Below is the complete transcript of the China Corner Office episode with Craig Allen.
Chris Marquis: Hi everyone. Thanks so much for joining us today on China Corner Office, a podcast powered by The China Project, the New York-based news and information platform that helps the West read China between the lines. I’m Chris Marquis, a professor at the Cambridge Judge Business School.
And today, we are joined by Craig Allen, who is President of the U.S.-China Business Council to discuss key issues in U.S.-China business relations for 2023, as well as how the changing political landscapes in both countries will shape business engagement moving forward. Craig started with an assuring tone pointing out that the Chinese local and provincial government leaders that he met a number of months ago in his late 2022 trip are mostly bullish, seem flexible, and ready to go to support trade and investment. While the central government of China has adopted somewhat a risk avoidance attitude, Craig said that the USCBC members are optimistic as well about future outlook, in particular in the agriculture, energy, manufacturing, consumer goods, and service sectors.
Craig also explained the factors that make industrials and exports aerospace in the tech sectors a bit more complex than the others. We then went on to detail the U.S.-China positioning in the tech sector in particular. And in that sector, the outlook is a bit less rosy as it’s increasingly bifurcated between the two countries and firms are dealing with a large amount of volatility and uncertainty. We also discussed the corruption scandal of the National Integrated Circuit Industry Investment Fund — quite a mouthful — but it’s also known as the Big Fund, as well as more generally how distortions in the global market for semiconductors and other products occur due to government subsidies. At the time of our recording, the Select Committee on Strategic Competition between the United States and the Chinese Communist Party headed by Representative Gallagher had just been established. We discussed the priorities of this committee, including Taiwan relations, tech regulation, Chinese investment in the United States, and other issues. It is notable that this is the first select committee directed specifically against a foreign political party.
We concluded the discussion with the topic of student exchange between the U.S. and China — a topic that both Craig and I are very interested in and hope to help improve. The number of students from both countries visiting the other dropped to historical lows during the pandemic, and we both agree this is an important area of focus for both countries in the future because having people with intimate knowledge of both sides is essential to foster a productive conversation.
Thanks so much for listening, and enjoy the show.
Craig, welcome to China Corner Office.
Craig Allen: Thank you, Chris. Good to be here.
Chris: The first thing I wanted to talk to you a bit about is face-to-face, person-to-person, business and diplomacy between the U.S. and China. You actually are one of the people in the past three years that has spent a chunk of time in China working with businesses; working with political leaders. And now we’re in this period, I think there’s going to be considerable opening up and traveling, which is a good thing. So I was wondering, I’d just love to hear a little bit about your experiences and how you think that those might inform some understanding of this next phase of the world basically that we’re going to be in.
Craig: Well, thank you. I went out during the worst part of the COVID lockdowns and had 10 days of solitary confinement followed by three weeks of hard labor as I toured around China. It was very difficult with a huge amount of uncertainty every step of the way. One had to be careful all the time to try to avoid a pop-up. So, I’m delighted that we’re now in the post-COVID era. I would note on the importance of face-to-face that it was really when Xí Jìnpíng 习近平 and Joe Biden sat down at the G20 in Bali, Indonesia, that we saw a little bit of a thaw in the bilateral relationship, and that was due to face-to-face after three years of not seeing each other or only seeing each other virtually. So, I don’t think it’s wise to underestimate the importance of that gathering in one room, preferably breaking bread together and talking to each other as more than just a two-dimensional screen, but rather as a three-dimensional person. We need more of that.
Chris: Yeah, I’d love to hear a little bit more about the folks that you met with when you were on the ground and what they were feeling about the situation and their businesses or their interactions with the government.
Craig: Well, I’d say that there was a whole range of views, but one could generally say that the local and provincial government officials that I met with were all very bullish, flexible, ready to go to support trade and investment in their regions. At the central government level, I sensed a great deal of more risk avoidant, that companies when they asked for a license or an approval, the government officials were not sure which way the wind was blowing, and therefore were unable to reach a decision or to move forward. And so, we just saw a lot of careful studying of problems rather than any resolution. Our businesses I think are generally optimistic and positive about the future, believing that China’s growth model still continues, that China will be able to maintain 5%, 6% growth into the medium term at least, and that they want to manage any problems that might come along.
Of course, there’s a great range there. The agricultural industries are full speed ahead; energy industry, full speed ahead; manufacturing, full speed ahead; consumer goods and consumer services, never been better. Industrials, a little bit more complex; aerospace, more complex, and tech, more complex, but many of our companies are very bullish, ready to continue to invest and to expand into China.
Chris: Let’s talk about some of the sort of easier ones. I mean, so we’re recording this, I think people are on holiday visiting their family over the spring festival, giving out gifts and buying dinners, etc. So, you can see sort of consumption bubble perhaps right now. What’s your sense of some of the specific sectors that okay, people have been locked up; travel is often talked about as something that’s going to really explode. Internationally, obviously, over the past weeks, there’s been domestic travel. I’d like to hear about some different segments that you’re particularly optimistic about.
Craig: So, I think consumer goods and services are clearly going to witness very rapid growth in the first half and perhaps into the third quarter as Chinese are able to travel and able to move about. And they want to travel, that’s for sure. The question is will there be a rebound in consumer durables and in construction? And there, I’m a little bit uncertain. Currently, Chinese households are saving an enormous amount of their income and household expenditures are only 38% of GDP in the fourth quarter of last year, so very, very low; savings, very, very high. And will there be enough confidence in the medium and longer term economy for the consumers to, if you will, take out their wallets and begin to spend?
Outside of that first, second-quarter post-pandemic rush, let’s wait and see. Certainly, the government is talking about relaxing the restrictions on the construction industry and so I’d be hopeful that we’ll see a pickup there. Industrials are, at least to a large extent, dependent on the global economy, and many of the industrials in the export sector are pretty glum because of a recession in Europe in a potential recession in the United States. And so, the export sector is weak. Tech has its own character and its own rhythms, and so it depends on where you are within that ecosystem.
Chris: I’m interested in following a little bit up on tech given that’s an area where there might be some more national security or other factors that create a little bit more tension between the two countries. For a long time, the Chinese were not consuming a lot. They were investing in things like property, so those probably go almost countercyclical to some extent. So, the buying an apartment option, sort of, I guess makes sense if people are holding back in some of their consumption. The tech, though, so obviously you think about there’s the CHIPS Act and other semiconductor legislation that’s been obviously announced and talked about. What’s your sense about the positioning of the U.S. and China currently in that sector?
Craig: On September 16th, the national security advisor, Jake Sullivan, gave an important speech where he noted that in the past we could keep one or two generations ahead and that was okay. He said that, that is no longer appropriate for today’s current strategic environment and that we need to stay as far ahead as possible. Shortly, following that, on October 7, a number of novel new export control regulations were released that more severely restrict American exports of high-speed computing semiconductors and semiconductor manufacturing equipment. And those new restrictions were put into effect immediately, so without any warning whatsoever. And so, this has led to some disruptions in the industry. The U.S. government is currently working with the Dutch or Japanese counterparts to try to encourage them to adopt similar restrictions.
It remains to be seen whether or not that will happen. Now the Chinese government is not sitting there passively, and indeed they have announced a countermeasure to the CHIPS bill with approximately three times the amount of money as it was called for in the CHIPS bill. But it remains to be seen how that will be disbursed. Our understanding is that a lot less is going into fabs and a lot more is going into manufacturing equipment and services and R&D. the Chinese are playing the long game here and industry is quite bifurcated and dealing with a huge amount of volatility. One important question that remains unanswered is whether or not Western, Japanese or Korean or Taiwanese semiconductor manufacturers will still be able to import American semiconductor manufacturing equipment one year after the October 7 regulations were released. And that is an unknown.
So, there’s a lot of volatility, a lot of uncertainty in the market. At the same time, the market is dealing with relatively low prices. In the memory space in particular, prices are at an unprecedented low level, and this makes the travails of the industry even more complicated. So, lots of moving pieces here as the two governments play three-dimensional chess against each other to solidify their own supply chains and to protect themselves from potential actions from the other. There’s two elements to this — the run faster element that is subsidizing your industry and the hide the ball element, protecting technologies they believe to be sensitive. And both governments are doing both things — Creating an environment that is nothing but complex.
Chris: Three-dimensional chess, I think, is a good analogy because then you also have to layer in the international dimension — the Dutch and the Koreans and the Japanese, Germans, etc. I’d like to actually ask you a little bit more about the Chinese run faster element. Less than a year ago, there was the big blow up of one of their prior big sort of industrial funding of the semiconductor industry. I forget the long technical name, but known as the Big Fund — lots of corruption, lots of money spent. Maybe some things happened, but there were some examples where spent $4 billion and actually there’s not even a fab that gets built. So, was there any discussion in the recent announcements about this stepped up funding of the chip industry, ways to actually make sure that it’s directed towards actual real innovation as opposed to potentially individuals taking the money and running basically?
Craig: So, I think that the Ministry of Industry and Information Technology, otherwise known as MIIT, really took a knock with, if you will, misappropriation of a great deal of funding from the big fund, and a number of people have been arrested as a result of that or lost their jobs. And I think that it just goes to show the difficulty of running an effective industrial policy if you’re a government. And the difficulty, especially if you’re on, if you will, the cutting edge of technology, it’s relatively easier to catch up. It’s much more difficult to actually move ahead or to leapfrog. My understanding is that the Chinese are trying to do all of the above, that there’s so much money being spent here as a result of a perception that this is a strategic matter that the U.S. and the West are becoming implacably hostile, and that they have no choice.
So, they’re looking at and have allocated significantly more money towards R&D. Then into the building blocks of the semiconductor industry, not putting 20 billion down on a fab but putting a lot smaller bets on semiconductor tool manufacturing companies. But that is also a very difficult way to move forward, particularly if you’re looking at leapfrogging. I think that the Chinese government is pretty realistic about this. They know that a lot of the money will be wasted but money that is used in a manner that is malfeasant, lining people’s pockets — those are two different things, but they are kind of hard to separate when you’re actually giving out the money. How does MIIT determine which of the 10,000 little dragons or the 10,000 little giants, as these companies are called, and how do they ensure that they’re being funded on the basis of, if you will, technological virtue as opposed to personal relationships? Those are very difficult questions and I doubt that they’ve cracked that code.
Chris: Yeah, and another challenge, I think, is just the whole idea of, in some ways, you want to make sure that you have sort of scrutiny and accountability, but on the other hand, if you have too much, it will squash the innovation really because people will just focus on meeting KPIs. I lived for a bit at SMIC (Semiconductor Manufacturing International Corporation), China’s leading fab, and they were, for a long time, one of the leading patent holders. And this is a classic case of some of the problems with industrial policy that has as KPIs’ patents, you just get a lot of low quality patents, but a lot of them. And so, it’s a real tough management challenge, I think, for them to actually make sure that actually the money is relatively well spent but also not tie people to the wrong objectives.
Craig: I agree completely. And we could look at Japan in the ‘90s as a model. I think that history shows that almost all the industrial policies that were sponsored by the Japanese government failed. It doesn’t mean that Japan wasn’t and isn’t innovative. It’s very innovative but not because of those industrial policies. I think that the real innovators in China are moving ahead without reference to the Made in China 2025. The many of the really innovative companies are much more attuned to the market towards becoming a global player rather than simply harvesting subsidies. But the combination of government support and subsidies almost in an unlimited amount made to the private sector innovators in China is going to be a very important thing to watch because it could distort global markets in a very big way if they are able to develop new technologies.
And I think that we should expect that they are; that they’re going to roll them out on a global basis very quickly with Chinese government’s support, and that could have quite profound effects in some industries over time. I think we could look at companies like DJI, and Huawei, and CATL, BYD, and many others as private Chinese companies that have really globalized very quickly, in part because of Chinese government support. And there are many, many more of those waiting in the wings that we shall be introduced to in the not so distant future.
Chris: Both globalized very quickly and also are tremendously innovative. I think it’s interesting, I mean CATL, the battery company, and BYD, seems that the EV industry is one where, for a long time, Chinese auto companies are really just basically stuck in China, and you had obviously Japanese, Korean companies that have been so successful globally, and the Chinese EVs are entering Europe, entering Latin America, and probably next five years will really be the time for those companies to shine.
Craig: I agree completely. The share of EVs in the total automotive market in China is higher than anywhere else in the world. And given their scale, they’re able to ramp up very quickly, and they’re investing overseas as well. So, this is a challenge and a change in the automotive industry that I suspect will have caused great ripples. And particularly the German automotive companies who have done so well on classic automotive technology are concerned about very rapid increases in Chinese EV exports. This is an area, however, where both Germans, American, Japanese, Korean companies are all deeply embedded into China’s automotive infrastructure. So, they also have access to all or most of this technology. So, this is going to be also an area of tremendous volatility in the future.
The other area to watch here is, of course, data because these electric vehicles collect and use enormous amounts of data. And how governments regulate that data is going to be enormously consequential as the Didi case shows. We also have cases where American badged electric vehicles are not allowed into some government building office complexes in China simply because they’re American badge. And so, there’s going to be an awful lot of challenge on the regulatory side and on the technical side, and we should look forward to a very exciting 10 years ahead.
Chris: Without a doubt, really it will be very interesting to see how the sector develops globally. In the next general area that I’d love to talk a little bit about with you is a new Congress in the U.S., and a relatively new government in China. They’re just going to be, in a little over months, having the two meetings where Chinese leadership comes together for the first time. In a way, to turn to that. I’m curious to actually follow this EV thread a bit. Chinese companies are moving into Europe, they’re moving into South America. I wonder what your sense is about the U.S. I mean, there’s a lot of discussion around TikTok, which you know may or may not be reasonable. I think one reason is potential for misinformation, but another is sort of information and tracking. We’re worried about TikTok — these issues you’ve mentioned about data collection and information from an EV almost brings that to another level. And what’s your sense about how Chinese EVs in the U.S. could potentially be welcomed or not?
Craig: There was recently an executive order issued by the White House clarifying the approach of the administration on this issue in the context of CFIUS. In accordance to that executive order, the U.S. government is going to pay a lot more attention to the collection of personal data on American citizens by potential Chinese and other countries. And I suspect that this directly addresses the concern that you just raised, Chris, that new CFIUS regulations give the U.S. government more authorities to regulate electric vehicles coming in from China and elsewhere. Interestingly, the same suite CFIUS executive orders also gives the government greater approval authority over Chinese investments in the supply chain arena, particularly for batteries and advanced materials processing for use in batteries.
And so, I think that watch this space, and the executive orders are available to anyone who wishes to read them, but my interpretation would be that the U.S. government will, through its regulatory apparatus, have very close scrutiny over Chinese investment or activities in this area.
Chris: So, turning from the executive branch to the legislative, so new Congress, I mean I’ve heard some, or at least I’ve read some things in the media about potential actions towards China. I would be interested to hear what your thinking is that the House has gone from Democrat to Republican control, although a very thin margin. Do you think anything will change or? I’m curious about your predictions for the next two years.
Craig: A Select Committee has been stood up. The formal name of that committee is a Select Committee on the Strategic Competition Between the United States of America and the Communist Party of China. Certainly, this is the first select committee that has ever been directed against a foreign political party. And indeed, the names of the Republican committee members have just been released just yesterday. And I would expect the Democrats to be announced very shortly. This committee will have a subpoena power. It is led by a very serious law-maker and experienced legislator from Wisconsin — Mike Gallagher, who’s a former marine, big national security, good national security credentials.
I suspect that they will be focused on exactly that — national security. And he had noted that his priorities will be Taiwan, among other things. So, we need to watch that space, and I think that given that the committee does have subpoena power, there will be a great deal of interest in following the activities of the group and see what kind of information they want. They will not have legislative authority, in other words, they won’t be able to draft bills. But we do expect them to be in close coordination with the various committees that will draft bills and presenting them with ideas where legislation might be helpful or required. From a U.S.-China Business Council perspective, we intend to fully support their work and to be good citizens in our democratic processes.
Chris: And you highlighted the fact that, to your knowledge, it was the first time a committee was set up that sort of in some ways invokes the name of a political party in another country. That framing of the title suggests an antagonistic approach, basically. Is there any foreshadowing of some of the work that they may do beyond just Taiwan, which you mentioned?
Craig: There have been comments about the origins of COVID, talk that they will be interested in TikTok, and indeed there has been a lot of legislation passed on TikTok, mostly at the local level.
Chris: Right, different states.
Craig: But something almost certainly will happen there. In addition to that, I think that the chair has intimated that he’s interested in Chinese influence in the United States, perhaps looking more closely at Chinese investment into the United States. Also, I suspect that there will be action on the Hill on outbound U.S. investment or, if you will, a reverse CFIUS. There has been the Casey Cornyn bill or the National Defence Critical Capabilities Act has been debated for over a year now. I do suspect that the Committee will focus on that and it will make recommendations on Americans or American corporate investment into Chinese technology companies. So, that is one area to watch, one area that we’re looking at and talking with the various committees and with the executive brand as much as possible.
We need to be aware of the law of unintended consequences, and nobody wishes to, inadvertently, impact American competitiveness over the longer term through legislation that might not be well thought out. This is another area, very active discussion.
Chris: These committees that can be set up at times can somewhat, I think, overplay the anti-China sentiment. I mean we saw this with the China Initiative around foreign scholars. As an academic, and I’d like to talk to you about some education issues that too, which strikes very much the core of my work. And, of course, we need to protect ethics and national security of our academic enterprise, but also this can have some negative spillovers on Asians or Asian America, as we’re recording this, just from the last number of days, this horrible shooting in California. Do you have any sort of recommendations or thought to the Committee or us as the general public of how to think about this very important national security issues but also make sure to not have things spill over such that it’s negative perceptions of all Chinese? Which, of course, at least most people I don’t think want to occur and is obviously a horrible thing.
Craig: Chris, it’s a big question, and I’d say, if I was looking for a guideline, a heuristic, if you will, it would be how do we harness the benefits of interconnection between the world’s two largest economies while managing the risk of interdependence? That is what we need to try and do. And I think that from a economic perspective what that means is de-risking, not decoupling. If we decouple, our risks actually will increase. We need to address our risks in a very forthright manner, but we need to do so without impoverishing ourselves. And indeed, we can decouple from China, that’s a possibility, but we would be a much more poorer and less competitive, also even more unequal society if we were to go down that road when no other country is doing so. With regard to the legislative context, I would note that in the 117th Congress last year, there were some 800 China bills that we are closely following, and indeed we talk to the drafters and legislators all the time.
Some of them are good. Many of them are really not so good. Some are written really for a domestic audience to prove one’s bona fides, if you will, an anti-communist. That type of legislation is generally really counterproductive, moves the ball backwards rather than moves the ball forward. We need to be very careful — de-risk, not decouple. We need to take advantage of the benefits of interdependence, and particularly a rapidly growing Chinese economy, while managing the risks interdependence and de-risking where we can by either developing alternative sources of supply; managing our supply chains appropriately; managing inbound and outbound investment appropriately. Looking at the world from a very, both an economic, geostrategic, and political perspective, we need to incorporate all of those disciplines as we move forward.
This is a problem that is not going to be resolved in my lifetime or probably yours, and we need to look at this from a long-term basis. The other thing I would say is let’s be mindful and remind the Chinese also, at the same time, of their multilateral obligations under the WTO, the UN Human Rights Charter, etc. We should not be shy about that. We do have multilateral institutions to which both sides have agreed upon, and we should use those whenever appropriately.
Chris: I like that phrase focusing on de-risk, not on decoupling. Sort of a final question, I want to build on that and come back to our initial discussion of face-to-face in this post-COVID era that we’re sort of just getting into right now in regard to student exchange between the two countries, it’s really disconcerting to me how low the number of American students in China has fallen to. That is such an important resource for a country really to have people that are intimately knowledgeable about China. I think I saw it’s between 300 to 400 in recent year or two. As we’re entering this new time when travel is more easy, what’s your sense and/or recommendations about how we can really dramatically hopefully raise that number back to the previous level, which I think was 10,000 or so, maybe a little more than 10,000, or also even increase it? I think the more and more students we have going to China, the better.
Craig: This is an issue that goes both ways. The numbers of Chinese students that are studying in the U.S. have fallen off about 25%. That might be devastating for particularly small medium size universities around the country. So, the problem goes both ways, which is very good. As a diplomat or retired diplomat, I would say, “Okay, you got a problem, we got a problem, let’s fix it together.” And indeed, I think that the Chinese recognize both their incoming and their outgoing as a problem, as do we. So, I suspect that, as Secretary Blinken visits China on February 4, this will definitely be one area of discussion. Joe Biden has spoken on this issue saying that, “We welcome Chinese students into the United States and we want more of them.” That is the right thing to say. And I’m sure that he would agree that we want more American students into China.
Visas are one part of that question. Make it easier to get a visa. Another part of that question is air transport. It is expensive and difficult to get flights now, but hopefully, that will normalize by, say, the start of the school semester in September. We will be edging back closer to normal at that time, and we’ll be able to fully recover in 2024, if not in 2023. But I think that you put your finger on it — there’s a lot of work to do there before we get there, and it is extremely important for bilateral relations, the scientific enterprise, if you will, and for academic integrity that we develop these lines of communications much more effectively than what we have now. The current situation is unacceptable and must be improved.
Chris: Definitely something that I’ll be keeping my eye on, and it sounds like it’s something that’s important to you as well. With that Craig, I just want to thank you for joining us today on China Corner Office, and look forward to the next time we get to talk.
Craig: Thank you so much, Chris.
