tv U.S.- China Economic Security Review Commission CSPAN September 4, 2019 9:29am-1:00pm EDT
privacy under the same and understanding how privacy works and the next issue, what a career is going to look like for the next several generations, what's work going to look like for the next several generations and probably a much more all encompassing topic than ones that are to deal with right now. >> big topics. any final words? do we have confidence? the ada talks a lot about the rule of law. are we going to be helpful in our roles to get the law to think thoughtfully about these enormous societal issues driven by technology? we're comfortable that things are going to be all right? >> if we don't have hope and promise for that-- >> we are going to leave the last few minutes of this discussion on tech innovation, with a quick reminder watch all of our programs on-line at c-span.org. we're going to forum on
u.s.-china, the changing relationship between the u.s. and china and ongoing trade tariff. the u.s. economics security review commission is a host of the event. >> with taiwan and hong kong. the commission began the hearings this year, we marks the 40th year of u.s.-china diplomatic relations. by examining the external and internal ability to sustain growth, project power and spread its influence on the globe. this year has been one of extreme volatility between the u.s. and china. chain and insta -- they thought it would be to visit and explore key topics. there is an increasing amount
of commentary in the foreign policy community, con jebbibbij- con jebbi conjecturing. and this commentary further characterizes china as a rival, having upgraded it from a competitor. the word enemy is less frequently used, but is not absent. the previous assumptions underlying u.s. policy, such as the current international order benefits china and capitalism brings with it democracy have been shattered and abandoned, even by those and our goal is to catch up on the facts of important development and hopefully gain insight how to craft and navigate what will
clearly be a new and different relationship between the united states and china. i look forward to today's expert witnesses and thank them for coming. in addition, i'd like to thank the senate foreign relations committee for securing this room for us today. i'll now turn the floor over to my colleague and co-chair for this hearing, vice-chairman robin cleveland. >> good morning. my statement is a little longer than commissioner fiedler's. >> in part because it's about hong kong and i have very strongly -- so when the hong kong region was established under one country, two systems, beijing authorities agreed a high amount of political, financial and legal autonomy. the hong kong protected freedom of movement, conscious, communications and privacy.
the term inviolable, no one would be placed under political arrest. hong kong citizens trusted democratic elections would be ultimate guardian of their human and political rights. beijing has denied this bringing citizens into the streets. in the past few months over 1100 people have been arrested for exercising their rights. and now they're looking at victims and strangulation policy. chief executive carrie lamb, creating havoc and it claims that she's not free to resign. i am pleased that she has acknowledged the extradition bills will be romaine and undrawn. there needs to be an operate
police investigation, not one by the police. there need for riots, people who are legally protesting. and free the detainees. when congress passed the hong kong policy act it memorialized chi china, that it would establish a model on the mainland. on kong would have trade and politic political-- and access to investors in min land bonds. mainlands to tending and the off shore clearing center and channelling foreign investment in and out of china. over 1,000 main land companies
with market capitalization of 2.6 trillion are listed on the hong kong exchange. they choose hong kong because there is no rule of law on the main land to protect their interest. because of government, they have found judicial institutions, nearly 4,000 companies with regional headquarters that include u.s. enterprises. beijing's actions not only with the citizens, hong kong's actiol i global banking and investment is in peril. as tension escalates the congress and administration will face a difficult challenge in challenging the threshold for the status. i'm hoping today's witnesses that might look at what warrants changes, and support hopping ko hopping-- hong kong's legal rights. and it's their legal and
technical support we should make available. and taiwan, the concept of one country, two systems was to be for the future for the taiwan and the main land. and the taiwan's major parties and vast majority of citizens reject this unification. and more in taiwan think of themselves as taiwanese. there was support 40 years ago providing the legal foundation for strong ties with taiwan. the act looked at any effort for taiwan for any peaceful means, including through could he version would be a grave concern over the united states. these provisions along with
u.s. arms sales have peace in the strait and the region. we've seen china carry out provocative air maneuvers in the waters near taiwan which-- and in july, taiwan conducted simultaneous military exercises near taiwan for the first time since 1995. a new chinese defense white paper reiterated beijing's refusal to renounce its right to use force with taipei and indicated that chinese operations and flights would become an official tool of national policy. beijing tried to interfere with taiwan's 2020 presidential elections by swaying media coverage in a pro china direction. beijing leveraging the fact that taiwan depends deeply on
the main land fand they look to expand the international links, but are concerned with bullying. and in an effort to damage taiwan's economy. we are at a critical crossroads with our friends and allies especially in east asia. this is not a chase between the united states and china. rather, we must join friends and allies to support them for civil rights and free and reciprocal trading systems or we default for those with economic imperialistic ambitions. i'd like to highlight the commission's work on u.s. and china relations and note that in november we will publish our annual 2019 report. and with that, i will introduce the fabulous first panel who i hope are not shell shocked by the comments.
would you like to say anything on hong kong. >> we'll start with a professor of professor science, a scholar of china's political economy, on banking policies, fiscal policies and exchange rates. next from mr. andrew paul from a china macroeconomics research advisory firm. he was formerly at global advisors and a resident china advisement where he co-authored the report the long softball in chinese agreement. and we'll hear from the senior fellow for asia studies on the couns counsel, an expert on chinese foreign policy published the
extent book on the new chinese state. i ask our witnesses to keep your remarks to seven minutes and doctor, we will start with you. >> great. so thank you, commissioner cleveland, and commissioner for inviting me here. i am going to talk first about the economic impact of the trade conflict in china and then i'm going to talk about state intervention in china's economy and then finally have some thoughts on policy recommendations. first of all, the trade conflict that china has engaged with the u.s. has had an impact on china's economy across a broad spectrum according to the latest data which would come from july of this year. it's lowered the growth of china's exports overall to close to zero and has depressed its exports to the united
states to negative in absolute terms. so this is pretty striking considering that china has grown as export to the u.s. pretty much nonstop since the 1980's. investors, more importantly, i think investigators have slowed their investment in trade- trade-trade-i trade-trade-i trade-in incentive sectors, including washing machines and equipment. and it's close to 10% year to date from january to july, relative to january to july of last year. finally the latest data shows that chinese firms are facing now drastically lower pricing power than was the case before. in both consumer durrables and in the i.t. equipment sec torsion, we've seen negative growth in wholesale prices and this is in the latest on ppi and the consumer manager price index compared to a year ago.
meanwhile, of course, the debt level of changed companies continues to rise rapidly which means that many firms are now trapped in between declining per unit revenue and high debts and the interest payments that you have to pay when you have high debt. so i would say the impact to trade war on chinese economy is worsening over time and so that this provis some incentive for the chinese government to come to the negotiations table. in addition to headwinds, they're highly indebted and provided a lot of credit so they can roll over all of this, most of which sort of bad debt and i can get into that in q & a. despite these economic challenges, however, the incrsing
increasingly draconian, and carried out means that most of the signs we've seen would suggest continual, you know, a tight rein by xi jinping within the communist china party. and recently with him sort of seemingly backing down on at a little bit on the issue of hong kong, but by and large the signs show that he's pretty strictly in control. okay. so in terms of continual intervention in the economy there are no signs that the chinese government is withdrawing from the economy. if anything, they're intensifying their intervention in the economy. the three major channels that i've seen is through bankruptcy, through overseas investment and through domestic lending. bankruptcies, a lot of chinese firms are in trouble as i indicated before, but the chinese government basically are telling banks to keep
lending to them so they don't go bankrupt. a lot of chinese households and companies would like to invest overseas, but the chinese government has ordered many of these companies to liquidate their assets and bring the money back to china because the foreign exchange reserve have been drained in recent years. banks in china would like to lend more money to the real estate sec terry, but the chinese government forbade them to do that and to industrial policy. industrial policy looms large still. finally, i think that china has weaponized its currency as we've seen. the rimbey has weakened by 4% vis-a-vis the dollar which is one of the largest moves we've seen in recent years. but this actually, not only is it a problem for china. of course, china, the problem
there is that investors in china may lose confident in the riminbe and move drastically and wipe out the foreign reserve. this is potentially a problem for the united states banks because u.s. banks and institutions have exposure to china in the tune of hundreds of billions of dollars directly and indirectly. banks in the united states have lend close to $100 billion to chinese institutions. institutions in the u.s. have bought-- i don't know the exact number, but i would guess 50 to 100 billion in debt issued by chinese corporations and if the currency were to devalue very drastically, then the stature of a lot of these loans become unclear. chinese companies, whose cash flows are denominated in
riminbe, and i think the exposure of major u.s. institutions, i think would be a very timely thing to make sure if the riminbe were to crash, u.s. companies would not get in trouble. and technology theft, u.s. will need to increase multilateral efforts to increase transparency on china's financial subsidies to the technology sector. as i indicated previously it's pretty substantial. here perhaps the imf could happen and finally coordinate with close allies, and technology by forgering countries and practice cyber security with our allies. thank youery much and i
welcome any questions. >> mr. polk. >> thank you very much to the commission for having me. i'm going to talk mostly about short-term economic growth, the chinese response and what it tells us about what they're thinking in terms of the relationship with the u.s. i have a little bit of a different opinion from victor. >> china is growing at the slowest pace since 1990 and that's been accelerating rapidly since 2018 given the growing bilateral relationship between the united states and china it's highly important for u.s. policy makers to understand the sources of china's current weakness, and what they've laid out and the impact on trade negotiations and stance with the united states as well as the broader policy toward the u.s. china's current economic slump is almost due to policy
choices. trade has had an impact on financial markets, individual companies and specific geographies, in aggregate the effect on -- has been minimal. trade tensions could be expected to grow specially since september 1st. driving the chinese cyclical slowdown were policy sinces in 2017. in april of this year financial reclators introduced a policy program to slow the growth of credit, seeking to look at the debt and derisk the system with volatility in 2013 and 2015. and at the same time, they were seek to go derisk the banking system and harden the local government. regulators increased scrutiny over local government financing vehicles which have been
conduit for off balance sheet spending in recent years and gave lifetime responsibility for the debt profile for the jurisdictions that they over see. the combination of significant financial tightening and regulatory tightening over local government spending are the two key drivers behind china's current growth challenges. notably, both of these drivers were intentional, domestic policy induced measures. more notably, they've kept these policies in place despite the toll on economic growth and the economic uncertainty that's arisen through trade decisions through the u.s. while there was a significant-- in the policy mix, policy makers have been slowed down by three unforeseen developments. first the intensity with the campaign and the economic slowdown have disproportionately affected china's private sector. secondly the speed and intensity with with which the
global narrative turned on china on the global and political and economic fronts. thirdly the longevity of u.s.-china trade tensions. each has worked to unnerve, and the policy stance since growth slowing in mid 2016. the media narrative has focused on u.s. and china tensions, the broader shift against china have been more critical in shaping china's policy actions. so far the u.s. tariffs appeared to have little mack crow -- mac macroeconomic impact, especially on tightening conditions. given the tiered nature of the position by the united states, chinese exports saw strong growth as u.s. supporters sought to front-run each new round of impending tariffs.
in 2019 that's gone into reverse, taking two percentage points off overall chinese export growth. however, that's offset in local currency terms thanks to the weakening exchange rates. that's not to say they have no impact whatsoever. it's primarily been psychological, and the sentiment in china when it was ailing. those effects on sentiment are likely to increase over time. importantly, despite the slowing economy and uncertainty from trade, chinese foyers shall taking-- officials are taking -- they're boosting investment primarily in infrastructure and real estate. in 2019 they have taken a different tact. they to innocecentivize banks
lending to small private sector businesses finally they have boosted efforts to inbound marketing opening in some key areas. chinese authorities increasingly see foreign capital inflows through fdi and portfolio investment to key to improving the investment market and that reality combined with the increased pressure from the u.s. and other foreign governments is under pending a pragmatic market opening streak. this praguetism of chinese policy makers is often overlooked due to increasing tensions between the u.s. and china. it's important that u.s. policy makers understand that chinese is it looking to widen markets thanks to pressure from the u.s. government as well as china's domestic needs. this current unproven policy approach, focused on improving, and opening wider to foreign
investment, as opposed to the crude efforts of the past, underscores the chinese policy makers in their effort to steer down this down turn. this may well be displaced however the fact that the confidence exists, chinese growth is not a point of leverage to acquiesce to the u.s. demand and trade negotiations. directly influences ccp behavior and policy decisions toward the economy and otherwise via u.s. policy actions is highlight difficult. in my view would be to invest in american competitiveness, prioritizing investment in the american education system especially in science and technology. while such an investment should be an always be a priority in my view, it's more important than in the past, chinese's
investment in the education system especially in the sciences. thank you. >> mr. economy. >> thank you vice-chair cleveland, fiedler and the commission. and how the trade war is affecting china. in the time allotted to me i'd like to focus on three, four trends i see emerging, but let me preface my remarks by putting forth one caveat i think speaks to the point that mr. polk just made, it's difficult to disaggregate the effects of the trade war, right, trade frictions from what's taking place domestically and what was already a slowing chinese economy. please understand in my remarks i'm talking about an added layer of pressure that comes from the trade war, not the direct impacts of the trade war on the chinese economy. as in the united states the trade war has contributed to
volatility in the stock market and declining levels of consumer confidence. i think this is manifested in a number of ways. all providences lowered their growth targets and slowing growth and absolute decline in household consumption in areas like appliances, autos. thers been a sharp contraction on venture capital deals in terms of the scale, the value and the number. for example, there's decline of 75% in the value of the deals in the second quarter of 2018 to second quarter of 2019, and a value in 2018 and 2019. second the trade war, i think, has forced chinese policy makers to focus on putting out fires as opposed to what they really wanted to work on was structural economic reform. progress in two out of ten
areas of economic reform, trade, which is as mr. polk mentioned, the chinese lowered tariffs in a number of areas and in the financial sector. overall, however, i think the chinese have, in fact, to some extent reverted to traditional mechanisms, like encouraging local governments again to borrow into and develop infrastructure and issuance of special bonds and cutting the sales tax for rural residents in half. they have resisted-- they were going to eliminate the subsidy that they were providing for purchases of new energy vehicles. they have not done that. they're looking for many ways to ensure that chinese economic growth continues and many are the short-term measures they have traditionally relied upon. third, i think the trade war underlines the ability of the chinese leadership to focus on
other priorities. for example in the environment, the commissioner of environment in late 2018 ex-poliplicitly st that the trade war was going to force the chinese to step back from the target on pollution. indeed we saw pollution soar between sore of december through march of this year as they allowed heavy industry to go in-- took a step back from enforcement and from more ambitious targets. we've also seen co-2 emissions increase in each of the past two years in china and they're undergoing a very significant debate once again about climate change and how committed the chinese leadership needs to be in the face of this slowing economy. demographics, economic optimism correlates very directly with birth rate. and we've seen just the-- from 2017 to 2018 despite the
fact that the chinese have now a two child policy, a decline in birth of two million. the lowest rate since 1961. marriage rate is the lowest it's been in 11 years. labor issues, so, i think the reorientation of the supply chain is having some impact, estimated somewhere the numbers i've seen between 1.2 and 2 million jobs have been lost as a direct effect of the trade war. the premier has talked about employment as his number one concern and they are now establishing a new central leading group on employment. so, even if we're not sure of the exact impact we do know that the concerns are significant. all right, we can look behind the scenes to try to see what they're doing politically to address these problems even if we don't know whether the unemployment rate is really 4% as they say or 20% as you can find some chinese scholars asserting and then last, i
think the trade war at this point in time is now strengthening the hand of the hardliners. i think if you look back nine months to a year you'd find a period of time when chinese economic reformers, certainly privately, but also to some extent publicly, would talk about president trump and the trade war as an opportunity. all right. an opportunity to push forward on economic reform the away there was the presser from the wto to work on state enterprise reform back in the late 1990's. now, however, that type of talk is not-- at least i don't hear it. instead that the united states is trying to contain china. our narrative moved from holding china accountable to rules based order to talking about china as an existential threat and i think that shift in narrative allowed the hardliners to come up with their own narrative that says
the united states is trying to contain china. this isn't just simply about intellectual property theft. this is about the fact-- i was in beijing in july and they said we're technologically superior to the united states and united states doesn't know what to do. ... enhances xi jinping's effort to decouple the two economist and push for more aggressively made in china 2025. what should we do? first went to change our narrative back to when the talks about china's adherence to the
rules of the game. that is a good way to bring in our allies because they all do support what we try to do with china on the trade front and allows us to bring more pressure to bear on that. second, distinguish between economic and national security more clearly and then third i think as mr. polk mention it's about use resilience. it's about investment immigration and education. i'll stop there. >> thank you. commissioner fiedler. >> i want to delve into a little of the behind the scenes sort of politics and impact of what i characterized earlier as unpredictability in the relationship, and what that has meant in normal diplomatic relations going on. i mean, the trade war has
captured most of the public attention, but there are lots of other things that have to be going on behind the scenes. so in other words, do we have as much access to people in positions, whether in the private sector or the government sector, as we had before? how are the chinese viewing the unpredictability of the relationship now? liz, if you would start. >> i think in the beginning the chinese felt as though they had president trump pretty much a get out. they believed that by buying more goods they would address what was his primary concern and that the whole thing would go away. i think over time they have become less certain of their ability to understand the
direction in which the administration is moving. and the think at this point in time there's also certain amount of exhaustion. if you look at sort of the various stages of chinese statements, i think they begin with, there was some laughter and some jocularity. i i catelli in expert community run president trump, initially i think that moved to some greater concern. and again i decide to strike a deal and to move forward, 12 a good relationship with china. victor i think begin to talk a little bit about some challenges that president xi might have faced. this would be last summer, where it looked as though the fact he couldn't make the u.s.-china relationship work was bringing pressure to bear on him within the top echelon as was pushed back on the belt and road initiative. i think that has now ended, because the more unpredictable the united states is, the more
that they can't understand what it is we ugly after, what is a good deal. i think the less patients they have and the mortgages pelee xi jinping is the right person to stand up and lead china forward. so i think sort of going back to what i was suggesting earlier, i think there was a moment in time with economic reformers were empowered. there was a sweet spot, at a think we've moved past that sweet spot at this point in time. >> thank you. do either of you want to? >> i would agree that the change in perspective in beijing has been quite swift. just a year ago, june 2018, before the first 301 tears came into effect there was still a feeling we can figure out the u.s. president. and the chinese were just absolutely stunned by how quickly the narrative, the sentiment in washington, d.c. on both sides of the aisle shifted against them and now they very much of you the relationship as
one of containment and in terms of volatility i think they are stealing themselves for long-term competition. just yesterday xi jinping gave a speech to the central party school talking about how we have two get ready for struggle on economic fronts, on societal fronts, on political fronts. and the political narrative in china internally is very direct now, sort of talks about the long march and self-sufficiency and all these things. i think they view the world as having fundamentally changed this past year in terms of the relationship with the u.s. >> victor? >> very quickly. i think i call a couple points of an race already. i agree completely that the fact one belt, one road has turned into this big waste of money. the fact that china does not
seem to be managing its economic relationship with the united states very well, and then of course what's happening in hong kong really is diminishing xi jinping's reputation. because i think when he first took power, least he saw himself and, therefore, of course the rest of the board also had to agree with the perspective that he would be the savior of the chinese communist party, and now we are seeing not sort of disastrous blunders yet but kind of family costly blunders and him having to sort of change course. so i think going forward this is going to be interesting. it wraps a change the way xi makes decisions, to make it a bit more democratic instead of just him making all the decisions. that's an open question. there are some signs to suggest maybe this is the case. in terms of the reform, i think
a lot of it is, as the blunders accumulate, the party increasingly shifts from a wanting to sort of try new things to speed up growth or to make the market more market-oriented, to just risk management. this is something andrew pointed out already. and again, i was also struck by this speech in the central party school where -- one of the party schools in any event where it seems like he is preparing senior-level cadres and these are very, the audience is pretty senior-level cadre, for disaster to come. and briefly telling them even if really hard times were to come, you should remain loyal to the chinese communist party. that's very dire language at a time when we're not even, and i agree with andrew that even though, i mean, trade itself is that something back the chinese
economy is a a massive economy. the trade war certainly has not crashed the economy by any stretch of imagination. it has just hit sectors that have been main beneficiaries of china's previous industrial policies. >> thank you. >> and you all for being here, for the time you're put in for your testimony, both written and oral, so thank you. i had i have to say i'm sort of confused and stymied by all this because we're still having discussions about engagement and theoretical rebalancing, et cetera, and we're in the middle of a real challenge period about how do we address what has been taking place in china. dr. economy come to talk about
the issue of compliance with the rules, et cetera. i think after 18 years in we should agree that china has not complied with many of the rules, and certainly with the division of the western nations had with china joint. so we're at a point in my opinion where it was time to confront china on its policies. we saw little engagement by a multilateral partners. some of that was our own fault or not engaging them, and still is, but the multilateral system doesn't seem to be willing to or capable of addressing the china challenge. and we are also at a point where we are look at different metrics about what success is.
and we talked a bit about investment this morning. to me, opening china for more u.s. investment will probably only continue our current path as 60% of china's exports have any aid from fort investment enterprises. we are not reaching the chinese market or its consumers like we would like come still being used as an export platform. more investment will probably lead to more technology sherry, et cetera. whether you believe the problems in china have been brought, other own making and the trade war, trade policies are a big budget a small contributing factor, what do we do now? do you believe multilateral partners are really going to engage? you believe the wto is capable
of with its rules and with its decision-making process, of addressing the china challenge? or, and i believe it was lbj many years ago said when you have somebody by the ear, don't let go to try to get a better grip. i'm paraphrasing. yash i was going to say, i don't think those were the exact words. [laughing] >> we on c-span, so those other ones i will stick with. so you know, whether you like the policy the president has engaged in or not, isn't it time that we confronted china, and what would you do differently now to try and make sure we actually get to a better, let us say, western concept of adherence to the rules? i'll go down each to the pedals. dr. economy, since i named your first why don't you start? >> okay, thank you. so i don't disagree that it was
time for a reassessment of the u.s. approach to china. and i think actually the trump administration has done a good job understanding china under xi jinping and coming to the conclusion that china is not moving in the direction that we had hopes for come across a full range of issues, economy, political, domestic and the terms of its foreign policy. that has happened and that was important. at this point, however, i think it would be useful to draw back in our allies. because, in fact, did you agree with us. across the board, whether it's on huawei, we have support from a number of countries. whether it's on sort the belt and road initiative and concerns the eu stood up on that, whether it's human rigs we find partners in united nations. they are out there but we're not, in fact, engaging with it. and eventually bring in the allies i think is twofold. first, it reduces that sense of
the united states simply trying to contain china and that we are afraid of china. i do think it's important we shift the narrative because the truth is we look weak when we're in china now. we look is a we're from a defensive position as opposed to a position of strength. so bring in our allies diffuses that sense that this is all just about the united states and china. it also helps us bring pressure to bear. the european china chamber of commerce and american china chamber of commerce exact same thing. i think that's important. we can still use reciprocity but i think asserting a more positive patient of yours economic leadership globally is equally important for filling that in as a think a number or agency agency thinking. it's essential. from my perspective the best defense is a good offense. and i don't think at this point that is what we are undertaking. >> mr. polk?
[inaudible] >> microphone. >> sorry. i echo a lot of what dr. economy said. the relationship has to change and everyone is trying to figure out what a sustainable equilibrium looks like. we are in an unsustainable equilibrium with china right now, and the relationship needs to undergo change. i don't have an answer for you today on what a state of equilibrium looks like, but i do think there are a few things. one is bring along friends and allies, absolutely, you know, i interact with embassies in beijing every single day, and every european country, new zealand and australia, japan, korea, they all agree with the idea that china needs to play by the rules. and things need to change pixel engaging those allies and bring them along each hugely important.
secondly, dr. economy talk about the national security issue. on both sides of the pacific, the idea of national security is getting bigger and bigger and bigger in terms of economic national security. so finding some limits of that that we can live with i think is hugely important. otherwise, if everything in both economies is national security, there's not even a starting point for discussions. and then i think also understanding the nuance of china. the tougher stance the u.s. i think has produced change in china, both positively and negatively. i actually see more opening that i think a lot of other people do, specifically in the financial sector. i also see marketization in areas of the economy. yes, the state is growing b also there is more room for markets. in the chinese leaders mind that's not total paradox, things
are both happy at the same time. recognizing when china is moving in the direction we want, there's multiple things happening at the same time. so recognizing that i think also gives a basis for discussion. but i would say those three issues are top of mind bringing along our allies to finding nationals could and recognizing actually whether some progress. but absolutely the pressure needs to continue. because in my view it's produced some good results, and if we can continue to pressure with a positive vision of what the outcome might look like, then we are moving in the right direction. >> so i also agree that things have to change, the trading relationship has to chink between the u.s. and china. what i think it's helpful to segment between nonstrategic
sectors and strategic sectors. there are a lot of nonstrategic things like farm goods, in andu could say strategic or not, and textiles and furniture and stuff like that, where american consumers have benefited enormously high buying these things at a relatively low cost from china come from the rest of asia, and also american businesses have benefited enormously by selling a lot of farm goods, soybeans, et cetera, to china. of course there are strategic sectors like i.t. equipment to be, it's one prime example where china's stated objective has always been, since 15 years ago, to relocate the entire global supply chain from other countries to china. they have largely succeeded in this quest, with the exception of several very high end components like chips, et
cetera, et cetera. that needs to be restructured. but the way we are doing right now, what we're doing now, is to force some of our allies to move the production out of china. i don't think that's especially helpful because that's basically like a club where the only benefit you get is bad things. it's a club for bad things. instead, i think the u.s. should try, and its allies, should try to think of a way to form a club where there are positive incentives. so what's in it for them if they are willing to relocate some of the supply chains out of china to other countries? there has to be some kind of benefits, whether it is if they meet certain standards then they are qualified to get certain kinds of contracts for critical infrastructure or security-related contracts. so i think i would urge policymars to really think about the ways to create positive incentives.
>> thank you. >> chairman farr phony. >> thank you. interesting tnyestimo -- bartholomew. thank you for the continuing work, and a little work you do. i really want to associate myself with the comic about the importance of working with allies. i think it's a china issue. it's a global issue for us and i think we need to rebuild those relationships and do what we need to maintain them. i would say though that certainly the problems in a relationship, i been doing this for 30 years now. i think some of you have been doing it just mattis long. these are not new and people seem to forget we have been struggled with some of these issues which were exacerbated on the world trade organization. it was supposed to solve the problem and the passive. dr. shih, i'm going to be like wessel ended up talking said asking questions. questions, but --
[laughing] but i, i do want to say that the consequences of losing textiles and shoes and furniture for the american workers and american community has been quite significant. it has not been cost free. it has not been cost free to regions of this country. it is not been cost free to the tax base and communities to their ability to educate their children and provide healthcare and all of these things. to me it's not quite as simple. another question or issue i have is, wasn't some of this moving of production out of china happening already because of increased labor cost? it's a continuation of a trend. that might be -- okay, that said, what evidence, again for 30 years we've been hearing about economic reformers inside a china and how important is to support them. i would argue the msn debate went back in the 1990s, some of what we're talking to do was support the economic reformers.
what evidence exists that xi jinping itself is actually an economic reformers are wanted economic reform? is there any? no. [laughing] i can move on to speech i which is quickly say, i think xi jinping cancel that much about the economy. i think he cares about politics, and his project is to rejuvenate the communist party in china. he has larger delegated the economic decision-making of to the vice premier and even it seems -- still in the mix of it. i think that you risking campaign a a talked about was l about saying listen, if the economy goes up while on your watch it is a deep rejuvenate the party. so i think xi, that's last thing on his mind. he cares about politics, military, chinese culture and the economy is just a tool to get those things done.
>> dr. economy or dr. shih? >> maybe not that he doesn't care about the economy, because he does have built into his great rejuvenation of the chinese nation, having china be an modern innovative economy on par with the united states and japan and germany, doubling chinese incomes by 2020. he definitely has economic objectives that you asked about xi jinping as an economic reformer. and i think if we take reform to mean opening up, reform and opening up, not just reform is change. he's clearly not an economic reformer. everything about xi jinping from day one has been about reasserting the role of the party into the chinese economy come into chinese society. so whether you talk about enhancing the role of party committees, whether in chinese enterprises or in joint ventures or even ensuring multinationals have party committees or your dog if i continue to strengthen the role of state-owned enterprises, or appoint the social credit system to
companies including to multinationals. all of that is about enhancing the role of the billy of xi jinping and the chinese party -- the ability -- using companies as tools of the state. economic actors as political actors. >> dr. shih, anything? >> i think one of the key points that people should realize is xi jinping, i think despite the fact he was a governor of a province on the coast, i think he's understanding of the market economy action operates is very superficial and minimal. he has lived his entire life on planet economy. even after the reform he was already a senior government official for all this food, his housing, everything is arranged by the chinese government. i don't think he actually knows how the real market operates, how -- especially not the financial market urges another level of difficulty. i think a lot of high level
policymakers in china struggle with this limitation. >> thank you. dr. economy, what you said, the phrase of using companies as tools of the state is a very important thing. if i have a second grant opportunity i want to delve into that. thanks. >> admiral? >> thank you as always when we talk about the economy, i spent a lot of time learning as opposed to questioning. but i do have a couple of things that came to mind listening to your excellent testimonies. dr. economy, you dwelt on the issue of hardliners. i guess i've been perhaps, in fact, i'm quite certain i've been dealing with chinese hardliners for the last decade that i i can think of, if i'm talking to chinese either pla or security people and they been
talking about the u.s. trying to contain china since the pivot was announced, and that's 2010. so there isn't anything new, i would suggest, that there is a lot of people in china talking about the u.s. trying to contain them. what i'm interested in is, is today's hardliners versus the ones that ten years ago were fulminating. has the hardliner you expanded? are there more people who would site up to being hardliners in china because of the trade wars and what have you asked the other question i have, and i'd like any or all of you to chime in on this is this, the connection between the downturn, the slowing of the chinese economy and the willingness of xi and whoever else advises him
on belt and road to come as we heard in this past summers global bri conference, the new approach, high-quality projects, we're going to get a handle on corruption, et cetera, et cetera. is this all related to the downturn in economy, or is it related to the narrative that i think washington started by calling the bri at deathtrap, et cetera, et cetera, and basing all of the potential -- racing all of the potential problems associated with bri? >> okay. let me say one word on the belt and road question of info to your first question. i think absolutely the trump administration secretary tillerson in particular was out there very early on calling the belt and road deathtrap diplomacy. at the time look like sour
grapes because we didn't have an alternative. now we can do plus the japanese are out there with a lot of higher-quality offerings than the chinese. in terms of comps i do think that played a lot, a lot of impact in terms of focusing the attention of many countries on what was going on, and then realizing some of what they're doing with china and the belt and road was the necessarily in terms of serving the long-term interest. so i do think there was a lot of pushback and that contributed to the quieter tone. i think china is going make a significant turnaround in terms of addressing the corruption,, improving transparency, higher-quality, et cetera? i think probably not. this is not, the belt and road is just built upon more than two decades since the going out strategy of the late 1990s which was china going out for natural resource rest. they already have in place many rules and regulations within china exim bank, within the
stock exchange et cetera that all devoted to trying to ensure transparency rule of law and accountability in the oversee strategy and get to come to fruition. when i see it i'll believe it. in terms of whether or not they're up always been hardliners and what's different now, i think what i'm really talking about is we are closing down the space for the reformers and economic reforms. wasn't just economic reformers who are quite vocal last october et cetera not try to push it with structural economic reform but you could talk to many people in the political sphere and also entrepreneurs who would save what donald trump is doing right now with this tradear is great because it's the last bulwark against xi jinping's sort of overreach and is great and patience, and the fact is clapping and politically. they were encouraged to what the united states was doing. i think at this point we have pushed too far. when i talk about and bolding hardliners i'm. [singing] on out a lot of the space for
those reformers and we've given with our narrative and somewhat of our phrases, with given xi jinping a scapegoat for what's going on the challenges that he is faced and the ability to stir up nationalism. >> just quickly on hardliners issue. i would just encourage you to think, yes there've always been hardliners china, but i don't conceptualize it is hardliners dragging xi to a more conservative position or more ideological position. i don't think he is outflanked by anyone. may be there are more reformist voices that are cowed because of current dynamics, but, so xi is a hardliner is what i'm trying to say. there's no one outflanking them there, know when trying to pull them in any direction on that side.
on the bri stucco i would just say, also -- stuff, , i would sy xi jinping is characterized the bri as a 100 your project. we see these new stories on a day-to-day basis but bri is felt, we won't know for 100 years. so we don't know if it is a failure of being successful. i think that is, i think it's a misconception that china's policymakers always take this long-term view or whatever. but on that front i think they are. and i would also just say, you know, they learn it as i said that are pragmatists. , they got sick of throwing good money after bad. they got burned. so how decide to rent calibrate for the time being. they also had a capital outflow issue which was fun than the important for them reining in that spending. trenches been longer than i have so maybe i agree with her that i will believe it when i see it in
terms was trying to root out corruption but at least they seem to be wanting to do these projects on a more straightforward -- i won't come is not a fully transparent base of baby i more transparent basis. because there's another stint in my view the corruption you know, one of the key issues that is in existential issue to the party domestically and that if you start to export that they may become an existential issue abroad. >> very quickly. so on the soft liner, hardliner question, i think the only serious debate that i've seen internally, just reading chinese sources, is one of, so the entire elite agrees china should one day replace the united states as the dominant power in the world. either as a sort of waffling over the world or china adjusting completed. that's not the difference between soft white and hard
line. it is a serious debate about when china should behave as if it is a dominant power. some people i think general believe china should behave today as if it is a dominant power, and others say let's just wait another five, ten, maybe even longer for the united states to shoot itself in the foot, and then if the technological progress continues in china then we can assert our power, our dominant power. i think that is, that's a debate that is ongoing especially given some of the recent developments. on bri, i think the internal desire to change how bri is done is genuine. and the reason is because china no longer has as much money as it did say five years ago with which to throw billions and billions of dollars around the world. when the foreign-exchange reserve was $4 trillion, china would use money directly from
the foreign-exchange reserve to finance many of the bri projects, but there were a couple of problems. one is the foreign-exchange reserve is not a lot smaller because of capital flight in 2015 here and so a lot of the new bri projects has to be financed by borrowing money western banks to finance bri. and there of course you don't want to get trapped in a situation where you borrow money but then to finance a complete dud, ends of like venezuela or angola for china lost tens of billions of dollars. the shooter losses ended dwindling foreign-exchange reserves, have certainly really alarm the technocrats and the technocrats over overtime haven able to persuade xi jinping that continuing to throw billions and billions of dollars around the world is not really viable so they have switched to only doing it when it is strategic apsley necessary and also of a set of procedures to do it a lot more
carefully. >> commissioner lee? >> thank you. thanks to the panel for excellent presentations and testimony. my question is hung up on some the conversation we've been having about i think it all agreed it different ways the chinese economy leadership are coming under stress from various causes from the trade war, from cyclical and domestic reasons. what are the biggest dan for the u.s. from china being under stress in terms of the economy? and other steps congress in particular could take to inoculate or to prepare for some of the likely impacts? one thing i i would mention a particular is the currency devaluation. dr. shih, i think you mentioned it in terms of the risk for use in terms of financial exposure of holdings of written to be but there's also domestic business
and workers. and so i was just curious what you think their particular things we have to be doing now in preparation for sort of predictable reactions? >> i guess i'll take it since i open that door. i agree with you that it is a potential risk, because certainly there are economists in china who are publicly advocated for sort of one step evaluation. so the value that renminbi by 20-30% in one shot, as not only as against u.s. tariffs but also generally speaking, economists had believed that renminbi to be overvalued anyway for quite some time and to really sort of fulfill the markets expectation
that the renminbi should be low and a one-shot devaluation of 20-30%. whether that -- yes, so of course this will have a huge impact on u.s. businesses that compete with chinese exporters. but by and large i think especially in the manufactured goods industry, the impact will be bigger for japanese, korean, and german firms here because these are the firms website in heavy machine areas, and autos, et cetera, that are nowadays directly competing with china, so they will be hit even more. for the u.s. i think the impact is one that we are seeing already, which is that chinese consumers will not buy as much you was on good as before. but because of china's import restrictions we are seeing that already. i think the biggest kind of trade shock for that kind of stuff them for devaluation, is
already evident because of some othe reason which is because of china's import restrictions. the bigger problem is a financial risk. so banks especially european banks, especially united kingdom-based banks also korean, japanese banks but also u.s. banks have lent trillions of dollars to china, , and the companies and banks in china whose titles are denominated in renminbi. so if the renminbi were to crash, these firms, the financial institutions will have a much, much harder time to come up with the cash flows to repay the u.s. dollar denominated debt, and that will force a large proportion of them to declare bankruptcy, to default on their debt, causing stress on u.s. financial institutions, including banks but including even mutual funds, a lot of pension funds have invested in
debt issued by chinese companies and banks. so i really think there should be some auditing, could be voluntary or not, of both direct and indirect exposure to renminbi denominated assets. >> i wholeheartedly agree with victor. i think from a real economic standpoint a slowed it and the chinese economy, even a disaster obviously hurts global growth, but the u.s. is primarily a domestic driven economy and is largely insulated from volatility out of china on a real economic growth standpoint. i generally take a pretty positive view on china's ability to manage its currency. what a mean by that is, is i don't, they learned a lot over the past two and half years because of currency volatility and there actually a depth at
managing it. i don't worry too much about the currency channel. but a financial crisis in china that hobbles chinese banks, i think china has what, the four largest banks in the world. that's something that's going to be a problem for the global financial system, and we don't have much view into how interconnected that is both the renminbi flows and u.s. dollar flows. but ordering, commission a study to figure that out is something that would be hugely productive and of value to every financial system and economy in the world. >> i would just make to the quick points. one, many american companies as is raised earlier have already begun the sort of china lost one strategy of beginning to diversifying, begin to diversify
their supply chains even before the trade frictions begin. -- china plus one. i guess from my perspective one of the things i'm interested in is that distinction between sort of a multinational chinese company is becoming almost nonexistent and that i think american companies are going to have to become, will have to make a decision each for itself about where to draw lines. whether you're having a party committee and a multinational or adapting to the cybersecurity law where you have two acyclic get over information to the chinese government, or you're going to be subjected to the social credit system, or you're going to be living in a situation where your employees can be detained without any rule of law at whim. i think what i've noticed over the past few years just eating away of private and public that's broadly happening in
china. it's also being applied to multinationals and they think that is a big challenge that american companies are going to have to confront moving forward. [inaudible] >> i think you both raised issues or have, also earlier about the vulnerability of the u.s. or some of judgment, that the u.s. companies are now so deeply embedded in china so they don't have any choices in terms of having to deal with their employees being arrested and so on. earlier maybe mr. polk you made the point about supply chains and the lack of diversification to supply chains. these are investment decisions that of inmate in the past we are now reckoning with. one question for asking for the commission going forward is just to thank a little bit more about should we have foreseen some of this? has the benefit of policy in terms of allowing such
concentration and the lack of foresight in terms of investment patterns? >> thank you. i have three areas the question. i want to follow up on interest and in debt, to talk about that, banking, and bonds. my understanding is the debt to gdp ratio is precarious in china. it's 245%, which is worrying given the fact it's an emerging economy, not a developed economy. dr. shih, you noted in your testimony that chinese debtors have presented 3 trillion and exposure to u.s. pension funds, mutual funds, and banks. can you speak more specifically as to what banks, what pension funds, what mutual funds you think are at risk and what the nature of that debt is? is equity in ali baba, or is it
on issued by a local government? that's my first question. my second question has to do with banking, and whether the market -- lets to the first question. we will get otherwise. thank you. >> yes. so very quickly, so the 3 trillion figure that i put into testimony is china's total, my estimate of times total extra that, to the world. not just use. the u.s. is roughly $180 billion. indirect exposure. that means that u.s.-based banks and investors have lit approximate $180 billion to chinese banks in chinese companies. by the way, a large portion of that was through hong kong. so this is why, of the 3 trillion that china has barred from the rest of the world, china has borrowed 1 trillion of
that through hong kong. and asked by which i do that, why doesn't china just borrow directly from beijing and shanghai? the reason is because you asked people within financial institutions around the world, because imf and the u.s. legally treats hong kong as a separate entity asked china, then the banks can say a welcome with whole world is going to treat hong kong as a separate as china, then we will do that also. so when we land money to chinese companies and we're going to land both to the hong kong-based subsidiary and to the headquarters in beijing. that we we can lend them even more money than internal rules would allow us to do so. and you asked why would they want to do that? is because chinese copies with a higher interest this is why they want to do. this is why it hong kong were to be treated as same as mainland
chin aually the credit limit of all the chinese debtors will automatically depressed by 20-30%. it is a big deal for china, when you are in debt to the tens of $3 trillion. you don't want your creditors to suddenly compress your credit limit by $1 trillion. i would be a big problem for china. and i think that maybe one of the reasons why china thus far has osen, i would cal it very moderate and softline approach in hong kong. even though most people disagree with me. the spectrum is what's happening in -- it's the hard-line approach and hong kong is the moderate softline approach. >> the chairman had speeded just to clarify question which is we keep referring to makers and went to understand. are you talking a investment bankers or talking about fdic entered bankers? what are you referring to as the
bankers? >> the main source of me, they e report to maxis of data. one is for banks lending and the other one is for bond issuance. i think u.s. banks has exposure, like 80-90 billion. the u.s. banks, commercial banks, not investment bank. commercial banks have lent 80-$90 billion to chinese entities, but then u.s. investors have purchased, i cann both through hong kong and mainland china, and additional $100 billion in bonds issued by chinese entities. but the buyer of these bonds can be both commercial banks and also mutual funds, pension funds, et cetera. >> i do want to turn to banking and bonds. i'm reading a paper that talks
about p bachus injured trying to decide whether or not it's going to bring to bear stabilizing influences in the potential bank failures, or allow the to price risk. they point out there's an inherent tension between reform of financial stability, stability requires guarantees to increasingly risky and peripheral asset markets, reform requires pairing those back as the default. but i cannot distance between appropriate and inappropriate pricing of market risk as can't use because they're so history of doing it. so i'm curious about your perspective on what will happen when it comes to each of you,, what's likely to happen in terms of the intervention, to manage counterparty policy issues and then the second part of my question is, it seems to me we've seen were tied by this opening of the financial market, we have seen a shift in local governments from issuing
financing vehicles, which were off books to issuing bonds and i'm concerned about as i know i resubmit report that the world bank as indicated they are concerned about the fact that there is an increasing emphasis on the issue of sub poverty and local bonds to finance projects. if you could speak to the bond market, how risky it is. does the simply reflect the shift to a different way of raising money that is probably risky? >> -- comparably. >> starting with the pcaob, part of what's going on this kind of what a start in my testimony with, is there's been a very active program to the risk the financial system, specifically the banking system. the way the banking system works, most of the most
speculative stuff happens in the interbank market which is different than the interbank market in other countries. there's more than just banks and it's not just about closing books in between banks. you can use vehicles and interbank market to then lend unto trust companies and other parts of the real economy. because of that insanity, frankly, pcaob started with derisking the interbank market causell of those financial structures were not really financing real economic growth, and one of them didn't have an impact on real economic growth either. but that started to have an impact on growth starting in mid-2018. so now the financial regulators are in a situation where they're trying to do with basically the effects of the derisking cola. they called the risks of addressing risks. so the derisking campaign has slowed growth at a time when
you're trying to slow growth in financial assets. and what that does is basically a tide is going out and we're seeing who was swimming naked. the bank was swimming bank, three have really blown up. there is an effort to try to push the banks to price risk more on a market-driven basis. this is just in the past few weeks, pcaob has introduced a new monetary policy mechanism called the loan prime rate so they can build an interest rate curve so the banks kin o understand where risk lies, oh in time and space. i i get all of these at quite positive. you got member the pcaob was read in the '90s i believe, right? their building office from scratch. there then has been the moral hazard issue on top of it.
they are trying to slowly address moral hazard without blowing of the system. it's a very difficult thing to do. in my view that's the most positive thing is happening in china, is financial reform in terms of trying to do this in the market ties basis. i will just quickly touch on the two of the things. your question about which pension fund is getting exposure to china, the answer is every single one of them. and the reason is because of bond inclusion, all of those things. exposure is relatively small now but it's only going to grow over time. when we signed up to new job and you take a pension from from black rock or for doing they'll index. those indices are increasingly including china, so we are, our financial system is being caught, the pensions of our teachers and other employees in our country are increasingly intertwined with china's
financial system. like, we should be aware of tht the very least. the final part, i also view this as a positive development. four years in economists have said you need a hard -- constraints. they said we want all this on book rather than doing in the shadows. they are leveraging up more slowly. they are still leveraging more slowly, although transparent. i think again this is an area that should be encouraged. it's okay for local government bonds to be used better than using the others. in terms of the riskiness we really don't know because we haven't had that type of bond default. but in general we should view it as high-quality government paper because it is effectively going to be backed by the central government.
i think development in the space are actually, there's so many risks that have to address that the problem is very big but on white sanguine in this area in terms of the proactive does of which difficult after the issue. >> i just want to really aye one of the points and you brought up, which is the size of the domestic chinese bond market is enormous. there's probably $6 trillion in bonds outstanding, and so that means a lot of the bond mature of the month and then you have to replace maturing bonds and also you have to issue new bonds to finance new debt. so that means every month there is 100-150 billion u.s. dollars in new issuance, and this is what keeps china going is, it's like a big ponzi scheme. i'm not the first one to say that.
a lot of people say that at actually the chinese, says it is a ponzi scheme but guess what, we supported. the chinese government would like for investors to help them finance this. i mean, right now for investors are buying anywhere from less than 1% to at most 3% of monthly issuance. they would like that ratio to increase the ten, 20, 30%. because obviously, if the whole world is involved, let's say, with their debt issuance, then is not in the world's interest to blow it out and the whole world can help financing. and, of course, the fact that interest rates are negative in europe and japan is helping china's cause because german and japanese investors facing negative yields in their home country, they have an interest in increasing their yields and besides usb only other major option that is china.
so this is, just to give you guys a big picture. >> the bond terms are how long? the avid? >> they have everything. i think on average probably five to ten years because they have like 20 or the short-term stuff. >> at what percentage? >> so sovereign bonds can so chinese government bonds and other local government bonds now is lesson 3% yield because the fed has cut rates and that actually a fax corporate bonds format, five percentage come something like that. >> thank you. commissioner lewis. >> thank you very much for your educating us today. i've been reading recently bought about the coupling these two economies. could you tell us, is that possible? how would occur and what the impact on the two countries?
>> i'll give you some numbers, i guess. i don't know. so to some extent decoupling has happened already, especially surprisingly i think on chinese side. so china bought a lot of farm goods, but a lot of energy products from the united states, you know, hundreds of billions. that has gone down by a lot, 50 plus percent. interestingly, despite all this talk about the u.s. is guilty of opposing imposing tariffs and all this kind of stuff. if you look at the dollar amount that is being traded between two countries, china has shrunken that trait a lot more so than the u.s. u.s. despite the tears and everything is still important a lot of stuff from china because even with the tariffs china is still better. >> is that one of the reasons why our deficit with c is increasing. >> was yeah, it's because the
extent to which china has decreased imports from u.s. is even more so than the impact of the tariffs on u.s. imports from china, you're absolutely right. so if there's huge decoupling it will be because u.s. stop buying goods and services from china. but i think cause for a lot of consumer will go up by a lot actually. >> what will be the impact on the two economies if we do decouple more? >> i think it's hard to say on overall growth perspective. i mean, i think each economy individual would not change that much but the relationship with other countries economies with change. what i mean by that is, when i hear decoupling i think generally, the u.s. being concerned about selling core technology to china. that's going to enable either military applications or their
rise generally. maybe ironic thing about that is china also wants to decouple. they don't want to be reliant on the u.s. for those core technologies. they would prefer to decouple more slowly. i think the natural outcome of that is that we are creating spheres of technological spheres at least china and the u.s., maybe europe has its own sphere, and the long-term change is what if an american company wants to do business in argentina? will it have to work on huawei systems or other chinese technological standards and order to do business of there? so it's going to i think sort of fragment of the global economy, raise transaction costs and changed sort of our interaction with other specifically developing economies. >> i'll just be brief. made in china 2025 was, is, in fact, an effort to decouple
because it's basically saying it wants chinese companies to control 80% of the market in teen areas of critical cutting edge area technology. everything from medical devices to ai. that process was already underway and we continues and is being played out so i don't think we should be under any illusion that just because they're not type of made in china 2025 if that have become it is. title is it happened but i think it's also being exported. i think when we talk about spheres of influence it is in part exactly as you say things like wally operating system but it's also, for example, china now helping to build the infrastructure and africa. they are doing hospitals, doing good works but also ensuring that chinese factories are making chinese medical devices are the os that are providing the sort of equipment for those
hospitals, right? medical devices are one of the heirs that made in china 2025, and previously china had passed a regulation that said if you don't come to hospitals come you don't use chinese made medical devices and you can't be reimbursed through insurance. i see this very much as first step made by china in transit decoupling and then we will be moving toward an effort, a broader sort of export of that decoupling effort. >> thank you. thanks for a terrific penalty and interest of time i will dispense with my wessel like commentary. [laughing] and go to my question. first, mr. polk tanks for terrific written testimony. i have a question, on page ten, paragraph under demographics, the last sentence reads
china, both losers, firms in other countries are the winners, malaysian and japanese, cambodia, vietnam and so on and so forth. i would invite our panel was to comment on the degree to which this notion that our allies are waiting for us to come back to them and we will proceed together perhaps in the near-term they are benefiting to some extent in those countries. >> i would say that is one way in which they are benefiting but all our allies would welcome the type of leadership by the united states we exerted in the past and exemplified in the past. certainly it is a great example not just of a country that can benefit in some ways by the
spoils of the trade war but actively and proactively leading international space. when we pulled out of the transpacific partnership, china and japan re-created in a different form the comprehensive progressive cpp tpp. that is moving forward. japan is the largest investor in southeast asia doing more infrastructure development from china, more active looking partnership with india and africa on high end infrastructure. they are moving forward without us in many respects but that doesn't mean we shouldn't get back in the game. there are parts of the administration very much working with japan and australia and new zealand to push back or offer alternatives. a lot of things are happening you don't necessarily know from following what you hear from the white house.
it is not as bleak a picture as often portrayed. >> i think it is complicated. most countries, most companies want certainty. there may be short-term benefits in terms of capital flow, would have been investing in the us, now broadly in asia. german companies have been big beneficiaries of china's opening in terms of ds of investing and china's warning joke to the community and so it is making high-profile deals, german companies have been the victims and beneficiaries of that. talking to these folks, they understand it is short-term
gain and it may not be long-term gain. they prefer a world where they like the was putting pressure on china, they would like to get to a place where china was following the rules and the us and china were getting along and they didn't feel like they had to choose between the two countries. a lot of countries and companies feel like that. it is short-term gain and it seems outweighed by the sort of feeling of long-term. >> what your talents? >> we are out of time. we have time? okay. i am going to follow up on commissioner cleveland's questions particularly with
regard to the chinese reserves that beijing holds. how valuable a role do they play in this? i say this because for years you talk about when you talk about building of all this could create instability, this bubble, this bubble people come back and say yes but they have $3 trillion in reserves. what is that held in? is that as big a backstop for them as people often portray it? give me your opinion on that. >> i have obsessed over this question for the past eight years. they invest in their own debt. >> of course the exact composition of china is $3 trillion in foreign exchange
reserve, one of the most closely held secrets in the chinese government and ask yourself why is it such a big secret? you are supposed to reveal the composition to imf anyway but even they will tell you that they don't really know. as far as we can tell, according to us treasury data china holds roughly $1 trillion in us dollar denominated treasuries and agency securities. a third of it we kind of know what it is except we don't know if they have used part of their holding and treasury is collateral to get loans. in which case they don't really hold it. some people suspect they've done this in 2015-16 when a huge amount of money was leaving china. that is a big question.
as for the other parts, i would say at least $300 billion of that has been lent to projects, it is not exactly what you would want in foreign exchange reserve. from public records, you can see 50-$100 billion of that is holding chinese stocks. the foreign exchange reserve has several subsidiaries that most people know is part of the foreign exchange reserve. they have been buying stocks in chinese companies and banks on the open market and the attempt to prevent stock prices from changing during financial difficulties in the past couple years. it is not a huge amount but if you add it together, 50-$100 billion, a little less. and then people believe generally the china holds the security that is pretty safe,
they don't think it is half $1 trillion. most people don't think -- the question is that leaves a of another $2.5 trillion that i think very few people know what is in it. some people think it is not really fair so probably half $1 trillion is not there. china and the foreign exchange reserve entered into this complex agreement with banks where banks really need dollars, the foreign exchange reserve will give dollars from the reserve today but take a promissory note from the bank but count that as cash in the foreign exchange reserve. they might have done that to the tune of several hundred billion dollars in 2015 when they were in big trouble. we just don't know. >> i like the way -- i am a
politician and i know they are under pressure, running out of money and they know all these reserves and the temptation to borrow against their use it as a way to deal with short-term pressure has to be immense. i just have to believe -- we -- this is the last hearing. it occurred to me a couple years ago we are going through one of our draft positions and they are doing this semiconductor fund and this would the hour i and pledging $2 trillion to environmental remediation, who wants that for everyone else? very good moments and i have been in rooms, i was in congress. i have been in rooms, i want to do this new program. that is great but people here freak out and they are throwing this money around. i don't know where they are getting it. i appreciate that and i love
the comment, the difference between moderates and partisans, the hardliners are open about the fact they want to be the global hegemon. the moderates want to keep getting everybody for another 5 to 10 years. >> i appreciate the senator's comments. this is something i have been concerned about for some time, that if you have the kind of banking problems we are seeing emerge, you are trying to prevent capital flight and seeing a significant decline in foreign direct investment which not only capitalizes your economy, i have argued it is not yet a perfect storm but i think there is increasing pressure on the chinese economy, that we need to pay attention to early warning
indicators. the chairman had some wrap up comments. >> i will d for my discussion questions about the private sector and how it is defined. i want to associate myself with comments of the vice chairman on hong kong. it has been an important point that hong kong is an important capital to the mainland and it is important people in the mainland understand the reason that is the case is because of hong kong's commitment to rule of law and hardline tactics and trying to manipulate those things worked against the interests of the people of the mainland. >> any other comments you would like to offer since we have offered hours? get out while you can?
[inaudible conversations] [inaudible conversations] >> the executive editor of the washington examiner joining us to talk about republicans, donald trump's candidacy. the opinion piece you wrote, being president restricts what you should say and do. you wrote about whether one believes the action announcing to obstruction of justice.
it is clear, there would be significantly less work to do and his words have more serious ramifications. he asked comey about his loyalty and tweets, even if one doesn't believe they were illegal and enters the 2020 election, his biggest vulnerability may be his inability to grasp the gravity of the office, specifically the ways in which it limits what people can say and do. give us some other examples. >> the main issue, you have on twitter the insults, the comment when he referenced disloyalty in jews who vote democrat, got into a debate, was he referring to disloyalty whether jews and so on and so forth.
the basic issue is, when you have an active twitter profile and benefited him as a candidate, created the ability for him to dominate the news cycle and always make the race about him in a crowded republican field but once you become president, even though you have certain powers it also comes with certain limitations and people expect a certain restraint. another big example was when he started tweeting about trade war with china and attacking fed chairman powell and so forth and after that the market tanked and he joked about the market that tanked on twitter.
those sorts of things, he could create international incidents and all sorts of problems with his words and i don't think that set in. i think he thinks he can still fire things off because he is the celebrity. >> do you think he doesn't have any effect among his supporters? if anything it may embolden them. >> i think that is one of the legacies not just of the fact that he won in 2016 but the way he won. he was always obviously bombastic as a candidate and all the smart analysts said he could never win, he was never going to win the nomination and then he could never win the
presidency and all the experts were proven wrong. in a sense he is self indicated that his gut instincts and saying quite comes to his mind to get a rise out of people, he won politically and so he still sees that as a successful strategy. but it might not be successful in all cases. >> the democratic field narrows and choices become smaller and the potential nominee or potential rival becomes apparent in early 2020, do you think his campaign approach will change? do you think it will be more about his accomplishments in the first term as opposed to the attacks against other candidates or other issues? >> i think if there is one
constant, trump isn't going to change. this is who we was before he was a candidate, who he was as a candidate and who he has been as president. the idea less so now and more so earlier in the presidency where he didn't give a speech or relatively calm on twitter for a week or so and people would say he is growing into the presidency. is this the day he became president? is he acting more presidential and suddenly you wake up to a storm of tweets about something or other attacking someone and so on and so forth so i think he is who he is, he is a grown man and the personality he has is not going to change.
>> executive etor of the washington examiner and managing editor as well, talking 2020 election issues. the republican line is 202-748-8001, independents, 202-748-8000 202-748-8002 and your comments on facebook too. the most recent washington examiner weekly, the magazine publication, the front page, legacy, what legacy, hardly a shred remains of obama's presidency, a piece by david in the magazine, donald trump frequently, barely a day or week goes by that he doesn't reflect on what president obama did. >> what is pretty interesting
if you look at the way the democratic primaries are playing out is other candidates, joe biden is trying to wrap himself in the obama legacy, refers to himself as an obama biden democrat and so forth. a lot of the other candidates are trying to play this game of attacking problems with the obama legacy on issues such as immigration for instance. it is quite remarkable in the sense that if you compare that to ronald reagan and how for decades, seeking the republican nomination, always tried to invoke trump -- tried to invoke reagan. so you are not so interesting that a lot of the attacks on
biden and a lot of the policies being outlined by democrats are really going in a different direction than the obama administration. obama was a candidate who ran as a transformational candidate. obama's policy was more incremental than democrats are proposing now which is more radical change. that has been interesting. >> we get to matthew in miami, ohio on a democrat line. matthew, go ahead. >> i believe donald trump is one of the most divisive and worst presidents in american history to be frank because he has eroded our democracy. all he seems to care about is dividing americans on the basis of race, wealth, class, and he
has shown he has made the concept that jews, say jews are disloyal if they vote against him which was so offensive and totally just ridiculous. and really disgusting. i hated hearing that. i have friends who are jewish and we are in a really dark place. just all the stuff he has done, from when he took office, he's not doing anything at all. >> major development in us china security relations in 2019. we start with doctor skyler who is an assistant professor of security studies at the edmund wilson school in georgetown university and resident scholar at the american enterprise institute.
the author of the cost conversation, peace talks in wartime. and currently working on a book about china's challenge. next, we hear from doctor andrew petovich who is at the hudson institute and adjunct senior fellow for american security and ceo of a defense consulting firm. he previously served as president of the center for strategic and budgetary assessments, the department of defense's office of assessment and personal staff of secretaries of defense. the author of several books, most recently publishing the decline of deterrence. earlier this year. our third panelist is doctor michael greene, senior vice
president for asia, japan, center for strategic international studies as well as director of asian studies at foreign service at georgetown university. we are overrepresented by georgetown university today. doctor green has authored numerous books and articles on east asia security including most recently grand strategy in american power in the asia-pacific. i ask all of our witnesses to keep your remarks to 7 minutes. we will start with you. >> thank you, vice chairman cleveland and the rest of the commissioners for having me today. i will highlight my written testimony and major development in the last year in chinese military modernization and focused specifically on the sino russian relationship and what it means for competition moving forward.
in terms of regional activities, two things i want to highlight, the first is the driving scenario for the pla. what this means is training for reform and reorganization have implications for taiwan. in the testimony i list the number of platforms coming online in the next year. china has begun the construction of a new nuclear task submarine and a new type of destroyer expected to come online soon. these platforms along with platforms we arty have like aircraft carriers, cruisers, destroyers, frigates, amphibious assault ships and all these scenarios to coerce, blockade, invade taiwan. the chinese air force made significant developments that would have implications for taiwan, currently developing a stealth bomber and have a whole series of bombers, fighters, air lifts and helicopters for
the ground forces that are all scheduled to be online and ready to go by 2020. chinese military development should be concerning because xi jinping's rhetoric, he outlined unification, the ultimate goal he talks about in the future and in my analysis based on his speech, it seems to me "cyberwar: how russian hackers and trolls helped elect a president; what we don't, can't, and do know" jinping no longer demand independence but that there are concrete steps toward the unification. what this means is great uncertainty but at the very least china wants to restart bilateral talks and to do this they hope the political party is amenable to this, who will win the presidency in 2020. in the meantime china is conducting sophisticated exercises and greater scope to intimidate taiwan. the most recent happened in july after the united states
announced an arms package. i want to talk about the south china sea which has been a significant concern, relative improvement in military posture. in the past year we haven't seen as much militarization happening because a lot of that militarization had occurred before. we do consistently see the rotation of certain platforms fighters coming out of what the island and radar capabilities. china has increased operational tempo which suggests they have a more persistent presence. of note, in july 2019 china conducted a series of ballistic missile test in the south china sea and bradley island, this is the first time they conducted such a test over waterways versus overland. the military activities have increased significantly during xi's tenure and the 2019 white
paper, china participated in 11 international humanitarian aid and disaster relief operations, 100 international exercises, 17 different countries and organizations that have been active in peacekeeping operations overseas. in 2019 they conducted 13 of these exercises humanitarian aid disaster relief operations suggest this is increasing. of significant concern is china's increased military presence in africa which expanded through the first and only military base in djibouti and they sell a lot of military equipment, drones and other surveillance to africa. i think this is an area to be watched abroad. also future development in china and the pacific islands and the arctic deserve to be watched but right now especially in the arctic the focus is mainly on energy. the chinese increasing military cooperation with european nations but most of this is more for the image of improved
relationships. the area that is most concerning to people when you look at security developments is the china russia relationship. there have been some trends in this space which were covered in my testimony and other venues. it is true the china has increased exercises at diplomatic platitudes when it comes to their relationship with russia. this is not sufficient to suggest they are moving away from a relationship of convenience and there are a number of obstacles over time. specifically china sees russia as a liability and is interested in a more legitimate eat grwer. china, russia has relationships with countries that china has poor relationships like vietnam. i think we are being too alarmist about the relationship becoming closer but not concerned enough about the smallest degree of improvement in his relationship for the united states military.
the first thing is it seems russia has accepted a junior partnership and this will change the cooperation moving forward. i always assumed it would have to be symmetrical. china is not really willing to put a sent out for russia for russian goals and europe. there willing to help china achieve its goals in asia but with the joint patrol you did over the islands that may be russia is going to help china even of china is not willing to reciprocate. this sparks a new relationship that mike make me greater relationship which will complicated us military operations there. in china they posit themselves as being a force of peace in the world, the chinese white paper is not a national security strategy the way the united states has a national security strategy. it is written for foreign audiences and had a few main themes.
the first is the chinese military is more comfortable as a global goal and china started becoming more comfortable with the pla becoming involved in implementing this goal. china promotes itself as a force for peace while the united states is an instigator of strategic competition and regional conflicts, arms race, power politics, etc. and the white paper is interesting because while it tries to assuage concerns about military modernization and had harsh rhetoric about taiwan in the maritime disputes. the last point is about our competitor, i was asked if china reached the level of the united states and i will say china did not need to be as sophisticated as the united states. we are fighting different wars even if it is the same war, they are the same challenges. i'm happy to go into that in the question and answers. also deterrence requires
capabilities and resolve. if we have a balance of capabilities we don't have a deterrent because china is more resolved and willing to accept higher costs than the united states and most contingencies and maintain deterrence the united states has to have better capabilities so we would suffer less then china would. there is a different trend than in the future. china has overcome or surpassed the united states, issues that given certain trends in the region china will soon be able to out match the united states. as we know on the global stage china is nowhere near being a pure competitor to the united states. having a number of recommendations in my testimony, most focused on the south china sea issue which is the key area of strategic competition on the military side. the united states needs to prioritize diplomatic solution, get all the claimants to agree on what rights violence gives them and have international enforcement of them.
the united states should consider protecting economic zone rights and improve our force posture in southeast asia. we are optimized conflict in northeast asia, not southeast asia and taken a great deal of political will to have access to southeast asia and that is what is really needed at this time. understandably states, leaders are worried about doing this because they want to avoid a war with their nearest competitor but the only way to prevent a war is to deter chinese aggression. the united states ability to fight, they are more likely to provide origin and this is what will drag our two countries into a war. the united states needs to put all military resources behind maintaining a regional order even if it means taking a few risks to ensure success. >> thank you.
>> thank you, chairwoman arthur lemieux, vice chairman cleveland and members of the commission for the opportunity to present my views on us china relations. given my background and expertise i will focus my remarks on military aspect of the relationship and in particul look at three issues, first the military balance of the indo pacific, second, the open ended or long-term military competition between the united states and china, and third, aspects of deterrence. it is my opinion at present, the indo pacific military balance is favorable to the united states. that said, i haven't seen anything in the public domain or in terms of military literature that comes close to the kind of analysis and assessment of military balance that for example you saw in the latter stages of the cold war
between the united states and the soviet union. to really get a handle on the true military balance their needs to be a rigorous set of regional and net assessments done looking at various aspects of the competition between the united states and china. as the competition with china is open-ended, we need to take a long view, not just a snapshot of the balance but a trend that will shape the balance over time and how to improve our position. and using michael howard's four dimensional strategy, the logistical social operation and technical, it is my pulmonary assessment the trends do not favor the united states. the current balance may be favorable but the trends are unfavorable. look at the social convention, the ability to mobilize, orient
your population, to eat bitterness if necessary, it seems as though the chinese have a distinct advantage over the united states in terms of us public in general. logistical -- this is to the scale of the challenge. if you look at gdp, that is one element of national power. we can get into others. if you look at gdp alone, china's gdp according to current exchange rates and the world bank is roughly 2/3 that of the united states. if you at russia, 80%. if you look at the historical data which is imperfect, you see him. germany in world war i, the axis powers in world war ii, soviet russia, the cold war never exceeded 40% of us gdp.
if you are looking at the scale of the challenge it roughly doubled in gdp terms to what we saw in the great power challenges we confronted during the course of the 20th century. if you add to that looking at the cold war our advantage in allies, our advantage in manpower to soviet russia and our advantage in technology, those advantages have either withered considerably relative to china or have gone away entirely. what also interests me is the scale of the challenge. if you look at the recent reports on us fiscal standing you will find according to the congressional budget office, interest on the us debt which was $263 billion in fiscal year 17, unless things change rise to $915 billion or roughly $650
billion more over the next decade. that is tax money going out to service to debt. the social security medicare trust funds late 2020s will be exhausted and state and local governments have $5 trillion in unfunded pension liabilities. cbos bias the nation, rosie as to 2.5% us gdp will be available for defense during the cold war against 40% soviet russia the average, 6%, we will leverage less than half that against a set of rivals, roughly 80% of gdp. in terms of scale the trends is negative. in terms of technical and operational dimensions, one of the things senior leaders in the pentagon worry about his circumstances in which there could be a disruptive shift in the military balance. all of a sudden things look very different and we find with
diffusion of technology to china and advances in technology where they set themselves some ambitious priorities, there are two directiviminish disruptive shift we need to worry about. one is what the pentagon calls a strike regime. we had a near monopoly of precision strike warfare in the first gulf war. the chinese are clearly catching up. we haven't seen them put it into practice but their capabilities and what they have accomplished. for our military looking at this precision strike regime we are losing a major source of military advantage. a couple of important questions, is this the new normal? are we going to be shut out of certain parts of the indo pacific as chinese capabilities mature or is there a different way? the second disruptive shift with an emerging military
revolution, everything from artificial intelligence, manufacturing, advances in biosciences, hypersonic's, technology, quantum computing and advanced robotics suggest there is a high likelihood the kind of warfare waged in the mid-2030s will be very different than we anticipate today. that is a source of potential advantage for us but also a potential source of great weakness if the chinese get it right before we do. operationally, how you fight, the people's liberation army seems to figure out better than we have how it plans to fight in the western pacific in particular. we really have not, i served on the national defense strategy commission appointed by congress. the us military hasn't stated clear operational challenges, let alone developed operational concepts to meet those challenges. this is critical because if you have challenges and the defense
program the defense program and capabilities, you should be able to look at those capabilities and say this is how they will be employed to accomplish our security objectives and i don't think we have reached that stage yet. a few words on deterrence. it is a major problem, deterrence is more difficult. it is becoming much more difficult in part because a lot of new kinds of military equip is coming into play which people don't understand particularly well. if you look at the relatively new domains warfare has moved into in the past 20 or 30 years, on the seabed you see in terms of deterrence the competition favors the offense which has the advantage and attribution is relatively difficult so deterrence through punishment becomes a challenging proposition. with modern weaponry, emerging weaponry becomes easier to
miscalculate military balance. we had the chinese are very conservative. that could be a very good thing but if we calculate the balance being in our advantage, that leads to be overly aggressive on both sides. there is a lot of advancement in cognitive sciences with respect to limits of rational human behavior. i will mention a few, prospector, optimism bias, risk tolerance and cultural variance. i'm happy to talk about those. that concludes my summary of my testimony. i'm happy to respond to your questions. >> thank you very much for inviting me to appear before the commission. i want to begin by commending your staff who did an outstanding job preparing us for this hearing so we could be useful to you. i'm going to focus on what might be called the phase 0
dimensional for planning which is what you focus on before, war fighting and before the trends. the area we are now in, competition for influence without fighting a war. china would like to supplant the united states and asia without fighting a war. we are in that strategic competition and in particular i would like to focus on the roles of allies and partners who get a vote in this competition. our worst mistake strategically with china came when we tried to form a bilateral, ignoring our allies interests or when charging at beijing without aligning with our allies to make sure they were effective. as we gear up for challenges you heard about and the real competition for influence and leadership in asia we have to think through what our allies and partners were, are they with us or not? i made three broad points in
that respect at the outset. the first is china is clearly targeting us alliances, not only in the indo pacific but they recognize that our alliances in many ways are the center of gravity in the region. chinese declaratory policy and the use of chinese coercive tools, military and commercial, have sharply increased against allies and partners in the last 6 or 7 years. a strong signal came in 2014 in april when xi jinping gave a speech in shanghai that asians should decide their own policy without foreign blocks. it is aligned to one garbage of used similar in 1986 to ultimately without success break up american alliances.
there have been much more specific cases of coercion against allies and efforts to entice the us where we set aside our allies. xi jinping's model to the obama administration was designed to demote the interests of japan, taiwan, south korea and others. there is a debate in this town, it will not be resolved within a revisionist power, it is more ambiguous on the global scale, historically rising power between the united states, germany and japan will see riders on the hedge fund globally but actively revisionist in their own regions. ask mexico. to me there is no question about china's deliberate and declared revisionism in asia targeted at us alliances. the second point is for the most part china's strategy for
now is backfiring. if you look at the foreign policy or defense white papers of japan, new zealand, look at the eu's policy on china, these like-minded democracies are stating chinese coercion gets their interests. even as many of them pursue more economic opportunities. opinion polls across the major democracies attending negatively for china. the trend in japan, korea, australia with nato allies is towards more joint miss and interoperability. not the alignment or bandwagon with china. the british and french decisions do freedom of navigation operations in the south china sea is another example and there are others i can give. the third point is while
governments, major democracies are trending towards alignment with the us to counter the us challenge, if you peel open the cover and look more closely there are disturbing trends. and most major alliance countries public opinions show increasing support for alliance in the united states and for our security treaty but in japan, polls show while the number of people supporting the alliance is up, when japanese are asked similar questions in korea and australia when they are asked do you trust the united states to do the right thing those numbers are very bad and trending badly. it didn't begin with the trump administration although that added spin to the ball, it began earlier with questions on taiwan or syria. even out of area commitments they are watching closely. we have to recognize alliances are a force multiplier for us,
especially in this phase 0 competition. we can blow it. we are at some risk of making mistakes. very briefly to touch on the major allies, it is worth noting smaller friends, allies, partners, the philippines, mongolia, they are the most vulnerable and under the most pressure but the ability to prevent and counter chinese coercion in smaller and weaker states depends how little there is with japan and korea and britain and france and germany. if you touch on them, japan has been competing with china since the japanese emperor was given the title member in the seventh century to signal the chinese they were nominally coequal. the government has built its
entire national security strategy around competing with china. japan has a declining demographic picture. a has largely countered that with external alignment. the quad you heard about, the us, japan, australia and india, the free and open indo pacific strategy. a is aligning with other asian powers which is useful for us, he is doing away with 6 decades of japanese alibi defense policy saying it means they cannot do joint offers. he has changed that. new legislation said no japan can't do joint operations. he is moving with us. the strategy we can talk about as a problem for us in the larger chessboard is deteriorating japan, korea situation. korea is wary of china.
polls are not good for beijing but korea has a different history and a different view of the political situation from japan and the chinese view korea as a more likely candidate for deal alignment with the united states. when xi jinping gave a speech calling for us alliances, this was a conference of eurasian leaders, continental leaders, the chinese put in more, to sign this speech in a joint statement agreeing there should be another one. the koreans held firm but beijing thought korea would bend. korean goods cost billions of dollars, missile defense systems, is another indicator. korea has not signed on to the indo pacific strategy like almost every other ally and partner. beijing sees opportunity that is a problem particularly given the japan korea situation. australia has come under huge
pressure. australians are pushing back. and generally aligning more closely. europe, when i was in the bush administration, had huge problems with europe, the eu was going to lift an arms article on china after that. we are way beyond that. the european statement on china policy was very tough. talk about systemic competition over economic and political models. france, germany are doing -- the problem with europe is the eu is a consensus-based organization and beijing has learned to break consensus by buying off week powers that block action. hungary, greece and southeast asia, cambodia and laos. when the eu tries to take a position on things like the south china sea or taiwan china has reached inside to block it. we have to think about how to work with europeans in a
different way with britain, france, germany while helping them to shore up the eu as a whole. i will be happy to go into the opportunities and challenges we have and emphasizing to get china policy right we have to get asia right and our allies right, china is targeting them. we need to be conscious of that. not only saying to ourselves and alliance is important but there are greater alliances, more joint, reach across bilateral alliances from collective cooperation. it will take a very active administration policy but we have very willing partners in the region and in europe which is a good news story to end on. >> thank you. >> thank you very much for this wonderful panel. i apologize i have to leave early. thank you to our hearing for allowing me to ask questions first.
the commission has been engaging on the juxtaposition of china's nuclear competitor to add xi jinping's decision the pla should be a world-class power by 2050. we are wrestling with this but my question is not about that. it is from what you said today it seems as we consider the question we ought to focus more naturally and intentionally on that degree to which china is competing within the region. thank you for your insights. my first question, doctor green, because you focus on the allies, is this a formulation that the question whether the pla is a near competitor in the region, is that a formulation that is useful or meaningful construct for how our allies -- >> the answer is yes.
behind the australian white paper and japan's national security strategy and the most recent interim defense plan was intense gaming, planning discussions in those allied capitals. the conclusion, i think, is evident between the lines in the white paper. china is approaching the region. it is deeply problematic for allies who have to respond by being more joint and interoperable in the us and get over some of the historic energy they had to that. so in every crisis is an opportunity but particularly japan and australia see the challenge.
they also see not only a contested south china sea but they see influence campaigns, they see the pacific island, myanmar, pakistan or djibouti which from their perspective mean that china is taking the fight beyond the first chain at least in the early phase of the crisis but if they and we and others like india have to give the chinese more of an advantage, from their perspective it is a game on problem, not just in the south china sea but spreading beyond them in ways that affect their interest. >> my second question relates to doctor green's final recommendation in which you say the administration should avoid using democracy protests specifically in trade negotiations but your argument
is based -- in view of how our allies would see that. we will give you a chance to comment and ask a follow-on question to the rest of the panel. i am surprised the degree to which you are organizing a certainty linkage for negotiation. i'm surprised the degree to which the chinese side preemptively delinked. the commission was in beijing in may. it is clear the pressure as a tool for enhancing the chinese negotiating position, was not being given a high priority. i welcome your thoughts on how they might consider doing that. first if you could describe what you are thinking. >> my own personal view is we will decouple from china on 5g. most of our allies will join us if we play this right and china
will try to create champions particularly in areas where there are weak semiconductor's but they are way behind. if you look beyond the elements where huawei has made advances putting things to market, the emerging technologies, they reside in korea, taiwan, so the 5g competition is decoupling. it is very much contested. australia made a decision very publicly to ban huawei and others from their market. japan made the same decisions. it is not legislated but it is an administrative decision. india, britain, and others are debating this. i mention the recommendation because we were to announce as our allies take enormous heat,
when australia band huawei, export suddenly stopped. we are taking huge heat for this. if we were to suddenly say we decided to take our position on huawei to getting a trade deal, it would undercut them but we would lose that fight in government to have a national security impulse to work with britain but enormous commercial pressure to work with huawei. steadiness on this is critical. >> two points, the first on linking security and economics more broadly. i agree with doctor green's assessment why that might not be beneficial. largely it might depend on who is in the white house. my primary concern about linking economic security is my assessment that donald trump prioritizes the economic issues of china over security issues. he never brought up the south
china sea with xi jinping, last time he tweeted about it was before he was president. my concern is the linkage would be done in order to gain the upper hand in economics but he would sacrifice our security. for that reason i would like to keep the issues separate. .. it seems, besides the freedom of navigation operations that they do there still seem to be a very low appetite for security competition with china. and so while allies and partners i think a much more of your site about pushing back china than
the political and economic side, i think there's still a lot of progress that can be made on getting them on the same page with the united states about being able or willing to take a few more risks or even upsetting or provoking china to reverse some of the negative security trends that we discussed. >> out at a couple of points, apropos of what dr. green said. it seems to me given the chinese focus on comprehensive national power, that they will accuse all the instruments of power. unlike us on occasions they will not say economics issues about online and profit. they will introduce that when they think it's appropriate and they can gain advantage. the point about the bad battery to south korea and all of a sudden there's economic consequences for the republic of korea, the japanese seizing the fishing boat and all of a sudden you don't have rare earth metals going to japan.
we used to do that. those of us for old enough to remember the suez tonight and 56, president eisenhower stop the british and french cold basically through economic means, not military means. at the end i think the chinese take a more comprehensive view then we do. the other thing i will say about peer and near peer is just it's very circumstantial. depending upon how you look at it, we could've considered north vietnam a peer competitor back in the '60s and '70s. the contingency, the circumstance, the nature of the conflict and you can only go so far i think with those kinds of terms. >> thank you. >> i want to thank all three for being here. i've got a few questions and i'm going to throw them out there. and if we don't get through,
maybe i could to some of them in a second round. but dr. mastro come on page five of your testimony you have this very interesting thing about the five ag ors going out into the south pacific. the last time the prc did that, if i remember right, was 1981 for the very first open ocean missile shot. they concentrated on positioning, salinity, metrics, things you would use a ballistic missile submarines. so tell me what you think they were doing out there. now, for mr. krepinevich, a specific one. you've written ecologic defense, and dr. green mention phase one. i want to take you into phase
two and three. decisions about going to work, mobilization. if you're going to recommend when to deploy or employ a marine corps expeditionary advance base operation or army multi-domain task force or japan southwest island defense, seems to me if you reach phase four you're in combat, it's a little late. and if you do in phase one they become big targets. so what would you call the suit? and for dr. green, this goes back to something dr. krepinevich raised. have we locked ourselves into an untenable position by our own legalistic policies in refusing to take positions on the disputed islands and little
reese out in the south china sea? we're pretty clear on second comes because of the grounded, but if were going to use legal means as dr. krepinevich suggests, have we hammed >> thank you for your question. are you asking about research fleet? >> right. >> okay. this is just speculation but i think china's main concern especially when the talking about the south china sea, talk to the chinese military they will say one of the number one reasons is because they need to get out. they're concerned about the united states keeping them in. in order to maintain a nuclear deterrent, concern about secure second stricken submarine force needs to be able to get out of their south china sea and be able to roam a bit farther. i've talked to some people, i'm not an expert on submarine warfare but if discussed that with other individuals.
it seems you have to get data, the temperature you mentioned, but that is also a routine process. with climate change, those statistics actually change much more quickly and rapidly over time so it's no longer the case that a country can gather data and then go home and still be able to conduct that warfare. it was the constant. it's probably a a combination f wanting to get information to build a better track u.s. submarines, combined with conducting their own training to have more routine presence farther from their shores. those are the main issue here is a strategic detnce and less nuclear deterrent. if i could add one thing. to meet the main issue is not the sovereignty of the items. china's interpretation of what that rock ditches basically control of all the waterways. they manipulate in such a way
they misinterpret territorial waters and the economic zones that they can dictate the rules. my position is what the united states inch-thick position that that we decide what's what but as i mentioned in my testimony this should be as important if not more important than the middle east peace process. we need to spearhead shuttle diplomacy, get all the countries together and if they come to an agreement at the very least about wikis features grand entrance of rights in and chins only one on the outside, that disagrees with that, i think it will be more problematic. i think the legal initiatives are important in the diplomatic initiatives in addition to military posturing. >> following the cold war we shifted much more from a forward base, forward deployed pashtun expeditionary posture. that won't work in the western pacific. in event of a crisis, you start
flowing expeditionary force it into the western western pacif. it's viewed as provocative. it's shifting the military balance, crate an incentive for the chinese to go now before the balance shifts further against them. after war starts, given chinese capabilities, makes it harder still to reinforce which is one of the issues with japan's rethinking of its defense posture and these mobile land forces. we have to move to a more forward deployed posture, and typically when i mentioned that, people say that's really hard,, you know, for a lot of reasons. it's going to involve a lot of diplomacy if we get it right and it's not going to happen overnight. the way i can talk myself off the ledge on this issue is, you look back at the last time we called out another great power as a rifle. it was 1947. recall that the soviet union.
the american people were not in think you got here anymore. we have no allies in europe, no alliances. we had hardly any troops in europe. and but we took a long view. we begin to say this is what we need to go and we had to make but we saw what was necessary and we understood we were any competition with another hostile power that we wanted to avoid war. we realized it would be hard and then we realize it was going to be a long-term effort. and what really strikes me is, if you look at, if you look at where we ended up, the pentagon started something called air sea battle a few years ago which ended up at a dead-end. if you look at where we were a year by the end of the cold war there was something called airland battle. and our army and air force
created that, and the idea was there were waves of forces coming out of the soviet union and without we could stop the first wave with a trip but we need capability to break up the second wait and we began to feel those capabilities and navy said we need to keep these customers of greenland, iceland, uk so we can reinforce. navy d develop something called outer navy out. we can help out in norway, protect the northern flank, , or allies bought into it. they understood what was going on. we had nothing like this in the western pacific. and how do you make decisions and set priorities in your defense program where you don't have a clue, even when you want to go? that was one of the critiques of secretary mattis' in the national defense strategy, said we need innovative operational concept. we need to forget how we're going to do our job here.
again, without that i wrote a dissenting opinion in the commission because i was sufficiently exercised over the issue. without that it's very hard and our allies, i that senior japanese offices come to me. tell us how you're going to do this, it's very difficult for us to make decisions about what aircraft to buy, what kind of ships to buy, where we should position them. very politely, get your head and again. this gets back to what dr. green said. secondarily, i went up to the naval war college, and there is a japanese cno up there. i went to visit him and you going to his office and he's got a table like this and he's got a map of the indo-pacific and yes white stones and black stones. he says let's play. part of the conversation is, what's going on in the south china sea.
it's not only building runways and this and that. it's about positional advantage, about playing not chess, not kinetics, but position. what we've lost in south china sea if you look at it, you lost strategic depth. with very little strategic depth along the first island chain. by positioning those stones in the south china sea we've lost the strategic depth we had in the philippines, or we could have in the philippines. when i ran defense department summer study a couple years ago looking at these lots of issues, i was told very pointedly, come back and tell us not where you would like to be, not to our allies are here tell us where you need to be in this competition in the indo-pacific. >> if i could pick up on that excellent point. another way to think about this defense and depth probably have is i first job in the pentagon
20 years ago now came right after the taiwan crisis, you will remember well, u.s. carrier out out-of-print lollygag to the south china sea and effect threatening china. invite most used that as a bastion to outflank us and threaten law and hawaii. that's the chessboard problem we face. you basically interest question about forces. dr. krepinevich answered the limitations of expedition forces when we're in the higher in war for fighting and i lynching. that is why you are hearing more from japan and korea about surface to surface missiles, which can deter without preempting a conflict by deploying the range. this will be an increasingly important issue for u.s. and
alastair i think we should be supportive and encouraging, when reason why we have two were carter at joint is an interoperability with our allies. we do not want independent surface to surface missile doctrine across the first island chain that could pose in the fight we don't want to answer one of the things i would emphasize over and over is we are close, more than we have in this region but not enough. if you look at the defense doctrine and emerging capabilities and concepts of,, good and the like in canada, japan, korea, new zealand, they'll want expedition amphibious capabilities. we have bilateral alliances as part of our customization strategy on china is integrating them or across the bilateral arrangements. if everyone's expeditionary capabilities, if they are all building laptops and all building amphibs, we ought to be
doing more joined with them, more joint operations, more training, or equipment. and great power competition results in war usually because of a deterioration around the periphery of the great powers. so what happens in south and southeast asia is incredibly important, if we have combined expeditionary capability to deal with natural disasters, civil wars. we get there before china. we lock that in. on your question but territory, my view is that international law matters. it is a strong card for the united states and would be a mistake for us to suddenly change decades and think it's a state department legal counsel position and suddenly say we have now decided that the japanese territory, et cetera, et cetera, et cetera. the main negative impact would be it would undermine their credibility of our rule of law,
tool, diplomacy but also open a pandora's box. all of a sudden it would be a test of american credibility ever in the world. i would not impose a cost on china by recognizing or changing our position legally on the question of territorial. but we do, we do have to think more creatively about cost and position to include possibly sanction on entities involved in artificial island building and to include things like more robust exercise schedules and so forth, punishment for coercive tools. but . but i would n uffice of legal counsel to punish china by subtly changing our well considered -- >> and what were they due to enforce -- >> i'm going to have to stop this discussion and move on, twice as long as we should a permitted. robin? >> i'm going to follow up on the point and talk about what near
peer looks like. we've had a conversation in the staff and with commissioners trying to come up with a taxonomy for our metrics to define near peer, and to think we can to get bogged down in very broad categories, like weapons systems. so dr. krepinevich, i was very interested in your testimony in terms of characterizing the importance of leadership decision-making, precision strike regimes, and the capacity to exercise disruptive shifts. if you were to define what the elements of near peer would be, how would you think about that? you mentioned contingencies at the nature of conflict, but if you look at some kind of matrix, with the things you mention in your testimony be included? i'm interested in each of your views on the whole construct of near peer.
part of the problem in making the case to aorward based saying and to be more engaged with our allies is certainly the public is not thinking in terms of what is the threat. i think taxonomy may contribute to that discussion. >> i have thought much about it, that's never stopped me before. [laughing] in terms of near peer competitor, based on my testimony, i guess i would look at several metrics. one would be with respect to china, our ability to preserve our vital interests in the indo-pacific in various contingencies against the chinese military threat. another metric might be, i think they certainly merit near peer
and possibly peer competitor status is they are the only other military that i can see that can plausibly conduct advanced precision strikes come with the russians called reconnaissance strike combination. i think another metric for peer competitor is where they stand in terms of being able to affect disruptive shifts in the military balance. and so we had seen them invest a lot in areas like ai and hypersonics and small sets and so on, even the 5g networks that have the potential to really, mostly in combination to affect significant shifts in the balance. that would be another.
and my own sense is that if the development of anti-axis aerial denial capabilities creates kind of a new norm in the western pacific where our freedom of office of maneuvers is very limited, then i think one possible attractive approach for us to gain advantageil be to move the competition either into those domains that gave us the offense, which is space, cyberspace and seabed, or horizontal escalation. we talked about positional advantage to begin to pick off a lot of their assets beyond the western pacific. so those, first blush those of the sorts of metrics i would be looking for to see a well the chinese can compete in these areas. and if they can compete on a level with us i would say they appear. they can't then there near peer or maybe they are not quite in the game yet. >> thank you.
the others? >> if i can add a few points the first is that we're not a level playing field. this is issue i have with the peer, near peer. even if they're only near peer we can't even get to that point back. just some examples of what kevin, if we have like land-based missiles and we could therefore more effectively attack a chinese base at a lobbying missiles at our basis, it's much easier for chan to resupply and reconstitute those bases because they are just moving stuff around mainland china. we'll have one or two vectors of approach from waterways to try to get supplies into our basis to reconstitute them. in a lot of these scenarios as was mentioned, it's like is going to prevail, but it's also much harder for the united states than it is for china. even if we do take the competition to space or to cyber, china doesn't have the lights in space or cyber to
conduct military operations the way we do. if they lose communication to space that fiber optic cables ii can use on the grantor one of issues we often think about is proportional, like if were acting in a in a proportional r in terms of a fax not sort of outcomes. the idea should be that the china hits a the ship, we hit a ship or china hits a a basic we database. what is affect is it that it on a were fighting. also when it comes to china global interest, one concerns about looking more broadly to peer competitor status is, i fear we're focused on the world-class military language, china moving more global, because resolving or do with the competition in the region is too hard. and so just in my personal experience it seems a lot of the discussions about this may be in the fence like we can't deal with the a2 adsl genesee so maybe we haven't advantage in
the indian ocean so we'll hold to put at risk and they were given on the south china sea. -10 in china that somehow this is going to work. that not going to be distracted from what they consider their core interests because we are imposing costs on them elsewhere. the competition in this way i think would this have to stay local. for me the near-peer competitor, two more things josé come that important does deterrence hold? this is my main concern has to do with the compostela capabilities but it resolves and maybe globally when they went to think about is whether the united states is a security partner of choice. as china is building relationships with countries in africa and central asia, beyond our alliances, they are becoming more popular security partner of choice and the u.s. strategy has i think of the most important prosper strategic country to be on our side. as a chinese would complain we got first it on allies and we got the best ones. but in this world, space with
international institutions, numbers matter. even if we have four countries on our side about a certain issue, in the u.n. if 150 of them are on china's side, then we lose. we also have to think about the weakest links china exploits, laos, cambodia, and we also have to build up our numbers to be security partner of choice beyond just our allies. >> thank you. >> jim talent. >> this has been fascinating, thanks to the three of you. dr. krepinevich, 25 years ago when we were both young whippersnappers, you wrote on article about the revolutionary military affairs. really opened my eyes and i'm grateful for that and your service over the years. i do have a question for you. you evaluate that the balance of
power in china's near see currently favors the united states, although you great concerned in the intermediate and longer terms. i'm sort of the opposite. i kind of think that we're in trouble now but i'm kind of encouraged about trends because a lot of this messiness that you are all concerned aboutith w american policy is what happens in our system when everybody's eyes open and they go we've got to do something now. not everybody is running into do things. i think we'll figure that out, okay, so the chinese have tremendous advantage in logistics, the more force in the region. their platforms only constitute are better suited in the kind of conflict would likely occur. and you're right, we are way behind in terms of operational concept. so explain why you saying the balance now at least favors us? it's not a rhetorical question. is it isr you think works is it
their failure? they are very concerned about the operational effectiveness, particularly in joint operations of the pla so maybe you share that. and then dr. mastro, you suggest the idea that has intrigued me a lot, which is hey, let's together with all in south china sea and negotiate an outcome, and leave the chinese in the outside. i think that would be a really good outcome from a lot of different perspectives. but they are not just, beijing is not going to sit there while we doing that. haven't they develop enough clout with enough of those claims this is a do with asean now, to basically block any kind of consensus? >> thank you. i may have misspoke. i meant the military balance in the indo-pacific region, not within the first island chain.
but the reason for that, i think right now in terms of our ability to escalate vertically, horizontally. i think we have advantages there that give the chinese pause. i think that also i think give themselves far more economic vulnerable to certain things we might do. although i must say i don't think the issue has been looked at carefully enough, especially when you start to look at global markets, global supply chains, what happens when you start to corrupt the global financial system and so on. they also have pause when you look at our equipment, our people, and experience in war fighting. it's a very impressive capability. so for those reasons i think the balance is generally favorable, my caveat was i'd really like to jim baker do some serious threat
assessment over there at osd with access to all the classified information they have in some of the best thinkers that they have here and again, it's interesting, i think if you look at the long-term competition, i'd rather be in opposition than theirs. but if you look at the trends right now, so we're in a in a h better position to fix things and they are. and i like our stuff and assets better than theirs, but we're not doing a very good job of exploiting our advantage. >> that i agree. which is turning to draw on the reservoir of strengths we have. i agree totally. dr. mastro? >> thank you for the question. my greatest frustration deal with these issues it seems that want to have the exact same policy would give outcomes. understand there's a lot of desire not to be provocative but i think what we first need to do is brainstorm all these different solutions and then
roll out which ones might be crazy and which ones are not. >> i'm all for being provocative. >> so let me go through a bit more detail about what i'm thinking. my premise is this. the united states maintains an military defense in the first island chain has to be our national priority. going back to a point that was made it doesn't seem that only the american people but even some scholars understand the threat. in terms of what can the united states military the longer accomplish that we cannot operate in the first island chain? then where basically point a lot of what china is doing, china can coerce the whole region without u.s. interference. it's a very problematic situation. if you want to do diplomacy, i will note we jt sat there for the past couple of years on the did the code of conduct but i agree we don't want to do it to asean. those are consensus-based systems. what am saying is we have separate initiative in which we're trying to spearhead diplomacy between the claimants and i would ask what they need.
i get certain points like vietnam will never agree to this order will never agree to that. we need to do more brainstorm about what do they need to agree to these issues. then we can say, for example, this is a separate issue but if we need access to the south east asia which you think we do, everyone abasing vietnam to what would we have to give to get a? in-q-tel vietnam we would recognize the paracelsus bears, which are based. they mckevitt discrete between me and dr. green whether that's worthwhile. i think it is. i understand he thinks it's not but the point is we need to start brainstorming some of these ideas and think strategically on the level of normalizing relations with china, online process of the soviet union during world war ii and stop just think we want to be the same exec stuff but a completely different outcomes. >> i think we discovered that george kennan of this national competition in dr. mastro. >> mike. >> thank you.
i've been sitting here agree with 99% of what all three of you were saying. having spent the last 25, actually since 1985, thinking about many of these same issues. i have a couple of questions or observations that are what you to respond to, to kind of move the discussion along in a little bit different direction. first, i certainly agree with dr. mastro that taiwan remains the center of the security universe between the united states and china and what have you, and east asian and the first island chain and all the things a very important that i think the other thing though h been lost in all of the discussion about this is the growth of chinese expeditionary disabilities, and more importantly, i think chinese expeditionary ambitions.
and i'd like to have your reactions to the fact that if you come maybe it's because i'm a sailor, you read chinese defense white papers and other documents and what have you and have a severe case of slack anxiety i guess is what i would call it. they are really worried that we're going to go out and, as well if they should be, i should say, and start come in case of prices or conflicts, start interdicting there see lines. so the building i capability to be able to deal with that. today of course if the pla navy shall set from underneath the air force and land-based air force and missile system, they are very vulnerable. but they are thinking longer-term and i just wondered if any of you have given any thought to the longer-term implications for apps in the of the world-class navy, and
expeditionary oriented capable pla and what that might mean for the united states around the world? the second question i want to ask is, it's often, i've heard people say it. i said as a matter fact, that the possession of nuclear weapons by the united states in china is going to keep the peace between the united states in china. do you all believe that? >> don't all jump -- >> i guess i'll go first and all samples of these questions, i have maybe a less popular view than the conventional wisdom. the first on expedition king abdullah's, i've written extensively about the types of things they're trying to help and what they have developed specific in terms of isr, left, a whole bunch of stuff to be able to do it.
their ambitions are quite limited in this area in terms of the military side. they still think they can largely rely on political and economic tools to protect our economic interests abroad. they don't want the ute states to do to them but at least when here he about the ce military themselves i think if they do have that control of the first island chain then they do have the capability, for example, to blockade also just allies and partners such that you can have a mutual vulnerability that potentially could protect them in a conflict or his attorney tried to cut off their maritime access, then japan no longer can get anything if china controlling those waters. that's kind their strategy, is much more limited but i will say my personal view is if china was more ambitious than how i think they are, that's how the united states wins his competition. we are at a a disadvantage bece were trying to project, period enters all of the world and china can basically use their
defense budget for a small area is close to home. [inaudible] >> so if this were more like the cold war in which we were both not the home team, i think that's at the trade or severe. i'm not as concerned about their desire to be able to basically pushed out beyond the indo-pacific. i do think you want to expend more into the indian ocean and if they did have the mentality that the united states tested ty need to be present everywhere, i think that's how we went. on nuclear weapons i don't think they play a role in terms of deciding whether or not we have a limited conventional conflict. we don't have a mutually assured destruction relationship with china. it's not the same as the cold war. it's questionable whether not the even have a secure stryker china thinks differently about nuclear weapons that are based on writing another train. did you train to launch on attack not a warning to permanently enter no first use policy. i do hard time believing the united states united states would use nuclear weapons first. because of this i think it creates a situation that allows
for much more conventional conflict. i would say this is not like the cold war i think there's a higher like that of hot were between the two site and this might be generational but the nuclear weapons just don't play a big role in the thinking. >> so you think we could conduct a limited war with china in east asia without escalation to nuclear weapons? >> yes. >> that's what the chinese say. i don't believe it, but go ahead. >> well, interesting questions. in looking at the indo-pacific, i agree with you that chinese have anxiety. interesting to me is last time widower between the navy's was about three-quarters of a century ago and is about saying amount of time between pearl harbor and today as is between pearl harbor in the beginning of our civil war. so you think about timeframe and how things change, so i try to
tell us if you can think about things in world war ii terms. but if it were to look at things in world war ii terms, i think one of the things we see, i'll use the phrase the oceans are shrinking to mediterranean size. the ability to scout over great distances from the land and strike from great distance from the land and you see what happened to poor admiral cunningham and a better train fleet trying to stop the germans at crete. they lost a lot of ships during that period our enormous advantages over novel was a tough go for us. they know we have to be and the scouting area is reduced. i think it's a really interesting question for our navy in terms of how you would operate in this new environment. the navy today talks about its opening a maneuver force but i think it's not just sailing and plowing through the water. it's maneuvering pfister one of
our navy great disadvantages is it hasn't sought opportunities to increase the range of the scouting and strike capabilities. saw just put that out there. as far as the nuke issues go, i agree with dr. mastro. i think it's possible to have this kind of a war. i think there will be an enormous incentives not to go to armageddon. the question is do we know, do we even know what an escalation looks like that? we used to worry about that during the cold war. we push him them hypersonics in there that could do strange things, pushed some cyber in that they could do strange things. war going into space, blockades that -- if you have a really effective blockade, how effective would you wanted to be? would you want to drive the chinese leadership into escalating because they really feel the heat? how to get out of that kind of work once you get into it? it's going to become a suckling on the battleship missouri.
it's going to come like the end of the seven years war in 1763 where the brits and range negotiator we just keep competing and you get some islands in the caribbean and i get canada, these sorts of things. but it's not going to be, we get to occupy china or they could occupy the united states. there is, it's like being at the cumberland gap in the 1820s, when you think about the strategic issues that have to be addressed in this relationship between us and the chinese. >> so on the question of china's ambitions, a prominent japanese historian argued japan's big strategic mistake was trying to expand on the carton as a maritime power. because among other things that cause other maritime powers to counterbalanced against them, the u.s. and britain. he's argued that china is making
the mistake of being a continental power like germany did 100 plus years ago trying to expand in the maritime domain which is not to its advantage. and china strategic thinkers know this. the pla promulgated in your see doctrine in around 2008, and it was -- state counselor for foreign affairs convinced them not to implement it because he was worried that it would causet counterbalanced among the maritime powers. to what we are now seeing. i am told by people for domestic chinese policies closely that what happened was in order to reform the pla to go after corruption in the pla, the payback was the pla cannot implement particularly the navy this doctrine war were fighting teams ahead without diving on the scene to isa so you're great counterbalancing, jew politically that will cost us.
i agree with the earlier comments. i think it is an operational challenge for us, to be sure. the net effect geopolitically, it was a stupid move because pushing large maritime powers together to do a threat. a nuclear deterrence, i'm quite certain the pla would like to fight a a limited war without k of nuclear escalation but i am very doubtful that and our heart of hearts they believe that organ come to the central military commission and promised that what the escalation. i think deters enormously. any scenario in east china sea or the south china sea that a false hitting u.s. bases or major counter balance groups could potentially trigger nuclear retaliation. i personally think nuclear deterrence is quite important and at play here. but i do, i do think there are dangerous signs because you don't understand escalation and we particularly don't understand the limit, the connection
between escalation in cyberspace and nuclear. they are not linked. a seemingly elegant strategy by china to avoid a nuclear fight by blunting as in space and cyber what i wanted to have the effect of rapidly increasing the nuclear escalation problem. i think we did to worry about whether or not deterrence works the way we traditionally thought it did and how we manage it, but i do think it's a very, very powerful deterrent on use of force i the chinese. >> thank you. did you have something? >> on deterrence, i think there's a whole can of worms that needs to be opened here. there's been writings over the last 30 years about prospect theory. i'll try to say real fast. basically, people are more likely to fight to hold onto something to have than to act with aggression against something they don't have. the people who won the nobel prize for this said a lot depends on what you feel like
you are in a domain of loss or in a domain of the game. are you trying to gain something you don't have or lose something you have? lashed four to the south china's in this is classicus of two sides may think they're both in a domain of loss which makes them both risk tolerant. the chinese overtime one could argue will come to see these as the new normal. we've had these for ten, 15 years. they are. >> whereas the united states and of the country say no, what you've done is illegitimate. both are operating from a domain of loss in a crisis. our side feeling, fearing the full hoback and legitimize something that we don't think the chinese have a legitimate right to. and the chinese having assumed now they do and the fearful and back on their side. advances in the cognizance of sciences and a number of areas suggest that this notion that
government and people act rationally according to cost-benefit analysis and risk and so on don't necessarily play out. and i think if we see kind of aa test case for the speaker, in the south china sea. >> thank you. carolyn. >> thanks very much, and thank you to our panelists. it's always interesting to listen and learn from you. i have two sort of of baskets of things. one is, so we been having a discussion and most of the discussion seems to be sort of a bigger strategic picture, and the weapons systems. sort of the tactical there. but senator talent made brief reference to the concerns in beijing about the operational effectiveness of the pla. and i wonder if you could talk a little bit about how to factor that in, right? are they going to be able to make the improvements, the systemic improvements, that they
believe nee beade? is this an issue, not an issue? that's one set of issues. the other one is on this question of economic security and national security and the balance of that. we have in the past we talk to economic security, sort of from the u.s. domestic perspective which is that if you want to have a strong security you need to have strong economy. without differences here about hyperlink those together. but i think the fact china has demonstrated its willingness to use economic tools for national security purposes has really shifted this. dr. mastro, you focus on when you mention weaknesses, you are talking abontries, right? countries we didn't know that we could depend on because they have moved into the chinese orbit. but i'd like to broaden that to the economic interest in a number of countries that are our
allies. we've got influence orations. but the business communities in these countries are enormously important. australia's continued economic growth has been because of them, its trade with china. how do we factor this in? there's going to be public opposition to some of these positions that are being taken because people's monitors interest is at stake. >> let me start off on the second question if i may. the increase of growth in the japanese korean australian economies is linked to china. that's clear. but i think people sometimes, i'm not suggesting you are saying this, sometimes it'll mistake flow and start, and mistake sdi and trade. yes, both of our key allies trade more with china than they
do with us, but first of all that is intermediate trade,, supply chains. it's not bilateral trade. secondly, international financial flows are global, not region. third, investment flows are overwhelmingly u.s.-australia, u.s.-japan, not china. there are many, many other much, much deeper economic interests that bond these countries to the u.s., including that unity of the dollar among other things. so i don't think we are as vulnerable to china's economic precious one might think and the chinese effort to cut off australia to punish them for huawei did not work. politically it had the opposite effect. the labour party generally outlined with the coalition on taking a a firm stand with chia because these are countries that are proud of their sovereignty and democracy. i spent as image most of august in mongolia, 3 million people.
beijing would love from ongoing to become a belt and road member. it is that accept massive infrastructure which mongolia needs. they won't do it. they won't do it because it seemed with happened in sri lanka and people honestly on tt can tell you this. they will not sell their sovereignty or democracy for money here so we have a better playing field than one might think. and for us the key is couple things very quickly. transparency. we need to get the story of a chinese economic coercion through all sorts of means but in particular just think tanks, media, congressional delegations. secondly, the build act and efforts to provide financial alternatives, we will not outpace the chinese but we're much more attractive alternative japan, australia and u.s. are working on this. and third frankly we need a trade strategy. we can set at the were not this
goes back to tpp but we need something to do in strict we're in the rulemaking game in asia with our allies and partners. and given all those things have continued attractiveness of u.s. self as a definition for foreign direct investment, we have a much stronger hand to put in this regard than perhaps appears on the surface. you will do that consistently from business leaders more so in japan and korea but i think increasingly and australia as well, and natural resource-based economies. >> just an observation. when we were in singapore, the concern those being expressed is the manifestation of the chinese economic relationship with different countries is, they don't necessarily see our investment in those places. they see at trading goods and services and that works against us in the sense that people don't nelson sosa the strength or the value of the economic
relationship with the u.s. dr. mastro. >> just to add, i agree with everything dr. green said. i think there's still part of your strategic communities that thinks that being a security partner of choice is going to be enough. the way i view the region at least is we have to have security plus. we can't compete -- we cannot compete with the chinese economic machine i think in the region. countries will benefit much more with a close economic relationship we have to ask ourselves in addition to economic which we do not have a better trade strategy and policy to strengthen the area we also bring all these other things to the table. to the point of messaging, my biggest frustration is china has this message want to hear a lot from other countries in the region which is they are just like us. that's with the chinese are finding use great moral equivalencies. you have come you use foreign aid for political purposes can we use economic for political purposes. you have police brutality issues, we have police withheld
issues. you have fake news come with fake newspaper doesn't matter what the issue is. china tries to create this moral equivalency and just with an unnamed ally and partner i met with yesterday ferroelectric to manage both of you. that's their view and it's very frustrating because my view is we are not the same. we need to do a better job at saint yes china has economic policies can with economic policies but we're not stealing it. that can be frustrating. we also need to think ackley best compete. it's not infrastructure. u.s. advantage is that infrastructure building. i'm not in business -- you don't decide to do what they do best and not as well. you think about what i might imperative advantages as i think the united states needs to do some more thinking on what will be good at and bring that to the region. operational effectiveness, the model might is i don't know. the thing that concerns me is from most focus on this issue of military competition, the thing that lets a sleep well at night
is this belief our people are better. we are trained better. we had better morale. the best part about the u.s. military is the people. that, i believe that. in my heart the part i believe that which makes me think i have biases that is going to lead underestimating china's ability to get this right. they've gotten everything else right when it comes to improvement in the military, so is it kind of my american centric view that makes me think they're not going to get the personnel part right? i think we have to plan on them getting it right and see as asa testing. >> translator: would get it right. even though i'd like to believe that they will not. >> thanks. >> commissioner lewis has a quick question and then we have to in. >> dr. mastro, i do question for you and one question for all of you. staff asked us to consider.
you said we are fighting to make different was that could you expand on that please? the question all of you is given the modernization and the chinese military, what is their ability and willingness to use that force to take taiwan? what is your assessment? >> my point on the different wars is just to say a lot of times you try to compare militaries can we compare like fighters to fight, ship to ship but that's not how wars are fought. the threat to fight it is an air defense system on the ground, for example. when we're trying to project power from vast distances and our assets is largely reliant on part of the allies in the region, china for the most part is trying to project power for taiwan contingencies. that is easier for them to do. i like to equate it to if were in a boxing match, the united states has completed a triathlon
you forget to the ring. that's what i mean that we are fighting to make different words is what is required for china to reveal and a conflict over taiwan is different than what is required for the united states to stop them from prevailing. issues i think are actually many cases especially the south china sea more difficult. when it comes to taiwan, i think china currently does not have the ability to take taiwan by force. that's largely because they haven't finished some of the modernization efforts. they need to be able to conduct joint operations to have some sort of amphibious landing if there actually physically taking taiwan. my concern is china thinks they will have that capability in the next five to ten years. and so while i'm not concerned today because i think it could be very risky for them to make a move in the middle of this modernization effort. what happens when they think they're done? on top of that xi jinping seems to move towards reification.
he's out in 2022 so no one could hold into it but then when extended the term limits, that put all those things he said about taiwan in a different light. >> so you think you would be willing to do it? when the military is more modern than it is now? >> if they believe they have the capability to do and to think the future trends are not in their favor, historically china tends to use force in order to reverse trend. if they think things are getting worse for the overtime and, indeed, to quickly switch it so the position is better, then it would be willing to use force. china would prefer to coerce taiwan into an agreement. that is always number one, can use force against subject compel them to some of agreement? all that would come before a full scale invasion. we would have many indicators and warnings before that would happen, but in the end i think the chinese military is ultimately prepared to take taiwan by force and if the party thinks that the trend are
worsening and this is the time to do it and if they don't do it now than they can't accomplish it later, then we're in a very risky situation. >> can either quick answer to the taiwan question before we go to lunch? we already running late. >> very quickly agree with what dr. mastro said. i think a lot depends on how this is more stark? doesn't start with a a pearl harbor like event that angers the united states and a lot of countries in the region, or is it more of a slow -- is it despicable attack on a sunday morning or is it a blockade basically says taiwan is ours, its territory, we will decide what going to taiwan and other left to do is agree to these six things and you start the process of absorbing taiwan into china. again, do we give up after a month if i want is taken? do we say we're going to get involved in a protracted conflict? final point is, i think i can
what dr. mastro said his the chinese don't want a fight. i totally agree. what you want to do is ship entered shift the military to where the time we say it's useless to resist. >> if you imagine the conversation of central military commission on whether or not to use force, when questioned early would have to answer is can we decisively defeat the u.s. and break its will to go to the next age of warfare, either escalating reinforcing whatever it is. but a a question that would beo less important is and we survive the isolation and blowback from international community that follows? there are a lot of lessons to be learned from china's decision on use of force but they haven't used force since to integrate in international economy. the chinese calmness party is brittle and vulnerable to legitimacy crises. and if the central commissioners told no, we have divided europe and u.s. and japan, they will not come together and punish us and isolate us, we can survive
the political, geopolitical blowback after a decisive miliy blow their more likely to do it. but if the answers we can really say for sure because there's a real chance that europe, japan, useful come together, will boycott us and punish us, that enhances deterrence. the axle points made by my co-panelists on deterrence matter for this. if you're allies don't think you can win an award you'll be less influential and china will start breaking apart your influence. but also the alignment we show, the willpower, the management of her partnership is support for deterrence because it's a factor in how the central military commission would decide whether or not they can survive that all the major conflict but the subsequent geopolitical and economic isolation they would face. we've got to get them both right. >> thank you very much. we will see you all again at 1:45 p.m. thank you, thank you, panelists, very much.
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