00:00We start with China. President Xi made his visit to Washington this week to keep the discussion
00:04going between the world's two largest economies. Economies with very different approaches and in
00:10very different places. Is there a path forward where both can prosper despite those differences?
00:16Michael Froman is the president of the Council on Foreign Relations.
00:22Michael Froman has laid out a very ambitious plan to be dominant in sector after sector and put a lot
00:30of money behind it, both subsidies and practices, policies to protect their industries, but also very importantly, not requiring their
00:39companies fundamentally to make a profit, which is perhaps the greatest subsidy of all.
00:43If you don't have to make a profit and you can continue to to charge less and less for your
00:48product, then you're going to both be very competitive at home, but also undermine other manufacturing capacity around the world.
00:54And that's what we've seen going on. On the other hand, the United States has come to the conclusion that
00:58we need to rebuild our manufacturing base.
01:01We need to reindustrialize, in part because we're dependent on China for critical inputs, even for our military, but also
01:08more broadly across the economy.
01:10So there's a real effort here to look at what are the policies necessary to rebuild manufacturing and make that
01:16a more significant part of our economy.
01:17When we talk about global trade right now, and this is the United States, but also Europe and elsewhere, I
01:22think the word I hear most of is imbalance.
01:25Talk to us about the structural imbalance right now with China's exports.
01:29Well, China has achieved last year they had a $1.2 trillion trade surplus with the rest of the world.
01:36Even though the U.S. had put tariffs on Chinese imports, Chinese imports to the U.S. may have been
01:41less, but we were importing even more from other countries to which China had been exporting.
01:47And their exports to Europe are going up quite a bit at the expense of Europe's manufacturing base.
01:52So Europe is now going through that moment that the U.S. went through early in the 2000s, sort of
01:58the China shock moment, of seeing its manufacturing base potentially eroded by Chinese imports.
02:04And that's going to create a political issue in Europe, as it has in the United States over time.
02:11If things keep going the way they go right now, where do we end up?
02:14Whether it's U.S. or Europe, what happens to that imbalance?
02:17What response can the U.S. or Europe have to it?
02:20Well, I think you're already seeing it from the U.S. perspective.
02:22We've become more protectionist.
02:24We've put tariffs up on Chinese imports.
02:27And as I said, it has reduced those imports to a certain degree, although China itself is not finding difficulty
02:33finding other markets.
02:34Europe is not going through that process.
02:36Europe, ideologically, in part because of the whole European Union integration ideology, they are more committed, at least rhetorically, to
02:46free trade.
02:46So it's harder for them to be protectionist in the same way that the U.S. has become protectionist.
02:51But they are heading in that direction as they see their auto sector and other key parts of their manufacturing
02:56sector beginning to get hollowed out.
03:00I think the real challenge is that it was one thing when China was half the size as it is
03:05now, exporting its way, exporting excess capacity to the rest of the world,
03:09and exporting at a rate at two or three times the rate of global growth.
03:14It's different now when China is the size that it is.
03:18You have the laws of arithmetic.
03:19And if you keep on growing significantly higher than you grow your exports significantly higher than global growth when you
03:26are an economy the size of China, that becomes unsustainable.
03:30At some point, as other markets close to you, you're going to run out of customers.
03:35And that's going to have a blowback factor in the Chinese economy as well.
03:39Which raises an important point that you made in your recent foreign affairs piece.
03:45There's the effect on the United States.
03:47There's the effect on Europe, on Japan.
03:49What's the effect on China as they run out of new export markets?
03:53So we have long been encouraging China, literally for two decades.
03:56We've been encouraging China to go through the necessary reforms to create a more balanced, domestic-demand-led, consumer-led
04:04economy.
04:05And they have basically resisted that because they know how to export.
04:09They know how to ensure that their exports are highly competitive.
04:13And they go back to that playbook every time they have economic challenges.
04:18So the result is they've run up these huge trade surpluses with the rest of the world.
04:21If those markets close to them, or if they can't grow at the same rate, they've run out of the
04:27property market.
04:28They tried that, and that grew and then busted.
04:32They've run out of infrastructure to build.
04:34There's only so many high-speed rails that are non-competitive, non-economic that you can build.
04:39And so it's hard to see what can take the place of exports.
04:43So if their export markets close, it's going to force them quite painfully to go through that kind of restructuring.
04:49And after years of financial oppression, of really preventing consumers from enjoying the benefits of their labor,
04:56they're going to have to see a lot of people laid off, a lot of companies that are sort of
05:01zombie companies closed down.
05:03It's going to have an effect, potentially, on their financial system.
05:06And that's certainly not good for China, not good for the rest of the world either.
05:10And you can see that then creating a broader global economic crisis.
05:14It's been said that things that are not sustainable sooner or later will end.
05:18So what you're describing is something that doesn't sound sustainable.
05:21Take us inside China as far as we can from outside, which is difficult.
05:25Is this a political matter internally, or is this an economic matter?
05:28Is President Xi running into this for the politics or the economics?
05:31So it's both.
05:31I mean, on the economic side, it's the playbook they know best, and they know how to export excess capacity,
05:38how to build excess capacity, and how to export it.
05:40At some point, that road is going to run out.
05:43But it's also, as you suggest, a political agenda as well, because it gives the party and the central authorities
05:49a great deal of control over the direction of the economy.
05:52One of the fears that President Xi allegedly has of creating a consumer-led economy is that you're putting power
05:59in the hands of individuals
06:00rather than in the hands of the party and of the state.
06:04Right now, he could turn to his provincial leaders and say, you must build solar panels.
06:09You must build electric vehicles.
06:10You are going to be incentivized.
06:12You're going to be promoted on whether you expand production, regardless of whether it's economic or not.
06:17When you're relying on the consumer, ultimately, to drive the economy, you have much less control than you do
06:23when you're relying over industrialization, manufacturing, and export-driven-led growth.
06:28It appears from the outside that President Xi's theory and part is, we're going to make it up on tech.
06:32We're going to do AI.
06:34We're going to do rare earths, things like that.
06:36Can that bail out his economy?
06:38Can that give him another approach beyond exports?
06:41I'd separate AI and these other issues, like critical minerals.
06:45I think both the U.S. and China are hoping that AI creates such a significant productivity boost
06:50that it's going to cover up a lot of other challenges that we have in both economies.
06:56The U.S. continues to be ahead, we believe, in the development of models.
07:00But China is probably ahead of figuring out how to ensure that as those models are developed,
07:06they are deployed effectively through the economy, including through manufacturing.
07:10And that nexus of AI and robotics, such that they've got factories that have almost no workers,
07:16but are very effective at producing their manufactured products.
07:19So I think that they do hope that that's going to be part of the answer for them.
07:25But $1.2 trillion of exports is about 30% of their economic growth.
07:30That's a hard piece to substitute for on AI alone.
07:34There is a lot and growing amount of talk about safety in AI right now.
07:39What are the prospects of our doing something with China, even as we are rivals and competitors,
07:44to actually deal with safety?
07:46I mean, we did that back in the nuclear days, right, and even in the 50s.
07:49The Soviet Union had all sorts of agreements and warning systems and communication capabilities.
07:56With China, we have tried to have this dialogue on AI.
07:59It actually goes back to the Biden administration.
08:01It took a lot of work to get the Chinese to come to the table.
08:04And then I think the only agreement that was actually secured was one that we should not take the human
08:09out of the loop
08:10in making decisions over the launch of nuclear weapons,
08:13which seems like a pretty base-level agreement that we can all get behind.
08:17I think looking further, and particularly to the issue of how do you balance the desire for accelerated innovation
08:26against the need to ensure safety around potential catastrophic developments,
08:32that is something that we're wrestling with here in the United States.
08:35And I think it's going to be very difficult to get the Chinese to agree to anything, at least in
08:38the short run,
08:39while we're not sure ourselves exactly what it is we want to try to achieve.
08:43We're here at the Council on Foreign Relations, and you say globally.
08:46If you had to rank the challenge of the United States between China, on the one hand, economically,
08:51the economic challenge, and our own internal house, which is more pressing?
08:56The answer is yes. Both are pressing.
08:58And we have two great imbalances in the world.
09:00One is China's huge trade surplus with the rest of the world.
09:03The other is our own unsustainable fiscal situation, our deficit,
09:07now at $40 trillion, about 130% of GDP.
09:11It, too, every economist says is unsustainable, just without respect to time and place.
09:17And so we don't know what it's going to take for that to end.
09:20And I think the challenge is, politically, there doesn't seem to be much motivation in either political party
09:25to take the issue terribly seriously and deal with the fiscal adjustment that that would require.
