Is COVID-19 complicating US-China relations? Zhiguo He and Chang-Tai Hsieh offer insight into how the current crisis has impacted existing dynamics between the world’s two largest economies.
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TESS VIGELAND: There’s no doubt the coronavirus outbreak has devastated the global economy.
EDUARDO PORTER: Adding fuel to the fire of a growing conflict between the world’s two largest economies, China and the United States. So what is the future of US-China relations?
TESS VIGELAND: This is Pandemic Economics, a podcast about the global impact of COVID-19 from Stitcher and the Becker Friedman Institute for Economics. I’m Tess Vigeland.
EDUARDO PORTER: And I’m Eduardo Porter. We’ve been invited to have conversations with University of Chicago economists. In this episode, I talk with Chang-Tai Hsieh and Zhiguo He of the Booth School of Business. Zhiguo is also the Director of the Becker Friedman Institute in China.
TESS VIGELAND: You know, I think that most people, at least in this country, their context for what’s happening with the United States and China is really just based right now on a US president calling it the Wuhan virus, the China plague. And we’ve been hearing mudslinging for months between these two countries. And it’s just really the latest, isn’t it?
EDUARDO PORTER: Yeah, that’s right. I mean, even though it might seem particularly intense right now, this conflict, in fact, has been brewing for a very long time before even the Trump administration. And it’s interesting to see where this will end up.
So I would love to hear your thoughts, your interpretation of what’s going on, what’s driving this specific instance of kind of bilateral bickering here. And I don’t know, if Chang-Tai, you want to go first?
CHANG-TAI HSIEH: That’s a complicated question. So I would say it’s clear that the US-China relationship is on the rocks. And I would even put it stronger than the way that you phrased it. I really do think that we are in a death spiral. I don’t really think that COVID is really that important in terms of this bigger question of why we did this debt spiral. I think the issues are deeper and they’re harder to solve.
So another way to think about it is, is the China-US relationship going to get back on track if next month, somebody announces that they discover a vaccine, and the coronavirus is wiped off the face of the earth in the next few months. And I think the answer is, no. That the problems are going to be with us, and unless something else big happens, we’re not going to get out of the death spiral.
EDUARDO PORTER: Yeah, it’s a symptom of a deeper problem rather than a cause of this deeper problem. And maybe in the same way one could argue that the Trump administration’s hostility towards China isn’t just a Trump thing, but there’s something deeper in the relationship between China and the United States. So Chang-Tai, is this a China versus the West issue, or is this actually a narrower bilateral China-US conflict that we’re seeing unfold?
CHANG-TAI HSIEH: The way I think about it is that the whole underlying premise ever since Nixon’s visit to China or before that, Kissinger’s visit to China– that the whole premise in the US, and not just us, but also, the rest of the world, for why we engage with China is that by engaging with China, eventually, what’s going to happen is that the Chinese are going to converge somewhat with the political and the economic systems in the West.
So here’s one really interesting thing to note about a lot of US presidents that when they campaign for office, almost invariably, they campaigned in office as being anti-China. This was true about Ronald Reagan. This was not true of George Bush, but this was also true of Bill Clinton. And then once they come into office, they change. They change and then the argument that they always use is that, well, yeah, there are things that we don’t like, but the only way in which we can get China to change in the way that we’re happy with is that we engage in them. This was essentially Clinton’s rationale for signing off on China’s succession to the WTO.
So here’s the thing that I don’t know the answer to. That whether this was maybe the intention of leaders in China all along, and then due to political forces, there was a change in strategy. Or whether, really, that there was never any intention of doing this, but they went along with this as long as they were getting something else out of the exchange. That it was important for their firms to be engaged with the world, but then it might be the case– so here’s a different interpretation that now that they have gotten what they want from the world, they no longer have to pretend to what they don’t want to do in the first place.
And you really see the beginning of this starting in 2008 and 2009 with the world financial crisis. This is perhaps where COVID comes in. That look, you’ve told us all along that open and free financial markets is the best thing. Well, guess what, guys– we didn’t do it. You had the financial crisis, we did not. You’ve told us all along that having a democracy was the best thing– well, let me look at what are the consequences of your free and open democratic system. Look at what’s happened in the US, look at what’s happened in Europe in the last 20 years.
Do we want those kind of outcomes? No. You’ve told us that having an open system is going to be much better. Look at how we handled COVID versus how you handled COVID. So it’s this accumulation of things.
EDUARDO PORTER: Yeah. I’d love to hear Zhiguo’s take on this. And also, one of the big questions that I have is, what does this mean for the rest of us? In particular, what does this mean for the world economy? Because China and the US have been you know partners for the last 40 years. They’re the engines of globalization that has pretty much driven the world economy for the last several decades. Are we going into an era of disengagement?
ZHIGUO HE: Yeah, I came to talk about it. All the reports that I’ve seen, you feel like, yeah, we got to divorce immediately tomorrow. From the business reports, et cetera, I don’t think so. I think that just looking at the entire history, et cetera, that the US, because of its strength, because of its military forces, all these things, it behaves as a worldwide policeman.
This is the Chinese translation for that, which means that it’s after the Second World War, the entire order is based on the US way of doing things, which is great– helping Japan, helping Europe, helping China, to be honest– after ’78, the US is supporting PRC instead of Taiwan. All these things just left an impression to me that it is very, very true– including UK, including all these strong allies– the way that they are thinking about it politically, economically, all these cultural issues that are slowly, slowly, I have to admit to myself also, gets conformed.
EDUARDO PORTER: So listen, Chang-Tai, if I remember correctly, you were suggesting that China was trying to rethink the strategy that it’s been following for the last 30 years or so of its economic strategy of relying on Western markets for its economic development. And that it was maybe pivoting away from that towards a more, I don’t know, homegrown kind of model. What do you think this forebodes for globalization and the integration between these two economies?
CHANG-TAI HSIEH: I mean, the fact is that in terms of growth, China depends much less on the rest of the world now than what it has before. So one simple way to see that is that if you look at the Chinese manufacturing sector, the share of what it sends to the rest of the world has fallen by quite a bit in the last 10 or so years. What has also happened is that in terms of the supply side, in terms of its supply chain, that more and more of the supply chain is in China.
I’ve been telling people for a while that the canary in the coal mine is this company called Taiwan Semiconductor. And they basically make specialized computer chips. It’s really the only company with that capability that what it does is the design of chips and it also manufactures the chips. So the best of the data that I’ve been able to put together is that up until last year, about 10% of its sales were to Apple and another 10% of its sales were to Huawei. So it’s a company that’s right on the fault line of US-China relations.
And it’s a critical company, because these specialized chips is essentially the brain of every electronic device. And I know that for a long time, the Trump administration has been trying to put pressure on the Taiwanese government to shut down TSMC sales to China, and it’s pushed back pretty hard on the Trump administration saying, no, we’re not going to do that. But Taiwan Semiconductor, TSMC, is being forced to choose between whether it wants to supply the Chinese market– they may have already made a decision, but in some sense, it’s almost like they’re being faced with a Sophie’s choice.
EDUARDO PORTER: Well, so that’s what I’m thinking, guys. And what happens if the world is forced to make a choice into one orbit or another a little bit like during the Cold War, except that here, this would imply like the reorganization of supply chains and presumably, a really kind of intense reorganization of world commerce to segregate the world in this. Is that a plausible future or are we too interconnected now even to think about that, no matter how hostile things get?
ZHIGUO HE: The supply chain that we developed is easily replaceable. And when I say easily, I mean, like, maybe two years, three years. So I don’t think that China is that confident in fighting against the US to that level. If you want to think about OK, push to the Soviet Union versus the Cold War, I just don’t think that’s a good analogy, just because China will never say OK, either chooses this type of a product or that product.
What China is now trying to do is to basically try to find the replacement of say, that chip, and Huawei is trying very hard to do it. And then hopefully, that we can do so-called self-sustaining internal growth. So I don’t feel like China is able to use this trade relationship to negotiate all these things. I’m very, very compassionate about China– what they’re going to do. But I also feel like they are facing the biggest obstacle in their future growth.
EDUARDO PORTER: After the break, we’re going to talk to Chang-Tai Hsieh, who has some doubts about whether China can really afford to disengage from the United States.
TESS VIGELAND: All right, stay with us for more Pandemic Economics in just a minute.
EDUARDO PORTER: So Chang-Tai, China is now the second largest economy in the world, but can it afford to disengage from the United States?
CHANG-TAI HSIEH: I think that China depends on the world more than the US depends on the world. I mean, it is exactly what the world went through 100 years ago. The late 19th century was a period where the world was even more integrated than it is now. And he was under, I would say, the institutional infrastructure of the British empire. And then what happened was that it’s almost an eerily similar analogy.
There is the competition between global powers– in that case, it was between the UK and Germany that eventually through a series of really bad decisions, led to the war, World War I. And then it was compounded by the political settlement after World War I that led to the Great Depression. So then all the integration of the world basically came to an end. Most economies went back into oligarchy.
And if you think about what it took to rebuild it, it took another war, and the US took up the mantle of basically rebuilding the global institutions. It was a way to try to recreate the world in its image. The US at the time was really the only superpower in the world. And it decided to do this. But that’s what it took. It does look like me that it’s like the eve of World War I.
ZHIGUO HE: I feel like the difference is I don’t think there are so many friends of China at this point.
EDUARDO PORTER: The argument that this conflict has to do with the economic consequences of globalization in the United States in particular, but perhaps also in China– that’s not really the source of the conflict. It’s not the economic tensions that are driving this. Is that what you guys are telling me, or am I overreading?
CHANG-TAI HSIEH: I absolutely agree with that point. It’s really shadowboxing over what the real conflict is– this intense ideological battle.
ZHIGUO HE: Let me just add one thing. The ideological battle becomes a sensible battle, at least from the Chinese side, because it little bit balances the economic power. And we feel that every single time it could be the thing. And I imagine the same thing here. So economic growth at the China side, I do think you can say that’s kind of a propelling part of it. Now whether the US’s side of antagony against China, I feel it’s more or less saying that there’s some deeper problem, and then you showed up as a symptom.
EDUARDO PORTER: You’re saying that there’s a fear of the very robust growth that China has experienced? That makes it more threatening? Am I hearing you right?
ZHIGUO HE: Yeah, that’s on the US side.
EDUARDO PORTER: What’s the end game? What do you guys see as a new equilibrium? And what are the costs of this when we’re out on the other end of whatever it is that we’re in? What does that place look like and what does the world economy look like in that?
ZHIGUO HE: In five years, probably won’t change that much. I feel like more unpredictable is the US side. We already talked about what would happen– that people kind of like have to pick a side, even though I think that China has a lot of, a lot of things to do to become a side. But I can see it. I can see it.
Many of the people who live in the United States might go back just because of the things that will change. I think cutting the number of human capital, I think that’s a pretty big impact. And in five years, that will change. And if the next president follows the same role, whatever we discussed will be the end game, and maybe there will be prolonged Cold War.
EDUARDO PORTER: So Chang-Tai, from your previous comments, I might expect you to tell me we’re heading for a hot war, but is it that dire? Couldn’t China and the US patch things up? I mean, after all, there’s a lot riding on this relationship.
CHANG-TAI HSIEH: I would say that there are two things. The first thing, I think, on the US side, is just more respect for other systems. I know it’s hard for people in the US, because in a sense, we grew up with almost this ideology or we’re taught an ideology that there is a certain system, free markets, the Bill of Rights, democracy. And that is in some sense, the best system. Our founding fathers have created the best system. And who wouldn’t want to have the best system?
And the only reason for why other people don’t have our best system is that either they’re ignorant or that the elites of the countries are self-interested. That’s simplifying it a bit, but I think that’s really the way that people in the US think. That if only we were to teach them to listen to the voice of America, to read The New York Times, they would just see the light and say, of course, this is what we should aspire to.
And I think that it’s not– you know, the US is just 250 years old. And I think that it’s an evolving system. There’s no guarantee in my mind that this is the best system and there isn’t an alternative institutional arrangement that could be better. So I think just more humbleness, more humility on that, and just respecting that A, other systems can be better. And even if they’re not better, that other people have the right to make their own choices. That’s the first part of it.
And I guess on China’s part, I would say just so understand that one doesn’t have to have a neuralgic response to things that you perceive as a third rail. So I guess also the way I would put it is that more respect for other people and for other people’s voices and the views of other people, even when they touch upon your third rail. And I think that just beginning that process is a crucial part of where you begin– just some sense of proportion and some sense of respect for the fact that they have their views about what goes on in your country in the same way that you have your views about what goes on in their country.
It does take leaders in order to begin to demonstrate that. And it’s not just political leaders, but civic leaders. It takes a social movement to learn to talk respectfully about other people. It’s about understanding the other side and learning to respect the other side. So I’m hopeful as well at the same time, but also, realistic.
EDUARDO PORTER: How do you see the stakes, Chang-Tai? How costly do you think this rift could prove to be?
CHANG-TAI HSIEH: Even if it just ends up being a Cold War, I do think the costs for both countries are going to be substantial. I don’t have a way to try to quantify the costs, but it’s like asking what’s the cost if you were to get divorced. I know it’s large, but my guess is also that the cost to China is going to be larger than the cost to the US. But there’s no question that both countries and also, the world is going to lose as a consequence of that.
TESS VIGELAND: As the world contemplates what’s next in US-China relations, there is a global competition to develop a vaccine. Next time, we’ll explore the complex questions of economic fairness in vaccine development and distribution. Nobel laureate, Richard Thaler, says the world needs to have this discussion soon.
RICHARD THALER: We could make the argument that the people who should get this drug first or the vaccine first are healthcare workers and citizens of the countries where the virus is hitting the hardest at that moment. And if we go by willingness to pay, it will never reach the hundreds of millions of people that are living in very poor countries.
TESS VIGELAND: Pandemic Economics is produced by the University of Chicago’s Becker Friedman institute for Economics. Our producers are Devin Robins and Dana Bialek. Our executive producer is Ellen Horne. Production and original music by Story Mechanics. Pandemic Economics is part of the University of Chicago podcast network. I’m Tess Vigeland.
EDUARDO PORTER: And I’m Eduardo Porter. Thanks for listening.