Transcript: What does China want from the US? With Jay Shambaugh
This is an audio transcript of The Economics Show podcast episode: ‘What does China want from the US? With Jay Shambaugh’
Soumaya Keynes
Trade relations between China and the US are tense.
News clip
Chinese embassy spokesman Liu Pengyu striking a defiant tone in a statement today, saying if the US is bent on waging a trade war, China will fight to the end.
Soumaya Keynes
A truce forged in Switzerland has lowered tariffs — for now. But if negotiators can’t get an agreement by August, who knows where they will end up?
Jay Shambaugh
Through the 90-day period, things are going to return to some semblance of normalcy, but people should be wary because that’s not going to last for too long.
Soumaya Keynes
So, what are the biggest sticking points in the US-China relationship? What’s it like to negotiate with the Chinese? And where are the trade wars headed?
My guest today can answer all these questions. Jay Shambaugh served as the US Treasury’s under-secretary for international affairs under president Joe Biden. In other words, he was the US’s chief economic and finance diplomat. Who better to speak to about the world’s biggest economic bust-up?
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This is The Economics Show. I’m Soumaya Keynes, and I’m here with Jay. Jay, welcome to the show.
Jay Shambaugh
Thanks so much for having me.
Soumaya Keynes
OK. So we always start the show with a silly question. So on a scale of one to 10, how hard is it to negotiate with China?
Jay Shambaugh
So it’s certainly not easy. I would say eight, maybe nine. The Chinese system itself is complicated. So even though you’re talking to one person, you know there’s a complicated layer of things behind them. There are a whole range of challenges just in the bilateral relationship itself that makes it a little difficult to negotiate, but it’s not impossible.
Soumaya Keynes
Can you be any more specific about that complicated layer of things behind them?
Jay Shambaugh
Sure. I mean, if you even just took a specific issue, like what do we do with sovereign debt crises in other countries where China is owed a lot of money and the world is trying to work it out. I could be talking to one person and that person could even be the person who is nominally in charge of dealing with this. But then they need to deal with China’s development bank, and the central bank also has a role, and the ministry of foreign affairs has a role. And everything could be feeding up to the premier, if not the president. And so you think you might be able to make some progress somewhere, but you know there are a lot of other powerful people who you aren’t talking to who have a role.
Soumaya Keynes
OK. So lots of layers there. And could you tell us a bit about what you were doing when you were in the Biden administration?
Jay Shambaugh
Sure. So part of my job was being the person in charge of the bilateral economic relationship with China. And so, my team and I spent a lot of time working with our Chinese counterparts. When I first came in, there wasn’t a lot of direct contact. Part of that was China still hadn’t been travelling post-Covid. And part of that was some pretty strong, I would say, uncertainty in the relationship, in part. Most recently, because congresswoman Pelosi had been to Taiwan and that really upset the Chinese and kind of, they cut off all contact. But really, for the end of the Trump administration and the first year of the Biden administration, there was just a lot of tension and there wasn’t a lot of direct communication.
After president Biden and President Xi met in Bali in late ‘22, they charged their teams to talk more, and we took that to heart. We had a number of meetings between Janet Yellen, secretary of treasury, and her counterpart, the vice-premier of China. My team and I went to China. Their team came to the United States. We met in person quite often to try to figure out ways to work together constructively. And we were really, in some sense, doing two things. On the one hand, trying to deal with the hard issues and make sure they didn’t escalate out of control. And on the other hand, trying to work together constructively in the places where we knew we needed to be able to work together. Financial stability is always an example to me, where the US and Japan, the US and Europe, the US and the UK, all do exercises to see what would happen if a big bank gets in trouble.
It’s important that the US and China know who to call. And so we spent a lot of time trying to build up that work. But part of it really also was though, talking about the hard issues, trying to make sure they didn’t escalate out of control. Whether it was any kind of trade or export control thing that the United States was doing, if it was around foreign investment, trying to makes sure that we could always clearly communicate what we were trying to accomplish and trying to make sure that China didn’t overreact to something we did and that we understood anything that they were doing.
Soumaya Keynes
How much of a kind of common through-line was there between some of the issues that the Trump administration is currently kind of annoyed with the Chinese about and issues that you were frustrated with the Chinese about?
Jay Shambaugh
I would say there is some through-line, but it’s also a little bit at times, unclear what is the key issue for the Trump administration. And my sense from talking to people who are currently talking to the Chinese a lot is that, is one of the challenges they’re facing is President Trump puts a very high weight on the US trade deficit and in particular cares a lot about bilateral trade deficit. So if we buy more from a country than they buy from us, that’s a very, very bad thing to him. He often refers to it as losing money. I will say there are almost no economists who would agree with that view. They would say that, you know, you buy more from one country, you sell more to another country, that’s fine, it’s just the pattern of trade. But to the extent that he cares a lot about it, that can start to structure what a solution could look like.
And you saw that even back in the first Trump administration, where the phase 1 trade deal, a lot of it was built around China, promising to make purchases from the United States. Not to necessarily change policies, but to make purchases. I would say the Biden administration was much more focused on what we saw as fundamental policies within the Chinese economy that had spillovers to the rest of the world. And so in particular, what we would refer to as non-market practices or industrial policy that could lead to huge surges in production, in particular goods or sectors, that then spilled over to the rest of the world. And it wasn’t just that they were really good at making something and so they would sell a lot of it, it was that state direction was pushing resources into one sector. And then that sector would produce more without any connection to what global demand was. And so there would be huge spillovers to producers in other countries. And that was something we had a lot of concern with.
So I would say there’s some through-line and that I think there’s some people in the Trump administration have similar concerns around those issues. But I would say it’s added to the concerns around the bilateral deficit.
Soumaya Keynes
OK, so when talking about those concerns, right? The concerns that, you know, Chinese industry has this habit of overproducing that imposes spillovers on producers elsewhere. What were those conversations like, right? I mean, what were you actually asking the Chinese to change? And second, what was their response to that kind of complaint?
Jay Shambaugh
So what I would say is it was a process. It took real work. And I think this is where things like the structure of the working groups and the fact that secretary Yellen was willing to really put a lot of personal time into this issue did make a difference over time. At first, they just said, I don’t know what you’re talking about. There’s no such thing as overcapacity. We don’t have subsidies. We don’t have any policies. We’re a market economy. Over time, we would continue to either show evidence or talk about very specific things that we were concerned about. And in particular, we tried to highlight the way in which these policies were not good for the Chinese economy either, that they were wasting resources, it led to lower productivity, things that we knew they were concerned about.
And we tried to emphasise that it was going to lead to bad consequences around the world. It was not just going to be the United States pushing back on China, they were going to see it coming from everywhere. And then we frankly tried to work very hard with partners and allies to emphasise that getting the right rhetoric towards China was going to be important to having any kind of success, for China to see that they needed to change policies.
I would say by late ‘24, you started to hear a lot of things coming out of China that they really did understand what we were worried about more. They talked a lot more about the need to lift consumption. They talked a lot more about especially in the solar industry, where it was just undeniable how much overcapacity there was that they needed to take steps to ratchet down wasteful investment and allow consolidation in the industry. So I think we started to see positive steps, but that was part of, kind of consistent pressure and also pressure from around the world.
Soumaya Keynes
Can I ask about national security? I mean, this has obviously been a fairly big point of contention. We’ve seen restrictions on electric vehicles using Chinese software going into the US. How prominent were national security issues in the discussions?
Jay Shambaugh
This was a big part of our conversation was, in some sense, trying to figure out the contours of the bilateral economic relationship and where national security ended and pure economics began. In any relationship you have with any country, your national security is always paramount. And so the Chinese understood that. They understood that this was obviously something incredibly important to us. The flip side to it was they were always concerned that we were either using national security as an excuse to do economic policy, or that we would take actions that would have huge impacts on their economy and constrain them.
And so I would say the electric vehicles one, they didn’t like it, but it wasn’t the biggest issue. I think transparently, the US auto market is hard to break into. There’s a complicated dealership structure, things like that. I don’t think they ever really thought they were going to sell a lot of cars built in China in the United States. I think they’re interested in building them in the United States to sell here. But they always understood that that was a tricky market.
I would say the constraints on semiconductors, our high-end semiconductors and semiconductor manufacturing equipment that we were putting in place, that was something they really worried about and responded quite nervously towards. And one of the things that was always important was to walk through, in great detail, what exactly was being banned and what wasn’t to make clear that you weren’t trying to stop the semiconductors that go into regular consumer electronics or into things like that. You were trying to stop only the very, very high-end semiconductors potentially for military purposes. And so, trying to make clear what we were doing was narrowly targeted was always important.
Soumaya Keynes
And they basically accepted those restrictions on national security grounds.
Jay Shambaugh
They never thought they were legitimate. They always referred to them as illegitimate. They didn’t like them. At times, they would do things in response that they’ve ratcheted it up much more now, which is, for example, restricting the export of certain rare earth minerals or critical minerals to the United States or the processing technology, things like that. Under the Biden administration, they were often doing things that we viewed as a shot across the bow. They weren’t actually taking direct impact. And I think transparently part of that was they were thinking — especially later in the term — if Trump gets elected, we need all of our ammo to be able to fight back if necessary. And so we’re not going to waste things now on policies that probably really aren’t that disruptive to the economic relationship. If the economic relationship is broadly OK, let’s not mess with it, I think, was often their goal.
I would say one other example of this was the United States put in place restrictions on outbound investment in a very limited number of sectors, high-tech sectors like quantum computing and certain types of military applications of AI or semiconductor manufacturing. And when the Chinese first heard of this, they were really worried and they threatened things and they viewed this as, you know, a sea change in the relationship. I think what they were afraid was that we were going to basically freeze investment into China.
And it took a lot of work on our part to clarify that what we were doing was narrowly targeted to certain technologies that we viewed as military applications. And when they looked at the totality, I think they decided, OK, actually, this isn’t a sea change in the relationship and if we overreact to it, that might be the sea change in the relationship and so we shouldn’t overreact. And that’s the part of diplomacy that I think is really important is making sure you understand what the other side is doing. You understand where it conflicts with your interests and how much you should react.
Soumaya Keynes
OK. Well, now let’s talk about the negotiations that are going on. You are now, you know, safely out of the Treasury. And so, you’re just kind of looking at these from the outside, I suppose. But do you have a sense of what the Chinese want now, right? What is most important to them when it comes to managing the US-China relationship?
Jay Shambaugh
I would say one thing they were always consistent about is that they both wanted to make sure there was no attempt to decouple the economies because they viewed that as potentially very dangerous to their economy, but they also didn’t want any perception that either side was heading in that direction. And so they always were concerned with how the market would react to any statements that either side were putting out. And actually, I think if you look at the kind of step back from the brink that took place recently, one of the statements that came out from both sides, was saying we don’t want to have tariffs so high that they lead to decoupling the economies. That’s a major goal for China.
Soumaya Keynes
OK, basic question, why are the Chinese so worried about that, right? They could sell to other markets. What’s the fear there practically?
Jay Shambaugh
I think they just recognise it would be highly disruptive to their economic model and how they are structured. They are not wholly dependent on the United States and they could find other markets. And for that matter, their major firms could produce in other countries and then sell to the United States. But at the same time, I think it would be disruptive that they do still really want US firms to invest in China. They do still want both the technology, the management knowhow, all the things that come along with foreign direct investment — they still see that as highly advantageous to their economy. And so they don’t want to lose that and they don’t want to lose the US as a market because a lot of their economy is still structured where the US is the end market.
Soumaya Keynes
I mean, a really cynical take on it would be that they don’t want to decouple because they want to sustain their leverage over the US, right? While they’re still an important supplier of so much stuff, they have power and influence. If there’s decoupling, they’ll have less.
Jay Shambaugh
Yes, I think that’s right. I think President von der Leyen — European Union [commission] president — had come up with a very helpful phrase of de-risking, not decoupling. And I think one thing that is useful to remember is China has been de-risking from the west for a decade. You know, the Made in China 2025 programme was an explicit attempt to become self-sufficient in a number of things where they saw themselves as dependent.
And so I think they really would like to make sure that they have, in some sense, finish that process more before any kind of bright line hard decoupling takes place. They would like to be even more prepared than they are now. And at the same time, I think to your point, they see the fact that we import things from them and not just the United States, but the entire world in many cases where China has close to 100 per cent market share in certain very-narrow goods or technologies, they see that as a leverage point. And so they don’t want to go into a world where we decouple and they lose that leverage. They also don’t want to go into a world where we decoupled before they are ready.
Soumaya Keynes
What do you think a US-China deal could include? I’m not thinking of a repeat of Trump one — the US-China phase 1 deal of purchases and things like that — I’m thinking if there was a deal that you looked at it and you were like, oh, actually that does address some of the substance of our concerns in the Biden administration. What could that look like?
Jay Shambaugh
So the first piece is, it probably will include something that looks like phase 1. I think there will be either a revival of those purchase agreements or new ones that look something like them. But will there be something else that gets more at fundamental structure? I think the hard thing there is, it’s hard to negotiate something like that in 90 days, right? You can negotiate a purchase agreement in 90 days, but something that says really touches the way China’s economy is structured, that’s not gonna be negotiated in 90 days and certainly not with kind of the threat of some massive tariff wall being reimposed at the end of 90 days. China’s not gonna respond well to that.
And so I think the deal you might get is something that has a little bit of window dressing or some purchase agreements that gives an excuse to basically extend the 90-day indefinitely and say that we will continue to talk about fundamental issues. And if we can’t reach an agreement at some point, then the tariffs would come back. Would you ever actually get something later on? I think you could, and I think you could in part because there are certain things where our interests align. It is not in China’s interest to throw as much money as they throw into steel or into solar or things like that. And they recognise that. And it’s a matter of trying to figure out ways to reorient the economy, which is not easy. But something that they know they need to do. And so I think to the extent that you can give them space and time to get to that, you might see a deal along those lines.
I think you could also see some sort of deal that included commitments around the currency. So the Biden administration had always believed that market-determined exchange rates is a better route. The Trump administration, I don’t think has that view. And so if China said, we promise not to depreciate the currency or we will intervene to defend the renminbi if needed, that could be seen as a concession to the United States right now. Whereas, transparently, I think it’s something China would have happily done two years ago, is promised to intervene in the currency. If the United States is asking for that as a concession, that might be another thing where you see China willing to do something that it viewed as in its interest.
And the last one I would say — and this is the most complicated one — is the US Congress has had a huge amount of resistance to China investing in the United States, especially in particular technologies. So China would very much like to see, in some sense, a revival of what happened between the US and Japan in the 1980s, where Japan started producing more autos in the United States. China would love to do that. They would love to have BYD building factories in the United States. To the extent that the Trump administration views that as a positive and is able to kind of roll over congressional opposition on that, that’s another potential thing you could see in a deal that might, again, give enough reason to ratchet the tariffs down substantially.
Soumaya Keynes
OK, well look, that’s what could happen, when we get back from the break, I’m gonna ask what you think actually will happen.
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Soumaya Keynes
We are back from the break. So, looking ahead, it is possible that there is going to be a big US-China trade deal that may even address some of the structural issues that are long-standing. Do you think that’s the most likely scenario or what do you think is going to happen?
Jay Shambaugh
I think the Chinese have shown — even relative to other countries — that they very much do not want to be seen as caving in to President Trump. They were one of the only countries that did any retaliation to the tariffs that were announced in April. They, as I said before, have been very focused on making sure they are ready for a fight like this if need be. President Xi is very adamant that China is itself a great power and they are not going to be bullied. So I think that may make it hard to reach something that looks like a grand bargain, if just because it’s not clear China wants to be seen as crafting a great bargain. I do think a baseline tariff is going to always be there. I think the Trump administration — unlike the first Trump administration — is very focused on the revenue they get from tariffs. And that’s one reason you’re seeing that baseline of 10 per cent against everyone. You reach a deal with the United Kingdom, 10 per cent sticks. I think because they want to cut taxes in particular on high-income individuals and to do so, they need revenue from somewhere and one place to get it is tariff revenue. So I think you’ll see some level of tariffs stay, I think there will probably be some attempt to climb down and there will be basically some window dressing.
At the same time, over time, there might be progress on the Chinese side, just because, as I said before, there are things that really are in China’s interest. And so I think China will take steps in those directions. I do think some sort of purchase agreement where the president can argue he has cut a deal, I think, is quite likely.
Soumaya Keynes
Can I ask about the rest of the world here? Because seen one way, all of this looks like the Trump administration basically came in and bulldozed all the Biden administration’s hard work of trying to get allies on the same page as the US. But seen another way, actually, maybe there is a bit of continuity here. You’re seeing reports of countries being asked to co-ordinate on actions against China with the US. Do you think that’s the end game here?
Jay Shambaugh
I would agree with you that there is continuity in terms of the goal of having other countries work with us in terms of what we see as a problem of the structure of China’s economy and the global economy. You know, when you’re 30 per cent or so of global manufacturing, what happens in your country matters to everybody. And so I think that is something that we spend a lot of time trying to get other countries to see that as an issue and to not go into deal-cutting mode and instead to really push on the broad structure. I think you saw that coming out of G7 statements. I think he saw it, frankly, when the EU put in place tariffs on EVs, Canada mirrored a lot of US tariffs. So I think there was a lot of work to have a common push.
The Trump administration still wants a common push. They’re doing it differently, obviously. It’s a little bit more by force or by bullying, saying, hey, you have to push on China, as opposed to trying to make it in other countries’ interests to do so. I think the hardest part about it is if we, ourselves, go into deal-cutting mode of saying we’re gonna try to get China to buy more from us, and that just basically means China is buying less from somebody else, then it’s a lot harder to work together with other countries.
It’s also if we’re focused on kind of the bilateral deficit as opposed to the broad structure of the economy, it’s a little harder to get others on board. It’s not that the UK or the EU or Japan really cares about the US-China bilateral trade deficit; that’s not of interest to them. The broad structure of Chinese policies is of interest to them. The national security threats are of interest to them and so I think trying to keep countries engaged on those places where we have common interests while we are at the same time kind of in a fight with those other countries is challenging. And I think that is going to be one of the things that makes it accomplish this goal.
But the flip side is, the Trump administration seems to view the appropriate way to do this is to basically kind of push other countries as part of the tariff negotiations to stand up to China. The challenge there is, as I think you know, China has been very, very clear that they don’t want to see a kind of bilateral deals between the US and somebody else that disadvantage China. And you know, for some countries, they might be willing to do it, but for a country like say Vietnam where a massive part of their economy is structured around their engagement with China. Is Vietnam going to be willing to do something like that? Is India? Is Thailand? And these are countries that were actually taking steps to try to push back on some Chinese behaviour. I don’t know that they’ll be willing to do so at the behest of the United States if we are threatening them as opposed to trying to work with them.
Soumaya Keynes
I want to throw this forward to the US-China relationship in say 15 to 20 years time, and I guess ask about how it could get better, or more specifically, how these national security concerns could be resolved. Because now, when you hear concerns about kill switches, right? The idea that China may just turn off stuff remotely, it’s really hard to see how they could prove that wasn’t an issue. And therefore, how we could get away from a kind of cascade of restrictions where more and more stuff just isn’t allowed because we don’t trust the Chinese at all.
Jay Shambaugh
I think you’ve hit on the most challenging issue in the relationship and realistically in almost all of international affairs diplomacy right now, which is where and how do you draw the line between national and economic security and just basic economics. When it comes to threats of kill switches and things like that, as you said, you can see it cross a lot of things. So the United States, for quite a while now, going back to the Obama administration, was strongly encouraging other countries around the world not to let Huawei technology be in the backbone of their communications networks. We had reason to do so, and I think that remains.
There was recently an article about certain battery connectivity to solar panels that actually do seem to have something that looks like a kill switch built into them. I think there is a real reason the United States has the concerns it has. And so I never want to downplay them because I think they’re real. And as soon as you’re out of government and you don’t have a security clearance, you don’t know what’s real and what’s not anymore, so it can be hard. But I do believe there are real security concerns. And so the question is, how can you have an economic relationship when those security concerns exist?
This is not the cold war between the US and the Soviet Union when there was just no trade between the countries. These are the two largest economies in the world with arguably the most important bilateral economic relationship in the world. And so, trying to navigate that is hard. I think if you ask where do we get to in 20 years, I think part of it is navigating through this current period. I think it is unfortunate and I would argue unhelpful that I think a lot of people see this as kind of a rising power, declining power, great struggle kind of thing. I don’t think that is actually what it is. I don’t see the US as a declining power. One of the things that we would often try to put into speeches Janet Yellen gave, and she was someone who was a big believer in this and would write it in herself, is the United States doesn’t have anything to be afraid of in engaging with China. It’s not that we are failing as an economy. And so I think as you get through that fear and start to realise that China is not going to take over the entire world and China, you know, frankly, with its demographics over time will become a smaller part of the global economy. I think you can get to a place hopefully, where there is less stress in the relationship.
That being said, the national security piece I don’t see going away anytime soon. And I think what it will just mean is there will continually be areas that we have to, in some sense, negotiate the parameters of the relationship.
Soumaya Keynes
Do you have any tips for the Trump administration negotiating with the Chinese?
Jay Shambaugh
I think deal with the Chinese in as straightforward a manner as you can and try to find the areas that you see as actually mutually beneficial. I think that is something China responds well to, it’s something that they want. When I saw the people sitting at the dais in Switzerland explaining the last negotiation, they’re people that I know, they’re people I was talking to a lot. These are not people who are completely unreasonable. And so I think going in with a view that. You need to get to some sort of reasonable solution is the biggest advice I would have.
Soumaya Keynes
Jay, that is very clear advice. Thank you so much for joining me.
Jay Shambaugh Well, thanks for having me.
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Soumaya Keynes
That is all for this week. You have been listening to The Economics Show with Soumaya Keynes. If you enjoyed the show, then I would be eternally grateful if you could rate and review us wherever you listen. This episode was produced by Mischa Frankl-Duval, with original music and sound design from Breen Turner. Our executive producer is Flo Phillips. Manuela Saragosa is the FT’s acting co-head of audio. I’m Soumaya Keynes, thanks for listening.