Some 200 companies formed the National Council for US-China Trade in 1973, with former United Nations Ambassador Christopher H. Phillips as its first president. 52 years later, as the US-China Business Council, it has been an anchor and reliable source of intelligence for its 270 members. Last November, Ambassador Craig Allen announced his retirement as the sixth president, to be succeeded by Sean Stein, chairman of the American Chamber of Commerce in China and former US consul general in Shanghai. Allen’s six-year term has seen off the end of the US engagement strategy with China, its replacement by trade war and protectionism, and ever tighter export controls under two US administrations. Here Allen shares his views as he looks back at his tenure and his own long relationship with the world’s second largest economy.

Looking back, was the engagement strategy with China a failure? How would you assess its success and shortcomings? 

Many times, it’s quite facile to put things in a binary situation of failure or success, and certainly here, when you look at the larger context. I think that [former US Treasury Secretary and former Harvard President] Larry Summers hit it perfectly when he said that China’s integration in the global economy is the largest economic event of our lifetimes. And I think that he was right about that, and engagement was one little part of it.

It brought billions of people out of poverty around the world, not only in China, but in many other countries, as China produced about 30% of global growth every year for 40 years. And when you look at it from that perspective, it’s amazing. But if you look at it from a US-China bilateral perspective, I think it’s true that the China’s entry into the World Trade Organization (WTO) resulted in significant loss for many Americans. Entire companies, industries, communities, and indeed, regions were impacted.

The best estimate is that approximately 2 million Americans lost their jobs through trade with China. But I think that was trade with China plus rapid technological change, plus hyper-globalization, all together. So, it’s not only because of trade with China. But we could look at what happened to automotive parts, furniture, textiles, apparel, and footwear, and come out with a different analysis.

The point is that labor-intensive manufacturing jobs in the United States disappeared. But when you dig more deeply into each of those however, you find different things. Sometimes these jobs were going to move to the southern part of the United States, in the case of automotive, or they were going to go to other labor-intensive countries. I think that we need to beware making China the boogeyman here, or demonizing China for what is an extremely complex process of globalization.

Some of these communities, some of these industries, some of these regions have recovered. Some of them will never recover. Again, it’s facile to say that we thought China would become a Jeffersonian democracy. No businesspeople ever thought that, and it wasn’t the point. The point was to trade, to have investment, to increase productivity, to increase prosperity and to increase wealth.

Today, politically, we find ourselves in a difficult situation which is truly well defined as a security dilemma between the two countries, and that’s going to make further economic integration or further economic engagement more difficult. The politics and the geopolitics have become too rivalrous for trade to flow without barriers on both sides. And indeed, we have seen tit-for-tat escalation over the last several years, and I don’t see any reason to expect it will not continue.

What were your initial impressions of China and how have your perceptions changed?

Back in the 1980s China was very, very poor, and life was very basic. The people were aspirational, but they were locked into boring, bureaucratic lives. And you know, information about the world was withheld, and they really had very little idea what was happening outside of China. And then, in 1995 the World Trade Organization (WTO) came into effect, and China gained entry in 2001.

Under Prime Minister Zhu Rongji there was a good faith effort to reform China and to integrate China into the global economy. And that largely succeeded. You could measure that by the pain of the state-owned enterprise sector. More importantly, Chinese prices were harmonized with global prices, and that was an incredibly painful period, leading to higher levels of inflation in the domestic Chinese economy.

With one huge caveat, I would say that the Chinese did a pretty good job at meeting their initial responsibilities under the WTO. However, we need to keep in mind that the WTO system was created by like-minded liberal democracies mostly in Northern Europe, North America and Japan, the North Atlantic Treaty Organization (NATO) countries, you could say as a kind of a shorthand. But China had a very different operating system. And when they did enter the WTO, the WTO fundamentally changed.

How the WTO was broken

From a Chinese perspective, they were just following the Japan model, the Korea model, the Taiwan model, doing what they had already done. And what they had done was that they had set up very aggressive industrial policy programs. But in the case of China, these industrial policy programs are so big and so powerful in the world’s largest trading country and the world’s largest manufacturing country that it subverted the entire WTO and I would say, even the Bretton Woods system.

If you wanted to use the vernacular, you could just say that industrial policy has beaten trade policy. Trade policy, as defined by the WTO, is simply not as important as it was previously, because industrial policy is so large. Chinese industrial subsidies are about 3% of GDP, according to Scott Kennedy at the Center for Strategic and International Studies (CSIS), or about 11% of GDP over 10 years according to Barry Naughton, at the University of California at San Diego.

When I was a trade negotiator, I would sit with the Ministry of Industry and Information Technology (MITT), in their offices. I would have a copy of the WTO regulations. My Chinese counterpart would have a copy of the WTO regulations. And we would look at a specific industrial policy, and I would say the WTO doesn’t say that you could do this. And my Chinese interlocutor would look at me, and he would say, the WTO doesn’t say we can’t do it.

This has happened at such a scale that the WTO is no longer able to play an adjudicating role in global commerce, and it’s just that the operating system of China as a state-led economy is just too large, too disruptive, too productive, and has led to non-reciprocal benefits. The benefits have disproportionately gone to China and have disproportionately been withheld, mostly from Europe, but also from the United States and China’s other trading partners.

And you could quantify that China has had large multilateral trade surpluses every year since joining the WTO. That is hardly reciprocal. The WTO is not about free trade. It’s about reciprocal trade and reciprocal opening. And the openings have not been reciprocal, and that’s why we are in the situation that we are in today.

Why industrial policy is bad for China

 I would argue the fact that household consumption in China is only 40% of GDP compared to 60% or 70% of GDP in the rest of the world. That’s what broke the back of the WTO. And that’s the problem, because it’s a massive misallocation of capital on a global scale, that is distorting global markets and bringing down prices. And it leads to price destruction of whatever the Chinese decide to focus their attention on. I question whether this is in the interest of the Chinese people. I question whether if the goal is to improve employment, improve life in China, then focusing on high tech manufacturing isn’t necessarily the best strategy to get there.

Yukon Huang, formerly of the World Bank, has a new book that has not yet been published, but his thesis is excessive investment in R&D and high-tech manufacturing is quite deleterious to society. And I think that that’s a really interesting thesis. And I hope his book is well read in China. I’ll go back to the fundamentals. The foundational fact is that household consumption in China’s 40% of China’s GDP, compared to about 60% on average around the world. And it should be much higher, but due to financial repression and excessive investments in manufacturing, it’s not, and that is not good for the people of China, and it’s not good for China’s trading partners, and it’s a matter of government policy.

Industrial policy has succeeded not because the Chinese people are such wonderful savers. It’s because of government intermediation of savings and a very high savings rate that’s channeled into manufacturing and tech. What is lacking, as is obvious to visitors to China, is a social safety welfare net, particularly in the rural areas, and the fact that China still has hukou [household registration] restrictions after all these years and rural residents are denied services in cities. That is a large part of the problem, and the fact that there is virtually no pension system for rural Chinese. And you know, most Chinese have a rural hukou.

There is very poor medical insurance and there is poor unemployment insurance, which leads to the over saving that we see in China. The lack of a social safety net is the fundamental reason why household consumption is so low. To become a healthy global economy, that needs to change.

Are higher tariffs the solution?

I have a very strong view. I think that if you look at our website, you’ll find two pieces of research, both by Oxford Economics. The first report, in January 2021, categorically proves that the first roundof tariffs led to the loss of 245,000 jobs in America. If there is a second round of tariffs, I would expect that will be even more inflationary. And if there’s one single reason why the Democrats lost the most recent election, it was inflation. Tariffs are inherently inflationary.

And it’s not always a direct connection. But when you go from the world’s lowest cost manufacturing base, which is often China, and you begin to procure from alternative sources, your defect rate goes up. Your infrastructure costs are higher, your shipment costs are higher. There are transition costs that are inflationary. I just hope we learn from our history that tariffs will both directly and indirectly push inflation higher.

Moreover, the tariffs are in the second piece of research that we did in November 2023, on the impact of removal of Permanent Normal Trade Relations (PNTR). American households will pay a very high price. Increasing tariffs are an incredibly regressive way of raising revenue. By that, I mean, if tariffs go up on consumer goods coming in from China to the United States, it is lower income Americans who will disproportionately pay those taxes. These are the people who shop in Dollar Store and Dollar General Store, those with incomes of $30,000 a year, those who are living on Social Security, and those who spend a higher percentage of their income on consumer goods than others, they’re going to be the ones who pay.

And that is quite unjust as a way to raise revenue. Not only is it unjust, it’s just inefficient, and many American manufacturers will also be forced to shut down if they’re no longer able to source supplies, parts, components, chemicals, machinery, whatever, from China and their German and European Canadian and Mexican competitors are able to do so. Initiating a trade war on a unilateral basis is going to be, is economically very, very perilous.

What do you tell business about the risks and rewards of investing and doing business with China today?

I think that it is true that our risks are going up, and managing those risks is more and more difficult, almost for everyone. And that would also be true of Chinese companies exporting to or investing in the US too. It’s certainly true of Hong Kong companies that have so wonderfully served the role of entrepôt for so many decades or even centuries.

The US-China Business Council does very good research on perceptions of risk in our annual member survey of risk.  What you’ll find is that bilateral tensions are the number one perceived risk of American companies, but the number two perceived risk of American companies has become Chinese macroeconomic management.

And this is new. China will not be able to obtain the growth rates that it had previously, and the potential rewards of doing business in China are smaller than they were before, and the potential risks are significantly higher. The number one concern is US-China relations. The number two concern is the Chinese economy. Number three is the very, very, very competitive private sector – Chinese competitors coming everywhere, and these are really strong competitors. How to deal with them, either in China or in America or globally, has become a much more important topic for our American companies, and that is particularly true in the case of those Chinese competitors that may be receiving benefits from industrial policies, or, if you will, trade barriers going into China.

It depends on what you include, but trade subsidies are a significant percentage of Chinese Gross Domestic Product (GDP). We have a database of 130 market access barriers. And it’s the combination of the market access barriers and the subsidies that create such complexity and give Chinese competitors such a huge advantage in their own market.

Then, because the Chinese market is so big, that gives them an advantage on a global scale. The world is reacting to this by global imposition of anti-dumping and countervailing duties on Chinese exports. And the Chinese should expect that, and if they’re not careful, virtually every country around the world that has a competitive industry will almost uniformly be blocking subsidized Chinese industries from destroying their own markets.

The automotive industry is a good case study. There are automotive export restrictions into Europe, into Brazil, into Turkey, into Mexico, into South Africa. And are you going to find the same thing around the world, in every country that has an automotive industry? I suspect you will, because governments are not going to sit back and watch subsidized Chinese competitors take over their domestic markets.

Now, some countries will welcome Chinese investment into their domestic market. Others will not, and that creates its own dynamic, which will be very interesting to watch over the next 10 years or so. The Chinese market is attractive but very risky, and the rewards are nowhere near as high as they used to be. And therefore, we’ve seen plummeting foreign direct investment going into China.

There has been a new bout of both economic and monetary stimulus on the cyclical side. But more important than that, reform is necessary.

Should China try the Abe solution?

When Japan was in its doldrums, Prime Minister Shinzo Abe spoke about his three arrows of fiscal reform, monetary reform and economic reform. And the Chinese have done monetary reform, and they’ll do fiscal reform, but they really need structural reform to make their markets more competitive, and to make their markets fair, and without that, I don’t see reason to be particularly optimistic about economic growth prospects in the Chinese economy.

There are a lot of false parallels between China and Japan. However, I would say that one of them is the huge difficulty that Japan had in disengaging itself or evolving beyond the export led growth model, and it’s only in the last few years that they’ve actually started running trade deficits. As Abe found, structural reform has remained very difficult. While there are false parallels between China and Japan, there are a lot of very real parallels too, and the most real one and the most dangerous one is, how low will housing prices go?

Already in third and fourth tier cities in China, you’ve seen reductions of housing prices by 40 to 50%, wiping out many families. In the first and second tier cities, maybe 20 to 30% and that’s had an enormous wealth effect. We don’t know how low prices will go. What we do know is that there’s an awful lot of supply coming on tap, and to me, that suggests that this problem is by no means resolved.

Is China in deflation today? We can have a good debate on that. I suspect if you only look at goods, then China is in deflation, although maybe not in services. But where is that going to go? Will that recover? Will you have healthy price increases? It doesn’t look like we’re getting there any in the goods market anytime soon. And SOE reform does not seem to be moving. I could argue it’s going in the wrong direction, and that SOEs are playing a larger and larger role in the economy and are restricting market and competitive forces in more and more sectors in China. And I think that these are really, really big problems, and that’s why structural reform is so necessary. The Chinese private sector is lacking confidence. And if the Chinese private sector is lacking confidence, why should we have confidence?

What do you see happening with the private sector?

It’s really interesting to watch private Chinese companies outside China. TikTok would be a great example. Nobody would say that TikTok is subsidized. But they’re a very disruptive force. The online marketplace Temu would be another example of a very interesting, innovative Chinese private sector company to watch. And I think that there are many of them. To the extent that they are operating in a competitive environment in China, we should welcome their entrepreneurial and technological prowess. If they are operating in a protected environment in China and Huawei would be the perfect example of that, then, I’m not so sure.

Within the United States, there is a tremendous concern about the national security implications of additional Chinese investment into the United States, including private sector Chinese companies. And the concern would be that private sector Chinese companies have to obey the Law on Protection of State Secrets, the Counter-Espionage Law, and are subject to the National Intelligence Law requiring them to provide information to the government.

We need to take into consideration the National Intelligence Law. Perhaps that law should be repealed. But until it’s repealed, Chinese citizens are required to report out to the Ministry of State Security (MSS) on demand. If you’re a bubble tea company, that’s probably not a problem. But if you’re in Information Technology or the Internet, then that might be a problem. Even food companies in China are so highly digitized, it’s possible that in terms of the Artificial Intelligence and data they collect, it’s possible there would be issues. Even bubble Tea might pose a national security threat. Funny, but true.

What drew you to the study of China in the first place?

I started out as a Japanophile and studied Buddhism in Kamakura for a year and a half. I found I wasn’t a very good monk, but that I enjoyed the sutras and I enjoyed the traditions, and following that experience, I hitchhiked down from Kamakura to Kagoshima in 1980, and took a boat to Keelung in Taiwan.

I was fascinated by the differences between Asia and Japan, China and Japan, Korea and Japan. I wanted to know how Asia fit together. And that’s how it started.

I began studying Chinese at National Taiwan Normal University and found that I loved the language. Since then, I have been working on China, not all the time, but in my career, every other job was a China job. I had 13 jobs with the US government, and six of them were China jobs or China-related jobs, including Taiwan. Two were in Japan, one was in Africa, one was on Asia in Washington with the Commerce Department and then Brunei. Two years were on Asia-Pacific Economic Cooperation (APEC), in Seattle.

If you could have a conversation with your younger self about China, how would it go?

I would say, if I had a redo, I would tell my younger self two things. Firstly, China has its own historical rhythms and dynamics, and it’s very important to understand that within the Chinese context. And I think that within the Chinese context, studying the Imperial era is very instructive, the rise and fall of the dynasties, the role of the courts, and particularly the great dynasties.

How did the third emperor of the Qing, the Ming, the Tang, the Song, do? What were their accomplishments? What were their problems? I think that would be very instructive. The second thing I would tell myself is, while I would so much prefer that the world had less ideology, it has more and more. And within the Chinese context, ideology is very important and under-studied by western scholars who just don’t want to wade through it all. I do believe that Xi Jinping looks at himself as a leading proponent of socialism, communism, Marxism and Leninism. That’s really important, and we need to understand what that means overall, for China, most importantly, but also for global affairs.

So if I had a redo, or if I had some time on my hands, I’d pick up the history books of Imperial China and focus on the third emperors of the great dynasties, and I would also spend more time trying to understand if you will, ideological components of Chinese decision making, because I think that they’re really important.

Why third emperors?

There’s a dynastic cycle with the first emperor establishing the dynasty, the second emperor stabilizing the dynasty and the third emperor expanding the dynasty. The Qianlong emperor was the third Qing emperor; before him was Kangxi; and the founding emperor was Nurhaci.

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