 And I'm a senior fellow here at New America, and I want to thank you all for coming out today. And Eamon Fingleton, he's sitting next to me. He's an old friend of New America, and so it's a special pleasure to welcome him here. He's actually, I guess, in a way a friend of New America going back to before New America was established, because Eamon used to hang out with Jim Fallows in Tokyo a long time before Jim became our founding chairman of our board. Another reason it's actually very, it's a pleasure for me to have Eamon here is because Eamon is one of the people, the few people in this town, a few people who come into this town who really have no fear. He just says what he wants to say, and that's a pretty rare thing in these days. Anyway, most of you, a lot of you know Eamon or have followed his career, but I'll just go through some of the basics. Eamon's actually been covering international business and international economics since the mid-1970s. He's been living and working in Asia, mainly in Tokyo since the mid-1980s. His work over the years, he's written for The Atlantic, New York Times, Washington Post, Harvard Business Review, among many other publications. He has three previous major books, the last of which was In Praise of Hard Industries, Why Manufacturing and Not Information Technology, Is the Key to Future Prosperity. His work has been present in a number of ways. Some of you will recollect that Eamon predicted the collapse of the Japanese banking system and the stock market, the asset bubble back in the late 80s. He predicted that in the mid-80s. Eamon, he didn't only just predict the popping of the high-tech boom, he also predicted the shifting of power back to hard industries. This is back in the late 90s. He also predicted the renaissance of Japanese manufacturing, while Americans were sort of focused on the fact that Japan was somehow washed up in the world. We're here today to, he's going to be talking about his new book, which is In the Jaws of the Dragon, America's Fate and the Coming Year of Chinese Egemony. I just received the book yesterday, so I haven't been able to read all the way through, but I think there's obviously a number of unique, original and vitally important insights in this book. Among the most important of these, I'd say, is the fact that Eamon makes very clear that this is, at its core, a struggle for control of a global system. And he also makes very clear that this is not necessarily something that's going to play out in a military way. This is not necessarily going to play out in some form of war. This is something he makes very clear how the Chinese are able to exercise their power one company at a time, over one person at a time. So anyway, without any further ado, I'll just turn it over to Eamon. Thank you, Barry. Good afternoon, ladies and gentlemen. It's a great pleasure to be here. I'm particularly grateful to the New America Foundation for giving me this platform. The argument, as Barry has hinted, is a contrarian one. And in East Asian studies these days, there isn't much space given to anything other than the conventional wisdom. This will not, I promise you, be the conventional wisdom. And part of my argument concerns truth, our ability to determine the truth. These days we have become rather complacent. We think that the world is an information society. Information travels at the speed of light. So at any one time we're fully informed on every other important aspect of what's going on in the world. But there is a distinction here. There are two sorts of information, truthful information and untruthful information. And they both travel at light speed. East Asian nations, I can say from the benefit of 22 years in the region, do not believe in telling the truth to their own people. Our fortiori, I think we in the West cannot expect to be well informed on what's really going on in the way of policy in the region. There's another problem with our information sources and that is that Western residents of East Asia as a general rule within a couple of years, certainly four to five years, they go over to the other side. They often remain critical in a token way of their adopted society. But very often that is a conscious cover for, in fact, propaganda. They are propagandists for the local system and on key issues of policy relevance here, they will be feeding the wrong message into the American media, into the American policy community. Some of these people have been pressured to do this or they certainly are rewarded to do this, to essentially lie to their home country. Some people maybe hold out for a while, but after years of frustration, they get a sense of inevitability about what's going on. They think that it's futile to try to continue to tell the truth back to the home country. They adopt an attitude of if you can't beat them, join them. They go over to the other side as an expression of frustration. Another problem, of course, is ideology. Ideology here tends to greatly discombobulate Americans' understanding of what's going on in East Asia. The ideology, of course, comes initially from economists. It's hijacked by the corporate sector. The corporate sector sees profit in putting across certain ideas and finds that ideology is a good way of boosting their message. The ideology, of course, is the ideology of free markets. The idea that the nation that conforms most closely to the free market ideal of the textbooks is going to be the most successful. The message that comes across is that America should be patient, that other nations, to the extent that they deviate from free markets, are actually only hurting themselves. This argument has been heard from Japan since what, the 1960s, mid-60s. People here have duly responded saying, we must give these people more slack. In doing so, America has a lot one industry after another to become, essentially, Japan controlled. So one-way free trade has been the message all along, and it has resulted not in the demise of Japan, not in the demise of any important industries in Japan, but rather the demise of American industries and the resulting damage to the American national interest has been huge. So the message has been there since the 1960s, but the clear evidence of the real world is that there's something wrong with our Western ideology. So what is the truth of the present situation? What is the truth of the rise of China in particular? I have two main points that I want to make. One is that the Chinese system is not capitalism and it's not converging to capitalism. The second point I make is a political one, which is that East Asia generally and China in particular are not converging to Western values, Western political values. Let's deal with the economics first. The reason I say that the Chinese system is not capitalism, because it depends very heavily on regulation and market rigging. In all our economies, we have regulation and probably we also have market rigging, but these are regarded in our Western societies as imperfections or in some way something short of the ideal. In the East Asian system and the Chinese system, regulation, market rigging, central role for government, all of these are crucial to the system. The system would not work without them. So in that sense, what we're looking at is not capitalism. I would add that capitalists in East Asia do not have the role that they have in Western societies. Wealthy people who have built up large businesses in China are not important people in the overall ranking in Chinese society. Ditto for Japan, ditto for Korea. Society is not geared around the idea of capitalists being important people. In all of these societies and particularly in China, there is a strong role for authoritarianism in government and managing the economy. Basically, the government at all times is second guessing, economic outcomes. Where did the system come from? It started in Manchuria in the 1930s under the Japanese military. The Japanese military moved into Manchuria, found an underdeveloped region, decided that they weren't prepared to wait for free markets to help improve economic outcomes there. So they thought they'd move beyond free markets, and they developed the system which lo and behold was highly successful first in Manchuria, then was perfected in Japan in the 50s, was sufficiently impressive for the Koreans and the Taiwanese to adopt it in the early 60s. By the late 1970s, the Chinese too had become convinced that this was a superior system to capitalism. We didn't know that at the time, I don't think, but certainly I for one did not know that the Chinese in the late 70s had moved to the Japanese model, but in retrospect it's very clear that they have moved to the Japanese model, the East Asian model with variations of course, and that the crucial decisions were made in 78 and 79. Given that the East Asian system diverges so markedly from our idea of free market capitalism, and given that we're told by our economists that free market capitalism is by far the most efficient way of running an economy, we have to ask the question why does the East Asian system work, why does it work at all, and why in particular does it work so much more effectively, obviously, in crucial matters such as boosting exports and boosting economic growth. The fundamental dynamic I would point to is a concept called suppressed consumption. In all of these economies, efforts are made to suppress consumption. That to an economist signals an important outcome. To suppress consumption is effectively to boost the savings rate. There's no controversy about that. And the Chinese savings rate is one of the highest, not only in the world today, but in world history. 40%, 35%, 40% of GDP, phenomenal savings performance even by the standards of previous East Asian model countries. How is consumption suppressed? There are many, many ways, and we can touch on only a few. Living spaces, for instance, in all East Asian countries tend to be small, certainly East Asian model countries, I should make that distinction. East Asian model countries tend to have poor housing, certainly small living spaces, very small, and we see that particularly in China today. If you live in a small space, if you live in 20 square meters of area, total apartment area, the chances are you will not use much electricity for heating, for air conditioning, for lighting. You will not have a big demand for Swedish furniture. You will not have to spend much on carpeting. All of your household consumption numbers will probably be lower than they would be if you had a bigger living space. So living space alone is a crucial issue. Then we see, for instance, tight credit in all of these countries. Credit is generally not available to the consumer. That is changing somewhat in China, but from a very low base. So they quote figures for the growth of consumer credit that seem impressive, but you have to realize that the base was almost nothing, so the growth rate still has not resulted in much consumer credit. When we as Westerners visit China, we are often impressed by the consumer culture that has developed there. We were impressed, for instance, by the fact that plastic cards are now widely used in China and have been for some time. The plastic cards look the part, many of them say Visa, for instance, but they are not credit cards. There is a crucial distinction here that is overlooked. They are debit cards. The effect of debit cards is entirely the opposite on the savings rate of credit cards. With a debit card, you have to have the money in your account before you spend, whereas it is the opposite with a credit card you spend first and find the money later. Continuing on the theme of credit, mortgages are scarce in China. In many cases, people have to save for years and years and years before they can buy a roof over their heads. Again, the situation is changing, but it is changing slowly. It is obviously under control. The authorities are no mood to have the sort of mortgage lending that we see in the United States or have until a few months ago seen in the United States. They will continue to control all forms of credit including a mortgage lending to keep it low and therefore to boost the savings rate. Another form of suppressed consumption is to simply impose barriers to imports, particularly imports of foreign luxury goods. We often see this in China in the form of high prices for such luxury goods. A Versace scarf or a Gucci handbag will be two or three or four times the price. It is the real thing, the price that one would pay in the West. This creates a paradox where people see wealthy Chinese paying huge amounts of money for such luxury goods and they think, how can this be a low consumption, high saving society? Well, the paradox is easily resolved. What's going on there is that, yes, people are spending a lot of money, but they're getting very little consumption for that money. What's going on is that the prices represent huge profit margins for privileged corporations in these societies in China and the phenomenon is familiar throughout East Asia. The corporations make big profits, basically shooting fish in a viral type of profits. Those profits are creamed off and go into productive investment. So there are two types of savings here. One is the individual saving and the other is the corporation saving to the extent that a corporation makes profits and retains them as opposed to paying them out in dividends. It is saving and it's adding to the national savings rate. It's one thing to have a high savings rate. It's another thing to make sure that the savings are invested effectively. There is a question here, how are the savings channeled to the right investments? A key dynamic is the use of cartels and the use of price rigging to ensure that those who invest very heavily in the latest technology, production technology earn a sufficient return on investment to pay the banks and so on. So cartels, again, are prevalent in the East Asian system and we see them in China and contrary to our Western logic they are part of the solution, not part of the problem in general. Cartels also serve to control capacity in an industry so that obsolete capacity can be retired to make sure that there isn't overcapacity in the industry which would cause possibly highly destabilizing effects for pricing. So much for the economics of this story. The other part of this is authoritarianism and the political side. China, like the other East Asian societies, is not as authoritarian as it once was. There's no question about that and there has been a big improvement in the last 30 years. Nonetheless, it is still quite an authoritarian society. It is now similar to other East Asian societies in that much of the authoritarianism is not that obvious anymore but it's there for people who live in these societies. These societies are truly authoritarian. Basically, still throughout East Asia and unlike Bush's America the end justifies the means not just some of the time but all of the time. The end justifies the means allows the authorities really to take firm action in pursuit of the national agenda, firm and well-organized action. The secret to modern authoritarianism in East Asia is a process called selective enforcement. The concept is that laws are written strictly and enforced laxly. This sometimes creates the impression that the inmates are running the asylum but there is method in this madness and maybe the easiest way to see this is to consider how South Korea controls its car market. I was in Korea about six months ago and Julie noted the brand names on the cars there. Fetching no foreign cars on the road still in Korea. The Korean government tells us that the proportion of foreign cars on the roads has increased by what threefold in the last five years but that actually means just from 1% to 3% of the market is foreign marks. Yet supposedly there are no real barriers to foreign producers sending cars into Korea. So how is this effect possible that on the one hand the market is open and on the other hand there are no foreign cars there? The answer is selective enforcement. In Korea as in many other East Asian nations, tax is rather flexible. On the one hand the rules are there but on the other hand it's understood that you can get away with quite a lot. You can basically evade quite a lot of tax. Obviously this matters more to wealthy people, high income people and to poor people. The effect is that if you fit in with the establishment's rules most of them unstated, your tax position is fine. If however you make trouble for the authorities or step out of line the tax laws will be enforced against you and maybe enforced against you very harshly. The penalties can certainly include imprisonment and certainly a harsh audit will take many hours out of your time and you will feel duly harassed. So the effect is that if you buy a foreign car in Korea you run the risk of a harsh audit and most people choose to avoid that risk. Hence they do not buy foreign cars, they do a lot of other things as well but the most obvious thing is that they do not buy foreign cars. The tax system is used in China also as a tool of selective enforcement but there are others. Corruption is an obvious example. In China more than any other country in East Asia probably there is a need to bribe, you need to bribe to get anything done there. Yet the theoretical penalties for bribery in China are draconian. They include execution of bullets in the back of the neck. Those of us who have kept tabs on this know that this penalty is not just there in theory. So on the one hand most people in China get through the day by bribing and accepting bribes and so on but on the other hand those who do not face draconian penalties selectively enforced. In essence this doesn't look much like democracy to me and it's hard to see how the system will ever become democratic if they continue to have this selective enforcement mechanism which as I say is not just a Chinese thing but it's throughout the East Asian region. One of the great things about selective enforcement is that it's so flexible and so precise in its effect. East Asian bureaucrats do not need to write laws very carefully to cover every possible eventuality to deal with every possible loophole. They can just give general guidelines and know that their guidance will be observed. Officials can be fast on their feet in changing policies and they pass on their guidance to the relevant entities, typically major corporations and so on, and things get done. So things are flexible and things are done quickly. The authorities at the top have enormous control. This is not to suggest that they control everything but they control the things that truly matter in terms of economic development. One of the issues going forward of course is the extent to which foreign corporations and particularly American corporations are being drawn into this net of selective enforcement. American corporations and all of us in Chinese corporations in China they have to do business quotes the Chinese way which means among other things bribing people. That leaves them open to selective enforcement action. You don't see that much of it but just the mere threat of it is enough to knock people back into line. Increasingly we see that American corporations who do business in China are doing business the Chinese way not only in China but increasingly here in America as well. Their lobbying activities for instance are geared to serving Chinese interests rather than American interests. The Chinese tail is wagging the American corporate dog. We saw this perhaps most obviously in the case of the discussion about China's entry into the WTO. Many American corporations probably understood that China was not ready for membership of the WTO. Maybe even understood the issues of fundamental incompatibility that are involved here. Yet they were more than happy to do Beijing's bidding in pushing the WTO application over the top. In conclusion let's sum up by saying that we should all rejoice that the Chinese people are pulling themselves out of poverty. They're still not rich but they're on the way. This is a matter that we as good neighbors in the West should be delighted for the Chinese people for. But we have to think also of the effect of all of this on the West. There's a problem particularly here obviously for the United States. Selective enforcement and suppressed consumption as a concept is fundamentally incompatible with the Western world order. It pulls the rug from under the entire theory of globalism. So the issue going forward is of course America's current account deficit which last year was more than 5% of GDP. That looks like a pretty big number and it truly is a big number. I've gone through the statistics for the major powers, six or seven of them, going back to when the statistics were first calculated. And there are virtually no instances of any other major power exceeding 5% ever. The one significant exception was after World War II, the years after World War II, the years of post-war reconstruction in Britain and Japan and a couple of other countries. They were starting with devastated economies with much of their factory capacity knocked out by bombing. So they had a crash course of rebuilding their economies and they indeed then imported a lot of stuff, particularly from the United States, capital equipment and other materials and products that they couldn't make at home temporarily because of the wartime damage. So with that exception, we have never seen the size of trade deficits that we're seeing now in the United States. The implications are obvious, surely, that here we have the United States borrowing ever more from China from a potential rival, even a potentially hostile rival. This is not sustainable. But I have to tell you, I'm pessimistic about the outlook. While people in Washington continue to say, as you know, that trade does not matter, they have not begun to understand how the world truly works. Thank you. I'm going to let, actually, Eamon handle his own Q&A, but actually before doing that, I'm going to actually throw a couple of questions at you first. I guess the first one, just to, from your point of view, is the problem here really a matter of China acting badly and sort of taking or in some ways sort of cheating within this global system? Or is it really more a matter of American elites acting badly and giving and selling assets that are in the United States and basically choosing for a variety of reasons not to manage the global system that was developed by their parents and grandparents? And that would be the first question. The second question is, I'm very curious about your view on Japan's role. I mean, spent 22 years living in Japan. I mean, Japan, I assume, even though Japan, you've looked at it a lot in terms of Japan in some ways sort of perhaps treating the U.S. generosity, taking advantage of American generosity over the years. And Japan has done very well, but also I assume that Japan and also, to some extent, Taiwan, these island nations that are really in between the United States and China, they have little interest in becoming satellite nations within a Chinese empire because they've done so well within the American system. I assume that they would want to use their sort of island status to manipulate their industrial power in a way to prevent China from taking too much power. And specifically, Japan, for instance, the United States has sort of essentially dropped the 787 with boom. We've kind of dropped a lot of skills. We've dropped a lot of technologies. We've kind of lost interest in certain technologies. Japanese have picked them up. The 787 is largely a Japanese project. The Taiwan semiconductors, their semiconductor policies designed specifically to maintain independence from China. So those are my questions. One is, like, is China acting bad? Or is it really in the American elite acting bad? And then the second one is the role of China and Japan and Taiwan. Well, big questions. In assessing responsibility for what's going on and what we're looking at is truly historic. It seems to me that the trade problem that America has developed now represents one of the major turning points in all history because it opens the door to leadership passing from the West for the first time in, really, truly in history. We in the West have always had our own system and could live our own lives free of authoritarianism from the East. Maybe those who suffered from Genghis Khan would disagree. But as a general proposition, we didn't have to worry about what went on in East Asia, at least not in terms of how it would affect our lives. So we're looking at a truly historic issue here, fundamental turning point in human history. Who's responsible for this? Obviously there are many people involved. Certainly I don't think that the Chinese have been particularly, the Beijing authorities have been particularly frank in dealing with the West. They are manipulative and dealing with their own people, and I think they've been manipulative here also. Starting with the truth ethic. Certainly the elites here, it's extraordinary to think how elite thinking in this country has changed during my lifetime. I can remember a bit the 50s and I grew up in Europe and I know how we in Europe looked, the light in which we looked at the United States and the United States and how advanced America seemed then. The country I was born in was perhaps at a level of one fifth of American per capita income then. Today the per capita income is higher than in the United States. There has been something truly phenomenal going on here that has never been explained and the elites here are surely responsible at least to the extent that they have not asked the questions. So yes, we can blame the elites here, we can blame the economists in the first instance, we can blame the media, we can blame the corporations, the Jack Welchers of this world. It seems to me that maybe one of the turning points, the minor one but a significant and interesting one, was when General Electric decided that it was no longer necessary for executives to drive company cars made in the United States. That change in the rules came maybe in the 1980s, maybe in the 1970s. At some point the American corporation decided it was no longer American, it was never announced at the time, but that decision was a historic decision, it was a decision, each corporation decisions were made that were quite consciously made. So yes, there is an interesting question of what were the reasons behind these decisions. You mentioned Japan and Taiwan and so on. In my view, Japan would much rather have China as the world's superpower than the United States. I know that almost everybody in this room will find that a stunning statement. On the one hand, the impression of Sino-Japanese relations is of constant bickering, but on the other hand, if you look beyond truly theatrical issues such as Yasukuni and you look at what the policymakers are really doing, what policies is Japan following, what policies are the Chinese, are the top officials in Beijing following. Look at that and you see a contradiction. On the one hand, yes, bickering on the surface which gets all the press here. On the other hand, enormous cooperation between these two East Asian powers. Clearly very conscious, very carefully calibrated cooperation. The most obvious is aid. Japan's foreign aid budget in many years recently has been the highest in the world. The major beneficiary of Japan's aid has been China by far the biggest beneficiary in the last 30 years. That doesn't get published here, but it is a fundamental indication of where Japan's priorities lie. Japan could, for instance, advance aid to Russia. It could advance aid to Brazil. It could advance aid to Argentina, the whole Latin America, Mexico. Its aid goes to China. That's telling you something. This is just the most obvious of a whole laundry list of areas where Japan favors China and favors it very consciously as a matter of national policy. Technology transfer. Where did the Chinese get their first technology to make semiconductors? Japan. It was offered to them on a plate by Fujitsu and other Japanese companies as a matter of Japanese policy. Where did they get steel technology? Again, Japan. Many, many technologies have been given to China that would not be given to any other country at that level of development or probably any other country at all. I should qualify that by saying that Japan has also given technology to South Korea and that there is a similar relationship between South Korea and Japan as there is between China and Japan. So on one level there's a lot of surface talk of hostility. On another level there's an enormous amount of underlying cooperation between the governments. Educational transfers, educational policy. There are more Chinese students now studying in Japan than in the United States. Until about 15 years ago, the United States probably had five to ten times as many Chinese students as Japan. Again, that's the result of policy. Japan has had a policy of favoring Chinese students in its educational system and giving them incentives to come to Japan as opposed to studying in the United States. Trade. Japan buys 40% more from China now than it does from the United States. I think all of us in this room would concede that Japan is rather regulated in its trade arrangements. This clearly represents regulatory decisions. Japan, again, favors China over other countries of similar level of wages and similar level of development. So China has a much bigger share of the Japanese economy than countries like Brazil that might be considered at the same general level of technology and economic development. Why does Japan do this? Well, it's not all a one-way street. Japan certainly has received many benefits from cooperating with China. Maybe the most obvious, although it's not much discussed here, is that Japan sells now to China twice as much as the United States does. Twice as much with half the population, less than half the population of the United States. Japan is so much more successful in selling to China. Again, we have to think about the regulations and the government guidance involved here. From the Chinese point of view, this is policy. They have given their approval to this policy of buying so much from Japan. Buying so much, indeed, that Japan runs a surplus on its direct trade with China. Amazingly, with wages some of the highest in the world higher at the factory floor level than here, Japan can run a surplus with China. So this is a long way of saying that these countries at the one level, at the level that is reported, tend to be seen very hostile to each other. But at a more fundamental level, they are cooperating closely. Why are they cooperating closely? I think that if you see this in East Asian terms, you think of this in terms of a very long-term perspective. China existed long before the United States was ever heard of. And frankly, it will, the East Asians, their bet is that it will exist long after it's gone. The East Asians have seen what? Six or seven empires come and go. The Portugal, Spain, France, Britain, Holland, Russia, the Soviet Union, America. I'm forgetting at least one or two, but they've seen a lot of empires come and go. They have no particular reason to believe that the American Empire is going to stay the course. So from a Japanese point of view, they're used to living with China. They have always, well, up until three, four hundred years ago, they regarded China as the center of their universe. China only fell from that position about 200 years ago. And now what we're seeing is that the restoration of China as the lead society in East Asia, Japan, Korea, Taiwan, they're all used to dealing with China. There are many ways in which China is a more acceptable partner to them than the United States is. Basically because all these countries are isolationist, so that the Japanese, for instance, have a policy of not pursuing human rights issues with other nations. This policy came into high relief after Tiananmen. I forgot to mention, of course, that Japan was China's biggest supporter for the WTO nomination, for the WTO application. It was behind the scenes. I really said anything for public consumption, but Japan was there for China all the way and specifically was there on the human rights issue from the get-go, particularly after Tiananmen. Japan's policy was to project into the West this idea that trade and human rights should be dealing. That came from Japan. That was a crucial issue for the Chinese, a major favor for them. To conclude my point on this, because these countries are isolationist, they get on with each other in a way that they don't irritate each other in the way that America's philosophy of globalism is actually a major irritant for all these countries. They feel they have to put on a show to deal with America. They have to pretend to be democratic, in the case of Korea and Japan. They're under pressure in China to bring in democracy. To say that's an irritation is another statement for the authorities in China. This isolationism works well for all these countries. They keep out of each other's domestic affairs. The title of your book almost implies certain policy descriptions given this situation. What would those be? Here we get controversial. I think the word is tariffs. It's a banned word in polite circles. But what is the alternative? I suggest tariffs for two reasons. One is economic and the other is political. The economic problem is surely vast. And short of tariffs, it's hard to see how it can be remedied in our lifetimes. We're looking for the United States now to balance its trade. It would probably have to increase the working force of manufacturing by about 35-40%. And all these new jobs would have to be ultra-high-level advanced manufacturing jobs. They would have to be highly capital-intensive, highly know-how-intensive. So how does the United States balance this trade given the structural implications? The basic issue is that trade deficits are baked into the American industrial structure. Some very drastic remedy is needed, and I don't see other remedy than tariffs. Tariffs are needed at another level because politically these systems are incompatible. The Western system and the East Asian system are not compatible. And the suggestion of tariffs is not put forward in any sense of hostility or anger. It's simply a recognition that they have a different system and that the two systems working together will create enormous tensions. So let's just at the outset say, you have your system, we have ours. This was the attitude that America brought to the Soviet Union in the old days. It seems to me that the same logic exactly applies in the case of the current version of Chinese ideology, East Asian ideology. There is a fundamental incompatibility. So let's agree that good fences make good neighbors. I have a question about just kind of methodology. I mean, I've spent, I guess I've spent five years of my life living in East Asia, in Beijing, in Harbin, in Hong Kong, Singapore. And I found that the economic, political and social systems in all of these places is very different. I haven't had the privilege of living in Korea and Japan, and certainly haven't lived in East Asia as long as you have. But I find for my time there and for my studies in college and here at the New America Foundation that these systems are quite different. So I wonder, my question is, how is it, what method do you approach these kind of lumping East Asia all together as one and how have you found time to study each of these areas in such depth that then you can, I guess, assume that they're so like each other? Well, let's all agree up front that none of us can see everything that's going on in China, let alone everything that's going on in East Asia. I'm really only giving you two points. One is selective enforcement and the other is suppressed consumption. I knew about both of these phenomena, particularly from Japanese experience, and I recognized these phenomena at work in China. And the floor is open to other people to offer an alternative explanation for what's going on in China, but what is the explanation for the high savings rate there? If you read the literature, as I have done, you find that there's no, there has been no solid attempt to study this question at all. Paul Krugman wrote something about the savings rate in China and he concluded that the savings rate was, rather he looked at the Chinese system and he said, this was about 10 years ago, his conclusion was that China was basically on the free market system and that its economic outperformance was attributable simply to one thing, the high savings rate. And he took the high savings rate as simply given and never thought to question it, never thought to ask, why is this savings rate so much higher than in the West? Indeed, why has it risen in the period of China's economic emergence? He was not asking the fundamental question, why is the savings rate so high? You may be better informed than I am on this, but I'm not aware of anybody who's really done a serious study on the savings rate in East Asia. But to complete the point on that, the idea of suppressed consumption is not my idea. This idea came from the U.S. government during World War II. The U.S. government during World War II suppressed consumption deliberately as a way of stimulating the savings rate and moving the money into the armaments industry. The documentation on that comes from J.K. Galbraith who actually worked in the U.S. government at the time. In the second instance, Raishar, the erstwhile ambassador to Japan, the ambassador during the 1960s, Edwin Raishar, in a book in 1955 and 1956 it was called Wanted an Asian Policy. He talked about suppressed consumption as the method by which all of these countries, he was talking not just about Japan, but about the entire region. He said they will develop by suppressing consumption. It's in that book. So to answer your question, I don't know everything about these societies, but I do know that suppressed consumption is a key dynamic. And that information alone has huge policy implications. I enjoyed your remarks very much. I've had a little too much about all of it, but good portions of it. And I've got two questions. One of them has to do with the consumer culture and the other has to do with the work. In the first instance, there's a fair literature on a rising consumer culture in China. We go to a house in Beijing or Shanghai. You see a lifestyle magazine on the coffee table. People talk about what kind of car they might get when they go on vacation. It's a whole new sort of way of looking at the future and establishing personal and family identity. I was a bit puzzled by the comment in your book where you say that actually the China's demand for everything for whom heating oil to Swedish furniture is greatly curtailed. Did you know that in Shanghai, the police had to be called to stop the crowds from overwhelming the Ikea store? I mean, you know, there were so many people, they couldn't literally not have them. The reason for that is that people were moving into new flats and they were trying to furnish them cheaply and they were using these Ikea, you know, do it yourself type of things. Okay. There is a, you know, that's one point. I just wondered what you thought about what seems to be a very powerful force in China, namely a rising consumer culture which contains a personal identity and a future and challenges the party. I have a question on the party itself, but I'll wait for your answer. Okay. Well, I've already suggested, of course, that things have changed quite a lot in the last 30 years in China. And they've changed not only politically but also economically at the consumer level. Yes, people are a lot better off than they were 30 years ago. And yes, if you're a Westerner and you visit Beijing, and you're dealing with top level people, Beijing University graduates or whatever, you will certainly see a sophisticated level of consumption among the people you know there. As for the Ikea store, well, you know, if they open a store and people are interested, why not? But it doesn't necessarily negate my point that the apartment sizes in China are small and that this has a serious effect in suppressing consumption. On the party, you were saying that the system is still authoritarian, no trend of any significance can develop without the permission or tacit approval of the authorities. What about the Falun Gong? What about the Christian evangelicals? What about all the things coming out of the Internet? Concepts of democracy, new ideas on personal private time, weekends, teenager, all these new concepts that are moving. That is beyond the control of the party. And it seems that the party itself is losing its grip. The Falun Gong is maybe the most important point in what you've said. The Falun Gong certainly is an amazing phenomenon. And the explanation there is that it grew so amazingly rapidly that the authorities didn't react in time basically and then had to be overtly authoritarian and cracking down on it. It's the exception that proves the rule. Basically, in China, the freedom of association is not conceited. Every organization has to be subject to the party. The Falun Gong was an exception. And they thought it was just a matter of people doing exercises and so on. When the Falun Gong became political, started looking like a political entity, they cracked down on it very fast. And they cracked down on it very successfully. I mean, it's gone as a political force in China now, we would agree. So it is an illustration of, it's a point for me, that the freedom of association is not conceited in China. These days, with technology, it is easier and easier for an authoritarian government to enforce this rule of blocking people associating together beyond a certain size. If you wanted to set up a new political party in China, you would find it hard to do so without having email, without communicating with supporters by email, talking to them on the phone. 150 years ago, 100 years ago, it was possible for all sorts of dissident groups to get off the ground without the authorities really becoming aware of them until blood was shed. These days, most of the time, they can spot emerging dissidents very rapidly and make sure that they do not coalesce into a major political force. Any major political force would have to have, for instance, newspapers as well. They control the press. All press organs have to be essentially state controlled. So everywhere there is control, freedom of association, freedom of speech is ultimately controlled on the internet. Jim Fowler was in the current issue of the Atlantic as a major piece on how the internet is controlled. Again, you can say that, well, there are exceptions, no question there are exceptions, but it's the general tendency that we're talking about. The number of websites that are truly free in China, I'm not aware of any, perhaps you're aware of some, but basically they're all under control. New ones may pop up, but they get shut down pretty rapidly. The best consultant in national security policy, it's a very interesting talk, but the question that arises in my mind is, what is the objective of this kind of policy, economic policy that you're talking about? Is it economic power? Is it political power? And then you did not really address the question that is right in the cover of your book, America's Faith in the Coming Era of Chinese and Germany. What is America's faith in this context? Chinese GDP will be higher than that of the United States in four years or so. Of course, this is according to World Health Network. It's projected 8% growth. Now, the United States, for the past 50 years, has been building a world system that is advantageous to us, and that includes globalization. Now, how does this system that you're talking about conflicts with America's system and when we will get the choice of the dragon? Okay. I think you should start out by thinking of this and try to see the point of view of the top leaders in Beijing. From their point of view, they live in a world that is very small now. Nuclear weapons can be thrown at them and delivered in the space of a couple of hours. Their traditional policy of isolationism, relative isolationism, is no longer possible. So from their point of view, they would like certainly to be the lead society in this world, and they would like to, as far as possible, control other societies to ensure order in the terms that they define that. So from their point of view, long-term, they see themselves as military leaders of the world community. This is a matter of speculation, but they no doubt would like to see general disarmament in the world community. They might find a way to make an exception for themselves. America's fate, basically, is to be dependent on a larger superpower in many ways, to be a sort of vassal state, as will other nations, other Western nations, other nations in East Asia. There will be one top power. I'm putting all this in terms of how the Chinese leadership sees the world. This is how the ideal world that they would like to see. You mentioned GDP in China, exceeding that of the United States in the next couple of years. You're talking purchasing power parity, which is, I think, misleading for these purposes. In terms, well, as you know, the per capita income in China at market exchange rates is about, what, $2,500 to $2,600? Yeah, but the Chinese people remain quite poor. The purchasing power parity numbers inflate the apparent size of the Chinese economy for geopolitical purposes. There are two different methodologies for assessing the size of it. The appropriate methodology, if you want to see the size of China's economic footprint in the world community as a whole, is not the PPP number, but the market exchange rate number, which reduces China very significantly, maybe one-third of the size of the PPP number. The world bank takes the PPP number? Sure. But all that is ideology, and it's ideology that has no relationship to the question you're asking. You're asking about national security issues, right? Well, if you are the Chinese military and you want to have the latest technology, you don't talk in terms of some phony exchange rate. You talk in terms of the market exchange rate in terms of your imports of key components from China from Japan, from Korea, from Germany, from the United States, and so on. If you're building up your military, you pay for your goods at the market exchange rate. So the market exchange rate is the appropriate exchange rate for looking at China's footprint in national security terms. Of course, they've got a lot of people at large military, and that is another factor. But I think talking about China being bigger than the United States and GDP is a bit misleading at this stage. It will be, Andrew, of course. I don't know whether that's covered your questions. Well, it's a related question to this. What kind of an international system should the United States promote assuming that the United States will be the second-rate power? Because so far the United States was promoting assistance on the assumption that it is the first-rate power. Now it's not going to work in the light of the rise of China. So what do we do to develop assistance, which is advantageous to us under the conditions of the second-rate power, and how does soft power is distinguished from any other formal power, and hard power is economic power and military power, soft power is something else. How can we use that soft power, diplomacy, our image in the world and such in order to preserve our influence in the world as long as possible? Empires come and go. So we are not going to stay forever the world dominant power. And you are exemplifying this by China's example. So what do we do? I've already maybe suggested one appropriate measure, and that is to draw back a bit from globalism, put a bit of space between American society and Chinese society economically, politically. The most obvious way that that can be done is with a judicious use of tariffs. Tariffs should be brought in in a measured way. So it's not to disrupt the Chinese economy, not to disrupt the American economy, not to disrupt the world economy. And they don't have to be particularly high to create a sense of space between the two societies. Maybe there are many other issues that could be addressed, but I hope that that really gives you something to think about. I think I keep focusing on the fact that their countries are supporting and supporting each other. One of the main points to the other, the main point to me was that sort of carry-onism in these countries and selectivity. One is on the suppression by, what you say, big space, right credit, etc. What I wasn't very sure about was how important to you to stress these things are going to be raised is the barriers to imports of luxury, expensive goods. Because, essentially, most luxury goods are found anywhere in the world. These are being produced once upon a time in Japan and now being used in China. So, okay, they are not authentic, but they are perfectly acceptable substitutes and we all are embodying them courageous. Chinese come and Japanese come and the one thing that they buy are not luxury goods, but gold, etc. What they buy is perhaps mortwisky and some abodeen beef and taken back with them. So, I'm not sure how important this idea of the barriers to imports is in the old war scheme. So much coming on that point. On the selective enforcement of laws, amongst the important points that you raised was that East Asian society is a corrupt and corruption is prevalent around the world, right? And you focus on the selective enforcement of laws vis-a-vis corruption as being an important element. I think I sensed a little bit what Mr. Ling is suggesting there that it isn't so much. It's a two-way scheme of corruption. I spent a long time putting together an anti-corruption program for the Commonwealth Committee and over the last ten years, if we see one after another a OECD bank fund, etc., that caught on in the anti-corruption bandwagon, I could. But all of them have found that it isn't just the developing countries that are inherently corrupt. The corruption comes from the fact that despite laws in the developed countries, people have been offering and providing enormous rights. So it's not just the recipient of the rights, but it is the provider of the rights that come into that. And so I don't think that the suggestion, I haven't read your book yet, that East Asia countries are increasingly corrupt is one that I can find. Okay. Imports to import barriers against luxury goods. The test of that is that the price is for the real thing in East Asia, China, and the other markets. When I mentioned this, I mentioned specifically, we're talking about real brand name goods as opposed to the fakes. Obviously the fakes are produced in China, but some people even in China want to buy the real thing. And if they want to buy the real thing, they pay a lot of money for it. Sure, but it's an example of what's going on. Okay. Second point you say about corruption. Corruption is not unique to East Asia, and some East Asian countries, particularly Japan, are relatively free of most types of corruption. But there is still significant corruption in Japan and it is political in its intent. Corruption exists particularly at the level of construction projects in Japan. People have to pay bribes to politicians to get a contract. You question that. This is the conventional view I'm putting to you, and I see no reason why in this instance it's wrong. As prevalent, much more so in Africa. Sure. Right. But the basic issue is that East Asian societies are built on the proposition that certain sorts of illegal activity is acceptable within reason, but it's selectively enforced against where the authorities want a tool to crack down on people. So even in Japan, where there's very little overt corruption, they still do have the ability to crack down on certain sorts of corruption that are inbuilt into the system and are intended precisely for this selective enforcement mechanism to work. So the bureaucrats in Japan control the politicians by selective enforcement. So the general principle is there. When you say suppressed, that's different, right? Sure. The reason I ask you to observe Asian in this country, the first generation usually are much more formal because you have a memory of poverty, so you don't spend that much money. But by the time you get to the second generation, there's no difference. So maybe when China becomes more, you know, or other countries become more affluent, maybe that or something, you know, that intention can be changed. The second question is how Europe plays in this? What's Europe's role in this? Okay. Your point about second generation people of East Asian background in America is well taken. There may be a cultural factor involved here as well. But I think immigrants as a category probably are under consumers relative to the public as a whole in the United States. I think that immigrants as a category have many distinctive qualities about them. They tend to... It is quite an effort to pull up your roots and go to another country for any immigrant from any part of the world. Obviously the psychology is different and maybe one part of the psychology is a more frugal view of consumption and maybe a more long-term view of one's commitments and responsibilities. Even before you take down the last couple of minutes, there's a bunch of questions that you might want to just take three or four questions at a time and finish the question about Europe. And then sort of try and wrap it up relatively quickly. I think the one issue about corruption I think they ended up getting a little bit off, which I think the issue that E-mail was trying to focus on was the degree to which individual companies are captured and then those individual companies end up being agents of... the corporations end up being agents of another political entity and they operate here. And I think that's this mechanism, corruption, the dynamic that E-mail was talking about is one of the mechanisms by which that happens. But I think the key thing to focus on is the degree to which individual firms are captured, individual people are captured. Anyway, go ahead. Yeah, okay. Dave, good question. I'd like to get your view of the popular argument for many China walkthroughs, which is that continued economic growth in China will eventually lead to an opening of that society to a point where more normal, peaceful approaches to interaction with China and India sort of stand. They often point to the development in Japan, development in Korea, Taiwan as examples of that type of economic trends which over the decades eventually brings about some sort of political opening. Right. You buy that at all? But why don't you grab a few more questions? A policy response if you have one to the other side of the question from the tariff solution, and that's a response to the way China will start using its built-up capital like the billion dollars it just put up to buy in a 2.5 billion dollar Intel plant? Yeah, okay. Increasing consumption will lead to political, increasing prosperity will lead to political liberalization. Maybe there's something in that, but I think that you have to look at it again from the point of view of the people in control. From their point of view, they're prepared to allow certain sorts of liberalization, and we've seen liberalization in China, and we've seen liberalization elsewhere in the region. But the mindset is different. The mindset is that they want to remain in control. And so always there will be an attempt to keep it within acceptable limits. And the authorities, it seems to me, thanks to technology have an easier task now than ever before in maintaining control, being very precise in the degree to which they can control society. So they can listen into phone calls, they can read people's e-mail, bugging devices so tiny now that they can be distributed everywhere, and anyone who shows any evidence of being a possible disruptive force from the authorities' point of view can be identified very, very early. And therefore it's possible for them to liberalize perhaps more than they would have done 30 years ago and still feel secure in their control. That's how I'd answer that. The question about building up capital, I didn't fully follow it. I was starting to use that money, and they just put a billion dollars out to incredible reports on that to entice Intel to put its $2.5 billion plan. They picked up 40% of the cost. No policy discussion in the U.S. about that. Congress will say, well, good for Intel, you know what to get. But it's an intrusion in the economic process in a pretty fundamental way that has long-term implications, particularly if that's just the first instance. Right. To me, I've been traveling. I've come from Tokyo and been on planes for most of the last couple of days. When did this news come out? It was last fall, at last November December. I must say I missed it. To me, that's very significant. I agree with the sense of your question. The reason that the Chinese are putting up the money is not because they think this is a great investment. It is political. They're establishing a precedent that can be used in other situations. And they're establishing a degree of intimate understanding of Intel that will probably lead to technology transfers in the future, things like that. So there is an agenda there that's more than economic, more than a normal stock market investor's mechanism. Yeah. You've returned a pair of a couple of times and signaled them out as a first. This is what you want to create. You go to say my pair of clothes. It's a complex entity. It doesn't respond to the market. What's the setting of those clothes? How do you gain the use of that tool in a way which gives you a sense of good and also a correspondence to what will work in society? You don't want to end up with a golden copy, I think, and seize it up because it doesn't work. You make like one thing you have to do and another thing everybody gets proud of. Right. Okay. Oh, you mean you might want to... Yeah, just these last two. Okay. Welcome. I'm just wondering how do you do research on China since you have spent all the time in Japan? I'm wondering do you all do China and talking about the Chinese people. You know there's a growing number, a large number of middle classes in China. They have very different, I know, consuming habits, as you said. You know, they will say, even if you talk with them, they will say China is just a totally capitalism. And they will try to spend more money on luxury goods, something like that. So I'm wondering do you have some updated information, maybe some maybe experience talking with Chinese people. Second, just to follow up with this gentleman's question about international system. If you say this promotion, Chinese, an era of Chinese hard money, I think most of the Chinese people will don't agree with that. Because they think China's power just enough, you can say it's a regional power, but comparing with the US superpower, we still have a long distance to say. So I want to know this two kind of, how do you think these two kind of systems can coexist in the future? Okay. I'm taking tariffs first. I should have made clear that I'm talking about a uniform tariff that would be maybe start at 2%, go to 4%, 6%, 8%, to maybe 10%, 12%, 15%. It would be on all products. Yeah, right. Your point is well taken if you get into complexity with tariffs, try to have a small tariff on one thing and a big tariff on something else, it completely distorts the way the economy works. But if you have a uniform tariff, sure. From an economist's point of view, this is obviously dysfunctional and I would certainly disagree with, I would certainly agree with the economic conventional wisdom on that. But the point I'm making is that you need a very drastic solution to the trade position. A uniform tariff across the board, brought in gradually, would be minimal in its disruption to the economy and would be minimal also in the distortions it created between different products and people arbitraging between different categories, which is partly what I think the sense of your question is. We're sort of running out of time, so maybe I can get to... You just did that last question, maybe very briefly you touched on the question of Europe's role. Right. Yeah, your basic point is that China is still pretty small and that China will take a long time to become a real power rival to the United States. Well, that depends how you define your time scale. It's 30 years a long time, maybe to the American press it's a long time, but I think to people who run China it's not a long time, maybe 40 years. But it's within the lifespan of most people in this room. It's coming up pretty soon. You are, I sense, Chinese by background. I'm just from Egypt. Yeah, but it seems to me that maybe you can put yourself into the position of the top leaders in Beijing more easily than I can. Surely they do not want to be second to any other power in the long run, but you can see that. You think they can coexist in the world and China has a peaceful environment for all. Forget it, just go to the research method of your research method. Well, I have explained that basically I'm looking at economic statistics. I have not spent that much time in China. I first went there in 1986 so I have some perspective on China. Do I go around China asking questions? No, because there is a problem in asking questions in China. If you're a foreigner, you do not get necessarily a very truthful answer. You can certainly acquire a lot of information by simple observation, but if you go to top officials, you have to filter everything that's said. And indeed, in China as you know, even for correspondence based in Beijing for many years, they've never met the top leaders. I happen to have met Deng Xiaoping and that's something that the first to know other journalists working today on China had the privilege. You don't necessarily talk with top high officials. You can talk to some ordinary people like middle class people. The book I've written is not about the sorts of things that you're talking about. It's about the overall economic on the one hand, the overall economic policy, which my source on that is China's statistical, the big, you know, thick China statistical book and many other statistics coming from both China and from other parts of the world. I'm interested in trade. We have reliable numbers for on this side, et cetera, et cetera, many issues here. I think we're going to have to call it quits. Some of you may want to come up after and talk with him in one-on-one. Anyway, I'm glad you all can. It was a good talk and I think we should round of applause for him.