Michael Spence is a Nobel Prize-winning economist, leading expert in Industry 4.0, and someone with the opportunity to advise the Chinese government. He joins this episode of Dollar & Sense to discuss global technology competition and how emerging technologies will affect the future of economic development.

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DAVID DOLLAR: Hi, I’m David Dollar, host of the Brookings trade podcast Dollar & Sense. Today, my guest is Nobel Prize-winning economist Mike Spence who is leading expert on economic growth, particularly the roles of technological innovation and international trade. He’s also someone that the Chinese leadership listens to, so we’ll get into China as well. Welcome to the show, Mike.

MICHAEL SPENCE: Thank you, David. I was thinking for this episode you could call it “Dollar and Spence.”

DOLLAR: Oh, I like that! Maybe we’ll use that title.

SPENCE: I’m just kidding. But anyway, nice title, and great to see you again.

DOLLAR: Thank you. So the background for our talk is that the world is undergoing an industrial revolution sometimes referred to as Industry 4.0. There’s a lot of anxiety in the United States that the U.S. is falling behind other countries in technology competition. Let’s start with the features of Industry 4.0. What are some of the key technologies that are going to enable this?

SPENCE: Well, I think at the top of the list is a collection of digital technologies. The core of it— somewhere in that core—is data, and who controls the data, and how do they get to use it. Then you have a lot of things that go along with it in multiple dimensions that give people headaches. You know, national security, how does a democracy function, impact on kids, impact on jobs. It goes on and on and we have to wrestle with all these things.

I think at the core of it, a group of people who think deeply about this—both from the industrial side and from our side (academics or policy)—we don’t really have a set of models that are fit for purpose for sort of dealing with this. So, we’re struggling. I’m not saying we have to throw out all our models, but we have a world in which valuation is essentially shifted almost entirely to intangible assets. And when you dig underneath that, it’s intellectual property, patents, and data…and marginal costs zero, lots of free services, measurement issues, all kinds of things. We’re at the dawn of a new age and I think we’re doing the best we can but we’re just scratching the surface so far.

DOLLAR: Yeah. I did a back of the envelope calculation about how much of the capitalization of the Standard and Poor’s 500 roughly is related to intellectual property and it was an astounding percentage, basically. So, we live in a world where capital is mostly intangible.

SPENCE: I was just listening to somebody who said that number was 91 percent.

DOLLAR: Yeah. I didn’t do a serious effort, but it was a shockingly high number. And, you know, it’s evident. You’ve got these giant tech firms that don’t have a lot of […] that are most of the market capitalization.

So, we’re going get into some talk about technology competition among countries. If we could step back from that for a moment: If you were making policy for the United States or any other advanced economy, what are two or three things that you would focus on in order to make sure we continue to have technological innovation and improving productivity?

SPENCE: I think the public sector investment has always been crucial as an underpinning of the innovativeness of the American economy. We’ve done reasonably well over lots of different administrations and decades at safeguarding that, but I think vigilance is required. If we decide that what technology is really about is reigning in these monopolies that have all our data and kind of forget the other stuff…and there’s more than just digital, but digital footprints kind of overlap everything. I mean, if you get deeply into biomedical science, there’s lots of parts of it that aren’t very far away from the application of digital tools and genetics and other things. So, it’s really important.

The second thing is—and we may kind of do this clumsily—but I think that we do have enormous amounts of market power that can be used to block good ideas from getting to the marketplace. Whether or not our traditional competition policy or we’re going to have to invent something new is a key part of sustaining innovation. There’s just no historical record of big monopolies driving innovation without somebody snapping at their heels, and if they can’t get the market because somebody controls the channels, then it’s tricky. That’s a more serious problem in smaller economies than it is in big ones. I mean, our Chinese friends say, “well, yeah, we’ve got these huge giants, but they’re actually competing with each other.” I mean, mobile payments has two mega players in Alipay and WeChat Pay, but that’s a pretty big economy. I don’t think you can apply that to Italy where I am right now.

I guess the third thing, David, I would say is that we have to think through what things we should decide are public goods, basically. Right now, at least in America, we just skirted the question. So, we’re sort of talking about, well, how are you allowed to use the data. We’ve talked a little bit about who really owns it. But the simple truth is that if you build an economy on digital technologies and ultimately data, and there’s huge extraneities positive and negative, at some point you’re going to have to address the question of public goods and their management. There’s only one entity that actually has the authority to do that and that’s the government. So, I think we’ve got a long journey to get through to the end of that one, too.

DOLLAR: Let’s talk a little bit about the competition with China. There’s a lot of anxiety in the United States that China is going to dominate all these key technologies of the future. How do you see the technology competition between the U.S. and China, and in particular, the Trump administration approach of the trade war and some of the things it’s doing to specific Chinese companies?

SPENCE: This is going to sound too simple, but from a global point of view innovation works best…at least experience tells us that innovation works best when the system is open. Right? We all have lived at least for part of our careers in the open part of the system where there really aren’t any barriers. A mathematician in Russia discovers something that nobody knew before and not too long after everybody knows it and nobody goes and tries to do the same thing. They just operate with that as a kind of premise. I think one of the things we should try to do while we’re acknowledging that there are going to be constraints on this is not to lose that fundamental point.

Now, why is it that it works best on a global basis? Well, there’s basically two reasons. Innovation is something like a fixed cost to the extent that it’s a cost. And the bigger the market you have against which to generate returns from that innovation, the more you’ll get because the returns will be higher and there isn’t anything bigger than the global economy. So that’s one. The second one is semi-obvious, which is if you have too much proprietary knowledge in this upstream layer than you will get duplication of effort. You will have people doing the same thing and trying to discover or learn about the same things. That’s just a waste of very high-priced and valuable talent.

Having said that, when you get sort of down in the weeds, it looks to me like there’s several considerations. One of the most important is that national security is now a key issue. I think we can’t sidestep that question. We have a country that could become a rival in multiple dimensions; lots of people think it is already. So I don’t think it’s unreasonable to expect that national security considerations will cause significant interventions that have the effect of disrupting relatively free global flows of technology and so on. The trick is to make that not as damaging as it could be. That requires international cooperation which we don’t have a lot of right now, but that’s an important dimension of this.

The third one that I would say is we just can’t let the mega platforms run the global economy—at least not in the current form and not without value-based regulation that tells them what is within bounds and what is out of bounds. That seems to me to be important. Having said that, China, I think they still have a long way to go if you take technology supremacy in its broadest form. There are areas you know very well that you and I have talked about many times in which they’re ahead. They’re ahead in mobile payments. They’re rapidly getting to the frontier in artificial intelligence. They have huge amounts of data. They have fewer constraints on how they use it. They’re behind in semiconductors, but that’s probably not a permanent state of affairs. So I think it’s reasonable to forecast that for a reasonably long period of time we’ll have at least two mega players in this game—neither of which has a huge advantage relative to the other.

DOLLAR: Hank Paulson has used this phrase that we want to have small yards with high fences to capture this idea that there are some legitimate national security issues. Protect those with the high fences. But as you say, the overall benefits to an open innovation system are quite powerful.

SPENCE: I think that’s the right idea. The trick in implementing it is figuring out what are the little things that you want to put fences around and are they adequate because we keep getting surprised. If you go back 10 years, David, and ask people, they would have said artificial intelligence has hit a dead end. Fast forward 10 years and they’ll say that not only has it not hit a dead end, there’s been a kind of breakthrough that was there conceptually for a fairly long time before that—like two or three decades—and it’s pretty important in terms of national security. So, here we are. We need to be humble about our ability to forecast. And the design problem is designing institutions both nationally and internationally that are sufficiently adaptive that we can respond to the world that we’re evolving into.

DOLLAR: I think that’s a very thoughtful way to think about it. The Chinese have identified these sectors where they would like to see advance and become leaders, but no government has really been very effective at predicting where technological advance is going to occur. So having robust institutions is actually a much more sensible approach. I know you have opportunities to brief the Chinese leadership—particularly Liu He, who’s the key economic interlocutor with the United States—but also other Chinese officials. So, I’m curious about what kind of advice you give them about their economic strategy?

SPENCE: I think the Chinese system was more open to this kind of discussion when you and I were there frequently—and you for a long time and sort of semi-permanently. I was always struck by the fact that as part of their complex strategy formulation for building a successful economy and society they were very curious about what had happened in other countries, what lessons have been learned, and so on. And they used us—those of us who had some experience with that, and I’m thinking of you and me in particular—very well. They would listen to us. It wasn’t our job to tell them what to do. And they then navigated with startling degrees of success.

My sense is that that system is much less open to that than it was, say, 10 years ago, particularly under the current regime. I’m not a Chinese citizen. It’s not my business to say whether that’s a good or bad thing, but I don’t think that external inputs of this type are either as welcome or as potentially influential as they were.

Having said that, I think by and large if narrowly construed the economic strategy in China is sort of working. The structural transformation seems to be continuing. They are shifting activity in the tradable and non-tradable sectors at paces that are difficult to achieve in any economy. You have worked with a group.… deep studies of the supply chain, so you know perfectly well that those supply chains are changing dramatically and where China’s position in global supply chains are changing very rapidly, all of which underpins successful economic growth and transformation. I think Justin Lin is right that in a country like China, let’s call it a developing country even though it’s very far along in that, that structural transformation and economic growth and prosperity are very, very close if not almost the same thing. So I think on that dimension they’re doing well.

What I have more reservations about are the political, social, and international relations steps that they have taken which strike me as, even if you look at it narrowly from a Chinese point of view, are more likely to create headwinds than tailwinds. Being aggressive in the South China Sea and Asia more broadly vis a vis the United States. I think it’s impossible to sort of pick sides because everybody’s had a role in creating and exacerbating the tensions. Certainly we have, but I think they’ve had a role, too. So, on that dimension, as an observer, I think that they would have benefited for sticking with Deng Xiaoping’s advice which was: We’re a developing country; that’s the main thing we’re doing here. And we’re a sovereign state, so we’re not going to get pushed around, but basically we want to cooperate with everybody.

DOLLAR: Mike, you mentioned the issue of global value chains. Clearly they’re changing and the pandemic is probably going to affect that, the U.S.-China trade war. I know it’s a very complicated issue because there are such different types of value chains. There is a lot of talk in the United States about this hope of manufacturing reshoring to the United States. So, I wonder, could you speculate a little bit about how value chains are likely to change—particular trends in the next decade?

SPENCE: Yeah. So I think they’ll be influenced by two things. One, by international relations and policy. Maybe three things. They’ll be influenced by something that’s come to the fore in the pandemic economy which is resilience. Have you wound everything up too tightly? Suppose things go to hell in a basket vis a vis certain trading partners. As a business or as a country, are you well positioned? So I think that will produce shifts. But finally, I think the digital stuff will be dramatic and decisive.

We all learned what the Japanese taught us—that kind of development model, even though it was a hybrid case in a middle-income country when they got started after the war. What basically came to be known as the Asia growth model was that you basically invest at high rates, invest in your human capital, and then occupy a slot in the sort of labor-intensive part of the world and leverage access to a nearly infinitely sized global economy. That model probably is in the process of not working anymore because we’re not that far away from AI aided robotics essentially taking out very large chunks of the labor-intensive sources of comparative advantage that we all learned and kind of took for granted for two or three decades. I don’t think that affects China adversely, but some of the poorer countries are going to have to experiment and find, maybe with some help, alternative growth models. They may or may not be as powerful as the ones that some of the Asian economies had leveraged and used to great good effect. But all kinds of things happen.

Once you release global supply chains, or big chunks of them, from the constraints associated with mobile labor and labor being valuable, especially if it’s low cost, then economic activity, manufacturing, and all kinds of things can move all over the place in a way that we just weren’t thinking about even 10 years ago. So that’s, I guess, a double-edged sword. When we talk about that in America we think, well, some of that stuff could come back to America. That’s true. But actually, what’s really going on is some of that stuff—meaning manufacturing activity—that isn’t labor-intensive anymore can move wherever it wants to. Right? There’s no particular reason why the intangible and tangible capital that are required to do these things…I mean, there’s scale economy effects, and there’s still the innovation hubs that are important in the world, but it’s a more complex picture than it was. If I had to single out one thing that’s going to drive significant change in global supply chains, it would probably be that one.

DOLLAR: Last question, Mike. You were the lead figure behind a World Bank report in 2008 called The Growth Report which looked at the success…a lot of it were Asian economies, which you just referred to. But there were also some southern European economies and a number around the world that have really moved from middle-income to high-income or from low-income to middle-income. I thought you did a nice job in the report. There was a simplistic recipe, but there was identification of different factors that seemed to contribute to this success in poor countries growing relatively well.

So a lot has changed in the last decade. You just alluded a little bit to probably the Asian model is not quite as relevant because of digitalization. In terms of advice, would you be giving the same advice? How would your advice change based on how the world is changing?

SPENCE: It’s an extremely good question, and I’ve been asking myself and you and others this very question. Is there a clear path that’s emerging for countries we care about who got a late start in the development process? If I look back at that report, I think it would have to be rewritten, but that doesn’t mean you throw out everything in it. I guess that’s a simple way I would say it.

I think that leadership; trust in government; building institutions; finding a way to sustain high levels of investment mostly financed by domestic savings, which is a stretch in poor economies; not mucking around too much with markets and interfering with them so that you lose the benefits of market incentives and so on. I think all of that is still relevant. It has to be applied with suitable adaptivity to local conditions. But that said, that part strikes me as good.

There was a discussion. It was relatively brief about a lot of things that I think are still up in the air. I still believe industrial policies are important if they’re properly formulated, but there are risks associated with them. I don’t believe in full open capital accounts, though international monetary policy finance is not my field. But I just…I think there’s a huge difference between hot money flows and foreign direct investment.

That said, I think that the wide-open question that wasn’t addressed—wasn’t even anticipated in that report—is what you and I have been talking about now which is that we’re going to live in a digital world. The mega players in that are all at the moment located in China and the United States. Even Europe, which is far from a developing set of countries, has got some major work to do to sort of join the party. Right? With cloud computing systems, appropriate control of data, incentives for people, innovative young people to do their work here, and so on. And I think that same set of questions.

Jim Vassili is the founder or one of the co-founders of BlackBerry and a very thoughtful guy. He says, you know, there’s a real risk that the big players will come to dominate in this kind of digital data world and everybody else will become client states. You can see a scenario in which the client states have to choose sides—and they don’t want to do that, but we don’t have a clear path right now that I can see to avoid that. I think the United States could play a lead role in that if we chose to, but over the last few years we’ve been going in a different direction and focusing […] business powerful domestic political considerations in any country, including our own. We’ve been kind of focused on ourselves and not really focused on whether we can repeat the post-World War II performance and play a leading role in creating an architecture that’s designed to foster prosperity pretty much everywhere in the world. And can we do it in collaboration with China and more natural allies in the future? I mean, to be honest with you, I hope after the November election, depending on how it comes out, that we start to move back in that direction because I think we can do an awful lot of good both for ourselves and for a whole lot of other people in the world.

DOLLAR: I agree with you that we really need to rethink the international economic institutions. The ideal outcome would be a moment where major countries—led by the U.S. and China but including many others—really have a new Bretton Woods in a sense. It has to go way beyond the issues taken up in the original Bretton Woods. We seem far away from that kind of collaboration at the moment and I worry a lot of poor countries are just going to be left out as this competition proceeds.

SPENCE: Yeah. I agree with you, David. The Singapores will be fine; they’ll find a way. They have an enormous amount of kind of intellectual horsepower even for a small place to sort of navigate in this world. But there’s lots of other countries where you really do—quite apart from governance challenges, which seem to be kind of somewhat ubiquitous these days.

An earlier version of this in my mind was, as we watch various aspects of multilateralism collapse, what I said about that was: If we’re going to go live in a bilateral world, if Europe acts as a unit and the United States and China negotiate with each other, and a few other big players or potentially big players like India participate in that world, they can probably look out for their own interests. But it makes you realize the multilateral structure was the umbrella under which a whole lot of players that aren’t going to thrive in a bilateral or regional world. Nobody’s going to spend a lot of time in bilateral negotiations with lots of small, poor countries. Right? It just doesn’t make any sense. So some version of…a new version of multilateralism that takes into account the realities of the world we live in for them to thrive is really crucial. And that does depend a lot on how the relationship between the United States and China evolves.

DOLLAR: I’m David Dollar and I’ve been talking to Nobel Prize-winning economist Mike Spence about technological changes in the world and how this is reshaping trade and country relations. Thank you very much for joining us, Mike.

SPENCE: Thanks, David. It’s pure pleasure.

DOLLAR: Thank you all for listening. And thank you all for listening. We’ll be releasing new episodes of Dollar & Sense every other week, so if you haven’t already, make sure to subscribe on Apple Podcasts or wherever else you get your podcasts and stay tuned. Dollar & Sense is a part of the Brookings Podcast Network. It wouldn’t be possible without the support of Shawn Dhar, Anna Newby, Fred Dews, Chris McKenna, Gaston Reboredo, Camilo Ramirez, Emily Horne, and many more. If you like the show, please make sure to rate it and leave us a review. Send any questions or episode suggestions to bcp@brookings.edu. And, until next time, I’m David Dollar and this has been Dollar & Sense.

       

In this episode of Dollar & Sense, we flip the format and ask host David Dollar what new data can tell us about how the COVID-19 pandemic and the associated recession are affecting U.S. trade. Dollar shares insights on which industries have been hit hardest, how the recession will alter the U.S. trade deficit and the phase one trade deal with China, and the likelihood American companies begin reshoring their manufacturing and value chains.

NEWBY: Hi, I’m Anna Newby, guest hosting today on the Brookings trade podcast Dollars & Sense. I’m here with David Dollar himself, the typical host for the podcast, to get his thoughts on what we know at this stage about how the COVID-19 pandemic has affected global trade.

Welcome, David, to the other side of our virtual interview table today.

DOLLAR: It’s a great pleasure to talk to you, Anna.

NEWBY: So the U.S. publishes very detailed trade statistics in terms of products and partners. They just came out with data through the first half of 2020 providing a snapshot on the effects of the coronavirus pandemic and the associated economic recession on U.S. trade. So, my first question just has to do with trade imbalances. It looks like the overall U.S. trade deficit is contracting modestly this year. Can you explain why that would be happening?

DOLLAR: So the coronavirus recession is affecting both U.S. imports and U.S. exports. For the moment, it’s having a somewhat stronger effect on imports. We import quite a bit more than we export, so if they both go down by a similar percentage, imports actually go down more in U.S. dollars. And, frankly, the recession is more serious in the United States than in some of our trading partners. We can get into talking about some specific trading partners, but in general, the recession is worse here, so the compression of imports is greater than the decline in exports. But I wouldn’t get too excited. I think in the first half of the year the trade deficit went down by about 20 billion dollars. That’s basically a rounding error in our GDP, so I wouldn’t get too excited. The other thing I would say is we don’t really want the trade deficit to go down because we’re in a serious recession. As we come out of recession, probably our trade balance will go back to about where it was. It’s been about three percent of GDP, that deficit, for a few years. Most economists are not too worried about that.

NEWBY: Okay, got it. Thanks. That’s really helpful for context. So let’s talk about the export side. How are American exports holding up right now?

DOLLAR: Overall, exports in the first half of the year were down 16 percent compared to last year. That’s more of a decline than we’ve seen in GDP. I think that’s common in recessions as trade is often more effected than many other parts of the economy. Looking at the U.S. detailed data—and let me just say, as an economist, I really appreciate the quality of U.S. statistics on many different issues, including international trade. So we have an amazing amount of data.

One thing that jumps out at me is that 16 percent decline is just spread very unevenly across goods and services. So I’ll give you a few examples. The U.S. is a major exporter of services. One of the major ones is all the foreigners who come to the U.S. as tourists or students. So what they spend on international travel, and then they come here, lodging, meals, going to Disneyland, going to Harvard… those are all exports of services by the United States. So, that’s down about 50 percent, and that’s a pretty remarkable number in economics — to see something, a big category, decline by 50 percent. I think that’s not that surprising. We’ve cut off international travel, universities are not clear if they’re opening, entertainment, et cetera, et cetera. But we export some other important services as well. Financial services and telecommunication services are two big exports. And I was struck that they are at about the same level as last year. So they’re not growing, but they’re not declining. So you’ve got this tremendous unevenness.

We see the same thing in manufacturing. Two of our big exports, aircraft and automobile parts, are down 30 to 40 percent. Again, I think it makes sense. Airlines all over the world are cutting back their expansion plans. People are holding off on big purchases for things like autos. So those numbers are down. On the other hand, semiconductors, which has been in the news a lot — we’re trying to restrict our semiconductor sales to Huawei, the Chinese telecom company. Well, overall, our semiconductors exports went up by 12 percent in the first half of the year. And I think that partly reflects that Asia is recovering pretty quickly from the recession. And, despite headlines about one company, we export a lot of semiconductors.

And then just briefly if I could add one more thing because we are such a diversified exporter: agriculture is a major export, and that’s down about three percent. Of course that’s not good—that’s down. But compared to some of those other numbers I was mentioning, agriculture is holding up pretty well because people have to eat and we’re a major supplier of food. So the basic point there, Anna, is tremendous variation across different goods and services in response to this virus.

NEWBY: Thanks. That all makes a lot of sense. So let’s turn to the other side of the balance sheet and look at imports. How are imports being affected?

DOLLAR: Right. So we’ve had a pretty serious compression of imports. And again, it tends to be concentrated in some specific areas. It’s no surprise our imports of crude oil are down by about 40 percent. People are driving a lot less. Like, I hardly use my car anymore. I’ve been wondering maybe I should stop paying insurance or maybe sell off the car since I never drive it anymore. And the quick statistics that come out are in current U.S. dollars, so that decline is a reflection that we’re importing a lot less oil. Plus, the price went down quite a lot. So what we’re spending on oil is down very dramatically.

I was also curious to see that things like auto imports are way down. We have this integrated auto production with Canada and Mexico, so we both export and import. They’re both down, and I think that reflects the reality that sales pretty much everywhere are down. But also cell phones and televisions—our imports are down about 25 percent. And pretty much all the televisions and cell phones used in the U.S. are imported. So that’s a pretty good indication about the whole market.

I thought perhaps some people were sitting at home ordering plasma TVs in order to make lock down a little bit more pleasant. And I’m sure some of that’s happening, but on average, people are holding off on these big ticket items, probably reluctant to go out to retailers. And also, everybody’s worried about their income. What’s going to happen? So you hold off on the big purchases and then that’s reflected pretty dramatically. Then on the other side of the ledger, our imports of medical equipment are holding up and imports of pharmaceuticals are up about 15 percent. So this kind of crisis is always going to create some opportunities for particular industries and it’s going to create really serious problems for some of the sectors I’ve mentioned.

NEWBY: Got it. Thanks. It’s interesting to sort of look at the nuances sector-by-sector on that. So what about trade with particular countries, David? Are there certain stories that we should be watching there in terms of international trade?

DOLLAR: It is interesting how our trade with different partners is playing out. Our imports from China are down pretty dramatically. We import a lot from China. A lot of those consumer products. I mentioned some products that are down. So not surprisingly, our imports from China are down by about 20 percent. And we have had that trade war going on. While we reached a phase one trade deal, we left most of our tariffs in place. So we’re tariffing about half of our imports from China at 25 percent. So that has to be one factor. And then you’ve got the recession on top. So I found it interesting that our imports from China, Mexico, Canada — these are, in fact, our three biggest trade partners — they’re all down about 20 percent. To be honest, I think the recession is a lot more important than the trade war. Some important products like cell phones are not covered by those tariffs that I mentioned. In some cases, retail firms just absorb these losses, basically. So, I doubt the trade war has had that much effect, but the recession clearly had a very large effect on what we’re importing from these different countries.

If you look at the export side, again with Canada and Mexico, and those are our two biggest partners, our exports are down about 20 percent. I think this just reflects this serious recession throughout all of North America. But in the first half of the year, our exports to China were only down five percent. So that’s down, but still that’s a pretty modest number, and I think it reflects China recovering from this recession relatively quickly. They actually posted a positive growth number in the second quarter, so they’re recovering more quickly. And then we do have this phase one trade agreement. We can talk a little bit more about that, but I think they are making an effort to import more from the U.S.

NEWBY: Yeah, let’s zero in on the question of the U.S.-China trade war and the trade deal where we already have a phase one. You see in the data that U.S. exports to China are a relative bright spot. They’re down, but they’re down only five percent, which, as you’ve described, sort of relative to other areas is somewhat smaller. So the broader efforts around a U.S.-China trade deal seem really relevant here. Phase one of that deal was supposed to bring an increase in U.S. exports to China. So, what’s happening there, and what are the prospects for the deal at this point?

DOLLAR: So I think the situation creates an interesting dilemma for President Trump and his administration. Our exports to China, as we just discussed, are actually down. News is not as much as our exports to many other partners, but still down. But China is recovering from their recession. If you just focus on June, our exports were actually up compared to a year ago. So that trend is in a positive direction. But they are supposed to be importing a lot more from the U.S. That phase one agreement had specific targets that were relative to 2017 trade levels. So, frankly, our exports are far below the 2017 level. I mean, not to throw too many numbers, but a simple way to think about it is that we’re at about half the level of exports that would meet the target for this phase one trade deal.

So some of President Trump’s China hawk advisors are encouraging him to rip up the deal and basically argue that China is not getting close to meeting those targets. On the other hand, U.S. Trade Representative Lighthizer and his Chinese counterpart Lie He are going to have a video meeting on August 15th to review progress. And I think you’ve got, first what we’ve emphasized, a relative bright spot in global trade compared to other things. Plus, if you look at the specifics of the deal, some elements of it are just clearly impossible. We were supposed to increase exports of a wide range of goods and services, including those travel-related services I mentioned. But we don’t have flights coming in from China. We don’t have students coming in from China. There’s just no way that particular element can increase during 2020—seems unlikely 2021. We were supposed to export 25 billion dollars of energy this year but prices are down, demand is down, the U.S. industry is contracting. So you’ve got elements of the deal that are just really hard to take seriously in the current environment. On the other hand, I mentioned the overall U.S. ag exports were holding up fairly well, but not increasing to China yet. So I would guess at that August 15th meeting there would be a lot of discussion about where are areas where China can increase its purchases, particularly in agriculture.

Then the dilemma the administration faces: do you want to accept a good situation in a terrible global recession environment, or do you want to tear up the deal which might appeal to some of President Trump’s base? On the other hand, probably stock markets will not react well to tearing up the deal because there was a lot of concern about the rising protectionism in the U.S. and the U.S.-China trade war. And if that seems to be getting worse, that’s probably going to complicate our recovery. So I think it’s a difficult decision. And frankly, there’s no particular reason why the president needs to make the decision in the next week or two as far as I can see. He may very well wait as this summit proceeds to see if there’s more agricultural exports to China. Then there’s plenty of time before November to decide if he wants to ratchet up the trade war.

NEWBY: Well, that’s definitely a story that we will continue to watch. I have one last question for you, David, and that’s about American manufacturing. There’s a lot of talk of reshoring of manufacturing in the U.S. and driving value chains out of China. Do we see any evidence in the data that this is happening?

DOLLAR: I would respond by emphasizing that there are all different types of value chains. There’s kind of a joke in the business that if you’ve seen one value chain, you’ve seen one value chain. They are all very, very different. So some of this discussion has a certain model behind it, I think. Some of the discussion is assuming that there’s a lot of American manufacturing capacity that’s moved to China to produce things to sell back to the United States. But I would argue that that’s actually quite rare. It’s hard to find American investors who’ve gone to China in order to export from China. They’re basically in China to serve the domestic market. Our auto companies would be one of the best examples of that. They’re not exporting any cars out of China back to the U.S. They have a certain amount of components that go from the U.S to China, they assemble in China, and they sell into the Chinese market. And actually, that Chinese auto market is starting to grow again as they’ve come out of their recession. So most of the American producers in China are there for the domestic market.

The American Chamber of Commerce did a recent poll of their members to see if they were thinking of leaving China, and I believe over 80 percent had no thoughts about moving any production out of China. So, if we did ratchet up the trade war between the U.S. and China, I wouldn’t expect that production to move back to the U.S. That doesn’t make sense. If anything, you might have the opposite effect that producers might worry about bringing American content into their Chinese production. So you might get separation, but in some sense in a bad way where there would be less U.S. content.

Now, it is true there is quite a bit of production in China for export to the U.S. Not so much by American companies, but more commonly by Korean, Japanese, and Taiwanese companies. That’s where a lot of our popular electronics and cameras, televisions, these kind of products. There I do think we’re seeing some shift in value chains, but not to bring things back to the United States because it’s just simply not economic to produce these products in the United States. What we’re seeing is some shift of what I call final assembly out of China and to lower-wage countries, mostly in Southeast Asia. Vietnam is the poster child for this. So over the last year or so you’ve seen a big increase in Vietnam’s exports to the United States of these electronic products. But then if you go deeper into the value chain, China has moved into the middle of the value chain producing machinery and components. So China’s exports to Vietnam have gone up very dramatically. So if you kind of look at the effect of the trade war on these kind of products, it’s been this shift of a certain amount of final assembly to Indonesia, Vietnam, et cetera. China is still providing a lot of the content from terms of machinery and more sophisticated components. And actually, a lot of those producers in Vietnam and Indonesia are Chinese firms. So you are getting some reshaping of value chains, but not in a way that brings production back to the U.S.

The last thing I would say on this, Anna, is that thinking about the diversity of products is actually quite helpful because there are some things that are clearly related to national security. First, we’ve always produced our military equipment domestically. We may decide that there’s certain pharmaceuticals or other types of high-tech components. We could create incentives to produce some of these things in the U.S. There will be a cost in the sense that if they’re not being produced now it’s because it’s more efficient to produce them somewhere else. So I think we want to be careful in what we want to delineate. We don’t want to try to get everything to be produced in the U.S. because that’s going to end up being very, very costly. But we could have a careful look at which kinds of value chains we’d like to see in the United States.

So I just think it’s a really complicated area where we probably could get some reshoring of critical national security inputs, but that’s going to end up being a tiny part of the economy. Then the notion that we’re going to get value chains in any large sense to leave China, that doesn’t really make sense to me because a lot of the production is for the Chinese market. And then you’re looking at exports. You’ve got integrated value chains across Asia, and China just has to move into the middle, have final assembly in those other countries. Then whatever the U.S. is doing with tariffs is not going to be that relevant, frankly. So I’ve never been a big fan of this tariff strategy in terms of trying to change our trade relations with China.

NEWBY: Well, it’s been a real pleasure talking to you, David. And as a total lay person myself on this subject, I can say that I certainly learned a lot.

DOLLAR: Well, thank you, Anna. I know we got a little nerdy there with all the data. You see a lot of anecdotes in the press, and I think a good anecdote can be valuable for giving you context, but it’s always dangerous to generalize from a couple of anecdotes. So I like to look at the data in terms of what’s actually happening. And I think the reality of trade and foreign investment is that these things change a lot more slowly than you might think. So when you read something that’s not just the U.S. — Japan is making some effort to encourage its companies to diversify out of China. I’m sure that will have a small effect, but at the end of the day, it’s not going to have a very big effect.

NEWBY: Well, I’m all for getting nerdy every once in a while. So let me just say thanks to all of our listeners and tune in again in two weeks when David will be back in the interviewer seat. If you haven’t already, make sure to subscribe on Apple Podcasts or wherever else you get your podcasts. Dollars and Sense is part of the Brookings Podcast Network. It wouldn’t be possible without the support of Shawn Dhar, Fred Dews, Chris McKenna, Gastón Reboredo, Camilo Ramirez, Emily Horne, and many more. If you like the show, please make sure to read it and leave us a review. Send any questions or episode suggestions to bcp@brookings.edu.

       

Globalization has earned a bad reputation in the United States for contributing to many of the challenges that American workers face. Rather than trying to reverse globalization with more protectionism, a position that’s gained traction in Washington, Reed College Professor Kimberly Clausing argues that the U.S. should pursue policies that directly help workers, like wage insurance and tax reform. She joins David Dollar to make the case for openness and recommend complementary policies that would ensure the benefits of globalization are evenly shared.  

Clausing is the author of “Open: The Progressive Case for Free Trade, Immigration, and Global Capital.”

Related content:  

Open: The Progressive Case for Free Trade, Immigration, and Global Capital (Book) 

The progressive case against protectionism 

The post COVID-19 world: Economic nationalism triumphant? 

This transcript has been lightly edited for clarity.

DOLLAR: Hi, I’m David Dollar, host of the Brookings trade podcast Dollar & Sense. Today my guest is Kimberly Clausing, an economics professor at Reed College. We’re going to talk about her recent book, “Open: The Progressive Case for Free Trade, Immigration, and Global Capital.” So, welcome to the show, Kimberly.

CLAUSING: Thank you so much for having me. It’s a real pleasure to be here.

DOLLAR: I’m very excited about this topic, particularly looking forward to hearing about the progressive case for capital flows. But let’s start with the kind of deeper foundation here. There’s a lot of disappointment with globalization, particularly in the United States and some other advanced economies. How do you see the track record of globalization over the last 20 or 30 years?

CLAUSING: Yes, that’s an excellent question. And I’ll mostly take that question with respect to the United States, but I just want to say up front that it’s also important to remember all the other countries of the world. I think the track record, particularly in the non-high-income countries, is much more unabashedly positive than it would be even in the high-income countries. But let’s take the United States.

I view the track record of globalization over the past three decades as similar to the track record of capitalism itself in the sense that it comes with a lot of positives, it’s probably better than the other alternative, but it also creates constant disruption. That disruption is important for many people and important to address. One question we might ask ourselves usefully when we think about this disruption is how big is it? How large are the consequences? Would we be better off with less globalization? And in general, what I’ve concluded from looking at the data and thinking about the experience is that even though the disruption is definitely there, we are better off not stopping or reversing globalization as a response.

Let me just briefly talk about why the discontent. If you look at the experience of U.S. workers over the past generation, you’ll see that wage growth has been disappointing relative to prior generations–sometimes even very flat. You’ll also see a dramatic increase in income inequality, regardless of which data you look at. It’s undeniably dramatic. So, we could say, well, those two trends are extremely troubling, which they are. And therefore, we need to sort of reverse everything that might have contributed to those trends. But I would point out that there are lots of factors that contribute to those trends beyond globalization. Technological change is one that leaps to mind. That’s extremely important. But I would also note that market power is a really significant issue in the U.S. economy today. We’ve seen a big increase in the market power of companies and capital relative to labor. And we’ve seen policies that have really turbocharged in many cases some of these effects.

When you look at different countries, they’ve all experienced increasing technological change and increasing trade, but they’ve handled the policy response to that differently and they’ve seen different outcomes on the ground. So, what I basically argue in this book is that the best policy response to all this disruption is to really go head-on and address the policies that workers would most benefit from. How can we best make sure gains in economic growth help workers? Usually that’s through things like the tax system. It’s not through stopping globalization in its tracks which, I think, can actually backfire and harm the very workers it purports to help. We can talk about that in detail as we go forward, I’m sure.

DOLLAR: I see a kind of theme in your book being that openness is basically good for the country, but we need complementary policies to really make sure that workers and citizens benefit from that. So let’s take each of the major flows in turn and talk about both the case for openness but also some of the complementary policies that would make it better. Let’s start with trade; we are the trade podcast and I think that’s the most important flow.

CLAUSING: Let’s first talk about the positives, and then the negatives, and then what to do about the negatives. So, on the positive side, it’s undoubtedly true that trade has made our life as consumers much, much better than it would be without trade. And the growth in trade has made our life as consumers much, much better. Now, consumers don’t tend to align to push their interests in political forums, so you don’t necessarily see the major benefits to consumers well represented in the political process, but there are very serious upsides there.

Trade has also helped our export industries. So if we think about tech or pharma or Boeing in Seattle or the movie industry in Los Angeles, all of these are export industries that have more opportunities because they’re able to trade. Trade has also helped many industries that we might not think of as export industries but nonetheless import a lot in addition to being quite active. So we might think construction and real estate, you know, they rely in part on imported steel and imported other products that might make them more productive. So those are also positives.

A final set of positives that I think is sometimes underappreciated by economists, but is quite important, is that trade tends to bring countries closer together and give them mutually recognized gains that they’re reluctant to part with over small conflicts. So, if you look at the history of trade agreements and the history of countries trying to promote trade, it’s often been an attempt to also make the countries get along better. The European Union is an excellent example. They used to fight quite often over there in Europe. At the end of World War II, there was sort of a deliberate recognition that that wasn’t the best way to proceed, and so there was a eventually a launch of both the free trade agreements that began with coal and steel but then expanded to become the full-fledged European Union with all of its different provisions.

I think that was one illustration of ways in which countries can sometimes deliberately seek out sort of mutual economic exchange in a way to make these global problems like war easier to address. But we could also think about global problems like public health, like climate change. When countries are engaged in mutually beneficial exchange it’s easier for them to work together in these other areas. Whereas if you’re threatening your trading partners with trade wars and bullying them as the United States has tried that experiment recently, it’s a lot harder to bring people to the table when you’re interested in solving a bigger global problem. So I also view trade is an important part of international relations.

Turning to the negative side, which is also important, if you look at the disruption that a lot of American workers have faced over the last generation, particularly in geographically intense regions—you know there are parts of the United States that have experienced more disruption than others. You could look at a map, for instance, of places that have seen more job loss since 2000 and you’d see that they’re pretty geographically concentrated. In some instances that job loss and that economic harm is quite concentrated in a way that correlates with extra import competition from developing countries. One example is this China shock literature, which has shown that some regions of the country that were more exposed to Chinese imports ended up experiencing disproportionate job loss. So I think that kind of disruption needs to be taken quite seriously.

When we think about the disruption with respect to Chinese imports in those geographically intense areas of the country, we need to remember that there are also a lot of other sources of disruption that affect workers all the time. Right? So, in addition to technological change, the capitalist economy itself generates a lot of disruption. If you look at the typical quarter in the U.S. economy, you’ll see six million jobs are lost and that’s a lot of job loss. But luckily in a typical quarter–not lately because of the coronavirus, but prior to that–in a typical quarter we also create about six million jobs. So if you think of that combination, there’s just a lot of job churn. It’s true that, you know, competition from China by some measures looks like it cost about two million jobs over a period of a decade or so. But every quarter we’re generating a disruption, too. So I think if we just sort of try to make a trade agreement or a country the bully and story of economic disruption, we’re sort of putting too much on the shoulders of that one agreement or that one country.

Now, how do we help those workers? I think there’s a lot of really productive ways that we can go straight to their needs. So one example would be having government programs that provide wage insurance such that if a worker loses a job in a manufacturing industry, say, and has to take a lower paid service job, which can sometimes happen, that for a period of time the government helps make up the difference in their wage loss. And we have a tiny program that’s linked to trade there, but I actually think it could be dealing from trade productively and sort of help workers who late in their careers might be losing jobs or facing disruption.

I think the earned income tax credit is actually an incredibly powerful tool. It’s much broader than that. It basically helps every low wage worker by giving them a negative tax rate if their wages are low enough. The earned income tax credit is far more generous if you have children then if you don’t, but it would be a stroke of a pen to make that equally generous for workers without children. It would be expensive, right? But there are other places where we can get revenue that I’m sure we’ll talk about later today.

So those are just two examples of ways to help workers. I also think we need to focus on the balance of power between labor and corporations which we’ve seen really distorted lately by the fact that companies are having more and more market power whereas unions are diminishing, particularly unions in the private sector, and that’s where they’re really needed to counter that market power. And then a final policy that I think would be very helpful in addressing these worker needs is to focus much more on the fundamentals of the U.S. economy. It sounds boring, but part of how the U.S. economy got to be so successful over time was in focusing on the education of workers, focusing on infrastructure, and focusing on strong public institutions. We’ve let all three of those really crumble in recent decades, and I think we could afford to invest a lot more in those types of public investments that would really help the entire middle class prosper more.

DOLLAR: Thanks. I really appreciate those insights. I think it’s easy to blame China or blame foreign trade on a pretty serious set of problems we have in the United States. But that analysis is shallow, and we’re going to be disappointed if our solution to the kind of problems we’re facing is just to cut off trade with China. That is definitely not going to bring back good jobs or deal with the uncertainty, et cetera. So, that’s great.

It seems to me the hardest of these flows to defend is capital flows. As I see it, they have a pretty bad name these days. The direct investment side is associated with outsourcing, taking our jobs away. And then the portfolio flows are often characterized as hot money. Not such a problem for the United States, but I’ve worked on a lot of different developing countries. The hot money flowing in and flowing out can have exchange rate effects and asset price effects. So, let’s break this into two parts. So, what’s the case for capital flows, free movement of capital, and then we can talk about some of the policy changes that might make the results better.

CLAUSING: Yes, so that’s a huge question and we could probably have a podcast just on that if we wanted. But let me just hit the highlights here. So, I’ll remind you first that the perspective of that book was very much a perspective from the United States. So I’m going to try to focus most on that in my response to your question, but I do think capital flows pose very different risks for poorer countries or emerging economies than they do for the United States. So, I’ll touch on those just a little bit at the end, but I do think that distinction is an important one to make.

So one place to begin with the United States is to recognize that the United States is a net importer of capital. We, every year, borrow from foreign countries to a large magnitude–often in excess of three percent of GDP, sometimes up to five or six percent of GDP. And so that’s capital that’s flowing into the United States from abroad. When you worry about capital flows, you often hear stories about offshoring and those types of effects. And those are important, too, but one thing to remember is that there’s a lot of inward bound foreign direct investment and a lot of inward bound foreign portfolio investment. And in fact, if you look at the some of that, there’s more coming in than is going out.

Now it turns out that that flow of inward capital is exactly equal and offsetting our trade deficit. And one myth that I tried to set aside in that book is that the trade deficit is telling us something about competitiveness or about the fairness of our trade agreements, because it’s really not. What the trade deficit is telling you is that the country is borrowing on net from abroad and that borrowing is basically, you know, the IOUs that come from that trade deficit. So all the countries in the world that borrow run net trade deficits and all the countries in the world that net lend run trade surpluses.

So the question is, is that good for the United States? And the counterfactual really matters here. So if we assume that we’re continuing to run big budget deficits, that we have savers that aren’t that interested in saving a lot compared to our counterparts in Germany or China, and you imagine life without those capital inflows, without borrowing from abroad, then that would imply that interest rates would be higher and we’d have less investment. There’d be less economic growth, and we’d actually be kind of poorer as a result of cutting ourselves off from this source of international capital.

From the United States perspective, I think this borrowing has on net been beneficial. That doesn’t mean we shouldn’t address the root sources of the borrowing, but it’s not about blaming foreigners. It’s about sort of saying, okay, if we don’t want to borrow so much let’s consider running a balanced budget. Or, if we don’t want to borrow so much, maybe Americans need to save more relative to all of their consumption. Those would be the things that would stop the foreign borrowing—not beating up on trading partners. And we’ve run that experiment the last few years. We’ve beaten up on trading partners, we’ve started trade wars, and we haven’t seen an accompanying improvement in the trade deficit. That’s because it’s not a result of those factors; it’s a result of all this borrowing. So that’s, I think, a really important feature to remember when you’re thinking about the United States–that close link between the borrowing and the trade deficit. That’s what I’m trying to get across in the book.

Now, if we’re thinking about international capital and its effects on poorer countries, I think it’s important to distinguish types of international capital. So if I were an emerging economy, I would be much more interested in attracting foreign direct investment than foreign portfolio investment because foreign direct investment, where a company comes and sets up shop or merges with one of your local companies to do something in your economy, that tends to be a much more stable source of capital. It brings a lot of advantages including foreign technology and expertise into your economy–particularly in the non-extractive sectors. Extractive sectors come with their own challenges. Foreign portfolio capital can be a nice source of capital too, but it often is subject to rapid reversals that can cause big macroeconomic stability problems. And so, I think emerging economies might be a little less welcoming of that type or at least think about some of the institutional and macroeconomic factors that would reduce the ability of that type of capital to be disruptive. So I think the issues from emerging economy perspectives are somewhat different.

DOLLAR: If we come back to the United States, without being an expert, my casual impression is that our tax code still favors our companies investing overseas. The tax reform a few years ago was supposed to address this–perhaps it did partially. But I guess more generally, what would you do with the corporate tax code? In terms of the complementary policies to go with capital flows, I think taxation is really critical, and I know you’re an expert in this area. So what would you do with the corporate tax including issues of outsourcing?

CLAUSING This is a really important area and one that I’ve spent decades of my life thinking about. I think the U.S. tax system both before and after this recent 2017 Tax Act – the Tax Cuts and Jobs Act as it was colloquially called – both before and after that legislation it’s quite clear that the U.S. tax code encourages offshore earnings much more than domestic earnings. So, prior to that tax act, you could sort of accumulate income offshore in a tax haven jurisdiction, for instance, paying a very low tax rate and never have to pay tax at home unless you repatriated the income. That provided this huge incentive to book income offshore. After the tax legislation, we actually have a sort of direct exemption of foreign income from taxation in the United States for the first 10 percent return on assets. And after that, it’s taxed at half the rate, roughly, that we apply to domestic income. So in both cases, there’s a clear tilt of the playing field towards foreign income and away from domestic income.

This is one area where I think it would be quite helpful to have both better U.S. laws that reduce the tilt of that playing field. You could do this even unilaterally with a stronger minimum tax. There’s a weak minimum tax in this recent legislation, but you could easily make it stronger. But I also think it’s an area that’s really ripe for better international cooperation. And we’ve seen some efforts through the OECD and the G20 to address this with this base erosion and profit shifting project that they have. The United States has been a somewhat reluctant and at times even hostile participant of that process. But I think, hopefully, some future administration not too long from now would be more welcoming to the idea of cooperation in this area, because I think even a little bit of international cooperation can go a long way to sort of reversing this race to the bottom.

One of the dangers of capital mobility that we didn’t get to in the last question is that because capital is mobile and labor is not, you’re going to end up with governments being really tempted to lighten the tax burden on capital and shift the tax burden onto labor. Well, because of all this economic inequality and disruption that we’ve seen, this is kind of the opposite of what you want the tax system to be doing right now. Capital is done really well, labor is facing a much more stagnant wage situation, so you’d really like the tax system to be working in the opposite direction to tax the winners from globalization and to help the losers. Right? But we’ve actually seen policy going the opposite direction in part because of international competition.

But this is not inevitable. I actually think there’s really easy things countries can do – even unilaterally, but best with a little bit of cooperation – that would sort of counter this dynamic and actually encourage other countries to raise their tax rates. For instance, even if the U.S. just put in a tougher minimum tax then our trading partners would have the choice of either collecting that revenue themselves by raising that tax rate or letting the U.S. collect the revenue. It kind of changes the dynamic towards a race to the top instead of a race to the bottom, but it does require a little bit of political will.

One thing I can imagine that would be really useful to do in the years ahead would be to pursue kind of a modern version of some of these big trade agreements. So if you imagine sort of reinvigorating the Transatlantic Trade and Investment Partnership around goals like tax competition and climate change, but also keeping the trade part, giving market access to the two economies – the EU and the U.S. – to each other’s markets. Maybe focus less on the corporate interests around intellectual property and investor state dispute settlement and all that and more around worker and citizen interests in areas like climate change and tax competition. Right? So you’d provide the free trade outcome, but you’d also be saying, okay, well, we should price carbon, and we should have a border adjustment for that, and we’re going to tackle tax competition at the same time. And that kind of agreement could really make globalization work for citizens. Not just for the companies, not just for the winners, but for the economy as a whole, because it would kind of pair together these important collective action problems and help governments make progress on all of them together. So I think that could be a great start to a better outcome.

It need not be just to the benefit of the rich countries that I imagine partaking in this. If we do a better job taxing capital or a better job controlling climate change, that’s going to really help the emerging economies of the world, too, because it’s going to easier for them to collect their own corporate taxes if they don’t have to worry about it all ending up in Bermuda or Switzerland. And it’s going to be easier for them to have water on their fields and all the other nice things that come from controlling climate change if the EU and the U.S. are taking it seriously. So that might be one way to start on some of these goals.

DOLLAR: We’ll come back a little bit more on potential trade agreements at the end. But first, I do want to cover immigration. I think immigration is a key source of dynamism and growth for the U.S. I’m genuinely curious whether you favor high-end immigration vs. low-skilled immigration or skill-neutral immigration policy? So, what’s the case for immigration, and how would you change our policy?

CLAUSING: Yeah, I think the case for immigration is so overwhelmingly positive. This was one of the great things about writing that book, because I was had a hunch that immigration was great and then I really dug into the research and it was even better than I thought it was. If you look at the research, it’s just such a clear win for the United States. It helps our innovation–and there’s tons of evidence on that. It helps job creation because immigrants are much more entrepreneurial and they found more businesses and they hire people. It provides our labor force with all sorts of skills that were lacking both at the high end and the low end. We see at the high end you’ve got a lot of scientists and engineers who are immigrants, but you also see immigrants filling really important roles on things like elder care and those kinds of areas that we may have a shortage of domestic workers for. And it also helps with the sort of demographic issues that we face with the budget deficit and with our aging population to have a robust labor supply. Recent generations of immigrants are more likely to have higher fertility rates, too, so they help that demographic burden question. So I think it’s just an incredible boon for the U.S. economy.

If I were so lucky as to have a role in shaping U.S. immigration policy would look like, I would suggest more immigrants of every type. But let me be a little more specific here. I think one area where we could stand to move in the exact opposite direction of recent Trump administration actions would be to be far more welcoming to international students. They’re really a great boon to higher education which is  one of our best industries here in the United States. They provide capital service exports while they’re here as students. And many of them want to stay in the United States and work and be productive entrepreneurs and scientists and engineers and all these great jobs here. I would suggest something like an automatic green card program for graduates of accredited U.S. universities because I think that would be a great way to expand high skilled immigration.

But I also think that the very foundations of this country, and here I’m going to move to a somewhat more moral argument, are really about being welcoming to all. Right? To refugees as well as scientists. And I think we could stand to be a lot more welcoming to the refugees of the world and to people who may have had a hard life in their home countries and are looking for a new start in the United States. Of course, we have to have some limits on that, but I think we can afford to easily let in more of those types of immigrants, too. And these folks often go on to be very productive Americans with a fierce sense of loyalty and love for this country. And I would love to see us sort of get behind the ethos of the Statue of Liberty and the poem at its base and less about erecting walls and separating children. Those types of policies are really a moral stain on the country as well as economically wrongheaded.

So, in short, I would like more of every type. There has to be some limits because otherwise we’d end up kind of with infrastructure problems as too many people would come at once, but I think there’s a really strong economic case for more high-skilled immigrants. And there’s even a strong economic case for more refugees, too, although that does create some concerns in the really short run about state and local budget stress and the like. So you’d want to manage that flow carefully, but we can certainly afford to let in more and we should.

DOLLAR: I totally agree with you about both ends of that – handing out green cards to college and graduate school graduates, but also being more generous and welcoming to refugees. So last question, Kim. You mentioned a potential U.S.-Europe trade agreement. I think we’re pretty far away from that. But do you see in any of these trade agreements we’ve actually been signing–the enhanced NAFTA, the so-called USMCA, the phase one trade deal with China–are these things moving us in the right direction? Potential rejoining of TPP may also be a little bit of a stretch, but I think that’s more believable than moving ahead quickly with a European agreement. So how do you see these different trade agreements fitting with your agenda?

CLAUSING: Yeah. So, I know that some of that may seem a little lofty earlier, but we should also remember that the political momentum can change quickly, and we may be on the verge of such a moment pretty soon. One thing I would note with all of these agreements like NAFTA and the USMCA and the TPP, is they’re often villainized by both the far left and the far right vastly out of proportion to any possible effect that they could have.

Even if we imagined the perfect NAFTA that was like the dream of the labor groups, for instance, and just had every provision just right and all the enforcement that we wanted, and we contrasted that with the NAFTA that we actually experience, I suspect that the true labor market effects of those two different agreements would be really very similar. Mexico isn’t that big of a country. It’s not really the dominant force in what’s happened to workers over the last 40 years. And those that would say otherwise I don’t think have taken a good look at the actual data. So I think some of these trade agreements are made out to be bad guys despite the fact that they really have pretty minor effects compared to other things. Even the places where we see trade being really disruptive, like in the Chinese case, we didn’t have a trade agreement with China. They joined the WTO. It’s true, I suppose, we could have tried harder to stop that, but it’s weird to sort of say to a country of over one billion people, like, we’re going to try to inhibit you from joining this international rules-based organization. So I think that we’d be better off focusing on direct ways to help our workers than trying to stymie other countries from participating in the world trading system.

In terms of the particulars, the USMCA I don’t think is all that different from NAFTA. There are a couple tweaks that really involve adopting parts of TPP and adding it to NAFTA. There are a couple areas where they are a little more sensitive to goals of labor communities and the like. So you could argue that it’s kind of like NAFTA 2.0. It’s not really a new thing; It’s just a slight tweak. I don’t view it in a particularly negative light. I think it’s way better than just ending an agreement that we’ve had since 1994 abruptly, which I think would be quite disruptive to the U.S. economy as well as to those in Canada and Mexico. I view USMCA is as a much better alternative than just throwing away NAFTA.

TPP, I would like to see the U.S. rejoin the CPTPP, and in that sort of rejoining process I think we might usefully rethink some of the ways in which that agreement might have overly emphasized the interests of, say, intellectual property and investors and focus more on some of these other things. I actually think there would be room to tackle tax and climate as two add-ons to that in a new administration. I can’t see any of this happening under the Trump administration, but I’m optimistic that we could have a reset in some of these areas.

When we do have conflicts with countries, I think it’s important to have trading partners and friends. So, for instance, if we look at the effectiveness of the U.S. in shaping Chinese policy on issues like the Uighur population or Hong Kong or the South China Sea, I would argue that in all of those cases we’ve been less effective with this approach that we’ve tried lately of bullying and putting on tariffs and restricting the opportunities for trade than we would have been if we had proceeded with the TPP and applied a different type of softer pressure with those other countries of the world. I think we’d likely be more effective with that type of pressure than with shooting ourselves in the foot with these trade wars. So, I’d like to see these agreements be modernized, but I don’t think we should make them out to be the real source of workers’ troubles because I don’t think that’s the case.

DOLLAR: I’m David Dollar and I’ve been talking to Kimberly Clausing who makes a really compelling progressive case for free trade. If you want to hear more about that, you’re going to have to read her book, “Open: The Progressive Case for Free Trade, Immigration and Global Capital.” So thank you very much, Kim.

CLAUSING: Thank you so much for having me. It’s been a pleasure.

       

China’s buildup of debt to fuel economic growth has raised fears of an eventual collapse. So, what factors would precipitate such a collapse? And if one were to occur, how would it affect the rest of the world? How can Chinese policymakers guard against financial crisis? These are questions that Bloomberg Economics Chief Economist Tom Orlik takes up in his new book, China: The Bubble That Never Pops. Orlik joins David Dollar in this episode to discuss China’s economic growth model, the potential for reforms, and how the economy has responded to the trade war and COVID-19.

Related content 

China: The Bubble that Never Pops

The COVID-19 recession is a good time to accelerate Chinese reform

This transcript has been lightly edited for clarity.

Dollar: Hi, I’m David Dollar, host of the Brookings trade podcast “Dollars and Sense.” Today, my guest is Tom Orlik, chief economist of Bloomberg Economics and the author of the new book, “China: The Bubble that Never Pops.” So welcome to the show, Tom.  

Orlik: Great to be here, David. Thanks for having me on. 

Dollar: So, you lived in Beijing for a long time. I think 10 years, if I remember correctly. And you’ve seen both the best and the worst of China. Let’s start with the positive. What are some of the things you saw that help us understand how China has been successful and dynamic?  

Orlik: So, I think one of the prevailing narratives about China that we hear in the West is that because of the single–party state and because of the large presence of the state in the economy, the policy space and the market space is both kind of sclerotic. Right? There’s just been a kind of nationwide suppression of incentives to perform – something like we saw in the Soviet Union in the 1970s and 1980s. And I think that’s sort of an important underpinning of the China collapse pessimism or China collapse theories that implicitly inform U.S. views on China.  

It’s certainly true that the political system and the state ownership in the economy have a depressing impact, but my overwhelming impression from meeting with Chinese policymakers, Chinese workers, and Chinese entrepreneurs was a sense of dynamism, forward-looking optimism, and ingenuity. So, if we just think about the central bank, the People’s Bank of China, I think one of the things which strikes me about the People’s Bank of China over the last fifteen years is just how much policy innovation there has been there. From the reform of the interest rate system, to the reform of the exchange rate system, to the steps which they’ve taken to begin de-risking the financial system. It just strikes me as a kind of very energetic and ingenious institution.  

Clearly there’s a huge number of problems in China. Clearly there are a huge number of problems with the social system. But if we focus narrowly on the economics, the impression I came away with from discussions with policymakers, discussions on the ground, was that sense that people were motivated and did have an incentive to think outside the box.  

Dollar: That’s a really nice point, Tom, about policy space. My experience in China as well was that there really was a lot of room for debate on certain topics. A lot of the issues you take up about the financial sector and debt and the growth model, you know, these things are actively debated. Other topics are completely taboo and I’m certainly not defending Chinese authoritarianism, but nice point about a lot of freedom – freedom may be too generous a word – but a lot of space for policy debate.  

So let’s turn to your book. A key point of it is that China has relied a lot on the build-up of debt, that is rapid growth of credit in order to fuel growth. So, how would you summarize the basic story of your book? Why do they need this rapid credit growth? Who’s doing the borrowing? Who’s doing the lending?  

Orlik: So the original sin of China’s economy and China’s unbalanced growth model is an extremely high savings rate. China saves a very, very high proportion of its national income. And to turn that saving into demand, there’s two possibilities. They can lend it overseas and then it comes back to the Chinese economy in the form of export demand. And that’s what they did very successfully in the 1990s and even more after they entered the World Trade Organization in 2001. Or, they can lend it to themselves, and then it comes back in the form of investment. After the great financial crisis, exporting wasn’t really working anymore, so the model switched from turning saving into exports to turning saving into investment. And so from 2008 on, we had just an astonishingly rapid buildup of debt in the financial system.  

In 2008 extending borrowing was up by 140% of GDP. By the time you get to 2015, it’s gone all the way up to 250% of GDP. And when we look around the world, we can’t actually find any other economies which have taken on so much debt in such a short period of time. But we do find a bunch of economies like Korea in 1997, the U.S. ahead of the Lehman shock in 2008, Greece and other countries ahead of the European sovereign debt crisis, which took on a lot of debt – not as much debt as China, but a lot of debt – and they had a financial crisis. So the concern people have looking into China is: you’ve borrowed so much, you borrowed so much in such a short period of time, surely you’re going to have a bunch of bad loans. Surely your banks are going to fall over.  

Dollar: So given that buildup in debt, obviously there’s a risk of a financial crisis. That‘s a key point of your book. You don’t see that as the most likely scenario – we can come back to that – but it’s certainly a possibility. What might be some of the precipitating events? There’s the coronavirus, the trade war with the U.S., or something that I haven’t thought of yet – are these possible precipitating events for a financial crisis?  

Orlik: That’s a great question. When we think about a financial crisis, you need two conditions to be met to have a financial crisis. You need a bunch of bad loans and you need the funding for the banks to dry up. So if you think about the Lehman shock, for example, both of these things happened. Right? Lehman had a bunch of investments in mortgage-backed securities which turned out to be much riskier than Lehman had realized. Then when the investors which were funding Lehman’s operations realized that Lehman had these very risky positions, they pulled away their funding and Lehman collapsed. So you need both of these things to be in place. You need the bad loans, but you also need the funding for the banks to disappear.  

So this is kind of a useful framework for thinking about what could trigger a crisis in China. And you already have one of the conditions. Right? There’s already a lot of bad loans in China. If we look at the balance sheets of the city banks then we see a very large buildup of sort of shadowy investments; probably money which has already been lent to borrowers that can’t service their loans. So there’s a lot of bad loans there, and problems like the COVID shock, problems like a renewed trade war with the U.S. if that’s what we get, would make that worse. Right? Because problems like that, they hammer incomes for borrowers. They make it harder for them to service their debt, and so they mean we’re more likely to have bad loans.  

The other condition for a financial crisis, the disappearance of funding, or the drying up of funding for the banks, that’s the condition which is not met in China. And one of the big arguments in my book is that because the savings rate is very high, and because it’s still difficult to take money out of the country, banks have a very solid funding base. And that’s why, even as we see hidden bad loans increase, we don’t see China’s banks falling over.  

Dollar: Right. So I basically agree with you there, Tom. One thing I worry about – a key part of all this is that China has pretty effective capital controls. So there’s real limitations on how much people can take out of the country and they seemed to work pretty well. But I assume whether capital controls work or not depends a lot on the state of the world. And if Chinese people really lose confidence in their system then there are probably a lot of ways around the capital controls that haven’t been discovered yet. And I don’t see that happening at the moment, but to me that’s a fundamental issue. You know, are people losing faith in the Chinese system. 

Orlik: Yeah, I think you’re completely right. I was in Beijing in 2015–2016 at that moment where we had a collapse in the Chinese equity market and that botched devaluation of the yuan by the People’s Bank of China which triggered that sort of panicked moment when hundreds of billions of dollars left China very quickly. And that was a moment where, I think, there was a genuine sense of panic and a genuine fear that perhaps the risks could crystallize because, of course, if you have enormous capital outflows, then you do have the funding for the banks disappearing, and that is a moment when a financial crisis could happen. But what Beijing did in that moment was quietly tighten the screws.  

I remember going to the bank at that period to try and transfer some of my earnings into dollars and move them out of the country. And the paper trail…no one said no, but the paper trail that was required was kind of a mile long. At one point my bank said your employment contract is not long enough. So, yes, ultimately if Chinese people lose faith in the Chinese economy and we see mass capital flight, that is not something the Chinese government is going to be able to easily control, especially because the trade account is so big and there’s so many ways of hiding capital flows in the trade account. But what we saw in 2015–2016 was that they are actually quite good at tightening the screws when they want to.  

Dollar: So if the bubble in China does pop and there’s a financial crisis, can you sketch out what it might look like? How it affects China and how it would affect the U.S. and the rest of the world?  

Orlik: So you have a shock to China and that shock ripples out and hits the rest of the world. So what happens in China? Well, it starts with a default for a single borrower. Banks recalculate the risks associated with lending to similar borrowers. They start pulling back lending. They start refusing to roll over loans. Defaults spread, and what starts as a kind of a single default spreads out to be a systemic crisis. Businesses which rely on credit – which of course is all businesses – and don’t have enough cash flow to keep themselves solvent start going bankrupt. They start letting go of workers, demand disappears, and you have a kind of a self-feeding shock similar to what we saw in the United States after the Lehman shock in 2008. So China’s growth, which let’s say after the COVID shock goes back to 4-5 percent a year, craters, and you have a period of contraction in China’s economy.  

Now, when the U.S. financial system blew up in 2008–2009, it was the financial linkages which spilled around the world and caused problems for European banks and Japanese banks and Latin American banks. And then, of course, the collapse in U.S. demand had a second round effect. So all of these countries had a financial shock and then they had a real economy shock because demand for imports from the U.S. disappeared.  

In China, as you know, David, financial linkages with the rest of the world are just not that well developed. There aren’t a lot of businesses around the world, or a lot of banks around the world, that have very close or very important connections with the Chinese banks. So if China’s financial system implodes, then we don’t actually see that immediate financial ripple effect. What we would see is a kind of a risk–off mood, a risk–off moment for global financial markets. So you’d expect to see equity markets in the U.S. and Europe and Japan collapse; potentially with significant negative confidence effects which would hit those economies immediately. And then – this is the bigger one – you see a real economy impact.  

China’s a very significant driver of demand for exports, especially for commodity producers like Australia or Brazil or Chile. So they suffer substantially. China is also now a very substantial driver of demand for other countries in the Asia region. So Chinese tourists disappear, Chinese consumer demand falls, and countries in the region, like Thailand, for example, see their grade fall very sharply. Asian countries are also extremely integrated into the Chinese electronics supply chain. So if we see a financial crisis which hits the Chinese manufacturing sector, and we see the big electronics producers on the East Coast go bankrupt, then that also has a negative impact on Japan and Korea and the Philippines and other countries that feed into that electronics supply chain.  

What does it do to Europe and the U.S.? Well, actually, the impact there is a bit less, and there are some countervailing positives. So the impact is a bit less because those countries are much further away. And, yes, they export to China, but not as much as a commodity producer or an Asian neighbor. And most of these countries are commodity importers. So, if China collapses, and the price of oil, for example, collapses, that’s actually good news for some European countries because it means their import bill falls.  

Dollar: Let’s talk a little bit about the response to the coronavirus. The natural response we’re seeing all around the world is big Keynesian stimulus through fiscal policy, monetary. The numbers in Japan and the United States are overwhelming; as much as 20 percent of GDP in the case of Japan.  

I find it interesting that China actually seems rather modest in terms of the stimulus it’s rolling out. China lacks transparency on some of this, but to the best we can estimate, it is providing fiscal and monetary stimulus but far less than the United States or Japan. So does this mean the technocrats, or the top leaders behind them, are they getting serious about controlling leverage? Is this a response to the kind of worries that are raised in your book?  

Orlik: I think that’s a really interesting question, David. I think there’s a few things going on. The first thing is that they really overdid it in 2008. That famous four–trillion yuan stimulus, which Premier Wen launched, was very effective at offsetting the impact of the great financial crisis, but the stimulus went on for too long and it’s left China with this legacy of a huge amount of debt. So they just don’t have space to run another very big stimulus.  

I think the second thing is that China has some instruments which other countries do not have. So the state sector in China is very big and very inefficient and a big source of corruption. And that’s probably a net negative for China, but it’s also an instrument which the government can use to act as a kind of countercyclical buffer. So the private sector isn’t hiring, the private sector isn’t investing, but the government can instruct the state sector to keep hold of their employees and to accelerate investment projects. I think maybe this is what you were hinting at with your point about transparency. It’s not fiscal stimulus; it’s kind of a quasi-fiscal stimulus so it doesn’t show up on the Ministry of Finance’s books, but it has a similar type of impact on the economy.  

Dollar: So ultimately you’re cautiously optimistic, I would say, in that you don’t see the financial crisis as the most likely scenario. But you highlight some serious risks. What are the most important things for China to do to continue healthy growth without a financial crisis? You’ve touched on some of them, but what would you add in terms of the policy agenda for China?  

Orlik: So to continue growing China needs to engineer a set of mutually reinforcing reforms. They need to restore the link between credit growth and growth in the real economy so that they can grow without massively adding to the existing levels of debt and leverage. They need to continue a transition from manufacturing to services. They need a smaller and more efficient state sector, leaving more room for a dynamic private sector. That’s one area where they’re certainly not making progress and indeed going in the wrong direction in the last few years. And they need a larger role for consumption, a smaller role for investment. And they need to have a more environmentally sustainable growth model.

So that sounds like a lot – it is a lot. But in fact, all of these transitions are mutually reinforcing. Right? So the service sector is more capital-light than the industrial sector. The service sector is more carbon-light than the industrial sector. And the service sector is more labor intensive than the industrial sector. So, as you transition from industry to services, you don’t need so much credit, so the relationship between credit growth and the rate economy gets better. You don’t burn so much carbon, so your economy becomes more environmentally sustainable. And you employ more people, so labor demand goes up, wages rise more quickly, and hopefully you get stronger consumption.  

There’s a huge amount to do. In some respects, China’s moving in the wrong direction, especially on the relationship between the state and the private sector, but many of these transitions are interlinked and mutually reinforcing, so I think that’s a sort of a basis for cautious optimism.  

Dollar: I see a common thread running through a lot of those recommendations is the need to open up and create more competitive markets in different areas. And the natural response to the coronavirus might be to close things off. We’re seeing that around the world, which I think is quite unfortunate. So it takes a quite a bit of leadership and even courage to go in the other direction. I mean, on a positive note, you probably noticed that China reached an agreement with ASEAN and Japan and South Korea on the RCEP trade agreement, which is modest, but still it’s a positive step in the right direction that will force China to open up its markets a little bit more.  

Orlik: Years ago I decided to myself that I could only absorb a certain number of acronyms, and the RCEP trade agreement didn’t make the cut. So, I didn’t track developments there, but it certainly sounds like it sounds like a positive one.  

Dollar: Right, it’s the Regional Comprehensive Economic Program, and for a long time we economists kind of pooh-poohed that it’s not nearly as deep integration as in the Trans-Pacific Partnership, but it’s pretty serious trade liberalization. Curiously enough, its positive effects in some sense are quantitatively about the same as the negative effects of the U.S. trade war. So you could say that China is undoing the trade war by participating in this Asia Pacific-wide trade liberalization. 

In fact, that brings me nicely to the last topic I want to take up, Tom. Not so directly relevant to your book, but obviously in everyone’s mind: U.S.-China relations. It’s related in the sense that hostility or the trade war from the U.S. has to make China’s growth a little bit more difficult and raise the risks of some kind of financial crisis. You’ve been covering U.S.-China relations for a long time. Do you see much prospect for an improvement? Do you think things are going to get worse? How do you read U.S.-China economic relations?  

Orlik: I think the question is, is Donald Trump going to turn out to be an aberration in terms of his approach to U.S.-China relations, or is he going to turn out to be a kind of turning point? Of course, that question might not be important. We’ve got an election in November. It’s possible that President Trump will win, and so if that happens I would anticipate we’d have something that looks like continuity in U.S.-China relations. If Biden wins, then we’ll find out. Has Trump identified the new trajectory for U.S.-China relations and is that going to be the trajectory going forwards, or was he a moment and actually we’re going to go back to more constructive engagement? I suspect that actually it’s the former.  

I think that fear of China’s rise is not something which is unique to President Trump. I think it is fairly widespread among U.S. voters. And indeed, I think it’s sort of a growing feeling in Europe, Australia, and elsewhere as well. I think we’re at the beginning of a global shift where businesses and governments view China less through the lens of an opportunity to be tapped and more through the lens of a risk, or even a threat, that has to be managed.  

That’s going to be a problem for China. It’s going to be a problem because it’s going to restrict global export markets for Chinese goods and Chinese services. A bigger problem for China, I think, is that China is still playing catch-up on technology, and the quickest way to catch up is to learn from overseas – or if we’re being less charitable, to steal from overseas. And that was a process which worked very nicely for China up until quite recently. There were basically no constraints on multinationals setting up shop. There were limited constraints global research partnerships. There was limited pushback even on intellectual property theft. And now that door to technology transfer is creaking closed, and I think that’s going to be a long–term and potentially rather serious drag on China’s capacity to develop and to drive productivity growth.  

Dollar: I’m David Dollar, and I’ve been talking to Tom Orlik about his new book “China: The Bubble That Never Pops.” It’s a really enjoyable read that you can buy from all the usual places. It gets into some really complicated issues about China’s growth model, financial sector, risk of financial crisis, but explains it in a very non-technical and enjoyable fashion. So, thank you very much for joining us, Tom.  

Orlik: Thanks very much, David. I felt when I was writing the book that I was very much indebted to the powerful analysis and insights of a whole group of China analysts. Over the years, I learned a huge amount from reading your work and occasional opportunities to speak with you. So, thank you very much.  

Dollar: Thank you.  

And thank you all for listening. We’ll be releasing new episodes of Dollar & Sense every other week, so if you haven’t already, make sure to subscribe on Apple Podcasts or wherever else you get your podcasts and stay tuned.  

Dollar & Sense is a part of the Brookings Podcast Network. It wouldn’t be possible without the support of Shawn Dhar, Anna Newby, Fred Dews, Chris McKenna, Gaston Reboredo, Camilo Ramirez, Emily Horne, and many more. If you like the show, please make sure to rate it and leave us a review. Send any questions or episode suggestions to bcp@brookings.edu. And, until next time, I’m David Dollar and this has been Dollar & Sense. 

       

If China continues to open and reform, it will probably gradually converge on the living standards of the U.S. and achieve its goal of becoming moderately well-off by 2049. There is tremendous uncertainty about the lasting impact of the COVID-19 pandemic; it may well lead to some countries backing away from globalization and to a slowing of growth everywhere.

But we think that it is not likely to overturn the persistent pattern in which less-developed economies that pursue integration with the global economy grow faster than rich countries and tend to catch up, at least partially. In fact, we believe that many reforms in China — reforms that we detail in our recent book, “China 2049: Economic Challenges of a Rising Global Power” — are more pressing in the wake of the pandemic. Three good examples are the challenges of aging in a system with strong rural-urban cleavages, inefficiencies and risks in the financial system, and the need to reform and modernize the international economic architecture.

Aging and spacial divides

Rapid aging is probably the single biggest challenge that China faces domestically. The Chinese population over 65 will increase from about 200 million today to 400 million by 2049, while the overall population declines slightly. Within this group, the most rapid rise will be the population that’s 85 and older: from fewer than 50 million today to more than 150 million in 2049.

Taking care of the elderly would be a challenge under any situation, but the challenge is compounded by rural-urban divides. Most of the elderly live in the countryside, though often their working-aged children have moved to cities as migrant workers (and frequently leaving school-aged children behind). Rural health systems are weak compared to urban ones, so taking care of the elderly will require a combination of more permanent migration to cities plus strengthened rural service delivery. It is time for China to completely scrap the registration system that limits permanent migration and to unify rural and urban pensions, health insurance, and educational systems.

Dealing well with aging is first and foremost a social issue. But it also has economic implications. As China’s workforce shrinks, the 55-64 year-old cohort will increase dramatically. Keeping this group and the “young olds” (age 65-85) healthy and active is China’s best hope for staving off dramatic labor force decline. Improving rural education is also critical because about half the workers of the future are going to school in the countryside, and deficiencies in their education will affect China’s growth for years to come.

This is the perfect time to dramatically expand public resources to address weaknesses in the safety net.

What is the relation to the COVID-19 pandemic? There is a lot of uncertainty right now, but probably even under the best scenario people will be slow to return to old consumption habits — fearful of travel and large crowds. There will be some return towards normalcy, but likely still a big shortfall in private consumption. This is the perfect time to dramatically expand public resources to address weaknesses in the safety net. As China spends more money to stimulate its economy, these would all be good areas of focus. Among other things, this will provide insurance against future pandemics.

China’s financial system

A second domestic weakness that China needs to address if it is to grow well is the financial system. It has adequately invested resources during its rapid growth phase, but the state-dominated system is inefficient. Now that China has reached middle-income status, it will need to depend less on investment and more on innovation and productivity growth. But the bank-dominated financial system favors lending to state enterprises, which have lower productivity and are less innovative than the private sector. One piece of evidence that the old investment-heavy growth model is running out of steam is that the debt-to-GDP ratio has been rising inexorably since the 2008-2009 global financial crisis. If lending is financing productive investment and growth, then this ratio should be stable or slowly rising. The rapid rise since 2009 is an indication that many poor investments are being financed.

As the pandemic devastates the economy, it is rational for the government to borrow whatever it takes to prevent a depression. But as China recovers, it will be even more important to reform the financial system because risks will inevitably increase during this stimulus period. The playbook for financial reform is well-known: Carefully introduce more flexibility into interest rates and the exchange rate; license more private financial institutions, both foreign and domestic; and turn to capital account liberalization last as this is the most difficult.

The international economic environment

China’s ability to meet its social and economic goals will also depend on the international environment and economic architecture. Before the pandemic arrived, we wrote that there are serious weaknesses in this architecture, and the pandemic has showed this in spades. The World Trade Organization is not equipped to deal with modern trade issues such as intellectual property right protection, investment restrictions, cross-border data flows, and subsidies. The major economies of the world cannot agree on expanding the resources of the International Monetary Fund because the U.S. does not want to increase the weight of China and other emerging markets in decisionmaking, though China’s growing role in the world economy should dictate otherwise. Meanwhile, the U.S. has withdrawn from the Paris Accord; China and Western donors have separate and competing programs to finance infrastructure in the developing world; and most glaringly in the current situation, the World Health Organization needs to be strengthened, not weakened.

For the world economy to function smoothly, these institutions that provide critical global public goods must be strengthened. This will require practical compromises between China and the U.S., and more generally between developing and advanced countries. Right now it seems like a (bad) joke to talk about practical compromises between China and the U.S., as the two hurl accusations across the Pacific. But we should not take it for granted that China and the U.S. will become enemies. Both countries have an interest in international cooperation on public goods. For China, we recommend unilateral further trade and investment liberalization — good for China, and a goodwill gesture in the current environment. The U.S. may go down the dead-end path of protectionism and isolation for a while, but we expect it to come back to internationalism because that is the best foundation for prosperity and peace.

       

In his new book “Unlocking Africa’s Business Potential,” Landry Signé shows why Africa is ripe for business investment, citing fast-growing consumer and business spending, improved political stability and business environments, regional integration, and a burgeoning youth population eager to capitalize on the Fourth Industrial Revolution. Signé joins David Dollar to explain which sectors – like agriculture and manufacturing – offer particularly high potential returns, and he details the trends that should leave us all optimistic about the potential for Africa’s long-term economic growth.

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Unlocking Africa’s Business Potential (Book)

Unlocking Africa’s business potential (Event)

Africa is more resilient than you think

Job creation for youth in Africa: Assessing the potential of industries without smokestacks

Understanding China’s Belt and Road infrastructure projects in Africa

This transcript has been lightly edited for clarity.

DOLLAR: Hi, I’m David Dollar, host of the trade podcast, “Dollars and Sense.” Today, my guest is Landry Signé, a senior fellow in the Africa Growth Initiative at Brookings. We’re going to talk about his recent book, “Unlocking Africa’s Business Potential.” A lot of headlines we see about Africa often focus on negative events, but we’re going to talk about the long-term potential for Africa. So welcome to the show, Landry.

SIGNÉ: Thank you very much, David, for having me.

DOLLAR: So let’s start with the general argument in your book. Why are we optimistic about the business potential for Africa?

SIGNÉ: Yes, that’s an extremely important question. I think that Africa has tremendous economic potential and offers rewarding opportunities for local and global businesses with favorable returns as well as a high societal impact.

So in my book, I examine economic, business, and investment opportunities and also the overall transformation in sectors with the highest potential returns on investment such as consumer market, agriculture and agri-industry, information and communication technologies, manufacturing and industrial development, banking, among others. So those sectors will foster economic growth and diversification, job creation, including for women and youth, and improve general welfare throughout the continent.

I identify about 13 core trends which justify why we should be optimistic about the potential of African economies. The first one is the fast population growth which is aligned with the growth of the middle class and household consumption. As a matter of fact, by 2030, Africa will have 1.7 billion people and a combined consumer and business spending of 6.7 trillion U.S. dollars. So about 50 percent of the population will be in seven countries: Nigeria, Egypt, Democratic Republic of Congo, Ethiopia, Tanzania, Kenya, South Africa, among others. And it’s also true that over 50 percent of the combined consumer and business spending will also be located in three countries such as South Africa, Nigeria, and Egypt.

So those are the first factors: fast population growth, which is extremely important, combined with the growth of the middle class and household consumption and sustained business spending in the area. The largest sector of business spending, for example, includes agriculture and agri-processing, manufacturing, and construction. But you also have household consumption, food and beverages, housing, health care, among other sectors.

The fourth point, which is extremely important here, is the fast urbanization that we see on the continent. By 2030, Africa will have 17 cities of more than five million inhabitants from about six a few years ago, in addition to five cities of more than 10 million inhabitants in comparison to about three in 2015.

So the fifth important point is also the rise of industries, especially industries without smokestacks. I will come back to this point later, but it is true that when people look at industrialization in Africa, they mostly observe manufacturing, traditional manufacturing. Because of that, people will be speaking about the industrialization on the continent. When we look at industries without smokestacks we see that the growth is phenomenal. I’ll be happy to further discuss it later, but in addition, the manufacturing output will be reaching one trillion dollars within the next decade, which is also an important increase.

The sixth point is the effort to bridge, or to close, the infrastructure gap. So we all know that it’s extremely important to have quality infrastructure to unlock economic potential. The African Development Bank, for example, has created the African Investment Forum and mobilized billions of dollars to fund infrastructure development on the continent. But we also have an initiative with the African Union and the African Union Development Agencies – previously New Partnership for Africa’s Development and the Program for Infrastructure Development in Africa (PIDA), which also has made tremendous progress during the past few years in unlocking infrastructure potential.

The seventh point is the innovation to unlock agriculture and resource wealth. And I’ll come back to that point later, but we have about 60 percent of the world’s available and unused arable land on the continent. And we see also a trend with many foreign direct investors looking for opportunities in Africa.

The eighth point is the fast digitalization and increased technological innovation. As you know, David, by the late 1990s, New York City had more mobile phone subscribers than the entire continent of Africa. But now, we have on the continent more than 700 million mobile phone subscribers. Some countries are leading the way in terms of innovation, including technological adoption. We see Zipline, for example, in Rwanda, which, of course, after developing drone innovation for the delivery of medical supplies was not authorized in California, but was authorized in Rwanda, and now has expanded in many other African countries.

We also see an increasing number of African countries among the most competitive economies globally. So we have in some sectors, in the financial sector, for example, M-PESA has been leading mobile payment, or mobile money, among other factors on the continent.

The ninth point is the increased stability on one hand, but also the increase in accountable governance and democratic development. More than 77 percent of Africans are really committed to stability, to democracy, and to accountable governance. And many including over-effective government. So accountability has been one of the drivers of overall stability.

So the tenth point is the improved business environment. As you know, David, five of the top 10 outperformers in terms of progress in ease of doing business a few years ago are located in Africa. And we continue to see countries – whether led by accountable leaders or less accountable leaders – we continue to see these countries improving and committing to improve the ease of doing business despite the numerous challenges which remain on the continent.

The 11th point is the fast regional integration including with the African Continental Free Trade Area which was first signed in 2018 and then a sufficient number of countries ratified it for it to come into force by the end of May 2019. Although the AfCFTA was supposed to come in to come into force more formally with countries starting trading as of July of this year, it has been postponed due to COVID-19. But despite the postponement, the Secretary General, who was already appointed, is playing a critical role in helping African economies dealing with trade issues.

The 12th one is the critical importance of the diaspora playing a role in trade, investment, research, innovation, technology transfer, among others. As well as remittances, which I currently use increasingly for consumer spending, but we also see a diversification and a redirection of those remittances toward investment.

And the 13th point, which is an extremely important point, is the competition between the established powers and the emerging countries, including the United States with Prosper Africa, with China, with Russia, India, Turkey, and the Emirates, among other countries – which contribute also to increase the level of foreign direct investment on the continent. And when well-used, they really contribute to unlock African business potential.

So those are quickly some of the key trends which made me really think that Africa is home for tremendous business opportunity. COVID-19 will likely affect the performance, as it is the case around the world, but as history has also shown, Africa is more resilient now than before and will also recover at a faster pace. So it’s the time to invest and to do business with Africa.

DOLLAR: So, Landry, there’s a lot of fascinating material there. Thank you. Just a couple of quick reactions. Africa has more than 50 different countries, so some of them inevitably are rather small economies. So your point about the regional trade integration, free trade agreement, just to remind our listeners that for small countries free trade is particularly important because trying to build all the diverse aspects of the economy in one small location is inefficient. Right? American states specialize in different things in trade among each other – same way African states should be specializing and trading. So that was very interesting.

Then I noticed you started with the rapid population growth. Africa is the last major place on Earth where we have this rapid population growth. Africa needs to create about 20 million jobs per year, I calculated, and that’s a challenge but it’s also an opportunity. So if these countries meet this challenge, then you’re going to get this rapid growth. And you have the other factors that you brought in as well. So that’s very interesting.

You cover eight sectors in the book. We don’t have time to go into all of them, but let’s take a couple. Let’s start with agriculture. So with this expanding population, is Africa going to be able to feed itself? Are there prospects for agriculture to become more of an export commodity for Africa? What do you see?

SIGNÉ: Thank you very much, David. Although the percentage of the working-age population in Africa, if I connect with our intervention, we have about 20 million people who will reach the working age on the continent every year. So probably not all of them are going to the job market. Approximately half of them will go to the job market. So probably the number of jobs needed is probably lower than the percentage of the population which will reach the working age.

I really appreciate your reaction and you pointed out some core elements. In terms of agriculture, as mentioned before, Africa home of about 60 percent of the world’s unused arable land. I personally think that it is inadmissible that the continent is still a net importer of food – most of the countries are net importers of food – as well as the percentage of people who are under-nourished people; famine remains one of the core challenges on the continent. So this is a little bit in contradiction as one of Africa’s fastest growing sectors has been agriculture. Agriculture, agri-industry, food, beverage, is also a sector which will be home of both the fastest, or the largest, consumer spending, but also the largest business-to-business spending.

This mismatch, this challenge that we see on the continent, also presents of a tremendous opportunity if solved. And you see countries such as China, India, Saudi Arabia, South Korea, which will be buying or leasing lands for crops. You see many countries which are particularly interesting in terms of investment, especially the coastal countries with large amounts of uncultivated crop land including Cote d’Ivoire, Ghana, Nigeria, Cameroon, Angola, Sudan, Ethiopia, Kenya, Tanzania, among others. You also see some landlocked countries with large amounts of uncultivated crop land. Perhaps the costs of exportation may be slightly higher in these countries.

Definitively, I think that the continent has tremendous potential in terms of agriculture industry, agri-processing. Horticulture, for example, is one of the fastest growing sectors in many countries, including Ethiopia, providing jobs for moderately skilled workers. You also have some opportunities that are presented when primary inputs in the form of farmland, green house, seed, fertilizer equipment, crop protection, in terms of production and processing, weather food packaging, vegetable protein, food processing, among others. Also in terms of transformation and infrastructure. So the potential is clear. Now we need a leader who will be creating a more conducive environment for investors, as well as entrepreneurs and investors who will seize the right opportunity so that Africa reaches food safety or security.

DOLLAR: So let’s shift gears and talk about manufacturing. That’s really been the entree into the world market for a lot of successful developers. The East Asian countries, they all tend to be resource scarce. So it’s kind of natural for them to move into labor-intensive manufacturing. Africa has more natural resources, but it has this growing population we were talking about. So how do you see the prospects for manufacturing? There is a kind of gloomy view that it’s not going to play the role in the future that it played in the past because of automation. How do you see the role of manufacturing and manufactured exports in Africa’s future?

SIGNÉ: Yes, this is an extremely important question and it is part of the strategic work that we are doing with the Africa Growth Initiative, including with my colleague and now Vice President of the Global Economy and Development Program, Brahima Coulibaly, who has also used this as a priority when he was leading the Africa Growth Initiative.

So, manufacturing in Africa. Let me speak broadly: Industrial development on the continent is critical. As stated before, Africa’s manufacturing sector is projected to double in size by some would say 2025 – it can go up to 2030 now because of COVID-19 now to reach one trillion dollars. So the projected number is one trillion dollars by 2025. By 2030, Africa will reach, as mentioned before, 6.7 trillion dollars of combined consumer and business spending. In the manufacturing sector in particular, business spending will reach not far from 700 billion dollars. So those are important.

With the adoption of the African Continental Free Trade Area, which aims at creating a continental free trade zone, a continental market, the African manufacturing sector will also definitely see its development accelerated for a couple of reasons. First, when African countries deal with the rest of the world, they mostly export commodities. So only about 17 percent of products are manufactured. But when African countries deal with one another, they export about 42 percent of manufactured product, which means that accelerating trade between African countries will also contribute to accelerate, to unlock, the manufacturing potential.

As you also know, about 70 percent of the manufacturing value added is concentrated in about four countries: South Africa, Egypt, Nigeria and Morocco. The industries without smokestacks that I mentioned earlier, those industries are extremely important. Another point that I want to mention here when speaking about industries without smokestacks is the fact that those industries share these same characteristics as traditional manufacturing. They are labor intensive, they absorb a high proportion of moderately-skilled workers who also have the trainability and exportability, and they are high productivity. So I definitively believe that industries without smokestacks represent an alternative path to development on the continent. Between 1998 and 2015, exports of industries without smokestacks products or services have grown six times faster than exports of traditional products or manufacturing products on the continent.

DOLLAR: It would certainly be nice if Africa in some ways could leapfrog the smokestack industries. We’re not going to have time to get into tourism, but that’s obviously a very important market for Africa. You’ve got that beautiful natural environment still in many locations. So if you can leapfrog the smokestack industries and find other niches in manufacturing and services, that’s probably a good development path.

SIGNÉ: Absolutely, and we financial services. We have as well horticulture, agri-industries, and tourists, which will also rebound. So those areas are definitively very dynamic.

DOLLAR: I did a little bit of work on Africa for the World Bank back in the day, and my impression was that the investment climate varied quite a lot across African countries. You have some better performing countries attracting more investment and generating growth and poverty reduction, and then we have some laggards. So at the moment, I’m curious who you see as particularly good examples of developing an investment climate and prospering. Then we can talk a little bit about laggards.

SIGNÉ: Absolutely. I think this is extremely important. Usually I classify African economies in three categories based on their past performance. So the first group comprised countries with relatively steady economic performance over the past few decades. This group will include fast growers, such as Rwanda and Ethiopia, and slower but relatively consistent growers such as Morocco. I also think that those countries will definitively mostly outperform during the post-COVID recovery. Some of the characteristics include the implementation of pro-growth policies, improving the ease of doing business and governance effectiveness, as well as your relations with donors and global investors. I’ll be happy to expand on those countries later if necessary, but they are definitively – many of them are among the most competitive African countries.

The second group of countries will include Côte d’Ivoire, Ghana…countries which have had a GDP growth rate which was significant for the past decade. So in the first category we have a longer performance, about a couple of decades, but a strong structural transformation of the economy, improvement macroeconomic management, ease of doing business, among others. The second group of countries has seen a better performance but in a much shorter period, which means that the post-COVID era will definitively tell us a lot about if those countries are well-structured enough to continue with their great performance. In the case of Cote d’Ivoire and Ghana, for example, the commodity shock, especially the drop in demand of cocoa as well as of the cost, may definitively have an impact there. So those are some of the countries with important potential.

It is true that, as I study in my book, there are eight sectors. Different countries will have different potential. For example, if people are interested in the size of the market, we have three countries which will be home to over 50 percent of the combined consumer and business spending, including Nigeria, South Africa, and Egypt. If people are more interested in investment in the mining and oil and gas sector, they will also choose a different set of countries. But overall, we can clearly see that across sectors some countries are outperforming others.

DOLLAR: Landry, in line with your book I wanted to focus our discussion on long-term issues of unlocking business potential, which is a largely positive story. But obviously, the coronavirus is having a very negative impact right now. So last question for you is how can African countries deal with this recession from the virus and come out of that and continue unlocking this business potentially you focused on?

SIGNÉ: Thank you very much, David. That is an extremely important question. There are a couple of things that I want to highlight. The first one, before doing a deeper dive in all the vulnerabilities on the continent, I want to highlight again the fact that African economies are more resilient than most people think. The first element of resilience is the global competitiveness. We have more than 10 African countries which are in the top 100 Global Competitiveness Index. Better ranking countries include South Africa, Morocco, Seychelles, Tunisia, Algeria, Botswana, Egypt, Namibia, Kenya and Rwanda. We also have, as I mentioned before, that increased consumer spending and accountable governance; the fast regional integration; the increased foreign direct investment, which will be affected among other factors; and the fourth industrial revolution. Many African countries are capitalizing on the fourth industrial revolution and leapfrogging technologies such as the Internet of Things, artificial intelligence, biotechnology, 3D printing and other technologies.

Having said that, there are three to four ways COVID-19 has affected African economies. The first one is related to the healthcare vulnerabilities. So we have the challenges of healthcare systems on the continent: initially limited preparedness; the high incidence and mortality for both communicable and non-communicable diseases; and the high social cohesion. So those factors of vulnerability. The first healthcare factors were very important, and they are important because they are connected to the other factors. As African countries we are not strong enough. They have to invest and to redirect your resources to those sectors.

So the second factor is the exogenous factors with the disruption of the global value chain which has resulted in the direct impact on the endogenous factor as well with the destruction of economic activities in African countries with income loss for both the formal and informal sector employees. When we add to this also the commodity shock and the drastic loss of revenue, especially for resource-rich countries, many scholars have been alarmed.

On the other hand, we have also seen many initiatives which have been taken, but which should be accelerated to really address the adverse impact of COVID-19 on the continent. So I think I will perhaps classify them in two main categories. The first one is inclusive of the measures to protect income for the public and private employees, which means the formal sector. And the second one that I will also be discussing later includes specific measures for the informal sector. So what government should definitely really be doing to protect the formal sector is to avoid and limit arrears to private firms from the public sector, especially in supply chains for critical sectors like health, education, as those will limit effects that will delay the recovery.

The government should also provide finance for the private sector in Africa to save jobs, to unlock the business potential, and to continue the momentum of the past couple of decades. When I speak about government, I’m also including multilaterals. So governments and multilaterals. In particular, bilateral and multilateral development, financial institutions, need to provide and inject sufficient resources for new capital to increase risk tolerance, among others factors, so that the economic actors will receive enough resources to continue their activities. Some actors such as the African Development Bank have already started with those measures.

The government should also finance the overall private sector through tax waivers and extended deadlines for tax filing. So we have seen that in some countries, but not all. So central banks should lower and stabilize interest rates and provide special funding resources to public and private banks, as well as ease regulations to reduce the cost of borrowing and make access to capital easier and faster for private businesses. Those are important measures which have to be adopted for the formal sector. But as the informal sector represents over 70 percent of hours worked in Africa, it is also critical for the government to adopt measures which will contribute to support informal sector livelihoods. Donors and international financial institutions have, for example, provided substantial funds to support the public sector budget and the health sector, but support for the informal sector so far is scant and government cannot ignore the damages already occurring to the livelihoods of those millions of people.

So, concretely, policymakers should maintain household consumption. Among the bottom 70 to 80 percent of households will have very limited savings. Those measures will limit short-term household welfare damages as well as speeding up the overall economic recovery.

The second factor is to protect the incomes of urban wage and salary employees. This is important because although wage and salary work accounts for a small share of total non-farm employment. Those tend to be the ones spending and providing resources to small traders/sellers of goods and services which will overall support the informal sectors.

Another measure includes protecting the health of informal sector workers with measures which are as simple as access to soap, water, and alcohol-based sanitizers, as well as to reduce food spoilage, support income, and declaring transport of food from the farm gate to the market as essential services. So overall, it is really critical that the security forces, in particular police, protect the livelihoods of informal vendors and service providers, especially in the urban areas, rather than using this COVID-19 emergency to harass them.

Overall, we have seen African countries, many African countries, learning from the experience of countries such as China, or the United States, or European countries which were affected first, and taking serious measures. I think about South Africa, Rwanda, and Morocco, for example. So those developments are positive, but much more needs to be done because at the beginning of the crisis many African countries did not have the capacity to test for COVID-19, for example. However, they are learning. Through regional collaboration they have accelerated their response and they continue to provide insight to policymakers.

DOLLAR: I’m David Dollar and I’ve been talking to Landry Signé from our Africa Growth Initiative at Brookings. Mostly we’ve talked about long-term issues that he takes up in his book “Unlocking Africa’s Business Potential,” but we also got into some of the short-run challenges of COVID-19 and how countries have to deal with that immediate crisis in order to start to untap that potential. So if you want more details, you’re going to have to buy his book from Brookings Press. Thanks very much, Landry.

SIGNÉ: Thank you very much, David. This is the time to be in Africa, to invest, to be involved in trade, and to do business in Africa. Thank you very much for your attention.

DOLLAR: Thank you all for listening. We’ll be releasing new episodes of Dollar & Sense every other week, so if you haven’t already, make sure to subscribe on Apple Podcasts or wherever else you get your podcasts and stay tuned. Dollar & Sense is a part of the Brookings Podcast Network. It wouldn’t be possible without the support of Shawn Dhar, Anna Newby, Fred Dews, Chris McKenna, Gaston Reboredo, Camilo Ramirez, Emily Horne, and many more.

If you like the show, please make sure to rate it and leave us a review. Send any questions or episode suggestions to bcp@brookings.edu. And, until next time, I’m David Dollar and this has been Dollar & Sense.

       

Brookings President John R. Allen gave opening remarks emphasizing the need for international cooperation and collective solutions to put an end to the global crisis. Senior Fellow and Director of Research for Foreign Policy Michael O’Hanlon moderated the panel, starting by asking each panelist about how things stand in the countries they study, and how they believe the world is handling the pandemic in terms of recovery and reopening. The conversation then moved to a discussion about lessons learned and how countries can collaborate more effectively, as well as where global leadership can — and should — come from.

Senior Fellow David Dollar opened by outlining the status of China, noting that reopening the economy is going “surprisingly well” and that certain sectors of the economy even experienced positive growth in June. He emphasized, however, that eliminating the virus will mean continuing to test people, and that China must control the virus via “constant vigilance and social distancing” until there is a vaccine, with the understanding that recovery is “going to be a long, painful process” requiring policy solutions to help workers and businesses adjust.

The importance of masks, social distancing, tracking, testing, and an eventual vaccine were common themes among the panelists. Though France was one of the hardest-hit European countries, Visiting Fellow Celia Belin explained that its three-fold reopening strategy of mask wearing and social distancing, testing, and isolation upon infection have proven successful. Regarding South Korea — lauded for its success in containing the virus — Senior Fellow Jung Pak highlighted the country’s innovative tactics, from its framework for using surveillance technology to track infections to its apt public awareness campaigns and mask vending machines.

The need for increased local, national, and international cooperation was another common takeaway. Belin emphasized “the absolute need to have universal access to tests, treatments, and vaccines,” which she urged can only be done through collective action. Dollar underlined the particular importance of effective cooperation between the United States and China and warned that a lack thereof will lead to even more devastating economic crises in places where poverty is already high. Likewise, Senior Fellow Anthony Pipa called for integrating cities into the policy conversations, as they are hit the hardest by the virus and will be at the forefront of vaccine distribution. Moreover, he pointed out that local leadership “tends to enjoy higher levels of trust amongst their constituents,” and mayors have seen success through transparency and direct communication with their communities.

Senior Fellow and Interim Vice President for Foreign Policy Suzanne Maloney underscored the critical role of strong leadership in her analysis of Iran, which she said presents a “cautionary tale.” Explaining how various factors, including stringent U.S. sanctions and a tendency to view the virus as a Western conspiracy, resulted in minimal containment efforts and maximum devastation, Maloney concluded that one of the takeaways from the Iranian side “is simply how difficult any kind of measures like this are to impose unless you have full consensus on the part of the leadership and the capacity to absorb a significant economic hit.”

To wrap up the discussion, O’Hanlon asked the panelists how they think democracies have done, as forms of government, in addressing the pandemic. While Dollar pointed out that “most of the success stories are democracies,” Pak closed the conversation by asserting that “we shouldn’t put this [as] authoritarian versus democracy, but I think South Korea has done a really good job of showing what a democracy can do and as others have mentioned, it’s about government, trust, and transparency.”

       

China was the first country hit by the coronavirus pandemic and the first country to go into recession in response to the health shock. Now, it is the first major economy reopening and getting back toward normal. It faces the challenge of reopening safely while the U.S., Europe, and others are in major recessions. The situation is still very uncertain and could go south very quickly so no one should be declaring victory at this stage, but are there any lessons so far that might be relevant to other countries, especially the U.S.? I see three lessons that are relevant for other places.  

THE IMPORTANCE OF TESTING, TRACING, ISOLATING, AND QUARANTINING  

As it got the virus under control, China continued to test, contact trace, isolate, and quarantine.

Getting the virus under control is the key to economic recovery. China delayed and covered up for several weeks at the beginning of the health crisis, which likely made the pandemic worse than it would otherwise have been and contributed to its spread to the rest of the world. But after that delay, China locked down a province of 50+ million people. Less well publicized is that local communities all over China took measures to limit coming and going and to take temperatures and test people who were traveling. As it got the virus under control, China continued to test, contact trace, isolate, and quarantine. Since then, there has been no major spread of the disease in the past month. China’s data, like the information from every country, probably understates the true number of cases and deaths. But if there were a major new hot spot, social media would be all over the story, even if posts were later taken down. We would know if there were major new outbreaks.  

Some of the details of China’s response are worth emphasizing. In Wuhan, after the chaos of the first few weeks, people who suspected they had the virus were not directed to hospitals but rather to temporary drive-through testing sites so that they did not go unprotected into the hospitals. They waited for their results and if they tested positive, they were isolated in special makeshift hospitals for minor symptoms or ICUs for serious cases. Up until April 30, anyone returning to Beijing from elsewhere had to go into two-week quarantine in a hotel—they could not shelter at home and infect family members. Where cases have emerged, there is contact tracing with testing and, if necessary, isolation of the contacts. As China opens up, there is mandatory wearing of face masks at work and on public transportation. 

There has been a lot of commentary about whether the measures implemented in China could be used in a democratic society like the U.S. South Korea has used the same basic playbook, with extensive testing, contact tracing primarily through the use of cell phones and electronic media, isolation, and quarantine. South Korea’s measures were less restrictive but more hi-tech than China’s, and it was able to control the virus quickly. As of mid–May, there have been more than 50 times more deaths in the U.S. than in South Korea, relative to population. That is 96,000 extra deaths in the U.S. because we have bungled the basic recipe of testing, contact tracing, isolation, and quarantine. Without that foundation, reopening the American economy could potentially be a disaster.  

DEALING WITH AN UNEVEN ECONOMY  

A second lesson from China is that it is hard to restart the economy, more so in some sectors than in others. As to be expected, the decline of the Chinese economy was breathtaking in February, as people all over the country were told to stay home. GDP declined 6.8 percent in the first quarter, compared to the year-before. Major activity indicators were all negative; for example, exports were down 17.2 percent in January-February; retail sales were off 20.5 percent; industrial production down 13.5 percent; and fixed asset investment down 24.5 percent. The Chinese economy was already starting to reopen in March, but the data that month were still quite negative, only less so than in January-February. For example, exports were down 6.6 percent, retail sales were off 15.8 percent, and industrial output fell just 1.1 percent. The fact that exports and industrial output were less negative than retail sales indicates that it is easier to restart factories than to get consumers to return to their old behaviors concerning travel, restaurants, movies, and shopping. Even with the virus apparently under control, and ubiquitous mask wearing, people are still nervous about going to places where large numbers of people congregate. Also, the whole experience is a reminder of the uncertainties and risks in life with the result that young people in particular are vowing to save more and spend less.  

A variety of micro-indicators confirm this gradual and uneven recovery of the economy. The transportation congestion index for 100 cities showed that the halt in transportation during Chinese New Year, which is normal, continued for four weeks after the holiday. In mid-February the index was down 21 percent from the year before; but by mid-March the gap had narrowed to 11 percent. Coal use by five big power groups in coastal provinces was down to one-third of the pre-coronavirus level in mid-February; now it is back up to two-thirds the pre-crisis level. Small- to mid-sized enterprises (SMEs) are not faring as well, however. A big data study of SME revenue by the PBC School of Finance at Tsinghua University found that even at the end of March, revenue was down by about 60 percent compared to the year before. All of this is consistent with big manufacturing firms getting back close to normal, whereas SMEs in service sectors are struggling.  

While the export and industrial production numbers were relative bright spots in the March data, the economy is likely to face what the Chinese are calling the “second shock” as export orders dry up in the face of deepening recessions in the U.S. and Europe. The April data are showing a drop in new export orders worse than during the global financial crisis. Containers full of Chinese goods are piling up at ports around the world. So, now, both large-scale manufacturing and small–scale service provision face problems of demand. Local governments are handing out consumption coupons to entice consumers to get back to restaurants, movies, and malls, but it is hard to get people to return to old behaviors.  

HANDLING SPENDING CHANGES AND HOLES IN THE SOCIAL SAFETY NET  

Third, and more speculatively, it is important to distinguish between the immediate drop in demand resulting from the shock to the economy, spending changes, and holes in the social safety net. The former requires a Keynesian stimulus in response. China’s fiscal stimulus so far has been less than that of the U.S. or Japan, but still amounts to a 5 percent of GDP fiscal impulse according to the International Monetary Fund. But as the economy returns toward normal, it is likely that people’s consumption habits have changed permanently or at least for the foreseeable future. There will be less travel, leisure, restaurant meals, even mall shopping—overall there will be less private consumption than on the prior growth path. 

On the other hand, people want more of various government protections and services. In China, there are obvious weaknesses in the safety net and addressing them could be a new source of demand. In shaping the immediate stimulus, it is smart to think ahead to what new patterns of demand will look like. In China, there is a division between the education, health, and pension systems for the registered urban population (about 40 percent of the country) and the rural registered, about one-third of whom live in cities but without a full slate of urban benefits. The coronavirus crisis has revealed weaknesses in public health systems, care for the elderly, and education—all of which could be addressed through government programs. In switching to online classes, for example, rural areas have been disadvantaged by inferior internet connections. And there are probably many more cases of the virus in rural areas than we know about because there is not sufficient capacity for testing and treatment.  

CONCLUSION  

Every country, including the U.S., has its own weaknesses and challenges. The crisis has revealed the lack of preparation in the U.S. public health system and holes in the safety net. Even aspects of our infrastructure have come up short, such as internet connectivity in rural and poor areas. As the immediate economic crisis is overcome, and as seen in places like China, it makes sense to address these deficiencies both for social and economic reasons. Given low interest rates and the economic crisis, it makes sense for the American federal government to borrow whatever it takes to overcome the crisis. But somewhere down the road we will have to raise taxes if we are to have more public services on a sustainable basis, which is likely what people want. We may well look back in future decades and see the pandemic as the moment we realized that the era of small government is over. Going forward there is likely to be less demand for private consumption and more demand for public services.

       

Senator Tom Carper (D-DE) joins David Dollar to discuss today’s pressing issues in global trade, including the security of Hong Kong, U.S.-China economic relationship, and implementation of the USMCA. Sen. Carper emphasizes the need for bipartisan solutions to meet these challenges and argues that Congress should reclaim its authority over shaping trade policy.

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This transcript has been lightly edited for clarity. 

DOLLAR: Hi, I’m David Dollar, host of the Brookings trade podcast, “Dollars & Sense.” Today my guest is Senator Tom Carper, Democrat of Delaware. Among other things, the senator is and members of the Senate Finance Committee which deals with trade issues. We’re going to talk about some of the key trade issues facing America and issues that Congress is dealing with. So, thank you very much for joining the show, Senator.

SEN. CARPER: David, great to see you. Thanks so much.

DOLLAR: So one of the important trade issues right now concerns Hong Kong. The United States has accorded special status to Hong Kong even though it’s part of the larger People’s Republic of China, but now that Beijing is encroaching on civil liberties there our administration is considering taking away the special status. It actually consists of a lot of different specific things – an extradition treaty, different tariffs for Hong Kong goods, we have very deep financial integration – so to some extent we can pick and choose. The challenge, it seems to me, is that we don’t want to hurt the people of Hong Kong, but we are interested in making some kind of statement and trying to influence Beijing. So can I ask: What are your views on what we should be doing with Hong Kong’s special status?

SEN. CARPER: You mentioned I serve in the Senate. I’ve been there…this is my fourth term and I get to serve on three committees: Environment and Public Works Committee; a committee called Homeland Security and Governmental Affairs; and Finance, which has broad jurisdiction over a lot of things including trade. And if you look – I have a copy of the Constitution here. Your listeners cannot see it, but I’m holding it and if I open it up to Article 1 in the Constitution it actually says that the Congress probably has a greater role in trade issues than even the president. You’ll recall our founders were concerned about having a monarch. They didn’t want that, and they ensured that they put in all these checks and balances.

But you mentioned I’m on the Finance Committee. Before I was a senator, I was a governor. I was governor for eight years and I loved being governor. You can only be governor for eight years in Delaware. Before that I was a congressman for 10 years. Before that I was state treasurer. I was treasurer when we had the worst credit rating in the country at the age of 29. I could barely say revenue anticipation note, but that’s how we funded our government in those early days. Before I did that, I got an MBA. I was in the Navy. I was a naval flight officer, and I served three tours in Southeast Asia and I’m the last Vietnam veteran serving in the United States Senate with the death of John McCain.

My crew and I were California-based, but we deployed three times. Six-month tours in Southeast Asia. We flew all the P-3 airplanes out of Vietnam in 1968 and put them in Thailand. We flew all our missions along the coast of Vietnam and Cambodia. The South China Sea – that’s where we patrolled. Low-level missions; 500 feet off to the water. And even at that time the Chinese were trying to encroach, not so much on Hong Kong but certainly on the islands; the Paracel Islands and other islands in the South China Sea. And we made sure that our presence there – Seventh Fleet by air, by sea – that we did not yield an inch to the Chinese. We were omnipresent.

I would say what’s important here is for us to […] our values. For us to make sure that we continue to have a dialog, an ongoing dialog, with the folks that are a force for resistance… a force for good. The people trying to make sure that the deal that was struck with China years ago is actually maintaining and that the Chinese live up to their words. One of the things that would be helpful is if we had an administration here who had the ability not just to dialog with the folks in Hong Kong, but also a dialogue with the Chinese–with Xi and his folks.

We made a huge mistake. We made a huge mistake when we walked away from the Trans-Pacific Partnership. We will probably come back to this several times. What a deal! Twelve nations; 40 percent of the world trade. We led it. The Chinese were on the outside looking in, and it gave us the opportunity to say to China: “If you want to continue to sell intellectual property, you want to continue to trample on people’s human rights, you want to do that stuff? You’re not going to be part of TPP. If you clean up your act and behave in a more appropriate manner, then there will be a role for you to play and we’ll all enjoy this together.”

So, to your question: one, an ongoing dialog with the folks who are fighting a very brave fight in Hong Kong. I always say, “ask your customer.” They’re our customer. What can we do to help, and follow their guidance. The other thing, too, even when it’s difficult, is to have a conversation with Xi and his people. Let’s go ahead and be sure we have it. Finally, be consistent. Be consistent. And not be…this administration believes in chaos, and that’s not really a good approach whether it’s trying to do the right thing in Hong Kong or any other place in the world.

DOLLAR: Let’s move on and talk a little bit more about China. You already brought up China and President Xi. What do you see as some of the key economic issues between the U.S. and China? You raise the idea of joining TPP. I’m very sympathetic to that as a way of trying to deal with China, but there are other possibilities as well. So how do you read U.S.-China relations on an economic front?

SEN. CARPER: They’re chaotic. If I had to think of a single word that would characterize our relationship, it’s chaos. Our president is hot and cold. He’s not consistent. He doesn’t say the same thing from day to day, week to week, or month to month. He’s got a very good man in Robert Lighthizer, his trade rep. And Robert Lighthizer succeeds another great guy who is Michael Froman who was the trade rep before that. I just had a meeting this week with the new deputy trade rep who’s going to be one of the two right-hand people for Ambassador Lighthizer. But the president, God bless him, the president doesn’t listen to his people. Lighthizer would never tell him to be hot and cold; say one thing one day; shake the sword; putting up tariffs in place and pulling them off.

We had this negotiation and the idea was – you know, this most recent negotiation that was concluded a couple of months ago – as I recall from that negotiation the tariffs were supposed to force China to make structural changes to its industrial planned economy. Remember? The issues outlined, and actually the trade rep’s Section 301 report includes, China’s dummy subsidies, technology transfers, cyber espionage, et cetera. None of these issues were actually addressed in the Phase One trade deal. None of them. So we went through all that […].

We raise a lot of corn, soybeans, and chickens in Delaware. Our farmers don’t know what to expect. It’s just no certain predictability. Other than that, David, everything’s fine.

DOLLAR: I think business in particular hates that uncertainty. You slap on the tariffs and then you take some of them off and you threaten more – it’s that uncertainty. I mean, business can live with most policies, but if you’re constantly changing them then that just makes it really hard to have a planting season or build a plant and get out ahead of this. So I gather you don’t really support this strategy of introducing the tariffs to bring China to the table?

SEN. CARPER: Well, as I mentioned, I was governor of Delaware for eight years, and I was privileged to serve as chairman of the National Governors Association (NGA) during part of that and loved being part of the NGA and loved being a governor. One of the things I focused on every day in those eight years is how do we create a more nurturing environment for job creation and job preservation.

More jobs were created in Delaware in those eight years that I was privileged to serve as governor than any eight-year period in the history of the state of Delaware. Think about that. And I did not create one of them, but I helped create that nurturing environment working with a lot of stakeholders: schools, colleges, universities, Chambers of Commerce, farm bureau, labor unions.

One of the things I have done since I was governor and even today, this week, I do customer calls. I visit businesses large and small in Delaware and I ask three questions. I’ve always asked three questions on these visits. Right now they’re virtual visits. First of all I say to the business “how are you doing?” I say, “how are we doing? We as our congressional delegation, state government, federal government – how are we doing?” And the third question I ask is “what can we do to help?” And right up to the pandemic when I’d ask, “what can we do to help?” businesses would say we need help on workforce. That was when we had like 150-160 million people going to work every day. […] They were saying we need people to show up and do this work, have the education, the work skills, et cetera. I don’t hear that anyone. What I hear…they don’t say we need workforce, what we need is predictability. And that is evergreen. I heard that for 40 years I’ve been privileged to serve in public office. Do you want to help my business? Big business and little businesses? Gave us some predictability and certainty.

I’ll never forget, David. I once had, I think was our friend Lamar Alexander, my colleague from Tennessee who’s been governor, ran for president, he’s been Secretary of Education. He’s been everything. Senator from Tennessee. We’re having this meeting with eight utility CEOs from around America and we’re talking about clean air legislation. There was one CEO from a southern utility. He said at our meeting about clean air, reducing emissions and cleaning up our air, here’s what he said: tell us – us being the utilities industry – tell us what the rules are going to be, give us a reasonable amount of time and some flexibility, and get out of the way. That’s what you need to do. That’s great advice. I’ve never forgotten that, and it’s not just for the utility industry to meet our clean air, but it’s for all industries across the board. Certainty and predictability. Those are the basics. And to ask your customers – in this case not just the environmentals, not just the businesses – but all of them.

DOLLAR: You mentioned this Phase One trade deal with China. It’s supposed to increase U.S. exports in a wide range of different areas which should be creating jobs. I have to point out that after five months, basically U.S. exports to China are down very significantly – I think by about 15 percent. You might think that’s inevitable because of the coronavirus recession, but actually China is coming out of its recession very quickly. So China’s total imports are not down, maybe down just a tiny bit, but their imports from the United States are down very significantly. So, so far, we’re not creating any jobs through this kind of approach.

Now Senator, you began by showing me a picture of the Constitution. I keep one on my living room coffee table.

SEN. CARPER: Do you really?

DOLLAR: I do. And as you say, the power to impose taxes, including taxes on trade which we call tariffs, that’s all given to Congress in the constitution. The Congress has given a lot of that authority to the president and so the president has been able to introduce these national security tariffs, other types of tariffs. You’ve joined with Senator Kaine to introduce the Reclaiming Congressional Trade Authority Act. Can you talk a little bit about what is in your act and what problem it’s trying to solve?

SEN. CARPER: Yes, and as you suggest, if you read the Constitution it’s pretty clear here that Congress has maybe an oversized role on this playing field and we have ceded that authority to the president. In some ways it’s understandable, but there is an ebb and flow here. When presidents or chief executives use this authority responsibly, maybe in consultation with the Congress, that’s one thing. When they use it irresponsibly, that’s quite another. If you look at the kind of stuff that this administration tried to do in threatening the Emergency Economic Powers Act which you’re familiar with. I worked with Tim Kaine to make sure that Congress begins to play a more appropriate role – reclaims an appropriate role – in terms of setting tariffs, not just ceding all that authority to the president. My friend Pat Toomey, my neighbor Pat Toomey up the way Pennsylvania, Pat and I basically introduced legislation called the Trade Certainly Act about a year ago. What it tries to clarify is something called the Emergency Economic Powers Act, which was never meant to be used as a trade tool. It can’t be used to impose tariffs or quotas.

I find it that in my business if you just try to do everything just with all Democrats, or you try to do legislation with all Republicans, good luck. That’s not the key to success. And there’s a guy named Rob Wallace who appeared before my Environment Public Works Committee maybe a year and a half ago. He had been nominated for a big job at the Department of Commerce to be in charge of our national parks, natural wildlife refuges, fish and wildlife. He used to be the chief of staff to Malcolm Wallop. Malcolm was a senator from Wyoming. Anyway, Rob Wallace said these words at his confirmation hearing, David. He said, “bipartisan solutions are lasting solutions.” That’s why he said, “bipartisan solutions are lasting solutions.”

I was on my e-mails last night till late at night with Bill Cassidy, Republican from Louisiana, talking about how we can work on particularly technology: testing, tracing, and so forth. I was on a similar kind of communication late last night – and when I say late last night, we were in session until like 1:30 AM last night. I got home – we drove home – I got home at 3:30 AM this morning. If I look tired, I am tired. But the reason why I’m reaching out to these guys, they’re great to work with. They know that bipartisan solutions are lasting solutions, and we need more of those. And we frankly need an administration that does a better job of reaching out to Congress. Lighthizer, Trade Rep Lighthizer, he is an ace this. He is as good…him and Michael Froman, previous trade rep, are so good at reaching out to the Congress. I applaud them both and they provide an example for everybody else.

DOLLAR: Yeah. We’ve had some really outstanding U.S. trade representatives from both parties over the years and I’ve been privileged to have a number of them on the show. In the two areas I really focus on – which is China, in particular, but then international trade more generally – we used to have a real bipartisan consensus in favor of free trade but rules-based trade and in favor of engaging China cautiously with eyes wide open. But I feel that that bipartisan consensus has really broken down on both trade and China. You mentioned Senator Toomey from Pennsylvania; he’s also been our show in the past. Do you think there’s a prospect of getting Republican support for what you and Senator Kaine have tried to do in terms of reasserting congressional authority over these national security tariffs?

SEN. CARPER: I think it’s hard to do that with this administration, but we may not always have the same president. In fact, if history is any gauge…either in six or seven months we’ll have a new president, or maybe in four years and six or seven months we’ll have a new president. You can probably guess which one I’m hoping for.

One the great things about Joe Biden is not so much a political thing. I’ve known him for forty years; I think he’s one of most decent people I’ve ever worked with. He’s really good at reaching out to Democrats and Republicans. And he took a lot of flak in the Democratic primaries for president because he was friendly with Strom Thurmond. He was friendly with Phil Gramm. He was friendly with D’Amato up in New York. But he believes that all politics is personal. He also believes that all diplomacy is personal and that you need a leader who believes that to their core and acts that way with respect to bipartisan leadership – Democrats and Republicans in the Senate. Also, with the ability to reach and have a dialog, an ongoing dialog, and some common ground with the world’s leaders – especially in places like China. It’s a hugely important relationship. They don’t play by the rules, and we need for them to play by the rules. The best way to do that is to use an entity like the Trans-Pacific Partnership to hold China at arm’s length. You can’t be a part of this until you clean up your act. That’s the way to treat them. The other thing is to develop a dialog and always have a back-channel dialog.

I think we have a great ambassador over there. We’ve got Terry Branstad, governor from Iowa – governor for life I used to call him. We served together for many years. Before that we had Max Baucus who was a great senator. We need people on the ground in China who have the kind of connections and can build those kinds of relationships. With Max and also with Terry Branstad we have those people.

DOLLAR: You know, Senator, I lived in Beijing for nine years. The first five of those was representing the World Bank, but then I was recruited by Tim Geithner to represent the Treasury during the first Obama administration. I worked very closely with Ambassador Huntsman and Gary Locke. I think I made it through three different ambassadors, if I remember correctly.

There’s actually a lot of impressive American talent on the ground in China in that Beijing Embassy. It’s a microcosm of the whole U.S. government.

SEN. CARPER: Oh my God.

DOLLAR: The USTR guy we had when I was there, I mean, his spoken Chinese was so perfect. You would have thought he was Chinese, but he was Caucasian.

SEN. CARPER: It could have been a mole. He could have been a mole, David. You never know.

DOLLAR: Well, you know, he’d been working for the US government for decades.

SEN. CARPER: I know. I’m just kidding.

DOLLAR: Can I change the subject a little bit and bring up the USMCA? This is the new-NAFTA. It’s going into effect I think very soon on July 1st. I’m interested in your general assessment since Canada and Mexico are our biggest trading partners, but I also know that you and Senator Grassley, I believe, and Senator Wyden had urged USTR try to delay. I think they’re going ahead, but I wonder, what are your concerns about introducing the new rules of USMCA in the middle of our pandemic – our pandemic recession I think we could call it.

SEN. CARPER: I think the approach should not be a light switch, but maybe a dimmer switch, and to turn it up at a reasonable speed not all at once.

I want to go back. Three years ago, Robert Lighthouse had been nominated to be our trade rep – three and a half years ago – by a newly elected president, Donald Trump. He was nice enough to come and see me and to talk about his nomination, who he was. I said to him: Michael Forman is in this job right now – this was right after the election – you ought to get him on your speed dial and work with him. And I said, the other thing is don’t throw the baby out with the bathwater with respect to TPP. And if you want to renegotiate NAFTA, do it in the context of TPP. You’ve already got a head start, and it involves China, but it also involves our friends in Canada and Mexico. And I thought foolishly we threw it away.

Tom Friedman, who writes books and columns for New York Times, has something he calls the Trump Doctrine. It goes something like this: “Barack built it; I, Trump, broke it; you fix it.” Think about that. Barak built it; I, Trump, broke it; you fix it. And one of the things that they broke was TPP. And what they tried to do was to come back and piecemeal it with NAFTA 2.0, the USMCA. Is it better than nothing? It certainly is. Is it as good as what we had with the TPP? I don’t think even close.

Two of my colleagues – Chuck Grassley, chairman of the Finance Committee, and Ron Wyden, senior Democrat on the Finance Committee – we had reached out. We joined together in a letter to Ambassador Lighthizer earlier this year to say that we should be going a little bit slower because there’s a lot to swallow here for our businesses and those that have to comply with these new guidelines and rules. We asked for maybe a couple of extra months to allow that to happen. I think we got maybe a month – to slow down and hit the pause button for maybe a month. It wasn’t quite as long as we thought was appropriate, but at least it was bipartisan and that we had the right message to the trade rep. He tried to meet us halfway and you can’t always get everything you want. But if you try sometimes you can get what you need.

DOLLAR: I’m old enough to get that reference. And I very much agree with you, Senator, that TPP wasn’t perfect but it had a lot of good features. It’s got a lot of rules and regulations that address concerns we have with China. So China is not part of that club, but if they want to aspire to join they would have to raise their standards. Then we brought a lot of that TPP agreement into the new NAFTA, which is fine, but we had the agreement with 11 countries and then we reduced it to just two countries: Canada and Mexico. So, that did not particularly make sense.

I wanted to end by going big picture, Senator. I was going to give you a chance to talk about TPP. You’ve talked about it a fair amount. We’re in a presidential election year. What do you think the role of trade will be in the election? What are the trade issues the American people should care about? I don’t know if you’d care to speculate on whether a President Biden might consider rejoining TPP and is there momentum developing within the Democratic Party to come back into TPP?

SEN. CARPER: As I said earlier I’ve had the privilege of knowing Joe Biden for a long time. I served with him when I was a congressman, when I was governor, and as a U.S. senator when he became vice president. The key to success in anything I’ve ever been a part of is always leadership. I don’t care of it’s a college or university, I don’t care if it’s a sports team, I don’t care if it’s a business, a government, a state, or a country. The key is always leadership. And leadership is a lot of different things. Leadership is the courage to do what’s right and keep out-of-step when everyone else is marching to the wrong tune. Leadership is surrounding yourself with the best people you can find, and when the team does well, giving the team the credit. Leadership is treating other people the way you want to be treated. And leadership is building bridges, not walls, to unite, not divide. Leadership is – there’s a guy named Camus who used to be a French philosopher and he used to say, “leaders are purveyors of hope.” And when I think of leadership, and I think of those qualities, I think of Joe Biden. He and I don’t agree on every single thing – we don’t. But I think that he has the kind of leadership qualities that we need in this point in our nation’s history.

I look forward to working, hopefully, with him in that role, and I especially look forward to the kind of people that he surrounds himself with. Wonderful people. I’ve known…for about 40 years I’ve known the people around him. Decent, kind, thoughtful, hardworking, honorable people with great values. People don’t always say “well who are you going to surround yourself with? Who are you going to have beside you in the White House?”

The other thing that’s like a special bonus – he always says he married up. Jill Biden, Dr. Jill Biden, I knew her when she was a high school teacher. She taught English in Brandywine School District here in Delaware. I know her when she was teaching our community college, Del Tech. I knew when she was at the University of Delaware. To have somebody as smart as she is in the White House by his side – it’s like a bonus. A real bonus for our country. So it’s a great team.

We’ll see how it works out. It’s a long ways from here to November, but I’m feeling good. Another musical reference: I’m picking up a good vibration. And we’ll see how it ends up, but it’d be nice to get back to somewhat more like a normal arrangement and somebody who really, truly believes that bipartisan solutions are lasting solutions and is pretty good at reaching out across the aisle. We could use that, and I yearn for that day.

DOLLAR: Yeah, it would be great if we can get back to a bipartisan consensus on free trade, expanding the U.S. economic role in the world.

So I’m David Dollar and I’ve been talking to Senator Tom Carper, Democrat of Delaware, about key trade issues for the U.S. and some of the issues that Congress is facing. It’s been a real pleasure talking to you, Senator. Thank you for giving us the time.

SEN. CARPER: Great to be with you today. Thanks so much. Take care.

DOLLAR: Thank you all for listening. We’ll be releasing new episodes of Dollar & Sense every other week, so if you haven’t already, make sure to subscribe on Apple Podcasts or wherever else you get your podcasts and stay tuned. Dollar & Sense is a part of the Brookings Podcast Network. It wouldn’t be possible without the support of Shawn Dhar, Anna Newby, Fred Dews, Chris McKenna, Gaston Reboredo, Camilo Ramirez, Emily Horne, and many more.

If you like the show, please make sure to rate it and leave us a review. Send any questions or episode suggestions to bcp@brookings.edu. And, until next time, I’m David Dollar and this has been Dollar & Sense.