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The United States vs. China: Economist Fred Bergsten explains why framing this rivalry as a ‘new Cold War’ is a big mistake

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Podcast & Video

This episode features Sean Speer in conversation with Fred Bergsten, the founding director of the Peterson Institute for International Economics, about his important new book, The United States vs. China: The Quest for Global Economic Leadership.

The two discuss why falling into a new Cold War between America and China would be a mistake and why conditional, competitive cooperation between the two rivals is essential for mutual success.

You can listen to this episode of Hub Dialogues on Acast, Amazon, Apple, Google, Spotify, or YouTube. A transcript of the episode is available below.

SEAN SPEER: Welcome to Hub Dialogues. I’m your host, Sean Speer, editor-at-large at The Hub. I’m honoured to be joined today by Fred Bergsten, the founding director of the Peterson Institute for International Economics, and now its director emeritus, and someone who has spent a lifetime in and around trade and foreign policy issues, including as an economic deputy to Henry Kissinger at the National Security Council. He’s also the author of the thought-provoking new book, The United States vs. China: The Quest for Global Leadership. I’m grateful to speak to him about the book and its key insights and arguments. 

Fred, thank you for joining us at Hub Dialogues, and congratulations on the book. 

FRED BERGSTEN: Thank you very much. It’s a great pleasure to be with you.

SEAN SPEER: A policy narrative has emerged in recent years, particularly in light of the pandemic, about the rise of a new Cold War between the United States and China. You think this framing is wrong and even dangerous. Why?  

FRED BERGSTEN: The framing comes from the historical reality that a rising power and a global incumbent power, China and the United States respectively, they do clash. And the issue is whether they can resolve those clashes without coming to blows, and hopefully even in some cooperative mode. There is a tendency now in the United States, and to some extent in China, to regard this confrontation as irrevocably headed toward conflict, toward a new Cold War, to a decoupling of the two countries. In my view, that is an exceedingly dangerous prospect. It’s wrong analytically because the two countries have every interest in working together cooperatively, particularly on economic issues, like global warming and pandemic responses, and trying to keep the global trading system going in an open way. But there’s a definite tendency in that direction. 

The countries are framing the relationship in zero-sum terms: If I gain, you lose. If you gain, I lose, therefore, we have to deny you any possible gain. That is a very bad idea because it would forego all the possibilities of cooperation, both for the two countries and for the global system as a whole. And it’s totally infeasible. Donald Trump tried containment of China, and it failed miserably. China kept growing, the only major country to grow throughout the pandemic, and its share of world trade and investment grew enormously despite the trade war with the United States. Despite Trump’s efforts, no other country join the U.S.’s efforts to contain China, nor would any do so in the future. So, I think containment is a dead end. It’s a huge mistake. It would foster the prospect of a new Cold War and confrontation, and we better find a better way to go about it.

SEAN SPEER: Before we get to your alternative of what you call conditional competitive cooperation, let’s just stay on the current situation. Where does the U.S.-China relationship stand now in your view, and what are the main factors that have led to their growing technological and geopolitical rivalry?

FRED BERGSTEN: The U.S.-China relationship stands on the precipice of descending into Cold War or worse. Confrontation is the order of the day. The recent Pelosi visit to Taiwan highlighted the hostility coming from China toward the United States and the U.S. readiness to push back on all fours. The relationship is being encouraged to go in that direction in both countries. A key reason is that Americans feel that they’ve been blindsided by the Chinese. For 20 or 30 years, under seven or eight presidents, the U.S. offered to cooperate with China, in a policy of so-called engagement to try to bring China into the global economy and the global security system, to become a full partner. The Chinese seemed to be headed in that direction, even perhapsin opening up in political as well as economic terms. 

But in the last 10 years, it’s clear that’s not the case, that China is adopting a more state-centered economic policy and is becoming more and more confrontational, more and more martial in its efforts in the South China Sea and elsewhere in security terms. So, the U.S. feels jilted. The U.S. was wanting to bring China in, but China has refused, and now the U.S. is of the view, in large part, that China is an implacable enemy. That anything the U.S. or the West more broadly does that enables China to strengthen itself further is a mistake and simply digs our own grave in the future because China is inevitably going to come at us, whether it’s sooner or later, whether its economic or military, they’re going to come at us. And that is increasingly the conventional view in the United States. 

Now, there’s a strong minority view, which I share and I’m trying to promote, which says, “No, no, their gain is not necessarily our loss.” The U.S. supported economic growth in its previous rivals, Germany, Japan, countries that we fought in the last big war, and that turned out very, very well. But people think that’s not possible with China, viewing it as an implacable enemy, having a different ideology, having designs on global power supremacy, that would supplant the United States for the first time in 100 years. The U.S. does have, for the first time in the 100 years since it’s become the world’s dominant country, a real rival. That has to be managed in a much more effective way than it is now or else we are headed to disastrous outcomes.

SEAN SPEER: Your answer is a great segue to the next question I want to put to you, Fred. While you’re critical of the Trump administration’s policy of containment vis-à-vis China, it would be great to get your thoughts on the West’s previous policy of engagement. 

Have the outcomes been net-positive in your estimation? And in hindsight, what if any aspects, should have been thought about or executed differently?

FRED BERGSTEN: I think the results of engagement were inarguably positive. China became a full member of the world economy, joined all the global economic institutions, and has, to a large extent, played by the rules of those institutions. It’s become by far the U.S,’s fastest growing export market, for example. It’s become a major source of profits and jobs for American firms of workers. So, the gains on that side were huge. And if you ask what the alternative was, of confronting China and trying to halt their ride a long time ago, it would simply have encouraged them and almost forced them to work even harder to do it on their own. To become successful, to challenge U.S. leadership. So, I think engagement had major benefits and was the right policy at the time. And in fact, even most of the China hawks who want to put engagement totally in the rearview mirror tend to agree that it was a reasonable gamble at the time, and they call it a gamble, and to some extent that’s true. 

Now, what people look back to today as the big error was not being tough enough in requiring China to play by the rules of the game. China sometimes dismisses that criticism saying that their negotiations to enter the World Trade Organization took 16 years. They made more concessions than any other developing country had ever made. They open up their markets in many meaningful ways. All of which is true. But it is also true that they did not go far enough. They violated some of the principles that they agreed to many other issues that are now front and centre were left unaddressed in that negotiation 20 to 25 years ago. The world has moved on. 

And so, what is needed now is a good faith effort by China, and the United States, Canada, and other allies, to renegotiate the rules of the road in ways that will accept that China has some different views on some of these things. But they need to have agreed on rules of the road if we’re going to deal with the critical issues of the day, particularly the new ones like climate and pandemics. Only if we get together with China, to work out new rules of the road that they are involved in writing, will we be able, I think, to get back to engagement, and all the positives that come out of that approach.  

SEAN SPEER: That’s a fascinating answer, Fred, particularly your observation about the counterfactual alternative to engagement over the past few decades. Even critics of engagement, as you say, rarely put forward what an alternative history might have looked like and what those consequences may have ultimately been for American political economy. 

A basic premise of the book is that the U.S. is no longer able to act as a unipolar power, due to its own domestic challenges, as well as China’s growing economic parity. In fact, as far back as 2008, you were arguing in Foreign Affairs that America ought to be pursuing what the essay’s headline called, quote, “A Partnership of Equals.” The book similarly argues that U.S.-China cooperation is essential to, quote, “provide a foundation for a stable and successful international order.” 

Let me put this to you. How much of your project is ultimately focused on sustaining the liberal international order in a world of bipolarity or multipolarity? 

FRED BERGSTEN: A very large part of the book is aimed at that. The subtitle of the book, as you said at the start, is “The Quest for Global Economic Leadership.” And that’s because we know from history that leadership by one or a few top powers is essential to keep the global economy functioning smoothly in an open way, avoiding trade wars, avoiding global depressions and recessions. In short, keeping the world economy stable and prosperous. The United States was largely able to do that on its own for the postwar, during the first generation after and for several decades. Increasingly, its allies, Canada, Japan, and the Europeans played an essential role in enabling that to happen. 

Look at the underlying economic realities now. You mentioned this already, but China is, for all practical purposes, the equivalent of the United States in economic power terms. On some metrics, it’s in fact superior now to the United States. I don’t think it makes too much difference who has a few trillion or more of GDP or who makes a few or less semiconductors. It’s rough equivalence that puts China at the top of the scale with the United States. Again, to emphasize, for the first time in a century since the United States became the top economy over 100 years ago. This is the first real competitor. And it is a real competitor. That means the U.S., even with continuing support from its traditional allies, is no longer able to call the tune, is no longer able to write all the rules and force all the rules to maintain a stable and prosperous world. 

When I wrote that in 2008, I had fresh in mind that it was China, along with the U.S. but even more than the U.S., that brought the world out of the Great Recession and ended the global depression. That was very constructive, very positive, global economic leadership by China. And they have on other occasions. However, as I said before, they’ve also violated a lot of rules. And that has created a tremendous backlash against them, most notably in the United States, but in other countries around the world as well. 

So, the Chinese are risking their own core interests. China, of all countries, has been the biggest beneficiary of globalization. It’s enabled them to have the most miraculous development story in the history of mankind, and it’s continuing to this day, despite some recent slowdowns. But China has been a massive beneficiary of the open world economy. If that economy were to close down on with global trade wars and investment restrictions, and all the like that Trump tried, then they would be in real trouble. And they have to realize that their own policies are generating a backlash, most notably in the U.S., that could lead to that outcome. So, I believe it’s in China’s own interest, not out of any doing good for us or being nice to us but very much in its own core interest in an open global economy, to keep its development going, to take steps that would result in cooperation with the U.S. as traditional allies in managing the global economy in the future. 

But that means, of course, that the U.S. and its traditional allies have to accept China as a rough equal in structuring and managing the world economy. It’s been done on an ad hoc basis, like the global financial crisis over a decade ago. It was done just a couple of months ago, in fact, when the World Trade Organization, the U.S. and China worked out a deal that basically saved the World Trade Organization’s big ministerial conference, and thus the trading system. So, it can be done even recently with all the confrontation. But that’s got to be the strategy that the two countries adapt.  

SEAN SPEER: This brings us to your idea of conditional, competitive cooperation. What do you mean? And from the American perspective, how would this approach differ from the previous policy of engagement, and the current policy of containment?

FRED BERGSTEN: What I am suggesting is a U.S. policy that has three basic parts. One is obvious: competition. The U.S. and China will compete day to day in economic and financial and trade markets, the policies will compete for the affections of other countries alliances, trading partners that align. So, there will be an ongoing high degree of competitiveness in the relationship. There must also, as I’ve already outlined, be a cooperative element. Even if the U.S. and China continue to confront each other on some security issues like Taiwan, some human rights and values issues like the Uyghurs, even if those conflicts continue, they have to find a way to cooperate in the economic dimension and on global pragmatic issues. So, that’s the cooperative extension. 

Then, to make it viable in both countries, in political terms, this all has to be conditional. Both countries have to take on obligations and they have to fulfill those obligations. One of the reasons for disillusion in the U.S. with China is that the Chinese arguably have not lived up to some of the commitments they made when they joined the World Trade Organization, when they’ve taken other steps that we in the West thought they were going to behave in a different way, and they have failed to follow through on that. And the Chinese, likewise, view that the U.S. has undercut some of its own principles, as admittedly we do in some cases. 

So, there has to be a conditional element. Each side has to monitor the enforcement mechanisms and instrumentalities and arrangements for constant negotiation and consultation in order to monitor each other’s performance in carrying out the obligations to each other and to the world as a whole. So, I put that together, as you say, in what I call conditional, competitive cooperation. It’s a mouthful, but I think all three elements are essential if we’re to avoid heading down toward a new Cold War. 

SEAN SPEER: A big part of this approach requires, as you say, the Chinese government’s cooperation and engagement. What would you say to those who would argue that this isn’t a reliable assumption for the purposes of policymaking, given its lack of transparency on the pandemic, its growing assertiveness in Hong Kong and Taiwan, etc, etc, etc.? 

FRED BERGSTEN: Skepticism is certainly justified because the Chinese have failed to follow through on some of the commitments they made in earlier international agreements and in some of the international institutions we participate in—the International Monetary Fund, for example, which they joined very early in the reform process. They violated the most fundamental rule, which is to not competitively devalue your currency. They did that to the tune of 3 to $4 trillion worth in a period of 10 to 12 years early in this century. Gross and flagrant and very costly violation of fundamental rules. 

More recently in the trade area, they’ve required technology transfer to give firms access to the market. They provide huge subsidies to their state-owned enterprises and some others. So, there are very clear violations of both the explicit rules and the implicit norms of the trading and investment systems that the Chinese are guilty of. And since there are not very many effective enforcement mechanisms today, frustration has set  in and any new accord would have to have both mechanisms and agreed rules of the road to permit monitoring and enforcement of the new obligations.

As I said a minute ago, I think that’s very much in China’s own interests, because whatever at the margin they may gain from subsidizing their semiconductors or requiring U.S. firms to transfer technology, is swamped by the benefit to them of an open world economic system, which has permitted and galvanized their entire economic development miracle. So, when the Chinese look at it carefully, and when they realize that they are now big enough that their actions can trigger backlash with systemic consequences, that could undermine the openness that is so important to themselves, then I think we have a shot at doing something positive. But it’s going to require the U.S. and its allies to go to China and propose that approach. And it’s going to require some enlightened leadership in China to pick it up. 

The obvious thing to do now would be to roll back the trade war. The U.S., in my view, should offer the Chinese to take off the tariffs that Trump put on. In return, this is the conditional part, in return for the Chinese taking off all the tariffs they put on to reciprocate and retaliate against the Trump tariffs. That would be a fully reciprocal deal. Nobody could say the U.S.-Biden administration or whoever was capitulating or accommodating China, being soft on China. We have a fully conditional, fully reciprocal deal, and it would be a dramatic step to get the world head in the right direction and pave way for broader cooperation on economic topics.  

SEAN SPEER: Let me pick up on the competitive part of your formulation. Is there upside here? Is a growing science and technology competition with China a potential catalyst for greater progress on innovation and productivity? In other words, Fred, is your vision for a U.S.-China competition a potential means out of the so-called Great Stagnation?

FRED BERGSTEN: It is and that’s a very good point, Sean. In fact, we’ve already seen it to some extent. The U.S. Congress and one of its rare steps of bipartisan action, just passed major legislation really increasing U.S. research and development in high tech sectors, and specifically, supporting a semiconductor industry that could restore a large measure of the lost U.S. competitiveness in that critical industry. That legislation had many fathers and many purposes, and it goes back a long way to its origins. But I think the catalyst that probably drove it to successful conclusion was the competition with China and the recognition, which I give the Congress credit for, that the U.S. has to pull up its own socks. 

We can’t just say, “Well, China cheats, and they’re terrible, and therefore we have to hit them over the head.” We may have to do that sometimes. But we have to pull up our own side. We all know, you in Canada well know, the U.S. has many, many shortcomings now in its economic policies, its broader society approaches, its political dysfunction. We got lots of problems in the United States and we have to put our own houses in order if we’re going to compete effectively with China. And the China rise does help galvanize that. So, that would be the positive side. 

When I say conditional, competitive cooperation, I certainly have in mind competition in trying to be successful. And R&D innovation, technological supremacy, that’s healthy competition. If it goes too far down the subsidy road, it raises another problem. But if you try to do it in the traditional way, there’s a lot of success to be achieved. That’s a topic, incidentally, where the U.S. and China ought to sit down and discuss what is acceptable. No American in his right mind can try to deny China’s technological advance. 

What we can do is say some of the ways you try to achieve your technological advance goes against all international norms and rules and laws, and therefore, you should not go down those roads like stealing technology. So, that is a very fruitful area and I would put that right at the top of the list for this new cooperative relationship, to try to put some guardrails around the competition to limit the extent to which it becomes just another zero-sum “I win, you lose” round of competition.  

SEAN SPEER: On the domestic policy front, another big issue that has influenced thinking on the U.S.-China relationship is the question of the China shock and the concentrated consequences of higher rates of import penetration from Chinese goods, in general, and manufactured products in particular. 

To what extent, Fred, does the U.S. need to reconceptualize the way it supports so-called losers of a globalized economy, to ensure that the costs and consequences aren’t disproportionately borne by particular regions, sectors, or individuals?

FRED BERGSTEN: Yeah, again, it’s a fundamental question. One of the greatest failures and inconsistencies of U.S. policies over the last several decades has been the failure to help the adjustment process that is required of the losers from globalization. This goes back well before the China shock and the competition from China to other countries—the Europeans, Canada itself, other Asian countries, Japan, in an earlier period was enemy number one. And through that period, the U.S. administration of the day was always paying lip service to compensate the losers, the workers who lost their jobs or took much lower incomes, but never really did much of that. 

No administration, Democratic or Republican, ever gave serious priority to dealing with those adjustment problems. And as a result, over the decades, hostility to the process of globalization itself builds up. Trade adjustment assistance, which was the specific policy that was promoted, became known as burial insurance, because it only came along after you’d already lost your job and lost your skills, and it was too late anyway. There was no proactive preemptive effort to maintain a political foundation to support globalization. 

So, while on the one hand, the U.S. was out trying to lead the world towards ever more open markets, it was not doing much at all at home to adjust to those open markets, which inevitably, were going to hurt some people. No economic policy change benefits everybody. There are some winners and some losers, on balance. The winners greatly outnumbered the losers. It was a huge net gain for the U.S. economy. Calculations at my institute showed we’re gaining $2 trillion a year from the globalization of the last 50 years. But there are 50 billion to 100 billion or so of losses, and those people are concentrated, and they have political clout, and finally, starting in the 1990s or so, that began to erode the political foundations of globalization. 

I always feared that the main threat to globalization was the United States, that internal fissures would emerge that would undermine political support, and that’s what’s happened over the last 20 to 25 years. Now, Trump carried that to an extreme: he totally abdicated U.S. leadership, he alienated allies, as well as adversaries, and carried it to an extreme. But the underlying foundation has been seriously undermined, and that’s going to take a while to build back. President Biden came into office saying, “We would have to restore a lot of our domestic strength before we can go out and do new trade deals.” I think that’s a little too pessimistic, but you certainly have to do it in tandem. And you have to get that domestic house in order to have a chance to get back to any kind of U.S. leadership in the world economy.

SEAN SPEER: As you say, Fred, your vision of globalized cooperation and exchange has found greater resistance in recent years than ever before. But one gets the sense that this may be changing a bit. The West’s significant support for Ukraine in the face of Russia’s invasion, for instance, is showing that liberalism may be stronger than one might think. What’s your sense? What gives you optimism these days? 

FRED BERGSTEN: I think as other countries have seen the results of the U.S. backing away from globalization and global leadership, as dramatized under Trump, they’ve had to step back and say, “Whoa, we may not always like everything the U.S. does. But we sure need it out front.” And I think the willingness of the traditional allies, of course, including Canada, in the Ukraine case, but more broadly now on a number of issues, is an indication that we may be starting to have a backlash against the backlash, which is what we need. 

Now, the critical question, though, is going to be the attitude of China. Because for my vision to have a chance of taking place, the Chinese and the other main Asian countries who inevitably will group around China, to some extent—its biggest trading partners, its neighbours with a constant military possibility overhanging. So, it’s really China and most of Asia, which is the most dynamic part of the world economy, and now, probably the biggest part of the world economy, it’s going to be their attitudes and their willingness to restore some version of globalization that I think will determine where this comes out. And that’s why I think it’s so critical for the U.S. and its traditional allies to reach out to China, to try to structure and conceptualize that together. 

When Mr. Nixon and Henry Kissinger, my old boss, went to China in the early 1970s, they started at the conceptual level. They didn’t talk much economics, but they talked about the global balance of power, the relationship with China to the Soviet-U.S. Cold War of the day. They put it in conceptual terms before they went to the details and the operational aspects of the new U.S.-China relationship. And that actually worked out pretty well and had a critical historical payoff. 

I think we need something like that now, given the deterioration of the U.S.-China relationship and the pivotal point at which China now rests, whether to continue down the Xi Jinping path of more state control of the economy, less democracy, more autocracy, more authoritarianism, or to get back on the earlier reformed path, which still had the Communist Party in charge, still was no democracy, still was no market economy by our style, but was much more compatible with the world in which we live. They’ve got to make some key choices in that area. But their choices will be affected by how we approach them, and how open we are to working with them. And that’s ultimately why I think it’s so crucial to do so.

SEAN SPEER: Let’s wrap up by bringing the conversation closer to home if that’s okay. What should Canadian policymakers be thinking about in light of the issues that we’ve been discussing? How can Canada navigate a world of conditional, competitive cooperation?

FRED BERGSTEN: I would first hand out a lot of kudos to Canada, and to the Europeans and the Japanese, for providing a good bit of the economic leadership that went missing when Trump abdicated it for the U.S.—and it was even declining before that, under Bush 43 and Obama. The traditional allies of the United States have really stepped into that policy vacuum in a major way, and Canada, particularly in the trade area but also in the climate change area, has really been a crucial actor. So, I hand out your kudos to Canada for doing that. 

Going forward, I think it’s more of the same, but really a two-track approach is needed. One is to continue to plug the vacuum that to an extent continues to exist, and maybe even gets worse given the U.S.-China confrontation, but also to work with the other traditional allies, particularly the Europeans and Japan, to really press the United States to move in a direction with China that we’re talking about today. “Okay, you’re going to disagree on the South China Sea, and the Uyghurs, and Hong Kong, and Taiwan, and a lot of things. And we, Canada and the Europeans, will probably agree with you on that. We don’t like those things either. But we have a world economy to run, we have pragmatic considerations to maintain, and hopefully even improve the openness and stability and prosperity of the global economy. And we can only do this with China, not in confrontation with them, not in some foolhardy effort to contain them.” 

So, I would say to Canada, and other U.S. friends, lean on the U.S. in friendly ways. We absolutely need foreign pressure to get us to do what we ought to do anyway. Our friends and allies and colleagues need to lean on us to move in the right direction. And I think demonstrably, that has an effect over time. The Biden administration has not really changed Trump’s policies toward China very much. But it has, of course, changed policies fairly dramatically toward allies, whether it’s NATO or an economic dimension, and shown a much greater readiness to understand the allies are crucial for the United States.

In my book, I emphasize that when you look at the economies of the traditional U.S. allies and add it up, they’re bigger than the U.S. economy. In other words, it more than doubles the clout of the West and can stick together vis-à-vis China and everybody else. I don’t think those allies were mobilized for containment or are trying to keep a thumb on China. But in terms of constructive relationships, try to bring China in constructive directions, trying to work with them, I think those alliances could hold quite well and provide a new dimension. 

We know from China’s past behaviour, that it is ready to resist bilateral or unilateral pressure from the United States. But it’s much less likely to resist truly multilateral pressure from the rest of the world. China does not want to be isolated in the world. It does not want to be ganged up on. In fact, it hates that thought. And it would very much respond, I think, to a multilateral front on the issues that we’re talking about today—the pandemic, be it financial crises—where it is absolutely essential to get results. Were we to have a multilateral approach to it, that could be very pivotal. So I would urge Canada and do that work with your other allies, set up a kind of non-U.S. G7 that will collude to bring the U.S. along, and work on that in the most thoughtful way.   

SEAN SPEER: The book is the United States vs. China: The Quest for Global Leadership. Fred Bergsten, thank you so much for joining us today at Hub Dialogues.

FRED BERGSTEN: My pleasure.

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