Johan Norberg & Derek Scissors: How Should the U.S. Economically Engage With China?

Summary

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

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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.

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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]

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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."

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

Transcript

[Scott Bertram]

Foreign.

[Johan Norberg]

Welcome to Future of Freedom. I'm your host, Scott Bertram. Future of Freedom is a production of America's Talking Network. You can check out all of our great [e-mail] to support great podcasts like this one, please donate by clicking the link in the show description. We bring you interviews today from different sides of the debate over US Trade with and investment in China. In a little bit, we'll be joined by Derek Scissors, senior fellow at the American Enterprise Institute, aei.org First we talk to Johan Norberg. He is senior Fellow at the Cato Institute. Johan, thanks so much for joining us.

[Derek Scissors]

Thank you.

[Johan Norberg]

Talking today about US Trade with and US Investment in China, I want to begin by actually looking backwards a little bit. Little bit. How would you describe, how would you explain the results? What have been the results of increased US Trade, increased US Investment in China over the past, say, couple decades?

[Derek Scissors]

I would say that the first thing that Americans have noticed is that 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, according to researchers. But the other thing that happens then afterwards is that once you do that, you face some competition, you lose some jobs. But it also means that American capital and labor 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.

[Johan Norberg]

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 United States, freer, less authoritarian. Has that happened in any meaningful way? And is that even an expected goal? Should that be an expected goal when we talk about economic policies?

[Derek Scissors]

It has not happened. I hoped it would have happened because this is the traditional historical trajectory in many countries. As they open up to trade, as they liberalize economies, higher, more education, higher wages. It means you have more decentralized economic centers, more independent entrepreneurs, independent media, and often people begin to demand some rights and liberties and even democracy. That's happened in, well, in many European countries. It's happened in Chinese neighbors like South Korea, Taiwan and so on. It has not happened in China. And why is that? I'd say that one reason is that we saw that happening beneath the surface in the early 21st century. We saw how entrepreneurs became more independent. They began to speak out against the government. We saw media independent of the Communist Party. Unfortunately, the Communist Party saw this as well and they reacted by a harsh clampdown on all these independent centers and retook control of the economy of culture. And obviously those things can happen as well. It's not automatic. It depends on particular choices in these countries. But I would say that overall more open countries that trade with the rest of the world stands a greater chance of experiencing forces like that. Whereas places like North Korea completely sealed off from any kind of interaction with the rest of the world. It's easier to be a dictator there.

[Johan Norberg]

Johan Norberg is with us here on Future of Freedom. You mentioned a few of the benefits, including lower priced goods. Certainly for American consumers. There have been some perhaps negative consequences too. We hear stories about intellectual property theft in China, patent infringement or simply stealing that patent, cyber espionage. Is it worth continuing status quo in this way if those effects also are felt in the future?

[Derek Scissors]

Well, those things are of importance. We have seen abuse like this. You know, many Western companies have experienced how they open up a factory and then in a next year there's another Chinese factory across the road and they produce basically the same thing. So we have seen that kind of abuse of these things and obviously abuse in many other areas. But this particular one, when it comes to intellectual property, it is a problem, but it has to be put into context because you know, 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 a roughly half say that they've experienced an improvement since the previous year every year. And the the share who experience a deterioration is down to the low single figures. So it tells you that as countries get richer, they start to protect intellectual property. Not because they care about us in Europe and the US and our intellectual property, but they care about their own. And they want to be seen as being more of a safe haven for or investments. But this is still a concern and it's an obvious concern. I think this is one reason why we need trade agreements like the World Trade Organization, the Trans Pacific Partnership, with strict rules on intellectual property. And perhaps that can tempt economies like China to say that, okay, we're going to have to defend this if we want access to other markets. So that's one reason not to abandon trade deals like that.

[Johan Norberg]

Looking back at the COVID era, there are some who argue that that is an example of why we have to disinvest from China or encourage manufacturing Back to the US so that at important times we can create our own goods that are necessary. 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?

[Derek Scissors]

I think we do. I think that everyone, the media, the public, politicians, they think that it's safe to have all the production close at home, but it's not. If you look at which countries, which businesses did the best during the pandemic, counterintuitively, it was the ones who had a more complex supply chain chain with many suppliers in various places. It sounds risky, right? Because someone might be under lockdown or disappear for some reason or another. But that's exactly why they could be more flexible. They had invested more in those relationships. They could reroute supplies, they could find other places. Whereas if you have a very short supply chain, if you are a factory that depends on one supplier in one particular area, it's sufficient for that place to be under lockdown at that moment. And suddenly you have nothing. It's game over. So we need more diversification, we need more places to rely upon. And again, this sounds counterintuitive, but this is the reason why the old saying doesn't go put all your eggs in one basket and protect it with tariffs and regulations, because then you have a single point of failure and that's risk. Need more trade and more alternatives to be able to, to deal with this. I think we saw this during COVID definitely, when it came to things like, you know, we needed personal protective equipment for our hospitals at that particular moment. China, they could import it from Europe and from the US back then, and then they got a respite and could scale up their own production. Whereas America and Europe suffered from COVID and then China exported some 70 billion face masks to us, not because they are kind and generous and like us, but because they're profit interested. So they scale up production to something like more than three times total global production in, in the year before. So I think that we, even countries with governments that don't necessarily want us well, can be a part of, in a diversified supply chain where we have many different alternatives.

[Johan Norberg]

Johan, are there any particular sectors in which it perhaps is important to manufacture these goods for potential national security reasons? Sometimes you hear pharmaceuticals, chips, semiconductors, shipbuilding, industry too. We've got to build our own ships here in the us 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.

[Derek Scissors]

Yes, but we also should also be quite cautious when using that argument because it will often be exploited by those who want less competition for other reasons. You know, the last time around when we had steel tariffs, it was said that this for security, we need steel if there's a war, obviously, yes, but then the Department of Defense answered that, yeah, we would need something like 3% of present American production. And if we were to have a sort of a world war, perhaps 7, 6% of total U.S. production. So we already had all of that and we have supplies among friendly neighbors like Mexico and Canada as well. It's not that we are so incredibly vulnerable that we need to scale this up for that's more like a. It's more a protectionist argument through the back door than, than anything else. But there are areas I think we should look into our supply chains and make sure that there are no, we're not dependent on one single supplier that might not necessarily want us. Well, like Germany, for example, was dependent on Russian natural gas, obviously a major mistake. But again that this means that we need more diversific rather than concentrating supply chains in those areas and perhaps also encourage our domestic manufacturing. I'm a little bit worried when it comes to some rare earth minerals, for example, where we're quite dependent on China, but we have lots of them. We have lots of them in the US in Japan, in Australia, in Sweden. But it's just the case that we. It takes so many bureaucratic hurdles and regulatory hoops to jump through to be able to open those mines. It's difficult to do it in a short period of time and so on. So that's something that we should look into, but not necessarily by blocking supplies from abroad, rather reinvigorating our own economies.

[Johan Norberg]

Johan Norberg with us. If the United States were to reduce trade with China, reduce investment in China, would that result in a more isolated China or would that simply drive them closer to adversaries like Russia?

[Derek Scissors]

This is the big thing that I'm worrying about. I do worry about the Chinese government. It's an aggressive totalitarian government, oppresses its own people and threatening its neighbors. But it hasn't gone all in, in sort of wrecking relations with the world. It has held back slightly from sort of supplying Russia and Iran with everything they need to wreak havoc. Why is that? I don't think this is because of their good, decent upbringing and decent character. I think this is because they know that they are interested in economic relationships with, with the west. And they know that sanctions or secondary sanctions would be detrimental to their economy. A loss of investments, a loss of markets. If they, for example, invaded Taiwan, and that's a major concern for them. They know that it would wreck their economy. It might not be enough to stop them from doing bad things. But we know that this is one thing that they do worry about. And I'm just thinking, wouldn't it be a bad thing to remove those constraints from them and make, make them pay the price in advance of losing those markets and those investments? In that case, they well might be free to act according to their character instead. And I think that would be a more dangerous world. I think that they would team up with the rivals, all the big dictatorships, and build their own supply chains and their own rival block against us. And I think in many respects that would be a much more dangerous world than the one where they're at least trying to in some respects fit in and moderate their worst excesses.

[Johan Norberg]

And on that point, many people I think, look at China as being strong or ascendant. 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?

[Derek Scissors]

Yes, China's economy is in a bad place right now. We don't really see it because we worry so much about their excess manufacturing. It's a sign that they haven't been able to turn into a sort of a consumption and innovation led economy and they have to subsidize traditional manufacturing. Instead they are in a bad place because they have run out of the opportunity of having much catch up growth. You know, just putting farmers into a factory with old western technologies and then increasing productivity, that's over. The population is in decline. They have no more farmers to put into factories. By the middle of this century, I think China will have lost more than 200 million working age people. So they are losing some economic capacity while they're losing people as well. At a moment when they're not sort of top of the world. Their GDP per capita is low. It's similar to the numbers for places like the Dominican Republic and Gabon. So it's not like they are hugely successful economy. And partly because of this crackdown on the economy in the last decade or or so, they have scared investors and innovators off. It's been difficult to do business in China. So I think they are in a long term decline and then I think they admit this because more than half of all the economic indicators published by Chinese statistics bureaus have been discontinued in recent years. And that tells you that there's something they don't want us to see. So this is happening in China. And on the whole, I think it's a good thing if a big dictatorship like China does not grow tremendously and expand dramatically. But I think it matters how this is being seen. If this is being seen as sort of the reckoning of their own being seen as the result of an evil, malicious America and West that's trying to wreck their economy with tariffs and decoupling, I think that could make for a more aggressive, revanchist China in the future.

[Johan Norberg]

Johan Norberg is senior fellow at the Cato Institute, cato.org and also on Xohank Norberg Johan, thank you so much for joining us here on Future of Freedom.

[Derek Scissors]

My pleasure. Thank you.

[Johan Norberg]

Now to hear another side of the debate over US Trade with and investment in China. We talk with Derek Scissors, senior fellow at the American Enterprise Institute.

[Derek Scissors]

AEI.org can also find him on X. Eric Scissors, 1 Derek, thanks so much for joining us. Thank you for having me Talking today about investment in China. And you recently wrote a piece@national review.com about this funding the CCP's development of advanced technologies. I want to begin by differentiating between direct investments and portfolio investments. What should people know about that difference?

[Scott Bertram]

So I think mostly people think of investment as direct investment, which is when a company sets up a plant in another country or in the United States or buys a 10% or more share of another company. 10% is kind of arbitrary, but that's what everybody uses around the world. That counts as direct investment. If you buy a 9.9% share or less or convertible bonds, it counts as portfolio investment, meaning it's more like a stock market purchase, not necessarily involving you in the ownership of the company. Now. So that's the basic link between gap between direct and portfolio investment. The operational issue here is that US Direct investment in China is not really what's moving. What's moving is US Portfolio investment in China. So we usually focus on direct investment. It transfers technology. We need to limit that. And that's an issue it's worth discussing, but that's not where the action is. US Portfolio in China more than tripled in the first Trump administration passed $1 trillion. It then fell during the Biden administration, not because of anything the Biden administration did, but because it was foolish portfolio investment. But now we have people hyping China again and we have the Trump administration returning. And so the conditions are there for US money again to support Chinese technology development.

[Derek Scissors]

You speak in the piece about the big need for transparency, particularly on outbound portfolio investment. So tell us, what do we know now? What should we know?

[Scott Bertram]

So we know almost nothing now. This is the remarkable thing. I'm not a government interventionist. I'm a traditional University of Chicago trained conservative. But one of the things government should do is provide information that makes decisions by market participants better. And we don't know almost anything about US investment in China. The Department of the treasury puts out a number that is wrong. It's negative information. They say the biggest recipient of US outbound portfolio investment is the Cayman Islands. Cayman Islands do not have a portfolio market of any kind. That is a transit point for money which treasury does not want to report the final location of every year a year late because meaning at the end of the year they give us the numbers for the previous year. The Federal Reserve writes a paper with a corrected number which is completely different than the treasury number because $2.6 trillion in portfolio investment in the Cayman Islands goes to zero. There is no US portfolio investment in the Cayman Islands even though treasury says the number is over two and a half trillion. That is a total government failure. The Fed corrects that once a year. Somewhat late, but it's much better than nothing. The problem in the Chinese case is we then get a number that has moved around. It's been over a trillion now it's 800 billion, but we don't know what it goes to. Someone could come back to me and say, well, how do we know that money isn't going to making toys and clothes and low end consumer electronics and what are you worried about? And that would be fine. If we actually got a breakdown of those numbers and it turned out there's like 799 billion is going to innocuous Chinese firms and activities, then I'd be wrong. And we don't need to restrict up on investment. But step one is find out what the money is doing and what China hypes and what it sells is technology. It doesn't hype join our low margin clothing factories. It hypes support our quantum computing efforts. So we have bad information on totals. We have no information on what the money is actually supporting.

[Derek Scissors]

You speak about specific technologies or sectors in which some of this outbound portfolio investment might need to be restricted.

[Johan Norberg]

What are those specific technologies that perhaps.

[Derek Scissors]

Should not receive U.S. funding?

[Scott Bertram]

Well, this is an argument so I'M on the econ side. On the econ side, we want transparency and we want consistent policy that all works together. You don't have one policy trying to do one thing and one policy trying to do another, which is a big thing in the American government. But I'm not going to claim that I or really anyone outside of a vote of Congress should be the arbiter of what the important technologies are. It seems to me right now that applied AI is really important because it can make autonomous systems, including weapons. If the Defense Department wants to tell me only this part of applied AI is important, I will immediately yield. But the idea is really important, not the idea. The field itself is really important and there may be only some restrictions needed in certain parts of it. The other one is advanced biotechnology. There are some incredible remarkable things, such as used MRNA vaccines, possibly curing cancer at some point. As an illustration, again, I'm not an expert on that. There are also really scary things like the COVID virus. So again, I would yield to the experts at defense and health on exactly what restrictions should be pursued. But there's no question that technology is. Funding is useful to both Chinese and military, which might be in conflict with our military, and events which can either help or very much hurt the ordinary American people. Like on the biomedical side.

[Johan Norberg]

Right. Let's go a little deeper there if you would like.

[Derek Scissors]

What are the specific dangers? Why is this something that we have.

[Johan Norberg]

To be aware of?

[Scott Bertram]

There's a strategy part to this and there's a danger part to this. And it's very easy to fall into, like hyping the risk. I'll get to that. And you know, I'll overhype the risk like anyone. But I want to start with a strategy which is, are we competing with China or not? We have had multiple administrations. The second Obama term, the first Trump term, the Biden term, the second Trump term, the start saying we're in a competition with China. They have a very different form of government. They have quite an aggressive leader and he's leader dictator for life. They provide a lot of disinformation. They're responsible. I don't think it was intentional by any means, but they're responsible for the COVID pandemic. I could go on and on and on. There are a lot of reasons to be competing with China. You don't compete with someone by helping them, which is what our outbound portfolio investment and to some extent, to a lesser extent, our direct investment does. So 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, which happened. Both of those things happened in the first Trump term. If you're saying in the Biden term, oh, we need to control exports of advanced US Technology to China, which I agree with. You can argue about which ones, but I agree with the idea. Why is American money allowed to support technology development in China? That's worse. It creates an independent Chinese capacity rather than one that's dependent on the United States. So the first issue is, are you pursuing a sensible strategy? And it is not sensible to say we're competing with China, but you know, let's send money over there to support whatever they happen to be doing. We don't even want to know what it is. And it could be a lot of money or it could be a rising amount of money. We don't want to know that either. This is just not sensible policy. And then the second part is the risk. And the risk is that the Chinese latest Chinese breakthrough in AI and I don't know how much of a breakthrough it is, but they're certainly treating as a breakthrough, it was by a private sector company. That is what US Firms and investors want to support. They don't want to work for the state, they want to work for innovative Chinese private companies. Now, as I understand it, DeepSeek received no meaningful funding from US firms. The Deep Seq creators received no meaningful funding from US firms. But ByteDance did. ByteDance is the parent of TikTok. If you happen to think that TikTok is a very innovative algorithm which can be used for disinformation, which by the way, it does and it has the US Helped create that. So hyping the risk is hard when you don't know where the money is going to by sector. But autonomous systems in the PLA People's Liberation army could be used to kill Americans. And I think that's enough of a risk to say, look, you're going to try to create these things anyway and you're going to secede to some extent without us, but we're not going to help you. That's the risk we'd like to avoid. We're not going to help you do these low probability but high risk developments. And then we're also going to have a consistent strategy where we don't say we're competing with China while we're helping China.

[Johan Norberg]

Right. This idea about are we competing with.

[Derek Scissors]

China or not, there are certainly in many sectors American businesses and companies that rely on Chinese manufacturing, supply chains, Chinese technologies. Is there any sort of crossover in these particular sectors? By harming China in these sectors, might we also be harming American companies?

[Scott Bertram]

Oh, absolutely. Look, I'm not one of those people who's going to tell you say if we put heavy tariffs on everything, everyone else will pay the price except Americans. No, this isn't separating ourselves to some extent from Bolivia or Belgium. There are going to be costs to the United States from separating from China. Let's take this is connected to outbound investment, but not directly, but it's an example of what we're talking about. Ship the land. It is a real problem for the US That China dominates shipbuilding. We are a maritime power. They want to be a maritime power. There is a big disadvantage for us there strategically and possibly militarily. But if you want to separate yourself from Chinese shipbuilding, it's going to hurt. It's going to have costs for users of shipping services. Yes, There will be benefits down the road as we rebuild our shipping industry that's also going to have costs. Maybe you think those benefits are bigger than those costs. I do. But in the short term, they're going to be cost to US shippers. And it's the same thing with outbound investment. I think you don't want to support certain activities. We can debate the activities, but for sure you do not want to support advanced biotech and advanced artificial computing. And then that means US Firms are going to lose investment opportunities and not going to have enough as much money. And if the Chinese popularize certain biotechnologies, maybe they don't invent them, but they're, they come in at a lower cost and they popularize certain artificial computing technologies or uses, then the American firms that could have gotten those benefits from those will not. So there's absolutely a cost on separating ourselves to some extent from China. There's no argument against that. That's the reason why I think we say we're competing with China, but then we don't actually compete with China.

[Derek Scissors]

Would cutting American investment in this way that outbound port portfolio investment have the possibility of driving China deeper and closer, closer to Russia? Is a more isolated China more dangerous?

[Scott Bertram]

Well, I do think there's an issue here of do the Chinese get more dangerous if they get weaker? Right. I mean, the natural thing for a lot of people to think is, oh, they're very different than us. They're hostile to freedom of expression and so on, and therefore we Want them to be weaker rather than stronger, but a weaker China could lash out. So I think that's a general issue. There's really no way to drive for restricting portfolio investment to drive China toward Russia. Russia doesn't have any money. They can't at all substitute for the US When US Investment was rising in the first Trump term, no other country could substitute for the U.S. nobody else had the kind of money that we were pouring into China. Now, in a more relaxed situation where our investment in China isn't soaring, yeah, the Chinese might try to get the Europeans to invest more. The Japanese, the Koreans, and so on. Not the Russians. Our friends or our friends until the last few months, anyway. I would say that in a commerce situation where US Investment isn't soaring, we should probably think, yeah, other countries will move in to fill that gap. American investment firms will tell you they're the best at identifying opportunities, and their record says they are. So I'd actually even rather European and Japanese investment houses serve the Chinese market and maybe not do as good a job identifying those opportunities and supporting them, because those opportunities are scary in some cases for the United States. But the big thing is that surge in US Investment we saw in the first Trump term. No one could replace that, certainly not Russia, not even richer countries. That's what the prime goal is, to get some transparency, avoid that kind of surge. It's not to wipe out all US Outbound investment in China.

[Derek Scissors]

What about potential retaliatory measures from China toward the United States if something like this goes into effect?

[Scott Bertram]

Yeah, I don't think there would be much. They would complain and do something token. And that. That sounds like, oh, you're being too optimistic. I don't think I am. And there's a specific reason Xi Jinping, the General Secretary of the Communist Party, does not really like the private sector. He really doesn't like the foreign private sector. He's not really happy with his own private sector. And what we're talking about with outbound portfolio investment is you have private sector money going into the Chinese private sector. Overwhelmingly. Not entirely, but overwhelmingly. I don't think he cares that much about that route being cut off. I think he's like, well, that's a luxury. I don't really want the private sector getting too much money. There are explicit statements from the party at senior levels that there's too much foreign money coming into China. That occurred in the first Trump term. They were worried about bubbles. It contributed to Alibaba being cracked down upon by the party. So in this case, I don't mean in all cases of US action, but in this case, I don't see any real meaningful Chinese retaliation.

[Derek Scissors]

If some of this outbound portfolio investment is stopped from going to China, is it rational or automatic that it then becomes invested inside US Technologies? Are there alternative markets that aren't China that could use this sort of investment?

[Scott Bertram]

Yeah, this is a good question because the US Is the dominant technology innovator in the world and China is trying to be a close second. I don't think they are, but they certainly are in some fields. They don't actually want to be first. Really being on the cutting edge of innovation is destabilizing and the party loves stability. But they would like to be a close second. I'm not sure anybody else is a replacement for those two. So normally you'd say, well, if you're trying to pour money into Chinese tech, well, you want to diversify from US Tech, totally normal, and so you'll go elsewhere. South Korea, maybe. They're not at scale. Of course they're going to be good companies that you want to support in other countries, but there's not at scale a substitute for both the US And China for outbound portfolio investment in technology. So I suspect that most. I'm not advocating this, but let's say we said we want outbound investment, portfolio investment in China to go to zero, which is not my position. I suspect a large chunk of that, over half a trillion dollars would be redirected to the U.S. now, this is subject to the usual qualifiers of, well, if the American market sucks, then it's not going to be invested. Maybe they won't invest in other foreign markets. Maybe they'll just sit. Yes, true. I don't mean to be too optimistic about this. It's not my goal to redirect money to the US but because the US And China are so dominant technology, there really aren't other markets to draw that money. Diversification money will go elsewhere. Certain firms in other countries will get money. But you can't say I want to diversify out of the US Into China and then say, okay, well China didn't work. I want to diversify into India. India does not offer the these opportunities at all. So probably most of it will go to the US except in the US Downturn, where it will just sit.

[Derek Scissors]

Derek Scissors is Senior Fellow at the American Enterprise Institute, aei.org and he's on X. Ericksissors1 Derek, thank you for joining us here on the Future of Freedom.

Thanks.

[Scott Bertram]

I enjoy the conversation.

[Johan Norberg]

We thank both of our guests for joining us, Johan Norberg, Senior Fellow at the Cato Institute, cato.org and on Xohank Norberg and Derek Scissors, senior fellow at the American Enterprise Institute, aei.org on x Ericksissors1 for additional episodes of the Future of Freedom podcast and other fine podcasts from America's Talking network, check out americastalking.com or anywhere you find your audio. Thank you for listening to Future of Freedom, presented by America's Talking Network.