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Clyde Prestowitz is the founder and president of the Economic Strategy Institute, a research firm concerned with ensuring globalization takes place on a level playing field. Prestowitz served as a counselor to the Secretary of Commerce in the Reagan administration and took part in trade negotiations with China, Japan, Europe and Latin America. He has also worked in business in numerous countries. He earned his bachelor’s degree from Swarthmore College; an M.A. from the University of Hawaii and an M.B.A. from the Wharton Graduate School of Business. He also studied at Keio University in Tokyo. He is the author of numerous books, including his most recent, The World Turned Upside Down: America, China, and the Struggle for Global Leadership (Yale University Press).

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Q: In your books and talks about China, you’ve focused a great deal on the trade and economic relationship between the U.S. and China. Could you lay out for us what you consider the key problems in the relationship today?

A: The key problem for the United States, for a long time, is that we’ve had a kind of dream after the Soviet Union collapsed. Frank Fukuyama wrote, “this is the end of history.” We came to believe that the future is liberal democracy and globalization. And we’ve had this notion that globalization is going to liberalize China. In other words, China will become not only a free market economy but that it will also become, if not a democracy, at least more liberal. [Former World Bank president] Bob Zoellick talked about how we would like China to become a “responsible stakeholder” in the liberal, rules-based global order. So our Democratic and Republican leaders have been pursuing this notion that engagement with China would change it economically and politically. And that’s been a fallacy. In all of our discussions, in all of our endless high level negotiations, we keep trying to persuade China to be like us, to adopt what we call “free market rules”; not to subsidize, not to have state-owned enterprises, not to have what you would call administrative guidance, not to set targets every five years. No five year plans. And it’s not just China. We did this with the Japanese in the 1970s and 1980s. We kept trying to force them to kind of be more like us. And it’s not going to happen. China is not going to be like us. You may recall the March 2018 issue of the Economist. There was a cover story about how the West got China wrong. I think that captures it. 

What do you expect to happen with China during the Biden administration?

It’s interesting to me that most of the Biden team were in the White House with Obama. And under Obama, they played the engagement game; they were still trying to persuade the Chinese to be like us. Now they are articulating a different line. Biden is saying, “Let’s revive American manufacturing. Let’s buy American. Let’s make ourselves strong.” That’s the correct line. 

But he’s also talking about getting together with our allies and trying to present China with a united front. And that smacks to me like trying to persuade the Chinese to play by the rules — the rules of the W.T.O. or the IMF. My strong view, after having gone through 40 years of negotiations with Japan and China, is that China is not going to change. We can’t force it to change. And we can’t persuade them to change. China is going to do what it wants to do. 

Can you take us back, for a moment, and tell us about your own engagement with China?

I was on the first U.S. trade mission to China in 1982. And I was astounded at how incredibly poor the country was back then. There were no stop lights and virtually no vehicles in Beijing. The tallest building was the post office at 10 stories high. China was just beginning to open a couple of American hotel chains. But at that moment, it didn’t occur to me that China would become such a powerhouse. I lived and worked in Japan in the ’60s and ’70s when it was a very poor country too — not as poor as China but pretty poor. I had experienced the Japanese catch-up policies. Before my eyes Japan became a rich country. 

Our Democratic and Republican leaders have been pursuing this notion that engagement with China would change it economically and politically. And that’s been a fallacy.

And I would say by the early 1990s, I was beginning to feel the same way about China. I knew the Chinese had carefully studied Japan. They had studied the U.S. and they had studied Germany, Korea and Singapore. They did their homework. In Japan’s case the catch-up strategy was essentially a mercantilist policy. It works and, in fact, if you think about it, every country except for the oil producers has become rich by following these policies. It was true of the U.K. It was true of the U.S. between 1815 and 1950. We were mercantilists. We had high tariffs. We subsidized the railroads, the merchant marine, RCA, and lots of other things. And Japan, South Korea, Taiwan, Singapore, all of them have followed that same pattern. That is the formula for getting rich. 

I’ll never forget that I was at a dinner in China in about 1992. I was sitting next to a high ranking official and I said something about China having to import a lot of advanced products from the United States. And he said, “No, we can make everything.” And it struck me particularly because for many years the Japanese justified maintaining a relatively closed market by saying, “Hey, we’re a small island country with no natural resources. We have to export to live. And so we have to make all the stuff in Japan because we have to export to live.” And here’s a Chinese guy telling me, “We’re a big country with lots of resources, and we can make everything.”

And that’s what China set out to do; to make everything themselves. In the U.S., for instance, we have GPS. Europe has a Galileo system. In 1993, those systems were much younger, but still they were there. And the Chinese could easily have used the GPS system, and yet they set out to build their own system, which they just completed last year. If you think about decoupling, China set out to decouple from the rest of the world to have its own GPS. Then you get to 1997, and China builds the Great Firewall to cut off its internet from the global internet. Again, decoupling. And, of course, during all this time, China has had five year plans, which most American observers dismissed as a kind of bureaucratic cover. But in the late ‘80s and ‘90s, American business people and analysts and economists were convinced that China was becoming a market economy. 

Just to give you a taste of this, [former U.S. President] George H.W. Bush was enamored of China — and I worked for a while on Bush’s staff, so I knew him reasonably well. He’d been ambassador to China [in fact, from 1974 to 1975 he was the chief of the U.S. liaison office in Beijing, since full diplomatic relations between the two nations was not restored until 1979]. And he loved the Chinese people. And they are wonderful people. He believed that trade and globalization would democratize China. So he’s at dinner, this is about 1997 to ’98 and he has [former Chinese Premier] Zhu Rongji there. At that time Zhu was in the process of reorganizing the state-owned enterprises by getting rid of a lot of them and cutting them back. And this whole reorganization had been presented in the U.S. as China becoming marketized; that we were going to have an economy with private enterprises, not state-owned enterprises. 

And so Bush says to Zhu at this dinner, “How are you doing in getting rid of the state-owned enterprises?” And Zhu says, “Well, no, Mr. President, we’re not getting rid of them. We’re reorganizing.” And Bush looks at him, kind of smugly, and says, “Yes, we know what you’re doing.” Well, he didn’t know. Now they make up a third of the Chinese economy. So there’s this great disconnect about what the Americans thought was going on and what the Chinese were doing. 

Because I had the experience in Japan, I kept saying, “Guys, you don’t get it.” I kept being frustrated. When we brought China into the W.T.O., [U.S. Trade Representative] Charlene Barshefsky and [former Secretary of Commerce and U.S. Trade Representative] Mickey Kantor and Bob Zoellick [who served as deputy Secretary of State, U.S. Trade Representative and at one time president of the World Bank] all went up on the Hill and told Congress that by bringing China into the W.T.O., it would dramatically reduce the U.S. trade deficit with China, since we already had low tariffs and China had high tariffs. So by bringing China into the W.T.O., we would be making virtually no tariff cuts and China would be making big cuts. And so that would stimulate our exports and not do much for Chinese exports. Obviously, this was baloney. The point is that we had no clue. And our leaders, Democrat and Republican, clung to this dream of China becoming a market economy and George W. Bush made the comment that free trade carries the seeds of democracy. 

What are you saying is the chief problem the U.S. has had with China? 

The chief problem has been false U.S. expectations and just pure misunderstanding of where China has been coming from. The U.S. brought China into the W.T.O. assuming that it would reduce its tariffs, open its markets to U.S. exports and investment, and become an open market, à la Canada and the E.U. Our leaders and negotiators really believed that China had turned onto the capitalist road and that it would inevitably become not only a U.S.-style market economy but also become more democratic in its government structure and philosophy. But China had carefully studied the industrial policies and catch up strategies of Japan, Korea, Germany, Taiwan, and Singapore. It had no intention of just opening up. It dragged its feet in implementing W.T.O. rules, it made entry into China dependent on technology transfer. It required companies investing in China to export a certain percentage of their production. It reserved many areas only for Chinese companies. Corporations like Google, Amazon, and others were totally barred. In other words, Beijing ran a classic mercantilist strategy under the roof of the W.T.O. and in the guise of “liberalization and opening up.” It was brilliant, but it wasn’t what the free trade, free world negotiators had promised.

But if that’s true, why are so many American companies and Wall Street firms seemingly more aligned with Beijing than Washington? Aren’t they opposed to Washington having a tougher line with Beijing?

It’s a complex story. This has been the fastest growing market for the last 20 years. So these companies have been making money. China has been the biggest engine, pushing globalization and pushing forward the coupling of the two economies. But their [corporate America’s] complaint is that they want more. And the cheating element gets you into the part of the policy world of national security. 

So let’s go back to the ‘90s. Back then, nobody worried about national security. That became a concern later. But as the Chinese began to advance, and as they stole technology, and as they forced technology transfer, some of the high tech companies became more concerned about Chinese cheating and theft. And yet those very same companies are trying to get into the Chinese market. They see the huge potential. 

And, of course, as China has advanced technologically and has been able to use technologies to essentially try to turn Uyghurs into Han Chinese and to create a greater threat to Taiwan and to essentially seize Hong Kong, and as they have built a formidable military capacity, then the human rights, liberty elements and national security elements have moved closer together. And national security encompasses companies like Boeing and GE, and so forth, and it has begun to affect them. 

But if you ask me where I am, I have myself gone through an evolution because of my experience in Japan. I always felt that it was foolish for us to try to convince the Chinese not to pursue their industrial policy. Japan had what they called a catch-up strategy. Japan was not going to abandon that strategy. It was part of their national security. And China isn’t about to abandon that. China is going to try to become the equivalent of the U.S. in technology, particularly technologies that have a military application.

I admire their professionalism. The thing I keep getting stuck on is I know that they cheat and steal and don’t play fair; and yet they’ve been able to co-opt Wall Street and corporate America for such a long time and to get them to lobby for them.

How are they able to do that? 

They give the American companies just enough, tease them just enough so that they think it’s going to get bigger, but they’re actually taking over their businesses. 

I would break it down into a few components. Let’s take FedEx. [Its founder] Fred Smith, back in the 90s, was just aching to get into China. There were so many consumer electronics and products beginning to be made in China and the potential to carry all that stuff by air freight out of China to the U.S. — I mean, wow. And the Chinese put up a lot of barriers. They didn’t allow it in right away. Well, I had been in the Foreign Service. And one of my classmates in the foreign service became the Deputy Chief of Mission at the U.S. Embassy in China. Fred hired him. There was an APEC meeting in Shanghai, in the mid ‘90s. And the guy hired by Fred, one of his first tasks was to be sure to get Fred lined up to be the guy who introduced Jiang Zemin to speak at the APEC conference in Shanghai. 

So eventually FedEx got permission to fly out of China but no permission to gather freight in China. They could take it in and drive it, but they couldn’t run their trucks around in China. And Fred lobbied more and tried to get more ability to operate in China. Anyhow, I wrote a book in 2005, called Three Billion Capitalists. And as part of that I went down to Memphis, and I went up in the tower at the airfield at about eight o’clock at night. It’s an amazing sight, you see little dots of light all over the horizon. And these are all FedEx planes, coming into Memphis to unload. You can get the package from Memphis to Boston by 10 o’clock in the morning. And I learned that the FedEx flight from Shanghai to Memphis is the most profitable single flight that FedEx has. So these guys were making money. And there were obstacles and hurdles, but they were making a lot of money.

I was an advisor to Intel for a long time. Andy Grove was very reluctant to go to China. But so many of his customers were moving their production to China. So eventually, Intel put a “fab,” a high-end semiconductor manufacturing facility, in China to supply the customers. So we’re making their computers and their phones, everything in China, and we’re sending it back to the United States. So there’s this funny dichotomy that the Chinese are stealing the technology of American companies, but those companies are making money. And often, they kid themselves that they can run faster than the Chinese; that the Chinese would be using old technology; that the Chinese steal the old technology, but they have new technology straight from Silicon Valley; that they are smart. There’s overconfidence because, remember, they’re making money.

Is there really a parallel with Japan?

One of the big differences between China and Japan is that the world never really manufactured its goods in Japan. So even if my company is not making money from the consumer market in China, I’m probably making a lot of money by having my goods produced there. Maybe the Japanese made a mistake. The Japanese prevented foreign investment. So during the trade wars with Japan, U.S. industry was solidly aligned with the U.S. negotiators, who were trying to force Japan to open the market; that’s because U.S. industry couldn’t get into Japan. The Japanese didn’t allow them to invest. The Chinese were more clever. They allowed them to invest. And so the U.S. trade negotiators were not necessarily being backed by U.S. industry. 

This is a very important point that led me to focus on an element that very few people understand. Take a company like Apple. In the early 1980s, I’m in the Commerce Department. My secretary walks into my office and she says, “Steve Jobs is on the line.” I thought she was kidding. I said, “Oh, come on. Don’t put me on.” And she said, “It’s really Steve Jobs.” So I take it, and it is Steve Jobs. And he’s having trouble getting the Apple III into Japan. So I go out, meet with him and the Apple guys. And we put together a program and we do manage to get Apple a little bit into Japan. Now fast forward 25 or 30 years, and everything that Apple makes is made in China. All the iPhones are made in China. Just about everything Apple sells is made in China. And Apple is one of the world’s most valuable companies. And we call it an American company. Now, in Washington, Apple is very powerful. It has legions of lawyers and lobbyists. It spends gazillions on political donations, quasi-political donations. Tim Cook has instant access to the White House and to Congress, wherever there’s power in Washington. In Beijing, he has no stroke. He’s at the mercy of Beijing. 

A year and a half or so ago, the demonstrators in Hong Kong were using an app from the Apple App Store. And the app keeps track of where the Hong Kong police are, so that the demonstrators can stay away from the police as they move around Hong Kong. Xi Jinping leans on Tim to get that app out of the App Store. And they take it out real fast. 

Or think of another thing. Jeff Immelt was chairman of General Electric. During the Obama administration, Jeff was also chairman of President Obama’s Council on Trade and Competitiveness. And while he was chairman of GE and serving on Obama’s commission, he announced that GE was moving its entire avionics division, which at the time was mostly in Minneapolis. He was moving the whole division into a joint venture with AVIC, which is the Chinese state-owned enterprise, building the Chinese commercial jets. Now, when he did that, I scratched my head. I said, “Avionics isn’t labor intensive. It’s all technology and capital. It can’t be cheaper to make this stuff in China than it is in the United States. It doesn’t make sense. Why is he moving this stuff to China?” So I dug around a little bit, and it’s pretty simple. It became obvious that the Chinese said, “You guys at GE, if you want to sell avionics in China, you better make them in China. In fact, the best thing for you would be to set up a joint venture with our state-run firm. And that’s what he did. I have often wondered, did Obama call him up and say, “Jeff, what the hell?” I’d love to know the answer to that question. 

Here’s the thing. Tom Donohue just retired a little bit ago as the head of the U.S. Chamber of Commerce. When Tom testified before Congress, inevitably, he would pronounce himself to be the voice of American business. But if you looked at Tom’s board of directors, you looked at the companies, they were all deep into China. Tom was the voice of China. Tim Cook is the voice of China. These guys are captured by China. 

What about Wall Street? 

These guys would sell their mothers to make a few bucks in China. [Former Treasury Secretary] Hank Paulson made his name by getting all the Chinese state-owned enterprises listed on the New York exchange without conforming to PCAOB [the Public Company Accounting Oversight Board‘s] accounting requirements. He set up a think tank, the Paulson Institute. And what does he do? He goes around the country talking about how we need to be nice to China. So the Chinese have captured a big part of the American financial and business community. 

In a way, I envy the Chinese. The Chinese government and Communist Party are not allowing the destiny of the country to be decided by hungry CEOs. Whereas we are!

By contrast, here’s the richest guy in China, Jack Ma. And he’s got these financial technology things. And he wants to do a big public offering. And Xi Jinping decides that he doesn’t want him to, and takes Jack down. Now, Joe Biden cannot take Tim Cook down. Actually, in a way, I envy the Chinese. The Chinese government and Communist Party are not allowing the destiny of the country to be decided by hungry CEOs, whereas we are!

Do you mean that the American CEOs have the upper hand in the U.S., as opposed to how Beijing deals with CEOs? 

China has incredible leverage with them. But it has also dangled this possibility that, yes, you can be with us. And that has somehow turned the tables on the U.S. in very complicated, complex and stunning ways. Look at Mercedes Benz. It had an advertisement in which the Dalai Lama made a three second appearance. That advertisement did not run in China, but it ran in the U.S. and it ran in Europe. The Chinese government got a hold of Mercedes Benz and they said, “Guys, if you want to sell cars in China, you’ve got to get rid of the Dalai Lama, instantly.” They got rid of the Dalai Lama. The same story with the Houston Rockets [see this piece on the N.B.A. from The Wire archive]. I mean China has them by the balls. And there’s no rule of law in China. So you’re not going to take the Chinese government to court. You’re at their mercy. So I mean, even now, to me, after the Trump administration kind of went to at least some degree of economic warfare against China, I don’t see the tide turning, even though there’s been more criticism of China in the last couple of years than we’ve seen in a long time.

Are you saying that the U.S. faces the prospect of losing out in business to China, but also on national security grounds?

That’s exactly what I fear. China is making great progress. And they offer this great potential to everybody. That was the one thing about Trump that I think was very positive; that the tariffs and all that stuff by themselves were not very significant in terms of changing the game. But what they did do was to create an element of uncertainty. So whereas prior to Trump, investment in China was a slam dunk, no risk, and you’re going to make money. Trump introduced an element of risk, so that if I go to do business in China, it’s possible the Americans will ban that or they’ll put tariffs on. 

So this is a propaganda battle right now. The Chinese want to convince the world that Trump’s policies are a total failure; they have no impact whatsoever. But some companies are opening factories in Mexico or India or other places. The Japanese government has put up something like $10 billion to facilitate the reshoring of Japanese production in China back to Japan, or to India or someplace else. So I think Trump’s impact in that regard was not zero. 

Having said that, I mean, you’re right. This is a huge market. The Chinese economy, depending on how you account for it, is a little bigger or a little smaller than the United States. And it’s probably going to get bigger. Eric Schmidt, the former Google guy, has chaired or co-chaired a thing called the Committee for China’s strategy. It’s a  bunch of high tech guys who got together. And Eric is saying, in artificial intelligence, their cycle is faster than ours, their development cycles faster than ours. Kaifu Lee, who used to work at Google in China, says the same thing. The Chinese work on Saturdays and Sundays. They work 20 hours a day. And China has an enormous amount of data, which is what artificial intelligence needs. 

And so yes, China is in a very powerful position. And I say, “Wait a minute. Here we are, and many of us are upset about Xinjiang. I am particularly upset about Hong Kong because I have spent a lot of time in Hong Kong. I have a lot of good friends in Hong Kong. Jimmy Lai is a good friend of mine. He’s going to die in some Chinese jail. And so we’re looking at this and on the one hand, governments are criticizing China for Xinjiang and Hong Kong. But on the other hand, they’re not. The U.S. government is not putting any pressure on Apple to reduce its production in China. There’s no pressure on Ray Dalio to stop him from throwing billions of dollars into the Chinese markets. So we’re hypocritical. We are not putting our money where our mouth is.

What can be done? What solutions would you propose? Would it start with the White House?

It has to be more than the administration. There has to be a Sputnik moment. It has to be a wide awakening that says, “Wow, this is really a dangerous thing.” If you look at what China is doing to Australia right now; if you look at what they’re doing to the United States. When was the last time the Dalai Lama was invited to speak anywhere in the U.S.? Chinese experts have to be very careful about what they say and to whom they say it to because they’ve got to get their visas. We’re being disciplined, without kind of knowing it. And every iPhone that Tim Cook brings out of China is helping to pay for that discipline. We ought to stop it. 

Now, we can’t stop it immediately. But what I propose is fundamentally two things. First, in response to Sputnik, we passed the National Science Act. I went to grad school on the money. As part of that act, we went to the moon. The government poured gazillions into Silicon Valley to build semiconductors and high speed computers. We invented the internet. We need a similar response. We need a Manhattan-like project approach to being sure that it’s not “Made in China 2025.” Take 5G telecommunications. We don’t even have a player there, but Ericsson and Nokia do. We should be pouring money into Ericsson and Nokia. This is where we are to ally with the E.U. to make Ericsson and Nokia stronger. And maybe we can bring Cisco into a consortium to make them the champion of 5G globally, at least for the free world. 

We need a Manhattan-like project approach to being sure that it’s not “Made in China 2025.”

We think that we’re the kings of semiconductors. Let me tell you how tenuous our situation in semiconductors is. The Wall Street Journal had an article a couple months ago talking about how Apple and Amazon are going to start making their own chips rather than buying from Intel or Nvidia or Qualcomm. Now, Apple and Amazon are not going to make their own chips. What they’re going to do is design their own chips. They’re going to have them made at TSMC in Taiwan or Samsung in Korea. These guys don’t make chips, they design chips. Intel is the only major chip company that actually manufactures chips in the United States. And Intel is now two generations behind TSMC in its manufacturing process. Recently, Intel announced that it’s going to outsource some of this production to TSMC. Let’s get the Scandinavians and the Germans and Japanese and Koreans into the game with us. 

The second thing we need to do is to change the game with American law. We need to get a handle on the U.S. corporations. One thing is to give them incentives to produce in the U.S. and disincentives if they’re operating in China or elsewhere. 

Another way to do it, this is the one that I like the most, but it would be difficult to do: All corporations have to have charters. And in the U.S., the charters are awarded by states and Delaware has run the race to the bottom. So most corporations incorporate in Delaware. People don’t realize this, but when the state grants a corporate charter, it’s giving a very valuable gift; it’s giving the gift of limited liability. And the state gives that gift because it expects the corporation to do something that will be good for the state and for the people who live in the state. So we tend to think that corporations kind of make themselves up, and that their job is to regenerate money for investors. But the state gives them a charter because they’re supposed to be doing more than just generating returns to investors. 

Now, I don’t think that we can go back and take the right to charter away from the individual U.S. states, but what we could do is to say okay, if you’re a billion and a half dollar company, and you’re doing 20 percent of your business outside the U.S., in addition to your Delaware charter or New Jersey or wherever you are, you need a federal charter; you need to get a Commerce Department certification. And the federal charter will then have teeth about what you can do and can’t do in a place like China.

We also need to re-industrialize the United States. Historically, countries that are workshops of the world get rich. It used to be the U.K. in the 19th century. And then it became Germany and the U.S., then Japan. Korea jumped in, and now China. You could argue, well heck, we have high wages or a high standard of living. For companies to remain competitive, they need to have lower wages, and they need to go abroad. And I would argue two things. One is that Germany is not a low wage country, Japan is not a low wage country. In the United States, manufacturing accounts for about 9 percent of GDP. In Germany, it’s about 18 percent. In Japan, it’s about 19 percent. Even in France, it’s like 12 percent, Korea’s 25 or 26 percent. So what that tells me is, it’s not just about wages. 

And moreover, manufacturing is no longer labor intensive. My dad was in the steel industry, and I used to run around steel mills. You drive up to a major place that houses thousands of people. Today, you go to a steel mill, and it’s like 20 guys in a computer room. Things have been automated. And with 3D printing, you can build the whole product on the computer, with a couple of people running the printing machine. So it really is a matter of capital and technology. Capital is made artificially cheap in China, partly because the government forces a high savings rate, and partly because it subsidizes capital. But fundamentally, the cost of capital is not less in China than it is in the U.S. or anywhere else. So we need to maintain or improve that performance.

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