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China no longer a copycat nation, they are the new Silicon Valley – ex-US govt adviser on Asia

A US-China trade war seems to have been averted for the time being. But will the truce last? We asked Robert Manning, former US government adviser on Asia, senior fellow at the Brent Scowcroft Center on International Security and its Strategic Foresight Initiative at the Atlantic Council, and participant of the 2018 Emertech international conference.

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Sophie Shevardnadze: Robert Manning, great to have you with us on this programme. 

Robert Manning: My pleasure. 

SS: Alright, so after the G20 summit President Trump said an “incredible deal” with China has been made. Now, the Chinese – they announced rolling back some tariffs, and they’re ready for another round of talks, but they have not given any specific details out. Do you think the deal is really that incredible as Trump says it is? 

RM: Well, despite the fact that Trump said it, it might be true. And I think that… This was worked out before the G20 by various cabinet officials. And I think we’re starting to see the Chinese announced purchases of more agricultural goods, I suspect you will see them also announce purchases of long-term natural gas, they’ve announced an opening of a range of sectors to foreign investment, and I think the whole set of issues around technology… We’re beginning to see things at least being talked about. Most of the things that the US has demanded, if you go back and read the speeches Xi Jinping has made going back to the 90th Party Congress, if he actually did what he said, there wouldn’t be much of a problem. And I think now he’s being tested. That’s not just the United States, I think that China’s mercantilist policies have been a source of concern in Europe, in Japan and elsewhere, that the Chinese have just kind of overplayed their hand. Even, there’s a quiet debate amongst the Chinese elite, where one’s worrying that Xi has overplayed his hand, and I think we’re beginning to see him walking it back a little bit. 

SS: But let’s bring this back into the realm of the US and China relations, because I do agree with what you’re saying about Europe and Japan, but I want to talk more about China and the US, because meanwhile, as the talks are in progress, and the second round of the talks is somewhere close, but meanwhile, the daughter of the founder of the tech giant Huawei, who is also second in command there, has been arrested at an American request, for violating US trade rules and anti-Iran sanctions. Huawei is linked tightly with China’s government – and even though China says the arrest won’t stop the trade talks with Washington, why the need to complicate things? I mean, things were just getting better, you were just about to hammer out a deal or so, won’t this arrest derail the year-long negotiations? 

RM: Well, I think you’re assuming more coherence within the US government than it might be prudent. We have an independent judiciary, the Justice Department does… In fact, Trump didn’t even know she was arrested at the time, he was having dinner with Xi at the G20. 

SS: Yeah, I know, John Bolton said that he did not pass the news of the imminent arrest to President Trump. I mean, I understand that, you know, the President shouldn’t be looking into every single detail of everything that’s going on, but this is a big deal. It’s like Bill Gates’ daughter being arrested in China, or something like that. 

RM: Right, but I don’t think we have a similar situation. The Chinese have a lot more control over all those sorts of things. I think, also the Justice Department announced a whole range of sanctions against Chinese hacking exercises and so on. This is part of a broader US attempt to push back on Chinese technology, mercantilism, stealing IPR, and so on. I think Trump is, obviously, using it as leverage in these trade talks, but I do think that you have two very large, the two largest economies in the world, very intertwined in ways, and you have some people in the Trump administration that are very anti-China, that want an economic divorce. I would note that, in a rare occasion, Trump has actually appointed somebody to be in charge, the USTR Lighthizer, and, because all of these advisors have different trade policies… 

SS: Yeah, absolutely, Lighthizer says he wants more tariffs against China, and Mnuchin says that a trade war should be evaded, and then, you have Peter Navarro, who is the trade adviser, he says: Trump, be careful, don’t enter a hollow deal. So ultimately, who decides what to do? 

RM: Well, as I said, I think that’s why they appointed Lighthizer. I think, for the Chinese it’s been very troubling, because historically, on our China policy, there’s been somebody in charge, so that the Chinese know who to go to. For example, in the Bush administration, it was Treasury Secretary Paulsen, so, and we had a pretty good way of managing these issues. In the Trump administration, no one’s in charge, and there’s several different voices with different policies. And it’s been very difficult for the Chinese, first they made the deal with Commerce Secretary Ross, and then Trump vetoed it. Then they made a deal with our Treasury Secretary, and Trump vetoed that. So from the Chinese perspective, it’s like, what do we have to do, who do we talk to? And I think Trump… Now, I think, we’re going to answer that question with the appointment of Lighthizer. 

SS: I want to get back a little bit on the arrest of the daughter of the owner of Huawei. Like I said, for me, it’s like an analogy as if Bill Gates’ daughter was arrested in China, for breaching Chinese trade rules. Surely it wouldn’t make the US give even more concessions to China, if that were to happen. I feel like… Why do the Americans think they can strongarm Beijing like that? 

RM: Well, she wasn’t arrested the way the Chinese picked up Canadians in retaliation, she was… She was taken into custody because of the sanctions violations, in terms of the fraud Huawei conducted indoing business with Iran through the subsidiary… 

SS: Right, but I can’t but just, like, stop for a second and notice that companies like Ericsson or Samsung, who sell to Iran, aren’t being sanctioned, people aren’t being arrested from them. I mean, this is hardly… It’s only obvious that it’s a political thing because, you know, the prosecution is very selective. 

RM: I think we’ve sanctioned a lot of other countries. 

SS: But I’m talking about companies. I just gave you 2 examples, Samsung and Ericsson, they’re selling to Iran. 

RM: I think Huawei has a problem not just with the United States, over the past several months they’ve been rejected in the UK, in New Zealand, Australia, Japan is now in the process of thinking of doing away with Huawei as a 5G carrier. So I think there’s a lot of concern about Chinese technology practices more broadly, and I think that’s one of the reasons we’re beginning to see these trade talks kind of get traction, because, I think, the Chinese… Chinese Big Tech is not that different from American Big Tech. if you’re Alibaba or Baidu or Tencent, you want access to global markets. China’s only 14% or so of the world market, they want access to the other 86%. And I suspect that the fact that they’re being shut out of markets, that their efforts to acquire RFID, tech firms have been rejected in a number of countries… They’ve probably gone to the leadership in China and said, maybe this isn’t working so well. 

SS: So, the White House has given Beijing 90 days to, as they put it, to actually make things right, and that means reform their technology rules, open up to US services. But, I mean, these are the demands that the US has been battling over with China for decades. Isn’t it naive to think that in 90 days it’s just going to all be good? 

RM: Yeah, well, I would be surprised if that happened in 90 days. I think the way at least some people in the administration are looking at it, it’s more, like, a trial period. They want to be able in 90 days to see if the Chinese are serious this time about actually following through on commitments. You know, they’ve made a number of commitments. Xi Pledged to Obama to stop cyber hacking, didn’t happen, in fact, it’s just been increasing in the recent months. So I think Xi has a credibility problem, and not just with the United States. And so, I think, these 90 days will serve as a way for the US to make a judgement about whether the Chinese are serious or not. 

SS: So the Americans, they’ve been actually complaining about China pinching American technology for years, right? And maybe it helped foster Chinese technological progress, but now they are investing more and more in research, and they are producing more tech graduates than America and Europe taken together. Will China even need to play loose with foreign technology anymore?

RM: Well, I think China’s no longer a copycat, I think they’re a leading… In fact, I’ve done a major report on global innovation where I called China the new Silicon Valley. And I think that we’re seeing in a number of areas, in terms of… And as you can see, the metrics in terms of number of patents, number of scientific papers and so on, and in some areas, in artificial intelligence and others, they lead the world. And e-payments, half the electronic payments in the world are currently in China. Something like 42 million. So, you know, I think they’ve become a serious actor on their own, and I think their attitudes on IPR are changing because now they have their own IPR to protect. 

SS: So here’s the thing, you said the American and Chinese markets are so intertwined, and their economies are so closely working together, they need each other. They need each other’s markets, investors. How far can the two even push each other until it gets to a point where they will be shooting themselves in the foot?

RM: Well, I think you’ll see a slightly diminished relationship, but I think it’s more than a bilateral issue. The US and China account for about 45% of all world trade. If the two largest trading powers are playing by different rules, what kind of international architecture and trade regime, what’s the future of the WTO? So these are big global issues, and I think that how this plays out will have a big impact both regionally and globally on trade architecture around the world. 

SS: So in the beginning of 2018, you wrote that the current global trade regime is at risk. You were referring to Trump’s protectionism, unilateral attitude towards the WTO, pacts like the TPP and NAFTA. But, you know, the year is coming to a close, and we actually see that the US-China progress is here, and that they’re talking, and there’s NAFTA talks, and, you know, people are selling, buying. Would you still say that the world trade system is in danger? 

RM: Yes, I think it’s very much in danger. The crown jewel of the WTO, the dispute mechanism, is at risk. The US has blocked new judges as a way to leverage reform. And we have less than a year to go, if we don’t get this fixed, that whole system may not be working. And then, we’re back to, instead of rules-based trade, power-based trade.

SS: Mr. Manning, this hawkish approach towards China - it’s not just in terms of economy, but also hardware as well - we see this in the South China Sea, there’s already too many bomber fly-bys and warships sailing back and forth. Can the trade war thaw lead to an ease of tensions in that region? 

RM: I think, the old consensus going back to the Nixon’s opening is gone. Up until Trump all the previous American presidents felt that China’s success was good for the United States. Trump is the first one having a different view on that. I think, trade has been the foundation for the relationship. The strongest advocates for US-China relations were the US business community. If you go back over the last several years and read the US Chamber of Commerce and Beijing or Shanghai’s reports, they find it harder and harder to do business, and there’s more and more disconcerted efforts and frustration, and so they are less supportive. If we get a new trade arrangement with China that may build a new foundation for more stable relations. I think, broadly the US has a problem in accepting the rise of China no matter what they do. I think, a lot of people in the US see the status quo as some eternal development…

SS: Right, so what’s America’s endgame in the South China Sea? 

RM: Well, you know, the Chinese are the ones who signed the Law of Sea treaty and then decided to interpret it on an a la carte sort of basis. They pledged to Obama that they wouldn’t militarise the South China Sea and they built a whole series of military bases, building up the disputed islands. I think, the US and China both have a problem. Neither side has answered what I see as the two basic questions that will shape the future. Chinese assumption is that US is an outlier and they’ll eventually leave, and they are positioning themselves as the dominant power in the region. The US seems to think that it’s a network of alliances and its presence in the region which has only been there for the last 70 years. If you think about the last five thousand years of Asian history, there have been three different kinds of security systems. For a long time it was the Chinese tributary system, then we had imperialist system in the beginning of the 20th century, and after World War II it’s been American dominance. And from an Asian perspective that’s a short period of time. It’s not the norm, it’s the exception. And I think, the question is - what type of Chinese presence and role is acceptable to the US. And flip it around the other way for China: once they understand the Americans aren’t leaving their Pacific power, what type of American role and presence can China live with? Those are two big strategic questions that neither side has answered.  

SS: Beijing is active in the South China Sea, it has an arsenal to counter US carriers, we know that, and it’s building a blue-water navy. Do you think China is being realistic, will its capabilities match its ambitions?

RM: Well, I think, nobody talks about this. But I think, PLA in China has been fairly uncomfortable because they haven’t fought a war since 1953 really. And they’re taking a number of aggressive actions that are putting them in proximity with American forces, and the likelihood of an accidental escalating has been going up, and so on. And I think, a lot of people in the Chinese military leadership who’ve never fought a war and have always fancied new toys and they’ve never actually tried to see if they all work together, are a little uncomfortable being put in that position.  

SS: According to President Trump, China is also to blame for the apparent lack of progress with US-North Korean relations. Do you agree? 

RM: No, that’s not true. I think frankly, the fact that China and Russia both supported the UN sanctions created the kind of pressure that led to developments we’ve seen since January 1. So I think China has done actually more than… I think, Trump’s unrealistic expectations of what China can do, our interests with China overlap over the Korean peninsula, but they are not the same. China puts more value on stability and the US puts more emphasis on denuclearisation. And I think the way Trump has done this, has really given away the store… I think, Kim Jong Un deserves ‘The Diplomatic Man of the Year’ for the way he has really dictated the whole pace of diplomacy since his January the First speech, the way he dealt with the Olympics and the way he manipulated Trump… You know, for Trump the summit was the ultimate reality TV show.

SS: But right now the second-round talks were abruptly cancelled by Pyongyang, with no further dates given for the next summit. What will it take to restart the process? 

RM: Well, I think, they’ve made a number of mistakes. 

SS: Who ‘they’?

RM: The US. First, when Trump met with the leadership, I think, it was taken as a signal in both Moscow and Beijing that it’s OK to normalise relations with North Korea. And the US, by defining it as a bilateral issue… Remember, we had six-party talks for a while that didn’t ultimately achieve the objective, but they did show that major powers could co-operate where their interests overlap, and Trump’s walked away from that and dealt with it as a bilateral US-North Korea issue which, I think, is a mistake because you can’t solve this without China and Russia being involved, for example, on the nuclear issue. The IAEA can only monitor fissile material and facilities. They can’t deal with nuclear weapons. That’s something the Perm Five and three of the Perm Five happen to be in the North East Asia - the US, China and Russia. We ought to be talking to the other nuclear weapons states in North East Asia about how do we go about moving fissile material out of North Korea, how do we dismantle the nuclear weapons. That’s not going to happen magically, and I think to the degree that… Even our ally Japan has been cut out of the diplomacy. And even they are quietly trying to meet with North Korea and so on because in order to solve this we have to have a coordinated multilateral approach, and it’s not happening. And I think even within the US government there’s a gap between Trump and the whole career team under Secretary Pompeo who’s much more skeptical about Kim’s intentions than President Trump who said he fell in love...    

SS: Well, John Bolton that Trump surely listens to, says that another North Korean summit needs to be held, as Pyongyang is failing to deliver on its promises to denuclearise. The June summit was purely for the show... 

RM: No, it was worse than that. If you read the statement that they put out, it was so vague that it didn’t provide any guidance for how to put together the diplomatic process to actually realise any other goals… 

SS: So what’s the guarantee that the next summit will bring any tangible results? 

RM: I think it’s a mistake. 

SS: To have a summit at all? 

RM: The North Koreans have boycotted two meetings with Secretary Pompeo. They were invited to Geneva by our North Korea special representative who spent two days in Vienna waiting and they never showed up. So, I think, they’re playing Trump against his own government. 

SS: Do you think that’s smart? I think, the root of the problem is maybe somewhere in a different place. On paper, Pyongyang wants to normalise relations with the US, promising to denuclearise in return. But for Washington denuclearisation comes first - could that be the root of the problem? 

RM: No, that policy is not going to work. The North Koreans, whatever you think of their view, have been consistent from day one. They said: we want a phased synchronous process, which is the only way it can happen because there’s so much deep distress on both sides. When we had these six-party talks which I was somewhat involved in, it was called ‘Action-for-action’ because the only way you can build trust is if we do something and they do something. And that’s the only way I can see it working. If the US thinks North Korea is going to give up all its nukes and trust us after we pocket all the concessions, that’s just not going to happen.

SS: And also, Pyongyang sees nukes as the only real deterrent against an American invasion. I mean, giving them up is like demanding them for a leap of faith. Why would they do that? 

RM: I can understand, if I was North Korean, I might want to view nukes as a deterrent. However, I think you have a young leader who is 33 years old, unlike his father, he wants to be around for a few decades. And he knows that in order to do that, he has to modernize his economy. And if he has to trade some of his weapons of mass destruction, or all of them, to get that, I think there… There’s been a lot of progress in the North-South Korean reconciliation, and I think… I can see a solution, but I’m not sure how you get there, because of the deep distrust on both sides. And when the White House says we want a front-loaded solution, and when you ask them, well, do you have front-loaded benefits for North Korea if they give you all these things, they give you a blank stare. And so I think… I’m not sure they’ve really thought through how this kind of diplomacy works.

SS: You said earlier that neither China nor America have answered the main questions of why they are in the situation that they are. So, for me… For China, North Korea is arguably a buffer against US troops right on its border and a point of leverage with the US and, actually, with the rest of the world, to a degree. For the United States, this is a pretext to keep troops in Asia and also project more power in Asia. So the way it looks to me, I mean, the prospect of war maybe is there, but it’s very unlikely. It seems that the status-quo is actually working for both powers at this point. Is there any will to change things? 

RM: I think it’s not just the United States that’s uncomfortable with the North Korean nuclear weapon state. I think that the Chinese would prefer to see a denuclearized Korean peninsula as well, and so would every other... Japan, and I think Russia as well doesn’t look forward to more nuclear powers in the world. So… But you have a point that in the near term, the status quo… It’s particularly because they’ve, as the diplomacy has started, the things that were provoking the US, testing of long-range ballistic missiles, nuclear weapons, has stopped. So the tensions are lower, and there’s less pressure. And so that’s why, I think, the US… Ironically, Trump has adopted the same policy as Obama, of so-called strategic patience, although they don’t call it that. But that’s… if you listen to what Trump and Pompeo are saying, we’re in no rush, it’s ok, we’re doing well. I think that’s going to change. The Democrats taking over the House next month, and they’re gonna get hauled up to hearings to explain what they mean by all this great progress when in fact nothing has happened. 

SS: Alright, Robert Manning, thank you very much for this interview. It’s interesting to see what’s going to happen in the first months to come.   

RM: Thank you.