David Malpass on Trump's Asia/China Policy (white paper)

Introduction of David Malpass
My company is Encima Global. Before this, I was the chief economist at Bear Stearns through 2008. Before that, I worked in the US government for the staff of the Senate Budget Committee, and then for the Treasury Department, and then for the Joint Economic Committee, and then for the State Department. Most of my Washington was working for James Baker on developing nations.
I was involved in a lot of the trade legislation, the tax legislation, and the savings and loan bailout, and a lot of the things that went on in the '80s and '90s in DC. I am now an advisor to Donald Trump on the idea, and I write a lot, I have a regular column in Forbes, and I write frequently in the Wall Street Journal on the need for dramatic change in Washington.
That's the thrust of my involvement with the campaign. For example, the growth rate of the US has been 2 percent now on average for seven years, which is very dangerous for the world. Trump has proposed policy changes that would generate four percent growth rather than two percent, and so that's one of the areas that I work on in the campaign.

1. China & Globalism 
Malcolm called yesterday and said, can I come join the discussion this evening. And I said great, because I'd like to listen to what all the issues are. I've worked, really, my whole career on development economics, how do you get countries to grow faster. As a way to benefit the U.S., it's in our national interest to have other countries grow fast.
I was on the board of the Council of the Americas and on the board of the National Committee on U.S.-China Relations in the context of it being in the U.S. national interest to have good relations with foreign countries and also to see them grow much faster. That helps us a lot when that can happen. I've written a lot about the IMF and the World Bank, often critical of globalism as a direction for the world. I think we need to find a way to have the U.S. operating in its national interest. The U.S. has, I think, fallen down substantially on that over the last eight years, but maybe you could say longer than that. 

The way I think about this is there is a giant part of the global population, not just the U.S. population, that is tired of the globalism that's been dominating. We can think about how you might evolve or want to change the G20, the IMF and World Bank, the United Nations, the TPP, and on down the list of internationalist concepts in a way that would work better.

We see the Brexit vote in England as a very important decision by the British people that they don't want to be forced to be tied in with the European Union as it goes through a collapse. That's representative, really, of a lot of sentiments we're going to see in Italy on December fourth, a referendum, basically on Renzi and on the globalist system. So we'll see how they vote. It's on a constitutional change, but it's become a referendum on the Euro and on globalism. 

I think for people interested in U.S.-China relations, it's critical to find ways that they can change. Trump has been popular in many parts of the country because he's saying what we do now is wrong and we need a new way to do it. We can all quarrel with how he's saying that but it seems as if there might be a majority of the population here, as there was in the UK, a majority that resoundingly wants a different direction for the country. 

As we bring that to China then, that means China being more forceful in its relations with North Korea. How is it possible that we have allowed the North Korea situation to go on as long as we have when China has substantial influence that's not being used? Or is it that China is kind of jerking our chain, meaning trying to have a bargaining chip with the U.S., and now we have Philippines kind of playing in a way, the same bargaining chip with China.

Wouldn't it be an interesting way to get a lot of benefits out of the U.S. by talking about working with China when the Philippine public really would rather work with the U.S., but we haven't had enough leadership or red lines in order to do that. It seems to me we're at a point in global diplomacy and global geopolitics and economics where there is going to be massive change of direction in the way the world works and the question is, who leads that and how do you lead it in a way that's beneficial for everybody?

2. U.S. Trade with China
The U.S. has a problem. We're the one running a big trade deficit and not having enough job creation to pull in the weaker workers within the labor force. To an extent, there is a problem that everybody around the table needs to address. We don't have to have China be the focus of it, it has to be that the U.S. has a problem that needs lots of work to change.

If we don't change it, then we're inevitably going to come to this currency manipulation thing. The U.S. will try to gain competitiveness by weakening the dollar or something if we don't have an alternative. 

That said, Trump wants to renegotiate the trade relations with China so that they would be consuming more and subsidizing their exports less. They're living beneath their means now by exporting more of their output than they need to. That would mean their trade surplus would be somewhat less than what it is now and their growth would be as strong as it is now but just in a different direction. It's very consistent with what China itself has been trying to do. They've been trying for years and years to encourage domestic consumption and reduce some of the subsidies for their exporters.
Let's say Trump is elected in November and then in January is inaugurated, so what policies would be out there? 

He's spoken a lot about the difficulty of the trade relationship. and we're already seeing this, IBloomberg did a big article yesterday about Chinese negotiators of WTO. I'm going to name names. I don't know these people. 

He Ning, Long Yan, and He Yafei, former Chinese Vice Foreign Minister and Coordinator. Those were three people that Bloomberg was able to get in direct quotes on the record about the implementation of WTO needing to be rethought and recognizing that it is causing a major problem for the U.S. 

As you think about a principal thrust of what Trump is saying, it's that we have an unbalanced trade relationship going with China that stems from the terms of their entry into WTO and that needs to be remedied, needs to be changed. 

China is responding in the press with the idea that there's some truth to that and there needs to be a world recognition that unbridled globalization isn't working for the U.S. I think that's the emphasis of the discussion. 

The U.S. needs to state what its grievances are with Mexico, with China, and so on. With Mexico, after NAFTA was negotiated, they implemented a value-added tax and then increased it and are not enforcing it symmetrically, so they allow imports in that aren’t subject to the VAT, and then they allow exports which are subsidized by the normal rebate of a VAT tax. That creates an imbalance in the way people do their investments. 

With China, it’s the same, there's that problem. But then also there’s the gigantic subsidies that China has done in various industries. The Chinese taken many of the manufacturing industries through subsidies without much response from the U.S. That gets into WTO dispute settlement, and the need to think about revisions of how that's operating. I think the way to have a relationship is to state where the problems are.
Just today, or yesterday, Chuck Schumer came out and said he was supporting the aluminum response from the U.S. If Trump hadn't raised this as a problem, and shown that it's really a nationwide problem, the Obama administration wouldn’t have touched that issue. 

You know, on the aluminum issue, China took not only the smelting industry, but then the downstream industries of aluminum foil and then it gets into stamping operations and so on all the way down. And then warehouses aluminum in Mexico, as a way to further directly undercut the U.S. industry.

The trade relationship that we have with China right now, Trump's hit a chord nationwide on it's not working for the average guy in the US. That really is a cry to voters but also to Hillary Clinton even of what we've been doing doesn't work. What's our new idea?

3. Engaging China
We're not able to engage now with China in a sharing of core interests, because China has gotten so used to the U.S being ineffective. China has set up very effectively the Silk Road and the Asian Infrastructure Bank, and is flanking the U.S We tried to block them in the IMF and so China went around the U.S almost instantaneously as if we were standing still.

The Asian Infrastructure Bank has been a giant home run for China and has neutralized the U.S influence that used to exist through the IMF and the Asian Development Bank. It just went right around us as if standing still. The U.S, in order to re-earn respect in China, has to start over again and think about how to have a credible presence. 

We did the so-called pivot at a time when we were, we simply didn't have enough ships to project a force. Trump has suggested incrementalism in terms of a bigger navy to project U.S. interest beyond Hawaii. You need more ships and more men and women on the ships. It's true that our ships are better than their ships, and if there were a war we could beat them. 

The U.S hasn't done enough to create, it's trite, but peace through strength. This really is a meaningful phrase, a way to work with the rest of the world.
China looks at things in a hundred-year time frame, and the U.S is wasting away. They watch that and believe that. That then colors their responses. For example, they're in no hurry to help us on North Korea, and North Korea isn't threatening to attack China. So they let it sit.

The U.S. needs to talk very candidly with China that it's going to be in both of our interest to have the North Korea problem diminished. The U.S. can't do it alone and certainly can't even consider taking control of North Korea's nukes. That's very close to China's border and brings back memories of the Korean War. The realistic communication is directly with China at high levels. The U.S. really needs China to begin to take care of this problem because it's a major problem. I don't believe we've said that. 

People talk about alternate realities going on, China has managed to create, let's call it, friendship although it's more practical than that, with Philippines, with Pakistan, with East Africa, with along the Silk Road, with Russia. 

Everybody's playing the China card now. Russia buddies up to them on that they have common concern about it and the Russians are running their navy through the, I don't know, the Sea of Japan or wherever they're going as a way of showing solidarity with China. The U.S. has ended up in the worst possible position that you could imagine in terms of our relationship with Asia.

4. Dealing with China’s Economic System
Industrial policy was a big issue in the U.S. in the 1980's. There was a movement in the Democratic party to have an industrial policy that consisted of a big U.S. government planning agencyto push back, in those days, against the Japanese because they were such a powerful force, and they wanted to do plasma televisions, and they were going to take the whole market on plasma televisions.

On industrial policy, I was just going to say we have an intellectual challenge for the world, how do you have a free market economy, which the U.S. kind of used to be, interact with China, which has extensive industrial policy in terms of how they plan their sectors. They plan their infrastructure, they plan which foreign investments they want to do. It hasn't gone well for the U.S. One of the things that even free traders need to try to deal with is how do we create a relationship with China when it's been very successful at its approach. 

After 2008 of course, China announced to the world that the western system had failed, and it was going to go its own way. That's been the practical implication. They now look down at us from an economic standpoint because our system did so badly. I think that has to be addressed as a policy issue. How are we going to work with China when it's got a distinctly different system? That then informs us on our alliance with Japan and with our treaty relationships with Taiwan.

I guess my thought is, we're not ready at this point to engage with China given the weakness that the U.S. has projected now for eight years. We've projected massive weakness or inattentiveness or misunderstandings around the world, whether in Egypt or Crimea or Syria or Philippines. And it's coming back to bite us over and over again with countries preferring to work with China or with Russia rather than with the U.S.
Before we can ever address industrial policy or interactions, the U.S. has to take a step back and strengthen itself and rethink what's gone wrong and then come forward with a relationship with China.

5. Chinese Investment in the U.S.
We have to recognize how the UK after a vote, is going through a massive change of the way business is done. It was just coming out today, it looks like the banks are going to lose their passport, which lowered their fees for doing business in continental Europe, is among the things that Britain is giving that up in return for getting some control of the immigration inflow. 

Likewise, the number of people who would like to come to the US is more than the public really wants to welcome. We have to recognize that there are deep issues that have to get solved.

Even if Clinton wins, I think there will be efforts to link CFIUS decisions more closely to the overall relationship with China. A risk we have is to politicize more of the relationship rather than less. 

As we talk about industrial policy, there may be, we don't know, but within the Democratic Party, the idea, left over from the '80s, which was a really strong thread within the Democratic party theory, that we ought to have the federal government have a ministry of industry that sorted these kinds of things out. 

If Trump wins, there is the distinct desire to shake things up as far as how negotiation is done with China, by using more tools. That means 201, 301, CFIUS, Super 301, the currency manipulation standard and so on down the list. You can worry going in and say ‘oh, that's going to shake things up. Well, yeah, I think that is something people have to kind of deal with. 

Along with many other things, including M&A from China, however the election comes out, we've got to recognize the world's going to be different in January.


David Malpass

U.S Treasury Undersecretary For International Affairs Designee

David Malpass of New York will serve as Under Secretary of the Treasury for International Affairs. Mr. Malpass returns to...

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