Try to Look Beyond Today’s Quarrels | Brunswick Group

Try to Look Beyond Today’s Quarrels

On the 16th September, Ambassador Bob Zoellick, former President of the World Bank, US Trade Representative and Deputy Secretary at the US Department of State and current Geopolitical Principal at Brunswick Group, gave the opening remarks at the China Development Forum in Beijing. The event marked the 40th anniversary of China’s Reform and Opening, initiated by Deng Xiaoping at the Third Plenum of the Eleventh Central Committee in 1978. These notes are his speech from that day.

- Opening remarks –

Thank you very much for the privilege of speaking at this CDF Event commemorating 40 years of China’s reforms.

I am pleased to see many old friends and colleagues in the audience.

I first visited China in 1980, when I was living in Hong Kong on a fellowship.

So I have seen China’s amazing accomplishments over 4 decades with my own eyes.

All of you deserve to be proud of the historic success.

This has been the greatest reduction of poverty in world history.

I have great respect for the hard work and drive of the Chinese people who have made these changes.

Your transformation has changed the world as well as changing China.

Yet those changes pose new challenges today because of China’s size and its success.

- Challenges for China –

One challenge is the need to change China’s growth model.

A second challenge is to achieve more inclusive and sustainable growth.

And the third challenge is to recognize China’s effect on the world.

When I was with the World Bank, we worked with the Development Research Center on the China 2030 Report with Mr. Li Wei, Mr. Liu He, Mr. Lu Mai, and my former colleague, Justin Lin, who taught me a great deal about China’s development.

I recall that our Chinese colleagues were focused particularly on the issue of the so-called “Middle Income Trap”.

The World Bank examined the 101 economies that it had considered Middle Income in 1960.

And by 2008, almost 50 years later, only 13 had made it to high income.

Our work with China examined how to shift from Export and Investment-led growth to greater Domestic Demand and Consumption.

We also considered the important issues of urbanization, innovation, the environment, social security and greater reliance on markets for enterprises, land and labor.

And from the distance of a few years looking from the United States, it appears that China has made important progress in some of these areas, such as fiscal reforms, increased consumption, financial sector reforms, and important pilots for Hukou reform.

I’m pleased to see that China is now focusing on eliminating extreme poverty, improving the environment, and financial de-risking.

- The expansion of China’s state sector –

I’ve noted, however, that in one area, there is a problem that I think remains, and that’s the expansion of the state sector, along with China’s debt.

Nick Lardy of the Peterson Institute of International Economics, who’s here with us today, has done some important work that points out that more credit has been channelled to state owned enterprises than to private sector firms.

He noted that the assets of Central SASAC Enterprises have been expanding 4 times faster than their profit growth.

This means that their return on assets has fallen from 6.0% in 2005 to 2.6% in 2017.

And it appears that about 40-50% of these companies are losing money.

So as a result, China requires more credit to produce a unit of growth.

Private investment, which has been key to China’s reforms throughout the 40 years, may be getting crowded out.

Now the combination of China’s success, its size, its increased reliance on the State has drawn the attention of people in the United States and elsewhere.

- Four concerns –

‘…to try to understand how the attitudes are shifting beyond that of the Trump Administration.’

And of course, at the same time, the U.S. has had a big shift in politics, too.

Now, I’m not here to represent the Trump Administration.

And indeed, I don’t think they would want me to do so!

At home, I’ve explained my differences with U.S. policy.

But my caution, my sincere caution to my friends in China, is that the U.S. concerns about China extend much more widely than the U.S. Administration.

  • I think it would be a mistake to assume that ties will return to past patterns after elections this November or in 2020.

I wanted to identity four concerns that I think have converged to increase tensions.

One is the issue of the role of the state and the impression being created on the outside that China is turning to a model of State Capitalism, which creates concerns about private and foreign companies in ability to compete.

Second, what I’ve observed over the past decade is that U.S. and other foreign companies that used to be the great supporters of relations with China are becoming increasingly frustrated by:

  • Forced technology transfers

  • Intellectual property rights and cyber theft

  • Investment limits

  • Regulatory and licensing procedures that limit competition.

  • As a result, the companies that used to be the bulwarks of support for the Sino-American relationship are no longer playing that role as they did a decade ago. And I hope that’s something we can turn around.

Third, the Made in China 2025 appears to some to be a plan to dominate the technologies of the future.

  • Now, I’ve worked with China. I understand the need to move up the value chain, especially because your labor force is shrinking every year.

  • And I understand that China may view the plan as a set of aspirational goals.

  • But I want to communicate that to outsiders, the plan looks like an intimidating drive to develop indigenous innovation based on subsidies, protection, state owned enterprises, technology transfer, and acquisitions.

  • This is not just a U.S. concern; the best analysis I’ve read is from the European Chamber of Commerce here in China.

And fourth, there’s been a shift in Chinese foreign policy from Deng Xiaoping’s self-restraint to more “major power” assertiveness.

- China/WTO –

‘The suit of clothes that China put on in the WTO in 2001 no longer fits in 2017.’

Now, it’s not my point to try to argue about these concerns. I just want you to try to understand how the attitudes are shifting beyond that of the Trump Administration.

And these problems are compounded by China’s role in the WTO.

Now, I helped complete China’s accession to the WTO 17 years ago, building on the work that Secretary Rubin and Charlene Barshefsky and others made.

But as one Chinese official recently mentioned, the suit of clothes that China put on in the WTO in 2001 no longer fits in 2017.

I know that China made very substantial commitments for market access-- more than other large developing countries.

But China’s average tariff rate of 9.9%. And that’s about three times higher than the average tariff rate of the United States.

It’s hard for people like me to explain when President Trump talks about China’s tariffs on autos of 25% and a U.S. tariff of 2.5%.

But the greater problem really is the issue of application of rules. How one treats state owned enterprises, technology transfers, discriminatory practices.

Now, of course, economies and technologies have changed a great deal since 2001 and part of the problem is that the WTO hasn’t kept up.

However, when one looks at the overall trade and investment picture, the obligations and practices don’t look reciprocal.

These conditions feed a sense of unfairness in the U.S. and other countries.

Now, in addition, the Trump Administration argues that the U.S. has conceded too much to others around the world over 70 years to sustain the international economic system that the U.S. helped create.

I don’t share this view, but it is important to recognize that perceptions of unfair treatment add to the pressure of this perspective.

Now, I sense that Chinese officials have been confused by this shift in the United States.

And frankly, they may be uncertain about what the U.S. really wants – and who is in charge of the negotiation short of President Trump.

I can only hope that the two countries will keep trying to resolve their differences or at least manage them.

- ‘China has to decide on its own course for future development’ -

But that brings me to the second major point.

At the same time, China has to decide on its own course for future development.

These are domestic challenges for China, which you will discuss today, but there are very important international implications.

I believe that China’s successful development depends on a successful international economic system.

Over the past 40 years, as you saw in the video, China has benefitted from its openness.

That’s true today and will be true in the future.

More open investment would offer win-win opportunities, better services and stronger international connections.

China could counter critics with steps that would support China’s own internal reforms.

And I hope this openness would also help rebuild U.S. and foreign business support by addressing legitimate complaints.

Given the U.S. government’s challenge in developing a coherent approach, I’ve encouraged U.S. and international business groups to recommend systemic improvements to go beyond individual concerns of companies.

For example, the Business Roundtable has produced a very good, practical four-page list of issues that China could help address. -

And I hope in future months, the business community can work with the Chinese government on some of these topics.

- Choices around China’s international role -

But I believe China also faces an important strategic choice about its international role.

For example, I view the Asian Infrastructure Investment Bank as a very positive contribution because the leaders have been attentive to good governance, transparency, international standards and cooperation.

The Belt and Road, on the other hand, is more of a question mark, undecided.

  • Is its principal aim geopolitical advantage or the building of a new corridor for development?

  • And is the purpose to export overproduction?

  • How will other countries benefit?

So I would suggest that China apply the principles of the AIIB to the Belt and Road vision.

Use transparency, high standards, open procurement to fight corruption, which has been one of President Xi’s priorities.

Consider how projects can encourage local jobs, develop local linkages, and importantly, consider the risks of rising debt in some countries.

Based on my years of work at the World Bank, I’m worried there’s an increasing likelihood that some countries will face repayment problems.

And when they do, the world will press China to account for its loans.

So I think China would be wise to get ahead of this issue by reporting the loans openly today.

China may also wish to consider how it could work with the European Union, Japan, other countries – and of course, I hope the United States too – to fix some of the problems that are paralyzing the WTO today.

I don’t have time this morning to offer specifics, but my point is the importance of thinking beyond the tactics of today’s disputes.

- In summary -

In sum, I’d advise China not to assume a defensive posture. Don’t just rely on economic autarky or maneuver tactically with the U.S.

Try to look beyond today’s quarrels.

Some of you may recall a speech I gave in 2005 explaining why China should become a responsible stakeholder.

Recall the context.

China had just recently joined the WTO.

For decades, US policy had focused on integrating China into the international system.

So the point I was trying to make in 2005 was that the structural work was largely done. China was in the WTO. It was part of the IMF. It was part of the World Bank. And China was integrated through treaties dealing with topics ranging from ozone depletion to WMD.

he question for the future, I suggested, wasn’t whether China was in or out – but its behavior and contributions.

Whether China would support and sustain these systems even as it sought to adapt them.

The issue ahead of us then – and now – is not forms, but norms.

One can apply this analysis to other international domains, such as maritime and cyber, too.

I often reflect on policy from a historical perspective.

So I was interested in a short paper written by Professor Arne Westad of Harvard, a scholar of China, on Learning From History for Managing US-China Relations.

He cautioned about the danger of threat inflation creating risks of confrontation – which we must avoid.

He emphasized the importance of looking for common ground – and recognizing that our cooperation has produced many mutual benefits.

And he stressed the role of mutual respect.

Wise advice for our work.