CSRC IAC Annual Conference
November 26, 2018, Beijing

Remarks by Leo Melamed

I dare say, that everyone in this room, including myself first in line, are great admirers of China. And for many good reasons. China has a great history of nearly 5000 years.  China provided the world its first building blocks—the foundation for innovation, for learning, and for growth.  China has one of the world's oldest written language systems. It has been the source of many of civilization’s major inventions---papermaking, the compass, gunpowder, printing, and a host of other innovations and inventions too numerous to mention, including ice cream. Prior to the 19th century, China possessed one of the most advanced societies and economies in the world. 

However, after several decades of internal conflict, Chinese economy became in dire shape. As late as 1980, 88% of the people struggled to survive on less than $2 a day. China’s GDP was a mere seven percent of the U.S. figure. Then, beginning in 1978, Deng Xiaoping changed China’s economic direction and sought closer ties with the U.S. Since its adoption of a philosophy of commonsense economics, China pursued a pragmatic path towards economic success. The results have been nothing short of astounding.

Within thirty years the new economic direction lifted China’s GDP to 62% of the U.S. GDP. Today China’s life expectancy is more than 76 years. Fewer than 3 percent still live in extreme poverty and 95 % of Chinese people are literate. It had the Industrial Revolution on steroids. Most every reputable institution that projects economic growth – from the IMF and the World Bank to PwC (Price Waterhouse & Coopers) and The Center for Economic and Business Research in London – estimates China’s GDP to surpass the U.S. figure, somewhere around 2030.

Graham Allison, the respected professor of political science at Harvard, paints a glowing picture of China’s assent to the brink of superpower status. He tells us in 2011 a Chinese firm built a 30-story skyscraper in just 15 days. In the U.S. these are multi-year projects. By 2013, China had the fastest supercomputer in the world which is five times faster than the closest American supercomputer.

As the same time China’s investment in human capital has been unprecedented. A generation ago China ranked at or near the bottom in tests for education, science, technology and innovation. But now, after two decades of determined investment in the country’s human capital it rivals, and by some measures outperforms the U.S. Tsinghua University passed MIT in rankings to become the number one university in the world for engineering.

One must stand in awe and admiration the foregoing incredible progress made by China. It is their credit and the credit of their intellect and drive that has made this possible. But it wasn’t just a change in economics. There was another force involved giving China a hugely constructive wind to its back. A world support structure that helped take this underdeveloped nation to bring its economy to become second to the United States---and helped it to create a technology to literally reach the moon.

I cannot state it better than did, Maurice R. Greenberg, one of China’s greatest friends and admirers, in recent Wall Street Journal Op. Ed piece on August 21, 2018. Said Mr. Greenberg, “When bilateral trade resumed, the U.S. extended favorable trade terms to foster China’s economic growth. In 1979, China was given most favored nation trading status. In 1981, the Reagan administration created a separate favorable trade category for China. Tariffs on Chinese imports into the U.S. were low—on average a third of those on U.S. exports to China. Bilateral trade grew from zero to several billion dollars within a few years.”

“As an emerging market,” Mr. Greenberg said, “China erected trade barriers to build its nascent industries. However, now discriminatory treatment of foreigners is embedded in the Chinese bureaucracy—in government policies, in regulatory procedures laden with obstacles and delays, in structural impediments.”

Frankly, this must be fixed. It is imperative that trade relations between the two major economies are acceptable to both countries. As Vice President Wang Qishan stated the other day, “The China-U.S. relationship is the most important bi-lateral one in the world for the world.”

In my opinion, some years ago China’s corporations and its consumers have reached stages of economic size, growth, and wealth where they can handle competition. However, in the realm of embracing competition, I am afraid China has a way to go.

“This all needs to change,” says Mr. Greenberg. “China cannot expect to continue receiving favorable trade and investment terms, when it is unwilling to reciprocate. It makes sense to reassess the terms of bilateral trade and make them more fair and equitable, with each trading partner securing equal and unhindered market access across all sectors.” This is said not by some enemy of China, but one of its greatest protagonists.

So allow this non-economist---but like Mr. Greenberg a great friend of China’s who was the first to invite and receive in 1985, as a guest of honor in Chicago, Li Xiannian, the first Head of State of China to step on the American shore---to suggest four areas which must be corrected:

First, Intellectual property must honored. IP ownership standards must be in line with world standards. This means adequate laws of protection and enforcement of them.

Second, the Bilateral Investment Treaty (BIT) should be reopened to achieve world standard settings and enforcement. The compelling of technology transfers must end.

Third, Cyber-attacks, whether State sponsored or not are unacceptable. The Chinese government is fully capable of stopping this totally unfair practice.

And finally, fourth, removing trade barriers. In 2016, China’s tariffs were 3.5 % while the US was 1.7 % against China.

What I am suggesting is that China’s mindset about its role in the world must Change. Big and successful does not mean a rejection of international rules and standards that have evolved over centuries and embraced by the world. I agree with Honorable Wang Qishan who quoted Mao in saying what is needed is “Balance.”

On our side of the fence, I am no economist, but I have learned to abhor tariffs. They are like hand-grenades with unintended consequences. They have never worked and have always hurt the economy of both nations and the rest of the world. They should be stopped. Instead serious negotiations should begin between experts from both nations to correct inequities. Instead of pointing fingers at China, the U.S. government should explain to its public that China is not the only cause of the loss of American jobs. The real culprit is technology and that will not stop.

There are those who distrust globalization. They are mistaken. Whatever harm they cause, are vastly overwhelmed by the benefits of globalization. Those benefits include lower-priced imports for U.S. and other world consumers and business. Most of what we import from China fits in the category of consumer goods that improve the lives of millions of Americans every day at home and in the office: computers and computer accessories; cell phones and other telecommunications equipment; furniture, appliances and other household good; clothing and shoes; toys and sporting good; and TVs, radios and other consumer electronics. Indeed, producers in China specialize in goods that are especially attractive to consumers in the U.S.

Finally, the U.S. should not fear China or reject its friendship. The U.S. is still far ahead of the rest of the world when it comes to innovation. From its very birth the U.S. inspired competition. Like nothing else it encouraged innovation. It is said that during the 20th Century over 70% of the major inventions in the world originated in America or by Americans.

As American writer, Thomas L. Friedman so eloquently stated: “America is the greatest engine of innovation that has ever existed, and it can't be duplicated anytime soon, because it is the product of a multitude of factors: extreme freedom of thought, an emphasis on independent thinking, a steady immigration of new minds, a risk-taking culture with no stigma attached to trying and failing, a non‐corrupt bureaucracy, and financial markets and a venture capital system that are unrivaled at taking new ideas and turning them into global products.”

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