He Yafei: Decoupling U.S.-China Ties Is Not An Option


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He Yafei: Decoupling U.S.-China Ties Is Not An Option


Source: China-US Focus    Published: 2019-11-27

James Chau: Ambassador He, thank you very much for sharing this time and sharing your insights at a very complex time in the world. The world always changes, but recently it seems to change more frequently and in nuanced ways. How do you look at the world today? What can you share from that?

He Yafei: Thank you very much for inviting me to this interview. The world, as you were saying, has changed a lot. We are entering, probably, a new phase in human history that is more challenging than at any time before. I often quote President Xi Jinping’s remarks that the world is going through a period of the most profound changes in the last hundred years, and I think this is very true.

Among the most profound changes, as I see it, first is the geopolitical shift in the balance of power, meaning that there has been, over the last three or four decades, a convergence between developed and developing countries.

China is a prominent case, moving from a relatively backward economy with an average GDP of $200 per capita [in the early 1980’s] to $9,900 last year — [to become] the number-two economy in the world. But China also feels this is very, very complicated. I often say this is the best time in history for China and also the worst time — the best time in the sense that after 30 or 40 years of opening-up and reform, China has grown up: It has become richer and more developed, and people have greater aspirations. They are hopeful about a better future, for example the total eradication of poverty by the end of 2020.

So, this is the best period in the recent history of China. And it’s also the worst one because China is facing more dangers and more risks in the world as we see it. The first risk and danger comes from the geopolitical conflict, or possible geopolitical conflict, with the United States, if the bilateral relationship is not handled well in the next few years. In the United States, some people view China’s progress so far as something that is threatening to the dominant position of the United States, whether it’s political, economic or technological. They see China as a competitor — not a competitor from the same side and with the same ideology. They see China as on the other side. Of course, we should not listen to people like [Steve] Bannon, who says China is a non-capitalist country, with which I agree, and second that China does not believe in Christianity and Judaism, which I suspect has some religious bias. Third, he says China is not Anglo-Saxon. That is bordering on a racist remark.

He’s an extreme example. What I’m trying to convey is that there are some dangerous signs, trying to paint China in a negative light — as a negative figure vis-a-vis America. That could create a situation where China and the U.S. could be on a collision course, geopolitically speaking. That would disrupt the normal pattern of cooperation, especially economic cooperation. Hence, you hear about the decoupling thing between the U.S. and China, the decoupling of their economies, the decoupling of their technological cooperation, etc. This is the one danger I see.

Second, something is going on inside Western societies. That something is both erosive and divisive. As we can see, it’s populism. Populism is rising, nationalism is rising, and protectionism is rising. How come there is so much anger and frustration at the lower end of the working people — not really people under the poverty line but lower-end, blue-collar workers or even white-collar workers? Because in these countries, including the United States, a balance between market efficiency and social justice cannot be found. ... The governments and the elites who are running the government and the civil society haven’t done enough or haven’t found a proper solution to maintain[ing] that balance.

I read a book by the French economist, Mr. [Thomas] Piketty, in 2015. The book is entitled “Capital in the Twenty-First Century.” [It’s] talking about the role of capital [and] return on capital, and he uses lots of data from developed nations after the Second World War, in the last few decades. And the conclusion he has — it’s very interesting — the conclusion he has is, over the last few decades, in all those developed economies, that the return on capital always surpassed average GDP growth. We all know that income by labor, whether skilled labor or unskilled labor, blue or white, if you can match average GDP growth you are lucky. Usually you will be 1 or 2 percent behind that growth. So you see a wide gap between rich and poor, and the wealth created by globalization is not distributed evenly or properly.

James Chau: Let’s look at a few quick issues. First of all, there seems to be, at times, a very aggressive tug of war between globalization and those who believe in a movement that runs counter to that. How do you find your place within a very rapidly changing global landscape when you have these two different schools of thought, and also very extreme camps within them?

He Yafei: China finds it worrisome that there is such intensity in this tug of war, as you were saying, between globalization, or pro-globalization, and anti-globalization, which is driven by populism, etc. And I have to hop back on the issue I mentioned, this widening gap between the rich and poor, the inability of various governments or societies to narrow that gap, to find a balance that, on the one hand, you keep your economy growing, you keep accumulating wealth for your society; but on the other hand, you take care of those people who are not well-treated by globalization. They are not as fortunate as those people who own capital or who own new technology — because now there is a tendency to combine technology with capital. With those people who are getting richer and richer, you see that the new high-tech companies, whether in China or in the United States, all those companies simply monopolize those profits.

They’re huge companies. In 10 years, in 15 years, or even in a few years’ time, just think how fast they’ve accumulated wealth. I’m not advocating an egalitarian society, but the thing is, the tech revolution is breaking new ground every day. And how can we manage globalization? How can we make society a cohesive, harmonious one? You need to have a very serious sort of thinking about bridging that gap between the rich and the poor.

James Chau: China has copied the economic success of the developed countries, and even innovated far beyond that. How does China now not copy the gaps in income, in social justice, in access to basic services that we see in those countries? There is already a gap emerging in China — that’s one of the so-called symptoms of success. How can it rein that back in and create a future that you say should be more balanced and more equal and happy?

He Yafei: I will not say China has copied a system from Western nations. I think what China did with reform and opening-up almost 40 years ago is to try to take a market economy as something China can use, combined with what we are very good at — that is, a visible hand by the government. So the two hands, the invisible hand of the market and the visible hand of the government, are well-matched for China. You can call it a Chinese economic development model. Some people don’t like it, but as President Xi has said, what China has achieved with this model on its developmental road is something maybe for other developing countries not to copy but to use as an alternative … because in the past, the economic development model, the economic growth model, was well-defined by neoliberalism — by the Washington consensus — a set of ideas always fixed. It doesn’t matter what your domestic economic development level is or what the economic situation you have is, those don’t matter to them. They’ll give you the same formula, the same recipe. You have to follow that, otherwise you won’t get loans from those countries or even from the International Monetary Fund.

The facts have proved that this model really doesn’t work, at least not universally. So China has tried its own model and achieved a stunning success that has amazed the whole world. It shocked the world, that such a populous socialist country — under the leadership of the Communist Party of China — that a strong government combined with a market mechanism could achieve so much within such a short period of time.

You mentioned also that China did not forget that social justice is equally important. Otherwise, whatever you are going to do economically to drive your economic growth forward, you will not get popular support. You’re going to have a divided society that builds up anger, builds up frustration and eventually disrupts economic growth.

So China’s efforts are at a different level of government nationally — aiming to help poor people, to have sustainable development, to eradicate absolute poverty and have balanced domestic economic growth. We all know in coastal areas — Shenzhen, Guangdong, Zhejiang, Shanghai — these are more developed areas in China. But you have less-developed areas or regions in China. So, internally, there is also a balance you have to make. Fortunately, we have a very strong central government that has enjoyed support by the people.

Internally, we can transfer resources. For instance, the tax paid by Shanghai or the surplus Shanghai has, can be used by the central government to help those poorer areas to maintain what we call “lucid water and lush mountains” — a healthy ecosystem. These regions couldn’t develop manufacturing from ground zero, with contamination and everything, as we did at the very beginning of the opening-up and reform. We cannot follow that; we cannot copy that in these regions. So you have to look at China’s economy and economic growth from a national perspective.

James Chau: Ambassador, when I think of China, I think of course about some of the great institutions, especially around culture, but also of an increasingly smart, driven society. For example, household appliances, cellular technology, innovations in medicines and global health and much more.

He Yafei: Well, this is a digitalized world, a connected world. The devices we use, you never could have imagined 10 or 20 years ago. So this is really an innovative new era. We enjoy lots of benefits brought about by new technologies on a daily basis, almost on a daily basis. China is very much into the tech revolution. China feels an acute distance between China and developed countries in terms of technology or core technology. We know we have lots of work to do. It takes time. It takes investment for years to come. The R&D expenditure now takes up 2 percent of China’s GDP, and it’s increasing. But again, when we put it in the U.S.-China relationship, in that context, the U.S. recognizes certainly that China has a right to develop itself technologically, but they tend to view China’s tech progress as a threat.

James Chau: But why is that? I mean, if technology enhances and improves billions of lives from whatever country it was innovated in, and often together with others, why do you think people are worried? Should they be?

He Yafei: They should not worry about China’s tech progress. You’re right. Technology’s progress will benefit everyone. Also, it needs both upstream and downstream and all countries in the full circle to make it work. The United States worries because it sees China as a strategic competitor. If China gains ground or catches up with the United States technologically, the superiority the U.S. has enjoyed in that field — which has supported its hegemonic position in industry — can be, or will be, eroded, if not replaced, by China, it feels. I would say that’s a pretty biased assessment of what China has done. I think they have mistaken China’s tech progress as ambition for geopolitical rivalry with the United States, which is not true. For China to develop itself from a manufacturing center to a more combined service and manufacturing economy, its technology has to improve. China will eventually move up in the global supply chain with new technologies, but it takes time.

I believe the gap between the U.S. and China is pretty large, pretty wide, for the time being. But China is trying to catch up. The U.S. should not be worrying too much about that. For instance, there is a chipmaking company in the United States that sells 50 percent of its chips, advanced ones, to China to consume, to put in smartphones, computers, etc., and then sell them in the world. Fifty percent is in China, but if you include what is used by Apple — Apple phones, iPads, etc. — that percentage would be 60 percent. If that market goes away (and some extreme conservative people in the United States are indeed advocating a tech decoupling of China and the United States), then those chips will not come to China. China will have to seek other sources of supply, maybe from Samsung of South Korea, etc. But, in that case, if the Chinese market is lost, that chipmaking company in the United States would simply collapse.

James Chau: The U.S.-China relationship has often been portrayed by leadership of both countries over the last 40 years and more as not only one of politics and economics but a relationship that ultimately is underpinned by people. There seem to be a lot of different understandings of what young Chinese are like today. How would you describe to an American what the modern young Chinese living in the big cities are today?

He Yafei: The young people in China and the young people in the United States share much more than our old generations. Recent survey data in the United States show that the younger generation in the United States has a better view, a favorable view of China, compared with the older generation 50 years of age (or older). The younger people are more internationalist. They live in a digitalized world, in a connected world. I know that they may have studied in the United States, and U.S. students may have studied in China. I am teaching a course at Peking University. I have students all over the world, many of them from the United States. I believe this cultural exchange breaks down cultural barriers. For people to have more exchanges and more contact is extremely important.

James Chau: What do they ask? What do young Chinese students ask you, as their teacher today?

He Yafei: My students are mostly foreign students. We have a few Chinese students. What they say, in general, is that they want to understand China better. They want to understand the U.S. better, because after 40 years of the formal bilateral relationship, from 1979 to this year, we are in a new era. China is not the China of 40 years ago. The U.S. is not the United States of 40 years ago. And the world has changed. The world is different from 40 years ago. So we are facing a totally new world.

James Chau: Does that excite you, even though you’ve laid out your concerns about a world that is rapidly changing and sometimes very dangerous as well. Are you ultimately excited about the possibilities?

He Yafei: It both excites me and terrifies me. I think the young people are in a better position to have a fresh look, to reevaluate, reassess. What is China now? How should we view China? How should we view the United States? How do we look at the world today? What has happened? What has changed? Should we change with the world? I mean, the bilateral relationship 40 years ago has some supporting basis or elements of strategic consideration that are unique to that time.

James Chau: What’s unique to this time?

He Yafei: What’s unique to this time is we all live in the same world. Well actually, we are in the same boat. We’re really entangled, intertwined. Our economies are intertwined, our lives are intertwined. Our finances are so entangled with each other. So if you get better, I’ll get better, simply speaking.

James Chau: And where they have got better and pulled everyone else along was only a couple of years ago, when they pushed the climate agreement well over the line in Paris in December 2015.

He Yafei: I think this is not the right move. When they see that the world has changed or see other people progress economically and gain more influence, especially China, they see a world change that is not favorable to the U.S. anymore, or not so highly favorable. Even as the U.S. garners many more benefits than others from the global governance system, they believe this is not business as usual. They need to work harder. They need to have a different way of looking at people, to look at things so that we can work together. Because in today’s world, in this interconnected world, nobody, no country, can develop in isolation.

James Chau: There are attempts, though, to contain countries like China, even though it will continue to develop. You’ve warned that no one can develop in isolation, but what happens when isolation happens?

He Yafei: I think attempts have been made already to try to decouple China from the United States technologically. Economically, it’s impossible. I don’t think it’s going to work for the United States. China has made very clear that we want to continue to grow along with United States. We are very good partners. We’re partners. We’re reliant on each other and we will grow together — not at the same speed, but we will benefit much more if we work together. If we work against each other, not only will the two countries suffer eventually, but it might lead us onto a path of confrontation, which would be a disaster. It would disrupt world economic growth.

James Chau: What happens when one of them opts out? The United States has signaled clearly that it will withdraw from the Paris climate agreement, even though that process requires a number of years. At the same time, private-sector companies, CEOs, said they’re going to step in — city mayors as well. Is there a way for China to continue fulfilling this commitment, and perhaps even more, as climate change has really emerged as the underpinning issue to guarantee our survival, not only the human race but the planet?

He Yafei: With 40 years of globalization under our belt, China has benefited from this process and become part and parcel of the global supply chain. And we firmly believe the current system probably is the best, though it might need some modification. As for the governance system, we should not overthrow it, or throw the baby out with the bathwater. For instance, the WTO is the one thing we need to make reform possible — to adapt to the new world we have. The purpose is the facilitation of free trade and free investment. In trade disputes, you should not go to a trade war to solve them, as that’s an impasse, a dead end. And you talk about global commons. As with climate change, we live on the same Earth. There is only one Earth. So when you adopt, or consider domestic policies in this field to protect the environment, to do away with environmental degradation, you have to think globally. That’s why China has made it very clear that whatever happens, we will of course welcome the U.S. back to the Paris accord. China will continue to play a leadership role.

James Chau: What do you say to young people? They are now part of the mainstream dialogue. At times, they have a seat at the table with high-level political leaders. What do you say to a young person today, whether Chinese or American, who may be really struggling to form their identity in this world, which you’ve described is in some ways equal parts terrifying and exciting. It brings some despondency but also presents positive opportunities. How do they find their place when they struggle alone with adolescence and moving into young adulthood? How do they find their own place in a world that doesn’t seem to have much structure?

He Yafei: Of course the world today seems a bit more disorderly than before because it’s in transition. How long that transition will last, nobody knows, but we certainly are in a period of tremendous change, a transition from the old order. So there’s disorder and then you regain the balance, have a new order historically speaking. For young people, I think they are lucky to live in this age of change because they are making history. Whatever they do, whatever they are determined to do, thinking more globally — less nationally, less regionally — will help shape the future of the world. I think they have a much heavier, bigger burden to bear, to shape a better world for everyone, for them, for their children, and for generations to come.

James Chau: Ambassador how you’ve talked about how China is going to stay committed to a sustainable future, whether it be through the climate agreement or a combination of mechanisms. What about trade? This relationship, this trade and economic relationship, has often been seen as the stabilizer for the United States and China in their actions and interactions over the past four decades. What about now? It seems that the rock somehow doesn’t seem as stable as before.

He Yafei: You’re right. What China has learned from the past four decades or so is that trade or global free trade is a driving force of economic growth. Without trade, or if trade is limited, the opportunity for economic growth is limited. Of course, now trade is not only the trading of physical goods. You have lots of trading done by digital means, services. And now, of course, there is a combination with the internet, which is easily available to everyone, with computers so powerful that even people in remote corners of China and other places can be part of the trading system. So China is very much determined to maintain a global free trade system.

James Chau: We tend to think — though in terms of borders and regions, as you just described — we think in terms of China, the United States or continents of Europe and Asia and North America and Latin America, and the exciting emerging markets in Africa, for example. Do we need to become more nuanced in the way that we look at the world, and will this approach help both parties in finding a way past or around the current stumbling blocks?

He Yafei: That’s why China has proposed that trade should have no tax. When you have no tax for trading, you break down all the barriers to trade, whether physical, by boundary or some other invisible barrier. But global trade now can be done intra-country, intra-region and also globally. It’s more globalized. You can imagine placing an order for food from Latin America and having it arrive two days later, even on your doorstep. So it’s really a globalized world we’re living in. That’s why China benefits so greatly from trade. China now is not just promoting exports because it has benefited from an export-oriented economy — not anymore. I’ll give you two figures. One is from 2008, when China’s net exports accounted for about 9 percent of its GDP. So it was a very much export-reliant economy. By 2018, it was 1 percent. This year, if you look at the Shanghai International Import Expo, China has overtaken the United States as the largest consumer market in the world.

James Chau: But should the world be worried about that, as it is about Chinese technology, or should it see this as a boon for all?

He Yafei: It’s a boon, a good opportunity, because this is the biggest market. The United States and China are the two biggest markets. People benefit by selling things to these countries. Then, people will get richer in other less-developed countries, and in turn that will make the whole world well-off, and you expand. The Belt and Road Initiative has been thought out along these lines — build up infrastructure, help developing countries improve their sustainable development, help industrialization, expand the middle class ranks. Then, you know, they will import more, and export more with infrastructure. So we’re thinking not of two silk roads only. If you expand it, it’s a global market.

James Chau: Ambassador He, when I look at the U.S.-China difficulties in their trade and economic relationship, I’m not so much worried about two governments and two national economies. I think about small producers, small farmers, small suppliers, owners of small businesses — and not only in these two countries but around the world. What do you say to them? Can they look to a sustainable future with these two economies, given the way they interact and the realities of what they’re facing now?

He Yafei: I’m still cautiously optimistic about trade, whatever name they gave to this China-U.S. trade dispute, or trade war. It’s going to end somehow, because a severance of trade between the two biggest trading nations would be a disaster not only to the two countries but to small producers in other places of the world. If we cooperate, we can settle trade disputes one way or another. But you cannot, or should not, try to change the economic structure, the economic system of the other side. You should not politicize trade issues to make a geopolitical issue, because you are going to hit a wall. My humble advice is that the two countries need to think very seriously about how we can better facilitate trade to help both nations, not to put up new barriers to hinder further progress on trade.

James Chau: Finally, we live in a world and on a planet that is not limited to trade and economy, one that has the beauty of the environment but the challenge of climate change, history, lessons of poverty and a future that needs to be sustainable — underpinned, for example, by the sustainable development goals. What’s going to make a livable future for all of us?

He Yafei: I think the UN initiative on the 2030 sustainable development goals, SDGs 2030, is a good starting point. Because we cannot have everybody become a manufacturing center. Some places are best reserved for pleasure, you know — beautiful scenery, as I say, in lucid water and lush mountains, places people would like to go to relax and enjoy themselves. But in the grand scheme of things, the countries that maintain a beautiful environment need to be compensated. And one thing we have been working on, and I think it has been going into practice, is a carbon emission market. Those places should be compensated for not emitting carbon. They should also have a decent reward system. If this country is manufacturing much more than others, you pay to buy those carbons, carbon emission quotas, as a start, so that we can maintain a balance, not encourage competition. Whatever your basic economic structure or your geographical location, you need to take into consideration the domestic conditions you have, and start working from that. But you also need to have an international system, an international mechanism, to offer rewards and punishments to go with it.

James Chau: Ambassador He, I think all of us look forward to achieving a sustainable future. Thank you very much. Thank you.

He Yafei: Thanks a lot.

He Yafei is a senior fellow of Chongyang Institute for Financial Studies at Renmin University of China.