Podcast: The Post-COVID China Challenge, With Special Guest James McGregor

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The COVID crisis has exposed new vulnerabilities in U.S. supply chains, as well generated even more distrust of the Chinese government. At the same time, China is doubling down its “Made in China, 2025” ambitions to be the global technology leader. How will these developments affect U.S. technology competitiveness? What should the next administration do vis-à-vis U.S.-China trade relations?

Rob and Jackie discuss these issues with James McGregor, Chairman of APCO Worldwide’s greater China region and a leading expert on China and Chinese economic policy.

 

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Rob Atkinson: Welcome to Innovation Files, I’m Rob Atkinson, founder and president of the Information Technology and Innovation Foundation. We’re a DC based think tank that works on technology policy.

Jackie Whisman: And I’m Jackie Whisman, I’ve been with ITIF for over a decade and part of my job is making sure Rob doesn’t forget to tell you that we are the world’s top ranked think tank for science and technology policy. Rob writes the 50 page papers and I tell everyone how great they are.

Rob Atkinson: Thanks Jackie. You do that very well. And this podcast is about the kinds of issues we cover at ITIF from the broad economics of innovation to specific policy and regulatory questions about technology and the economy. And in this episode we’re focusing on China, which has long posed the biggest competitive threat to American leadership. And obviously now with the COVID virus has been in the center of a lot of talk and thinking about what we should be doing vis-a-vis China and we can’t imagine having a better person to join us today than Jim McGregor. Jim is the chairman of [APCO Worldwide’s] Greater China region. He’s based in Beijing. He’s author of two highly regarded books on challenges of Chinese authoritarian capitalism and another on the lessons from front lines and doing business in China. And I really don’t know anybody who has a better handle on what’s going on now in China and the implications for the U.S. particularly economically. So Jim.

Jim McGregor: Well thank you for having me Rob. I’m glad to be talking to you.

Rob Atkinson: Great. So let me start by, I can’t really talk about China now unless we talk about the COVID crisis. Elite opinion in the U.S. was shifting already partly from President Trump, but also partly from how the Xi administration had been ratcheting up its innovation mercantilism and now with the whole set of accusations that China covered up the outbreak and we’re not clear where the outbreak actually came from. There’s been an increasing call to get tougher on China. There’s a call to talk about maybe bringing supply chains back, but before we get into that, I want to talk a little bit about how has the tide of opinions changed? You wrote an influential report, oh boy, I don’t know, maybe a decade ago, it really was the first report really highlighting that China had made a significant shift in its economic policy from just simply attracting branch plants from around the world to become a manufacturing hub to driving indigenous innovation. And that really helped people understand how China was giving a leg up to its competitors. You want to just describe that sort of how you came about that, what that strategy is all about?

Jim McGregor: Well, it’s interesting because if you look at indigenous innovation, this program that came out in 2006. If you step back and look at it, it’s really China’s first blatant move at decoupling. It was all about self-reliance and developing its own technologies. The issue was about co-innovating and renovating the technology of your partners and then mastering it and then taking and beating them globally. There’s a long background to this. This goes back to China’s always been playing technology catch up and always felt it was really a problem in a net security threat. Going back to the opium war when a few British ships with good canons could basically knock down the Qing government and begin what started as a veritable colonization of China.

So then that started the self-strengthening movement where they tried to modernize weapons and modernized some of their manufacturing. Then you come into Mao in 1956 and he’s got Russian advisers. There’s 11,000 Russian advisers in China, 40,000 Chinese students in Russia and so Mao in ‘56 comes up with this massive technology plan with almost 700 research projects and ends up with two bombs and a satellite. They came up with the atom bomb, hydrogen bomb, and the East is Red satellite. Dong did the same thing when he came in ‘78 with 20,000 experts on a technology plan. And then we come into Wu and Wen doing indigenous innovation.

And that plan was very detailed on all the technologies of the future, but it was about, as I said, co-innovation, renovation, using the technology of your partner and then beating them and that really woke up the business community and technology community and then they pushed back. They pushed back very strongly and it became political. So then China said, “Well, wait a second, why don’t we do this?” They came up with something called strategic emerging industries. Let’s go for the technologies of the future where people don’t own it completely, it’s got a lot of room to run and put a lot of money into that and that really ... Again, that wasted a lot of money because it was going into state labs and research institutes. It became a game of getting money, but to bring it up to today “Made in China, 2025” is a latest iteration of this and it’s more dangerous, it’s smarter, it’s about why would I steal your technology when I can buy your company? By using venture capital money and the talent of China to build their own technology sectors. And so this is the current, major, major concern.

Rob Atkinson: Yeah. I want to delve into that a bit. You mentioned the opium wars. I had read Orville Schell’s, excellent book, Wealth and Power, and I didn’t really know this before, but at least in that book, Orville talks about how one of the reasons for the opium wars is the Chinese emperor would not allow British imports of textiles and that this was a response to that, that they were trading in opium instead. So it was almost like from the very beginning, China had this autarkic, protectionist view of the economy and it’s led them down the wrong path.

Jim McGregor: If you look at the history of China, everybody outside China as a barbarian. And their role was to come in and pay homage to the emperor. And actually if you look at China, it was conquered a number of times by outsiders. But every time those outsiders adopted Chinese way and were absorbed by Chinese culture because they look at China as being a superior culture and in many ways, it was. The first group to come in with that same attitude was the West and it’s like, no, we have the superior culture. You’ve got to become more like us. And that’s been that conflict ever since. It’s an interesting observation.

Rob Atkinson: Absolutely. So why do you think, I mean, as you said, the first initiative was really in 2006 but it took a long time for U.S. elites, leading policy makers, thought leaders, economists and others, business leaders to really understand what China was all about. You have any sense of why it took that long? There’s a real sense now, I think, of understanding that China is not about sort of playing by the rules and looking for their own comparative advantage. They’re looking at something much more and something much more troubling. Why did it take so long for us to figure it out?

Jim McGregor: Well, you just used the word, comparative advantage. We got this ideology in the United States that we should only do what we’re good at and spread everything across the globe. And so, America went from design, manufacturing, and sales to design and sales and we were doing that as a policy and almost an ideological view. And China comes along and this was happening with the tiger economies. Jobs had been leaving on a steady pace for many years for lower-income countries, Taiwan, Hong Kong, Singapore, whatever. But then when it happens with China, China’s very efficient and it’s very big and it moved very fast. And so all of a sudden there’s this giant sucking sound of these jobs are going out. And why did the West not really recognize it because it fit into our ideology of comparative advantage and moving things around the world. But it also had a lot to do with greed and fear.

Companies were making a lot of money. It was very efficient manufacturing for export. I used to come back to the United States from China and go to a Walmart or a Target and buy something and just couldn’t believe how cheap things were. How do you make that thing in China and ship it over at that price? They were just very good at it and then fear, China is very good at intimidating companies that would complain. If your technology is being stolen, you’re not going to complain to the U.S. Government because you fear what will happen. You’ll have a dawn raid from the pricing bureau or the antitrust bureau. I mean, I’ve had clients who would not go into the USTR building in Washington out of fear a Chinese diplomat may see them do that.

Now, that may not be a well-founded fear, but it was a fear. And also, China, we all believed that. Even myself to this day, believe China was on a fairly decent path under ‎Zhu Rongji and Jiang Zemin on opening up. They were going to be their own way of doing things. They were going to have their own influence in the world, but Xi has really changed that. Xi has taken in a whole different direction. Top-down Leninism there’s some self-reliance and looking really, to trying to dominate in many things in the world, not go along and get along.

Rob Atkinson: Yeah. I remember talking to the chief counsel of a major Fortune 100 company recently or a while ago, and he said to me, they had had a problem with the Chinese government where literally they were just stealing their technology in China. So he went to the appropriate minister and said, “Look, if you don’t really stop this, we’re going to have to bring a WTO case.” And the minister said, “You’re welcome to do that, but you’re never going to sell another product in China again.” And we know what the answer was. They didn’t, file the case. You talk about Xi really changing this, moving into a more Leninist position. I’m struck by how oftentimes the Chinese leadership seems completely tone deaf. They were attacking Sweden for criticizing China. They attacked leading newspapers in Germany for calling into question some of their hiding information with regard to a COVID-19. They’ve limited exports of major medical supplies. What’s going on there? Are they just tone deaf? Do they not understand how to advance their case in the world because they should see that it’s just inflaming, re-shoring. It’s inflaming anti-China activity.

Jim McGregor: I’ll hold the medical thing for a little later because I think that’s a different issue. But we always say when China does things, we go, “God, what are they thinking? Don’t they know how the world would look at that?” Has there ever been a time in Washington where the players in Washington said, “Geez, I wonder what the world would think of us?” They’re just like America in they’re completely caught into their own world and they’re bringing their own behaviors and practices international. They’re treating the rest of the world, the way they treat their own people, their own citizens, the way they treat their own party members when they want to discipline them. And also under, Xi, it’s just an overreach. My father had a saying, anything worth doing is worth overdoing. And that could be the Communist Party slogan because they overdo everything.

Just look at this, I mean remember after World War II, when Mao took over China, there was his consternation under McCarthyism in the U.S. about who lost China as if we have the ability to win or lose China? Well, I have the same question. Who lost America? China had America where they wanted us. I mean we, their young people could be educated in our universities on our scholarship. They had market access, they could steal technology from an American company and that company would go to USTR and say, “Please don’t do anything. I don’t want to mess up my market share.” But they overreached terribly. And I think it’s very much ... China was very good at playing an empty hand. I think Zhou Enlai out maneuvered Kissinger very well in the initial configuration of how these two countries have come back together, but they’re very bad at playing with a full hand. Once China got some power, it just converted the type of ... They go between an insecurity complex and a superiority complex and I think the superiority complex has taken over.

Let me get to the medical supplies. I have sympathy for China on that one because there’s a lot of shady business people and opportunists in China and they were sending out really shoddy stuff and China’s trying to do this medical diplomacy to dig itself out of the hole for allowing this virus to spread all over the world. So China did what it always does, it overreacted and it cut it off completely. That wasn’t a retaliatory effort against other countries. That was, we got to clean up our supply chain, but there’s no nuance in China. You just cut it off. This goes both ways, early on in this virus outbreak, American companies got together and sent a huge plane load of medical masks and supplies to China to Wuhan and it turned out they bought them in Mexico and they were all shoddy. You could put your finger through the mask and they had to send it all back. So we had the same problem early on when we were trying to help them. So I have some sympathy on that issue.

Rob Atkinson: Sure. Although I did hear that they, again, I read this, that they prevented 3M from exporting masks back to the U.S. early on. And maybe, I guess a lot of countries have put in place policies like that. Maybe they’re not the only ones.

Jim McGregor: Well actually, Trump was trying to do that with 3M here and now let them export to Canada and Mexico. But yeah, you’re right. I think they were in a panic and 3M makes the best stuff and they wanted to hold it there. You’re right that that was not a good thing.

Rob Atkinson: Nor was it on our side either. So I want to ask you, the Chinese government is looking to expand their influence around the world both politically and economically and we see that with the One Belt, One Road initiative and yet you see a lot of what they’re doing and I don’t know how to describe it other than ham-handed or as you said, if it’s worth doing, do it a lot. Do you think that the COVID virus as well as their response is going to lead more countries to be more on the side of the United States now where you’ve seen Europe in particular kind of on the fence, they’re not sure they want to try to engage with China or stay with us? How do you see that playing out over the next year or two?

Jim McGregor: I think it’s going to be very situational and transactional because it’s not like the rest of the world trusts America right now. With this administration and the way they’ve been handling trade, instead of having allies attacking everybody, neither of us look very good, and China has actually had an opportunity to step ... There’s a void now in global leadership. This is the first major crisis since World War II where the U.S. hasn’t been the lead, where America first. We’re just kind of hiding out in our own world and China’s going out and trying to do global diplomacy and doing it in a very, very awkward and damaging way. Look at these Wolf Warrior diplomats. They’ve weaponized their diplomats. Chinese diplomats used to be very smooth, very friendly, even if it wasn’t genuine. But then now, once China got powerful it’s in your face. It’s very aggressive and I think they’re talking to Xi, just like somebody in the U.S. is talking to Trump when they’re on TV. You can’t be hurt by being too tough.

And so yeah, they’re hurting their image all over. And actually even this medical supplies they’re sending around the world, they then have a press conference where the people getting it have to kowtow to China and Xi and thank them for it. And that’s embarrassing and making people very unhappy. So yeah, China’s diplomacy right now is taking a very strange turn because if you look back when China was coming out of Tiananmen, Chen Xitong went around the world with very soft, very friendly diplomacy, and got China’s reputation back. This time around, they’re taking a much more aggressive and very, very damaging kind of tone.

Rob Atkinson: There was this whole view in the Cold War, oftentimes of the ugly American, I think it was the Graham Greene book, and now you could argue it’s the ugly Chinese or the ugly China because they just simply don’t understand diplomacy and they’re alienating countries that could at least be neutral towards them.

Jim McGregor: Yeah. And again, I think it’s the same. They’re treating them like they treat people in organizations domestically. It’s about control. It’s about people doing what they’re told. It’s about propaganda for the supremacy of the party. And I mean they’re feeling very wounded because they know they screwed up on this virus and spreading around the world, leading to all those horrific deaths. And so they’re overcompensating now on that, Xi is the master and he’s fighting it and he’s now helping other countries and they believe their own propaganda. They got caught up in their own BS actually.

Rob Atkinson: Sure, sure. So maybe Jim moving or over to what can we do in the United States? I think there was a view for a long, long time that we could negotiate with China that if we just explained what we were concerned about in a clear way that they would make real reforms. I was co-chair for President Obama’s U.S.-China innovation experts group for a few years and I was at a number of these dialogues and meetings and there was this constant back and forth where American side would say what we thought was the problem and the Chinese response would be, we’re working on it. Or the response would be, you really don’t understand what we’re doing. We’re all friends and we should just work more closely together. That doesn’t cut it anymore and the Chinese don’t seem to be willing to be engaged in any serious reform, particularly under Xi. So where does that leave the U.S.? President Trump had his phase one deal, not sure where that’s going. Probably nowhere now. What should the next administration be doing? How should Congress be thinking about this?

Jim McGregor: Well, of course, the phase one deal is very lopsided in U.S. favor because China was willing to sign anything because they’re just buying time. They’re just buying time to decouple and get out of having any dependence on the United States. They’re very clearly headed in that direction and we’ve got a 14th Five-Year Plan that’s going to be coming out that’s going to be woven through with that. What should we do? We should protect ourselves, number one. On Chinese acquisitions around the world, we should block acquisitions that are coming from China Inc. We should worry about our national economic security as much as our military security when it comes to technology and businesses. We need to invest in ourselves. You guys are big proponents of we need to invest in science and technology research. We need to invest in technology.

I mean I’ve had chip companies in the Valley telling me that they have to take Chinese money because private venture capital money in America won’t invest because the return isn’t quick enough. I mean this country was built on policies, on industrial policies. I mean look back at what, 1791 or so, when Hamilton with the policies he came out with, lasted for 150 years. But look at the World War II, the War Production Board run by a Sears executive when a business and government came together to ramp up our military production and put Rosie the Riveter, put the women in the factories and the men at war. And then that huge industrial might that we built was turned into consumer goods That built the economy for people like me that were born in the 1950s. The Space Program, the chips with Japan, we need to ramp that up again because you can’t ... Look, private money, venture capital money, corporate money has to make a profit and it’s got to make it in a shorter period of time. We need patient money.

That’s why China’s doing very well. They’re putting a lot of patient money out there into a lot of sectors because they know it takes time to build these things and they’re not going to be profitable right away. One of the things I wanted to bring up is, look where U.S.-China is right now. I talked to a bunch of senior retired Chinese officials before this virus broke out back in November, December in Beijing and they were very confident. They were saying, “Look, we knew that America could not handle our economic system differences, once we got big. We knew this battle was coming. We’re ready for it. We’re confident, we’re going to move ahead.” And they were quite proud. They’re saying, we are what we are and countries including the U.S. will have to decide where they fit in with us.

Now, I think this virus is going to knock China back a little bit. On the other hand, the U.S. is looking at ... Okay. We’re talking about a Cold War. Right? Okay. Well let’s really look at this. What was the Cold War? The Cold War was a zero-sum game where the Soviet Union believed capitalism had to die for communism to win. China is not in that. This is a battle between economic systems and development models and unlike with the Soviets we expected, their system was so flawed, it would collapse of its own volition. That’s not going to happen to China. We have to compete and it’s all about competition. It’s about waking up and competing and getting rid of our own arrogance on, that we have such a superior system and that we can beat China with the system.

Rob Atkinson: My colleague, Bill Janeway has written a wonderful book, [Doing Capitalism in the Innovation Economy], and Bill talks about the importance of national missions and that to your point, the U.S. had national missions for a long, long time. The Hamiltonian mission of building the country to be independent of England. You had the mission from Lincoln all the way to Roosevelt on becoming a great world power and tying the country together. The World War II Soviet containment mission and now we seem to be lost and the Chinese have a mission. They know what their mission is. You think we need a new national mission and if so, what would it be?

Jim McGregor: Rubio and some others are looking at industrial policy and industrial policy, I’ve been a big proponent of it. We got very ideological that free markets solve all problems. Well look where it got us. Of course, you need strong markets and you need industrial policy, industrial strategy and looks like people are coming around to that. We’ve got a lot of strength in this country, but we got to bring it together. It’s not about individual companies or individual profits.

Jackie Whisman: Well, to that point, are there any proposals out there now, legislative or otherwise that kind of come close to addressing all these needs you just listed and help to level the playing field at all?

Jim McGregor: Well, I’ll tell you what, let me point out a report I recently read by a guy named Rob Atkinson called “The Case For a National Industrial Strategy.” That thing is full of good, I’m not saying that to flatter you, that thing is full of good ideas. I’ve been talking about this for a long time as an amateur. And I was thrilled with that report because it goes through a whole litany of ideas and if you were to ask me what I think Congress should do, if they have a 100 billion dollars or 200 or 300 billion dollars. My answer would be put together a special joint congressional committee. And look at what Rubio has put forth. Look at some of the ideas in your report and move this country ahead with a national mission. And you know what, China is looking at what goes on now is a Sputnik moment for them. We should be looking at this as a Sputnik moment for us.

We have a lot of advantages in our system that we are dissipating every day that we’re not focusing on as we yell at each other on cable TV. It’s time to wake up and grow up and compete.

Rob Atkinson: So maybe just one last question Jim. We don’t obviously know what’s going to happen in the November election and President Trump could win. It could be Vice President Biden. If Democrats do win in November, do you see them going back to Obama-ism when it comes to China or you think that that bridge has been crossed and there’s going to be a new fundamentally different approach to China for a democratic presidency?

Jim McGregor: Yes, I do. I think it’s going to be a fundamentally different approach. Hillary would have had a fundamentally different approach. The worm had already turned in the last election. Again, China, I watched this happen with the business community. Remember, I’m one of the members that for years has lobbied on Capitol Hill for China joining the WTO, permanent trade MFN, those kinds of things. And I still today believe that China was on a different course and the shift in course under Xi woke everybody up. So I don’t think we’re going to go back to where it was, but I also think we can’t continue where we are with this ideological really hard line, almost looking at it as Iran and really if you look at some of the people in the Trump administration their view is that we can accomplish regime change China. Well, no, we’ve got to deal with the Communist Party as it is.

And I don’t think the communist party is out to dominate the world. I think they’re out to make the world safe for the Communist Party. They basically, want people to accept their system as it is. And go about our business. And I don’t have an answer to that, but we got to deal with China as it is, but we also got to get our stuff together. This is an our own goal. It’s our own problem. If we don’t, then this is end of empire.

Jackie Whisman: Well, thanks Jim. We really appreciate the benefit of your thoughts on this. And our press team really appreciates you plugging our industrial strategy report. We’ll link to it in the show notes. So can you tell our listeners where they can find you? Twitter, website, all of that good stuff.

Jim McGregor: Yeah. Well, they can find me, of course, on the APCO website, but my own website is James McGregor at JamesMcGregor-inc.com. I’m on Twitter as @JamesLMcGregor. And you can find me on LinkedIn. My main social platform is LinkedIn. I do a lot of posting on LinkedIn.

Jackie Whisman: Thanks Jim. And thanks for listening. If you liked it, please be sure to rate us wherever you get your podcasts. Also, go to itif.org, and sign up for our weekly newsletter. You can follow us on Twitter, @ITIFdc and we’re on Facebook and LinkedIn too, but I don’t know if we have as many followers on LinkedIn as Jim.

Rob Atkinson: Well, speak for yourself.

Jackie Whisman: All right. Thanks everyone. Thanks Jim.

Rob Atkinson: I don’t. Well, that’s it for now. Thank you, Jim. We’ve got more episodes of the podcast coming up. We’ve got great guests lined up to talk about issues like the impact of COVID-19 on privacy policy and disease tracking. What are the long-term impacts from COVID on the economy, and also what the crisis has shown about our broadband system and do we need some changes to that? So please come back. Thank you.

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Podcast: The Post-COVID China Challenge, With Special Guest James McGregor