Future of Freedom: How Should the U.S. Economically Engage With China?

Podcast: Future of Freedom
Host: Scott Bertram, America's Talking Network
Guests:

• Johan Norberg, Senior Fellow at the Cato Institute
• Derek Scissors, Senior Fellow at the American Enterprise Institute (AEI)
  Release Date: April 15, 2025

Introduction

In this episode of Future of Freedom, host Scott Bertram engages with Johan Norberg from the Cato Institute and Derek Scissors from the American Enterprise Institute to discuss the complexities of U.S. economic engagement with China. The conversation delves into the benefits and drawbacks of increased trade and investment, the impact on China's political landscape, intellectual property concerns, supply chain resilience during the COVID-19 pandemic, national security considerations, and the current state of China's economy.

Benefits of U.S. Trade and Investment with China

The discussion begins with an analysis of the tangible benefits that American consumers have reaped from increased trade and investment with China.

Derek Scissors highlights the consumer advantages:

"It has reduced the price of many goods, many products in your local store, from home electronics to furniture. It seems like a 1 percentage point increase in imports from China, close to 1.9% decline in US consumer prices. So it saved the representative American household roughly $1,500 a year."
[01:13]

Scissors further explains how this economic interaction has led to job market transformations:

"American capital and labor [have moved] to places where they can add more value. So we've also seen an upgrade into more higher, higher productivity, higher education jobs in American sectors that have been affected by Chinese competition. So I would say that it has been a win-win story."
[02:03]

Impact on China's Political Landscape

Norberg shifts the conversation to the hoped-for political liberalization in China as a result of increased economic engagement.

"One of the other goals that I sometimes hear about increased trade and increased investment is that the hope that it will make China more like the United States, freer, less authoritarian. Has that happened in any meaningful way?"
[02:23]

Scissors responds with a sobering assessment:

"It has not happened. I hoped it would have happened because this is the traditional historical trajectory in many countries... But in China, the Communist Party reacted by a harsh clampdown on all these independent centers and retook control of the economy of culture."
[02:46]

He contrasts China with other nations where economic liberalization led to greater freedoms, emphasizing that China's authoritarian resilience is a unique challenge.

Intellectual Property Concerns

The conversation turns to intellectual property (IP) issues, a major point of contention in U.S.-China trade relations.

Norberg raises concerns about IP theft:

"There have been stories about intellectual property theft in China, patent infringement, or simply stealing that patent, cyber espionage. Is it worth continuing the status quo in this way if those effects also are felt in the future?"
[04:32]

Scissors provides context to the IP situation:

"For 10 years, the American Chinese Business Council has asked US companies how China's intellectual property protection has changed over the past year and roughly half say that they've experienced an improvement since the previous year every year. And the share who experience a deterioration is down to the low single figures."
[05:02]

He argues that as countries become wealthier, they naturally start to protect intellectual property more rigorously, not necessarily out of goodwill towards the U.S. and Europe, but to enhance their own economic standing.

Supply Chain Resilience During COVID-19

Norberg brings up the impact of the COVID-19 pandemic on supply chains, questioning whether the response supports disinvestment from China.

"You write in the piece at Reason that safety in supply chains is created by multiplying options, essentially saying, when we needed stuff, China produced it, and when China needed stuff, we produced it. Are we learning the wrong lesson or thinking about what happened during COVID in the wrong way?"
[06:48]

Scissors counters the prevailing narrative that reshoring manufacturing enhances supply chain security:

"Everyone believes that having production close at home is safe, but in reality, it’s not. The businesses that did best during the pandemic had more complex supply chains with multiple suppliers in various locations. This allowed them to reroute supplies and remain flexible when lockdowns occurred elsewhere."
[07:23]

He emphasizes the importance of diversification over concentration, arguing that a diversified supply chain is inherently more resilient.

National Security Considerations in Manufacturing

The discussion shifts to whether certain sectors should be prioritized for domestic manufacturing due to national security concerns.

Norberg asks:

"Are there particular sectors that perhaps would be better off being either built here or reshored here to America for sort of like national security reasons?"
[09:48]

Scissors responds with caution against overusing national security as a protectionist tool:

"We should look into our supply chains and make sure that we're not dependent on one single supplier that might not necessarily want us, like Germany was dependent on Russian natural gas. But this means diversification rather than concentration."
[10:16]

He acknowledges the importance of certain sectors, such as rare earth minerals, but urges reinvigorating domestic capabilities without resorting to outright blockade.

Economic Decline in China

Norberg introduces a provocative stance on China's economic trajectory, citing Scissors' recent writings.

"You argue in the Reason piece that perhaps China actually is in decline. What are indicators that that is true and how should we perhaps calibrate their behavior if it is true that China is actually in decline?"
[14:35]

Scissors elaborates on the signs of economic downturn:

"China's economy is in a bad place right now. They haven't turned into a consumption and innovation-led economy and are instead subsidizing traditional manufacturing. Their population is in decline, and by the middle of this century, China will have lost more than 200 million working-age people."
[14:55]

He suggests that China's economic struggles, coupled with a crackdown on open data and innovation, indicate a long-term decline. This decline, however, risk public perception skewing towards blaming the West, potentially fostering a more aggressive, revanchist China.

Differentiating Direct and Portfolio Investments

The latter part of the episode, led by Derek Scissors, delves deeper into the nuances of U.S. investments in China, distinguishing between direct and portfolio investments.

Scissors explains the difference:

"Direct investment is when a company sets up a plant in another country or buys a 10% or more share of another company... Portfolio investment is more like a stock market purchase, not necessarily involving ownership of the company."
[18:12]

He points out the lack of transparency in U.S. portfolio investments in China:

"We know almost nothing now... The Department of the Treasury puts out a number that is wrong. It states that the biggest recipient of US outbound portfolio investment is the Cayman Islands, which do not have a portfolio market of any kind."
[19:46]

Scissors criticizes the government's failure to accurately report outbound portfolio investments, emphasizing the need for greater transparency to understand where U.S. capital is actually flowing.

Risks of U.S. Investments Supporting Chinese Technology

The conversation focuses on the potential risks of U.S. investments inadvertently supporting China's military and technological advancements.

Scissors identifies key sectors of concern:

"Applied AI is really important because it can make autonomous systems, including weapons... Advanced biotechnology also poses significant risks and benefits."
[22:02]

He underscores the strategic importance of regulating investments in these areas to prevent bolstering China's capabilities that may conflict with U.S. interests.

Strategic Inconsistencies and Policy Recommendations

Scissors addresses the inconsistency between competitive strategies and investment behaviors:

"If you're going to have a strategy of competition, if you're going to say Chinese goods are driving American firms out of the market through predatory pricing, we need to put tariffs on. Why is American money then going to China to support Chinese firms?"
[26:35]

He advocates for a coherent strategy that aligns trade policies with investment regulations to avoid inadvertently supporting adversarial capabilities.

Potential Shift of Investments and Geopolitical Implications

The discussion explores the possible consequences of restricting U.S. investments in China, including shifts to other markets and geopolitical alignments.

Scissors warns of limited replacements for U.S. investments:

"The US is the dominant technology innovator in the world and China is trying to be a close second. There really aren't other markets at the same scale as the US and China for outbound portfolio investment in technology."
[31:56]

He suggests that while investments might be redirected to the U.S. or other countries like South Korea, these alternatives may not offer the same opportunities, potentially limiting strategic responses.

Conclusion

In wrapping up, both guests emphasize the complexity of U.S.-China economic relations. Johan Norberg and Derek Scissors advocate for policies that balance the undeniable economic benefits of engagement with the strategic need to safeguard national interests and prevent bolstering authoritarian capabilities. Transparency in investment flows and strategic diversification of supply chains emerge as critical themes for fostering a resilient and secure economic future for the United States.

Notable Quotes:

• Derek Scissors [01:13]: "It saved the representative American household roughly $1,500 a year."
• Derek Scissors [02:03]: "So I would say that it has been a win-win story."
• Derek Scissors [02:46]: "But in China, the Communist Party saw this as well and they reacted by a harsh clampdown on all these independent centers."
• Derek Scissors [05:02]: "As countries get richer, they start to protect intellectual property... they care about their own and being seen as a safe haven for our investments."
• Derek Scissors [07:23]: "We need more diversification, we need more places to rely upon."
• Derek Scissors [10:16]: "It’s not that we are so incredibly vulnerable that we need to scale this up for that's more like a protectionist argument through the back door."
• Derek Scissors [14:55]: "China's economy is in a bad place right now... By the middle of this century, China will have lost more than 200 million working-age people."
• Derek Scissors [19:46]: "We know almost nothing now. This is the remarkable thing."
• Derek Scissors [22:02]: "Applied AI is really important because it can make autonomous systems, including weapons."
• Derek Scissors [26:35]: "If you're saying in the Biden term, oh, we need to control exports of advanced US Technology to China, which I agree with... Why is American money then going to China to support Chinese firms?"
• Derek Scissors [31:56]: "The US and China are so dominant in technology, there really aren't other markets to draw that money."

For more insights and discussions, explore additional episodes of Future of Freedom and other podcasts from America's Talking Network at americastalking.com.