The United States and China: a quest for global economic leadership

Creon Butler

Well, hello, everyone. My name is Creon Butler and I’m the Director of the Global Economy and Finance Programme at Chatham House. It’s my great pleasure to welcome you all to today’s panel discussion on the competition between the US and China for global economic leadership. This is, clearly, a massively important issue, with implications for all of us, that’s whether one lives in one of those two countries or elsewhere in the world and it is an issue that is constantly evolving, in response to global drivers, such as technology, climate change, demographics, the pandemic and, also, the most recent tragic events in the Ukraine. It’s a highly complex question and there are other major economic blocks, notably the EU and India, but others, too, that have a major stake in this competition and they may well seek to influence the outcome. And there’s also, of course, the private sector and the role that the private sector plays, which will be – which is very significant.

So, I’m looking forward, very much, to the next hour of discussion and to take us through the subject, we have a fantastic panel of speakers and I will shortly introduce our panellists, but before I do so, there are a few quick housekeeping points. Firstly, just a reminder that this discussion is on the record, that’s despite it being a Chatham House posted event. It will be recorded, and we will start with introductions by each of our panellists, for about five minutes and then, there will be a discussion, which I will moderate, initially among the panellists, but then, we would very much like to get your questions in, as well. And to put your questions, please use the Q&A function, not the chat function, the Q&A function, and depending on how much time we have available, either I will come to you and ask you to put your question, or I may read out your questions or group them together, but we’ll just see how that goes. Please do try and keep your questions as short and to the point as possible and if you have more than one, put them in several times, but just so it’s easy to read when they come up on the Q&A, that’s very helpful. Good, and then, a final point, really, is that we will have a hard stop at 2 o’clock GMT.

So, let me know introduce our panellists and I’ll do so in the order in which they’re going to speak. And our first speaker is Fred Bergsten, who is a non-resident Senior Fellow and the Founding Director of the Peterson Institute for International Economics. Fred is a highly influential and a very prolific author and has just published a book with the same title as today’s session, and as I said, he founded the Peterson Institute and that has grown to become one of the most influential economic think tanks in the world, some would argue the most influential. He also has a wealth of experience at senior levels in the US public service, both before and after becoming a think tanker, including in the US Treasury and the National Security Council.

And our next speaker will be Dr Olivia Cheung, who is a Research Fellow at the SOAS China Institute, at SOAS in the University of London. Olivia is working with Professor Steve Tsang on the project, “The Political Thought of Xi Jinping.” She’s widely published and is also writing a book on “Factionalism and Ideology in Chinese Politics: from Mao Zedong through to Xi Jinping.”

After Olivia will come Dr Keyu Jin, who is Associate Professor at the Department of Economics at the London School of Economics, and Keyu’s research focus is on international economics, technology competition and the Chinese economy. She’s also widely published in newspapers and economic journals and sits on the board of the Richemont Group.

And last, but by no means least, my colleague, Neil Shearing, who is an Associate Fellow at the Global Economy and Finance Programme at Chatham House, and Neil is also the Chief Economist at Capital Economics. He’s widely published and before joining Capital, worked in HM Treasury. He – much of his – or a key topic in his research, has been on the structural shifts in the global economy, so he’s ideally placed to comment today. So, those are our panellists and for our first introductory comment, I’m delighted to hand over to Fred Bergsten. So, Fred, over to you.

Fred Bergsten

Oh, Creon, thank you very much and thanks to you and your colleagues at Chatham House for organising this session and hosting me. I’ve had the great pleasure to speak with Chatham House a number of times over the years, but it’s been a long time since I did and I’m very glad to be back. We meet at a time when Russia is immediately threatening the global security order, while China is, at the same time, providing a long-term challenge to the supremacy, the traditional supremacy, of the United States and the West, in economic terms, and posing a real challenge to the liberal international economic order.

The reason for that is simple. China’s economic power has now become roughly equivalent to that of the United States. Doesn’t really matter whose GDP is a little bigger, who makes a few more semiconductors, or less. China is, for all practical purposes, roughly equivalent now to the United States, in terms of its international economic power, and that means that China and the United States really have to agree if anything very significant is going to happen, in terms of reform, improvement, of the international economic order. They can veto each other’s initiatives and so, it’s imperative for them to get together.

That means that China must come to play over time a roughly equivalent role in managing the international economic order. China wants to do that. It’s not clear yet whether it will exercise the responsibility to do it the way some of us would like, but it, clearly, wants to do so and on economic strength grounds, it clearly has the wherewithal to do so. Now, that’s going to mean some changes in the rules, the norms, the institutions that we’ve grown to love over the years. China’s going to have to change some of its policies, as well, to make that possible. But it’s got to become a full partner in the management of the international economic system, and not just a responsible stakeholder, which the US called for 15 years ago. It made sense then, but now, it’s really got to be more than that.

So, China’s rise poses very substantial, perhaps existential, questions for the international economic order, since no single country can now lead in the way the US has traditionally done, over the last 50 years or so, and Great Britain did before that. So, the question is, who will lead in maintaining a stable and prosperous world economy? Or if nobody will lead, will there be a vacuum that will then pose a substantial risk to the international economic order?

When Donald Trump totally abdicated US leadership during his administration, we got a taste of what that might mean. We got trade wars, not just between the US and China, but among the US and its allies. So, the international economic order clearly was at risk. We all know the story of the 1930s, when the incumbent power, Britain, was no longer able to lead, the rising power, the United States, was unwilling to do so, and at least some people interpret that as a major cause, if not the major cause, of the global depression.

So, big questions about the international economic order going forward. To me, the main conclusion is the world must find ways for the US and its allies to co-operate with China in managing the world economy if we’re going to restore and sustain global economic stability. And by the way, to avoid a new Cold War, because if the economic conflict continues, that furthers the trend already worrisome toward overall Cold War between the US and China.

Now, what this will require, finding this mode of co-operation will require, is decoupling, not between the US and China as a whole, but between the economic issues and the other issues that are on the agenda. I assume that there will be continued contention and even conflict on security issues, values issues, a host of political issues, between the US and its allies on the one hand, China on the other. So, it’s going to be necessary to treat the economics separately and that, to me, is much better than trying to separate the two countries, totally, separate on an issue specific basis, try to decouple in that sense.

Now, fortunately, the foreign policy construct of the Biden administration permits for that and even opens the door to it, because they have talked very clearly about separating the bilateral issues between a co-operation basket and a competition basket. Now, their co-operation basket explicitly includes climate change and pandemics. They haven’t really said where economics sit, and my argument is that economic issues, at least those with systemic implications, have got to be put in the co-operation basket. I call it a policy of conditional competitive co-operation, where you acknowledge there’ll be competing, but there’s got to be co-operation on the economic front and that, in turn, has got to be conditional.

Now, part of the reason I argue that is because the alternative strategy of containment is simply a terrible idea, and it wouldn’t work anyway. China’s too big, too dynamic, to be suppressed. No other countries would go along with the US in trying to do that. The Chinese would respond by trying even harder to achieve their goals, and Trump tried it and it was an abysmal failure. China was the only big country that kept growing right through the pandemic. Its share of world trade increased, despite the trade war. So, containment is a terrible idea, wouldn’t work anyway and should be rejected in favour of the co-operative approach.

Final point, what is necessary to achieve the kind of co-operation on economic terms that I espouse? The first thing is for the United States to beef up at home. President Biden, again, coming into office, clearly recognised the US had to put its own house in order before it would be in position to provide constructive global leadership again, and we certainly see a whole host of issues, economic and political, where the US system is now pretty dysfunctional, where that’s got to be done. We’ve got to restore international confidence in the United States, including, incidentally, Chinese confidence in the United States. They now regard the US as, inexorably, on a downslope. So, the US has got to put its house in order.

Secondly, we’ve got to further strengthen the alliances. When you look at the numbers, the traditional alliances of the United States actually double its economic clout. The economies of the main allies: Europe, Canada, Australia, Japan, Korea, they add up to about the same size as the US economy, which doubles the strength of the coalition. So, keeping it together is absolutely fundamental and some of those countries, particularly the Europeans, have exhibited an admirable leadership quality on a whole range of issues, doing so now with respect to Ukraine, incidentally, as well. But in the economic sphere, Europe has filled some of that vacuum left by the US decline and particularly the Trump abdication. So, the alliance is absolutely crucial.

But the third, and final, piece of it is China. China, of course, has got to change a number of its policies to enable it to play a responsible leadership role, and that’s the conditional part of my conditional, competitive, co-operation. China has a huge continuing interest in an open world economy. It’s been absolutely essential for their miraculous economic development. It still will be, going forward. I would argue it’s a core interest of China to maintain an open world economy and China, to its credit, has shown global economic leadership on a number of occasions. But it’s, of course, got a lot of trade policy, investment policies, retaliation against others, like Lithuania and the EU, Australia, not just the United States, which have caused a huge backlash, which in turn, threatened the openness of the global economic system. So, China, in its own interest, not to be nice to the US, not to be nice to the West, but in its own interest, I think is going to have to realise, as it has on some issues, that it’s got to play by a more consistent, internationally compatible approach. If and when it does that, then I think it can, and should, achieve the roughly equivalent international economic status and role that it would like, and in that case, we have a basis for sustaining a world economy going forward. Thanks very much.

Creon Butler

And thank you very much. It’s a really, really interesting proposition, a very, I think, convincing, in many ways, but it whole – a whole bunch of questions we’ll come back to, and one of them, as you say, clearly is does China see it the same way? So, with that, perhaps we can move to Olivia, who has been thinking a lot, and working a lot, on exactly what the internal political process in China is. So, Olivia, may I hand over to you for the next comment?

Dr Olivia Cheung

Yeah, thank you, Fred, thank you, Creon. So, the goal of my, you know, brief talk here, is really to put China’s quest for global economic leadership within a broader context of Chinese economic policies under the current Chinese leader, Xi Jinping. I think a starting point, and a really important overarching context for us to appreciate, is a slogan that he repeated a lot, that “Quite often, you know, in a turmoil of global economic competition, we forget about that,” and that is the China Dream of national rejuvenation. And Xi Jinping is absolutely serious about the China Dream of national rejuvenation, and to him, he has set out benchmarks on what that will look like.

By 2050, he said, “China will become a leading country, in terms of comprehensive national strength and global influence and the Chinese nation will be standing more mightily among the world of nations and in higher spirit.” So, that’s the goal for 2050, the due date for national rejuvenation and he has also established 2035 as a milestone to gauge how far China is moving towards the goal he set for 2050. So, for 2035, he wants to see China’s economic and technological strength to be greatly enhanced and, also, China already become a top ranked innovative country.

So, this is to say from Xi Jinping’s perspective, the purpose of US-China economic competition is to contribute, ultimately, to the national rejuvenation of the Chinese nation and to this end, he has placed a lot of importance in developing China’s independent ability to innovative in cutting edge economic sectors, and he called that “cultivating China’s indigenous innovation ability.” And what that means is the ability to innovate and commercialise, to a global scale, cutting edge technology that would determine the future of the world economy and these include advanced manufacturing capability outlined in the Made in China 2025 Industrial Strategy, put forward for the first time in 2015, and this strategy has been reinforced in various government pronouncements ever since.

So, to Xi Jinping, developing indigenous innovation ability is profoundly strategic for national rejuvenation, because it would allow China to break free from foreign important on core components and technology. So, to him, that is a question on national security and regime security and to him, if China become a major and leading stakeholder in technology, that would give it the authority to make global economic moves.

So, that is a very revolutionary and important thing to see, and most importantly, he is really looking at increasingly topping the importance of new sources of domestic drivers for growth in China, and if China has the ability to innovate independently from the West, it would contribute to that very significantly. So, that feeds directly into the so-called “dual circulation strategy” introduced by Xi for the first time in April 2020, during the COVID-19 pandemic, when the world is still struggling quite badly with that.

So, an important implication for that, for today’s discussion, is that the tech sector will increasingly become the main focus of US-China economic competition, even more so than the extent to which we are seeing today. Now, the tricky thing for China is that, at the current stage, it really doesn’t have all it take to develop indigenous innovation ability. So, the emphasis is on self-reliance, but China is not completely there yet, and we can see that quite clearly from how the goals on innovation says in Made in China 2025. The goals set in that blueprint has been missed and chances for that being fulfilled on target, on schedule, are unrealistic.

For China to innovate in advanced manufacturing sector, it rely heavily, still on core components imported from the West and with restricted technology sharing between the US and other Western countries with China, China isn’t having an easy time to move forward in that direction. So, in this context, in the recent months, what we are seeing is an increasing trend for the Chinese leadership to shift the focus of indigenous innovation ability from advanced manufacturing, to the digital sector, digital economy, where China already has a competitive edge. So, it’s not a new agenda, but is an agenda that China has really doubled down in effort. So, we are talking about industries like blockchain, Internet of Things, AI and abled financial services and so on, as, you know, a breakthrough point for China to achieve its aspiration in global economic and technological leadership.

However, one may do wonder if Xi Jinping does attach so much importance to the digital economy, why has he been so harsh on Alibaba, Tencent, Baidu, all the, you know, internet giants in China? I mean, aren’t they the leaders that China would lead to occupy the global internet space? So, there seems to be, you know, a kind of, a contradiction there, at least from an outsider point of view. So, the digital sector has recently been made as a new focus for China’s anti-corruption campaign for 2022. They’re also being imposed heavy anti-monopoly fines and currently, under Xi Jinping’s Common Prosperity Initiative, large businesses, especially from the digital sector, are being solicited very significant corporate donation, and they’re also being asked to cap their executive salary, raise the salary and bonuses of their low-level staff, and so on. So, it’s not easy for them and with economic growth slowing in China, digital sector in China isn’t having an easy time.

So, how do we put this all together? What I think we do have to appreciate is Xi Jinping is serious about seeking global economic leadership and at the same time, he is equally serious about putting that firmly under the guidance of the Chinese Communist Party. So, what that means is even if increasing state control and party leadership would entail measures that, from our perspective, look like stifling China’s technology sector, he thinks negative effects are temporary, transitionary and unnecessary for long-term economic health in China. Now, whether heavy state control and making China’s digital economy globally competitive can go together, would be, I think, the long-term question that we have to grapple with to see whether China can win that economic competition. Thank you.

Creon Butler

Thank you very much, Olivia. Yeah, another whole set of issues and I think, you know, one – certainly on your question about the policies towards domestic firms, I mean, you could certainly argue, as I think in the EU and in the past, in the US, one would argue that, actually, competition, domestically, is a way of making sure you have a strong industry. So, it’s not impossible, I guess, that that’s an aspect in Chinese policy at the moment, but maybe that’s – Keyu, I know you want to focus on technology as one of your elements. Maybe that’s one of the issues you can pick up. So, Keyu, over to you.

Dr Keyu Jin

Thank you, Creon. I’m going to start by asking two questions and then, also, incorporate some of my comments – incorporate some of the previous comments into my own, as a response. So, the first question is, what does Xi Jinping ultimately want as for his legacy? Legacy is a really important thing to take into account when we think about where China might be going. The first is economic, as both of the previous speakers mentioned. It’s economic leadership and, by that, just simply meaning overtaking the US, in terms of actual GDP size, is one of the most direct measures of that leadership. Now, of course, being big does not mean being rich. China could be – have a big GDP because of its size, not because it is as rich as the US, as we are all aware, and that we have to keep reminding ourselves.

And the second part of the legacy, in my view, although I’m not a Political Scientist, like some of the other panellists, but of having – how do you create a sustained, long-term system that won’t be toppled easily by a new generation of leaders? How do you institutionalise what China has implemented today, politically, into something that is lasting and enduring? And, of course, we know that is a very different form of government and governance, political governance, from what we are familiar with. So, that is, I believe, his idea of what his legacy might look like and there are a specific set of issues around that.

The second question I want to raise is what is this global economic competition really about? For me, it’s not about trade as the – although it was manifested in trade wars during the Trump administration. It is about Chinese aspirations, but ultimately, it is about technology competition. I think that is, ultimately, what will determine the economic competition outcome between these two countries, for the simple reason that, first of all, we are in a new era of information and knowledge economy, but more importantly, I believe that the technology, which carries with it so much significance, not econom – not only economically, but also in terms of security, in terms of all kinds of dominance, is just so prominent today, in today’s age. And here, China is faced with a dilemma and is faced with a challenge, because as Olivia mentioned, the critical components are as – by definition, really still critical, and as Biden has added more and more Chinese companies to the entity list, they are faced with a big problem. And we’ve seen that with Huawei, where, you know, the company was forced to spin off the handset business elsewhere, because of the – being cut off from the critical components, especially semi-conductors and chips.

So, in the near-term, a lot of these companies will suffer, and the US still has that leverage, not in trade, not in, notably, other areas of the economy, but really, especially just in critical components and technology. However, this has the effect of accelerating China’s path to self-reliance, as Olivia mentioned. But, I believe, in a very direct, market driven way, which is that now, the domestic companies supplying these chips and components, have been met with a huge boost of demand, because now they’re being procured from these Chinese companies that relied comfortably, assumingly, from these American companies and – American companies and, therefore, that huge boost in demand is driving the growth, driving the resources flowing in, and just by pure market forces, that will accelerate that depend – that, kind of, self-independence.

Technology is also critical because this is the only way for China to have sustained growth now that the demographics [inaudible – 28:41] is gone, the investment model is no longer working. How do you get China from a $10,000 income country, which is still what it is now, to a $30,000 or $50,000 income country that will depend on sustained innovation, which is the only way that countries can grow into the foreseeable future?

Now, the question is, what is China doing to accelerate that process? One is driven by US – as a response to the US actions. China’s launching a techno-nationalism that’s – with an intensity that’s unseen since the days of Mao Zedong, when he tried to develop nuclear power and, ironically, the innovation system, which is really a system, it’s not about just companies, but it’s about companies, industries, university, government, working together, that kind of innovation horizontal system is ironically modelled after the Polar Programme or the Manhattan Project. And it’s, kind of, mobilising national resources in the way that China has mobilised national resource to win Olympic gold medals or to fight the pandemic in early days. It’s that kind of mobilisation.

Now, in my view, that’s going to [audio cuts out – 29:56] let China – help China master a lot of the tech leading edge areas. Of course, we already know that in some of these areas China is already competing neck-to-neck with the US. But mastery of hi-tech, which I’m confident that China’s able to do, is not the same thing as breakthrough technology, creating the kind of first innovative solution to curing cancer or going to Mars, or whatever it is. That kind of breakthroughs is not yet in China’s advantage that – to be achieved, simply because there’s a host of issues around fundamental research, around education, around creativity and openness and just a patient nation with patient capital.

China’s method is what we call “short, fat, fast and flat,” the volleyball approach, but that’s the same mentality that’s been used in investment and apparently even in marriages these days. That’s the Chinese attitude and you have to overcome these, you know, growth pangs in other to have the foundational advantages of these breakthrough technologies. And here I’m a little bit less confident about China’s prominence.

Now, finally, let me just mention that I don’t necessarily agree that Chinese Government is just focusing on the digital sector. On the contrary, the whole thing about common prosperity, even though on the appearance, might look like it’s tac – it’s going after the technology sector, these are really just internet – consumer facing internet platforms, which the government does not believe is really fundamental technology or hi-tech, and the same thing in many of the applications in the digital sector.

China still wants to be at the core of the manufacturing supply chain, notably, going forward, being the – part of advanced manufacturing supply chain, with – powered by things like AI, Internal Cloud of Things – sorry, Internet of Things, Cloud, Industrial Internet of Things, etc., with new technology, with fundamental technology. This is, again – this separation between this and the digital platforms is something I think that actually [audio cuts out – 32:16] – with this drive for anti-monopoly on the platform economies.

And to Fred’s point, you know, we’re all about international co-operation. Actually, Chinese leadership is about international co-operation, but it’s been made very difficult with, well, two things. One is the acts on the American side, American truculists – truculence, and the perception of the Chinese that the Americans are now trying to limit its growth. But also on – but the second reason it’s difficult is, despite the pol – leadership’s desire for global co-operation, we also do have a very strong Chinese leader, and – who is not going to resist or shy away from international aggressiveness. So, whilst that is the most desired outcome, how is that going to be achieved? How do you expect international co-operation, not only economically, but in terms of security, in terms of many other dimensions, when China perceives the US to be having these – undertaking these aggressive tactics to contain it? Or even on the political front, how do you get China to co-operate with you politically and militarily when there are lots of, you know, disagreements, let’s put it mildly, on a number of issues? So, these are things to also take into account. Thanks.

Creon Butler

Keyu, thank you very much. I mean, I – there’s an awful lot fascinating. I mean, one thing immediately comes to mind is, you know, in an economy where the government decides what the key technologies are, you know, is a platform a good technolo – is important technology or not? You run the risk that actually platforms may drive some of the most important technological developments in the future and if you make a decision that, actually, that’s not key, you may rule out some of the aspects of technology that are really important in the future. But maybe that’s something we can come back to. Neil, over to you. So, lots there, but also, I know you’ve got quite a lot you want to add yourself. So…

Neil Shearing

Yeah, and we’re…

Creon Butler

And you use the…

Neil Shearing

…running out of time, as well, ‘cause…

Creon Butler

Not at all.

Neil Shearing

I’ll leave it…

Creon Butler

No, no, just…

Neil Shearing

I will keep it…

Creon Butler

I mean, we…

Neil Shearing

…brief.

Creon Butler

It’s a really good discussion, so please go ahead.

Neil Shearing

Yeah, one of the problems of going last in these panel discussions is that almost every point I wanted to make has been made somewhere along the line, before, by one of the three participants. So, I’ll keep it brief and maybe I’ll tear up my – the remarks that I prepared and I’ll – perhaps I’ll just – it’s useful to reflect a little on how we got it and then, where that might take us.

I think the first point I would make is that China’s rapid emergence as an economic superpower, I think that was always likely to create tensions and strain in the – in – amongst the global status quo. But I think that that – those strains and tensions would’ve been manageable, without conflict if China had evolved in the way that the Clinton administration’s and the Washington Consensus crowd had thought and anticipated that it might, in the 1990s and 2000s, as the world was integrating. I think most people, and I’ll – you know, I was back at the Treasury, as you mentioned, then, Creon, and you were at the FCO, and we all – we know colleagues in Brussels and in Washington. I think every – the assumption, the driving assumption there was that you integrate China, market forces would take over, China would be come – ultimately, the government would step back, the state would step back, the gover – the economy would become a, essentially, a market-led liberal economy and perhaps there’d be some political change, as well. It – a kind of, move towards some elements of democracy. You know, that was, clearly, a long way out, but that was – there – that was the, kind of, the framework through which globalisation was approached in the 2000s.

Now, it’s clearly not played out that way, both on the political and on an economic front, and clearly, my expertise is on the economics, but there we have seen – actually, Keyu did a really good job of laying out some of the challenges and you mentioned, you know, GDP per capita $10,000. That’s the point at which the state needs to step back. The market does the work at this point of development, in terms of allocating resource, the state steps back. If anything, we’ve seen things go into reverse on that front in China, so states are becoming more powerful and decisions over resource allocations is becoming more centralised, with perhaps less role for the markets. And so, the – what’s emerged, I think, is that you have a system now where the US and China have different approaches to economic management, but also different sets of values, as well, and given that set of circumstances, I think it was always likely that the Western powers would start to treat China as a strategic rival, rather than a strategic partner in some areas.

So, that’s, I think, how we got here, and the question is what comes next? And I think, you know, it goes without saying, it’s highly uncertain. It’s going to depend on decisions yet to be taken in China, in the West, as well, and Keyu also did a good job of laying out the tensions there and some of the political challenges to promoting co-operation, but also avoiding conflict. One point I would absolutely agree on with Fred is that China’s interests here are very much in terms of maintaining elements of the global status quo. It has been the big winner from globalisation. You know, income, as a share of the US, was 5% in 1990, it’s about 30% now. Now, interestingly, you compare that with what’s happening in Russia, incomes actually as a share of the US in Russia have fallen since 1990.

So, China, and there’s lots made about how the war in Ukraine is a manifestation of deeper conflicts within the US – within the global economy, you know, fracturing of the global economic order. Actually, I think China wants to maintain elements of the status quo. It just wants to influence it and help then shape it and play a greater role in it. Whereas Putin and Russia have much less of a vested interest in maintaining the status quo, because Russia’s economy has done rather less well out of it. So, I think that you view it through that lens, I think elements will stay. I absolutely agree that elements of the trading relationship will stay. They’re very difficult to unpick. The economic logic of trade is so powerful, it’s difficult to unpick. We saw that with Trump. I think some parts might start to fracture and it might – I think it’s likely that the production of some goods that are deemed to be strategically important, semiconductors, for example, rare earths, dependence on rare earths in China, maybe we start to see some fragmentation there in the global supply. But I think, you know, essentially, I wouldn’t expect a huge restructuring of the global trading system.

Where I think this starts to playout and decoupling starts to playout is, instead, in other fields, which are, to some extent, political and geopolitical. They’re around defence and security, but they all touch on economics, particularly finance and investments in technology, and so, I think it’s less about the, kind of – in my, kind of, economics hat on, it’s less about the trade side of the balance of payments. It’s more about the capital side of the balance of payments, so that flow of finance in and out of China and between the – between China and the West. And it’s about the exchange of ideas and knowledge and I think that might become impaired in some areas.

So, what does that mean for economic growth and prosperity? Well, I think, as I say, I think that the main pillars of the global trading system will, ultimately, endure. I think that’s difficult to unpick, so I don’t envisage a big reshoring of production to different centres, for example. But I do think that there will be some decoupling in areas like technology, investment, finance. We’re seeing that already. I think that will accelerate and endure. The question is, is that good for growth or bad for growth? Well, I think a large part of the answer is it depends how managed that is and how quickly that starts to occur. I think, though, that given the relative starting positions and the size of the economic blocs that will align with the US and align with China, if push comes to shove, there’s greater – there’s more to lose, if you like, on the Chinese side. So, I think the economic risks and calculations are much graver – much greater on the Chinese side.

And so, yeah, I’m not one of these – I’m not a kind of, fatalist. I don’t think that China’s on the cusp of a hard landing, like so many China bears do, but I do question the extent to which China is – will inevitably become the world’s largest economy by 2050, as some of the bulls do. So, yeah, there’s my two cents, in an effort to try and pull together some of the thoughts that we’ve heard today.

Creon Butler

Neil, thanks very much. That’s more than two cents, but I really appreciate that. So, firstly, I just want to remind everybody to put questions in the Q&A section and we’ve already got a number of questions coming in, which I’ll come to in a session, but I do want to just go round each of the participants first and, really, with two things. Firstly, anything you want to react to that you haven’t already in what other panellists have said, but secondly, I mean, there is – and these are questions that have come in. So, one is the role of other blocs, and particularly the EU. I mean, in – Fred, I think you’ve presented the US as having – it’s crucially present – important that it’s having – has its allies alongside it and yet, there’s clearly tensions between the two. They have very different views in some areas of economic policy. So, how do you see the – what role do you see the EU playing in this eventual competition, is it, potentially, actually going to be a three-way system, at least in economic sense, if not in a political or security sense?

And then, also, if I could ask the question about the impact of Ukraine, which is another factor that people have raised. So, it’s obviously very early stages, but I think it’s clear the impact of Western sanctions have been far – has been far greater than perhaps many expected at the start, and there are a number of reasons why that may be the case, both in terms of the nature of the sanctions, but also the nature of the Russian economy and so on. But do you see any aspects of the current Ukraine crisis and what we’ve seen so far, as having a significant influence on this competition? So…

Fred Bergsten

Well, I…

Creon Butler

…Fred, if I could come to you with those two questions, but please also react to what you’ve heard from others, as well, if you’d like to.

Fred Bergsten

Well, I do think your questions are very pertinent and I’ll answer the two together. As I said, I think Europe has played a very constructive leadership role on things like global warming, trying to restore the World Trade Organization, the trade system, in the wake of the Trump onslaught. So, I think Europe, the EU in particular, UK as well, have stepped in to fill at least some of this leadership vacuum. The question has always been is that sustainable? Will Europe itself stick together and will it be able to function as a single entity and, therefore, have the clout that it’s underlying economic weight would suggest? What’s happened here in just the last week in Ukraine seems to give a positive tilt to that answer. Europe clearly has been pulling together, pulling with the United States.

The alliance has been seemingly stronger than ever. Again, we’ll see how long it lasts and how far it goes, but so far, I would say very encouraging. So, yes, Europe could play a big role, but will it be a kind of, co-equal third pole? That really depends on whether Europe will amalgamate across the board. It’s always been a big power on trade, because it did function as a single entity there, but it has not done so in the other areas, macro or monetary or technology, and if it can do that, perhaps galvanised by what’s happened in Ukraine, and moves further toward economic integration, complete the integration project, then sure, then we could have a three-way system that would be highly constructive.

Let me be – two quick comments on the others. I think Neil makes a very important point, which I stress in my book, actually, that China really wants to maintain the current international economic order to a large extent. It’s what I call a revisionist, not a revolutionary, power. It wants a bigger role for itself, it wants some changes in the rules and norms, but it has benefited enormously, and it knows that. The problem is that China has, in my view, wanted to get what I call the best of both worlds.

On the one hand, it wants to take advantage of the open system, created, maintained by the US, Europe and others, but it also wants to deviate from the rules when it thinks that benefits it. So, it’s extensive subsidies to state-owned enterprises, it’s manipulation of technology in multinational firms. In an earlier period, it’s massive currency manipulation. China has both used the rules to benefit itself, but also deviated from the rules when it thought it could get away with it, which it has to a large extent and so, it’s, kind of, gotten the best of both worlds and that adds, I think, to its desire to keep the current system without too much change.

Both Keyu and Olivia emphasised the technology issue and I think that’s right. A lot of the competition will be there. But I think one has to make a fundamental distinction between means and ends. Neither the United States, nor anybody else, should disagree with China’s desire to become a technology superpower. If China wants to do that, put its resources into it, and devise policies to do it, that’s fine, but the question is how you do it. If you do it through market devices, even accepted types of government intervention, that’s fine, but if it goes beyond the basic rules of the game, through subsidies, through forced domestic investment and technology transfer, through theft of intellectual property, for example, which has been rampant and widespread, if it uses means to achieve those legitimate ends, which means are not legitimate, it does lead, then, to the kind of backlash that I talked about, which has now gone so far that it threatens to undermine the whole system.

So, my plea to China, in its own interest, is to recognise that it can achieve the goals of Xi Jinping, the China Dream goals, the 2050 goals, all that, which I fully acknowledge and respect in my book, in fact, assume that something along those lines is going to happen, but to do it in a way that is not so disruptive of others that it throws out the baby with the bathwater, to use a colloquialism. That, I think, is the crucial distinction that I think China needs to make and that the system will need to find a way to assimilate if the overall goals, including China’s, of maintaining that system, largely intact and continuing to be successful, is to be achieved.

Creon Butler

And thanks very much. What I want to do, given we’ve got a lot of good questions come in and we are, you know, squeezed on time, is in coming to the next – to the other panellists, also just see if we can feed in some of the other questions. So, if I could come to Olivia next. There are, though – you may want to react to what you’ve heard. There’s also this question about the impact of Ukraine and how that may change the way China looks at things. But there’s a question, also, which interestingly – from the – from our audience, which is about, you know, “Is there a fundamentally different economic philosophy at play here?” I mean, at one point it didn’t seem the case – that was the case, but – and to some extent, one could interpret the, you know, the actions on domestic players as being, actually, quite a standard, sort of, way of preserving a market. But is there a fundamental philosophy or not – philosophical difference or not? But Olivia, if I could come to you next, please.

Dr Olivia Cheung

Yeah, thank you, Creon, thank you, Fred, for your remarks. So, I think I would react briefly to Fred’s comments, and I think that touch on the question that, Creon, you raised, as well. I think a major issue we are seeing here is China today is really a fundamentally different China from a China, you know, ten years/20 years ago. Economically, China’s approach is different and a lot of it really politically guided. Chinese politics has fundamentally changed since 2012 and those changes have been cemented in 2017, with Xi Jinping starting a second term. And further on, you know, later, then, with term limit in China for the top leadership being eliminated.

So, things that, you know, outside China, that Western countries have significant and longstanding complaint on, like China not playing by the economic rules, I think we are familiar with those charges, you know, what they are, you know, SOEs, IP [inaudible – 51:04], you know, forced transfer of technology and so on and so forth, those are grounds that, previously, we thought, you know, there would be a basis for pragmatism, for compromise. But with the current Chinese regime, where political security is being seen as very absolute and, also, related to every other kind of security, the mood and scope for compromise has reduced drastically, and in an environment where there is a top leader who is, basically, unchallengeable, constitutionally, and this is quite – really quite clear from policy pronouncements coming from the party itself. Then, scope for making, you know, practical, pragmatic changes have been narrowed and I think this is something that we see plenty of evidence in the – in recent years. So, I think that make political and economic decoupling very difficult in China’s political reality.

Now, reacting briefly to Ukraine and what it means to the US-China economic and technological competition. First of all, I think it really would strengthen the sense of the Chinese leadership, that it is correct in emphasising the need to be as self-reliant as possible, because the international environment is in turmoil. So, that was a fundamental assessment that Xi Jinping made during 2020, in April 2020, when he introduced the dual circulation strategy to increase domestic consumption as a share of China’s economic growth. And what is happening in Ukraine and uncertainty on how the West is feeling with it, in terms of sanctions and so on, would further that sense that indigenous innovation ability, technology, hi-tech, is something that China should really, really push, because this is necessary for security in the long-term.

So, the importance of technology will stay and, fundamentally, though, we have to appreciate, and I think Keyu is extremely right in pointing that out, that China is deeply embedded in global production chains and that is a position that China absolutely want to consolidate and is in a very good position to consolidate, very difficult to be dislodged. China produces a lot of intermediate goods that Western countries need to make their final products and that won’t change with the situation in Ukraine, and China’s position in this sense is not easily replaceable. So, although, you know, if China – depending on how far it would go to help Russia in, you know, weathering sanctions, that might possibly invite secondary sanctions on China, but even with that in place, it would be quite difficult for the West to really sanction China, given how deep it would cut into the West interests in light of China’s dominant position in global economic chains.

Creon Butler

Thank you. Do you think Chinese policymakers would be surprised at the impact of sanctions on Russia so far?

Dr Olivia Cheung

I think Chinese policymakers did not expect such a united response that we see from European countries and, in some way, going beyond the sanction package that have been discussed before the invasion actually began. So, the Chinese relationship would have to be really quite careful in how it is helping, or not helping, Russia and if it is, you know, helping Russia in a very major way and that becomes highly visible, I don’t think that’s what the Chinese leadership want to do. Further decoupling in trade and investment, I think we all agree here, is not in China’s interest. But if you know China and Russia’s, you know, relationship is to an extent where it make Western countries, where public mood is now overwhelmingly against Russia’s invasion of Ukraine, if it make Western countries feel very uncomfortable, then it could make decoupling a necessary political choice, I mean, furthering that route and it would be much more difficult to reverse.

Creon Butler

Okay, thank you very much. Keyu, perhaps I could also, firstly, give you the opportunity if you want to respond to what others have said and, particularly, the two questions I put around the role of the EU and Ukraine, but also just pick up a couple of questions in the chat. So, one is about the – so, China’s success, up to a point, in terms of its economic outreach in the Asia-Pacific region, and the extent to which the US Indo-Pacific strategy is an effective response. And then, there’s also a question about Chinese investment in the UK and the extent to which, for a variety of reasons, there will be a sort of, continuing pause in Chinese investment in the UK, so not so much driven from the UK side, but by the Chinese side, as well. So, if I could put – add those two questions to you, as well, thank you, Keyu. You’re on mute, still.

Dr Keyu Jin

In my allocated two minutes I’ve tried to – I’m going to try to give a answer to all these questions, but I’ll combine with EU and the UK. I think it’s important to recognise that the Chinese leadership is actively seeking strengthening a relationship with Europe, precisely at a time when US-China tension is rising. So, it’s not just US interest to strengthen its allies, but also Chinese interest to make more friends. And I would just want to point out that there’s no one European view towards China. Actually, there are many, many different views about China and this is where a lot of European countries might disagree with each other. And where there are European countries, or non-EU countries, that are interested in having a Chinese investment and open to it, China is going to actively engage with that and there are going to be some countries that are going to be more pragmatic economically, some more about the ideological, competitive and I think we’re going to see a different, you know, a different kind of geography of these events happening.

I think that I want to point out the international rules issue. What if the international rules itself are somewhat problematic? I think there’s a growing consensus that there needs to be WTO for reform. A lot of the things that Fred mentioned that China did was, and here I agree with Olivia, was during China’s early years, during the WTO, until the recent years. When China was a smaller country, a developing country, there was leeway that WTO allowed for these developing countries to have industrial policies and technological – looser technological IP standards, and – but that only became a problem when China became really big. So, I think now is the time that China needs to decide how is it going to change its behaviour to fit in with a certain set of rules.

But let me say that the international rules are designed by the West and for the West, in some major ways, not – that’s not entirely accurate, but there are – there is a sense that there is a bias towards that and now that emerging markets are representative, so – such a big part of the economy, how – the world economy, how do you take into account their desires and needs, as well?

And finally, I think on the Ukrainian issue, I just want to add what has been said, I think these sanctions is also a good warning for lots of countries, including China itself, of what might be the consequences of a set of, you know, unexpected events, let’s just say. And, also, for a number of other smaller countries which has assumed Western reliability or Western security aid and all of that, I think it does reveal a quite number of things that we just have to be aware about. But that’s a longer discussion to have.

Creon Butler

Yeah, indeed. I mean, it also, I think, reveals, if – you know, as we can see, if a country does something which has such overwhelming opposition worldwide, then in a sense, sanctions can go a very long way. Anyway, that, as you say, is another issue. Neil, I’d like to come to you, to the end, and I, you know, I apologise for squeezing your time, but I – as a former US economic specialist, I wanted to put a couple of US related questions to you, as well. So, one of them, actually, is about – a question that came up in the chat, which is about the US approach to voting rights, particularly in the IMF, and whether – I mean, whether or not, in a sense, in response to the need to develop a, sort of, co-operative approach, this is something that, ultimately, you could see a more equitable balance of the overarching governance of the IMF and, to some extent, other international organisations.

And then, secondly, just a question about what if Biden turns out to be a one-term President and we have a Republican come back in? You know, obviously, might not be the – Donald Trump, might be someone else, but to what extent, you know, in a way, there’s a whole new game in that world, or whether, in fact, there is a, kind of, continuity that one could expect to continue? So, Neil, if I could come to you on those two questions.

Neil Shearing

Yeah, two small questions in the remaining minute that we’ve got left, to tackle. On the second question first, what happens if Biden is a one-term President? Well, look, in one sense, I think perhaps not much, and I say that in – because I don’t think that Trump, necessarily, achieved much. I don’t think the Trump – the tariffs necessarily achieved much and they’ve not been really well backed, to any great degree, by the Biden administration either. The point being, as Fred made and I – as I made too, the economic logic of trade is so powerful that it’s quite difficult to unpick all of that. But I do think that this fundamental, kind of, ideological difference, both politically and in terms of economic models, means that there will be persistent pressure to decouple in areas, irrespective of who is in the White House, that it’s an ideological difference that will persist and continue to push that.

On – that then leads me to the second point about international governments – governance and IFIs and how that plays out. Oh, goodness me, I don’t know if I really know the answer to this, but I mean, if there – if we’re going to see a kind of, more democratic and shall we say egalitarian, fairer system of governance, then clearly, it’s not – you know, it’s – principally, China’s voting rights need to increase, but also those of other large EMs, too. But in a way, that gets to the heart of this problem, doesn’t it, which is that there are, kind of, two systems, one of which – and the ideolo – the overarching ideology was that these two systems would become closer together, more a mesh, greater integration and everyone – you know, and it’s not playing out that way. I’ve – I’m sceptical that we’re going to see wholesale reform of the IMF, you know, at least this decade.

Creon Butler

Thanks, Neil. Fred, very quickly, would you agree with that, or do you think there is some chance of, sort of, governance reform, particularly in the IMF, but more broadly, in the international architecture?

Fred Bergsten

I think it is necessary. In fact, in my book, I advocate China being moved up to equality with the United States, in terms of votes and quotas at the IMF. But it will only happen if there’s a broader construct of the type I think I’m talking about here, where the US, but the West more broadly, and China, try to decouple the economic issues from the others and agree that they need a co-operative framework in the interests of global economic stability and prosperity for all. Keyu said the US has been ‘truculent’, right. The US will probably continue to be truculent on a lot of things, like Uyghurs and Hong Kong and Tibet and stuff like that, and that, I think, reinforces the case for trying to decouple, work on the economic issues in a more pragmatic way, which the Chinese themselves have interest in.

The final point, then, is one Neil just made, can the rules be changed in a way that would satisfy China as well as the incumbents? We have to recognise that some changes to the rules will be needed. A good place to start, in my view, would be trade subsidies. We have a subsidy code that was actually written under my direction back when I was Under-Secretary of the Treasury. I’m the first to say it needs much further change, including to reflect the perspective of countries that have a different role for government in their economic system. And that’s an ideal place to sit – it’s difficult, but it’s an ideal place to sit down, try to work out new, amended rules of the game, in the interests of both preserving a system and integrating those newly powerful countries into the management structure.

Creon Butler

Thank you. Well, I think that’s a good positive note to end on, in the sense that I think it’s going to be through incremental steps that we will build, you know, the – if you like, the co-operation that is going to be essential. And, you know, we’ve got – you’ve given a good example of one area we could start. So, I’m afraid we are completely out of time. We’re now into negative in time, but I would, first of all, just like to thank my brilliant panellists, Fred, Olivia, Keyu and Neil, for giving such really insightful comments on this topical issue. I’d like to thank the audience for joining us and for the – those who put questions, so, a really great set of questions, and really, then, to say goodbye until the next time, when we look forward to seeing you all again. So, goodbye.