The intensifying trade conflict between the U.S. has all but eliminated the chance of a trade deal soon, giving pause to what that could do to the global economy. Kim Parlee speaks with an expert on China, professor Ann Lee at New York University, author of “What the U.S. Can Learn from China”.
- The intensifying conflict between the United States and China has eliminated the chance of a trade deal soon. And that is giving investors pause on what it means for global economic outlooks. And today, Chinese state media reports suggested the country is considering limiting exports of rare earths to the United States. Rare earth is the chemical elements that are widely used in everything from mobile phones to military hardware. And China makes most of it in the world.
Earlier today, I spoke with an expert on China, Professor Ann Lee at New York University. She is the author of What the US Can Learn from China. And it's an award-winning international bestseller. And also she wrote Will China's Economy Collapse? I start off the conversation by asking Professor Lee what she makes of the deteriorating trade relations between the United States and China.
- I am not surprised at all, mostly because the US never intended to have a trade deal with the Chinese. There have been people in the Washington establishment that have been itching for a fight with China for decades. I know that personally when I was speaking to think tanks back in as early as 2005, there were people who were coming up with policies that were very anti-China. And these folks have been waiting for the right moment to spring this. And it required them to gather more consensus around folks to also share the same position. And so no, I'm not surprised at all.
- Let me ask you. You recently published an op-ed in Project Syndicate I think it was a few months ago. And the title of the op-ed was "The Road to War with China." I assume you're talking about a trade war. How far are we down that road then?
- Well, yes, it is a trade war now. I basically was warning that it could actually develop into something more serious. It actually could turn into a hot war if people on both sides are not careful. And with this very elevated tension, things can get miscalculated. Mistakes can happen. And so things can become very dangerous very quickly.
- How do you balance-- you talk about this-- the demonization of, in your opinion, what's going on with China versus, some may say, some legitimate trade concerns? Of course, legitimacy is in the eye of the beholder. I understand that. But how do you balance trying to get things that are important, let's say, to the United States done without demonizing China at the same time?
- Well, it's certainly legitimate to raise certain issues. But to isolate China and make it sound like they're the only violator of certain things is inflating the accuracy of what's going on. And so I'm not the only one who says that things have been inflated. Professor Jeffrey Sachs also put out an op-ed I think over the weekend on CNN pretty much saying the same thing that China was basically acting like a developing nation like many other nations following the rules along with the WTO.
And some of the things that happened happen with all developing nations. And so it was nothing out of the ordinary. And to-- for the Trump administration to make the case that it is completely not a legitimate actor and that China was behaving out of the ordinary as like an enemy, that actually is a big exaggeration and, therefore, would fall into the demonization camp.
- What-- is a quick fix possible on this? Or are we past that point?
- I think we are past that point simply because so much trust has been eroded between the two sides. The Chinese before was very willing to work with the Trump administration. But after the Trump administration backed away from trade deals multiple times when they came close to having a deal, I think the Chinese now believe that the US is not sincere in wanting to negotiate in full faith. And therefore, it would be very difficult to try to patch things up quickly here.
- Let me ask you then, obviously, you have a great deal of financial market experience. You look at this just not from the Chinese perspective or from the market perspective. How do you see this conflict playing out then?
- I see it getting much worse. I see it deteriorating. Because like I said in my op-ed, there are folks in Washington that have interest in containing China and escalating the tensions. They benefit from it, whereas many other American businesses and consumers do not benefit from it. And unfortunately, the ones who want to have a fight with China have the president's ear, have more political capital and leverage in Washington right now.
And so this can certainly last years because this is not just a Trump phenomenon. This, like I said, was developed by Washington insiders for many, many years. And so my big fear is that we start with a trade war, and it quickly escalates into other areas. And it already has. It's already turned into a tech war as well, but it can get much worse from here.
- I'm going to end this on a positive note, I promise, to people who are watching. I'm not sure if it's justified or not. But we're going to come back there. But we have seen equity markets, of course, retreat a little bit every time there's a headline, today about rare earths. Tomorrow, we'll have to see what more it is. But any ideas on how the equity markets might react to all this?
- The equity markets tend to trade on short-term news. I think that some of the bigger players already have positions where they have hedged themselves so that they could benefit from a downward swing in equity markets because the equity markets is just one small part of the financial markets. You also have debt markets. You have credit derivative markets. You have equity derivative markets. You have commodity markets. You have all kinds of markets in the financial markets. And so the equity markets is not a strong barometer of what the other players understand and know.
- Yeah, and obviously, people are watching treasuries pretty closely given the conversation. I want to ask you. At the end of your op-ed, you do say, and I want to quote, "America faces a critical choice about how to handle the rise of China, realism, creativity, and willpower." You implied that you could get a good outcome, but don't bet on it. I'm going to ask you, though, if there was realism, creativity, and willpower, what tactically would that look like? What would-- if you were advising the US right now, what would you tell them to do to try and make this right and move this forward?
- Well, there were so many historical situations where the US basically reached out and-- to former competitors and say, OK, let's work together, the UK being one of them. And so I think that here is a huge opportunity where they can come together and work on joint problems like climate change. The Obama administration was working down that path where you get both China and the US to cooperate on big global problems that neither country can single-handedly address by themselves.
And so there are many other joint issues, such as how do you deal with the rise of technology like artificial intelligence and robotics replacing jobs at a mass scale or pandemics? I mean, there are so many global problems that they could work together on. And given that both countries have complementary skills, they actually don't have to compete head-to-head.
They could actually just focus on what their core strengths are and work together much like in a marriage where one spouse might be very good with financial acumen with financial markets. The other one can be very good with health care or some other area. And both can benefit from their expertise. And so I think that if the folks in Washington can step back from this brinksmanship and think more creatively, they can definitely make something work here.