Chen Wenling: Analysis of the US President Donald Trump A keynote speech delivered by CCIEE Chief Economist Chen Wenling at the Penn Wharton China Center (PWCC)

Obviously, the head of the Penn Wharton China Center (PWCC) is very proud of Wharton Business School. The Moderator Yao Xuesong said that everyone in Beijing is talking about the China-US trade war. I think that everyone is actually criticizing Wharton because the US President Trump, who initiated the trade war is an alumnus of Wharton, perhaps the proudest alumnus of Wharton. Wharton has cultivated many business elites, and even the President of the United States Trump, who often makes troubles.

I have made a great preparation before I came here, but now I do not want to talk about the speech I have prepared, instead I want to criticize Wharton’s alumnus Trump.

I would like to share with you some of my research and thoughts on the China-US relations. As we all know, a three-day vice ministerial-level negotiation between China and the United States has just concluded in Beijing. Both sides issued a statement and agreed that progress has been made. I think that China is very restrained but the US believes that it has achieved significant progress, especially president Trump. How will the China-US trade war develop? How should we look at the China-US relations? What is the essence of the current China-US relationship? We should have a deeper understanding of these questions because they are strategic, directional and fundamental issue. The world is now standing at a crossroads of history: is it going forward or backward? Will be more open or closed? Will it become unilateral or multilateral? Will it put one country’s interest above global interests, or build a common community of shared future for mankind? These questions need to be answered by the entire world, not just China and the United States.

I believe that the competition between China and the United States can be divided into five levels. The trade war is only the prelude. Many people call it China-US trade friction or the escalation of the trade friction, but actually it is generally recognized as a trade war. The United States also considers it a trade war and thinks that it has achieved great victory. The trade war initiated by the United States is not only aimed at China, but also its allies and the 101 countries exporting to the United States. The ultimate goal of the US is to re-establish the world rule, order and system according to the interests of the United States.

The second level is closely related to the trade war, the competition in manufacturing. The criticism of many western economies such as the United States and the European Union on China is mainly because of the rapid development of China’s manufacturing industry. The fact that China has become the second largest economy did not cause panic in the US and other western countries. In 2010, however, China’s manufacturing output value surpassed that of the United States for the first time and the United States was shocked because its manufacturing remained as the world’s No.1 for several decades after World War II. According to the statistics of the United Nations Industrial Organization, China’s manufacturing output accounted for 19.8% of the world’s total in 2010, while the United States fell to 19.4%. This is the first time China surpassed the United States. The scale and level of manufacturing development represent a country’s military production capacity and it also means the value and price of the trade goods will reach a new level in the international market.

The third level is the competition in the financial industry. Before the euro and the RMB internationalization, the US dollar was a quasi-world currency. On August 15, 1971, the Bretton Woods system was collapsed and the French President Charles de Gaulle believed that there was an economic problem in the United States and was afraid that the gold stored in the United States will depreciate or France will never be able to get them back, thus, he sent a ship to the United States and brought back a ship of gold. When other countries were about to follow suit, then US President Nixon announced to the world that the dollar is no longer pegged to gold, and the currencies of other countries are no longer pegged to the dollar. Consequently, France did not send the second ship to the US and the gold reserve of other countries remained to be stored in the underground treasury of New York. The formation of the Jamaican system led to a floating exchange rate, the currency exchange rates of various countries are no longer in a fixed relationship with the US dollar, so is the relationship between the gold and the US dollar. When the Bretton Woods system collapsed, 1 ounce of gold is equivalent to $35. 40, but the dollar is now only 2.89% of the original price. The dollar has been on the path of depreciation ever since and the worst depreciation was $1400 per ounce. I remember very clearly that in the first quarter of 2015, the price of gold fell from more than 1,400 US dollars to 1,200 US dollars, which triggered a wave of buying gold in China. More than 300 tons of gold were sold during that quarter. At the CCIEE Monthly Economic Talk held last April, I said that although the price of gold dropped more than 200 US dollars per ounce, it is not the best time to buy gold. Many ordinary Chinese people do not understand the changes in the international monetary system. They do not know that the price of gold increased from $35 an ounce to more than $1400.

After the collapse of the Bretton Woods system, more than 80% of the major currencies in the world’s commodity settlement are US dollars; all the OPEC members use US dollar as the settlement currency; and more than 80% of the international reserve currency is US dollar. As can be seen, the US dollar is still a quasi-international currency. However, the establishment of the euro made a huge impact on the dollar. Among the global trade settlement currencies, the share of the US dollar has dropped from more than 80% to 39%, while the euro accounted for more than 30%. Why did the United States suppress Europe? Because the European Union has established the eurozone and the euro has become a strong competitor to the dollar.

Previously, the RMB did not pose any threat to the US dollar because China did not use RMB for trade settlement until 2010. At first, there were only four pilot areas in China but later, more than ten areas were included in this experiment. Now, RMB accounts for less than 2% of the international settlement. In the past, all of China’s foreign exchange reserves were US dollar. On July 21, 2005, the foreign exchange reform adopted a basket of currencies. Now the RMB internationalization has caused panic to the US in the following aspects. First, China initiated the establishment of the AIIB, the Silk Road Fund, the BRICS National Bank and the SCO is also preparing to create a bank, all these new banks and financial institutions have shocked the US-led international financial system, especially the US dollar hegemony. Secondly, the RMB became the major currency in the IMF’s SDR currency basket in 2016, accounting for 10.92% of the total major currencies. The RMB internationalization is beyond our expectations but actually, China does not want to promote the RMB internationalization so quickly. The US is losing its creditability and consequently, more than 60 countries have begun to use RMB as a reserve currency and 1,600 banks around the world started to offer RMB settlement and clearance services. Thirdly, the credibility of the US dollar is decreasing because the dollar has no physical support. More than a dozen oil countries stopped using the US dollar for settlement. Among the 31 countries holding the US treasuries, 21 of them have reduced their holdings. In particular, Russia liquidated almost all of its US treasuries, Japan and China also reduced their holdings for seven consecutive times. In November 2018, the United States issued 110 billion US dollars of bond but the subscription rate was less than 5%. No one dares to buy it because the incredibility of the United States affected the dollar’s creditability directly. On the contrary, the subscription rate was 500% when China issued $3 billion non-credit rating bond in Hong Kong during the same period. This is why the US is so eager to contain China. In Shanghai’s energy futures trading market, RMB is used for oil payment settlement and can be pegged to gold, which is similar to the gold standard era and the Bretton Woods system. During the China-US trade war last year, the white paper published by the Chinese government actually adopted the views of many experts, including my view: the dollar worth only a few cents but it is used to exchange for more valuable goods. I am very happy to see this point of view in the government white paper. The viewpoint put forward by Chinese government received a very strong response from the international community. On September 3, 2018, the EU President Juncker made it clear that the energy imports from the US only accounts 2% of the total energy imports, and the remaining 98% are imported from other countries, including Iran. Why do we have to use the US dollar for payment settlement? We want to establish a euro payment system that is independent of the US dollar.

The fourth level of the competition between China and the US is the high-tech battle, which is closely related to manufacturing. Among the 525 major industrial products of the world, China has the best production capacity in 225 of them. Moreover, China now has the most comprehensive and diversified industrial system, from the low-end to the high-end of the industrial chain. Why is the United States so anxious? China’s manufacturing industry is so large that it surpassed the United States in 2010 and accounted for 25.5% of the world’s total in 2015. The scale of the manufacturing industry did not make the US panic because in the past, China produced mainly low-end products which allowed the United States to enjoy high welfare at a low price. Now, China’s manufacturing industry is moving towards the middle and high-end of the industrial chain, which is why the United States is so afraid of. According to the program of “Made in China 2025”, China will become one of the strong manufacturing powerhouse by 2025; the second step is to reach the middle level of the worlds’ manufacturing powerhouse by 2035; the final step is to make China’s manufacturing one of the best in the world by 2050. However, I think that we will not be able to realize our first goal by 2025 because we definitely need more time, 2050 would be a reasonable estimation. Actually, no one believes that China could become a manufacturing power by 2025, but the US, EU, President Trump and his colleagues really believe in that and hence have become really anxious. Lighthizer said publicly that if China can achieve its goals of “Made in China 2025”, China will completely surpass the United States and it will be impossible for the United States to maintain its hegemonic status, so it is necessary to impose sanctions on China.

Chinese government proposed to transform and upgrade the manufacturing industry and move it to the middle and high-end of the industrial chain, which is absolutely correct but we need more time to achieve that goal. On October 28, 2017, I participated in a dialogue between top Chinese and German economists in Berlin, Germany. Ten economists from each side took part, including the drafters of German Industry 4.0, the chief economist of Deutsche Bank, and the chief economist of the German Ministry of Finance. The participants had a debate on whether the government should design industrial policies.

The Chinese Ambassador to Germany just returned from China at that time and interpreted the spirit of the 19th National Congress report of the Communist Party of China at the conference. I think that it is a universal practice that government designs industrial planning and strategy. The United States designed its industrial strategies and policies and Germany also did. The strategy of “Made in China 2025” is a guiding plan rather than a mandatory plan. After nearly 40 years of reform and opening up, China is still in the process of perfecting the transition from a planned economy to a market economy. Entrepreneurs are not only the contributors to the successful reform and opening up, China will not be able to achieve what it has achieved today without the correct strategies and policies designed by Deng Xiaoping and other leaders. The industrial policies formulated by the Chinese government is based on China’s own condition and the successful experience of other countries. Nonetheless, there are also some problems with these strategies and policies and thus, we will continue to reform policies that are out of date and do not conform to the laws of the market economy.

China’s civil servants are a very great team. They often work overtime and learn from the experience of countries around the world in order to design better strategies, planning and policies. China’s civil servants are the most vulnerable group because they are not protected by the labor law, work overtime and can not complain about it.

Nowadays, think tank experts can express themselves freely. I was subjected to very strict discipline when I was working for the Research Office of the State Council. For example, I could not accept interviews, express opinions different from the government, nor could I participate in social activities without approval. In fact, China’s manufacturing industry is moving towards the mid/high-end, and some of its industries and fields have become one of the world’s leaders. Why do so many countries adopt Huawei 5G standard and require Huawei to build the base station for them? Because Huawei has the invention patent. ZTE also has the world’s third largest number of patents. The rapid technological progress made by Chinese manufacturing made the United States anxious and consequently, the US firstly tried to destroy ZTE and now it wants to attack Huawei. Huawei has now signed agreements with 26 countries to establish base stations for them, and Huawei’s technology is still progressing. Thus, the United States has become very anxious and kidnapped Huawei senior executives. Everyone knows that Meng Wanzhou was detained in Canada. It is said that Zhang Shousheng himself jumped off a building. So, the competition between China and the US is very intense. A few years ago, China launched the “Thousand Talents Program” to recruit global experts but all the talents returned from the United States to China were under investigation in the United States. The United States even tries to ban Chinese students from studying high-tech related majors in the US.

The fifth level is the national competition. During the post-World War II period, the United States is the dominator of the world and used the Cold War mentality and extremely selfish policies to bully and exploit other countries. On the contrary, China moves towards the center of the world stage through hard work, wisdom and proper strategy. Now, China’s has the world’s second largest GDP and the largest manufacturing output. In 2013, China’s goods trade became the world’s number one, accounting for 12% of global trade while the United States accounted for 10%. Therefore, everyone said that now the competition between China and the US is about who will become the first.

Personally, I believe that the United States has shifted the focus of its strategy to China. The United States used to treat anti-terrorism as its top priority since the “9.11” in 2001; dealing with countries like North Korea, Venezuela and Iran is the second priority; and the competing with other big countries are in third place. Russia has always been the No.1 competitor of the US. However, the US has made a strategic shift in recent years and has re-organized its priorities: the competition with big nations has become its first priority and China has become the biggest competitor of the US, followed by Russia. Anti-terrorism has been placed in third place.

This kind of strategic shift is not a decision made by Trump alone, but supported by many US scholars and strategists. I feel that the entire American society has adopted a hard approach on China, not just Trump and his administration. The Democratic and Republican Party may disagree with each other in many aspects but they have great consensus on how to deal with China. Not long ago, there was a big debate in the United States on whether the US policy for China was a failure. Most people concluded that the US policy for China is a total failure. Why? China and the US established diplomatic relations in 1979 and in the following 40 years, the US wants to bring China into the world system, helps China to promote reform and opening up, and hopes that China will become its ally. In the past, some Chinese thought that the United States is a paradise and a land of freedom. Now, the US suddenly realized that China’s political system and ideology have not changed but it has become stronger and stronger, which is why many people in the US think that the US policy for China is a failure.

In the so-called “iron curtain speech” delivered by the US Vice President Mike Pence on October 4, he said that the United States rebuilt China in 25 years but China still refuse to reform and open up. It steals America’s intellectual property rights and forces US companies to transfer technology. As we can see, the accusations of the United States on China are absolutely ridiculous. Michael Pillsbury, a key figure behind Trump’s confrontational China policy, is actually a third-rate scholar. He was not well-known at all in the United States but wrote a book called “The Hundred-Year Marathon”, which is very appreciated by Trump. Michael Pillsbury speaks very good Chinese but academically, he is not well-known at all in the United States. In the book “The Hundred-Year Marathon”, he said that China is very cunning and has started a hundred-year marathon race with the United States a long time ago. He used the thirty-six stratagems of Master Sun’s Art of War to explain China’s strategies and concluded that China will have a 100-year marathon with the United States. I think his conclusion is very short-sighted.

The US Vice President Mike Pence is even worse, the so-called Iron Curtain speech he made on October 4 was to ingratiate himself with Trump. In the first two years after Trump took office, the turnover rate of the White House’s officials was as high as 83%.

At the dialogue with the US Congressional assistant delegation last August, I cited an example from the Washington Post. I said that according to the Washington Post, Mr. Trump’s has made a lot of mistakes in his speeches since he became the president, 4,229 Twitter are either inconsistent or wrong, while others are simply unreliable. What am I trying to say is that as a big country, you have to keep your credibility. If the president often fails to live up to his promises, who wants to deal with you? Immediately, someone from the US delegation said: “I want to ask you a question. We have such a good newspaper in the United States as the Washington Post, which can track the President of the United States and disclose his mistakes. Does China have such a mechanism? Do you have any newspaper dare to disclose the mistakes of your Chinese leaders?” I replied that our leaders are very different from President Trump and do not use Twitter at all. Instead, Chinese leaders like to have everything written on the paper because China has 1.4 billion population and Chinese leaders have to be responsible for their people. Generally speaking, there are no mistakes in the papers issued by Chinese leaders.

Actually, China does not want to be the leader of the world and we want to keep a low profile, but we can not do that, just like an elephant hiding behind an ant, it will not work. President Xi Jinping delivered an important speech at the last Davos Forum, saying that trade war will hurt both sides. Protectionism is like keeping yourself in a small black room. It seems that you can escape from the wind and rain, but it will also isolate you from the sun and air. After President Xi’s speech, the leaders of various countries went to him and shook hands with him. Nowadays, Trump has given up economic globalization that he used to support and started to implement protectionism and populism. That is why China’s voice is so precious and important in the international community.

In November 2018, the British “Economist” conducted a public opinion survey on 50 countries around the world and asked three questions. One of the questions is: are you satisfied with your country? 91.4% of the Chinese respondents are satisfied, while the rate is only 38% in the US and 12% in Italy. We can see that the reform and opening-up have brought great satisfaction and happiness to the Chinese people. During Trump’s presidential campaign, he said that the United States is a third world country and China is a developed country because China’s railway and highway are so much better than that of the US. Recently, Trump said that the US is also a developing country with a relatively fast development.

The competition between China and the US is stronger than ever. Trump has two great ambitions. The first one is that he wants to be the greatest president in American history. The second dream of Trump is to keep America first and make America the greatest country forever. Of course, this is also the case during the Obama era. At the speech made at the West Point Military Academy, Obama said that the United States must lead the world for at least another hundred years and we should not allow countries like China to have the final say in rule-making.

Therefore, the fifth level is the highest level of competition. The development of international order and rules are closed related to the future of mankind. President Xi Jinping proposed the concept of building a common community of a shared future for mankind, the principle of joint contribution, mutual consultation and sharing, and the “Belt and Road” initiative. The “Belt and Road” initiative is an economic cooperation plan proposed by China, a new type of public product that will reduce costs, increase revenue, and improve outcome-sharing through interconnection.

On the contrary, the United States is now in favor of unilateralism and hegemonism. The government has been shut down for more than 20 days, 800,000 civil servants are not getting paid, 380,000 of them went back home, while the rest of them are working for nothing. Some civil servants are now marching on the streets because of the unpaid work. Trump is so determined to build the border wall. He said that if the Democratic Party does not like cement wall, I can change it to steel structure! In contrast, China will continue to open itself.

A sound China-US relationship will make the world prosperous and vice versa, more details can be explained as follows.

A sound China-US relationship will make the world prosperous. Perhaps the United States should adopt the principles proposed by President Xi Jinping when dealing with China: non-conflicting, non-confrontational, mutual respect, and win-win cooperation. I believe that China-US cooperation will bring new energy and benefits to the world. According to my calculation, the population of China and the United States accounts for 25% of the world’s total population, the trade of the two countries account for 25% of the world’s total, manufacturing output accounts for 40% of the world’s total, GDP accounts for 40% of the world’s total, and the currencies of the two countries accounts for 52% of the SDR currency basket. The relationship between China and the US is not simply who is the first and who is the second. The US is the most influential and powerful country of the world, while China is the fastest growing country with the biggest potential to become a leading superpower. The two should work together and become the force driving world economic development, scientific and technological development, peaceful, green and civilized development, that is, the road to peace, prosperity, sharing, innovation and openness.

The US is the most unstable and uncertain force in the world today. For example, the US agreed not to impose a high tariff on China after negotiation, a few days later, however, the US broken its promise and increased its tariff on another 200 billion dollars of Chinese goods, later on, another 267 billion dollars of goods. How can we deal with this kind of country? The cooperation between China and the United States will benefit the entire world. If China and the United States cooperate, the world economic development cycle can be prolonged, and our journey to a happy life will also be faster, which is why I said that a sound China-US relationship will make the world prosperous.

The fight between China and the US will make the world chaotic. The former US Secretary of State Dr. Henry Kissinger once said that if China and the United States are in a tit for tat, other countries will choose their side and the world will be in chaos. In fact, I believe that the game between big powers is based on their core interests and concerns. The world has now become multi-polarized and countries will not simply choose the side of China or the US. Countries make choices according to their core interests, value orientation and stage of development. They may support you on certain issues today but become your opponents tomorrow because they disagree with you on certain things. This is very different from the past. In terms of the WTO reform, for example, the United States, Japan, Europe, and Canada have reached some consensus against China. With regard to free trade and investment, anti-tariff, anti-unilateralism and bullying, all these countries, including the European Union, Japan, and South Korea have the same view as China. So, no one can expect that another countries will support itself on all issues.

If China and the United States disconnect from each other, the world will enter a new cold war and a worldwide economic recession is likely to occur. The 2008 international financial crisis did not lead to a 13-year long economic recession like the Great Depression in 1929 because of the G20 cooperation and the consistency in the global economic policy. If China and the United States are decoupled and other countries do not cooperate with one another, what happened during the 1923 great recession may repeat again. The world has finally come out of a decade long economic crisis triggered by the United States but the United States is bringing it back. An American expert wrote an article, “Trump is leading the United States back to the 19th century”, I think that this writer is right. All the laws and regulations used by the United States to launch the trade war are from the 19th century: the Tariff Act of 1930, the Trade Act of 1974, and even the principle of origin of 1809. Previously, the world did not have a global industrial chain, supply chain, service chain and value chain like we have today. Today, however, 2/3 of global trade goods are intermediate goods, and 4/5 of East Asian trade goods are intermediate goods, implying that the relationship between different parts of the global value chain has become closer than ever and the entire production process can not be completed in one country. The US will not be able to cut off the global industrial chain. If the global industrial chain is cut off, not only China, the United States and many other countries will also suffer greatly.

Why is the United States negotiating now? Trump is a businessman, he wants to do business and calculate his benefits. I think he has already felt that if he does not negotiate with China in several aspects, the following businesses of the US will be greatly affected.

The US energy exports will be significantly affected. The United States has now become the largest energy producer of the world. Since September last year, the United States has produced more than 11 million barrels of oil and natural gas per day, surpassing Saudi Arabia and Russia. After the meeting between President Xi Jinping and President Trump in 2017, China and the United States formulated the “100-day plan” and China promised to import more energy, agricultural products and aircraft from the United States. In 2017, China’s import of US energy imports increased by eight times. From January to September 2018, China’s energy imports from the United States accounted for 15% of US energy exports. The United States will be the largest exporter of energy in the future and China will be the biggest market for the US. China’s energy use will reach its peak by 2035 and before that, Chin will remain as the largest importer of energy. It will be a huge loss for the US energy sector if it loses the Chinese market.

The US soybean export will be significantly affected. China have significantly reduced soybean imports from the United States this year. In September and October, the import of the US soybean was almost zero. The US government is preparing to spend $12 billion to subsidize soybean farmers, but less than $1 billion was in place by October. Can the US government subsidize the farmers forever? Without the subsidy, what should the soybean farmers do next year? Without the Chinese market, what should the US farmers do with their soybean? Lately, some of the US soybean farmers have detoured New Zealand and exported to China; some have hoarded soybeans and are waiting for an opportunity; some are on the verge of bankruptcy. There are 35,000 soybean farmers in the US, plus a total of 110,000 people working for this industry, who live in seven states, which means a lot of voters for Trump.

The US aircraft exports will be significantly affected. The chairman of Boeing Aircraft said that China plans to import 3,700 Boeing aircrafts from the United States by 2035. If, however, the China-US trade war continues, China will certainly not increase its import of aircraft from the United States. China can either import from Airbus or expand production by itself. There is also why the C929, being developed jointly with Russia made the Boeing so worried.

The US livestock exports will be significantly affected. China is the largest market for US pork and beef. As the trade war continues, the US farmers are experiencing great difficulties in exporting pork and beef to China.

US chip exports will be significantly affected. The largest market for the US high-end chips is China. In 2017, China imported US$260 billion of chips, higher than the value of energy import, of which US$87.5 billion came from the US. The Chinese market is particularly important for US chip companies like Qualcomm and Intel as they sell a lot of high-end chips to Chinese companies such as Huawei and ZTE, apart from other smaller enterprises. The trade war has cut off the industrial chain and consequently, Qualcomm and other companies can hardly sell their chips to China, which is why they are so anxious.

The US revitalization of manufacturing will be significantly affected. Trump wants to bring US companies and capital back to the US by offering them tax cuts, nonetheless, only a small number of US companies returned home. Many big US companies even expanded their business and productions overseas: Tesla has set up factories in Shanghai, Ford has closed seven branches in the US and Australia but increased investment in China.

Trump is getting more and more anxious and I totally understand him. He is in a bad mood. He said that he was alone in the white house while everyone else was celebrating Christmas. I heard that Trump watches four TVs at the same time, of which three are dedicated to collect news praising Trump, while the last one plays ordinary news. It is certain that he can now hardly find news on the three TVs, which is also why he is so anxious. We should concentrate on doing our work properly and move forward with confidence. Thank you all!