>> My name is Cynthia Rathinasamy and I am an MPP here at the Ford School, and I'll be your moderator today. So on behalf of Alstom, I'd like to welcome you all to the first of the policy -- Ford Policy MU Debates. These debates, sponsored by the Ford School's International Policy Center are intended to bring informed discussion of international policy issues of importance and interest to the students of the Ford School, the University of Michigan community and the wider policy world as a part of the Ford School's mission to educate the future policymakers. The International Policy Center plans to host several of these events over the remainder of this academic year, and continue the series in subsequent years to enrich the educational experiences of students, bring the leading voices on key policy issues to the Ford School, and contribute to the wider, more informed discussion. Today's topic is the issue of U.S. - China relations, and in particular U.S. - China trade relations. I will explain the conduct of the debate in a moment, but first I'd like to welcome our two participants, first let me introduce Doctor Pete Navarro, a professor of economics and public policy at the Paul Merage School of Business at the University of California, Irvine, welcome.
>> Thank you.
>> Our other participant [applause], other participant is Doctor Phil Potter, an assistant professor of public policy here at the Ford School, specializing in international security and American foreign policy. If you all could please -- and welcome [applause]. If you all could please refer to your programs for their full biographies they have more -- much more information in there. So our debate today will be conducted in a fashion similar to a competitive forensic debate but with the difference that there will be participation by the audience. The debate will center on the following question: whether China's trade and membership in the World Trade Organization are not the primary causes of job losses and weak growth in the United States. Doctor Potter will be advocating for the passage of this resolution, while Doctor Navarro will argue against passage. In all rounds of the debate, Doctor Potter, as the advocate, will go first. The debate will begin with each debater giving a twelve-minute opening statement of his argument, with the argument for resolution by Doctor Potter opening the debate. And then Doctor Navarro will go, and two minutes of his twelve will be used to show the trailer for his film, Death by China. Following the two opening statements, each debater will then make a five minute closing statement. The debate will close with questions submitted by the audience, as you came into the auditorium you all received index cards, and we'll plan to collect those after the opening statement. Please write whatever question you may have on there, and people will come around and collect then, and we'll continue to ask as many of those questions as time allows during the audience portion. Following the audience questions we will then evaluate the results in two -- the debate in two ways. First we'll take a vote in the audience by show of hands, I'll ask all of you just to raise your hands and ask--- also ask for some patience as we just count because there's a lot of people here, as we're doing this, Miss Maria Lew up here in the front will serve as our forensic debate judge, and she will also provide her expert opinion on who she believes won the results of the debate. Finally, after all of that counting and evaluation we'll submit -- we'll tell you all who won, both in your opinion and Maria's opinion. Finally, after the debate has concluded there'll be a few minutes while we clean up and organize everything for the showing of the film -- Doctor Navarro's film, Death by China, so please stick around if you'd like to watch that. And then once again, welcome to our ongoing series of international policy debates, and I'm just going to move over there and we'll get started. All right, so Doctor Potter you have twelve minutes to go ahead with your opening statement.
>> Let's see if I've messed with this. Can everyone hear me all right? Okay, so I am not a debater by training, so I will probably now break every rule and convention of that discipline, but here goes anyway. So what I'm going to argue is that the WTO is not the primary cause of - or China's entry into the WTO is not the primary cause of our current economic difficulties, and more generally that we need to be taking a more nuanced view of the U.S. - China relationship than what is being proposed in this film that you're going to see a trailer for in a moment, and then I believe the full movie will show afterwards if you're interested in staying and taking a look at that. The reason for that is that at its core, China is now a major power, and we need to be taking seriously how we want to deal with China. We're not in a position to dictate terms in the way that I think this discussion suggests we could, and still achieve U.S. strategic interests. By pursuing some of these -- kind of cracking down on China paths, we're actually likely to undermine our own self-interest. So at its core I really question sort of what this movie really is for, right? It seems to be about sort of stirring up passions in the U.S., about exciting people for a certain course of political action, in a lot of ways it strikes me as something that is very much at home in the current debates regarding the presidential election. But I see this as much more an inherently complex situation and more than that, the oversimplifications of this kind are not benign, they're not clarifying and they can, in fact, be dangerous. So the first reason for that I think is that this and a lot of arguments about the deficiencies of China on the international system sort of harken back to these "Good Old Days" arguments, right? I think one needs to be very careful about that in the U.S., right? And specifically, I'm referring to stories about how, you know in the 50's through the 70's, man could have a blue collar job, and his wife could stay at home and they could have a car and life was good, right? First of all, household income in the U.S. was $25,000 adjusted for U.S. dollars now, it's roughly double that now, there are issues of inequality, some of which China has something to do with that we should be paying attention to and I'll return to that in a minute, but I don't think that this is a cut-and-dried case where we want to be returning to the past, right? Second of all, that past was very much the product of a very odd historical moment in which we were coming out of World War II; we controlled half of the global GDP, right? This is not something that's likely to be replicated, okay? And so we need to start thinking about how we grapple with other major powers, other major economic powers, rather than cracking down on them. So the reason for this I think is that blaming China is really pretty easy, right? But they're not fundamentally the problem. Manufacturing output in the U.S. has actually been relatively consistent since the 1940's, that line is actually quite flat with some bouncing around the mean, of course the number of people employed in manufacturing has declined almost linearly over that same period, okay? The reason for that is not China, right? It's machines, it's computers, it's productivity, okay? Second of all -- sorry, lost my train of thought there, broke a debating rule I'm sure. Second of all, manufacturing as a sheer global GDP has also been in decline over this period, right? And the share of U.S. GDP has gone right along with it. Again, much longer time series than you see with China's entry into the WTO, and representing a broader global phenomenon that we need to be taking -- paying attention to, right? Manufacturing just isn't the way to prosperity anymore, and this is sort of the fundamental thing that we're missing here. Both in the U.S. and globally, the path forward is not through manufacturing, okay? Finally, China's entry into the WTO -- it's a singular event, right? It comes in in 2001, late 2001 specifically, right? And tinning everything that happened after that with all its complexities, with sort of U.S. rises and declines, I think really washes out a lot of the information we want to know, okay? First of all, we entered a recession in 2001, right? And when you look at -- maybe some of you have seen this, there's kind of a pretty graph that got kicked around pretty frequently with the decline in U.S. jobs and manufacturing that seems to go down in 2001, I'd actually point tot that same graph as evidence that something else was going on. China entered in late 2001; the trend's already falling off the cliff prior to that, right? We have things like 9/11 in 2001. I could name any number of events in that period that could have important shifts -- important effects on the U.S. system, okay? So China's had some impact, I'm not trying to say that they've had no impact, but it's been dwarfed by larger shifts in the global economy. Specifically I think points where Doctor Navarro is correct is that there are some issues with particular regard to intellectual property, with regard to property rights, things that are not problems are things like currency manipulation, just being in Beijing and talking to a lot of business leaders at the beginning of the summer, a lot of people in U.S. business circles are concerned that if China floated its currency it would go the other way, not the way that we are insisting in congress that it's likely to go, okay? So part of the reason I think we need to be very careful about this, and that these are not just statements that are in my opinion factually incorrect, but are potentially damaging, are issues of unintended audiences, okay? I am not trying to draw an overly strong parallel here, but we've seen what happens when you put movies out that could reach the wrong people, right? And I'm specifically referring to this movie that we've been dealing with in the broader Middle East, which has enraged a lot of passions. Throughout this movie, Doctor Navarro has sort of caveats that say, "Well, there's the big bad Chinese government, but we do love the Chinese people."
Okay, I would put forward to you that the Chinese people are not out of step with the government in this direction. If anything, Chinese people have lower opinions of U.S. behavior, right, and would like to see the government take a stronger line against us, right? And then this is something that we need to be paying a fair amount of attention to, right? We assume on some level that at a popular level, if the Chinese government went away then the Chinese people would be our friends. It's false, okay? On this same trip to Beijing some Ford School students and I sat through a fairly lengthy diatribe by a member of the economics ministry who pointed out that the U.S. is -- sorry I'm trying to think of a more civil word for it, ruining China's day because of control of the reserve currency, because of our control of international institutions, because of our control of an international system in which they were a latecomer, okay? And so what I want to say is that our -- China's presence in the WTO is actually a very positive thing for the U.S., right? It brings China to the table and it brings us into a conversation with China where otherwise we might be direct loggerheads. That conversation doesn't always go well, it doesn't always work smoothly, we don't always get what we want, but it's a hell of a lot better than the alternatives, okay? So rather than China exploiting us, I think it's much more productive to think of this in terms of a mutual hostage situation, okay? Yes, absolutely, China owes -- has an enormous amount of our debt, that's a problem, but this also poses substantial problems for China, right? It prevents efficient investment, right? It inflates -- and on the U.S. side, it's inflated asset bubbles, okay, so this is not a good thing. It's something that both sides need to back off in a serious way, but that's done through conversation, right? In a mutual hostage situation you can't dictate terms, okay? And I would posit that that is very much where we are. So the point that I'd like to make here is Navarro's film is both sort of wrong and antiquated, and the real question is what we're going to do when China falls on hard times, okay? This film is very much geared towards the U.S. falling on hard times, but I think the real question for us is what happens when China falls on hard times, and I think that's likely to happen fairly soon. Inflation is very high; some of these same issues we've talked about productive investment are coming home to roost, right? From the Chinese perspective, they didn't kick us while we were down, right? They did it in their own way, but they stimulated when we said they should stimulate, they played ball with the global system, okay, and I think for a lot of Chinese people, the real test is going to come when it comes time for us to reciprocate. And what concerns me about movies like this and a lot of the dialogue that comes out of the presidential elections and out of the congress is that the U.S. is much more inclined to take advantage of the situation. And if you're going to take advantage of the situation you'd better finish the job, because this is a country that is gigantic in population, has an enormous amount going for it and is likely to rebound regardless of what we do. And when they rebound, it's going to be a heck of a lot harder for the Chinese government to make the case to the Chinese people that they should be cooperating in a system that we designed and ran and in many ways privilege our interests. Thanks [applause].
>> How are you all doing?
>> Yeah? Last time I was at U of M was literally 45 years ago and I jumped out of a plane, it was weird. My brother went here and he made me go skydiving, and this might be just the same kind of experience [laughter]. The question before us is really simple, is China's entry into the World Trade Organization responsible for the last ten years, essentially of economic misery that we've endured here in the United States. That's the question. So let's stay focused just on that for a minute. If you look at the five and a half decades prior to 2001, our gross domestic product in this country averaged 3.5% and life was pretty good. Once we hit 2001, for the last 11 years now, that GDP growth rate has fallen to 1.6%. 3.5 to 1.6. Now, two percentage points, roughly, may not seem much, but one percent is one million jobs you don't create when you lose it, two a year for ten years is about 20 million jobs, and that's about what we need right now to put everybody back to work. We have an unemployment rate which looks to be at 8.3, but for example the unemployment rate dropped in the last report, but only because 400,000 people dropped out of the labor force, 400,000 people. By my estimate and by the estimate of many economists, there's 25 million people in this country that can't find a decent job. Now, it's true that the forces of globalization started long before 2001. But something happened that year you can blame it maybe on the wars in Iraq and Afghanistan, you can blame it on the war on terror, but the other elephant in the room is China's entry into the World Trade Organization. If you look at the history of our economy, the problems of this last decade did not begin in 2007, make no mistake about that. Here in Michigan, which was ground zero for the problem, the recession started back in 2001 and just kept going, okay? There was never, never any recovery here. And you've got General Motors, one of the biggest corporations in the world now, saved by our government, offshoring not only its production to China, but also its research and development, which is where the new jobs come from. So something happened. If you look at the statistics, they're pretty simple, and you'll see them in the film, 50,000 factories gone, six million manufacturing jobs out of here. Now this whole notion which is common to academia that you don't really need manufacturing base anymore, you don't need an industrial base, you know, we're all going to be running around in suits, and life's going to be okay, really doesn't make sense. If you look for example at one of the strongest economies in the world, Germany, 25% of their women and men are in manufacturing. What do you think it is for us ? What do you think? Pick a number. Ten, yeah, but it's nine and still going down. Okay? And when I talk about manufacturing in America, I'm not talking about t-shirts, all right? They're gone forever to Honduras and so be it, great. But the difference between countries like Honduras and China is Honduras will buy our stuff and probably they won't go to war with us, okay? Now here's the thing about the World Trade Organization: China joins it and that would have been fine if they'd done what they said they were going to do, which is play by the rules, okay? What does that mean? It means no illegal export subsidies and respect for intellectual property. Now, since that time, because of weakness here in the U.S., they've broken every single rule in the book. The currency manipulation which 40% -- 40% advantage alone, okay, just on that, and then you have -- you'll see a wonderful scene in the film where this guy Dan Slane, Bowling Green, Kentucky, 2002, because China got in he was forced to move his furniture company over to China or go out of business, right? So he's over there and he makes stuff and he makes it at cost, right? Ships it over here, dumps it over here, because business don't generally do stuff at cost, right? The way he made his profit? The Chinese government gave him a check every month for 17% of his revenues, okay? That's huge, okay? Now another thing that's interesting about the World Trade Organization is that it is absolutely silent on two things: worker abuses and then environmental abuses. In other words, you can do anything you want -- anything you want to your workers or to your environment, there's no ability to complain to the World Trade Organization. And the biggest flaw with the World Trade Organization is that you have to take it case by case by case, and any case that you file takes three or four years. And often by the time you get relief, the problem's gone. The factories that you were trying to save are gone.
So this is a serious issue, and if the people of Michigan -- most of you are sons and daughters of the people of Michigan, I would assume, the people of Michigan can't understand how important manufacturing is by the fact that you see now what has happened that it's gone and nothing's really replaced it, then we've got issues here in this country. Now in terms of what needs to happen going forward, I really think we need to talk about whether this country needs to be in the World Trade Organization at all, I mean if you think about what it is, I remember when I was shooting the film, one of the worst things that happened was I had this really good interview with a lawyer who prosecuted cases at the World Trade Organization, and he told me things like, "Yeah there's over 150 countries in the World Trade Organization and most of them don't like us." Okay? So we're not going to get much justice there. The funny thing about that interview was simply that when we shot it we lost the sound on it. It was the one interview we had where that happened; it was kind of the worst case for a director. Now what I've been doing with the film is going throughout the Midwest, I spent a lot of time in Ohio -- let me just tell you a couple of stories so you kind of understand kind of what I'm hearing from the grassroots. For example, I go to a place like Mansfield, Ohio, used to be a huge steelmaking town. There's a mill there, AK Steel. It's about a mile long, about a mile long okay? And you can cut that thing in half and half of it now is nothing but weeds and grass and beat up concrete, and what happened to that -- half of that plant, a cold finishing mill, is it was boxed up and shipped off to China, and now that plant competes against American steelmakers. You'll see in the film there's this guy, Tom Dancer, who talks about the irony of China being the highest cost producer, check this out now, highest cost producer of steel in the world, with the lowest price, okay? That can only happen if there are legal -- illegal export subsidies. But when you take half a plant from a place like Mansfield, you take out not only the steelworker jobs that go with it, but all of the surrounding support jobs. I was in Portsmouth, Ohio, down -- it's a beautiful town, anybody ever been there? Anybody? Portsmouth, it's a beautiful river, Port's mouth, hence Portsmouth, there's a young man there who had just graduated from college. He wanted to be a teacher. The best work he could get was occasionally a sub, but the tax base of Ohio has been so decimated by the loss of the manufacturing base, that they're cutting teachers left and right and cutting budgets left and right, so the only place he could work was Wal-Mart, which was some high irony. But what he told me, with tears in his eyes, and he told the people in the audience was, his grandfather who was a World War I veteran, he wanted to go and basically honor him with a flag on the grave, and he couldn't find an American flag that wasn't made in China. And there's something really desperately wrong with that. And so the bottom line here is, this is a mystery, okay? You solve it. You look at the statistics and you give me a counter hypothesis as to why in 2001, like a step function down, everything's gone. You tell me if you can compete here in the state of Michigan with a company over in Chengdu run by the state government that has the advantage of currency manipulation, that has the advantage of illegal export subsidies, that may have taken your own technology and taken it over to use against you, to dump anything in the river, anything in the air, and keep its workers working 16 hour days, 7 days a week and often not pay them. And I think some of you may have noticed the news today? Anybody see that? 2000 workers, 2000 workers in a Foxcon, i.e. an apple factory in China, rioted, and it's just like the Pinkertons back in the Ford days, right? They sent in 5000 storm troopers to keep those folks under wrap. So bottom line is I never say, "Enjoy the film," because that's not the kind of film it is. It is alarming, but I reject the idea that it's alarmist, because everything in there is factual, and the 50 people you will see in there, every one of them is an expert in their own way, that tells a very simple truth, and it's a very, very nonpartisan film. Neither right nor left but it's about right or wrong. It's the American film. Thank you [applause].
>> [Music] I was laid off three times within six months until I was permanently laid off.
>> I graduated with my Bachelor's and I haven't been able to find anything.
>> Jobs disappear, and the way the economy's going right now it's tough to find a job.
>> When the workers in China are being abused, then workers in America have a tougher time competing against them.
>> Five and a half million manufacturing jobs gone.
>> 57,000 manufacturing facilities closed in this nation.
>> Some of the workers at the companies literally their last act at the factory was to unbolt the machine and load it up to be shipped off to China.
>> There's no question that a large part of China's competitive advantage has come from environmental neglect. 16 of the world's 20 dirtiest cities are located in the People's Republic.
>> That leads to carbon emissions and particulate matter falling all along the coast of the United States.
>> If you put it in your mouth or the hands of a child, don't buy it from China.
>> We're poisoning our children with the toys that we give them!
>> China today is a [inaudible] regime. It's a dynasty, no republic, not people's country.
>> China's military power is strengthening very, very rapidly. It's developing a modern, well-equipped, technologically capable military.
>> China is the only major nation in the world that is preparing to kill Americans.
>> [Music] we're a subsidiary of China and getting worse and worse because they're going to own us pretty soon.
>> If we talk about who's to blame, I think partially our own government.
>> Our government should be doing something.
>> They could have stepped in I think a long time ago.
>> Please hear us.
>> I think that at every level, people could break out, and there would be a shot heard around the world.
[ Music ]
>> Doctor Potter you have five minutes for your response statement.
>> Okay, so maybe we should have started with that, because it gives us, I think, a better idea of why this movie sort of alarms me a little bit. I would say it's alarmist, but I mean images of World War II-looking jets replace Asian people here with Chinese, carpet bombing the U.S.? A bowie knife, blood dripping out of the continental United States, I mean, maybe alarmist is not the right word but I might one up, okay. So, you know, Doctor Navarro gave us some really touching anecdotes, but then challenged us to look at the numbers a little bit, okay? So I would say, let's start there: let's look at the numbers, all right? This supposed cutoff in 2001, right, where you have over 3% growth higher than that, 1.6% growth after that, so you know here at the Ford School we like to do a fair bit of analysis, I think this should be well within your reach. What happens to those numbers if we shift the cutoff to 2000? We still have high on one side, low on the other. If we cut it to 2005 or better yet, 8, right? You have negative on the one side and positive on the other. So my point is this supposedly smoking gun cutoff at 2001 is arbitrary, okay? And it looks compelling if you sort of say that the number's on one side or the other, but that is not smoking gun evidence, that's not what smoking gun evidence looks like. In general, China has consistently lagged behind the U.S. several steps on the value chain, okay? So this is part of the problem with the story that China is taking American jobs, right? China's comparative advantage despite what's being claimed here is actually low-cost labor, okay? That's what they've got, they've got people. This isn't terribly complicated, okay? Unfortunately, and I think the Foxcom example's a great pointer for this -- that's been changing, right? China's been having a lot of problems recently because they're having trouble competing on price for the lowest cost labor, which are jobs they took from the rest of the developing world, not from us, right? They're having trouble competing on price for labor, and having a really tough time moving up the value chain the kind of things that we do well, okay? And this is what really concerns me about this story we keep hearing that "we need to be returning to manufacturing." Right, the Chinese are desperately trying to figure out how to get the heck out of manufacturing, okay? It makes very little sense for us to turn around and say, "That's what we need to be doing," okay?
The Germany example I think is a really good one, all right? Germany's in the World Trade Organization, right? Why is Germany -- if you need the [inaudible], why is Germany doing well, and the U.S. not? It's the type of manufacturing that matters, okay? China has not been doing that sort of -- that high tech, machining, that sort of work that the Germans have long been very good at, right? And certainly it is true that having some manufacturing sector, the right kind of manufacturing sector, German-style manufacturing sector, is good for security interests, those are things that -- those are capabilities you want to have, but these blanket statements about steel mills being hollowed out in Youngstown or wherever it might be are again, missing the larger point. That's enough [laughter and applause].
>> Doctor Navarro before you start your response statement I just want to remind everyone if you have any questions to please give it to the individuals at the top row here and they will give them to me.
>> Okay, let's start with the data, first of all. The claim here is that the points are arbitrary, okay? But let's look at the data. Let's start with jobs growth, okay? If you look at the average monthly job, net new jobs, which is the big number that comes out in the employment report, last one was like 90,000. If you look at that and you go back to the 1960's, right, through that whole decade we were generating about 160,000. We went to the 1970's, about 170,000 a month. Our best year was the nineties, and that was 181,000 a month throughout the nineties. Once we got to 2001 for the last decade, okay? What is it? It's minus 2000. Minus 2000! And that's not like a single year, it's across years. It's not an aberration, it just does that. Same thing with personal income, okay? Our average median household income grew 18% in the 80's, 16% in the 90's, went to zero, zero in the 2000's. Something happened. Something happened. Now the thing that I find to be the most counterfactual is the idea that cheap labor is the source of Chinese competitive advantage. If that were true, Bangladesh and Cambodia would be powerhouses. I spent two years studying the sources of Chinese competitive advantage at UCI, and the study I did came up with the fact that, yeah, cheap labor matters, okay, but it was the other five things, the other five things, the currency manipulation, the illegal export subsidies, the counterfeiting and piracy, the pollution, the ability to pollute for profits, and the ability to abuse workers, which creates the real advantage in China, the real advantage in China. And so everything that the Chinese government is doing to gain competitive advantage, even as their labor costs start to rise is contrary to the rules of the World Trade Organization. They cheat, you'll see in the film people talking about they cheat, they cheat. Now, in terms of the knife going through, yeah, that's a little bit of Hollywood, but I was in Los Angeles standing up with 12 people from China or Tibet and this gentleman from Tibet says, "When I saw that knife, first time I saw that knife it was exactly how I felt about what the Chinese government has done to Tibet." Any Tibetans in the audience? Do you know what is being done to the Tibetans and the Uighurs? These people are kept in essentially locked states, all right? And they bring in Han Chinese to dilute the population. And they send the women out so they can't breed with Tibetan or Uighur men as a way of pacifying -- these are the kinds of things that are going on that we -- you know, we go about our merry way, we buy the cheap stuff, you'll see in the film, it's like, you can go ahead and buy the cheap stuff, but as Lord Chang says in the film, "Yeah things are cheap at Wal-Mart but we have to consider the consequences." So approach this like an academic. Look at the numbers. Look at the startling step function down, look at how year after year since 2001, year after year we've lost -- steadily lost our manufacturing base, trend it out, see where we're going, and understand that unless we start producing things -- and by the way the Chinese are the largest producers of automobiles right now, do you know that? They are the largest producers of automobiles and they're going to aircraft, okay? Unless we start making things again, there are not going to be any jobs for everybody to prosper. Thank you [applause].
>> Great, now we will proceed to the question portion, and Doctor Potter you will have the first question. What factors influenced the movement of manufacturing jobs abroad? Are these all traceable to China's trade policies?
>> That's it?
>> So no, I don't think they're all traceable to China's trade policies. The U.S. has been losing manufacturing jobs for quite a long time, right? As I said, a lot of this story is inevitable, right? When we talk about this incredible vibrancy of our manufacturing sector you're talking about a post-World War II environment in which we are primed and everybody else is decimated, right? And we used that to lock in a lot of advantages in manufacturing that carried us for quite a ways. We also used it to lock in things like the World Trade Organization which can continue to help us out, right? So as far as things that have shifted manufacturing jobs abroad, as I said, the U.S. has kept a fairly steady state as far as overall manufacturing production, all right, we have become a lot more efficient in how we do it. We've done most of our economic growth in other sectors: the financial sector, various service sectors, and you know, I think this example that was brought up just a moment ago about the 1990's is a perfect illustration of that. We did not grow in the 1990's because we got super good at building cars, right? We were not doing that -- growth was not about manufacturing, that was a decade of unprecedented American growth and it was about things that we are, frankly, right now better than China at, and I think that's where we need to be dedicating our attention.
>> Doctor Navarro, the next one is for you, how can the U.S. avoid starting a trade war with China at a time of economic uncertainty? Or are you advocating a trade war?
>> There's a great part in the movie where Dan Slane a member of the U.S. China Commission says that we're already in a trade war, and I think that's the case. It's an undeclared trade war. If you think about what trade wars are they're basically when one country bends the rules for advantage, and China has been doing that very, very effectively since they joined the World Trade Organization. So I don't advocate a -- so you see, here's what's the most interesting thing. If you simply take the currency manipulation issue, okay, if you just take that issue alone, if you have an undervalued currency by 40% gives them an advantage that's basically like a tariff on our exports to China and a subsidy to their exports here. Now that's worked for them up to this point in time, but if you were to let them strengthen their currency now, gradually, say over a two year period, it would solve the most fundamental problem facing the Chinese economy: which is they're too export-dependent. In order for China to maintain a steady growth rate they've got to sell to Europe and the U.S. and now the U.S. and Europe are so weak it can't do that. So a stronger Yuan coupled with health and pension reform would give birth to a Chinese consumer and therefore basically make that country strong, prosperous and less in conflict with us.
>> And here's a question that I'd like both of you to answer, Doctor Potter you can feel free to take the first whack at it. What are the next steps to achieving a more normalized trade relationship between China and the United States?
>> I think a lot of it is continuing with what we've been doing, right? Which is having conversations in an international forum, right? So we've you know, the car example just came up a moment ago, we don't like how China is handling their car exports, right? Are we better off in a situation where we force conflict and force China out of the World Trade Organization which is a built-in forum, where we -- or as was posited earlier, where we remove ourselves from the World Trade Organization, where we don't have the opportunity to have conversations about these things, right? Everybody in the end bends the rules on the World Trade Organization, right? We -- the aforementioned diatribe we got from the Chinese economic ministry, I cut that off after about two and a half hours, because it was moving into the discussion of all of the ways that the U.S. has manipulated the World Trade Organization to rip off China, right?
We actually globally have a pretty lousy reputation, as far as the World Trade Organization is concerned, but it continues to be an important place where we can have conversations, and it prevents us from having these sorts of spillages where suddenly economic concerns have no built-in place for discussion, they start spilling into security concerns, and this is what I mean about us needing to take seriously the implications of these arguments for our broader geopolitical interests.
>> Repeat the question, please?
>> What are the next steps to achieving a more normalized trade relationship between China and the United States?
>> My own view is that China respects strength and exploits weakness, and what we've been showing China for a long time now is either benign neglect in the Bush administration or flat-out weakness in the Clinton administration. One of the first things that Hillary Clinton did, and I've been a fan of hers, but one of the first things she did in 2008 when she became Secretary of State is basically announce in a speech that she would not hassle the Chinese government about human rights, that it was all about trade relationships and national security things vis-à-vis North Korea and things like that. The Chinese will exploit that kind of weakness. I believe that if Barack Obama had kept his promise that he made in 2008 to the people of Michigan and Pennsylvania to brand China a currency manipulator, that if he'd kept that promise then we'd have a strong Yuan and a more balanced trade with China. I think that we just simply have to stand up for our own interests, not tolerate cheating and I think that the Chinese government will respond positively to that.
>> Thank you. The next question is from Doctor Potter: The 2001 recession is commonly attributed to the bursting of the tech bubble and the Federal Reserve keeping interest rates too high. How does this explanation square with Doctor Navarro's assertion that China's entrance into the World Trade Organization is the primary cause of the U.S. economic woes starting at that time?
>> It doesn't. No, I mean, in all seriousness though, the answer to the question is baked into it, right? The origins of the 2001 recession, which is often attributed -- you know, it starts slightly before China's entry into the World Trade Organization, right, and certainly before the effects of China's entry into the World Trade Organization is felt on an economic level, right? And what's often attributed to this sort of step function thing that Doctor Navarro has referred to a number of times is that declines and declining sectors tend to happen in recessionary periods, right? So you're inefficient in important ways, you're being passed by, suddenly there's a lot of belt-tightening, a lot of industries got shaken out, but the fact that the macroeconomic situation has changed means that when the rebound comes, that industry doesn't rebound to the same extent, right? So that's a lot of the origin of this supposed numerical blip that we see, which again, as I said before, actually comes ever so slightly before the supposed causal factor.
>> Would it be okay to say something at this point?
>> Sure, if you'd like to respond.
>> Look, again, treat this as a mystery that you have to solve, okay, and then look at the data. It's pretty clear that what happened after China came into the World Trade Organization and began using basically these illegal subsidies, it's pretty clear what happened, okay? You look -- the first industries that got hit were in the south. They were primarily furniture, film and textiles. I mean, virtually within a two to three year period, half of those industries were wiped out, and that was all due to China -- those things went right to China, okay? And then as you go through time to today even, you see this spread first up into the Midwest with things like steel and autos and then it spread to the rest of the country. So there's no way you can explain 1.6 over a ten year period when you had three and a half over the past five and a half decades. There's got to be a reason, okay? And it can't be, well, yeah, we had 9/11. That's not it, okay? There has to be something. So you tell me what it is, if it's not letting the largest populated country in the world come into your markets with cheap labor and ungodly unfair trade practices.
>> Doctor Potter, would you like to respond to this, since I gave him an opportunity to? It's all off-book, you don't have to.
>> I'll just be very brief...
>> Then I'll go to the next question after that.
>> I think by saying, you know, I would need to be able to look this up, but I'd be really interested to know what the numbers were once we'd rebounded from the 2001 recession and prior to the 2008 crash. My sense is that those are not consistently lousy numbers for U.S. growth.
>> If you actually look at it you see that we....
>> I will.
>> We dropped into this lower pattern, it's fascinating, like the latest numbers that came out, we're back down to 1.6, like we're settling into this lower glide path. Like somebody get tenure studying this, or a PhD thesis okay? But I'm telling you that the numbers are really startling.
>> I mean, we wouldn't grant PhD theses for "single point predicts trend" that tends to be frowned upon, but...
>> But if you could explain why it happened, you could solve it, and that's what we're supposed to do in academia, my friend. I think we're in a policy place.
>> Agreed, and so my concern here is that we seem to be averaging in the financial crisis, which has again , as I've said, something that has to do with these asset bubbles, but has not a lot to do with this World Trade Organization entry.
>> But like I said earlier, this thing started...
>> It's not a glide path.
>> This thing started, okay, the idea that our economic woes began in '07 is absurd. And everybody in Michigan should know that, because the recession and the slow growth basically began here, and in Ohio and in Pennsylvania. And that goes back to '03 and '04 and has persisted throughout that time. And what's missing? The only thing that's missing is all the steel mills and the auto parts factories and the manufacturing facilities that are now gone. And you'll see Richard McCormick in there, an expert on this, gone, vanished. And that's what's missing.
>> This has been a very good exchange, but I will move on to the next question, Doctor Navarro, is there a role for cooperation and competition, since the economies are so closely intertwined?
>> See, you know, look. I think that in one scenario, the relationship between China and the U.S. could be wonderful, okay? You go -- you'll see in the film there's this great rhetoric by Bill Clinton talking about how we were going to let China into the World Trade Organization and get access to the biggest market in the world, and American companies are going to produce on American soil selling to that market, okay? If the Chinese government can make the move now, basically, and empower their consumers, and move from a third of their economy consumption to two-thirds like Germany, Europe and we are, okay. They would buy our stuff, we would make some of it here, their standard of living would go up, and life would be good. That's what free and fair trade is supposed to be like, but we don't have that now, and until we have that, the relationship is going to be very, very, very conflicting, as it is now. And you can just see what's going on with Japan and China, and us being drawn into that, to know that there's nothing alarmist about a prediction that there could be a hot war.
>> I have a question for both of you, Doctor Potter you can start: do U.S. consumers benefit from cheaper Chinese commodities?
>> Yes, I mean, cheaper is good, there are costs to that, right? I'm not making the case that this is a relationship that has been perfect or that China does not engage in some unfair trade practices, right? This is not a perfect relationship, right? So yes the U.S. consumers benefit from that but in certain cases there are downsides to that as well. I would say that in aggregate the U.S. benefits, but the point is that -- you know, it's two questions, right? Whether it's World Trade Organization entry is the key variable we need to be paying attention to, and whether these sorts of remedies that we're talking about are essentially taking a baseball bat to the problem, right? And whether we in the end would be a lot worse off for doing that, and I'm making the case that yeah, we would be worse off for trying to blow this thing up.
>> Sure, look, here's the choice, okay? Yeah, things are cheap at Wal-Mart, as Gordon Chang says, but you have to consider the consequences. So here's one scenario: you have income basically zero for the last ten years, you have 25 million people now out of work, and when they go to a Wal-Mart they can barely pay for anything, and it's nice to have the prices as low as possible.
Scenario two: 25 million people have a job, and they have rising income and they pay a little bit more for their stuff at Wal-Mart. I like that world a lot better.
>> Doctor Potter, next question's for you. How would you advocate addressing IP theft and illegal export subsidies?
>> I think that this is something that we should be pursuing through the channels that we're pursuing it, right? I mean, there are limited avenues to force China's hand, right? And this is sort of the broader theme that I'm driving at here, I think there's the sense here that this film is sort of putting out there that we have tools at our disposal that involve compelling China to end practices like that, right? That era's gone. We don't have compelling tools in that regard without essentially withdrawing from the international system. All right, so the question is how do we get the most of what we want, right? How do we move in the right direction? And I think that's what international institutions do, right? They allow powers to come together in an iterated way, build collaboration, cooperation and trust. That doesn't mean that that's a clean process, that doesn't mean that you immediately get to where you want to be, but these forums allow us to continually revisit the issue, to file trade claims, to hash that out, and hopefully in a step-wise manner, move in a direction that we want to be moving in. I don't think the alternative is either realistic, I don't think this is something we can do on a policy level. There's a reason that presidents on the campaign trail tend to get tough with China, and then when reality comes home and they look at what tools are at their disposal, everyone tends to go back to the same course, right? You can tell a special interest story, as Doctor Navarro does about that, but I think the reality is that they're highly constrained in this relationship, right? And so I think, that's what these international institutions are for, I think we're very lucky that we designed the rules of the road and that by forcing China out and reshaking the whole situation, we're looking at a new order in which we would be significantly disadvantaged.
>> Let me just ask you, though, if you want to use these institutions: the White House, through the treasury department, has the duty every six months to consider branding China a currency manipulator, and if they do that, that allows the ability to introduce countervailing duties if China does not comply. Now, would you as president in '08 or '09 have branded China a currency manipulator, if not, why?
>> Because what we did is behind the scenes, we've pressured China considerably...
>> But it's not working!
>> Hold on, it is working!
>> How has it worked? How has this worked?
>> We've lost, we keep losing these jobs...
>> Excuse me...
>> Nothing works! I mean, China just does what they do.
>> If you guys are both okay with going on with this exchange we can continue, but I just want to make sure it's okay with both of you.
>> So, you changed the nature of the discussion there, right? You said we kept losing jobs. Where it's worked is where it's supposed to work: on currency.
>> But you wouldn't have cracked down on China as a currency manipulator.
>> No, that's not what I said. I said I would not have labeled them as a currency manipulator, I would have gone behind the scenes, as we did and caused pressure on them, which has led to increases in their currency over time, if you look at the trend in Chinese currencies, they've increased substantially, and the fact is, there are broader underlying issues going on that have suggested that there has been a general rise, which now has Chinese currency about where it should be, this 40% that you're giving me has very little in common with the numbers I hear from business people...
>> As technical matter, okay, you can have a currency appreciating, maybe appreciating 20% at the most over time, but it's the trade deficits increasing at a faster rate, the undervaluation stays either the same or gets worse. Any macro class that you take, any macro class that you take which talks about how trade is balanced will talk about how it's through currency adjustments, it goes back to David Hume, and the goal species low adjustment mechanism. And if China pegs the currency, it doesn't allow what's supposed to happen, which is in the presence of trade deficit, the Yuan is supposed to go up, the dollar is supposed to go down, our exports are cheaper and you sell more to China, our imports here, we buy less and everything comes back into balance, so this idea that they've done something like, oh yeah it's gone up a little bit, if you've got a 300 Billion dollar deficit every year and rising, that currency by definition is undervalued, my friend, and I just, I don't understand -- see, you mentioned the special interest story. Yeah, in the movie you'll see how it's GE, GM, Caterpillar and Boeing, basically they love that currency manipulation because it allows them to go offshore, produce over there, dump stuff here.
>> We can go on to the next question?
>> This is for you Doctor Navarro. Doctor Potter said, 'The advantage to having China in the World Trade Organization is that they have a seat at the negotiating table." if, as you say, they break all the rules, why not have an opportunity to hold them responsible?
>> Well, there's two things. There's an interesting thing going on on the campaign trail. Romney comes out and wants to brand China a currency manipulator on his first day in office. Now the advantage of that is that it's a global solution: in other words, if you impose duties there, it would basically be duties and tariffs across the board and would help all industries in America offset that. On the other hand, Obama, when he was down in Ohio, in fact in Columbus, the day I was there, he announced some additional cases before the World Trade Organization for auto parts. Okay, so far in his administration he's done like 80 cases. That helped very specific industries but it leaves all the other industries apart. So the World Trade Organization is a very, very ineffective mechanism to basically bring somebody to the table on the question of unfair trade practices, because you have to go piece by piece, industry by industry and it takes too long.
>> So a question for both: how do we encourage American investment in the U.S.? Doctor Potter?
>> I think we, I don't know, that' a tough question. I think that we want to continue to, within the rules, subsidize certain industries, right, again, this is a little bit like the critique that China lobbed at us, that you actually protect a number of your domestic industries, right? We've been in the process of trying to grow a, you know, a green energy industry for example, and I think that techniques like that can have their place, but you have to be very careful because we run into charges of hypocrisy on this stuff fairly regularly, you know? Some of these practices that China is doing, they're looking at the situation and saying, "You know, you had long periods in which you were protecting domestic industries before you sort of loosed them on us and now you tell us that we have to -- or even if you weren't actually protecting them they were allowed to grow, sort of, free of competition, and now you're telling us as a developing country that we have to play by mature country rules, right?" That's a critique that we need to take seriously because even if we don't believe it it's strongly felt.
>> Well, interestingly enough one of the things that draws our American multinational companies abroad is the differential tax system, and we go far beyond China on this, we have the highest corporate tax in the world of the major producing countries. And so if Caterpillar has a choice between Peoria and Chengdu, okay, they can move a new plant, right, build it in Chengdu and get immediate huge tax break. I was in Cincinnati doing a town hall and after the film this former P and G, Proctor and Gamble executive says -- I don't know if you know this, but Cincinnati is like, Proctor and Gamble land, they might as well call it Proctor and Gamble instead of Cincinnati, but he was an accountant and his whole job for many years was to evaluate where to put production distribution facilities. And he said that the only thing that mattered at the end of the day after he did his calculations was not labor, labor costs had nothing to do with it, it was all about the tax system. So that would be one constructive thing that we could do in terms of tax reform, and the other thing is, look, you'll see in the film, Alan Tomlinson says, you know, these American based multinationals that do not salute the American flag, they like the status quo, they like the cheap currency and the subsidies, if you take those away they'll be more likely to come back here. And by the way, if we're going to bail out GM, we ought to have a little clause in the contract that says, "Hey, the next plant you build, build it here."
>> The next question is also for you, Doctor Navarro. Don't U.S. companies benefit from cheap production abroad? Isn't greater efficiency in the U.S.' interest as well?
>> Well, who's the U.S.? If you look there's a great scene in the film, this guy Ralph Domery [phonetic spelling], who was professor emeritus at I think MIT and a very distinguished man, and he says, he says, he was talking about Apple, and it was like, "The shareholders get the profits, but China gets the wages," right?
And what America needs is wages, right, so that's the conundrum. So we're in danger in this country -- I mean this whole thing with Romney and the 47% thing, right? It's scary, if you think about to have 47% of the people in this country not paying any taxes, I was in Calgary about four days ago, giving a speech up there and they were talking all about it because in Canada it's only 36%, it's only 36%, so our percentage is rising and rising and rising because we've lost this manufacturing base and we've had zero wage raise. So there it is.
>> And I believe this is the last question? It's about 5:15. And it's a question for both, and it's about human rights. How can the U.S. promote human rights in China without being counterproductive?
>> I think this is, like a lot of these issues, it's important to understand what we can do and what we can't do. The reason that China engages in a lot of these practices that we're talking about, right, that promote -- that promote some of these export imbalances is because they're deeply, deeply concerned with domestic employment, right? They're concerned with internal security. Okay, they're concerned about regime preservation, all right, when those are the stakes of your adversary, it's very important to sort of know what you're dealing with, right. When those are the values that they think are on the table here, it -- most of the tools we're talking about are not going to work for you, right, because the stakes are too high. What they care about is more important than what you care about. I think you're dealing with a similar situation with regard to human rights. A lot of the ways in which people talk about manipulating the human rights issue fail to understand the origins of both problems in the Chinese system. Okay, so I think it's very important both with trade and with human rights for the U.S. not to be overly confident about how many tools we have in our tool bag for dealing with this, all right? That said, I think that there are practices that can be put in place involving sort of identifying human rights violations, boycotts of particular industries, bringing in, you know, using trade rules to deal with unfair practices as far as the overlap between human rights and trade production, which Doctor Navarro brings into the film, so there are tools, and I think this is something that the U.S. needs to be concerned about, and it is something that we've talked to the Chinese about it every time we have one of these bilateral meetings, but part of the reason you don't see a lot of either us banging our fists or them responding in kind is because there aren't an enormous number of tools we can do that'll allow -- sort of force the Chinese to start behaving you know, in ways we want them to.
>> This is really important. We gave away the most powerful tool we had to put pressure on the Chinese government on human rights, when we let them into the World Trade Organization, okay? And the history goes like this. Before China had most favored nation status, which was a precondition for entering the World Trade Organization, there was an annual rite of passage in congress basically, as to whether or not we were going to renew trade with China under the existing rules, okay? At that point there was some trade, but it wasn't a flood, okay? So we did it, we did it every year, and every year we were able to use that debate to extract concessions from the Chinese government on human rights. Now, 1994 was the year that Bill Clinton as president loosened up on that, and you'll see in the film a guy named Chris Smith, conservative, Republican, who focuses a lot on human rights, just disgusted with that because it was a pure sellout to the multinationals that you'll see also in the film. But when we got to 2001, the vote that was held in congress wasn't to let them into the World Trade Organization, it was to give them permanent MFN, permanent Most Favored Nation status. And that was the best bargaining tool we had up until that point to have them abide by more humane human rights abuses. And you will see in the film. Do we have any Thalum Dong [phonetic spelling] in this room? Does anybody know what that is, Thalum Dong practitioners? Okay, you will see in the film that for the practice of Thalum Dong Buddhism, that's probably the wrong word, but tens of thousands of people have been put --- not only put in prison, worked in forced labor camps. But some of them have their organs removed while they're still alive by the government as part of an organ harvesting thing. That kind of thing, I mean -- our government allows that, we allow that. When we go into a Wal-Mart, we as consumers basically tacitly approve that kind of thing. There's a great scene, I'll end it with this: Harry Root was in a forced labor camp for 19 years, you'll see him in the film, he says in the film, China is a dynasty, no republic, not people's country." And he talks about from firsthand experience how the rubber boots we buy, the buttons on our shirts, the Christmas lights and a lot of stuff in between are made in forced labor camps, by people who get no payment at all, and when I was in Los Angeles that one time, along with the Tibetan there was a woman on the stage who's in a movie now called Free China, and she sat there and told the audience that in 2002 she was a Thalun Dong practitioner, in a prison camp, making rabbits, little furry rabbits that got sold out into the west. So the human rights issue is one of many, but I'm telling you, this country, as the greatest democracy in the world, has at least some responsibility to do a lot better on that issue than we're doing.
>> Well, could everyone please join me in thanking our debaters, it's the end of the formal part [applause]