What Happened to Hong Kong?

Transcript

Rob Johnson:

I’m here today with an old friend, William Overholt, and I must say, he is the man who awakened my interests, and helped me become acquainted in China, going back to around 1990. Dr. Overholt is a senior research fellow at the Kennedy School of Government at Harvard University. He’s written nine books. I remembered dearly “The Rise of China” from 1993, and “China’s Crisis of Success,” a new book a couple of years ago, and “Renminbi Rising.” He’s a formidable, formidable presence, lived 18 years in Hong Kong, was the former president of the Fung Global Institute, which was, I must say, my favorite Asian think tank. Bill, I’m delighted that we could get come here today, and discuss things related to China, what’s recently happened in Hong Kong, the pandemic. Thanks for joining me.

William Overholt:

Rob, It’s an honor to be here with you today. I think the overall theme of US-China relations is that the US doesn’t want to grant China a place at the big people’s table. And China is an adolescent power trying to be arbiter of the new global system, and at the same time, playing the victim, and trying to get all the advantages of being a child. But let me go to the foundations of what’s happening and start with the economy.

William Overholt:

The US and the world can tolerate countries that are young and growing up being protectionist, but they get to the point where they’re affecting the whole world. We went through this with Japan, we nurtured Japan, we allowed them to protect their industries, and undervalue their currency, and subsidize. And then it got to the point where Japan was a really big power, and it was affecting the whole world. And we had to get really tough, and tell them, “You’re a big boy now. You have to play by the rules.” And we put 10% tariffs on them, we had all sorts of restrictive marketing agreements with them, but they made the transition. And that’s where China is today.

William Overholt:

We have two really big economic problems with China. One is intellectual property theft, Xi Jinping promised Barack Obama that this would be banned, and it went down for a while, and it’s right back up there. They’re, stealing all our most important technologies, and that’s just an unacceptable. But the really big issue is market access. Now, why is that a such a big issue? Well, with China’s current scale, you have a company like Huawei that feels it should have the opportunity to take over the whole world market for 5G, and 5G is going to be the foundation of our lives.

William Overholt:

Their competitors are two European companies, Ericsson and Nokia. Now, Huawei has had access to all the three big markets of the world, US, the EU, and China, whereas Nokia and Ericsson are restricted to a very small part of the Chinese budget. So Huawei can afford a research and development budget that’s more than Nokia and Ericsson combined. And given the importance of technology, that means that Huawei can simply destroy Nokia and Ericsson. Not because it’s a better company, but because it has access to the whole world market, and the Europeans don’t. The same thing is true in a much more basic technology of credit cards. Many years ago, China promised that Western credit card companies would get access to China, but they’ve restricted it. They haven’t honored their promises. It’s now UnionPay, the Chinese credit card company, has 38% of the world market.

William Overholt:

MasterCard only has about 20%, and Visa has, I think, somewhere around 30. Don’t hold anything to the exact number. So is UnionPay the biggest force in the world market because it’s a better company? No. It’s taking over world market share because it has access to all three major markets, and Visa and MasterCard are restricted. Western companies just gradually die under this scenario. And the only way the system continues to work is if China grows up, and gives the market access that it’s promised. And that market access has to be broadly into the service economy, as well as the manufacturing economy. China has access for everything that it’s good at, namely manufacturing, but it restricts access for almost everything that the US is good at, namely services, banking, consulting, accounting, and so forth. So we’ve got a real crisis here, and it has to be confronted very decisively. And that means tough measures.

William Overholt:

Now, how has the Trump administration handled this? Well, first of all, the atmosphere in Washington changed, because the business community changed from being a defender of China, when it was getting early access and making money, to being really angry at China. This is not just the US businesses, but the European ones, while they’re making money, they’re so restricted in the China market, that China is still simply taking over the big world markets. And these companies were demanding that this problem be solved. In comes the Trump administration. Now for the Trump administration, there are four issues. The two real issues, the intellectual property issue and the market access issue, and there are two completely phony issues. One is the currency. For years, the Chinese currency has been overvalued. It actually inhibits Chinese exports. But Trump, and other politicians of both parties, go back a decade, and use the most extreme measures of undervaluation. And, “Oh, China’s manipulating its currency to destroy American jobs.” It simply isn’t true. It’s exactly the opposite of the truth. But Trump has focused very much on that issue. And the other issue is trade balance.

William Overholt:

Now, Everyone who’s taken first year economics knows that a country’s overall trade balance is how much we save minus how much we spend. Americans save very little and they spend a lot, so they have a big trade deficit. Under Trump, the big tax cuts have meant we save a lot less than we used to, and we spend more than we used to. So our trade deficit goes through the roof, and that’s a Trump problem. It’s not a China problem. But leaning on China, you can force the trade balance to shift to other countries, like Vietnam and Bangladesh, but you can’t reduce the overall trade balance. Trump has focused on the two phony issues. Buy billions of dollars of soybeans to reduce the trade deficit. And by doing that, he’s neglected the issues that are important to American business. And instead of trying to solve the problems, he’s created this Cold War atmosphere, which makes it very difficult to solve any problem. The Chinese have not behaved better. They have been very intransigent on the major issues.

William Overholt:

The concessions they’ve offered, in some cases sound good, but there are all sorts of ways to get around them with local regulations. So we’ve got an impasse, and this is very hurtful to the American business community, because instead of solving the problems, the problems are becoming impossible to solve. And going back to my first comment, the basic problem on the Chinese side is that they’re demanding the privileges of a poor underdeveloped country. They’ve got four of the world’s ten largest banks, but they use infant industry arguments to argue that they have the right to protect their financial system. They want Huawei to be able to take over the world, but they’re not going to allow anybody else to have comparable positions in the Chinese market. So we’ve got absolute Chinese unwillingness to grow up, and we’ve got a Trump administration that’s focusing on all the wrong issues, and messing up the possibility of any progress.

Rob Johnson:

I was going to say, Bill, I’m very inspired as I listen to you, because I follow a lot of the, you know, basically from you teaching me as a much younger person working in the currency markets. But what I find really compelling is that these problems were cropping up. People like Blackwell and Kurt Campbell writing at the Council on Foreign Relations in 2014 and ‘15, before Trump was even campaigning. And the question of intellectual property, and the question of access to the market, or the combination of the both, you do foreign direct investment, and miraculously, the Chinese who work with you create a competitive firm, and it starts to get all of the market share and access that Westerners had dreamed of. Wall Street thought we were going to make the Renminbi convertible and modernize the Chinese market. And they would have access where you might say America’s comparative advantage in providing financial services.

Rob Johnson:

And then I think something that was quite healthy, but nonetheless compressed the enthusiasm, American companies that had done foreign direct investments started seeing Chinese wages going up, and environmental protections necessarily going up, and that compressed some of their profits at the margin. The coalition that lobbied America for integration with China, and proceeding along the lines of a deeper and deeper interconnection, just start- it was falling apart before Trump came to town. And then, what you say, that Trump focused on the wrong things, rather than the right things, leaves us with lots of acrimony, and what I’ll call a deepening ditch. The China 2025 was, I believe, a public document well before Trump came into power, and that notion of displacing knowledge intensive and higher up the value chain things with domestic production, it kind of reminded me of Orville Schell. He wrote that book with a coauthor, I think his name was Jury, “Wealth and Power,” about how the Chinese, the former middle kingdom, had been wounded by the Opium Wars, wounded by the Japanese invasion. And there’s a nationalism that wants to regain their preeminence, but that’s not compatible with the global system as the cards are being dealt right now.

William Overholt:

Yes. I’m glad you brought up Manufacturing 2025, because that’s become a special ‘bete noire’ for the Trump administration. And there are issues on each side. One is the Chinese view the American right wing’s desire for decoupling with China as a threat, but the Chinese assertion that they’re going to take over the market in every leading manufacturing technology, and replace the Westerners, who now serve a large part of their market. That’s a Chinese version of decoupling. And they started this process of decoupling, this mentality of decoupling, long before it was a thing at the Heritage Foundation.

William Overholt:

The logic of decoupling makes no sense for either side. China is hugely dependent on foreign direct investment, for growth, for technology, for jobs. The decoupling makes no sense for their economy. On our side, the decouplers focus on the supply side, they, “Oh, we can’t be dependent on China.” When you look at the demand side, China is the big market today. If you make cars, your biggest market is in China. If you’re Gucci or Nike, your biggest market is in China. For three quarters of a century, the center of gravity of the world market has been the Western baby boomer, Rob that’s you and me.

Rob Johnson:

Amen.

William Overholt:

And we’re getting along in the tooth. Now the center of gravity of the world market is China. If we cut ourselves off from that, we’re dead. I guess my analogy to that would be what happened to France. When I was a kid, France was a great world power. If you were going to be anybody in international diplomacy or international business, you had to speak French.

William Overholt:

And France became just enough more protectionist than places like the US and Germany that it’s global position went into radical decline. Now it’s a third grade power. And that’s exactly what the US will do to itself if this mentality of decoupling is allowed to prevail. We have a big problem on this, and the Chinese have a big problem on this. Having said that, it is probably useful to switch for a minute to the national security side. And here you have the same phenomenon. China in the South China Sea, is behaving as if it were a tiny little country like Malaysia, or Vietnam, or the Philippines. And these countries play all sorts of little games. Anwar, who went in his previous incarnation as Deputy Prime Minister of Malaysia, used to fly out at midnight to these little islands on a helicopter and plant foreign artifacts to show that Malaysia had always been in control of these islands. And that’s what small countries do. That’s what China’s doing. It’s behaving like a small country, just grabbing everything it can. But, as a big country, you have some responsibility to maintain the system.

William Overholt:

You need peace. You need rules that preserve the peace. You need a situation where countries have strong interest, but they recognize that other countries have strong interest too. And they need a citizen for compromise. China refuses all that and behaves like a tiny power. The US, on the other hand, wants to treat China as if it were still a tiny power. When China says, “We should have some say over standards on digital commerce, where we’re the world’s leader,” or when China says, “We should have an agreement, maintaining peace and space,” or when China says, “We’re a big economy now, we should have a proportionate role in the world bank,” this is no, no, no, no, no. You’re challenging our right to be the world hegemon, to control everything.

Rob Johnson:

Yeah.

William Overholt:

That’s not going to work in the modern world. China’s not the only country that’s bigger than it used to be. India, Brazil in particular are. Somehow our congressmen in particular, and most of our political leaders, think that we have a God given right to control everything. And that if some other country thinks it should have a say, even in areas where it’s the world leader, that’s unacceptable to us. We Americans have to accept that China’s a big power. It’s going to be there indefinitely. It has a right to compete. It has a right to have a say in the world standards that

William Overholt:

Say, in the world standards that are set, and when they ask for a voice, it is usually legitimate. Now when they try to chair the U.N. Human Rights Committee, that’s unacceptable. We have to fight for our standards in areas like that. But those areas are actually relatively limited.

Rob Johnson:

I think, Bill, that there are many things that are, which you might call, coming from different philosophical traditions, and when I’ve met in recent years with some of the very top leaders in China, not Xi Jinping himself, but some of those right around him, people who you know, they say to me, “Well, if we had been Tonga, we could have tied up to the tugboat called America, sent some of our people over for education, come back, modernized our economy, and we’d have been so small you wouldn’t even have noticed, but when we’re a country that has between four and five times the population of America, we start to, what you might call, sink the tugboat.”

Rob Johnson:

But they didn’t think that globalization necessarily would sink the tugboat. They thought that the Americans failed to take the logic of what economists call free trade theory seriously, which requires for everyone to be better off, some compensation, some adjustment, some transformational assistance, and that the government and the money politics of the United States led to essentially rewarding the winners with tax cuts, deregulation, the right to keep your money offshore. And the losers saw their public school systems and their health systems and everything collapse, which led to a despair and a despondency, which some Scandinavian economists have said to me they used to call Europe sclerotic and America, because of its supply-side flexibility, would be more dynamic, and that was the growth model.

Rob Johnson:

But because of the pervasiveness of globalization, technical change, financialization, America’s now in a position where the despondency and the temptation towards authoritarian politics and delusional scapegoating is not going to be the model of the future. We are not… The way it was put simply to me by a New York Times reporter is when you go to Sweden, they love the robots, because it improves the production possibility frontier. This, his name was Peter Goodman. It improves the production possibility frontier, and the people in Sweden trust that while they don’t save jobs, they save people, so that you and your children and your pension and your health and so forth would all be intact if you played the dynamic evolutionary game that America is not playing very well right now.

Rob Johnson:

And when I talked to the Chinese about exactly what you said, which is their market going through and up and out of the middle income trap, not the baby boomers like you and I, but that source of aggregate demand is the engine of growth in the next phase. And while I think you’re right that they’ll sputter and not reach the heights that they could by closing off, they feel that they can turn inward and exploit the economies of scale, invest much more in R&D, and that in the medium term they would assert, or at least before the last year, would assert that they were in pretty good shape and not gonna kowtow to the American Empire’s leadership.

William Overholt:

I think they’re half right. They can use their internal market and they have created a vast and expanding middle class, because they’ve taken care of their people. In the Zhu Rongji years at 1994 to 2003, they lost 45 million jobs in the state enterprises. And most of those were manufacturing jobs, but they took care of their people. Virtually all of them got jobs in the service sector, which was the expanding sector. And those that didn’t were retired on double pensions. Now the problem… So they’ve got the market.

William Overholt:

Their problem is gonna be on the supply side, because, as a recent book by Michael Enright showed, they are very dependent on foreign investment and foreign technology, and their Manufacturing 2025 bears a remarkable resemblance to the old Japanese industrial policy programs. Remember, we Americans were terrified that the Japanese were gonna take over the world. They had all these subsidies and reduced interest rates and special protections for their big companies. They were just gonna be kings of every important sector.

William Overholt:

Now what happened? They had a few successes, mostly pretty much outside the special technology, industrial policy sectors: cars, consumer goods, especially consumer electronics. Their subsidies for the big technologies had some successes, very expensive, but they had more failures, also very expensive. Merit Janow and Tom Pepper of the Hudson Institute did a book back in 1979 that added up the results, and the results were hugely negative for Japan. And the Japanese were very sophisticated, much more sophisticated than the Chinese about industrial policy.

William Overholt:

The biggest Japanese industrial policy success was the fifth generation computer artificial intelligence program. They were gonna take over the computer industry and artificial intelligence. It has a remarkable resonance with today, even though that was back in the 1980s. And it was a complete disaster. Now, the same thing’s gonna happen to China. They’re gonna have some big successes. Alibaba and Huawei are extraordinary successes facilitated by the system, but not really the core of their Manufacturing 2025 subsidies and protections.

William Overholt:

And the Japanese found something else. They put… As they turned inward, they protected their cell phone sector by making sure that their standards were completely incompatible with the technology of Motorola, which was the big competitor. And the protection was very successful. The Japanese got the domestic market all to themselves. But at the time, they had the five best cell phone companies in the world, and the turning inward meant that they turned the world market over to Apple and Samsung and Xiaomi.

William Overholt:

So by protecting their own market, they lost the world market, and I think that’s the fundamental lesson for China. The lesson for the Trump Administration is that this terror about Manufacturing ‘25 is inappropriate. We did it once before with Japan. We should learn that lesson. Let the Chinese waste a lot of money. When they threaten to take over a particular sector through unfair means, as with Huawei or as with credit cards, we should block them in that sector. But we shouldn’t succumb to this existential terror that the Trump Administration tends to spread.

William Overholt:

That leads me to the other point you made about our response to the job losses compared with Sweden’s. Our response compared to the Chinese losses of 45 million jobs are an even more dramatic contrast. Now what happened there? Manufacturing jobs have been in steady decline since 1947. I published a paper that has a graph. You can’t… On that graph, you can’t even see the emergence of globalization or of China. It’s just a steady decline since 1947.

William Overholt:

And our manufacturing output similarly goes up steadily from the post-war period. It goes up, but it uses a lot less fewer people, fewer jobs. And the reason is primarily technological change and organizational efficiencies. It’s true that globalization does affect some jobs. On the average about one out of seven manufacturing jobs lost, but manufacturing jobs are going the way that agricultural jobs once went. We used to have 98% of American workers in agriculture and now it’s closer to 2%. Is that because Peru stole all our jobs? No. It’s because we’ve got combines and all sorts of technologies, so that one machine can do the work of 100 or 200 previous workers.

William Overholt:

Now when agricultural jobs were declining, we built the transcontinental railroad system. We built the Interstate Highway System. We created the foundation of modern cities and modern manufacturing by zoning rules and work safety rules and union rules, all sorts of things. We didn’t blame foreigners. Now the same thing is happening in manufacturing jobs. The future is in service jobs, which on average are much, much better paid than manufacturing jobs. The Chinese recognize that. They shifted people.

William Overholt:

What’s happened in our country? Well, the Democrats have their roots in the manufacturing unions. They’re totally dependent on them. So they talk about getting the manufacturing jobs back. They never talk about the fact that those manufacturing jobs are gone forever, and you have to move people into service jobs. Instead, you blame it on China.

William Overholt:

On the Republican side, the rationale is different. What we know from the work of people like MIT economist, David Autor, is that when you’ve got a company town and the company goes down, people just sit around helpless. They don’t know what to do. These are not highly educated people who can scan the global market and see where the jobs are. You don’t just have to offer retraining programs. You have to identify where the jobs are gonna be, which is in services and where physically they are and help them. But that means giving the government some authority and some money, and Republicans are absolutely unwilling to do that. So they also find it convenient.

Rob Johnson:

You’re singing my song.

William Overholt:

I’m-

Rob Johnson:

I’m of a boy that grew up in Detroit, Michigan, and I watched the decline of the auto industry, the outward migration of population. But when I talked, I used to… I worked for six years in the U.S. Senate. When I talked to the Michigan senators like Carl Levin and Don Riegle, they said, “Well, after the Voting Rights and Civil Rights Act, no Democrats in the South are willing to provide trade adjustment assistance or economic adjustment assistance to a place like Detroit, which is a Northern black-run, meaning Coleman Young was the mayor, and black majority. And so Michigan, Detroit Metropolitan Area are gonna have to fend for themselves. And we saw what that implied.

William Overholt:

Yeah. That’s the perfect example. Michigan governors and Michigan politicians rail against China as having destroyed jobs in the car industry. The truth is exactly the opposite. GM was headed for the dustbin. At the turn of the century, GM was hopeless. It was a European and American car company. It was losing money hand over fist. In Europe, it was losing money in huge amounts. In the U.S., it was headed for bankruptcy and the loss of all those jobs. And when you include the supplier who would’ve been affected, it was millions of jobs.

William Overholt:

So what happened? China opened its market in a way that our allies, Japan and South Korea, never would.

Rob Johnson:

Mm-hmm.

William Overholt:

In China today, you can’t drive anywhere without seeing a couple Buicks. If you go to Japan or South Korea, you’ll virtually never see an American car, but in China they’re everywhere. And the profits in China were just enough to save GM. GM sells a lot more cars in China than it does in the U.S. Moreover, the Chinese engineers re-engineered the styling of the Buick. Buick was headed for being Oldsmobile. Oldsmobile died because it was only being bought by people in their late sixties and seventies. Chinese made the styling a little sexier, and all of a sudden Americans were buying. Americans under 60 were buying Buicks again. Now GM had lots of advertisements about European engineering. It wasn’t European engineering at all. It was Chinese.

Rob Johnson:

Fascinating.

William Overholt:

On the job front, when I was at RAND, Charles Wolf did a study of the effects of productivity on jobs at General Motors. If productivity doubles and the number of cars you’re producing remains the same, then the number of jobs is cut in half. And so Charles did the calculation. How much should jobs have been reduced by the increases in technology and productivity at General Motors?

William Overholt:

And what he found was that jobs should have gone down more than they did because of increasing productivity. And he asked, “Why didn’t they go down more?” Well, they didn’t go down more, because the China market was supporting jobs that wouldn’t have been there under ordinary circumstances, but the democratic politicians, in this case were the Democrats, found it very useful to blame everything on China. And this is a very fundamental factor in our bad relationship with China today.

Rob Johnson:

Do you…? So we look particularly now at the horizon of the need to collaborate on a global level vis-à-vis climate change. I think the evidence that in the next 20 years, lots of things have to be done to transform the structure of energy use and reduce carbon substantially. We’ve been talking about a disintegrating relationship, lost opportunity in the economic sphere from that disintegration or the pursuit of what you might call false or close to meaningless grievances in missing the big picture. But on the horizon, there is a big picture that will beckon us to collaborate with China. Do you see that as possible, and what’s the pathway that you would envision to creating that necessary collaboration?

William Overholt:

Well, as you say, global collaboration, and that means especially U.S.-China collaboration is the only way we’re gonna solve the problem of environmental degradation and of climate change. And that collaboration was going very well. At the beginning of the Obama administration, China was a big problem in the world. Obama was very angry at them. By the end of the Obama administration, China was becoming a leader and we were… While disagreeing over the details, we were basically in sync, and the degree to which we were in sync is much more impressive when you go down to the technical level.

William Overholt:

Harvard has a collaboration between a group at its engineering school, a group led by the guy who solved as much of the Los Angeles air pollution problem as has been solved. And they work very closely with China to try to help China solve the terrible air pollution problem that Beijing and other major cities have. And that’s good for China. It’s also good for us, because the technical problems of solving air pollution are some of the most complex, difficult problems in science today that you push down one kind of pollution, you get another kind. Solve a problem in one area, you worsen the problem in another area.

William Overholt:

And the mutual learning that has been happening by having some of the greatest scientists in the United States and China working together, it just can’t be overstated. And it’s not just Harvard and the leaders. It’s scientists at all our major universities and our government who are collaborating successfully on these programs. But what’s happening now? What’s happening is that the U.S. is…

William Overholt:

…is that the US has gone from being the leader on the environment and on climate change, to being the one that breaks the Paris Agreement and subsidizes the coal industry while China has become the leader in every form of green energy. And while it’s digging itself out of a very deep hole, it’s spending more on environmental improvement than all of the United States or all of Europe.

William Overholt:

So at the top level, we’ve had a breakdown in collaboration. And the paranoia that’s set in from Washington, which there have been bad things happening there, there have been Chinese scientists stealing our technology, but it’s gone from, “Okay, this is a problem we neglected and we really got to solve it,” and we really do have to solve it, there’s some bad things have been happening, but it’s created a paranoia about all Chinese scientists.

William Overholt:

It’s created special investigations of a very large percentage of people who happen to be ethnic Chinese. And the people are scared. Some of the best scientists are moving from the US back to China. And this is a terrible loss. We did this in the McCarthy era. We chased out one nuclear scientist and he went and invented the Chinese nuclear weapon industry. He was working for us. He wasn’t doing anything wrong, but we drove him out. We’re now doing this on a vast scale. People are spitting at Chinese on the street.

William Overholt:

The other aspect is crucial. It’s crucial. You go to Silicon Valley and look at these giant companies that have made America the leader of the modern world. Everywhere you go in Silicon Valley, the founders, the leaders, are Indian and Chinese, a few more Indian than Chinese. If we turn inward, block immigration, drive out these entrepreneurs and scientists who are helping us be the leader in the world, we’re in trouble. So we have to get our balance back. I don’t know how we do that.

Rob Johnson:

I think you’re really touching on a deep psychological fulcrum that is haunting America a great deal right now. Peter Temin, who you know, the economic historian professor emeritus from MIT, wrote an INET book, 2016 to early 2017, called The Vanishing Middle Class. And the underlying premise was that, as you said earlier, the new jobs are in the high margin services.

Rob Johnson:

And for people to get there, for America to be called the land of opportunity, we need from prenatal nutrition up through college education, the rungs in the ladder. And yet where we see economic distress and dispar geographically, we see the 70% of the population that is not in those high margin, high value added sectors, of which only about nine percentage points are African American, but we see the others voting and lobbying against something that would make a huge contribution to America being credibly called the land of opportunity.

Rob Johnson:

And it’s in the poison vis-a-vis scientists, it’s in the poison of what my board member John Paul refers to as “otherness,” that as a society we are choosing, in the realm of identity politics, to break down our own system of opportunity. And we will not become vital and dynamic and realize our promise if we continue on that path. And the US-China relationship, given the size and scale of China, portends a lot of changes, not just how globalization and others things have affected the United States.

Rob Johnson:

Give me your thoughts on, say, the development of Africa. INET did a conference in December 2018 with Justin Lin, who advocates a new structural economics, that was very much focused on the development of Africa and the role the US plays as distinct from the role the Chinese play. How do you see the horizon for African development and the US-China relationship in that context?

William Overholt:

Let me talk about that, but let me first address the very important thing you said earlier, which is that as a society we’re voting against the things that would improve our situation. Why is that happening? People don’t vote for Trump because they have calculated the economic interests of themselves and their families. Obviously they’re voting against that. Why do they vote against these things? Well, they’re angry. They feel the establishment has deserted them. And they’re right.

William Overholt:

It’s not just Trump and the Heritage people arguing for decoupling, it’s Nancy Pelosi and Chuck Schumer and those politicians in Michigan that we talked about earlier that are refusing to deal with the major social problem of our country in the new century. They’re treating these people as flyover people in favor of short term political calculations. Let’s do tax cuts for the rich rather than helping our left behind people. Let’s pander to the manufacturing unions rather than talking straight about where the jobs really are.

William Overholt:

Our whole establishment has abandoned the responsibility to take care of our people. And I know the people are voting, not against policies for education and health, they’re voting against an establishment that they’re angry about.

Rob Johnson:

Yes.

William Overholt:

And unfortunately they’re right. And nobody is standing up on either side of the aisle and saying, “Here’s how we solve this great social problem. Here’s how we move our society into the modern world and help all those struggling people.” Until we have a leader who does that, we don’t have a chance.

William Overholt:

Now to Africa. In the old days, the US was the promoter of a system of development, strong World Bank, strong WTO, strong A-I-D programs, strong institutional development programs. And in a place like Indonesia, those programs worked miracles. Indonesia in 1965 was the most hopeless place in the world. Negative economic growth. Inflation in the multi-thousand percent. More Islamic jihadis than the rest of the world combined.

William Overholt:

And we persuaded the new government under General Suharto to focus on the economy. We taught him how to do it. The Berkeley Mafia became the ministers. The Harvard Institute of International Development provided the institutional guidelines. And Indonesia became a solid, successful constructive member of the international community. And it’s now a democracy.

William Overholt:

Now, what do we do in Africa? Well, we didn’t want to expand the World Bank and the IMF and the WTO so we let those kind of atrophy. We got rid of most of our aid programs. We got rid of virtually all of the institutional development programs. And the main thing we do in Africa is we provide a special forces team in each country to fight terrorists and offshore Naval presence just in case there’s a bigger problem.

William Overholt:

The ones promoting development are China. And the last big diplomatic and developments success the US had in Africa was under Republican George W. Bush, who put tremendous resources behind a program to solve HIV. And that did wonderful things for the people of many African countries. And it got America a huge amount of credit. Today all they see is the special forces teams. And those special forces teams are barely succeeding anywhere. Like our forces in Syria and Afghanistan and Iraq, they never lose a big battle, but they never win the war.

William Overholt:

China on the other hand gets four dozen African leaders together and talks about development. And then it builds railroads and it builds roads and it invests. And Ethiopia has become the Chinese version of Indonesia under our successful program. Almost nobody in the West realizes that in many years, Ethiopia is now the world’s fastest growing country. When I worked in Ethiopia, it had six violently conflicting Marxist parties. It had one of the modern world’s worst famines. This was a complete disaster like Indonesia in 1965. And there are a number of contributors to its success, but China is the biggest one.

William Overholt:

And if you look at the belt and road program throughout Africa, there are a lot of problems. And American commentary is focused almost exclusively on the problems, which are real, but we kind of like to belittle China. But if you talk to economists who work systematically and if you talk with Africans as a group, “Well, for all the problems, this is huge progress for us.” China, on balance, is helping and helping a lot. So China’s doing what we used to do and it’s the right program.

William Overholt:

And when our Assistant Secretary of State says they’re just building a Great Wall of Debt and trying to subordinate these countries, all American research has shown that that’s nonsense. They’ve handled debt problems roughly the way we would’ve handled them. The notable exception being a big part in Sri Lanka. So we’ve passed the baton and we’re surprised that somebody else picks up the baton.

Rob Johnson:

Yeah, I think that’s almost a metaphor for the entire American experience outside of the top 5%. And the world experience. And that’s a daunting prospect.

Rob Johnson:

Bill, you lived in Hong Kong for 18 years. I remember we met when you were working with Bankers Trust there and so was I. There have been some big changes since the days of the British rule and Chris Patten and others, but it seems like things have become quite acute.

Rob Johnson:

A year ago I was at a Victor Fung event of his Asia Global Institute. And on the way to the airport, riding in a van with Kishore Mahbubani, a bomb went off at about a hundred yards at about 11 o’clock, on the clock as we were driving. A lot of the debris and so forth hit the car and the driver just pulled around and kept going. Saw a bunch of people with those Guy Fawkes-type white masks all standing and cheering as they’d blown up a part of the road. We got to the airport, both of us were kind of terrified, and went on home, him back to Singapore and me, I went on to Beijing before New York.

Rob Johnson:

But what’s happening in Hong Kong now seems, what you might say, even more profound or severe. I know you’ve written a recent paper on the Hong Kong situation, but it preceded this pandemic and it was called The Rise and Fall of “One Country, Two Systems,” which I’ll post on our website associated with this podcast. But give me a sense, what’s happening in Hong Kong? Is this a continuation of things that have been building? Is it aberrant? What does it imply for the people there and the world?

William Overholt:

Well, until 2014 one country, two systems was working beautifully. The Chinese observed every comma of their promises to Hong Kong. The British, by the way, earlier had not. They broke the agreement in very important ways. But with the emergence of Xi Jinping things changed. There were some book sellers in Hong Kong who were publishing books about Xi Jinping’s love life. Beijing found a way to shut those down. There went freedom of publication. The local Editor of the Financial Times was asked to chair a meeting of the Foreign Correspondents’ Club where Joshua Wong, a dissident high school leader, had spoke, and our government refused to renew his visa. So there went freedom of the press.

William Overholt:

And one of the promises was that China would respect the Hong Kong judicial system and that organs of the mainland government would not interfere in Hong Kong. But there was a billionaire who lived at the Four Seasons Hotel and the Chinese Public Security Bureau made a deal with a local triad gang to kidnap him out of the Four Seasons Hotel and bring him to the border where the Public Security Bureau could capture him. In addition, the people from the Public Security Bureau were everywhere in Hong Kong, contrary to the agreement. They didn’t just look at security issues, they were the arbiters of many locally important business deals.

William Overholt:

So China was breaking every major political agreement it had with China. And it was a very explicit policy, very explicit change under Xi Jinping. So then you get riots, people react the way those bomb throwers you encountered did. And China could easily have solved this problem by, “Okay, lower level people made mistakes. We’re going to reaffirm our promises and stick with them.” Everything would’ve calmed down. We would’ve gone back to a situation where there were skirmishes along the boundaries of one country, two systems. China wants something to happen, people in Hong Kong don’t want it to happen and have demonstrations, under all previous Chinese leaders there would been calm discussions, negotiations, some kind of a deal.

William Overholt:

But instead, this time China’s reaction was blame it all on the United States and Taiwan. “This is all done by black hands, manipulated foreigners.” They always had a hard time explaining how American CIA agents could somehow get a million or 2 million middle class, educated Hong Kong people into the streets, but that didn’t bother them. They had wonderful propaganda, subcontracted, by the way, to Russia. Most of their best propaganda videos were made by the Russians.

William Overholt:

And they want to characterize even peaceful demonstrators as rioters. Being a rioter makes you vulnerable to a 10 year jail term. And they had somehow turned the previously very respected Hong Kong police into a thuggish operation that operates the way police do on the mainland, just beat the hell out of anybody who disagrees with you.

William Overholt:

So things were badly polarized. But these things could have happened one after another quickly. The explosion came over what would’ve been a relatively minor issue by itself, an extradition law so that they could send a guy who had murdered his girlfriend back to Taiwan. The big riots, before the pandemic, exploded over that. But it wasn’t over that. It was the pressure, the anger that—

William Overholt:

It was the pressure, the anger that had built up over three years of China abandoning all its promises to Hong Kong. So then you have a pause for the pandemic and then China wants to implement this new national security law. Now, the basic law, which Britain, and China, and Hong Kong, leadership all agreed to as Article 23, which it says Hong Kong will pass a national security law that prevents subversion. Most countries have such a law. The Democrats oppose any kind of anti-subversion law with a big demonstration every time there’s a proposal to have one. And that was actually a big mistake. They should have gotten together and said, “Well, here’s the kind of anti-subversion law that would be acceptable to us.”

William Overholt:

So it’s been an impasse for 23 years, so China finally said, “Since you won’t do it, we’re going to impose one.” So the problem is not the law itself, the idea of an anti-subversion law, which is a mistake almost all of our media and politicians make. There are two problems. One is that the proposed law will have very severe penalties for rioting and subversion. Those are words on the mainland that are interpreted in the most expansive possible way, makes it possible to arrest almost anybody. And that’s absolutely unacceptable to Hong Kong people. The second is that although China has a reasonable beef, that Hong Kong has not lived up to its promise to pass an Article 23 law, it’s illegal for the People’s Congress to impose a law of their choice on Hong Kong.

William Overholt:

Finally, the new law will allow the public security organs of China to function openly in Hong Kong, and that is specifically prohibited by another part of the basic law, which I mentioned earlier. So this is two things. One, it’s a proposal that has absolutely unacceptable elements, and it’s a trigger. It’s a trigger for all the pent-up frustrations. And this time it’s not just triggering the frustrations in Hong Kong itself, but internationally. Obviously the biggest response has now come from the Washington of Trump and Pompeo, who said that Hong Kong is no longer to be considered an autonomous entity. If we have time, I’ll step back for a minute and look at two things.

Rob Johnson:

Sure.

William Overholt:

The fundamental conflict of view that underlies this, and the risks that are posed by the US reaction. China’s view of Hong Kong has always been that it’s a business entity. Other Chinese cities or areas have a mayor and a party secretary or a governor. China has a chief executive. Whereas under the British it had a governor. That chief executive title is because Hong Kong is a business arm of China. The reason China wanted to preserve Hong Kong’s system is it’s so incredibly valued as a business. Now, the Western view of one country, two systems is that it’s a free liberal polity with democratic potential. Now, in the old days before Xi Jinping, Chinese leaders saw some connection between these two.

William Overholt:

Many top Chinese leaders talked about Hong Kong as a model for the future Chinese economy. They imported Hong Kong advisors into very high levels, typically deputy chairman of the bank regulator, or deputy chairman of the securities regulator, and they saw a connection. Hong Kong represented a Western system that was very successful. It was an economic system that was very successful and it had connections to this kind of political openness that they didn’t completely buy into, but they saw as connected to the economic success. Two things happened. In 2008 the global financial crisis disillusioned Chinese with the idea that Western financial systems were the way to go. No, this created a risk of total collapse. China needed to find its own way with more controls.

William Overholt:

Second, the advent of Trump, and Bolsonaro in Brazil, and Boris Johnson in Britain, convinced not just Chinese leaders but a broad swath of Chinese and many people throughout the world that democracy created a risk of dangerous, irrational, thoughtless, leadership that would damage the economy. Chinese ways seemed better. And then in comes Xi Jinping with his authoritarian tendencies and they say, “Well, I want to preserve one country, two systems in the important part, and what they considered the important part was the economic system, “and we can get rid of this other stuff.” So here’s the clash, that they think they’re preserving the only important part of one country, two systems, and we think they’re destroying the only important part of one country, two systems.

William Overholt:

Now, the Washington reaction given that this Beijing government has broken so many promises to Hong Kong, the Washington reaction that it’s no longer as autonomous as we thought, is completely reasonable. The question is what happens now? If you take away the legislation that treats Hong Kong as autonomous, Hong Kong’s role as a trading center collapses, Hong Kong’s foreign direct investment system collapses. And if you apply the export controls to Hong Kong provided to China, you’re not allowed to transfer any sophisticated American computers to China. And this means, if it’s interpreted this way, that we won’t be allowed to sell any sophisticated computers to Hong Kong and we’ll enforce that on our European partners.

William Overholt:

Now, when I was a governor of AmCham in Hong Kong, the calculation was that the big banks had to turn over their computer systems every two years. And if at the time we were legislating the special rules for Hong Kong, if the export controls had been applied, the big banks would’ve collapsed within two years. It’s virtually impossible to replace their systems with systems that they would be allowed to export or with systems bought from China. Now, I don’t know what the current situation is, but you have all the biggest American banks, all the biggest European banks, and the biggest British bank, HSBC … While HSBC is legally headquartered in London, the core of its business is out of Hong Kong. Are we going to destroy all those banks?

William Overholt:

So how if you’re Pompeo and Trump do you take this finding, which on its face is reasonable, and implement it in a way that doesn’t destroy the livelihoods of the people of Hong Kong? In the Vietnam War some of our soldiers had a slogan, “Burn down the village in order to save it.” If you burned down the village and killed everybody, they wouldn’t become Communist. Afterwards, some people thought that was a pretty bad idea. In the most extreme interpretation, just taking away the special protections of Hong Kong would burn down Hong Kong in order to save it. I don’t know how much of our allies were consulted. The Trump Administration doesn’t have a very strong record in consulting allies. Have they talked with London about the fact that HSBC might be just crippled? I don’t know the answer, but I’m concerned.

Rob Johnson:

These are profound changes in a very turbulent time. Bill, any final thoughts? In many of these podcasts at this time, towards the end of May in 2020 I opened with people’s impressions of the profound influence and unmasking that the pandemic has provided. Do you have any final thoughts on how the pandemic has changed the forces in the context that we’ve been discussing today, US, China, Hong Kong, Africa, Asia, or any other observations that relate to it?

William Overholt:

Well, I think it has thing changed things profoundly. The whole world is angry at China because China’s the origin of the virus, and they were slow to respond, and we don’t know whether they could have prevented the virus from getting out. This is a very, very fast-spreading virus. But if there was a chance, they blew it. So the world is very angry at China about that. But then China cracked down. They did what you do to control the virus. They did what US plans would’ve done before Trump threw away all those plans in 2016. And then the Trump administration delayed considerably longer than China delayed, so now the US has been the center of the pandemic.

William Overholt:

Even if the Chinese figures for infections and deaths are off by a considerable magnitude, the US has far more infections and far more death. So the US is a super-spreader of the virus to the rest of the world right now. And the way it first delayed for political reasons, Trump was afraid that the stock market would go down so he called it a hoax, and then did this haphazard shutdown where every state is different.

William Overholt:

Then Trump mobilizes his own supporters against the shutdown and validates armed protestors intimidating the governor of Michigan, and now we have almost every state opening up before the guidelines say it’s appropriate. So the US comes out as the big super-spreader. And the other thing, there’s this kind of silly effort by the government of Mississippi and voices in Washington say, “We’re going to Sue China for this.” Boy, if we have a valid suit against China, and I don’t know of any legal basis for that, an awful lot of other countries would have a valid basis for suing us.

William Overholt:

They’re very angry at us, and instead of seeing us as a world leader they see us as a joke. That along with abandoning the TPP, and the Paris Agreement, and subsidizing coal, and ridiculing our allies about almost everything, that provides a capstone of the end of our image as a valid world leader. China’s got a big problem, but they can say “Once we got our act together, we did what was right. We did what was necessary to take care of our people.” On the economic side I think the consequences are very important. China had a huge problem so it just clamped down, as did South Korea, Taiwan, New Zealand, Australia, Germany, Austria, the result is they can open up their economies.

Rob Johnson:

Yeah. I want to thank you, Bill, for this kind of vast and deep dive on this day. And I think I said at the outset, you’ve always been my teacher about things related to Asia, related to Myanmar, related to China, Taiwan, Hong Kong, and much, much more. Your vision and insight with regard to geopolitical forces, technological and military, as well as the kind of bread and butter of the economic dynamics is extremely helpful. I hope that you, before too much time passes, will come back. I mean as I know you will do. We stay in touch, and you’ll always alert me if something acute is happening.

Rob Johnson:

I know my team at INET is very interested in doing a video webinar with you with our 11,000-strong Young Scholars Initiative and also the webinar for scholars and leaders that has been blossoming. But for now and for today, I want to profoundly thank you. Your insights are very, very valuable, very considered. You’ve always been someone who, how do I say, is a guiding light in perhaps the most interesting and challenging frontier, this relationship between these two philosophical systems, these two large countries, and all that it portends. I hope you enjoyed yourself. You certainly created a lot of things for people to think about for my listeners. So thank you very much.

William Overholt:

Thanks, Rob. It’s an honor to be part of your program.

Rob Johnson:

Yeah, it’s-

William Overholt:

Continue to work with you.

Rob Johnson:

Yeah. Well, you have been a core. You’ve been a featured attraction for a long time, and that’s not about to stop. So we’ll talk again soon, and thanks again.

William Overholt:

[inaudible 01:32:49]

Rob Johnson:

Bye-bye. Check out more from the Institute for New Economic Thinking at ineteconomics.org.