What Happened to Hong Kong?


William Overholt, Senior Research Fellow at the Kennedy School of Government at Harvard University, talks to Rob Johnson about how China expanded its power over Hong Kong, and the state of US-China relations.

Transcript

Rob Johnson:

I’m here today with an old friend, William Overholt, and I must say he is the man who awakened my interests and helped me become acquainted in China, going back to around 1990. Dr. Overholt is a senior research fellow at the Kennedy School of Government at Harvard University. He’s written nine books. I remember dearly The Rise of China from 1993, and China’s Crisis of Success, a new book a couple of years ago, and Renminbi Rising. He’s a formidable presence, lived 18 years in Hong Kong, was the former president of the Fung Global Institute, which was, I must say, my favorite Asian think tank. Bill I’m delighted that we could come here today and discuss things related to China. What’s recently happened in Hong Kong, the pandemic. Thanks for joining me.

Bill Overholt:

Rob it’s an honor to be here with you today. I think the overall theme of U.S.-China relations is that the U.S. doesn’t want to grant China a place at the big people’s table, and China is an adolescent, or trying to be the arbitrator of the New Global System. At the same time playing the victim and trying to get all the advantages of being a child. But let me go to the foundations of what’s happening and start with the economy.

The U.S. and the world can tolerate countries that are young and growing up being protectionists, but they get to the point where they’re affecting the whole world. We went through this with Japan, we nurtured Japan, we allowed them to protect their industries, and undervalue their currency subsidize. And then it got to the point where Japan was a really big power, and it was affecting the whole world. And we had to get really tough and tell them, “You got our big boy now, you have to play by the rules”. And we put 10% tariffs on them, we had all sorts of restrictive marketing agreements with them, but they made the transition, and that’s where China is today.

We have two really big economic problems with China. One is intellectual property theft, Susan Finn promised Barack Obama that this would be banned, and it went down for a while, and it’s right back up there. They’re stealing all our most important technologies and that’s just unacceptable. With a really big issue is market access. Now, why is that such a big issue? Well, with China’s current scale, you have a company like Huawei that feels that it should have the opportunity to take over the whole world market for 5G. 5G is going to be the foundation of our lives.

Their competitors are two European companies: Ericsson and Nokia. Now Huawei has that access to all the three big markets of the world; The U.S., The EU, and China. Whereas Nokia and Ericsson are restricted to a very small part of the Chinese market. So Huawei can afford a research and development budget that’s more than Nokia and Ericsson combined, and given the importance of technology, that means that Huawei can simply destroy Nokia and Ericsson, and not because it’s a better company, but because it has access to the whole world market and the European stone.

The same thing is true, and a much more basic technology of credit cards. Many years ago, China promised that Western credit card companies would get access to China, but they’ve restricted it. They haven’t honored their promises. So now UnionPay, the Chinese credit card company, has 38% of the world market. MasterCard only has about 20%, and Visa has, I think, somewhere around 30%. No, don’t hold me to the exact number. So is UnionPay the biggest force in the world market because it’s a better company? No. It’s taking over world market share because it has access to all three major markets, and Visa and MasterCard are restricted. So Western companies just gradually die under this scenario.

The only way the system continues to work is if China grows up and gives the market access that it’s promised, and that market access has to be broadly into the service economy, as well as the manufacturing economy. China has access for everything that it’s good at, mainly manufacturing, but it restricts access for almost everything that the U.S. is good at, enabling services, banking, consulting, accounting, and so forth. So we’ve got a real crisis here and it has to be confronted very decisively, and that means tough measures.

Now, how has the Trump administration handled this? Well, first of all, the atmosphere in Washington changed because the business community changed from being a defender of China when it was getting early access and making money, to being really angry at China. It’s not just the U.S. businesses, but the European ones. While they’re making money, they’re so restricted in the China market, that China is still simply taking over the big world markets. And these companies were demanding that this problem be solved. So in comes the Trump administration. Now for the Trump administration, there are four issues. The two real issues, the intellectual property issue and the market access issue, and there are two completely phony issues.

One is the currency… For years the Chinese currency has been overvalued. So it actually inhibits Chinese exports, but Trump and other politicians of both parties go back a decade and use the most extreme measures of undervaluation and all of China’s manipulating its currency to destroy American jobs. It simply isn’t true. It’s exactly the opposite of the truth, but Trump has focused very much on that issue. And the other issue is trade balance. Everyone who’s taking first-year economics knows that a country’s overall trade balance is how much we save minus how much we spend. Americans save very little and they spend a lot. So they have a big trade deficit. Under Trump, the big tax cuts are that we save a lot less than we used to, and we spend more than we used to. So our trade deficit goes through the roof, and that’s a Trump problem, it’s not a China problem. But leaning on China, you can force the trade balance to shift to other countries like Vietnam and Bangladesh, but you can’t reduce the overall trade balance.

Trump has focused on the two phony issues… Buy billions of dollars of soybeans to reduce the trade deficit. And by doing that, he’s neglected the issues that are important to American business. And instead of trying to solve the problems, he’s created this cold war atmosphere, which makes it very difficult to solve any problem.

The Chinese have not behaved better. They have been very intransigent on the major issues. The concessions they’ve offered in some cases sound good, but there are all sorts of ways to get around them with local regulations. So we’ve got an impasse and this is very hurtful to the American business community because instead of solving the problems, the problems are becoming impossible to solve. And back to my first comment, the basic problem on the Chinese side is that they’re demanding the privileges of a poor underdeveloped country. They’ve got the world’s 10 largest banks, but they use infant industry arguments to argue that they have the right to protect their financial system. They want Huawei to be able to take over the world, but they’re not going to allow anybody else to have comparable positions in the Chinese market. So we’ve got absolute Chinese unwillingness to grow up, and we’ve got a Trump administration that’s focusing on all the wrong issues and messing up the possibility of any progress on the nationals.

Rob Johnson:

I was going to say, Bill, I’m very inspired as I listened to you because I follow a lot of the, you know, basically from your teaching me as a much younger person working in the currency markets. But what I find really compelling is that these problems were cropping up. You know, people like Blackwell and Kurt Campbell writing at the Council on Foreign Relations in 2014 and 15, before Trump was even campaigning. And the question of intellectual property, and the question of access to the market, or the combination of the both you do foreign direct investment. And miraculously, the Chinese who work with you create a competitive firm and it starts to get all of the market share and access that Westerners had dreamed of. Wall Street thought we were going to make the Renminbi convertible and modernize the Chinese market, and they would have access where you might say America’s comparative advantage in providing financial services.

So, and then I think something that was quite healthy, but nonetheless compressed the enthusiasm, American companies that have done foreign direct investments started seeing Chinese wages going up, and environmental protections necessarily going up, and that compress some of their profits at the margin. The coalition, that what you might call, lobbied America for integration with China and proceeding along the lines of how would I say, a deeper and deeper inner connection. It was falling apart before Trump came to town. And then what you say that Trump focused on the wrong things rather than the right things, leaves us with lots of acrimony and what I’ll call a deepening ditch. The China 2025 was I believe a public document well before Trump came into power. And that notion of displacing knowledge intensive and higher up the value chain things with domestic production.

I’ve been kind of reminded of Orville Schell, he wrote that book with a coauthor, I think the name was Delury, Wealth and Power. About how the Chinese, the former middle kingdom, had been wounded by the opium Wars, wounded by the Japanese invasion, and there’s a nationalism that wants to regain their preeminence. But that’s not compatible with the global system. I would say, as the cards are being dealt right now.

Bill Overholt:

Yes, I’m glad you brought up manufacturing 2025 because that’s become a special bet bar for the Trump administration. There are issues on each side. One is the Chinese view American right-wings desire for decoupling with China as a threat. But the Chinese assertion that they’re going to take over the market in every leading manufacturing technology, and replace the Westerners who now serve a large part of their market. That’s a Chinese version of decoupling, and they started this process of decoupling, this mentality of decoupling long before it was a thing at The Heritage Foundation.

The logic of decoupling makes no sense for either side. China is hugely dependent on foreign direct investment for growth, for technology, for jobs. And so the decoupling makes no sense for their economy. On our side, the de couplers focus on the supply side, they’re all “Oh we can’t be dependent on China.” I mean look at the demand side, China is the big market today. If you make cars, your biggest market is in China. If you’re Gucci or Nike, your biggest market is in China. For three quarters of a century, the center of gravity of the world market has been the Western baby boomer, Rob that’s you and me, and we’re getting long in the tooth.

Now the center of gravity of the world market is China. If we cut ourselves off from that, we’re dead. I guess my analogy to that would be what happened to France. When I was a kid, France was a great world power. If you were going to be anybody in international diplomacy or international business, you had to speak French. And France became just enough more protectionist than places like the U.S. in Germany, that its global position went into radical decline. Now it’s a third grade power.

That’s exactly what the U.S. will do to itself, if this mentality of decoupling is allowed to prevail. So we have a big problem on this, and the Chinese have a big problem on this. Having said that, it’s probably useful to switch for a minute to the national security side, and here you have the same phenomenon. China and the South China Sea is behaving as if it were a tiny little country like Malaysia, or Vietnam, or the Philippines, and these countries play all sorts of little games. Anwar, who in his previous incarnation as Deputy Prime Minister of Malaysia, used to fly out at midnight to these little islands on a helicopter and plant foreign artifacts, to show that Malaysia had always been in control of these islands. And that’s what a couple of small countries do, and that’s what China is doing. It’s behaving like a small country, just grabbing everything it can. But as a big country, you have some responsibility to maintain the system.

You need peace. You need rules that preserve the peace. You need a situation where countries have strong interests, but they recognize that other countries have strong interests too, and it’s a super compromise. China refuses all that, and behaves like a tiny power. The U.S. on the other hand, wants to treat China as if it were still a tiny power. When China says, “We should have some say over standards on digital commerce where we’re the world’s leader.” Or when China says, “We should have an agreement maintaining peace in space.” Or when China says, “We’re a big economy now, we should have a proportionate role in the world bank.” No, no, no. You’re challenging our right to be the world regiment, to control everything.

Rob Johnson:

Yeah.

Bill Overholt:

That’s not going to work in the modern world. China’s not the only country that’s bigger than it used to be: India, Brazil, in particular. Somehow our congressmen in particular, and most of our political leaders, think that we have a God given right to control everything, and that if some other country thinks it should have a say, even in areas where it’s leading the world leader, that’s unacceptable to us. So we Americans have to accept that China is a big power. It’s going to be there indefinitely, it has a right to compete, it has a right to have a say in the world standards that are said. And when they ask for a voice it is usually legitimate. Now, when they try to chair the UN Human Rights Committee, that’s unacceptable. We have to fight for our standards and areas like that. But those areas are actually relatively… but those areas are actually relatively limited.

Rob Johnson:

I think Bill that there are many things which you might call coming from different philosophical traditions. And when I’ve met in recent years with some of the very top leaders in China, not Xi Jinping himself, but some of those right around him, people who you know. They say to me, “Well, if we had been Tonga, we could have tied up to the tug boat called America, sent some of our people over for education, come back, modernized our economy, and we’d have been so small. You wouldn’t even have noticed. But when we’re a country that has between four and five times the population of America, we start to what you might call sink the tug boat.”

Rob Johnson:

But they didn’t think that globalization necessarily would sink the tugboat. They thought that the Americans failed to take the logic of what economists call Free Trade Theory seriously. Which requires for everyone to be better off some compensation, some adjustments, some transformational assistance. And that the government and the money politics of the United States led to essentially rewarding the winners with tax cuts, deregulation, the right to keep your money off shore. And the losers saw their public school systems and their health systems and everything collapsed, which led to a despair in a despondency. Which some Scandinavian economists have said to me, “They used to call Europe sclerotic, and America because of its supply side, flexibility would be more dynamic. And that was the growth model.”

But because of the pervasiveness of globalization, technical change, financialization, America is now in a position where the despondency and the temptation towards authoritarian politics and delusional scapegoating is not going to be the model of future. The way it was put simply to me by a New York Times reporter is when you go to Sweden, they love the robots because it improves the production possibility frontier. His name was Peter Goodman. It approves the production possibility frontier in the people in Sweden, trust that while they don’t save jobs, they save people. So that you, and your children, and your pension, and your health, and so forth would all be intact. If you played the dynamic evolutionary game, that America is not playing very well right now.

And when I talked to the Chinese about exactly what you said, which is their market going through and up and out of the middle income trap, not the baby boomers like you and I, but that source of aggregate demand is the engine of growth in the next phase. Then while I think you’re right, that they’ll sputter and not reach the heights that they could, by closing off. They feel that they can turn inward and exploit the economies of scale, invest much more in R&D. And that in the medium term they would assert, or at least before the last year, would assert that they were in pretty good shape and not going to kowtow to the American empire’s leadership.

Bill Overholt:

I think they’re half right. They can use their internal market and they have created a vast and expanding middle-class because they’ve taken care of their people. In Juron Ge years, 1994-2003, they lost 45 million jobs in the state enterprises. And most of those were manufacturing jobs, but they took care of their people. Virtually all of them got jobs in the service sector, which was the expanding sector. And those that didn’t were retired on double pensions. So they’ve got the market, their problem is going to be on the supply side. Because as a recent book by Michael Enright showed, they are very dependent on foreign investment and foreign technology.

Rob Johnson:

Mm-hmm (affirmative).

Bill Overholt:

And they’re manufacturing 2025 there’s a remarkable resemblance to the old Japanese industrial policy programs. Remember we, Americans were terrified that the Japanese were going to take over the world. It had all these subsidies, and reduced interest rates, and special protections for their big companies. They were going to be kings of every important sector. Now what happened?

They had a few successes, mostly pretty much outside the special technology, industrial policy sectors, cars, consumer goods, especially consumer electronics. There are subsidies for the big technologies, had some successes, very expensive, but they had more failures, also very expensive. Mary Janno and Tom Pepper of the Hudson Institute did a book back in 1979 that added up the results. And the results were hugely negative for Japan. And Japanese are very sophisticated, much more sophisticated than the Chinese about industrial policy. The biggest Japanese industrial policy success was the fifth generation computer artificial intelligence program. They were going to take over the computer industry and artificial intelligence. It has a remarkable resonance with today, even though that was back in the 1980’s,

Rob Johnson:

Yep.

Bill Overholt:

And that was a complete disaster. Now same, thing’s going to happen to China. They’re going to have some big successes. Ali Baba and Huawei are extraordinary successes facilitated by the system, but not really the core of their manufacturing, 2025 subsidies and protections.

And Japanese found something else. As they turned inward, they protected their cell phone sector by making sure that their standards were completely incompatible with the technology of Motorola, which was the big competitor. And the protection was very successful, the Japanese got the domestic market all to themselves. About the time they had the five best cell phone companies in the world. And the turning inward meant that they turned the world market over to Apple and Samsung. And so by protecting their own market, they lost the world market. And I think that’s the fundamental lesson for China.

The lesson for the Trump Administration is that this terror about manufacturing 25 is inappropriate. We did it once before with Japan, we should learn that lesson, let the Chinese waste a lot of money. When I threatened to take over a particular sector through unfair means as with Huawei or as with credit cards, we should block them in that sector. But we shouldn’t succumb to this existential terror that the Trump Administration tends to spread. At least we, to the other point you made about our response to job losses compared with Sweden’s. Our response compared to the Chinese losses of 45 million jobs are even more dramatic a contrast.

Now what happened there?

Rob Johnson:

Mm-hmm (affirmative).

Bill Overholt:

Manufacturing jobs have been in steady decline since 1947. I published a paper that has a graph. On that graph you can’t even see the emergence of globalization of China. It’s just a steady decline since 1947.

And our manufacturing output similarly goes up steadily from the postwar period. It goes up, but it uses a lot less fewer people, fewer jobs. And the reason is primarily technological change and organizational efficiencies.

Rob Johnson:

Mm-hmm (affirmative).

Bill Overholt:

It’s true that that globalization does affect some jobs, on the average about one out of seven manufacturing jobs lost. But manufacturing jobs are going away that agricultural jobs once went. We used to have 98% of American workers in agriculture and now it’s closer to 2%. Is that because Peru stole all our jobs? No it’s because we’ve got combines and all sorts of technologies so that one machine can do the work of 100 or 20 previous workers.

Now when agricultural jobs were declining, we built the transcontinental railroad system, we built the interstate highway system. We created the foundation of modern cities and modern manufacturing by zoning rules, and work safety rules, union rules, all sorts of things. We didn’t blame foreigners. Now the same thing is happening in manufacturing jobs. The future is in service jobs, which on average are much, much better paid than manufacturing jobs. The Chinese recognize that, they shifted people.

What’s happened in our country? Well, the Democrats have their roots in the manufacturing unions, they’re totally dependent on them. So they talk about getting the manufacturing jobs back. They never talk about the fact that those manufacturing jobs are gone forever and you have to move people into service jobs. Instead, you blame it on China.

On the Republican side, the rationale is different. What we know from the work of people like MIT economist David Author. Is that when you’ve got a company town and the company goes down, people just sit around helpless. They don’t know what to do. These are not highly educated people who can scan the global market and see where the jobs are. You don’t just have to offer retraining programs. You have to identify where the jobs are going to be, which is in services, and where physically they are and help them. But that means giving the government, some authority and some money. And Republicans are absolutely unwilling to do that. So they also find it convenient-

Rob Johnson:

You’re singing my song. I’m a boy that grew up in Detroit, Michigan. And I watched the decline of the auto industry, the outward migration of population. I worked for six years in the US Senate. When I talked to the Michigan senators like Carl Levin and Don Regal, they said, “Well, after the Voting Rights and Civil Rights act, no Democrats in the South are willing to provide trade adjustment assistance, or economic adjustment assistance to a place like Detroit. Which is a Northern, black run, meaning Coleman Young was the mayor, and black majority. And so Michigan, Detroit Metropolitan Area, were going to have to fend for themselves. And we saw what that implied.

Bill Overholt:

Yeah, that’s a perfect example. Michigan governors and Michigan politicians, rail against China as having destroyed jobs in like the car industry. The truth is exactly the opposite. GM was headed for the dustbin. At the turn of the century, GM was hopeless. It was a European and American car company that was losing money, hand over fist. In Europe it was losing my in huge amounts. In the US it was headed for bankruptcy. And the loss of all those jobs, when you include the supplier who would have been affected, it was millions of jobs.

So what happened? China opened its market in a way that our allies, Japan and South Korea never would.

Rob Johnson:

Mm-hmm (affirmative).

Bill Overholt:

In China today, you can’t drive anywhere without seeing a couple Buicks. If you go to Japan or South Korea, you’ll virtually never see an American car, but in China they’re everywhere. And the profits in China were just enough to save GM. GM sells a lot more cars in China than it does in the US.

Rob Johnson:

Yeah.

Bill Overholt:

Moreover, the Chinese engineers re-engineered the styling of the Buick. Buick was headed for being Oldsmobile. Oldsmobile died because it was only being bought by people in their late sixties and seventies. Chinese made the styling a little sexier, and all of a sudden Americans under 60 we’re buying Buicks again.

Now GM had lots of advertisements about European engineering. It wasn’t European engineering at all, it was Chinese.

On the job front, when I was at RAND, Charles Wolfton study the effects of productivity on jobs at General Motors. If productivity doubles and the number of cars you’re producing remains the same, then the number of jobs is cut in half. And so Charles did the calculation. How much should jobs have been reduced by the increases in technology and productivity at General Motors? And what he found was the jobs should have gone down more than they did because of increasing productivity. I asked, “Why didn’t I go down more?” Well, they didn’t go down more because the China market was supporting jobs that wouldn’t have been there under ordinary circumstances. But the Democratic politicians, in this case were Democrats, found it very useful to blame everything on China. And this is a very fundamental factor in our bad relationship with China today.

Rob Johnson:

So we look particularly now at the horizon of the need to collaborate on a global level vis-a-vis climate change. I think the evidence that in the next 20 years, lots of things have to be done to transform the structure of energy use and reduce carbon substantially.

We’ve been talking about a disintegrating relationship, lost opportunity in the economic sphere from that disintegration. Or the pursuit of which you might call false or, or close to meaningless grievances in missing the big picture. But on the horizon, there is a big picture that will beckon us to collaborate with China. Do you see that as possible? And what’s the pathway that you would envision to creating that necessary collaboration?

Bill Overholt:

Well, as you say, a global collaboration, and that means especially US, China and collaboration, is the only way we’re going to solve the problem of environmental degradation and of climate change. And that collaboration was going very well. At the beginning of the Obama Administration China was a big problem in the world. Obama was very angry at them. By the end of the Obama Administration, China was becoming a leader and we were, while disagreeing over the details, we were basically in sync. And the degree to which we were in sync is much more impressive when you go down to the technical level,

Harvard has a collaboration between a group, it’s engineering school. Group led by the guy who solved as much of the Los Angeles air pollution problem as has been solved. And they worked very closely with China to try to help China solve the terrible air pollution problem that Beijing and other major cities have. And that’s good for China. It’s also good for us because of the technical problems of solving air pollution are some of the most complex, difficult problems in science today. Pushed down one kind of pollution, you get another kind. Solve a problem in one area, worsen the problem in another area.

And the mutual learning that has been happening by having some of the greatest scientists in the United States and China working together, just cant be overstated. And it’s not just Harvard, it’s, scientists, all our major universities in our government who are collaborating successfully on these programs.

But what’s happening now? What’s happening is that the US has gone from being the leader on the environment and on climate change to being the one that breaks the Paris Agreement and subsidizes the coal industry. While China has become the leader in every form of green energy. And while it’s digging itself out of a very deep hole, it’s spending more on.

It’s spending more on environmental improvement and all the United States or all of Europe. So at the top level, all the way that breakdown and collaboration, paranoia that’s set in from Washington. There have been bad things happening. There have been Chinese scientists stealing our technology, but it’s gone from, okay, this is a problem. We neglect it. And we really got to solve it and we really do have to solve it. There’s some bad things have been happening. But it’s created a paranoia about all Chinese scientists, it’s created special investigations of very large percentage of people who happened to be ethnic Chinese. And the people are scared.

Some of the best scientists are moving from the US back to China. And this is a terrible loss. We did this in the, in the McCarthy era, we chased out one nuclear scientist and he went and then the Chinese nuclear weapon industry, he was working for us. He wasn’t doing anything wrong, but we drove him out. We’re now doing this on a vast scale. People are spitting at Chinese on the street.

The other aspect is crucial. It’s crucial. You go to Silicon Valley and look at these giant companies that have made America the leader of the modern world, everywhere you go in Silicon Valley, the founders, the leaders are Indian and Chinese, a few more Indian than Chinese. If we turn inward, block immigration, drive out these entrepreneurs and scientists who are helping us be the leader in the world, we’re in trouble. So we have to get our balance back. I don’t know how we do that.

Rob Johnson:

I think you’re really touching on a deep psychological fulcrum that is haunting America a great deal right now. Peter Temin, who you know, the economic historian professor Emeritus from MIT wrote an INET book, in 2016, early 2017 called The Vanishing Middle Class. And the underlying premise was that, as you said earlier, the new jobs are in the high margin services. And for people to get there, for America to be called the land of opportunity, we need from prenatal nutrition up through college education, the rungs in the ladder.

And yet where we see economic distress and despair geographically, we see the 70% of the population that is not in those high margin, high value added sectors of which only about nine percentage points are African American, but we see the others voting and lobbying against something that would make a huge contribution to America being incredibly called the land of opportunity.

And it’s in the poison. These are the scientists is in the poison of what my board member, john powell, refers to as otherness that as a society, we are choosing in the realm of identity politics to break down our own system of opportunity. And we will not become vital and dynamic and realize our promise if we continue on that path. And the US China relationship, given the size and scale of China, portends a lot of changes, not just how globalization and others things that affected the United States, but give me your thoughts on say the development of Africa.

INET did a conference in December 2018 with Justin Lin, who advocates, a new structural economics that was very much focused on the development of Africa and the role of the US plays as distinct from the role of the Chinese play. How do you see the horizon for African development and the US China relationship in that context?

Bill Overholt:

Let me talk about that, but let me first address the very important thing you said earlier, which is that as a society, we’re voting against the things that would improve our situation. Why is that happening? People don’t vote for Trump because they have calculated the economic interests of themselves and their families. Obviously they’re voting against that.

Why do they vote against these things? Well, they’re angry. They feel the establishment has deserted them. And they’re right. It’s not just Trump and the Heritage people arguing for decoupling, it’s Nancy Pelosi and Chuck Schumer and those politicians in Michigan that we talked about earlier. They’re refusing to deal with the major social problem of our country in the new century. They’re treating these people as fly over people in favor of short term political calculations.

Let’s do tax cuts for the rich, rather than helping our left behind people. Let’s pander to the manufacturing unions rather than talking straight about where the jobs really are. Our whole establishment has abandoned the responsibility to take care of our people. The people are voting not against policies for education and health. They’re voting against an establishment that they’re angry about. And unfortunately, they’re right. And nobody is standing up on either side of the aisle and saying, “Here’s how we solve this great social problem. Here’s how we move our society into the modern world and help all those struggling people.” Until we have a leader who does that, we don’t have a chance.

Now to Africa. In the old days, the US was the promoter of a system of development. A strong World Bank, WTO, strong AID programs, strong institutional development programs, and in a place like Indonesia, those programs work miracles. Indonesia in 1965 was the most hopeless place in the world. Negative economic growth, inflation in the multi thousand percents, more Islamic jihadis than the rest of the world combined. And we persuaded the new governor general Suharto to focus on the economy. We taught him how to do it. Berkeley mafia became the ministers at Harvard Institute.

International development provided the institutional guidelines. And Indonesia became a solid, successful constructive member of the international community and it’s now a democracy. Now, what do we do in Africa? Well, we didn’t want to expand the world bank and the IMF and the WTO. So we let those kind of atrophy. We got rid of most of our aid programs. We got rid of virtually all of the institutional development programs. And the main thing we do in Africa is we provide a special forces team in each country to fight terrorists and, and offshore Naval presence, just in case there’s a bigger problem.

The ones for development, China, and the last big diplomatic and development success the US had in Africa was under Republican George W. Bush, who put tremendous resources behind a program to solve HIV. That do wonderful things for the people of many African countries. And it got America, a huge amount of credit. Today, all they see is a special forces teams and, and special forces teams are barely succeeding anywhere. They like our forces in Syria and Afghanistan and Iraq. They never lose a big battle, but they never win the war.

China on the other hand gets four dozen African leaders together and talks about development. And then it builds railroads and it builds roads and it invests. And Ethiopia has become the Chinese version of Indonesia. And there are successful programs. Almost nobody in the West realizes that in many years, Ethiopia is now the world’s fastest growing country.

When I worked in Ethiopia, it had six violently conflicting Marxist parties, it had one of the modern world’s worst famines. This was a complete disaster like Indonesia in 1965. And there are a number of contributors to success. But China is the biggest one. And if you look at the belt and road program throughout Africa, there are a lot of problems. And American commentary is focused almost exclusively on the problems, which are real, but we kind of liked to be little China.

But if you talk to the economists who work systematically, and if you talk with Africans as a group, but for all the problems, this is huge progress for us. China on balance is helping and helping on. So China is doing what we used to do, and it’s the right program. And then our assistant secretary of state says, they’re just building a great wall of debt and trying to subordinate these countries. All American research has shown that that’s nonsense. They’ve handled debt problems, roughly the way we would have handled them, the notable exception being a big part in Sri Lanka. So we’ve passed the Baton and we’re surprised that somebody else picks up the baton.

Rob Johnson:

Yeah, I think that’s almost a metaphor for the entire American experience outside of the top 5%. and the world experience. And that’s a daunting prospect.

Bill, you lived in Hong Kong for 18 years. I remember we met when you were working with bankers trust there. And so was I. There’ve been some big changes since the days of the British rule and Chris Patton and others, but it seems like things have become quite acute. A year ago, I was at a Victor Fung event of his Asian Global Institute. And on the way to the airport, riding in a van with Kishore Mahbubani, a bomb went off about a hundred yards at about 11 o’clock on the clock. As we were driving a lot of the debris and so forth, hit the car and the driver just pulled around and kept going. So a bunch of people with those Guy Hawks type white masks, all standing and cheering as they’d blown up a part of the road.

But now it seems, we got to the airport, both of us were kind of terrified and went on home. Getting back to Singapore and me I went on to Beijing before New York. But what’s happening in Hong Kong now seems what might say, even more profound or severe. I know you’ve written a recent paper on the Hong Kong situation, but it preceded this pandemic and it was called the rise and fall of one country in two systems, which I’ll post on our website associated with this podcast. But give me a sense. What’s happening in Hong Kong? Is this a continuation of things that have been building? Is it abberant? What does it imply for the people there in the world?

Bill Overholt:

Well, until 2014, one country two systems was working beautifully. The Chinese observed every comma of their promises for Hong Kong. The British, by the way earlier had not broke the agreement in very important ways. But with the emergence of Xi Jingping, things change.

There were some booksellers in Hong Kong who were publishing books about Xi Jingping’s own life. Xi Jing[ing found a way to shut those down. There went freedom of publication. The local editor of the Financial Times was asked to chair a meeting of the foreign correspondents club where Joshua Wong a dissident high school leader had spoke. And Hong Kong refused to renew his visa and there went freedom of the press.

And one of the promises was that China would respect the Hong Kong judicial system and the organs of the mainland government would not interfere in Hong Kong, but there was a billionaire who lived at the Four Seasons hotel, Chinese public security bureau made a deal with a local triad gang to kidnap him out of the Four Seasons hotel and bring him to the border where the public security bureau could capture him.

And additionally, people from the public security bureau were everywhere in Hong Kong, contrary to the agreement. They didn’t just look at security issues. They were the arbiters of many local important business deals. So China was breaking every major political agreement it had with China, and that was a very explicit policy, very explicit change under Xi Jingping.

So then came riots. People react the way those bomb throwers you encountered did, and China could easily have solved this problem. Okay. Lower level of people made mistakes. We’re going to reaffirm our promises and stick with them. Everything would have calmed down. We would have gone back to a situation where there were skirmishes along the boundaries of one country. China want something to happen. People in Hong Kong don’t want it to happen. Have demonstrations under all previous Chinese leaders, there were been calm discussions, negotiations, some kind of a deal, but instead this time China’s reaction was blame it on the United States and Taiwan.

These are all done by black hands, manipulated foreigners. They always had a hard time explaining how American CIA agents could somehow get a million or 2 million middle class educated Hong Kong people into the streets, but that didn’t bother them. They had wonderful propaganda, a subcontractor by the way, to Russia. Most of their best propaganda videos were made by the Russians.

And they wanted to characterize even peaceful demonstrators as rioters. Being a rioter makes you vulnerable to a 10 year jail term. And they had somehow turned a previously very respected Hong Kong police into a thuggish operation that operates the way police do on the mainland. Just beat the hell out of anybody who disagrees with you.

So things were badly polarized. When these things of happen one after another quickly, explosion came over what would have been a relatively minor issue by itself, an extradition law so that they could send a guy who had murdered his girlfriend back to Taiwan, the big riots before the pandemic exploded over that. But it wasn’t over that. It was the pressure, the anger that built up over three years of China abandoning all its promises to Hong Kong. So then you have a pause for the pandemic and then China wants to implement this new national security law. Now the Basic Law, which Britain and China, Hong Kong leadership agree.

China and Hong Kong leadership all agree to as Article 23, which it says Hong Kong will pass a national security law that prevents subversion. Most countries have such a law. The Democrats oppose any kind of any anti-subversion law with a big demonstration every time there was a proposal to have one. And that was actually a big mistake. They should have gotten together and said, “Well, here’s the kind of anti subversion law that would be acceptable to us.”

So it’s been an impasse for 23 years. So China finally said, “Since you won’t do it, we’re going to impose one.” So the problem is not the law itself. The idea of an anti subversion law, which is a mistake almost all of our media and politicians make.

Two problems. One is that the proposed law will have very severe penalties for rioting and subversion. And those are words on the mainland that are interpreted in the most expensive possible way, makes it possible to arrest almost anybody. And that’s absolutely unacceptable to Hong Kong people. The second is that although China has a reasonable beef, Hong Kong has not lived up to its promise to pass an Article 23 law, it’s illegal for the National People’s Congress to impose a law of their choice on Hong Kong.

And finally, the new law will allow public security organs of China to function openly in Hong Kong. And that is specifically prohibited by another part of the basic law, which I mentioned earlier. So this is two things, one , it’s a proposal that has absolutely unacceptable elements and it’s a trigger. It’s a trigger for all the pent up frustrations. And this time it’s not just triggering the frustrations in Hong Kong itself, but internationally. And obviously, the biggest response has now come from the Washington of Trump and Pompeo, who said that Hong Kong is no longer to be considered an autonomous entity.

Rob Johnson:

Yeah.

Bill Overholt:

If we have time, I’ll step back for a minute and look at two things.

Rob Johnson:

Sure.

Bill Overholt:

The fundamental conflict of view that underlies this and the risks that are posed by the U.S. reaction. China’s view of Hong Kong has always been that it’s a business entity. Other Chinese cities or areas have a mayor and a party secretary or a governor. China has a chief executive, whereas under the British it had a governor. That chief executive title is because Hong Kong is a business arm of China. The reason why China wanted to preserve Hong Kong system is so incredibly valued as business.

Now, the Western view of one country, two systems, is that it’s a free liberal policy with democratic potential. Now, in the old days, before Xi Jinping, Chinese leaders saw some connection between these two. Many top Chinese leaders talked about Hong Kong as a model for the future Chinese economy. They imported Hong Kong advisors into very high levels, typically a deputy chairman of the bank regulator, or a deputy chairman of the securities regulator, and they saw a connection. Hong Kong represented a Western system that was very successful. It was an economic system that was very successful. It had connections to these kind of political openness that they didn’t completely buy into but they saw as connected to the economic success.

Two things happened. In 2008, the global financial crisis disillusioned Chinese with the idea that Western financial systems were the way to go. No, this created a risk of total collapse. China needed to find its own way with more controls. Second, the advent of Trump and Bolsonaro in Brazil. Bolsonaro and Boris Johnson in Britain convinced, not just Chinese leaders, but a broad swath of Chinese and many people throughout the world, that democracy created a risk of dangerous, irrational, thoughtless leadership that would damage the economy. Chinese ways seemed better.

In comes, Xi Jinping with his authoritarian tendencies and they say, “Well, we’re going to preserve one country, two systems.” And the important part, what they considered the important part was the economic system, and we can get rid of this other stuff. So here’s the clash. That they think they’re preserving the only important part of one country, two systems and we think they’re destroying the only important part of one country, two systems.

Now, the Washington reaction given that this Beijing government has broken so many promises to Hong Kong, the Washington reaction, it’s no longer as autonomous as we thought is completely reasonable. The question is what happens now? If you take away the legislation that treats Hong Kong as autonomous, Hong Kong’s role as a trading center collapses, Hong Kong’s foreign direct investment system collapses.

And if you apply the export controls to Hong Kong that provided to China, you’re not allowed to transfer any sophisticated American computers to China. And this means, if it’s interpreted this way, that we won’t be allowed to sell any sophisticated computers to Hong Kong. And we’ll enforce that on our European partners. Now, when I was the governor of AmCham in Hong Kong, the calculation was that the big banks had to turn over their computer systems every two years. And if at the time we were legislating the special rules for Hong Kong, if the export controls had been applied, the big banks would have collapsed within two years. It’s virtually impossible to replace their systems with systems that they would be allowed to export or with systems bought from China.

Now, I don’t know what the current situation is. But you have all the biggest American banks, all the biggest European banks and the biggest British bank, HSBC. Well, HSBC is legally headquartered in London, the core of its business is out of Hong Kong.

Are we going to destroy all those banks? So how, if you’re Pompeo and Trump, do you take this finding which on its face is reasonable and implement it in a way that doesn’t destroy the livelihoods of the people of Hong Kong?

In the Vietnam War, some of our soldiers had a slogan, “Burn down the village in order to save it.” If you burned down the village and killed everybody, they wouldn’t become communist. Afterwards, some people thought that was a pretty bad idea. In the most extreme interpretation, just taking away the special protections of Hong Kong would burn down Hong Kong in order to save it.

I don’t know how much of our allies were consulted. The Trump administration doesn’t have a very strong record in consulting allies. Have they talked with London about the fact that HSBC might be just crippled? I don’t know the answer, but I’m concerned.

Rob Johnson:

These sort of profound changes in a very turbulent time. Bill, any final thoughts? We, in many of these podcasts at this time, towards the end of May in 2020, I open with a people’s impressions of the profound influence and unmasking that the pandemic has provided. You have any final thoughts on how the pandemic has changed the forces in the context that we’ve been discussing today, U.S, China, Hong Kong, Africa, Asia, or any other observations that relate to it?

Bill Overholt:

Well, I think it has changed things profoundly. The whole world is angry at China because China is the origin of the virus and they were slow to respond. We don’t know whether they could have prevented the virus from getting out. This is a very, very fast spreading virus, but if there was a chance, they blew it. So the world is very angry at China about that. But then China cracked down. They did what you do to control the virus. They did what U.S. plans would have done before Trump threw away all those plans in 2016.

And then the Trump administration delayed considerably longer than China delayed. So now the U.S. has been the center of the pandemic. Even if the Chinese figures for infections and deaths are off by a considerable magnitude, the U.S. has far more infections and far more deaths.

So the U.S. is a super spreader of the virus to the rest of the world right now. And the way, at first delayed for political reasons, Trump was afraid that the stock market would go down, so he called it a hoax, and then did this haphazard shutdown. Every state is different. And then Trump mobilizes his own supporters against the shut down and validates armed protestors intimidating the governor of Michigan. Now we have almost every state opening up before the guidelines say it’s appropriate. So the U.S. comes out as the big super spreader.

There’s this kind of silly effort by the government of Mississippi and voices in Washington say, “We’re going to sue China for this.” Boy, if we have a valid suit against China and I don’t know any legal basis for that. An awful lot of other countries would have a valid basis for suing us and they’re very angry at us. And instead of seeing us as a world leader, they see us as a joke. That, along with abandoning the GPP and the Paris Agreement and subsidizing coal have, and ridiculing our allies about almost everything, that provides a capstone of the end of our image as a valid world leader.

China’s got a big problem. But they can say, “Once we got our act together, we did what’s right. We did what was necessary to take care of our people.” On the economic side I think the consequences are very important. China had a huge problem. So it just clamped down, as did South Korea, Taiwan, New Zealand, Australia, Germany, Austria. The result is they can open up their economies.

Rob Johnson:

Yeah. Well, I want to thank you Bill for this vast and deep dive on this day and I think, I said at the outset, you have always been my teacher about things related to Asia, related to Myanmar, related to China, Taiwan, Hong Kong and much, much more. Your vision and insight with regard to geopolitical forces, technological and military, as well as the kind of bread and butter of INET, the economic dynamics is extremely helpful. And I hope that you, before too much time passes, will come back. As I know you will do. We stay in touch and you’ll always alert me if something acute is happening. I know my team at INET is very interested in doing a video webinar with you, with our 11,000 strong young scholars initiative and also the webinar for scholars and leaders that has been blossoming.

But for now and for today, I want to profoundly thank you. Your insights are very, very valuable, very considered, and you’ve always been someone who… How would you say? Is a guiding light in perhaps the most interesting and challenging frontier, this relationship between these two philosophical systems, these two large countries and all that it portends.

I hope you enjoyed yourself. You’ve certainly created a lot of things for people to think about for my listeners. So, thank you very much.

Bill Overholt:

Thanks Rob. It’s an honor to be part of your program. And I’ll continue to work with you.

Rob Johnson:

Yeah, well, you have been a core. You’ve been a featured attraction for a long time, and that’s not about to stop. So we’ll talk again soon and thanks again. Bye bye.

About the Host

ROB JOHNSON serves as President of the Institute for New Economic Thinking.

Johnson is an international investor and consultant to investment funds on issues of portfolio strategy. He recently served on the United Nations Commission of Experts on International Monetary Reform under the Chairmanship of Joseph Stiglitz.

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About the Guest

Dr. William H. Overholt holds a research position at Harvard’s Kennedy School and is Principal of AsiaStrat LLC, a consulting firm. Previously he held the Asia Policy Distinguished Research Chair at RAND’s California headquarters and was Director of RAND’s Center for Asia Pacific Policy.