 Welcome to the Gap. In episode 13, John Hamry and Sam Palmisano discussed U.S.-China relations and the factors shaping CEO decisions about the two largest economies in the world and how these relations are impacting the global economy. New geopolitical interests by each country are a major aspect of these developments. Late last month in Japan, the leaders from the G7 countries met to discuss the global economy and how to coordinate their economic and foreign policies to seize the opportunities and address the challenges being presented around the world. The nations of the G7 represent approximately 45% of the global economy. They are a significant force shaping the economic policies that govern not only their own domestic markets, but global business. And each has significant trade with China. Their discussions and agreements represent another factor CEOs should consider as you make investment and operating decisions in the months and years ahead. Of particular importance are the agreements reached on economic resilience and economic security. We suggest listeners familiarize yourself with these actions taken by the G7 heads of state as they directly affect U.S.-China relations and how businesses will need to adjust their operating behavior. Building resilient supply chains and resilient critical infrastructure, non-market policies affecting global economic resilience, economic coercion or country actions that exploit economic vulnerabilities and dependencies, and harmful practices by governments that require companies to localize their data and grant access to data without appropriate safeguards are the specific areas called out by the G7. With regard to economic coercion, G7 members have agreed to launch a coordination platform on economic coercion that will allow them to increase assessment, preparedness, deterrence and response to nations using economic coercion in business and foreign affairs. We see the recent G7 meeting and its agreements as additional factors requiring CEOs focus as decisions are made about U.S.-China business matters and about operating in an increasingly reshaped global economy. This is why we are re-releasing episode 13 of The Get. We encourage you to listen to John and Sam's insights about U.S.-China relations and become familiar with the G7's recent actions. Welcome to The Get, the podcast for enterprise leaders delivering timely insights for today's global economy and tomorrow's competitive advantage. I'm your host, Chris Kane, president of the Center for Global Enterprise. And today, we sit down with two people who have been leaders in U.S.-China relations, one in government and one in business. John Hamry is president and CEO of the Center for Strategic and International Studies in Washington, D.C. He formerly served as the 26th U.S. Deputy Secretary of Defense and is chairman of the Defense Policy Board under four secretaries of defense. And Sam Palmasano, chairman of the Center for Global Enterprise. He also serves as chairman of the America's Frontier Fund, a non-profit deep-tech strategic investment fund and was formerly chairman and CEO and president of IBM. John and Sam, welcome and thank you for helping us discuss this defining issue. Glad to be with you. Thanks, Chris. So both the United States and China have recently announced plans and enacted policies that will affect each other and more broadly the global economy. The two largest economies in the world will shape the nature of business over the next 30 years in perhaps more pronounced ways than they have over the last 30 years. Two factors in particular shaped the last few decades of global economics. In December of 2001, the U.S. granted China permanent most favored nation trade status and China was formally admitted into the World Trade Organization. Since then, CEOs have operated their businesses to factor in a relatively cooperative economic and geopolitical relationship between the U.S. and China. But today, things are different. We will discuss how things have changed and what are the factors CEOs need to address as they execute their business over the next few decades. John, perhaps we can start with you. You have served in the U.S. government for many years and in many different capacities. You have directly dealt with many countries of the highest level. You recently wrote about the resurgence of geopolitics over geoeconomics as the organizing force for the years ahead. Can you elaborate on this and what you think it means for CEOs? Thanks, Chris. I wrote that in the context of the Russian invasion of Ukraine. And I do think that it marks a significantly different period in our approach to international relations. You know, really for the last 30 years, as you noted in the setup for the question, it was basically a fairly politically benign time in global commerce. We invited China to join the WTO. We worked hard to try to pave a way for that. There was a pretty permissive environment. There were some scratchy episodes, but nothing that really fundamentally changed the underlying economics. But the war in Ukraine triggered something quite profoundly new. You know, we decided to weaponize the global financial system. I mean, to put swift sanctions, restrictions on Russia, we mobilized the most comprehensive sanctions on economic commerce with Russia. This means we took what people for 30 years considered to be maintaining a public utility, you know, global finance, and we turned it into the weapon that we could use in a war that where we didn't want to get involved militarily, but we wanted to affect the outcome. This is a pretty different world. Now, I will say, I think I had personally anticipated in March last year that this would bifurcate the international political order. It did not. And that's largely because China chose not to let it become a divisive point. But I still think geopolitics is going to be a dominant factor. So, Sam, given your former and current private sector activities, what do you think this new U.S.-China environment means for CEOs from a business and an investment perspective? Chris, I mean, I agree with John. I mean, basically what's happened is whether it's national security or nation's own self-interest, whatever you want to be, has overridden some of the things that were viewed as economically beneficial for all. I mean, when the world integrated after World War II, it really did lift millions and millions of people out of poverty. Standards of living are better. Life expectancy is lower. So there was a great benefit to that. And that's not being challenged. I think John, I completely agree with John. The war has exacerbated that and brought some things into focus. But it's been under challenge for the past two years. If you just look at recently at China, then we're talking about China today, I would put my hat as the CEO. I mean, as you know, in the past 90 days, China has completely flipped their policies. COVID-free has now changed. The pressure on the technology sector innovation is now opening up again. And credit or financing to the property sector has also opened up again. So, yes, there were economic downturn. Forget the numbers that are public. Nobody believes them anyway. But it's either slow or negative. And then fundamentally, these things have changed. The reason I mentioned the question is, what's going to happen next? And as a CEO, you're worried about, because you're making long-term investments. And so you're worried about, is this actually a philosophical change or are they going to go back to their old audiology? Are they going to go back to the malice approach or they go back to done? You will see. But as a CEO and you're planning, you really can't plan that things are going to return to the way they were, let's say six or seven years ago, given what's happened recently and now they're pivot now. But that means overnight they could pivot again. So I guess my only point is, you need a plan B. You need to have a business as usual plan and maybe you assume the next couple of years are fine as far as being able to invest and get returns in China. But you also need a plan to protect your assets, assuming this thing reverses itself again. Well, that's the title of our session today, which is looking ahead at U.S.-China relations and factors shaping CEO decisions. Sam, you're certainly right on point, given the scope of what we want to talk about today. John, from a government perspective, the pivots that Sam just described by President Xi, do you anticipate that this will continue to be kind of a dynamic policy approach by Xi or do you think this is a temporary let-up without necessarily a fundamental shift on his part? We don't really don't know that. I don't think there's a view on that. He held very firmly to his COVID policy as well as to the more restrictive policies that were choking off the real estate sector. You know, pretty firmly up until one weekend, and then bam, it changed. Now, one can say that he had gone through the 20th Party Congress and he cemented his power status. And if you believe that's the case, then you say, well, he has the flexibility to move things around. And he was holding a firm line as long as he could until he knocked off all the internal opposition. The other is that he is authentically worried about the health of the economy and that the decisions that he thought were right were damaging the economy. And he is recalibrating. Now, does that mean he changes his underlying... He's still basically a Marxist. He's a Leninist Marxist. He believes in common ownership of the means of production and believes in a central Leninist party that directs the economy. So, you know, is it tactical or has he made a realistic change? I don't think we really have an agreement on that. I think probably the predominant view is that it's tactical, but I don't think we know. Let's talk a little bit about the U.S.-China economic relationship that has been quite a powerful engine for global growth over the last 30 years and had profound effects on people around the world and countries around the world. There's been a lot of discussion about the decoupling of the U.S. and China economies and the impact it will have on global economic growth. Certain investments in operations in sectors such as semiconductors or deep-tech technologies and certain consumer, even certain consumer technologies are being constrained by both countries. Do you see government policy restrictions expanding? And if so, what areas of business do you see next? Sam, maybe we can start with you and then go to John on this. Yeah, Chris. I completely agree with John. Nobody can really call what's going to happen in China. We know where he is philosophically in ideology. Who knows? It's a little bit of brings uncertainty into the things that you're talking about, like sanctions or tariffs or restrictions as far as the flow of technology around the world. I really did believe at the end of the day these economies, these countries will not decouple. And the reason I say that is because their economies need each other. And either you're going to lower your standard of living for your population, which is probably not attractive, or you're going to defund entitlements of military, which is again, probably not constructive, because you have to have a robust economy to do these things. I admit that I'm not an audiologist. I'm a pragmatist, which says, though, that you can't disconnect completely these two economies and accomplish those goals. However, I do think the points that you've made as you project out to the future, anything that they view as related to national security when it comes to technology, that is going to come under restriction and pressure, not just the short term as far as technology around semiconductors and the equivalent that produces the semiconductors. And that's what you see going on right now. But even future areas like quantum computing, 5G cyber infrastructure, those sorts of things, biologics, biotech, all those areas, I believe are going to be more challenging. So if you're a company, you have to think through and you're in those spaces, you really do have to think that through. Jeff? What worries me is that we have two political parties that don't agree on much these days in the U.S., but there are two things that they really do agree on. One is a parochialism about America, by America in one form or another. And the other is a fear and loathing of China. And this is bipartisan now. And I think that could become dangerous in months ahead. I think there'll be fighting and scratching at each other nonstop, but they're ready to align themselves together if the right stimulus presents itself. Now, you know, when I thought the major development of the Biden administration was the semiconductor restrictions announced last September, because the most important thing was the accompanying narrative for it. Our historic industrial policy, we don't call it that, but it is. Our historic industrial policy was always we will restrict people from having access to cutting-edge technology today. We will allow our companies to export, sell or older technology, and we will subsidize companies to invest in the next generation. That was our national strategy, and that was coherent because it meant that companies could capitalize on the productive revenue opportunities that came with old technology, use it to invest in new technology, and so there was a logic to the framework. But when Jake Sullivan gave his presentation, he basically said, we're going to try to restrict everything. Now, that's a very problematic shift, and I don't think we really know where it's going yet. I think American semiconductor companies are very nervous about this. I know our foreign partner countries that are in semiconductor are very nervous about this because they continue to want to sell in the China market, and they don't want to give China a protected enclave to develop a competitor. So I think it's unstable, but I think the trend of our macro politics is going to be difficult and challenging. So you and I worked closely together. When you were in government, I was at IBM around that very subject matter, which is those technologies that are leading and developed in the United States, and how do we create a market-oriented approach to giving the United States a lead in those technologies without it being captured by adversaries in a global market, which is a perfect tie-in to the next question that I really want to ask you both about. And in many respects, it's both a policy but also a management question, which is in the previous periods where geopolitics was the organizing force for a global business. Read that to be the Cold War era. The US government oversaw compliance by US business through a spectrum of export controls. You were just referring to that, John. Today, the global economy and technologies are very different than they were during that period. We have cryptocurrencies, we have pervasive computing, we have digital products and services, we have global supply chains. So should business leaders be expecting a return to detailed export control regulation by the US government and be reinvesting in the operating controls to ensure that they are compliant? Because we were benefited greatly during the period of trade liberalization where export controls were allowed to be loosened up around the spirit concept of dual-use technologies, consumer technologies, etc. Are we re-entering a period where the export control environment is tightening and therefore companies are going to have to begin the reinvestment of management processes internally? So John, maybe we can go with you. I think the announcements on semiconductors in September clearly suggest we're heading that way. And at the time, informally, they were saying there's lots more coming. It's going to be in other sectors. We're going to go into biotech, and we're going to go into medtech, etc. Now, we haven't seen that. And I think the administration has been quietly getting a lot of pushback from the business world and from our allies. I mean, I think that there's a general agreement on limiting the most advanced semiconductors that are used for artificial intelligence, but there is not an agreement on constraining semiconductors just generally. So I think they're getting pushback, but I know the administration said that they had a vision of much more expansive controls. Now, export controls only work if there's a consensus on them. What happened at the end of the Cold War was we kept export controls in place, but nobody else in the world did. And so it kind of lapsed, although the mechanism is still there. Americans still have to get an export license for the radiator for a 50-year-old truck design. If it's a military vehicle, it's stupid, but we still have it. But we could be marching down that road again, but it only will work as if there's a broad consensus among affected parties. And right now, I don't think we have that. So Sam as a CEO, what would you be doing now internally in the planning process, given the direction yet the uncertainty that we've just been talking about? Yeah, I think, Chris, that John's right, the world doesn't work this way anymore. And I don't know how effective controls would be. Let's go back to semiconductors. There are five or six key countries that are advancing semiconductors. In China, it's not one of them. There's only ones in the United States. You have Japan, you have Korea, you have the Netherlands. You have a couple of European countries. You have Germany, et cetera, et cetera. That's the industry. So I know the politicians would like it not to be that way, but that is what it is. And you can't get the tooling if you have these controls. You can't get the materials, the design tools. All those things are completely globalized. And the best solution is to have these like-minded nations work together not restrict them. The other thing, that's why I think you see this European reaction to some of these things, even in the automotive industry with EVs, because they view it as biasing the US, you know, for their own self-interest, but impacting our allies. I just quote, I should say, that if I was running the company that some rational behavior would some point occur. Now, I mean, you can't expect that from politicians. I understand that. They're right to have some kind of logical behavior versus their positions they like to take. But fundamentally, those controls would be destructive to the things they're trying to accomplish. So I would start with if I was a company educating those people why it's destructive. And you see that going on now in semiconductors, quite honestly. And you're going to see it going in biotechnology as well. They're going to try to educate these people so they understand that this is going to hurt us as much as everybody else. Going back to the previous era of geopolitics being the organizing principle, you had allies, as John said, who had less scrutiny from our export control system than other countries who were not considered allies. And therefore, the world was broken up into different lists of countries that were assigned different levels of risk. So the sounds though, like the French shoring concept, which has been talked about by folks in the administration and elsewhere, is one way of finding maybe an HOV lane stand for what you're talking about, which is if Japan and the Netherlands and other countries are considered friends for the semiconductor space, then maybe as a CEO you target your investment into those countries as opposed to someplace else. Yeah, I mean clearly I would not put assets into countries today like Russia, obviously, or China. I would not be putting hard assets into this location. I would try to figure out in China how to operate economically without having hard assets there. And there is a solution to that, quite honestly. There are ways to do that, as you and I know, because it created a lot. But I wouldn't be putting it, if we stay on semiconductors, a fabricator in China, if I was IBM today. I'd keep it. I would either put it in Germany or the United States, quite honestly. That means though, the reason why we'll, and to jump to this American Frontier Foundation, we should be collaborating with these countries. The research for future technologies is very expensive and it's very hard to do. The fact that we think we're going to go along is very naive. It's not technically sound. So what you need to have, you need to do is have relationships with these five or six countries where you have that expertise is my point. So you really can't, in any way, disrupt the system the way it works today and expect to be self-sufficient and leading in semiconductors. You will fall behind. Forget the $52 billion in the CHIPS Act. That's like four fabs, guys. That's nothing compared to what's required from the R&Ds, the tools, the material science, all those sort of things that need to be done. And that's all done globally. So I think it would be destructive to the industry and destructive to our economy if we decided to say it all has to be in the United States. And if you were asked by CEOs and companies who were participating in sensitive industries, or some of these strategic technologies that we were talking about, what countries would be the safest for me to invest in? Can you suggest the top three? Well, I think, Chris, I think the challenge with the question you posed depends on what it is. I mean, you can't just invest in any country for lithium. You've got to go to certain places to get lithium. If you're talking about building factories and having manufacturing in a country, I agree that there's a chill in the air on China, but there's no country in the world that has put together the whole package the way that China has. The internal transportation networks are dovetailed into intermodal transit, efficient ports. If you need a longer runway, they'll extend a runway for you so that you can get in different... I mean, they've put it together like no other country in the world. And I don't see another country getting close in the near term in having it. So I think for manufacturing, I think China is still going to be a pretty central actor in global supply chains for a long time. I don't think that's going to go away soon. I mean, it's a very important point for your listeners here is that last year, the world invested in about 2 million industrial robots. Half of them were in China. Tell me who's going to step in and replace China as a manufacturing power center given the way they've got the package together right now. So I think we've got a long way before we're going to see a shift. So recently, President Xi and Biden met face-to-face in Indonesia and they have announced new high-level meetings in defense, foreign affairs, and financial sectors. But what's notably absent from these positive actions is trade, commerce, and scientific cooperation. So what should CEOs and other business leaders take from this? If anything, is it to be determined and don't worry about it, or is it a message... John, let's start with you. Is it a message that you think is telling as to the geopolitical relationship that these two largest economies are in right now? Well, I think it's a leading indicator of the problems that we're going to have with each other. I mean, part of it is a unique problem with the Biden administration. They don't want a trade policy. There's a proclism about the Biden administration about manufacturing, and it just... There is no trade policy. They've got something they call the Indo-Pacific Economic Framework, but it's... there's nothing in it. Just a label. The Asian friends are working with them, trying to get them to agree to put content in it, but I don't think that's happening. But when you get to something like technology restrictions, I think, unfortunately, this is now a bipartisan consensus, partly based on paranoia, partly based on protectionism, legitimate protectionism. You know, the Chinese do spy. I mean, after all, they've been trying to steal secrets. But we're starting to see real restrictions coming in place, and a very little-known thing right now, the Biden administration is talking about doing away with non-compete clauses on business. Well, what they haven't thought through is a non-compete clause restricts foreigners from taking trade secrets back home. So we could see a real ratcheting up of other restrictions in technology controls once the dawn's on them, that one agenda is in conflict with another. So I would be nervous about where we're heading right now if I were a business guy. Sam, so is it a leading... Would it be a leading indicator for you if you were still a sitting CEO with investment plans in place for 23 and 24? You know, I'm kind of where John is. I mean, they had a meeting, but they didn't establish anything that I understand. It's called guardrails of some kind or lanes we could operate with them. I don't know that that's been defined. And so I would just be cautious. I mean, you'd have to watch closely, guys. I mean, you know, as a CEO, especially if you're operating outside your domicile country, whether that's your European United States, it doesn't much matter. You need China for business growth, right? In tech, it's like either the largest or second largest market in the world. So you can't say I'm going to avoid the largest market or second largest market in the world. But my point being is I would just be watching and trying to see where this thing goes. I wouldn't be committing much of anything. You'd be operating your business, dealing with it. You have enough pressure on the business these days called high inflation, commodity prices going through the roof, labor causes going through the roof, economy slowing in a macroeconomic environment. There's enough to worry about without putting this on top of your place, you know, quite honestly. So I would, I'd be watching. I'd be relying on people like yourself, Chris, to keep us informed what's going on. But I wouldn't be acting quite yet. The title of today's session is looking forward, looking ahead to U.S.-China relations because CEOs and businesses need to know how to plan and they need to know how to plan and informed in the algebra way. So I want to thank you both for joining in the conversation today. Hopefully it's been helpful to our listeners. But before we close, we like to use the last minute or so to give our listeners some strategic insights to think about. We call it our emerging critical issues moment. So in one word or one phrase, please tell us what emerging issue do you see on the horizon that business leaders ought to be putting on their radar? So John, why don't we start with you? There's a proclism that's growing in American politics and the only antidote to that is business has to be engaged in Washington. You got to come here and share your insights. But I don't think this is unavoidable. We now have to have the business world in Washington sharing its insights about what we have to do. And do you see that same involvement by business leaders in other capitals around the world, maybe in Europe and elsewhere? Oh, yeah, no, no. Europe has put together a consultation mechanism with the business world that's much more effective than ours. Now, unfortunately, the regulatory environment in Europe is choking off of their future. So Europe has decided they're going to manage their future by controlling access to their consumers, not by stimulating an innovative economy. And so that's why we're scratching at each other right now. I mean, that's why the Europeans are all pissed off at us over the new green investment stuff that the Biden administration put in, because they don't have it. And so their solution is, we're not going to let American companies sell into our market. Okay, so we're going to have some challenging days, I think, with our allies too. Sam, one thought, one word, that CEOs ought to be putting on their radar. I'm going to give you a technology, Latinx versus a geopolitical economic, Chris. I would say this whole accept area or chat GPT, I would think about the same way what we thought about digital currencies before FTX. Well, the GPT is getting a lot of attention. And so is so was Bitcoin. And so was the ethics. Across all generations too, right? Not just my generation. Absolutely. Absolutely. All right. Well, great. And we will come back to these critical issues in future shows. Thank you for your time today and your insights. It's been very enjoyable and helpful. And you've been listening to The Get, sponsored by the Center for Global Enterprise, celebrating 10 years of convening global enterprise leaders around the world to the most important business transformation issues.