 Welcome to this session on China, U.S. relations, how things are looking with a new administration of the United States. To speak about this is a real pleasure to have David Dollar with us. David is very well known with economics profession. I've been familiar with his work for many years since he was at the World Bank. He's currently the senior fellow at the John L. Fortin China Center at the Brookings Institution. From 2009 to 2013, he was the U.S. Treasury's economic and financial emissary in Beijing, involved in facilitating the macroeconomic and financial policy dialogue between the U.S. and China. Prior to that, David worked for 20 years at the World Bank, as I said, serving amongst many other things as country director for China and Mongolia based in Beijing for five years. Also very extensive direct experience of China, and his most recent book is also on that subject to China at 2049, Economic Challenges of a Rising Global Power Timely Book. So with that, David is going to talk for about half an hour on a whole range of China-U.S. relation issues, and he will then welcome your questions and comments after that for about another 30 minutes. The entire event is on the record, and we very much look forward to your presentation, David. Over to you. Thank you very much. It's really a great pleasure to join by video, and I wish I could be there with you all in person in Dublin. That would have been a delightful long weekend. So my topic is U.S.-China relations in the wake of the 2020 election. And I have to emphasize that there's still tremendous uncertainty about the positions of the new Biden administration, the policy positions, and he's named many key staff, but lots of positions, staff positions remain to be filled. So we can speculate and identify a few things, but I do want to emphasize the uncertainty. If I were picking a headline for this or a summary for the talk, I would say, I do not expect any immediate dramatic change in U.S.-China relations, but I expect subtle changes that over time will be quite significant. So I want to divide the talk into five topics. First, I think one of the clearest things about the incoming administration is that it's going to put more attention on global public goods. President-elect Biden has made it clear that he'll rejoin the Paris Accord on climate change, the World Health Organization. He wants to get back into the UN deal on Iran and strengthen and extend that. And in dealing with these global public goods, he will inevitably have to deal with China. U.S. and China are the two biggest economies in the world. They're the two biggest emitters of carbon. There's no way we get to net zero by 2050 if the U.S. and China are not each strongly pursuing policies toward carbon reduction. It doesn't mean we have to cooperate closely necessarily. It doesn't mean we have to be friends, but we are going to be working together on global issues. And I would argue that was completely missing from the Trump administration. And in some ways, it sets a floor on the relationship. We have to work together on these global issues. And that does kind of put a limit on the hostile things you can say and do to each other if we're actually going to make progress on those global issues. And I agree with President-elect Biden that these are really the challenging issues, especially climate change. While I'm talking global public goods, I would also like to add in, I think, a less well-known one. Clearly, this coronavirus recession has had a devastating effect on developing countries. A lot of developing countries have excessive debt. We already have a debt service suspension initiative affecting the poorest countries in China, the U.S., the rest of the G20 are cooperating in that in a fairly effective way. Probably needs to be extended, probably needs more, but it's a good start. The main problem, it's really just focused on the poorest countries. So there are a lot of large emerging markets that are simply not involved in that. And in a lot of those countries, there are going to be debt problems. China is the largest official creditor to many countries. The U.S. is the largest shareholder in the IMF, which takes the lead in addressing these kind of financial issues. So I think of that as another global public good. If we don't cooperate on third-world debt crises, we're going to have spread of those crises. We're going to have terrible economic results. It's going to be hard for the rest of the world to grow. So that first point, I think, is good news in a way for the world that the U.S. is back in terms of dealing with global issues. And that will inevitably put us working together with China common objectives on many of these issues. Now, the second point I want to make is that President-elect Biden has made it clear that he wants to reestablish U.S. relations with our allies, move away from the America First policy of President Trump. And I think the key allies are our European friends like Ireland and the EU more broadly and in the UK now that it's left the EU. And then in Asia, Japan, South Korea, Australia, New Zealand, these are key allies of the United States. And in talking about re-establishing those relationships, Biden's team has made it clear that that includes trying to develop a common approach to China. Now, that involves a lot of different issues. I think we will see more attention paid to human rights issues in China. Xinjiang, Hong Kong, what's happening with Taiwan. Some members of President Trump's cabinet have spoken out about these issues. But according to John Bolton's book, President Trump himself was not very engaged and in some sense encouraged President Xi Jinping of China to pursue authoritarian measures in these areas. I think you'll see a more consistent policy now among Europe, the United States, our Asia-Pacific allies. Now, our allies are a diverse group. So working more closely with them across a broad range of issues is not necessarily going to be a simple thing. Certainly the Asia-Pacific allies would like to see the US continue to have a strong security presence in the Asia-Pacific. So continue to do freedom of navigation operations through the South China Sea and push back in some sense against Chinese activity in the South China Sea or along the India-China border. I'm not going to presume to understand that well how European partners view that, though there is talk, certainly talk within NATO that China's rise is one of the preeminent security issues of the time. Now, if you think about the first two issues I highlighted, it starts to reveal the complexity of the US of the challenge of dealing with China because the US and Europe, other partners working together on global public goods, that's something that China should welcome because that's the only way we're going to deal with issues like climate change and the next pandemic and third world debt crisis. On the other hand, China is not really that comfortable with the US alliance system, thinks of that as a Cold War relic. And I think to be frank, I think the Chinese administration welcomed that aspect of the Trump policy that the US was moving away from its traditional alliance. So thinking about things from China's point of view, the first two issues I raised are kind of a wash where China should welcome the first thing I brought up but then not be so happy about the strengthening of the US alliance system. Now, the third issue I would bring up is that I'm going to start getting into economics, but quite a few of the things that have been done that have an economic effect in the relationship have been done for security reasons. So, for example, the United States has put Huawei on our so-called entities list. We're preventing American companies from selling high-tech inputs to Huawei. We've taken the extraordinary step of preventing the Taiwan semiconductor company based in Taiwan. We're preventing them from using previously purchased American equipment to make chips that they sell to Huawei. And I believe some other Chinese purchases are involved. We just recently put out a list of firms that are aiding the development of the Chinese military. And many of the firms on that list are obvious defense contractors. And that kind of firm has very little interaction with the US. So sanctioning those firms is more symbolic. But the list also includes the three big Chinese telecom companies. China Mobile, for example, is on this list. And the sanctions at the moment are not that strong. The key new sanction introduced just in the last few weeks is that Americans like myself, you know, we cannot buy securities of these firms. And for a firm like China Mobile, it's included in a number of popular stock market indices about Chinese stocks or emerging market stocks. So the most popular exchange traded fund dealing with emerging market stocks owns a piece of China Mobile. And that's now going to be illegal for Americans to own that. So either Americans are going to have to divest out of that popular security or else that exchange traded fund is going to have to rearrange its portfolio and divest itself of China Mobile. So we're seeing a lot of actions like that that clearly have some economic impact, but all of which are justified on security grounds. Now, I think and I would add that some of the things I just mentioned have been introduced by executive order since the election. OK, and it is frankly unusual in the United States for an outgoing administration to be doing major executive orders after it's lost election as it's leaving. You could argue that some of this is being done in bad faith, you know, tossing a bunch of hand grenades as you exit from the White House. So this is the first of a number of very complicated issues that the Biden administration is going to have to face. I would not expect them to reverse all of these security measures. I think we can be pretty sure they won't reverse all of these security measures, things like putting Huawei on the entity list, which was done a couple of years ago, some of the other sanctions of high tech firms. I think President-elect Biden and his team, they're going to want to maintain some of these measures that are aimed at protecting national security. And they would certainly come under bipartisan criticism if they moved away from all of those measures. On the other hand, the fact that a lot of this stuff is being put in place right now after President Trump lost the election raises questions about bad faith. So I would expect the administration to do a careful review of these different measures. And this is an area where I think it's easy to state rhetorically what the ideal policy should be. But harder to implement. Rhetorically, I like the phrase from the former U.S. Treasury Secretary Hank Paulson, who said that in this area of, you could think of it as technology competition or national security related technologies, the United States needs to have a small yard with a high fence. And what he means by that is we should identify a relatively small number of critical technologies that have national security implications and put up pretty serious walls, meaning pretty serious obstacles about investment mergers and acquisitions, the selling of U.S. high technology to relevant Chinese firms, et cetera. But then a part of that whole idea is that the yard would be relatively small, and that you would leave most of the rest of the economy open for trade and investment back and forth between China. And I think you may have heard this phrase decoupling, this word decoupling. I think the idea from Secretary Paulson is that there's never going to be a certain amount of decoupling in some specific technology areas that have security implications. But from his point of view, you want to keep that relatively small, and then you want to have open exchange essentially among the United States, China, other major economies. So I agree with that kind of assessment, which you get from quite a few thinkers in both our main political parties that any kind of radical or complete decoupling between the U.S. and China is completely unrealistic. For one thing, our allies, especially Asia Pacific allies, are never going to go along with that. Probably Germany wouldn't go along with that among our European friends because people are firms and workers are benefiting from the trade with China. And I don't think the key allies of the U.S. have given up on the idea of integrating China into the global economic system. So as I said, relatively easy to state the principle, harder. Now lots of different types of firms are getting put on sanctions list by the United States. And so I think the Biden team will take a hard look at that. And the end result will probably be some of that will be dropped, I would guess, some of these things that were added at the last minute as the Trump team is exiting the White House. But quite a bit of that will end up staying. The Americans, the general attitude toward China has definitely hardened. And Americans are worried about potential threat from China. And so you will see some of that national security related trade and investment sanctions. Some of that will definitely stay in place. Now the fourth issue I'm going to raise is the more general economic trade relations between the U.S. and China. And you notice that more than halfway through my talk before I'm really just getting to talking about economics. And to be frank, that's deliberate. I think it's just not the most important issue in the U.S.-China economic relations. I think the global public goods, security issues, human rights. To me, all of these are arguably more important than the economic relations. And to be frank, the economic relations right now are a complete mess. And so I think President Trump is leaving President Biden with a very difficult situation. And obviously the U.S. has lots of domestic challenges at the moment. The COVID pandemic is accelerating. The economy seems to be slowing down and needs more stimulus. We infrastructure, there's broad agreement on a need for some kind of infrastructure plan, more family-friendly policies. So you can count on the Biden team to be focusing on these more domestic issues certainly in the first half year, probably throughout most of the first year. And I think economic relations with China are just not going to be that high on the list of priorities. So what is this mess I'm referring to? Well, at the moment, the U.S. has a 25% tariff on about half of our imports from China. It's a pretty significant distortion. In order to avoid further escalation of that, China agreed to a phase one trade deal. The heart of the phase one trade deal is Chinese commitment to buy more goods and services from the U.S. And economists like myself, we felt the deal when it was announced nearly one year ago now seemed completely unrealistic. It would have involved China importing 40% more than last year during 2020. And then an additional 40% plus increase in 2021. We don't normally see macro variables growing at those kind of rates. And it turns out it certainly has not materialized during 2020. At the moment, China has imported through October about half of what would be necessary to meet the target for 2020. Obviously, we've had the coronavirus pandemic and recession. There are a lot of reasons. There were very specific targets. China was supposed to buy $50 billion of energy. But shortly after the deal was signed, global recession started. Energy prices dropped. U.S. firms are cutting back production. They were not particularly interested in selling to China at the prices that were prevailing in the middle of 2020. One of the big exports in the U.S. to China is the fact that there have been about 400,000 Chinese students in the U.S., mostly in universities, mostly paying full tuition, plus Chinese tourists. That was all supposed to increase under this phase one deal. But of course, it's contracted dramatically because of the cutoff in travel between the United States and China. So basically, that phase one deal, it's not really being implemented. And I think this is the kind of situation that President Biden inherits. His team, including Vice President-elect Kamala Harris, fairly recently, have been criticizing the tariffs. Federal Reserve staff did a study that U.S. tariffs on China have cost the U.S. about 175,000 manufacturing jobs. It always seems like a good idea. Let's restrict Chinese imports and protect our industry. Well, global value chains are very complicated. U.S. firms import a lot of parts and components from China. And the 25% tariff ended up being slapped on a lot of those. And then that hurts American firms. And then they lose customers because prices are going up. They lose exports because they become less competitive. They also lose exports because China, of course, retaliated in response to the U.S. tariffs. So U.S. has not really gotten anything very positive out of that. But President-elect Biden just did an interview with the journalist Tom Friedman. And he made it clear he's not going to eliminate those tariffs, certainly not on day one and not as an early move in his administration. Basically, I think that Biden team is going to leave that protection in place, let it play out for a while. I emphasize domestic priorities are going to be number one. And that's a big agenda. Also, I think we can count on the Biden team getting rid of remaining tariffs that have been imposed on allies in steel, aluminum, and various sectors. And I think that'll be very welcome. I think that would be a good statement from the administration is to get rid of the tariffs that have been imposed on various allies as part of this America-first policy. But then, as I said, President-elect Biden has made it clear he'll leave the tariffs on China in place for the moment. Now, I do think there's an opportunity for China to come with a proposal. And any proposal from the Chinese side will probably met with some skepticism in the US because we've been negotiating over these issues for a long time. My own view is there's been gradual progress in things like intellectual property rights protection, opening up more markets. China has opened up financial services and automobiles. There are other sectors that are relatively protected in China. There's still issues about state enterprise discipline. The penalties for intellectual property rights violations, there are a number of practical areas where China could come with a proposal and essentially put out an offer to move substantially on some of these structural issues in return for the US phasing out the tariffs on the Chinese product. So the potential is there for a deal. But I don't see the Biden team taking the lead in trying to bring that about quickly because they'll be distracted by other things and because the whole economic relationship with China continues to be quite controversial in the United States. Now, the last point I want to make is indirectly related to China. So, you know, leaving aside US-China economic relations for the moment, there's the issue of the US trade relation with the rest of the world. And I think the easy part of that is eliminating tariffs on products from allies, as I said. Also, the US has been blocking the dispute settlement process in the World Trade Organization. I think we can get a compromise to allow the WTO to start functioning as part of that US kind of returning to international organizations. But President-elect Biden has made it clear that he would approach very cautiously any big new trade agreements. And that would include any talk about rejoining the Trans-Pacific Partnership, which President Trump dropped out of on day one. And I do think that politically, large trade agreements have become very difficult for the US. Under President Trump, you've definitely got some pretty strong protectionist elements within the Republican Party. There were always some protectionist elements within the Democratic Party. So now you have a kind of unholy alliance cutting across our parties, questioning the value of trade agreements. And I think, again, with domestic priorities taking first place, the easy thing will not be to pursue any new major trade agreements. First time President Biden goes to Asia, first time he talks to Japan, South Korea, I think he'll be hearing from these traditional American partners that they feel that the US is withdrawing economically from Asia. China is one of the 15 countries that reached agreement on RCEP, the Regional Comprehensive Economic Program. This is really an ASEAN initiative. I think ASEAN should get a lot of credit for bringing this to fruition. It's the first trade agreement, including China, Japan, and South Korea. It also has Australia and New Zealand. You can criticize it as relatively shallow because mostly it's tariff cutting without dealing with the new issues of cross-border data flows or intellectual property rights protection. But I think it'll solidify a lot of value chains in Asia and centered very much around China. So there's talk about getting value chains to leave China and reassure to the United States. I think mostly that's completely unrealistic. You will have some evolution of value chains as more labor-intensive parts of the value chain leave China, move to Southeast Asia, because wages are going up in China. China is now becoming one of the higher-wage countries in Asia, and it can be a very healthy process for those chains to evolve. But China is not going to be left out. China is producing a lot of the machinery and the more sophisticated components. So an important milestone in 2020 is that ASEAN moved into first place as China's number one trading partner. The EU is number two, and the United States has dropped to number three. And I think in the current environment, a lot of political elites in the US are probably perfectly happy to be dropping down on that list of Chinese trading partners. But China is going ahead, developing trade agreements. It's negotiating a bilateral investment treaty with the EU. And there is definitely a risk that the US is being left out of those agreements. So let me wrap up by just emphasizing how complicated this all is. If you think about the US administration pursuing relations with China, I started with what I view as relatively positive news that we want to work together with China and other partners on global issues that's been missing. We also want to rebuild our traditional alliances. European friends should be happy to hear that. But again, we have to see the details. The US has to be willing to compromise on various issues if that's going to be meaningful. I think some of the technology stuff is the most complicated. And I worry that wherever there's a question, we're going to opt toward protectionism on a kind of precautionary principle. And that would be unfortunate, because I think we're still better off with an integrated global economy. Don't expect the US to rush to actually sort out the trade relations between the US and China. There are other priorities. But if, under some scenarios, within two years or so, I could see the US coming back, for example, into the Trans-Pacific Partnership. Not right away, of course. But perhaps two years down the road, particularly depending on what President-elect Biden hears from his allies in the Asia Pacific and in Europe. So managing that very, very complex relationship with China, I do think that really is the biggest challenge that the United States faces. And arguably, it's the biggest challenge that the European Union faces as well. So hopefully, we can work together. Let's start by having a good frank exchange of ideas. Thank you very much.