 Today's event is co-sponsored by the International Policy Center, and I would like to thank them for their help in making things possible this evening. Well, with President Obama's second foreign policy team still very fresh in their new roles, we are especially pleased today to be joined by one of America's most highly regarded authorities on the very important topic of U.S.-China relations. And there are both, of course, some immediate issues, but this is an evolving and medium-to-long-term strategic challenge and having a better understanding of what's in play and how things may evolve over the coming years is extremely valuable, I think, from so many different perspectives. So we are particularly pleased to be joined by Dr. Ken Leverfall, who is senior fellow at the Brookings Institution and former director of the John L. Thornton China Center. He also served as a member of the National Security Council under President Clinton. There's a biography of Ken Leverfall in your program, and so I invite you to take a look at that as well, but as many, if not most of you know, he's certainly no stranger to Michigan, and we are very delighted to have him back here. He was, of course, a member of the faculty for many, many years. He's a professor emeritus at Michigan, and until 2009 he was an Arthur Thurnell professor of political science and William Davidson professor of business administration. During his time here at Michigan, he taught a number of different courses, but in particular, China's evolution under communism and doing business with China, and I know that there are many of the themes from those courses that are likely to feature in some of his remarks this evening. So he's going to talk about some of the unfolding policy experiences and challenges, and he has agreed to take questions as well. We will have staff collecting your questions around 4.40, and so I hope that you had the chance to take a card to write those questions on. Those of you who are watching online, or even those of you who are with us in the audience, are, of course, welcome to tweet your questions into us, and please use policy talks as the hashtag. Professor Phil Potter will select questions along with one of our graduate students, Christina Hajj, and they will then deliver the questions in the last part of our session. So it is a great pleasure and an honor to welcome Henry McCall back to Michigan. Thank you. Thank you very much. It really is a pleasure to be back here, and it's such a great university. I have been looking forward to getting back, and sometimes wonder why I ever left. But especially since it's so nice out today and the forecast is for snow by the time I get back at 11 p.m. tonight to Washington. I'm going to talk about the overall framework for the Obama administration's policy toward China during the coming four years, and cover an array of issues that the administration is wrestling with and where I think some of these are going. I want to make clear at the start that in the Q&A, I'm happy for you to raise questions about anything so long as the word China is somewhere in the question. So don't feel that you have to be constrained to just picking up on the themes that I've laid out. Feel free to ask whatever you want to ask. I'll count on Phil Potter to screen out all the tough ones and forward the rest to me. If you want to think about the Obama administration's policy toward China in the coming four years, I think you have to put it in the framework of what to my mind was probably the single biggest strategic decision that President Obama made in his first four years, and that decision was to rebalance toward Asia or pivot toward Asia, whatever you want to call it. This is a decision that was region-wide. It is often talked about both in the region and in the U.S. media as all about China and directed at China. I would argue both of those characterizations are wrong. I have some idea of what the President was thinking and what the White House National Security Council was thinking as they shaped this policy and have sought to implement it. And the policy truly is based on the President's appreciation that was already evident in what he said in the 2008 campaign that the most important region for the United States over the long-term future is Asia. It's the world's fastest growing region. It's the world's most populous region. It's the region with the major militaries of the world. And it's a region in which the U.S. has played a huge role for a very long time. We do most of our trade with Asia. I believe we have most of our investment in Asia. We have PAKOM, our Pacific Command, as by far our largest military command globally. And yet, we have spent 10 years enmeshed in two wars in the Middle East. Without commenting on whether we should have been in those wars or should not be in those wars, the President felt that during his first term he had to transition from the enormous investment of resources, not only treasure and lives, but also what's very precious in any government, the time of the top leaders of the government, had to transition from this enormous investment in the Middle East to a more balanced policy that allowed for greater systematic and laying the basis for long-term and high-impact engagement with Asia. What are the purposes, you know, what are the goals of this? What I find in the discussion of this policy that is so disappointing is that the tools that we're using are discussed endlessly and the goals I never mentioned. But, you know, tools are only important insofar as they get you closer to what the goals are that you're trying to achieve. I would sum up the goals of the rebalancing strategy twofold. One is to encourage Asia's ongoing economic dynamism so that it continues to be a global driver of growth where the U.S. participates fully in that growth and benefits from it. Secondly, on the security side, to try to shape an environment there such that security issues do not end up disrupting that economic dynamism, basically having the region underperform because of tensions between countries and conflict potentially between countries in the region, and also a security environment such that the U.S. does not have to put unsustainable levels of resources into security issues in Asia, devoting both our treasury and putting at risk lives of Americans out there. So the idea is to do what we can to develop a security environment where you have the kind of stability necessary to permit flourishing growth and to have us very much engaged on both parts of that effort, the former part being more of a cost, but it's to get the benefit of the latter part, which is potentially enormously enriching in the broadest sense of the word, as well as more narrowly. And the objective of diplomacy is to facilitate both of those outcomes. So this ends up being across the board. It's economic, it's security, and it's diplomatic, and it is region-wide. It is not only focused on China. Now the major components of that, let me just spend a minute on, and then I'll bring China more essentially into the equation. But the major components of it include the following. On the economic side, what's called the Trans-Pacific Partnership. If you haven't heard of it, it's because it doesn't exist. It is being negotiated. But this is a trading investment platform that we hope someday will be a platform for all of the major economies of Asia. We are now negotiating with a subset of those economies. Japan is trying to decide whether it can engage in this. South Korea would qualify for it. Their free trade agreement with the United States that was finally ratified by both sides about a year ago meets all the conditions that we're hoping to get into the Trans-Pacific Partnership. The problem is their domestic politics won't let them sign on to this at this point, but hopefully that'll change. China is not a participant in this. It's not a participant largely because its economy is managed in a way that is so far away from the kinds of standards that we're trying to build into this platform that we don't see a way at this point for China to get from where they are to meeting the conditions that we think will apply to this platform when those conditions are finalized, we hope, during 2013. But eventually we would like to have China join. It'd be a tremendous success if you have a high-quality trading investment platform and China does qualify, means the Chinese economy has evolved in directions that really are very good for a global market economy. So that would be a tremendous success if it were to occur. So there are big issues there. The first issue is to finalize the negotiations among the current countries that are negotiating this, and then secondly to try to expand it to get the really big players all be a part of this. Secondly, on the diplomatic side, for those of you who look at Asia, there are just an alphabet soup of multilateral organizations in different parts of Asia in different groupings. One of the things the Obama administration really devoted a lot of attention to when it came into office was trying to figure out where we'll put our resources in that alphabet soup of multilateral organizations. And the most important decision they made was on the economic side, now it's developing TPP, it all along has also been involved in APEC and ASEAN which have economic dimensions to them. On the security side, there's been no effective multilateral organization in Asia. What has developed is an organization called the East Asia Summit that the U.S. had decided not to join. The Obama administration decided that it would join it. It had to take some serious steps to qualify to join it. And they see that as the most important multilateral vehicle for addressing security issues in the region. Let me add, a year before we formally joined we discussed it with Beijing and Beijing encouraged us to join. I think they may now be rethinking that enthusiasm but we have joined. That requires that President Obama making additional trip to Asia every year. And for people like Susan who knows something about presidential scheduling, getting the president to commit to an additional trip out to Asia each year was quite an accomplishment. Thirdly, on the military side, what does rebalancing mean? There is a lot of perception globally that rebalancing means that we're going to withdraw from Europe and enormously boost our military resources in Asia. That is not what it means. I mean, we are going to draw down in Europe. We have to draw down in various parts of the world, and Europe will be a part of that front. In Asia, what rebalancing means is we're not going to draw down in Asia. It doesn't mean we're going to plus up in Asia. It just means the Asian part of our military budget is being protected. The next president, obviously, can choose to change that. But in a time of budgetary constraint, Asia, the Asia-Pacific region, basically PAKOM Pacific Command has its budget protected. There will be some modest shifting of resources that were pulled out of Asia for our wars in the Middle East to return to Asia as we fully extricate ourselves from those wars. But this is, frankly, around the margins. Very dramatic. What is more consequential is that we are developing some new military doctrines. These are not spoken of as China's specific, but they sure do fit the China challenge. The most wide-ranging one is called the Air Sea Battle Concept. This is fundamentally that our Navy and our Air Force actually work together so that Air Force planes can actually take data from naval radars and use it real time, or vice versa. In a lot of ways we can integrate assets which otherwise don't talk to each other in operational terms. So it's to optimize our naval and air capabilities. And Asia is all about naval and air. You know, Army doesn't have much of a role there. So we can integrate those capabilities in order to maximize what we're able to do given the resources we have available. This is focused on what's called overcoming an area denial, what's it called, A2AA. Oh, anti-access area denial problem, which is to say as coastal states especially around in China, frankly, developed increased capabilities to keep our key assets, naval assets, farther from their shores. The question is how do we overcome those increased capabilities so that we can operate relatively freely outside of their territorial waters, but otherwise right up to the edge of their territorial waters. And so the question is how do you overcome a combination of missiles and submarines and other capabilities that can increasingly be brought to bear that otherwise might push you farther out to sea as you try to exert your power. So there are military, economic, and diplomatic dimensions to what this strategy is about. Now the question is to what extent this is a China strategy. The Chinese see it as all about China and all about constraining China's rise. Complicating China's relations in the neighborhood, building the capacity to offset China's growing abilities, and thereby undermine China's interests. This strategy builds China into the middle of the strategy, but it's in the middle of the strategy because China's in the middle of Asia. Not only geographically, but in every other way. It is central to Asia. So you can't have an Asian strategy that doesn't have a huge China component to it because there's a huge China component to everything else you want to do in Asia. I think it's very hard to look at the record of the Obama administration and conclude that we have not sought to engage China on a massive scale. We have more cabinet level officials go to China in any six month period than to any other country in the world. We have more dialogues with China than with any other country in the world. The State Department is now behind a major initiative to get 100,000 American students studying in China. And we welcome more students from China to the United States, I believe, than from any other country in the world. You know, this is not your grandfather's containment strategy. This is very much a strategy of engagement in order to try to have a successful China play a constructive role globally. And constructive is not narrowly defined. It's, you know, in the broadest sense, contribute to global well-being. As we think about China in the context of an Asian strategy, we have to keep in mind a couple of bedrock truths. Truth number one is that China's economic role in Asia now dwarfs America's economic role in Asia. Even a country like South Korea, which is a U.S. long-standing U.S. ally, very close economic and other ties. South Korea does more trade with China than it does with the United States and Japan combined. Every country in Asia does more trade with China than it does with the United States. In 2000, virtually every country in Asia did more trade with the United States than it does with China. The gap between China's economic impacting Asia and America is growing, not shrinking. And nothing that we do is going to change that fundamental reality. Okay, their lead is so large and every country in the region, as it looks to the future, counts on being able to benefit from China's economic growth, to participate in it and to benefit from it. And nothing's going to change that. What no country in the region wants, though, is for China to be able to leverage that economic position for diplomatic and security advantage. And what they fear is that China increasingly is seeking to do that. And there's a good case to be made for that. So what's happened is that countries in the region have increasingly turned to the United States to provide the diplomatic and military leverage to limit China's ability to leverage its economic dominance for a diplomatic and security advantage. So we find that almost without exception, I mean there are a couple of exceptions, Cambodia allows, but otherwise, pretty much across the region, every single country comes to the United States and says, you have to show up more. We need your military to play a larger role. We need you there in every multilateral meeting in Asia. You have to be engaged across the board because we're scared. Now, back in 2009, the first year of the Obama administration, there were two worries. The biggest worry was of what was called a G2. The possibility that the U.S. and China, remember this was in the context of the global financial crisis, President Obama came in, won a major stimulus program, the Chinese adopted a major stimulus program, Europe did not want to do that. So the U.S. and China worked very closely together and fear began to grow that the U.S. and China would work so closely together that they would effectively dictate to other countries what they could and could not do. If the U.S. and China were tightly in a tight embrace, no one could really stand up to them effectively. No one worries about that anymore. That worry is gone. It's been replaced by what was a residual worry and is now a central worry. And that worry is that the U.S.-China relationship will become so difficult, so tense, eventually so antagonistic that countries in the region effectively will have to choose to side with one side or the other. And no one wants to do that. So what we hear constantly in the region now is manage the relationship with China wisely. Wisely means do just enough that they can't bully us. But don't do so much because we have to choose between you and them. And thank you for figuring that out. So that getting to the right... And this is very serious. You really hear this nonstop. China has really alarmed almost every country in the region. So getting to the right place in the rebalancing strategy, even in the best of circumstances, is not going to be either easy or certain. This requires a lot of different activities and different dimensions that manage to get to a kind of ill-defined sweet spot that doesn't generate excessive antagonism, but does show strength and staying power. These uncertainties are increased, I think, by another factor that lurks behind both China and the United States here. One of the big questions in Asia is whether... Okay, the U.S. has announced we're rebalancing toward Asia, pivoting toward Asia. We have stepped up our game out there quite a bit, diplomatically, dramatically, militarily and minor, but very symbolically important, ways. And we've declared that we aren't leaving. This is really where we're putting a stake in the ground. And the question for countries in the region is, can we pull it off? Do we have staying power? And the biggest concern there is the U.S. Congress, is the fact that our political dysfunction is so dramatic that they fear that we may be slipping into irreversible decline. I think the biggest single loss of power for the United States in recent years was the cliffhanger over increasing the debt ceiling in the United States a year and a half ago, during the summer of 2011. Around the region, I haven't been traveling around there quite a bit, around the region it was unbelievable. People just looked at this and said, these guys are gone. I mean, if you can't reach a decision as simple as whether you will cover your debt, when you're the world's reserve currency and the biggest debtor in the world, holy Toledo, you're gone. I mean, it just had a profound impact and we're at it again. And we could say until the last election, the election this November, well, in the U.S., the way we resolve political dysfunction is through elections. They all, and then to get the new people in, they've got momentum and they begin to put it together. The next couple of years are going to say a lot, right? And everybody's watching. So they wish us well but really worry about whether we're shooting ourselves in the foot so badly that we're not a good bet for the long-term future, right? And the shadow of the future looms large. Now here let me say there's an interesting dimension to this that doesn't get nearly enough attention. And that is that from a kind of 60,000-foot level, China is in the same position. It's just not as widely appreciated. Because in both China and the United States, we are both acutely aware of the reality that what we've been doing in recent decades that has produced enormous success is not viable for the future. That we have to undertake significant reform or it's not that our economies will collapse tomorrow but over the course of the coming decade, without major reform, our futures are going to be dramatically and adversely affected. In the U.S. we currently have 70-plus percent of our GDP is debt. That's very management. I mean if we could assure it and we've got above that, we could all relax, okay? The problem is if you look at the cost and revenue curves and track them out to 2020, if we haven't made major changes in those curves, by 2020 we will have done ourselves a whole, we will be so deeply in debt, forgive me mixing my metaphors, that it will dramatically adversely affect our future beyond that. What's the problem? It's not that we don't understand it, we do. It's not that we don't know what we have to do and broad terms we do. We have to increase revenues and decrease expenditures or at least as versus current expectations. Our problem has been very simple. We don't have the political wherewithal to make the tough decisions. That's what you see every day. China has the same problem. The development model that they have followed for the last two decades, which has been so phenomenally successful, has now run its course. The basic assumptions behind that model, and I'll detail this if anyone wants to ask questions about it, but let me just say the basic assumptions behind the model are no longer valid. They have in typical Chinese fashion very pragmatically laid out a new development model and adopted it as at least in theory their national policy. The problem is they have to date demonstrated an incapacity of failure of political capacity to actually implement those decisions. Their current model will continue to generate a fair amount of growth, but that growth is already increasingly socially and politically destabilizing rather than stabilizing. Increasingly unsustainable in terms of resource use and in terms of what the cost of labor will be and that kind of thing. And if they are still there 10 years from now, we'll likely lock them into some form of middle income trap where they will not rise to be a high income middle class country. And they know it. But what they have to do to address that is much more complicated than what we have to do to address our problem and much more difficult politically. They have a new leadership that's just come in, we'll have to see how they do. But the bottom line is at the end of the day probably the most fundamental determinant of our relationship with China 10 years from now will be how far each of us respectively has gotten in undertaking not only adopting but implementing the reforms that each of us has to take to be successful domestically. That's what generates capability. On the US side everyone's very sensitive to that and looks ahead with that in mind. On the Chinese side there's still this kind of peculiar division. You talk to people who study China and they all know what I just said about China's domestic situation. You talk to people about China's role in the world and they all forget what I just said about China's domestic situation and assume that China is going to keep on growing at not a 10% thing at 8% or 7.5% plenty enough to be a dramatically more powerful place 10 years from now. So this hasn't quite gotten there yet but if China doesn't undertake major reforms this reality is going to be increasingly pressing and we'll begin to factor in a major way to international calculations. Now let me say rebalancing this broad strategy has achieved notable results. I think it's the greater US energy behind its role in the region which in part is simply our ability to conceptualize what we're doing to package it if you will and sell it and then show up with the kind of dynamism and the program behind us has really increased our credibility. There is a sense again of the US being robust after the year 2009-2010 at the height of the financial crisis and as we just began to come out of it where it looked like we were really set back on our heels and slipping into decline. There is as I've stressed a real desire by many to increase the US role and frankly if you're in the White House it feels pretty good to have countries in the region asking you to do more, right? They really love you and want you. That's reinforcing. I mean people are people that is affirmative. It's reinforcing. With the kind of kicker being the question about our staying power. My problem with what's happened since we announced the rebalancing strategy is that these immediate wins that I've just described are potentially increasing the risk of failing to achieve the strategic goals of the policy that I named earlier on the economic and security sides. So I think we need to start to rebalance our rebalancing strategy to make midterm adjustments in it. Over the last couple years territorial disputes especially maritime territorial disputes in the region have become much sharper and the risk of actual conflict especially between China and Japan has gone up a great deal. I think conflict if it occurs will be not because one side decided to shoot at the other is because there will be some accident in our incident that causes loss of life and control of the escalation very effectively and a huge amount of damage can be done very rapidly. Again if you want to ask I'll lay that out. Also the way this has played out again I stress the conceptualization of this from the start has been region wide build bridges to China integrate China into a region that has plenty of room for both of us and where we can do a lot of things together. The way it's played out in China is this is all about China and it's all against China and the Chinese have a real kind of conspiratorial understanding of U.S. motives. The premise of that is that the U.S. first of all the U.S. has always been anti-communist pro-democracy. We've voiced that sentiment whenever you get an opportunity to it's who we are. But if you're a leader of the Chinese Communist Party that translates into the U.S. seeks to overthrow you. You know that gets personal that is not welcome. So there's an underlying distrust about whether ultimately we see our success as premised on system change in China. I think in fact we don't we just you know we can't say we don't because we're pro-democracy but we don't say we do. You never see the present call for the overthrow of the Chinese Communist Party or something like that. It's kind of two tracks in our foreign policy but they put them together very seriously. But more specifically they assume that because the U.S. is the most powerful country in the world and because they are now the second most powerful country in the world and because their power trajectory is going up well they see ours as having plateaued and at some point we'll start to go down. I think it started and others think it will start at some point in a not too distant future that we must be using our phenomenal global power to delay constrain complicate and if we can possibly do it disrupt China's rise. So that everything they see around the region from democratic reform in Burma to how the Philippines acts when there's a dust up over fishing vessels in a shoal near the Philippines in disputed area to anything else you can name is all at the instigation of the United States. The problem and if you point out to them the many many many things we've done including in the Obama administration that are in China's interest you know the people are being honest with you sit there and say yes that just shows how clever you are right? I mean the problem with the conspiracy theory is there's no way to disprove a conspiracy theory because if you're smart enough you'll occasionally mislead them by doing something nice but ultimately that creates enormous distrust distrust about long term intentions and the motivation behind everything you do. Now the Chinese don't want an antagonistic relationship with the United States we're the biggest single issue out there for them we don't want an antagonistic relationship with China but when we see them adopt that analytical approach it encourages many on the US side to say well if that's the way they think then they must be concluding that the only way they can really meet their aspirations is by undermining the United States if they think we're using our power to constrain them then unless they're idiots they'll feel they have to do what they can to undermine our power in order to give them the space that is rightfully theirs and if that's what they're going to do then maybe we better be a little more serious about defending against that right? and so you can see how you can easily get into a negative spiral here even if that is not the desire of either side in addition when you think about it as our stress China's economic role in the region has continued to grow for China Asia is a huge profit center our security region role in the region is growing security is a huge cost center given our budgetary constraints we do we should not want to end up in a place where for China Asia is a profit center and for us it's a growing cost center we want Asia to be a profit center for China and us and many others with minimal but necessary security commitments to make that occur but the trends in the last couple of years are not there they're moving somewhat and increasingly in the other direction in addition to that given the realities of the way the world works the Department of Defense now is fully taking on board the coming decade in budgetary terms will not look like the last decade in budgetary terms they've had a tremendously rich budgetary environment for the past decade a little more than that that is now coming to a screeching halt and the issue is who loses what from their wish list and from their necessary I mean who loses what is now a constrained budgetary environment those who study the military know full well that one of the ways you protect the budget in the military is you articulate more clearly and compellingly than any other competitor for that money the threat that you alone can deal with effectively if only you're given the appropriate resources now the biggest money in the military other than for personnel is for major new weapons systems research, development, testing, evaluation deployment and operation it's the biggest budget in the history of the world other than our personnel budget so that's a lot of money at stake there is only one country out there where dealing with them if they become really antagonistic requires major new weapons systems and that's China you don't need them for terrorism you don't need them for Kuwait you don't need them for Luxembourg you need them for China so there is a natural tendency not cynical well intention to articulate the downside the downside potential of China and what would be necessary to protect our vital interests if that downside potential becomes a reality and in the world of new weapons systems you're always living in the 15-year future that's your time horizon from the time when there is an initial conceptualization enough that it becomes a real policy issue whether to go in that direction or not to actual deployment of major weapons systems generally 15 years depends on the system some are much longer, few are shorter but you're a futurologist and since no one really knows what the future will hold the question is where you place your bets and what's the most compelling place to put scarce resources and China is emerging increasingly in those debates and there is huge, huge money involved let me say by the way I'm quite convinced on the Chinese side, same thing is true the US drives the debate there Taiwan doesn't warrant the budgetary expenditures dealing with the US Navy warrants so you have this kind of our hard liners and their hard liners are the best of friends so I think it's time to think about what we can do to get things on a better trajectory within this overall strategy and let me suggest an approach to doing this we have to continue convincingly to tell our friends and allies in the region that we are there for them we're there for the long term and we're going to have their back should keep in mind though that if we can affect Chinese behavior in a way that reduces that makes Chinese behavior in their minds more responsible, less threatened we get credit for that that is what you call wise management of the relationship with China I think while providing ongoing strong assurances to friends and allies we need to do some things to kind of bring Beijing back into the equation on a more positive basis the question is how can you do that keep in mind there's a new Chinese leadership no person becomes a leader of China by working on foreign affairs this is a deeply, deeply indigenous domestic oriented political system our secretary of state is the top ranking cabinet officer in the United States in China you look at the top 25 officials and not a single one of them is charged with managing foreign affairs their foreign ministers so far down in the pecking order gets lost in the crowd a guy like Xi Jinping has very, very little foreign exposure the only member of the standing committee of the Politburo who was educated abroad graduated from Kim Il Sung University in Pyongyang you just have to keep that in mind we deal with China as an international actor China is all about internal stuff and foreign policy derives from internal dynamics I have a new leader there who faces enormous demands for domestic reform has a plate absolutely full and 70% of China's party government and military leadership is turning over in a six month period 70% so there's a lot that is just very unclear about what decisions will be made and where these guys will head seems to me we ought to take advantage of that period of uncertainty about what operational priorities will be to lay out for them quietly, not publicly and the details will be decided within the U.S. government so any things I suggest are just my own thoughts so if I really thought they were going to do what I suggest I wouldn't be suggesting it publicly but conceptually to lay out for them a program a set of issues that meet several criteria one, they are issues of concern to China in many cases they are issues that affect China's views of our ultimate intentions and they are issues that the president can act on without the support of the U.S. Congress since it's not clear that he can get that support for anything he wants to do and finally there are issues that stretch across political, economic and military arenas to always go across the relationship and indicate what he is prepared to do on those issues I'm running short of time so I'm not going to go through a lot of suggestions as to what they may be but just ask the question I'll take up the rest of the time on them because it's easy to come up with a substantial list of significant issues that the president can execute on where let me say all of them are in our interest to do so this is not giving up major U.S. interests as a sign of goodwill toward China this is acting on American interests but also doing so as part of a package that demonstrates to the Chinese side that we take this relationship extremely seriously we value it we're prepared to move forward on it in a wide-ranging way we should present that to the Chinese leadership quietly and say to them you know what our areas of concern are come up with your list that is comparable comparable in significance comparable in impact don't make it public we don't want to get a document out of this come back to us with your list and let's sit down and negotiate and see whether we can reach a package of steps that each of us will take within prescribed periods of time and where expectations are reasonably clear we're taking those steps we'll build mutual confidence that both of us take this seriously and that we want to have a more stable, forward-looking expanding relationship that is in both of our interests and again I'll suggest specifics if you want to raise them this sounds abstract but it's actually the only reason I don't want to go into specifics is that they're so dull it's a lot of detailed programs wrapping up our technology export review program this kind of stuff it's a lot of stuff but these things are all very significant in the relationship the nice side about this is if we can put together a package like this first of all you have to do it internally in the U.S. by an interagency process that we'll get by in from the various parts of the U.S. government and so the objective is to get each of the major players DOD and state and treasury etc feeling like they own the program and the White House runs the process but in a new industry almost everyone who deals seriously with China at a policy level is changing in a four month period here so it's a new team you've got to construct a new consensus and this is a great vehicle for doing that secondly, if you offer it to China and the Chinese can't step up and offer something comparable A, you don't have to implement anything and B, you get credit for having offered it you're showing your goodwill and you're also showing your tough I'm not going to do that if you aren't going to do something comparable so there's not a downside to doing this thirdly, why should we offer it instead of just asking the Chinese to come to the table with their wide-ranging set of initiatives because the Chinese are incapable of developing a wide-ranging set of initiatives their bureaucratic system simply is incapable of doing that when you want to get anything that is that has some scope and some drama to it done with China it is always the case that you have to propose it that then gives their bureaucracies something to come together to discuss and respond to and then their response may be quite creative they aren't bashful about responding they can't take the first step but I would argue even that's in our interest because it has a great advantage of letting us set the terms of the discussion right and then they respond that's actually not a bad position to be in when you're in a negotiation so and I think that Xi Jinping personally is very early in his thinking about international strategy and about the balance how he wants to play the interface of the international and domestic policy arena in China I think he still is when you're number two in China you don't get to make those decisions it's only when you step up to number one and so he's in a really new new situation and that's the right time to get to him not quite yet but this summer or early this fall none of this would be easy but I think recent trends and new opportunities suggest that it's both timely and necessary I am out of time the other thing I was going to do is to tell you the four reasons why this will not work but I'll wait to get your questions instead of doing that so I periodically said ask about this if you want me to follow up on it and ask about anything else as long as China is somewhere in the question we have reached that point but I really do look forward to your questions and happy to respond to whatever you want to raise thank you very much Dr. Lee with all my names Christina I'm a second year master of public policy student here at the Ford School thank you I'm half of the students for coming to speak to us today the first question we have here is in response to the latest North Korean nuclear test how can the U.S. further pressure the Chinese to reign in North Korea are there any specific policy ideas beyond dialogue and what is stopping China from taking action we break at what time you know if you read what has been said in the last day and a half or so since North Korea had its most recent nuclear test there are a series of themes here can you all hear me is this microphone no okay let me if you read what has been said in the last day and a half or so since the most recent North Korean nuclear test I mean a series of consistent themes most of which I think are wrong North Koreans are inscrutable so you don't know what they're going to do I think the North Koreans are very predictable you always know what they're going to do the problem is it's exactly the opposite of what you want them to do okay but actually you go back and their strategy has been more consistent than the strategy of almost any country you can imagine right secondly China has a lot of leverage over North Korea but just won't use it what constrains China is two things regarding North Korea one is that it is very very difficult for a big state to tell a little state what it should do and have it do it just think Cuba forget Cuba think Haiti right we haven't we have these itsy bitsy places very near to the America-Southern border that have not lacked for US attention over the years and we've never been able to get them to do what we want them to do right so it sounds good but it doesn't work and in addition China is constrained because well we don't fear instability in Cuba China does fear instability in North Korea big time and what they fear is that what they will end up with is a unified nuclear Korean peninsula in bed with the United States that's a terrible outcome from their perspective so while they don't want a nuclear North Korea a nuclear North Korea that has Chinese interests everywhere they even more don't want a unified pro-American nuclear-armed Korean peninsula which would be a major player and so on balance they try to nudge North Korea but are constrained and I think in fact there are some things that China can do they aren't exactly what we've been calling on them to do you know we tend to focus on what we support in a UN resolution that will impose more sanctions on North Korea frankly you know we've rung out of sanctions we sanction everything in North Korea right and doesn't make much difference because they don't do much with the international world but I think there are some things that China can do and approach they could take and what I would quietly be going to them along is the following package in the UN support a resolution they're going to do it anyway you know and well we won't be quite as harsh as we otherwise would have been because it's a distinction without a difference nothing's going to change what North Korea is doing anyway so get the Chinese to sign up for the best they can and then praise them for doing but quietly say to them we have two big asks one is the North Korean nuclear and missile program my understanding is are organically tied to the Iranian nuclear missile missile and nuclear programs when North Korea tested its long range missile the most recent test the first one that was successful the third stage was Iranian right the two nuclear programs have been joined at the hip for years so when North Korea tests a nuclear weapon I don't know for sure but I think there's a very good chance that data are going to Iran so they don't have to test right that's a huge threat my sense of geography is you can't fly from North Korea to Iran without landing in China or at least crossing Chinese airspace because no one else is going to let you go right so suppose we go to the Chinese and say don't let any North Korean or Iranian planes fly from one country to the other cross Chinese airspace that would be a way to kill two birds with one stone right invisible no one need notice you don't have to make an announcement but it would wake up leaders in both countries big time and secondly China should begin they've done a little bit of this they should do a much larger scale delaying and disrupting Chinese supplies to North Korea not joining sanctions just things don't show up have a problem with the rail system have some incident over here sorry the factory couldn't produce that you just have to wait don't know when it will come North Korea will get the message in 24 hours and if they continue you ratchet it up a little bit something you can control completely no one's face is involved if you do it publicly there's face involved if you just do it then it's real money and you get attention so that's what I would go to the Chinese for and the third thing I would do is see whether the Xi administration different from Hu Jintao who was a wuss on this stuff frankly don't quote me on that but see whether the Xi administration is willing to sit down with us and with South Korea to talk about what we do if there is a dramatic contingency in North Korea not that we have to act together but we should know what each other are thinking about what our plans are for example currently if there were a real collapse in North Korea which is unlikely but feasible certainly over the coming 10 years it's feasible if there were a real collapse you can be sure the PLA has contingencies to move into the northern part of the country to pacify it potentially to try to identify where nuclear materials are and get a hold of them and to prevent massive refugee flows into China well guess what the US and South Korea have similar plans it would not be at all surprising to learn that there are parts of Korea where both militaries would have operational orders to seize it and hold it and pacify the population if we aren't talking to each other we could end up shooting at each other which is not an outcome anyone would want to have but we literally don't talk about the issue we have never had a conversation with China about long-term contingencies in North Korea never okay let me say we've been willing to and they have not question is whether under new circumstances with new leadership they might be more willing to and we ought to see what we can do to foster that conversation so that would be my set of issues the next question is what are the implications of China's aging population for China's rise China let me give you one ratio one set of ratios just to highlight what the issue is here currently in China you have one retired person for every five people of working age I'm sorry one dependent for every five people of working age but those dependents overwhelmingly are retired not children by 2030 you will have one dependent for every two people of working age between now and 2030 China's demographic pyramid is age distribution becomes the same as Japan or Italy or Florida okay I'm serious you know the for the first time last year China's working age population shrank that was only a marginal portion of 1% that shrinkage will accelerate phenomenally over the coming 25 years phenomenally and you know it I mean one thing about age is you can tell the future and the future is very very grim on that so they are going with unprecedented speed from being a country with a demographic surplus which is to say as compared with other countries at their level of GDP having more people working age population than the normal one does and fewer dependents they have enjoyed that for several decades they are now transitioning at literally historically unprecedented speed to the opposite which are not quite the opposite but you know where they have a demographic deficit fewer people working age as a percentage of the population than almost any other country in their category of GDP or anticipated GDP that has consequences the price of labor will go up the ability to support double digit increases in their military budget will be there going to be a lot more competition for those dollars they have to improve healthcare they have to improve all kinds of services for the elderly we are talking about the retirement of our baby boomers it is not nearly as dramatic as the transition occurring in China and so how they work that out is not fully clear at this point frankly the politics are such that they still haven't dropped their one child policy which is frankly insane but politics are a funny business right and they just haven't been able to do it so you know you don't know for sure but what you do know for sure if they can't continue the development strategy they've had to date that has to undergo major changes and that will require a lot of investment and a lot of very difficult policy decisions and we'll just have to see how it works out how can the U.S. mediate between China and Japan without alienating China regarding the Daoyu Islands and also as it relates to the security issues in the South China Sea it was enough to say you don't have to say South China Sea too that's a I don't think we really can mediate that's the bottom line China and Japan have dealt with each other for a long time what we can do is what we've done to date which is to encourage them in every way we can to cool it right and we say the same thing to both of them on that let me explain what the danger is here I don't think that China and Japan are going to start shooting at each other as an act of conscious policy both of them realize that if there's a real conflict their economic relationship will tank and that will have dramatically negative consequences for both of them this is not like dealing with the Philippines in the Chinese economy this is huge and the Chinese are very sensitive to that but they now have a situation around these islands in Chinese and Senkaku by the Japanese these are five uninhabitable rocks I mean they literally are you know so there are no real significance in terms of being able to base you know put a naval base there or air base I mean it's just ridiculous but they've been caught up in nationalist passions over sovereignty the both countries are now putting a lot of boats in that area to highlight that effectively they're the ones that control the area what the Chinese say we have traditionally said Japanese administer this area and the US-Japan security treaty covers these rocks not because we recognize Japanese sovereignty we do not but our security treaty in a peculiar little anomaly says it covers all areas of Japanese sovereignty and all areas administered by Japan and these rocks have been administered by Japan so an attack on Japanese forces over these rocks in theory could trigger US response militarily that's why it's very hard for us to mediate because we have an alliance that covers one side's participation in this the danger here is there are enough boats and enough planes increasingly kind of challenging each other just by their presence that there could well be an accident or incident that causes loss of life and if that occurs this will turn instantaneously into a wholly different problem because I think given the politics of this country keep in mind each is still in the middle of a political transition in Japan in July there is a parliamentary election that is very important to the new Abe government in China next month they have a national people's congress that will form their government this is not a time when either side will be very good at escalation management so it is a big problem for the Japanese to at least recognize that there is a dispute over sovereignty and the Japanese say there is no dispute over sovereignty we have sovereignty now there are ways diplomatically to bridge that we have indisputable sovereignty but we know that there are some others who disagree with that position even though our position is right at least technology is a dispute there are different things you could do but I think what they have to do on a very very urgent basis is to get it is too early to have the governments really try to negotiate this too much face and too much passion out there right now but get some of the elders on each side who have known each other for many years who trust each other and who have command the respective current leaders in each of their respective countries have them get together and work out not any final resolution not capable of that but work out steps that each can take unilaterally to pull back to get these boats farther away from each other to not have planes over there at the same time so that you reduce dramatically the chances of accident and create the chronological space necessary for people maybe later this year to begin to engage government to government to try to get some workable agreement some language diplomatically and then some workable agreement on the ground will not resolve sovereignty sovereignty is very hard to negotiate but you can postpone sovereignty each side claiming that they have indisputable sovereignty and work out on the ground how things will operate that's been done before I think it needs to be done again they need to get to it real fast South China Sea is an even longer answer do you really want me to get into them no okay thank you China is now the world's largest producer of solar and wind systems yet it still relies on coal for 70% of its electricity generation this has colossal impacts on both the environment and global climate change how can this be dealt with how can it be dealt with well first of all let me say China there's one statistic that's wrong there it relies on coal for over 80% of its electricity generation for 70% of its total power total energy use it relies so heavily on coal A because it's the most if you don't price out the externalities of burning coal in other words if you assume asthma, treatment you know all the things that happen including global climate change that happen should not figure into the price of coal then coal is the cheapest source of energy by far right and China is a development country their energy demands are expanding at a phenomenal rate and so they grab coal also coal is the only source of energy they have in relative abundance domestically so there's an energy security dimension to this too they in fact have bought into the need to transition both for energy both because of environmental degradation and because they are realizing now that they do not have as many years of coal use ahead of them as they thought they had if you go back a little more than 10 years the Chinese thought they had usual figures 900 years of coal reserves in any case hundreds of years of coal reserves that figure is now down to 40 and dropping like a rock down to 40 for two reasons one is their energy demand is just expanding much faster than they anticipated was so you need more coal but secondly to mine coal you need water and most of China's coal is in the North China coal basin where they have a dramatic water shortage and what they're finding is their lack of water is now limiting their capacity to exploit coal in the North China coal basin they have now become I think the world's largest coal importer in the last five years right so they are trying to transition away from coal that's the good news the bad news is they have been trying in one way or another to transition away from coal for at least 15 years and they had totally failed it's in part again because their overall energy demands have been growing so rapidly that even as they rapidly develop solar some wind energy they're going in for biofuels they're trying to develop natural gas they're importing more oil and using more oil for firing power plants they're doing everything they can the figure I've been told I don't know whether it's accurate or not is they spend about $9 billion a month on building non-coal energy sources right and the result of all of that is that the percentage of energy that is that derives from coal is the same as it was before they started right so they are in deep, deep trouble on this issue and I think at the end of the day they aren't going to get away from coal until they begin to really run out of it so the focus really needs to be a more efficient exploitation of coal super critical combustion carbon capture and sequestration some of these things are well developed something like carbon capture and sequestration was in the early days but it's the kind of thing those are the kinds of things that limit these technologies from use of coal and I think that they just have to put a lot more money into that and focus on it much more effectively and let me say I think we have a role to play in a lot of this because we have a lot of we're farther along in some of these technologies than they are but they can scale them up faster than we can so if we get together we can do some things that actually would benefit both sides the Chinese are doing a lot of development and resource extraction in Africa that run counter to US interests can you speak a little bit about this and about US policy towards China and Africa are there specific policies that have been developed to address the relationship in this context if so what are they China began to move into Africa in a major way really just in the last 15 years or so they've had a presence before then and certainly a political presence but their investment presence is relatively recent and they've scaled up very very rapidly our big concerns about it have been mostly that they really have not the kind of conditionality that we put on aid or that the World Bank puts on loans this is environmental governance standards and things like that they go and they pay pay off everyone in town and get the resources they want what they do contribute is they build a lot of infrastructure and that infrastructure has contributed in a significant way I am told I'm not an African specialist so this is all just why I'm told by people to look at this that infrastructure is contributing a significant way to the rapid growth of Africa's GDP over the last decade so I'm not sure that I would look at this as solely what they're doing is not in America's interest it enables Africa's economy to begin to really get on a sustainable development path I'm not talking about sustainable I don't mean strictly environmental I mean get to a kind of takeoff and self-sustaining I think that's a very very good thing what the Chinese are finding very painfully is that a major reason why a lot of western firms are not in Africa or not in particular parts of Africa where the Chinese go is because they're very high risk and they're high risk for a reason so the Chinese are now finding that they have problems of mind managers being beaten to death Chinese workers being kidnapped people being shot local governments local political leaders campaign against the rape of the land by the Chinese and kick the Chinese out you know that's kind of stuff you run into and bribes don't always swear the circle so they have begun to become much learier about continuing to ramp up the way they have been in Africa and they're becoming more sophisticated about it we and others are now talking with them in much more detail than we did before about aid program cooperation aid program standards how you manage these things in a way that minimizes risk for China and Africa most of what they do in Africa is through their corporations so it isn't government aid it's corporate investment backed usually by loans from the China Development Bank from one of their policy banks there's government money behind it but the purpose is profit right and there may be some strategic element to it certainly these companies are encouraged to go out and bring resources in because China is a tremendously resource of financial resources but the companies don't want to go where they're going to lose money and get their people killed so we're finding after this initial rush there is now some rethinking and I wouldn't be surprised if within a decade we have a somewhat you know a clearly adjusted approach by China and Africa and I think this will be the last question what do you first see as the biggest challenge in U.S.-China relationship years and what advice do you have for China and the U.S. government separately to create a win-win situation the biggest danger I see I think because I think we're in a fairly critical period after all we have a new leadership in China that at least for the top couple of people will be there for 10 years and we have a second administration you know second term Obama administration in for another four years but my biggest concern is that five years from now will be at a point where it is hard to avoid slipping into a fundamentally antagonistic relationship which I think would be a huge loss for both sides and for everyone else in Asia I mean some of us in this room live through the Cold War it costs a lot costs an opportunity costs him wealth costs him lives not a good place to end up we can get there in a lot of ways first of all there's this underlying distrust of intentions there are the dynamics within each of our military establishments and I will say our bilateral relationship is wide-ranging and deep in terms of activities and stuff except between our militaries our militaries interacted about the level of government interacted at 20 years ago I mean literally about two decades behind the rest and that's not good thirdly there's a tail-wags-a-dog problem I mean you asked about the Diary Islands earlier right we could get drawn into conflict that we have no interest in whatsoever I mean frankly it is totally irrelevant to us who has administrative control over the Diary Islands I actually talked with Henry Kissinger about this because he was the guy that made the decision to put the Diary Islands under Japanese administration and the records are there I mean the meeting where he made it and the discussion of it and everything I asked him about it and he said you know frankly you're not the first person who's asked me and for the life of me I can't remember it you know and he wasn't being disingenuous I mean this is so inconsequential so was the start of World War I I mean you know you get just obligations that get you into a particular situation that has a dynamic that you can't quite control because of nationalist passions elsewhere and then credibility becomes an issue and do you stand up for your alliance and this kind of you know don't get me wrong I'm not anticipating a third world war but both sides can want to have a good relationship and there are a lot of paths that stand up someplace very different frankly that five years from now it will be much harder to steer it back onto a more stable and positive forward trajectory it's one of the main reasons why suggesting what I just suggested in the formal remarks I made which is that we need to try to come up with a package of things that in their totality communicate and intention to credibly have a much better relationship so some of the things like I mentioned in passing completing a technology export review this review has been going on for three and a half years in the US government our current technology export policy hurts American business dramatically we preclude our businesses from exporting many things that our west European allies export without question so we lose the business and they get the business this isn't only to China this is a global regime we've been reviewing it for three and a half years to rationalize it and bring it up today we have not gotten the review done the China you see it as directed at them they complain constantly that we restrict technology exports to them where they can get the technology elsewhere it shows that we want to constrain their development well it doesn't show that at all but you can understand why they think it let's put that on the table and let's get the president behind concluding that technology export review let's offer to them let me give you this three other things just to give you a couple of flavor for what we can do right the president Obama met with Hu Jintao twelve times over the last four years with only a couple literally a couple of exceptions every one of those meetings is on the side of some multilateral meeting that they were both participating in the APEC leaders meeting or the G20 or whatever one time Hu Jintao came to the UN Terminal Assembly opening and they had a one hour bilateral meeting which is the standard venue right keep in mind who speaks no English Obama speaks no Chinese the interpretation is consecutive not simultaneous so each gets to speak for 15 minutes in a one hour meeting and who in particular always just sat there and read his talking points so there was no interaction you know literally none Xi Jinping is more flexible than Hu Jintao is frankly anyone breathing is more flexible but that's it the I think Obama ought to offer to Xi Jinping that when we meet on the side of these multilateral meetings we will take three hours together and it will include an informal meal alright and so we have a chance to talk get a chance to know each other because if we're going to engage it's got to be driven by the top of each government you need the very top leaders mutually invested and build some mutual trust secondly we now conduct more than 60 bilateral government to government dialogues with China every year it's an alphabet soup of dialogues across each of our governments there is one common characteristic of every single one of those dialogues not one of them talks about the long term future effort every single one of them is about a current problem in the next couple of months until you have the next dialogue but our fundamental distrust is about the long term future so I would recommend then we establish a what's called a Paul Mill dialogue one that gets civilians and uniformed officers in the room where the focus of the dialogue is our respective strategic postures in Asia 5 to 10 years from now what are the doctrines what are the platforms what are the red lines are there areas where mutual restraint might actually build mutual confidence and build greater security for both sides we could actually have those discussions over nuclear weapons we can't have them with the Chinese it's just bizarre right and by the way we have never sought to have them with the Chinese and they've never sought to have them with us I think we ought to take the initiative and see if we can develop that and do it at a high level maybe four times a year so you have a progressive agenda that you can keep working at to build mutual trust and some mutual activities on the military side military's interact virtually not along I'll wrap up on this because it's 531 I'll see you back there we hold more than 300 multilateral military exercises in Asia every year we have almost one a day some of these are very large scales some of them are much more modest over 300 a year we generally invite the Chinese to none of them every other country in Asia with the exception maybe of Laos and Cambodia maybe Laos is the only exception every other country in Asia is involved so the biggest of these is called RIMPAC we have now invited the Chinese to be an observer at the next RIMPAC exercise it's brought together 24 countries the last time it was held the Chinese were the only real excluded people the president can use waiver authority believe it or not the congress has stipulated that we may not invite the Chinese to any military exercise that's a great way to build mutual trust but the president has waiver authority on that decision I think he should use his waiver authority to invite Chinese at least observer status in a selected gradually increasing array I don't mean 300 I mean 3 maybe building to 5 and then military exercise because it's vitally in our interest that they have some understanding of what we're doing through observation and talking with the people involved believe me we know how to run these exercises without giving away any secrets we've got that down pat so inviting their participation would potentially give them a sense of buying and make it feel as if we are not trying to hold them down and exclude them into a dynamic dimension of the Asian region so I think there's a lot we can do I think we need to get started on doing it and let me say there's a huge burden here on the Chinese side to step up and understand that this is in their interest too and be adequately responsive thank you very much that was terrific and very timely thank you very much I wanted to thank all of you for joining us and for a really wonderful set of questions I'm sorry we're out of time because I know there were a number left I hope you will come back and join us for other policy talks at the Ford School just a final round of thank you to Ken Lieberthal