US-China Forum Keynote at Yale (China Economic Forum) – April 5, 2012

[INTRO]

Thank you very much for that kind introduction. I know that you have a big

conference coming up and I had to be out of town, so I was offered the opportunity to

talk to you at the pre-conference keynote (it’s probably a new term, but I’m delighted to

do this). I have a great interest in China because for a good part of my professional life I

have been involved in Asia. So a lot of what I have to say about China is really with the

perspective of my experience in the broader Asian arena. I first went to Asia as a soldier

in 1972 during the Vietnam War and I had a very unusual job in Thailand where I was on

the Thai-Burma border. I was only 21 and it was my first view of Asia and a very

interesting view because even though there was a war going on in Vietnam and a

communist insurrection in Thailand, you could also see this enormous vitality in the

region. It didn’t take very much to understand that once the war was over, there was

going to be an enormous burst of energy and dynamism in Thailand and the surrounding

countries and I never really forgot that.

I returned to Asia about 22 years later when I was an investment banker and

transferred to Japan to oversee Lehman Bros. in the Far East. Part of that time I lived in

Tokyo, part of the time in Hong Kong. China was still pretty much closed. Deng Xiaoping

was in power and China was opening, but in fact the opening had not really caught the

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rest of the world. But being in Hong Kong, I got a lot of opinions about what was

happening in China and I was deeply interested in finding a way to get involved. And

that happened ten years after that when I entered the Clinton Administration as

Undersecretary of Commerce and became deeply involved in the Middle Kingdom

because we were working with Beijing to prepare its entry into the World Trade

Organization. I met a large number of the Chinese leaders and I think many of my

formative views about China were formed then. It was a very exciting time because

these were the first steps of China’s real integration into the world economy.

Summary of Talk

So what I want to do tonight really is to talk about US-China relations. I’m going

to go back into history because I think it’s very important to have a historical

perspective on an issue like this, and I’m going to talk about different phases of US-

China relationships. I’m going to do it very, very fast, and very casually. Then I want to

talk about the present and explain why I think that the past is simple compared to

where we are today and where we’re headed, and why the challenges of the next

decade make past challenges look easy. I’d like then to talk about what I think are some

of the key requirements for policy and I want to conclude with a word about the role of

student exchanges because I know that all of you are a part of that. And then I’ll take

questions.

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Historical Background – Worrying About Japan

A good place to start talking about US-China relations is really at the end of the

19th century. Most of you come from China, so it may not be obvious to you, but the US

is a very young country. When people talk about its foreign relations, they don’t have to

go back very far, because you go back too far, there were no foreign relations at all. It’s

not like China where there have been thousands of years of interacting with other

countries. And for the United States, its official involvement in Asia didn’t really occur

until the Spanish-American War and the US acquisition of the Philippines. Basically the

US took over the Philippines and for the first time it had a physical stake in Asia. Before

that, there were Americans going to China, but they were really on their own. There

were some traders, there were some missionaries, but there was no American

government support; and there was no American government policy other than to try to

help some of the American individuals. But in 1898, when America invaded and

captured the Philippines, suddenly it began to notice everything that was going on in

Asia. Between then and 1914 and the onset of the First World War, the US got very

involved. But it got involved in a couple of ways that were fairly simple. One is it was

very concerned about Japan and very concerned about Japanese incursion into other

parts of Asia. Secondly, it was very concerned about other European countries and

Japan having a monopoly on the China market. We had what we called an “open door”

policy and basically we just wanted to make sure we had access to the Chinese market

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just like everyone else did. And third, a lot of Chinese workers started to come to the US

because at the end of the 19th century, early 20th century, we were undergoing our own

major industrial revolution. The US was growing very fast and we just didn’t have

enough workers and were importing immigrants from both Europe and Asia. But the

key point was that we began to become very discriminatory and we had a very harsh

treatment of immigrants from Japan and China. Not far into the early 20th century, in

fact, we basically barred Asian immigration altogether. And I mention this because

while a lot of people don’t remember this period, it is all part of the fabric of American

relations with China during this period.

Between World War I and World War II, America was even more concerned with

Japanese intentions in Asia. It is very important to realize that a lot of American concern

about China has always been less about China than about other countries having

designs on China. And that inter-war period was very much, when you look at the US

and Asia, it was the United States trying to figure out how to stop Japanese expansion.

It was a lot of commercial activity with China, but for the most part this had nothing to

do with the American government – these were American investment banks and

American entrepreneurs who saw China as a big market, wanted to get in on the

building of railroads and other kinds of projects.

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Backing Wrong Horse in Chiang Kai-shek

During the Second World War, we considered China an ally. Now I say China, but

there were two parties obviously – the Nationalists and the Communists. We had allied

ourselves with the Nationalists. And President Roosevelt actually had a vision that after

the Second World War, China would replace Japan as one of the major powers. We

were focused on Chiang Kai-shek and we poured massive amounts of resources into

Chiang Kai-shek’s backing and into support for him with the idea that after the war, the

Chinese would become one of the four major powers in the world; it’d be the US,

Russia, Europe and China. But obviously in 1949 when Mao Tse Tung won the

revolution, Americans realized that they had placed the wrong bet and in fact I say they

realized it – but they kept supporting Chiang Kai-shek and so we entered this period of

Cold War in which for 30 years or so we considered Mao’s China as an enemy. All of

American policy was really devoted to containing China as it was containing Russia.

China became a big domestic issue in the US because with Mao having won the

revolution. I’m mentioning this because you would have no way to know, but it was a

huge political issue for both major American political parties, as to “who lost China.”

And there was still a lot of support for Chiang Kai-Shek, even though he had been driven

out, even though in reality there was no chance of his coming back. The American

political system went way to one side and anyone who even made conciliatory noises

about relations with Mao was branded as a political heretic.

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Nixon to China – Using China as Leverage Against USSR

This all changed in the 1970s with President Nixon. But it didn’t change because

Nixon had some warm spot for China. It changed because China and the Soviet Union

had split and the US realized that it could use the so-called “China card” to force the

Soviets to do things that we wanted it to do. So Nixon made the trip to China and he

was followed by President Carter who eventually normalized relations with China, but

the big impetus was to use the specter of China as a friend and ally to force the Russians

into a détente and disarmament. By the 1980s, we had normalized relations with

Beijing. In fact, in the 1980s, the US was even selling military arms to China. The US was

helping China on its borders to monitor Soviet movements. The dial had swung way

over. And everything was going quite well.

The Taiwan Issue

You get to the 1990s, but Taiwan was a big thorn in the side of the US-China

relations. China wanted the US not to continue to sell arms to Taiwan; the US claimed it

was defensive arms, but because of the political issue in the US, no administration could

have totally abandoned Taiwan, or give the appearance of abandoning it. Meanwhile,

the Chinese were apoplectic for all the reasons you know – that we were interfering in

their domestic issues. But in the 1990s, in addition to Taiwan, two other issues started

to arise. One was trade. Before that we had no trade with China to speak of. And even

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in the 1990s, that’s when I was in the Clinton administration, I have to say that nobody

anticipated what trade would become. It was relatively important, but nothing like

trade with other Asian countries, certainly nothing like trade with Japan. Nothing like

trade with Mexico, Canada or Europe. But we had a lot of interaction because we

wanted China to get into the World Trade Organization. We had our reasons – we

wanted China to adhere to what we considered to be international rules and China to its

great credit wanted to move in that direction, so those were two countries very much

on the same wavelength.

Human Rights, Followed By Trade

In the 1990s, another issue arose – the issue of human rights – especially in the

wake of the Tiananmen protests. And then in this decade, the agenda started to grow.

Not only trade, when I say trade in the sense of specific trade disputes, but now

currency issues started to evolve and China’s growing political footprint began to create

an agenda that was much larger than anything we had seen before.

So I just want to sort of sum up at this point that for most of the time, US-China

relations consisted of a limited number of issues. And for most of the time, US

motivations to get close to China were as much about Japan or the USSR as it was about

China itself. Also, for all of the time the US was rising to power or was a superpower.

China had a weak hand to play. And for most of the time the US and China bilateral

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relationship was the key axis. China was never part of the global political scene. It

didn’t really participate in multilateral diplomacy in any major war.

Today

So if I look at things today, I see that US and China have a lot in common. I think

this is a source of optimism. On the larger sense, we are both searching for a formula,

an economic and political formula, for growth and for equity. We may be in different

stages of capitalism, but the essential issue of the balance between public and private

interests is a question that both societies are facing. We have a very similar interest in

making a transition in the energy arena with all that entails including the environmental

protection. We both have aging societies with their enormous requirements for a social

safety net. And there are a lot of other things, but these are two countries which,

although they have come from very different directions and although they are in very

different stages of development, there’s a great commonality there.

On the other side, it is very likely that the patterns that each of these countries is

in is not going to be viable in the world that is evolving. The United States all along, not

only with China, but with the rest of the world, has a kind of missionary personality. We

are not only convinced that our way of governing and our kind of economy is superior,

but we feel compelled for reasons that are very hard to define, to take that message

and to proselytize everywhere we possibly can. In the China case, we did that from the

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beginning. The missionaries and the traders, even before the US had the Philippines,

were pushing the American way. And this is simply not going to be viable going

forward. But China also has its complexes, too. Thousands of years of Middle Kingdom

complex in which China feels totally superior to other countries. I don’t think that’s

going to fly in the New World. It’s not just question of dealing with the US or dealing

with Europe, but we’re in a world where a lot of other countries are rising too. India’s

not going to buy China’s view of its own supremacy; Brazil’s not going to buy it; nor will

many others. Also this Middle Kingdom complex in my view carries with it a de facto

sense that either China is in control or China can be a free rider in the system. That is,

other people since they’re not as superior, other countries, they carry the burdens.

That’s not going to fly as well.

So we’ve got two countries here with common interests, but with personalities

that are going to have to change if we’re going to see the kind of progress that these

common needs really require.

I think also that if you look at the last 30 years, the issues that the US and China

faced are relatively easy compared to the ones that are arising now. Today the agenda is

much broader, much more complex. I’m just going to give you a couple of examples.

In the past it’s been very specific trade disputes. China’s subsidizing solar energy.

The US putting countervailing duties on China products. But now, the real issue is the

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shape of the trading system itself. It’s a much bigger question of what are the rules of

international trade. How are you going to encompass countries industrial policies in a

world where commerce is becoming so important and these industrial policies are so

different?

In the past we argued over where currency was vis-à-vis the other. That’s a

dispute now – the yuan vs. the dollar, with the US putting a lot of pressure on China to

revalue. But this is nothing compared to the debate which is emerging which is the

whole shape of the monetary system. And we have the governor of the China Central

Bank talking about new kinds of arrangements for central currencies. That’s a much

bigger issue than anything we have handled before.

We are also going to be dealing with one another’s economies in terms of the

basic model of growth. The US will be trying to put a lot of pressure on China, to

accelerate the model in which growth in China derives very much from domestic

consumption as opposed to exports. The Europeans are too. Now the Chinese have

said that this is want they want to do, but the actual execution of it in a short period of

time is going to be very difficult. So there are issues here that are far deeper and far

bigger than the very specific things that we have argued about before.

Another new fault line is global competition for resources. This is clearly going to

be one of those issues that shapes this century. And just to take one very current

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example – energy. It is very possible that over the next ten or twenty years, the US will

be developing much more of its energy resources in North America and moving away

from its dependence on the Middle East. At the very same time it’s possible that China

will look at the Middle East as absolutely essential to its future. So in terms of shifting

geopolitics, we are going to see resources not just as resource issues, but also as ways

that are going to change the way global politics works.

We have yet to really face military rivalries. And while there is no comparison

today between the military capabilities of the US and China, there is no question either

that China’s military budgets which officially are increasing by 15% or 20% a year and

unofficially much more than that, this is going to change the shape of security issues

going forward.

Non-proliferation, climate change, need for rules for cyberspace; there is just a

very long large range of very difficult issues that are going to bring the US and China

together in a way that has not happened before. So all of that history I talked about will

look simple compared to the era that we’re entering.

And to make it even more complicated, in the past it has always been the United

States that has put forward the new ideas about how the world should be organized.

Those days are over. Whether China wants to or not because of its broad geopolitical

footprint which is getting bigger and bigger, it may well be advancing its own ideas. And

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so we have a whole different situation here where since the Second World War, what

the US said basically most countries fell in line with. That’s not going to be the case

now.

Also I think there’s a psychological element. China clearly a rising power; the US

at least relatively declining. The psychology of this is very precarious because it’s

possible that it breeds either too much confidence in China or too much defensiveness

in the US, and it can very much undermine real rational policy-making. And finally, each

of us has a political system that is I would say to put it charitably, handicapped. The US

is bordering on disfunctionality in terms of being able to make any major decisions. But

China too is in a very difficult spot because it’s not just the current transition, but I think

it is a group of people, a relatively narrow group of people, that is wrestling with a much

more complex world and in a system that is very tightly controlled and it’s not at all

clear that that system can continue to deliver what I think have been very effective

policies for the Chinese people, let alone for the rest of the world as China grows into

that leadership position.

Looking Ahead

So here are a few of the things that I think are very important in terms of policy

imperatives:

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First, we have to have realistic expectations. Speaking just from the US

perspective, I believe China is never going to be an ally of the US, and it shouldn’t be an

enemy. We have to have a ceiling and a floor, and Beijing is going to belong in a

category which is not going to be the same category as Japan or France and certainly not

the same category as China and Russia were in the Cold War. So I think that there’s

going to be a lot of tension, and there should be also a lot of cooperation. We must be

adept at balancing that.

Second, by far the most important thing the US can do, priority one, two, three –

is to revitalize its domestic economy. As long as the energy is being sapped out of the

United States, as long as the middle class continues to decline, as long as we are afraid

of the budget deficits that are coming, we don’t have the resources to fulfill our

potential, our international policies will be really deficient. And so the biggest foreign

policy and issue we face is not with China, and it’s not with any other country, but it’s

with our own capabilities at home. And I believe we have it within our power, but you

wouldn’t know it if you’ve watched the policy of recent administrations and congresses.

In the China case, I believe it has to move much faster with the economic reforms

that it talks about. The plans are really good and no one could fault the Chinese for not

understanding exactly what should be done. But we’ve seen a lot of these plans at the

very same time that the reforms have been slowing and in some cases being unwound.

I was just in China for a couple of weeks with my students and it was very clear from

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some of the things that we heard that the pace of reform is moving in the wrong

direction. I don’t pretend this is easy any more than it’s easy for the US to revitalize

itself, but we have a situation where both countries have got to make far-reaching

internal reforms that are politically very, very difficult to do.

I also think that it was not so long ago that people talked about a G2, a group of

two. The US and China were basically so important, so the argument went, that they

would be the inner core of everything that happens. I mistakenly suggested that once in

something that I wrote about five years ago. Well, that’s not going to be the case. In

fact, I would say that again from a US perspective, the bilateral relations with China is

less important than the multilateral structure. If the US wants to have influence on

China, it will not be directly but by gaining a global consensus which China joins. Having

as part of that consensus not just Europe and Japan, but big emerging markets – that’s

what will get China to listen. And this is a big change for the US, which is used to

throwing its weight around and acting unilaterally or bilaterally.

We’ve got to guard against what I would call flash points. These are things that

happen with very little warning and can throw everything off and create a highly

dangerous situation. It’s not out of the question that there is a major domestic

upheaval in China. I can’t tell you how it’s going to happen; I don’t think anybody can.

But it’s certainly possible in this age of communication that an incident, a

demonstration, some particular act in some part of China, spreads discontent very, very

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fast, much faster than the government would anticipate, and that it would invite a very

violent government reaction. It’s not out of the question that a cyber-attack let’s just

say on the New York Stock Exchange, which just knocks the Exchange out, comes from

somewhere in China and nobody knows exactly from where - was it the government,

was it a private group, did the government put the private group up to it, was it the

PLA? Nobody knows, but this kind of incident could paralyze the American economy in

minutes, and could create a major firestorm. It’s not out of the question that in the

naval competition of Asia, there is a confrontation that is accidental. The main point

here is that the two countries have to do something which I don’t believe that they’re

doing. They’ve got to really come to grips with all of the things that might happen and

have a system of communication to prevent a miscalculation. In the cold war, we had a

red phone with the Soviets that allowed the President to just pick up the phone – there

was no dialing or anything and he got the Premier in Russia. We were afraid that some

rogue bomber, some rogue general would launch something and we wouldn’t know

what it was and we wouldn’t have any time other than to retaliate right away. And all

I’m suggesting is I think that both the US and China are going to act rationally until or

unless something happens that nobody calculated and it invites a very quick irrational

response. And to me that is the biggest danger that we face.

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Student Exchanges - Invaluable

In this situation, a very complex situation, I think one really piece of great news is

that student exchanges have really mushroomed and that the growth of Chinese

students entering the US is really phenomenal – most people don’t realize just how fast

it has increased and also that Chinese students are studying the things that are so

important – math, engineering, science, technology – not only to China, but to the

United States as well. I only have a couple of observations to make. I don’t quite know

how to evaluate this; I certainly don’t think that just because you study in the US, that

you form one set of views. I think it’s also possible that you come to the US and leave

feeling much more antagonistic to the US than when you came. But the most important

thing is that you’re here and that you see the system, and that you make contacts, and

that you have a sense of what American thinking is. I think that’s great for China; I think

that’s great for us. I do think that the US is falling short in two areas. One is it has to

figure out a way to send more students to China. Speak of a trade imbalance – I mean

this is really atrocious. And we should be sending as many students as the Chinese are –

I think that would be to China’s benefit as well as to the US. The other is, and this may

not be so fair, but I think an awful lot of students from outside the US would like to stay

here, would like to work here, stay here for a period of time – many more than say they

would. And since we in the US are in need of great minds and experience and skills,

which all of you bring, if I were in the government and I had a voice – if I were president

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or were advising a president, the first day I would say, “Everybody gets a visa who gets a

graduate degree here.” And I think we would create the biggest reverse brain drain that

the world has ever seen. And there will be a lot of screaming, but looked at very

selfishly from the US, this would be one of the smartest things that we could possibly

do.

Optimistic About the Future

So let me conclude by saying that I’m cautiously optimistic that the US and China

are going to work things out. I have two reasons. One is I believe everybody recognizes

the stakes. I don’t think there is any person in any area of responsibility that doesn’t

understand that the United States and China are at the core of what the world is going

to be and that if there is a miscalculation, it’s not just our two countries that will suffer.

So that may sound mundane, but it’s not a small thing. History shows that

miscalculation, inability to really understand what’s valuable and what isn’t, inability to

understand how big the stakes are has been very characteristic of leaders. And the

other thing is that since President Nixon met Mao and since Nixon dealt with Deng, both

countries have handled themselves pretty well. I say pretty well, but I should say “really

well.” We’ve had a lot of disputes; we’ve had a lot of chances for big

misunderstandings. For example, the events in Tiananmen could have thrown the

whole thing out of whack and it came very close. But I think that both governments

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have done a really good job in keeping things within bounds and on track and I think

that the future governments will certainly try to do the same.

Everybody in this room has both a stake and I think a responsibility in their own

ways of making sure that our respective societies give those governments a hand.

Thanks very much, and I look forward to your questions.

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