Stephen Roach - Ideas Lab Series - April 19th, 2023

[00:00:07] Stephen

When I attempt to present in the US, especially to our government, whether it’s the Congress or the White House, basically, there’s no interest. Their response is something like, you’ve got to be kidding. We are not interested in bureaucracy. We know what the problem is and we want the Chinese to be more responsive to our perspective. I definitely feel that we play just as an important role in China in leading to this dysfunctional relationship and it’s our obligation to really commit to a different approach to managing the relationship. If you don’t like the secretariate, give me a better idea. I’m happy to listen to it.

[00:01:02] Intro

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Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:57] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary people from all around the world. In this series, I have invited one of them, namely, Kevin Coldiron to host a series of in-depth conversations to help uncover and explain new ideas to make you a better investor. In this series, Kevin will be speaking to authors of new books and research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within it. With that, please welcome Kevin Coldiron.

[00:02:34] Kevin

All right. Thanks, Niels and welcome, everyone. Henry Kissinger, the US Secretary of State, who initiated the modern relationship between China and the US in the early 1970s, now says the two countries are at the foothills of a new Cold War. As we follow the news every day, it really does feel like we’re climbing higher and higher in those hills.

Today, we’re going to talk about how and why the two countries got to that point, and more importantly, outline a path for walking back down away from conflict toward a more stable, interdependent relationship. The guest who’s going to take us through that path is Stephen Roach. His commentary and analysis have helped shape policy debates in both Beijing and Washington for many years.

He spent 30 years at Morgan Stanley, where he was the chief economist, and for those of us in the markets, a must-read about Asia. He then went on to become the Chairman of Morgan Stanley Asia, and since 2010, has been at Yale where he’s currently a senior fellow at the Paul Tsai China Center.

He’s written three books all about Asia, and he’s here to talk about his most recent one called Accidental Conflict, America, China, and the Clash of False Narratives. So Stephen Roach, it’s a real honor to have you on the show. Thanks for joining us, and welcome.

[00:04:05] Stephen

Well, it’s great to be with you, Kevin.

[00:04:08] Kevin

At the end of your book, you describe yourself as a recovering Wall Street forecaster. It’s been over a decade. Are you fully recovered now?

[00:04:19] Stephen

Well, I don’t think anyone ever fully recovers from anything, but the Wall Street experience was challenging, it was enriching. It gave me the opportunity to travel and see many important countries, their policymakers, get familiar with their institutions. So I wouldn’t give that up for anything but I’m glad to be out of that and now taking a more academic perspective on many of the issues that whetted my curiosity but I could only touch briefly when I was in the Wall Street world.

[00:04:58] Kevin

The title of your book says that the story really is about narratives, and I thought maybe we could start with a little bit of your own personal story. You’ve visited China many, many times, spoken at conferences, you’ve talked with policymakers. Can you walk us through a little bit of your own personal history with the country?

[00:05:22] Stephen

Sure. I first went to China in the early 1990s, but these were infrequent and brief, sporadic trips. My appetite was whetted though in the late 1990s, in the depths of the Asian financial crisis, when I was heading up Morgan Stanley’s highly regarded global economics team, who basically didn’t have a clue as to how the Asian crisis was unfolding.

So I had a hunch, only a hunch, that China would hold the key to the end game of what many were calling the first crisis of modern globalization. I started going there in late ’97 quite frequently, in fact, every other month, and it just took off. It quickly became evident to me that China was not going to go the way of Thailand, Indonesia, South Korea, and others that were falling like dominoes that had had the wherewithal, the strategy, and most of all, the determination to avoid currency devaluations and resist the capital flight that was taking down other countries.

I started writing about it and my research was picked up by some senior Chinese policymakers. I was invited to a number of important international conferences in China, became a trusted confidant of the Chinese leadership for reasons that still escape me. But in any case, I really had tremendous access and still do. I was just in China last week for the first time since COVID, and while China’s very different than it was 25 years ago in the depths of the Asian crisis, it’s still a fascinating place to go.

[00:07:37] Kevin

The arguments in the book hinge on the distinction between true and false narratives. You say right now, the two countries are trapped in dueling false narratives about each other. I’m going to spend most of the time outlining those narratives, but before we get to that, there’s a fascinating little bit in the book where you introduce this concept and you talk about why false narratives are so prevalent just in human society.

You referenced this MIT study that compared how both true and false stories spread. I was wondering maybe if you could just summarize that for us, because it seems pretty important for us to just appreciate why false rumors play such an important role in relationships.

[00:08:33] Stephen

Thanks, Kevin. I think that’s such an important point to really unpack the key points I’m trying to make in this book. My view that I try to develop and defend is that these false narratives don’t just arise in a vacuum of nations and their leaders trying to fabricate stories about adversaries, but they really stem from a deep-seated vulnerability that each nation is unwilling to accept.

In the case of the US, we’re certainly a superpower global hegemon, but our economic foundations are not as strong as we’d like to believe. I go through that in the book. Our political stability is being drawn into question daily, especially today, on the day of the indictment of a former president, and our social stability reflects a worrisome and potentially dangerous polarization. So we’re vulnerable and we don’t want to face up to it.

The way our political system works is when you don’t want to face up your own vulnerabilities, you tend to blame someone else outside of your system for that, and China is our big adversary. China is our biggest trading partner. China holds the biggest questions with respect to our own economic prosperity. China has clearly flirted with some transgressions in the areas of technology, trade secrets, human rights that make us very uncomfortable, so China is our favorite scapegoat.

I would just add, this is not a dissimilar blame game from that which we relied on 30 years ago when we blamed Japan for many of our (at least economic) problems at the time. So we’re good at blame. The Chinese suffer from a similar affliction. They are celebrating their strength, the rejuvenation and Xi Jinping’s term, their aspirations to become a great modern socialist nation by 2049, which would be the 100th year of the founding of the People’s Republic of China.

For Xi Jinping, the promises that he has made to the Chinese people and to the party really hinges on being able to deliver a growth and development trajectory that justifies those claims of rejuvenation and great power status, yet the Chinese economy is surprisingly vulnerable as well. It’s unbalanced, in the words of a former Premier now nearly I’d say 15 years ago, Wen Jiabao, who claimed that the Chinese economy correctly was unbalanced, unstable, uncoordinated, and unsustainable, and China has yet to fully address those concerns.

So a vulnerable China turns out to blame an adversary that it now views, in Xi Jinping’s words just a few weeks ago to the National People’s Congress, as a United States that is intent on suppression, containment, and all-around encirclement of China’s system to say nothing of its development objective. So the blame is two-way and I developed that in going through the false narratives, that in most cases, are fact-based but they draw the wrong conclusions on both sides of this conflict.

[00:12:52] Kevin

Let’s talk about the false narratives, go into maybe a little bit more detail so we can get some more granular context on how we reached this point. So from the US perspective, you talk about a couple of false narratives. The first one is what you call the bilateral blunder, which is essentially just looking at the US trade performance on a US-China basis and not looking at it on a more multilateral basis, getting a more complete picture of what’s going on. Can you explain what you mean by that in a little more detail?

[00:13:30] Stephen

Yeah. If you had to ask me for my favorite false narrative on the US side, that would be it. Actually, the chapter that goes through it is called “Bilateral Bluster”, but blunder is fine. They sort of mean the same thing. What I argue in that chapter is, yes, America has a large trade deficit that inflicts hardship and pain on American workers, their companies and the communities in which they reside, but this deficit is very much an outgrowth of a shortfall in domestic saving.

When countries have low saving rates and they want to grow, they have to import surplus savings from abroad and run massive balance of payments deficits with the world, and those balance of payments deficits give rise to multilateral trade deficits with many countries. In 2022, for example, the United States had trade deficits with 106 countries. Yes, China is the largest piece of our 106-country multilateral trade deficit, but that still leaves 105 others by hardly unsophisticated math.

If you put tariffs on China, as the Trump administration did and as the Biden administration continues to levy, all you do, it’s like rearranging the deck chairs on the Titanic. You shrink the Chinese piece of our multilateral trade deficit, but that gets diverted because our savings are still under pressure to other countries. That’s exactly what’s happened over the last several years.

The Chinese piece has come down, but our trade deficits with countries like Vietnam, Malaysia, Taiwan, Japan, Germany, Mexico, Canada, have all increased, and our overall trade deficit has gotten larger, in fact, hit a new high record last year. So the false narrative that I stress in this chapter is that yes, America has a big trade deficit, but we cannot pin it on China. It reflects largely on our shortfall of domestic saving, which is pretty much an own goal in the realm of economic reality.

[00:16:39] Kevin

You also make the point later in the book that while the savings narrative is true, the US has a savings deficit, blaming it on China is the false narrative. That’s also going to be a challenging one to promote politically, and we can talk about some of the ways you move around that. That’s a clear false narrative that you talk about.

You have some other ones that are interesting. One is this notion that, well, yeah, we’re in a cold war with China, but we can win it. We already won one, and that over the long term, our economic strength, our open democracy is going to win out. You’re skeptical of that argument. You’re saying, yeah, you did win the first Cold War, but you were in a much stronger position economically going into it and the system that you were, if you will, facing off against was very different economically; far less sustainable than what you have in China.

So can you elaborate a little bit on that, on why you worried that that’s a dangerous narrative?

[00:18:00] Stephen

Well, it’s very important to me. You started out in introducing our talk today with the Henry Kissinger quote that we’re in the foothills of a new Cold War. He actually said that. He did say that, but he said it now nearly four years ago, I think it was in 2019. He would be the first to admit that we’ve climbed well above the foothills. In fact, this is a legitimate Cold War. It’s a different Cold War. No two are alike. We’ve only had two of them so it’s difficult to make the same precise comparisons.

But the one I make the book is that the first Cold War, against the former Soviet Union, occurred in a period of great economic prosperity in the United States. We were in the sweet spot of our post-World War II revival during this 1947 to 1991 period when we fought and ultimately defeated the former Soviet Union. The comparison that I make this time is that our economy is a good deal weaker. It is true if you look at the numbers on GDP growth, productivity growth, domestic saving, which is a key aspect of the comparative metrics I use, the trade deficit, the balance of payments deficit, and I document this in the book.

We’re basically running at a sharply reduced pace in terms of productivity and GDP compared to that earlier period, and our imbalances in terms of savings and trade in the current account are far more severe. But the adversary is different. The Soviet Union was a small economy. It was a peer competitor in terms of weapons technology, but it was a very, very small economy compared to the behemoth that we now encounter in China. At the end of the first Cold War, the Soviet Union was collapsing.

Many Cold War scholars conclude correctly, in my view, that the decisive battle of the first Cold War reflected the economic victory of a very strong US economy over a smaller and collapsing Soviet economy. China has got problems, and we can talk about that if you want, I’ve written about it recently, but they’re a much, much larger economy by some measures that are actually on a par, if not slightly greater than the US, but the conventional wisdom is that they’re on a path of convergence that will equal the US in dollar terms at some point in the next decade.

They’re enormously powerful in terms of their weapons technology as the Soviet Union was back then, but they’re larger, stronger, and a far more formidable adversary against a United States that lacks that, at least to the extent that we had it in the first Cold War. So I think it’s a little bit worrisome, smug, potentially arrogant that we presume that just because we won the first Cold War, that the verdict will be the same this time around.

[00:22:05] Kevin

I’m kind of an economics nerd. There’s a number of questions that came up in the book that probably take us a little bit off-piste, but I’ll indulge myself. One of them (I think it’s related to the savings problem and also the winnable Cold War false narrative) that in the first cold war, the US (for a lot of that period); the federal government was investing heavily in basic research and development, and that that just kind of gradually went down over time to the point where it had fallen to I think 25% of federal funding for R&D, where it had been over 70%, and it continued to decline.

What’s interesting is that decline in US federal support for basic R&D coincided with the fall in the savings rate. I suspect there some relationship there, but what I’m interested in is your opinion in some of the new policies that Biden administration has introduced which seem to be moving back in the older direction of getting the US government more involved in basic research. I don’t know if you agree with that assessment, if you think that’s a positive step that might do something over the longer term to address the savings deficit.

[00:23:35] Stephen

Yeah, that’s a great point, Kevin. Some of the developments that you’re alluding to, of course, have occurred after the book was written, in fact, published, especially with the recent enactment of the CHIPS and Science Act of late last year, which seems to be what you are alluding to.

I write about the technology piece because it’s become so critical to America’s anti-China narratives right now, especially the full throttle attack on Huawei, China’s leading technology company, and the one that we’ve targeted as a threat to our national security through the alleged potential to install 5G infrastructure and telecommunications infrastructure in the United States with a quote “backdoor” unquote that could unleash Chinese espionage activities into our domestic society and defense.

I make the admittedly controversial point that our fear of Huawei, it could well be a false narrative in the sense that it deflects our focus away from the question you just raised on our own ability to invest in the building blocks of technological prowess through research and development, especially the basic research piece of R&D, as well as our failure to really invest in STEM-based higher education: science, technology, engineering, and math.

The basic research piece of R&D really grew dramatically post the so-called Sputnik Crisis and was critical in building our technological prowess in sending men to the moon, that we’re now trying to do again, and then it has receded sharply in recent years. Whether or not it’s a direct outgrowth of the savings shortfall, it’s hard to pin that down, but I think that there’s more than just coincidence behind those two similar trends. The Biden administration, to it’s credit, has focused on addressing some of these technology issues.

On the surface, the industrial policy actions that were taken last year, the CHIPS and Science Act being one, the Inflation Reduction Act being another are aimed at addressing that shortfall. But if you look under the hood of the CHIPS and Science Act, especially the $52 billion piece that is aimed at supporting the revival of the domestic semiconductor industry, the numbers show that about 81% of that total of 52 billion goes to bricks and mortar construction of new domestic fabs as they’re called, and only 19% goes to R&D.

So whether or not we’ve really come to grips with this profound shortfall of basic scientific research that goes into future R&D is still an open question. That worries me. Our fixation on Huawei as the enemy may well be a cover-up for our unwillingness to really do the heavy lifting on R&D that we really need to maintain our leadership technologically.

[00:27:59] Kevin

It was interesting. I had Chris Miller on the show who wrote Chip War, about the semiconductor industry. He talks about various companies and whether or not they were involved in IP stealing or forced IP transfer. He says that there are some very clear cases of that, but ironically, Huawei was the company that in a lot of ways did things the right way. They invested heavily in R&D. They invested heavily with US expertise in management practices. They did a lot to become a very efficient producer and move up the value chain.

Whether or not it makes sense to have them embedded in our telecoms infrastructure is an open question, but he said it’s just a little bit ironic that they’re one company that followed a similar path to what some of the Korean and Japanese firms have done.

[00:29:06] Stephen

The important note to that point, which I agree with, is that where is the US on 5G infrastructure? There’s not one domestic telecom company that has a meaningful market share that can provide us with the telecom infrastructure that we need to upgrade our own system. There are alternatives apart from Huawei, but they’re Nokia and Ericsson. They’re not US-domiciled companies. We have dropped the edge in really being able to maintain our presence in this critical telecommunication platform industries.

[00:30:00] Kevin

In the US, we’ve got the false narratives of this kind of bilateral blunder or bluster, either one, both of them, and then also this notion that a Cold War is winnable. As you point out, that might not be correct. It’s highly unlikely to play out the way it did before. But China also has their own false narratives. Let’s talk about that so we can kind of understand a little bit better how we got to this point of conflict.

One thing that kept popping into my mind, and you’re very explicit about this in the book, is can a country like China come to terms with false narratives given that it’s a society that’s increasingly driven by mistrust. Can a surveillance state ever admit that there’s false narratives? So maybe if you could start with that high-level question, and then we’ll talk about some of the specific false narratives that you think China is engaged in.

[00:31:13] Stephen

I definitely feel that this is not just an inclination on the US side, but one that’s equally shared by the Chinese side. I start my Chinese portion of the false narratives in the book off with a chapter on censorship a make the point that a system where the State controls the story and the dissemination of information and curates the facts that are available to the people as well as to companies and other decision-makers, that truth can be an especially elusive construct if it’s imposed from a propaganda ministry.

That’s a critical issue in preventing the internal discourse of a heavily censored Chinese society from facing up to misstatements and false narratives. I make a related point in that same chapter, I admit this is hugely controversial and I’ve been accused of a false equivalency here, but I’ll say it anyway, that the US does not have a state-to-record system of censorship, but we have polarized information distortion where a large portion of our society believes in conspiracy theories put out by one political party or another that have very destructive impacts on the way in which our nation attempts to move forward.

Look no further than the big lie of the 2020 presidential election, which is playing out real-time today as we speak, where, again, the State doesn’t censor the debate, but the political polarization amplified by social media really has a comparable disturbing impact on masking the public from the truth. So both nations, China more so I would say in this regard, really suffer heavily from the way in which they selectively utilize, filter, and distort information to prevent the key actors in both systems from facing up to the difference between a true and a false narrative.

[00:34:14] Kevin

Is that a point that you’re able to talk with your contacts in China about or is that just an area that you avoid?

[00:34:24] Stephen

I don’t avoid it. I was just in China last week, and I will raise this not as an issue to threaten their core values but just to point out that we’re in the midst of this very worrisome conflict. Wouldn’t it be better to be able to resolve the conflict if we could both speak more freely than we could about these issues? In a heavily censored society, that’s difficult for the Chinese to do. I don’t get much pushback from that. I really don’t, Kevin.

The Chinese take State-directed censorship as a given. They don’t deny it. But they’re in large part unwilling, at least in the official circles, of course, to challenge the narrative as it is defended and projected by the state propaganda department.

[00:35:29] Kevin

Let’s talk a little bit about some of the specific false narratives. You start off talking about the rebalancing to a more consumer-led economy, and that’s a story that’s been out there for many, many years, the notion that China over invest and it needs to and will be able to gradually shift to a more consumer-based society. That’s quite important because that’s the flipside of the US savings deficit, is a degree of excess savings in China.

So if China had less excess savings, then it’d be potentially less pressure on the US to run such a big deficit. You say that’s a false narrative because the policies aren’t in place to allow Chinese consumers to save less, that there’s a lot of precautionary savings going on that won’t be reduced unless there’s some meaningful change in the structure of the provision of retirement and health insurance.

[00:36:37] Stephen

That touches on my favorite false narrative, which is, again, playing out real time right now in the US-China debate. I’ll get to this question but let me just give you a brief preamble. About three weeks ago, at the National People’s Congress in Beijing, Xi Jinping just came out and said what he had been hinting at for years, and that is that the United States, and he named us, is the adversary of China because it is engaged in what he called all-around encirclement, containment, and suppression of Chinese development.

This is an example of a classic false narrative. Yes, the US now has come clean in embracing a strategy of containment, but China’s inability to sustain economic development because of its failure to put in place the policies to support consumer-led growth, that’s its own problem. That has nothing to do with the United States. So this to me qualifies as a classic false narrative, one that’s grounded in the facts of America’s containment strategy, but then is projected cause and effect to drive an outcome in the Chinese economy that is very much an outgrowth of China’s own inabilities to support the model.

I participated last week in a big conference called the China Development Forum, which I’ve participated in basically every year since 2001. I spoke in several sessions, but the first or maybe the second panel I spoke on was the need to stimulate domestic demand or consumer demand. I pointed out, when I was addressing the conference last week, that of the 20 some odd China Development Forums I’ve participated in, I think this is the eighth time I have presented in a panel called stimulating domestic demand. So they know they have to do it, but they just can’t do it.

I pointed that out very clear to them, and there was some nervous laughter from the Chinese audience. The point I made is very simple. They generate a lot of spendable labor income by creating jobs in an embryonic but growing services sector, they raise real wages a lot by encouraging migration from the countryside to the cities where wage rates are more than double what they are in rural areas, but the labor income is not spent because of this deep-rooted sense of financial insecurity that is traceable to the lack of a well-developed, well-funded, social safety net in retirement and healthcare, and that’s particularly problematic for a rapidly aging Chinese society.

So the income comes in and it goes to provide for safety net needs for the future and does not drive the consumer-led dynamic. I have said this literally for 15 years in China and they all say, those are very important points, thank you.

[00:40:30] Kevin

It’s kind of ironic, isn’t it? I’m certainly not the first person to say this, that a communist country has a problem with providing a social safety net relative to the US, which is considered to have quite a weak social safety net. It’s interesting, your point about containment. We had Susan Shirk on the show. She was talking about her recent book Overreach.

She said that historically, China’s greatest fear has been containment by the West, yet its policy actions, particularly, she was pointing out the wolf warrior aggressive foreign policy stance, has created exactly the situation it fears the most. I don’t know if you agree with that perspective or not. Sounds like you’re of a similar mind.

[00:41:22] Stephen

Well, again, cause and effect is tricky here. Certainly, I take the point that containment is a big fear, especially given the historical context that Xi Jinping has stressed from the onset of his leadership grounding Chinese aspirations in this rejuvenation perspective, compensating for a century of humiliation that can be dated back first to the Opium Wars and the mid-19th century where Western and foreign countries, in particular, invaded and occupied parts of China and containment was a legacy of that. That’s only part of the story.

China has some problems of its own with the internal decay of the late Qing dynasty that has less to do with external containment and more to do with internal instability, but that’s an important detail at this point. But where has the containment come from this time? Is it one that the wolf-warriors are exacerbating or did it begin with the Obama pivot of a post-Middle East geopolitical strategy of the US that was designed to return to the Asian theater and address the threat, the concerns of a rising China?

The pivoted feature as its first major initiative, the Trans-Pacific Partnership, a very ambitious pan-regional trade accord that included all the major nations of Asia, with a notable and important exception of China. How much of a role did that play in eliciting the response of the wolf warriors? It goes on and on. The so-called AUKUS submarine deal between Australia, the UK, and the United States, aimed at creating a counterweight to China’s very powerful and now the largest naval force in the world.

So the wolf warriors have not made things any better. You’re entirely right about that. But the counter to that is that they are reacting and responding to containment pressures that are emanating from the United States. You talked to Chris Miller, the latest and very significant chapter comes from containment focused on advanced semiconductors which goes to the heart of China’s aspirations for indigenous innovation. So this is a two-way phenomenon that, again, fits, I think, my structure of dueling false narratives.

[00:44:58] Kevin

Yeah, I completely agree, and I certainly wouldn’t want to oversimplify her quite detailed and nuanced view of the relationship. But I thought that was, broadly speaking, an interesting point about in the end, their greatest fear is being realized. But you’re right. This is kind of a complex and interactive set of relationships.

Let’s move on to conflict resolution. Let’s move on to the last couple of chapters in your book where you talk about potential ways forward. You say that, look, any conflict resolution has to be goal-oriented. It has to start with rebuilding trust and ultimately move to codifying fair and sustainable enforceable rules. You make a couple of suggestions. One is a bilateral investment treaty between the two countries to ideally create a framework for presetting those rules.

You also talk about creating what you call a permanent secretariat, which would replace periodic meetings with a permanent standing group of Chinese and American policymakers, but also academics, researchers, etc., to manage the relationship. So let’s talk first about your notion of a bilateral investment treaty. What is a bilateral investment treaty? Potentially, I know there’s political reasons it might not be exercisable at the moment, but why do you think that’s a potential starting point for repairing the relationship?

[00:46:46] Stephen

Well, can I just back up a second to make the point that my book tries to be balanced in assessing the US-China conflict from a relationship perspective, contrary to what we read in this country that America has a China problem and contrary to what I heard last week in China that China has an America problem. I believe strongly that we both collectively have a relationship problem or have allowed this relationship to become destabilized and in desperate need of repair.

So the framework of resolution that I end the book on, and I didn’t want to end the book just on another warning of mounting conflict and the Cold War that could turn hot, but I wanted to really offer what I hope are some constructive suggestions on the off ramps here. The framework of resolution has to be a relationship framework that both countries jointly endorse rather than one imposing it on the other as US Congress seems inclined to want to do right now.

Trust is obviously the most important thing. There’s very little trust so that certainly needs to be dealt with right off the bat. You can’t just push a button and reestablish trust. Take little steps first like reopening closed consulates in both countries, relaxing visa requirements, restarting student foreign exchange programs, relaxing constraints on the operations of nongovernmental organizations, NGOs, and then big, much tougher issues like climate change, global health and cyber.

Assuming we can make a little bit of progress in the trust front, then we have to suck it up, I think, and go for these poor codified rules-based proposals like a bilateral investment treaty. A bilateral investment treaty, finally getting to the answer of your question, is a treaty that lowers investment barriers for multinationals who want to invest in both countries. It’s inherently pro-growth by allowing capital flow more freely across borders.

China has been an active supporter of bilateral investment treaties. It has over 100 of them in place right now more so than any country in the world. The US has also been very active in supporting a bilateral investment treaty. We have over 40 of them in place right now. We were 95% of the way done at the end of the Obama administration and then Trump immediately took that along with many other things off the table.

What a bilateral investment treaty will do is it not only reduces investment barriers, which is inherently pro-growth, but it allows you to codify a lot of the structural issues that have come between the two countries and include them as side clauses or side issues in the formal agreement. So this could cover things like forced technology transfer, subsidies, to state-owned enterprises, and labor practices, environmental practices, and the like. So it’s a broad, potentially powerful framework.

I would say, also, it is far preferable to addressing economic frictions between nations than something like the Phase One trade accord that was agreed upon by the Trump administration as the principal strategy to reduce America’s trade deficit. The Phase One trade accord completely failed, and as I said earlier, the US trade deficit has gotten larger rather than smaller. That is an example of a zero-sum approach to addressing an economic adversary rather than a pro-growth bilateral investment treaty.

The final leg of the stool, if you want to call it that, is the US-China secretariat, which is actually a proposal I am most excited about and one that I have not seen elsewhere. It recognizes that we really have a dysfunctional way of communicating with China, example being, we shoot a balloon down, our defense secretary tries to call his counterpart in Beijing and no one answers the phone. There’s no one sitting around to say, what’s going on here? We trade insults back and forth. With COVID, the same type of thing. We want to fixate on blaming a lab leak rather than getting to the heart of what caused the disease and what needs to be done to address it and prevent pandemics in the future.

So I argue for the establishment of an organization that is staffed largely, as you said, Kevin, by equal complements of Chinese and American diplomats, researchers, and other experts located in a neutral venue, and one that operates full time, 24/7, with a broad remit to cover all aspects of the relationship from economics and trade, to innovation, to state subsidies, to climate, health, cyber, even human rights, and the secretariat is empowered to produce collaborative policy white papers based on a mutually agreed upon common database, no alternative facts.

It has a convening function to bring experts into the process when serious, unexpected problems arise like COVID, and finally, it has a compliance function that monitors existing and new agreements with a dispute resolution mechanism should the inevitable frictions arise. Basically, it’s a proposal for a new architecture of engagement.

Right now, the engagement take place sporadically. Xi Jinping and Joe Biden met last November in Bali so there was a lot of staffing a few weeks before that meeting, but then the staff went back to their day jobs. I want continuity, permanence, and a far more robust framework of support to this critical relationship.

[00:54:42] Kevin

Yeah, I really liked that part of the book. I agree. I haven’t read about it before. It sort of feels like right now, we’re relying almost on an informal secretariat, people like you, people like Susan Shirk, presumably others who have contacts that they build up over their careers, and there’s this informal channel of dialogue, which is better than nothing.

But really, what you’re talking about is setting up an organization in a neutral site, I don’t know, if we’re talking… I suppose it doesn’t really matter where. It could be Switzerland, it could be somewhere that both parties agree on. It’s permanent, staffed by people, and it’s recognized by both countries as, hey, this is the place we go if we’ve got a conflict, but more than that, it’s producing regular, joint research on how to make the relationship better over time, recognizing that it’s an interdependency, as you say, that’s going to be there for our lifetimes and probably beyond.

When you talk about this idea, with people in the US, with people in China, what’s been the reception?

[00:56:04] Stephen

Well, it’s mixed, to be honest with you. I did talk about it in considerable detail with a number of Chinese officials and academics in my recent trip to China. There was some interest. They would tweak this or that and want to make a few suggestions. But in large part, they recognize that the lack of engagement and the framework that underpins that engagement is a hugely disconcerting and potentially risky phenomenon.

When I attempt to present it in the US, especially to our government, whether it’s the Congress or the White House, basically, there’s no interest. The response is something like, you’ve got to be kidding. We are not interested in bureaucracy. We know what the problem is and we want the Chinese to be more responsive to our perspective. So I’m really committed to raising this issue in the United States much more than has been the case thus far.

I definitely feel that we play just as an important role in China in leading to this dysfunctional relationship and it’s our obligation to really commit to a different approach to managing the relationship. If you don’t like the secretariat, give me a better idea. I’m happy to listen to it.

[00:57:55] Kevin

Well, you say in the book that the goal is to say, hey, this is the most important bilateral relationship in the world and it basically deserves an organization that is commensurate with that. Let’s elevate the relationship to the status it deserves, I think is what you say. So I appreciate you writing the book and trying to be constructive at the end and I hope you continue to use your contacts and influence to move it forward. Thanks for taking the time to join us today. We really appreciate it. Like I said, it’s really an honor to have a chance to speak with you and I wish you all the best, Stephen.

[00:58:37] Stephen

Thanks very much, Kevin. Thank you for giving me the opportunity to express my point of view and just underscore the bottom line that you just alluded to. This is a relationship that is now at a dangerous fork in the road, and we can’t afford to let it continue to deteriorate.

[00:59:03] Kevin

Well, thank you. It’s an important message and I’m glad we have a chance to get it out there. With that, I’m going to pass it back over to Niels.

[00:59:13] Niels

Thank you very much, Stephen and Kevin, for a really important conversation about a couple of topics that we are all faced with today, namely, one, the false narratives that we’re all exposed to through this news-driven world that we live in, and of course, also the most important geopolitical relationship that we see today, namely, between US and China.

I really enjoyed Stephen’s hard-hitting analysis of the current conflict between the US and China, and the dangers of these false narratives and the rhetoric that has led to a trade war, a tech war, and a new Cold War. He really does stress the importance of a more credible assessment of the risks both nations face, and I like his idea of a new roadmap to restore a mutual, beneficial relationship built on a higher level of trust and better communication between the two countries through say a US-China Secretariat, especially of course, if it’s located in my country of Switzerland.

That is it for today. Make sure you go and follow Stephen’s and Kevin’s work, as well as getting a copy of their books, because as you can tell from today’s conversation, some of these ideas and topics are not being discussed enough on mainstream media. From Kevin and me, thanks so much for listening. We look forward to being back with you on the next episode. In the meantime, as usual, take care of yourself and take care of each other.

[01:00:42] Ending

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