants to swap the current system and impose its own system, that is preferentially good for China.

The US continues to be the partner of choice, as demonstrated when 36 countries participate in RIMPAC to learn interoperability with the US military. The US tariffs are creating some issues in our international relations but these other activities keep the oscillations in geopolitics damped down.

Dr. Kasoff: A major concern is that the Trump Administration’s actions in the region may be fraying the established relationships with our allies.

A major concern is that the Trump Administration’s actions in the region may be fraying the established relationships with our allies.

Speaker Biography

William Duff

William “Bill” Duff is a native of San Francisco, California, and is a 1992 graduate of the University of Southern California where he received degrees in History, Economics and Communications. He completed his maters work at the University of California, San Diego earning a master’s degree in International Economics and East Asian Security. Upon graduation, he was awarded a Presidential Management Fellowship, where he worked in the Department of State, at the United States Trade Representative, and a detail to the National Security Council.

Bill became a member of the United States Foreign Service in 2000. His assignments include Special Assistant to the Ambassador in Beijing (2000-02); Economics Officer in Tokyo (2002-04); Economic and Foreign Policy Officer and Special Assistant to the Ambassador in Bern (2006-08); Deputy of the Economic Section in Tokyo (2008-10); Foreign Policy Advisor to the Commander, U.S. Division South and U.S. Division Iraq (2010-2011); China language and Political-Economy student in Taipei; and Political-Economic Section Chief in Shanghai (2013-16). He currently is the Foreign Policy Advisor to Admiral Chris Aquilino, Commander, U.S. Pacific Fleet in Pearl Harbor, Hawaii.

Bill speaks fluent Chinese, Japanese and German. He is the recipient of numerous Department of State Superior Honor and Meritorious Honor Awards, and was recognized for his service in Iraq with the Department’s Expeditionary Service Medal and the U.S. Army’s Outstanding Civilian Service Medal.

Ira Kasoff 

Dr. Ira Kasoff is a recognized expert on Asia.  He has lived and worked extensively in the region – ten years in mainland China, eight years in Japan, eight in Hong Kong, and two in Taiwan. From 2010-13 he was Senior Counselor at APCO Worldwide, a global public affairs consultancy, and serves currently on APCO's International Advisory Council. Before joining APCO, Kasoff served as Deputy Assistant Secretary of Commerce for Asia, where he oversaw Asia trade policy for the Department, engaged in trade negotiations with officials of key counterpart governments, and served as the senior advisor on Asia to two Secretaries of Commerce, Carlos Gutierrez and Gary Locke.

From 1985 to 2007, Kasoff was a diplomat, serving seven assignments in Asia with the U.S. Commercial Service, including senior positions in the US Consulates General in Shanghai and Hong Kong and the US Embassy in Tokyo. Kasoff has also worked for the Boston Consulting Group (BCG), where he specialized in Asia business strategy. Earlier in his career Kasoff worked as the Beijing representative for Fuqua World Trade Corporation, where he arranged and oversaw manufacturing of consumer goods in China for the US market; and at the National Committee on US-China Relations, where he managed US-China exchange programs.

Dr. Kasoff received his B.A. from Harvard University in 1973, and his Ph.D. from Princeton University in 1982. Following the normalization of relations between the US and China in 1979, Kasoff was part of the first group of American scholars sent to China, spending a year doing research at Beijing University. He is the author of a book on Chinese intellectual history published by the Cambridge University Press, which has recently been translated into Chinese and published by the Shanghai Classics Publishing House.

Ira Kasoff is married to Ms. Ellen Eliasoph, CEO of Village Roadshow Asia, and has one daughter.