You get people saying, well, but the increment to china gdp is so large that ive been trying to use National Wealth as an alternative indicator. Its hard to we have a great series. If you want to know how the u. S. Economy is doing, look at the Federal Reserve series on net National Wealth or net worth of households. Its more informative than gdp. Its hard to do that for some other countries, especially large countries like china. If you use their data, they say from the end of 2013 to the middle of 2018, chinese wealth grew 26 to near 52 trillion. Thats a 4 1 2 year period. In the previous fiveyear period which included a chunk of the financial crisis, the larger chunk of it, the chinese wealth grew 130 . Not my data, right . You might say im biased, trying to find chinese stagnation where i look. They do this independent of me. I send them emails all the time. 130 in the previous five years, 26 in the last 4 1 2 years. Thats more like whats happened to the chinese economy than the official gdp. U. S. Wealth increased 29 . Faster than china and to 898 trillion 98 trillion which roughly fits the feds. China has a growth problem and it is understated by official gdp which i think you are aware of. I point out how stark it is using wealth calculation. Debt, bank of certainly sentiments. There are two biss in my life. I get them confused. China tate debt is a percentage of gdp. Eight years later, its pardon me. Eight years later, yes, its 142 . Its gone up 8 Percentage Points of the percent of gdp. Thats the beginning of the financial crisis. From the end of 2008 to the end of 2017 it goes up 109 . We get an 8year period where it goes up 8 Percentage Points and then another period where its 109 Percentage Points. Its not my date a that is the worst than the worst period equivalent period for the United States since going back to 1952 when data starts as plus 65. We have been i agree with rileys opening remarks. We waste money, we borrow money. Were going to regret borrowing in the future. Weve done it for years. Our worst period of this is plus 65. Chinas most worse is plus 109 and were much richer than them. Official disposable income is about in china, this is official income is 1 9th of the u. S. Level. Its far too early in the Development Process for china for growth to be this slow and for debt to be this high. So you want to know the state of the chinese economy. Its that state. Its not close to becoming a rich country. Its highly indebted in the last nine, ten years and growth has slowed dramatically. Why . Riley touched on a couple. The median age in china is about that of the u. S. Now. In two decades it will be older, an older japan. It matters a lot to the chinese economic trajectory and nothing to do with trade. When people talk about the trade war is going to hurt the chinese economy. Demographics will hurt them much more than that. Nothing to do with us. Education. The u. N. Mean years of schooling. 7. 8 years. Were at 13. 4. Its not rising quickly any longer. You have clear education discrimination against 550 million rural chinese. No sign of that changing. Directly related to that, theres no private ownership of rural land. You cannot make the rural population wealthy. Any rural population in any country wealthy if they cant own their most valuable asset. China has an anchor on the personal income, on all of its Economic Development because it wont let rural people own their land. Again, no Movement Towards change. We have a very powerful chinese leader. He could make change happen. Doesnt want to. My major issue has to do with the state sector. In 20 to 25 sectors, you have a suppression of competition because enterprises cant lose. This is the solution to the mystery of can china innovate. Of course it can. But not in the 2025 sectors where firms are guaranteed market share. Why should they innovate . Its not a when youre on top, you dont want change. Thats the situation in major sectors in the chinese economy. Banking, oil, insurance, power, steel, i could go on and on. Part of chinas economy will innovate. The part protected by the state will not innovate. Innovation, capital, labor, land. Those are the sources of growth. Theyre all in bad shape. So im going to be quick on the unimportance of trade compared to that. I suppose the trade conflict could make china borrow even faster. Thats whats happened this year, early this year. They were borrowing themselves to death before this. The demographic crunch has nothing to do with the rural discrimination, nothing to do with it. S. S. O. E. s is im not defending that. Im saying thats what were doing. We could be trying to get a regulatory protection but were not. Job losses. 15 years ago, china had an ex paneding labor force and they needed exports to pull keep people off the streets. Thats no longer the case. The quantity of jobs is not a major challenge. Trade is not important to the chinese economy that way. If you want to find a place where trade is important, its seconda secondary, although interesting matter, although external finances, not domestic macro. China is hiding data on Foreign Exchange and the banking system. Their official reserve imply about a 6 o billion drain the last year despite a 380 billion goods and trade surplus with the u. S. In the First Quarter, chinese the drain accelerated. This is all prior to the hike in tariffs. Which goes into effect saturday as riley said. So theyre losing Foreign Exchange prior to the hike in tariffs. If we hike the tariffs and, say, put a 10 with exclusion tariff on the 300 billion trench. In july so a 60 billion last year, its going to go past 100 billion. China can afford that. If you follow china, you know that they dont like pressure on their currency. Theres about screeching about that in chinese media. You will feel unbelievable pain. Media has become very difficult to read in the past couple of weeks, chinese media. American media, too. Were going to be dont like outflow of income. They feel like the possibility of being devalued rises. You have a sense where china, the u. S. Can cause Serious Problems for the chinese. We cant have one implication and im almost done. One implication will be, if we do that, if we take the trade actions to sustain them, the bri will be comatose for an indeficit period. Its funded by american consumers. We stop buying chinese goods so summation. The chinese longterm economic problems concern enormous amount of wasted capital, premature aging due to demographic policies and the antipathy, fear, of unnecessary domestic policy. In the shortterm, its vulnerable to Foreign Exchange, pressure from the United States. That doesnt matter to chinas longterm economic prosperity. Ambassador allen. Thats great. Im never going to speak after derek again. That was wonderful. Thank you very much for the invitation. Its wonderful to be here. The kind of perspective im going to give is a little bit different. About a year ago, president xi and President Trump met in ba e buenos a buenos heirs. Theyre expected to meet again in osaka. Probably on june 29. So what i wanted to do today was to provide a little bit of a scorecard. Where are we . What progress has been made . What has been the cost . I think on the positive side, a good number of things have happened within the chinese economy. The benefit American Companies and other chinas trading partners. Little noted in the press here, but the chinese have reduced tariffs on some 3,700 product lines, including many lines that are important to foreign traders like automotive and cosmetics. Theres been a reduction of tax, a reduction of that. Theres been an elimination of equity cap restrictions and a reduction of barriers to investment in china. Theres been a number of approvals, important approvals in the Financial Services sector. And at least formally, legally, theyve banned Technology Transfer. By introducing a negative list for foreign direct investment, theyve opened up larger areas to for american and foreign investment. I agree with dereks comments on s. O. E. S and i think thats the litmus test here. Whether or not they will open up those. Let me just summarize and say that the chinese have made some significant market openings, little noted in the United States. But noted elsewhere. And i think that the president needs to be given credit for that or applying the tariffs and the pressure to get this. These are things that we had negotiated for a long time and finally were seeing some progress. But there is a downside or a price. Id like to divide this into shortterm and longterm. Over the shorter term, u. S. Exports to china were down 7 in 2018 over 2017. Overall chinas imports increased 10 and what we are seeing, particularly in the High Technology area, is that european and japanese competitors are taking market share from American Companies. Agricultural exports from the United States are significantly down. I was startled that iowa exports to china, for example. Down 50 . Many american soybean farmers are finding it theyre unable to plant with current prices. On the services side, chinese travel to the u. S. Last year was down 5. 7 . Chinese travel overall globally, outbound chinese travel was up 13. 5 . And Chinese Investment to the u. S. Is down. This is really dereks area of greatest expertise. The number ive been using is between 60 and 80 down. Thats very, very significant. Many in washington are okay with that. They dont mind seeing this decoupling or falloff of Chinese Investment. I would argue that theres a tremendous opportunity cost, particularly in the poorer parts of the country. I would submit to you, Ballard County kentucky, one of the poorest counties in the country, recently added 500 jobs as a result of Chinese Investment in fish farming and paper mill. I would submit to you, again, forest city, arkansas, where 800 new jobs are planned but in a yarn production facility. But those jobs are on hold since the tariff hit tat began. I think its okay to put that on the downside. The administrations use of more aggressive export controls and investment restrictions are a little bit outside of the trade area. Theyre very closely related. So let me note that on the sip yus side, that the changes in the law has led to at least three forced divestments. One grinder, the second patients like me and health tell. I think theres an Economic Loss there thats forced this investment. On the export control side, which is a different but related area, would note that u. S. Suppliers to cte and ha wie have been affected. American tech competitors, that is the european and the Japanese Companies that are competing with america across the world are in the door immediately once the export controls are signed. Are put into law. So i would argue that the Chinese Government response to the u. S. Moves has been pretty careful, calibrated and conservative until recently and that is changing. The ministry of commerce of china has said they reserve the right to use, quoteunquote qualitative measures against investors in china. Me may or maybe not see that beginning to happen. So the best statistical evidence is from the American Chamber of commerce which released a survey last week, 47 of their members said that on top of the tariffs, so those are tariffs going both ways, that they have faced measures such as slower customs clearance, more inspections and delayed approval for licenses. So thats nearly half of the american investmeors that responded to the survey. Approximately 1 3 were cans sells or dee canceling and 40 of the American Chamber of commerce in china said that they were relocated manufacturing from china to a third country. Possibly back to the United States. But that would be an in a very, very small minority. Mostly vietnam, perhaps mexico, cambodia, sri lanka, wherever. Lets see. So over the shortterm, i think that there has been a considerable cost to the United States to American Companies, american farmers, American Workers, american ranchers. But i worry much more about the longterm rather than the shortterm. So as i look at the situation right now, and the possibility that, as riley mentioned, additional tariffs might come into play they will come into play on june 1 and then the fourth tier might come into play later in the summer. As i look at that, i am very concerned. So let me share those concerns with you. Longer term concerns. The first one is that nation nationalism is rising in china. Theres no doubt about that. That could be used to ill effect against American Brands and American Companies. Theres a lot of cooler heads within the Chinese Government trying to tamp down a national is particular response to this, there are calls for boycotts and other campaigns. In total, american branded products, theres probably about 190 billion worth of exports, but 600 billion worth of sales in china, including sales made in china, taiwan, wherever, around the world. But there are calls for boycotts and i dont think that were too far away from that, its already appearing in social media, then the impact will be considerable. And european and Japanese Companies will be right there to pick up the slack. There are relatively few areas, even in high tech, where we have a monopoly position. So i am concerned that farmers are potentially the greatest victims here. Recall, please, 1972 with the nixon embargoing of soybeans to japan. The National Response of the japanese was to invest very heavily in brazil to have independent bases of soybeans. And no doubt, while i dont have statistical proof of this, the chinese are developing a alternative longterm supply bases. Probably in brazil, russia and ukraine. Again, i dont have evidence of that. But that would be a natural response. The american agricultural economy is predicated on producing for a global population and expanding global. We produce far too many calories for us to use economically. It has to be. It has to be exported. The entire agricultural economy is predicated on a Global Market despite dereks very good effort here. On qualitative measures, we must be respectful of the chinese and mindful that they are they do not operate within the rule of law boundaries and that they can create considerable amount of problems for American Companies. And i wouldnt say necessarily that thats Chinese Government, per se. Just individual chinese bureaucrats who are very risk adverse would have a hard time approving american applications and what not. Even if it wasnt an official government policy. I think the American Chamber of Commerce Survey demonstrates that. On the high tech side, i am also very concerned. Point of fact, United States graduates 650,000 s. T. E. M. Engineers, scientists a year. A third of them are foreigners. About 400,000 americans. China graduates 1. 8 million s. T. E. M. Graduates a year. And so i think it is not inappropriate to be concerned about over the longer term how our two tech sectors are going to intermesh. So let me just end up with a quote from rob atkinson. Rob is in town. He runs the ifif. Information technology and Innovation Foundation and generally a real good scholar of this stuff. He estimates that if the tariffs fully go into effect that u. S. Firms could lose between 14 and 56 billion in export sales over five years, threatening 800,000 to 774,000 jobs. I think that thats something we should ponder. Let me end and say tariffs are an appropriate means to an end. But they cannot be the end. If tariffs are the end of or the objective, then were going to pay a very high price. The two president s will be meet not guilty approximately a little bit less than a month. Let us hope that their diplomats and statesmen can get together to resolve the structural issues as identified in the 301 so that the trading relationship can get back to normal so that American Workers, companies, farmers and ranchers can benefit from the growth that will be derived from china over the next ten years. Thank you. I think, according to the china survey you mentioned, good statistics, by the way, on the views that business is operating in china. I think Something Like 50 would even prefer to simply go back to the status quo of what we had two years ago. Of course. Because weve gotten to this point. Finally, our last guest, wayne morrison, if you will. Thanks, riley. Great to be on this panel with my esteemed colleagues. I was asked to focus more on the trade aspect, trade relationship part of it. Partly because derek didnt want to do it. I think hes tired of working on it. I dont blame him. Ive been working on china trade issues since 1988. I was transferred and do you want to work on china. Nobody is interested in china. Oh, okay. Now it seems like thats changed. Everybody is very interested in china. I do agree a lot with what derek said. When china got into the wtr, i remember when the negotiations were going on, that was a really big deal and there were tremendous expectations that china was going to not just open up its economy to u. S. Trade and investment, but also transfer more into a marketbased economy within around 15 years and it seemed like the chinese were saying that. After a couple of years, we saw china make progress in the wto and u. S. Trade, investment, which i really did increase a lot. There were a lot of positives. China didnt begin that transition to a free market economy and to some extent in 2006, they sort of went backwards with greater state intervention. Theres definitely a lot of disappointment visavis china, and for the members of congress who i work for, theres tons of frustration with china and has been for many years. This is definitely a huge issue. Where were going on this is not clear yet. Ill give you a little bit my perspective. This is my perspective, not sierras. I only speak for myself. Im going to be a little more critical of the Trump Administrations approach to this issue. And partly because im looking at the big picture on trade. Not just china trade. I know theres a lot of frustration. The big picture on the trade issue. Im going to start with the beginning of the section 301 case launched in 2017. I was kind of surprised that they started that because when the u. S. Helped form the wto, the wto created this dispute settlement system. That was the u. S. Idea. Because we felt there wasnt a strong system to adjudicate problems. When wto went into creation in 1995, the u. S. Basically said were going to use were going to go through the wto process. When the administration decided to launch this, i was a little surprised by this and taken back. But they brought up some very important issues, innovation policies, intellectual property. Those are important to the u. S. Economy. I would have preferred they brought all the issues to the wto. They brought one. Unfair technology likenessing requirements. They took one. There were four issues. Two of the other issues, forced Technology Transfer, cyber threat in u. S. Trade circuits. Those are huge problems, right . I felt like, okay, so theyre going to go sort of rogue and use the section 301 to deal with china. However, in march 2018, when President Trump made his announcement that he was going to proceed with his section 301 case, he talked about the ipr issues, he sort of really went all over the place and talked about all sorts of issues regarding china, right . Then it became the trade deficit with china, which for some reason President Trump never can get right. I dont know why. But he always says its 500 and 504 billion. He cant get that right. It was the largest trade deficit in mankind. I dont know if thats true. He mexntioned that. He talked about reciprocity and mentioned the trade deficit. He said ive asked president xi to reduce that by 100 billion. He went way off cuff on that. Then what does he do . Does he continue to talk about china . No he goes on to attack practically every Major Trading partner. The european union, attacks japan on their trade policies and attacks the wto, right . So this whole list of grievances that he has on that. Its kind of interesting because then later on, lighthizer spoke and said ipr is a big issue and commerce secretary ross said ipr is a big issue. I wish that the Trump Administration had stayed focused on the ipr issues. Those are very important, right . They did decide to proceed and like craig said, theres been so much frustration and issues for years and years and never solved and resolved. Lets get tough with the chinese threaten to hit them with tariffs. I was thinking this morning, this is may. I remember what happened last year in may. The United States and china issued a joint statement and they stated that they had come to some sort of agreement or accommodation and then secretary mnuchin went on fox tv and he said that theres a ceasefire in the trade war and china is going to make significant purchases of natural gas and agriculture products so everybody thought, well, this issue was resolved, right . But then about ten days later, the u. S. Trade representative announced that they were going to go ahead and release the list of increased tariffs against china, right . So as you can imagine, it absolutely enraged the chinese. It really did. The rhetoric that came out of the government was pretty harsh on that, right . And so they did thats what they did. So they proceeded to now impose tariffs against china and basically theyre talking about tariffs on all products. By the way, i went and bought my iphone in december, i knew this was going to happen. Weve seen this going on and so it makes you sort of wonder where the administration is going on this, right . So everybody thought, like, were going to have an agreement in february or maybe in march and that didnt happen. And then may comes around and again, it doesnt happen. In fact, all of a sudden things fell apart. What happened . So President Trump says that the chinese have sort of stepped back on the agreement, that they had pulled back on all these issues. And of course, the administration has never really outlined what the issues are, per se. Theres been some that have been listed by the u. S. Tr after some meetings with china. Its sort of like, i keep wondering, like, where do these things begin and where they end. First, it was the ipr and innovation issues, then the trade deficit, then it was we want china to buy significant amounts of u. S. Goods and services. Then they brought into the currency issue and then chinas industrial policies and then we had to have some sort of enforcement mechanism where we would decide whether china greed whether china had complied with the agreement and if they didnt, we could slap on tariffs again and china couldnt do anything about it. They couldnt slap us back, right . So i begin to wonder, what are they trying to accomplish, right . Because i keep asking people, whats in it for china . Usually these kind of agreements, both sides get something, right . Im not quite sure what the chinese are getting. Obviously they write a big check to say leave us alone. Im not sure thats going to happen. So when trump said that, well, we havent reached an agreement, the chinese reneged on what that he promised. Im going to increase tariffs by 10 to 20 on 200 billion and were going to hit them on 300 billion on the rest. Again, i began to wonder, do they really want an agreement . And some of the things, like were not supposed to read tweets trump says because it gives us heartburn, right . But he said, on may 11th, china felt that they were being beaten so badly, right, then made other comments like well, they want Sleepy Joe Biden as president. Then i began to wonder, is this now part of the 2020 election . Does this make it impossible now for any kind of meaningful agreement to be reached . I share, you know, craig your concern about the future. Because you mentioned the 2018 data. But if you look at whats gone on from january to march, our import from china are down 30 and their imports from us are down 37 . Thats pretty significant. How long is that going to go on . Nobody knows. I think that there is a big concern that the administration is not out just to sort of like get this great agreement with china. But in fact, seeking to decouple the entire economic relationship with china. Im wondering if thats not true, right . It seems like almost every week theyre sort of issuing new statements on china. Ha way statement, the announcement on ict products where we would sort of like decouple completely on ict. We depend heavily on china for to products. Where are we going to get them from . Whats going to happen, right, on that . What i find interesting is when the ustr said were going to issue a list, but exclude some products and for some reason they mentioned rare earth elements. I dont know why they would do that. The Chinese Press immediately picked up on that. We dominate the rare earth markets, we produce most of it and we can hit the United States really hard. I dont know why they would give make them look it up in the tariff sked stul. Dont put it down on a piece of paper like that. I am wondering if this is part of a bigger Economic Strategy and i think its not just about china, see . Its not just about china. These issues of trade deficits and reciprocity do not just apply to china. So even if they get some sort of agreement with china, theyre going to go after other countries too, right . Were seeing this happening. The section 232 investigation, we saw that of the National Security aspects of auto trade. I mean, really . National security on cars, right . And the president is hinting that they could impose trade descriptions unless they reach a trade agreement with other countries. Theyve left that out there. I saw that today, Peter Navarro has a letter to the editor, right, and basically hes promoting his sort of like trade reciprocity bill thats in congress right now. And what they want to do is give the president even more power to impose tariffs against other countries and it would be against any country that had a tariff that was greater than ours. Not just tariff, but lets say a quota as well. Right . It would give the president the authority to increase tariffs on any country that didnt give us reciprocity on trade. So im very concerned about that. Its not just about china. Its about other countries. Im very concerned about us going against the wto, right, which we helped create and which we supported and has given great benefits to the country. I think that since im in the heritage foundation, ill end with a quote by ronald reagan, if you dont mind. Ronald reagan in 1987, he gave a speech to the workers of harley davidson. And he was talking about trade agreements and he said, america does best when america sticks to its word. Then he went on to say, an American Workers can take on the best in the world any time, anyplace, anywhere. And i this i that we sort of have to move away from this narrative that america has been victimized by all these countries. Everywhere trump goes, everybody has been taking advantage of us. You know, president s in the past have sold us out, et cetera. I think the u. S. Has really benefited from the Global Trading system. I think its kind of a shame when we think that increasing tariffs somehow makes us better off. In fact, tariffs are attacks that we are all going to pay for and it is going to hurt our economy. There was a study recently and theyre talking about a 0. 9 decrease in the u. S. Economy and Economic Growth by 2021. I mean, thats a significant amount, right . The losses will be bigger for china, of course. By the way, all of the supply chains, all of these corporations and companies all around the world, theyre not going to appreciate the u. S. Driving down Economic Growth over this trade war, right . Of course, if a trade agreement was reached, well say no blood, no foul, everybody will be happy, right . To me, what we ought to be doing is making sure we put china in a position of not losing face, that they have some things to gain. We can give credibility to the economic reformers in china. A lot of reforms were asking for are beneficial for china as well. This should be a winwin. President trump shouldnt be saying we got them over a barrel, et cetera. Ill end there. Thank you. Thank you, wayne. At the end there, it almost sounded like youre advocating for a comparative advantage. An old concept. Were going to go to questions and answers. Im going to take the benefit of the moderator to give the ask the first question. When we do start going around the room, wait for the mic, introduce yourself and ask a question. If you start grandstanding or rambling, im going to cut you off and move on to the next person. Now, wayne, you mentioned the wto and derek, you mentioned reforms. Certainly, what the white house is trying to do right now is at least from the legal process, get major reforms out of china in certain degrees. Not everything, of course. But to a certain degree. So the last, i think the last significant reform we really saw out of china was through its ascension into the wto. One argument for why it agreed to wto agreements and for reform at that time was because chinas economy at that time wasnt exactly doing so well. Can we expect as chinas economy slows for that to kind of be remerg remerged. . Maybe a slow economy means more reform or should we not expect that in bay smieijinbeijing. In 2018 their response was hardly reform. It was to pump an enormous amount of credit out through state banks, which also got tossed down the drain because there was no it was there was no use for the money other than to keep firms in business that should have gone out of business. Theres a social stability argument. We dont want the people, okay, fine, i understand that. China was under stress, much more than theyre under right now and chose an expansion. Xi z he has no track record a all in the Current Office or before this of pro market economic reform other than putting his finger in the wind when he was younger and going along with what was being done elsewhere. None. Neither does leo huh. Youre expecting china to act like it did 20 years ago. Ten years ago it didnt act like this. Not you, like youre expecting it. That argument. Five years ago it didnt act like this. I dont think its reasonable for the United States to think we can make china undertake important Economic Reforms that he i dont think thats a reason to stop pressuring the chinese. We have to pursue our own interests. It should be to improve the outcome for the United States. Part of my main point i was trying to make in my talk was the chinese are going have been doing the wrong thing for a long time and likely to continue to do the wrong thing. Hoping for them to do the right thing is not a realistic expectations whether youre in favor or against it. Well, i think that the record shows over the last 40 years that those in charge of the chinese Macro Economy have been incredibly successful and effective at managing the chinese economy from per capita income of 200 in 1979 to about 10,000 today. This is a history of growth of the type that the world has never seen before. I dont think that theyve lost all their mojo. In fact, im going to disagree with derek here. That they have faced many crises before and managed them extremely well. In 2008, many of the High Tech Companies that are really taking on the world right now didnt exist in china. Market reform has proceeded despite the strong despite the ideological and other constraints that they have. I would argue that, as we look at the 301, that all of the items articulated wayne ar tparticular lated in the 301 china escaped the middle income trap, it would do so by implicated similar to those articulated in the 301, particularly with Stateowned Enterprises. They must introduce more competition into the state on enterprise sector to obtain larger growth. But that is very much in their interest. There is a strong constituency for reform in china and i think that we were close to an agreement a month ago. We were close to a bilateral investment treaty two years ago. This is not out of sight even though in the press it may appear that way. It is in americas interest, it is in our National Interest to try and get there, to try and resolve these structural issues. I would only add that the chinese view the u. S. As, quote, out to get them. Out to undermine their economy, right . And weaken them. I fear that there will be more Government Intervention in the economy. You got to all get the wagons in the circle and fight this menace, et cetera, et cetera and the government has to be the head of this, right . I dont want to push china in that direction, right . We definitely want to get them to reform. Definitely we definitely got the approach. But i definitely think we need a carrot approach. I hate to keep crying about ptp as many economists have. I felt at that time that the chinese were nervous about that. They thought they would lose competitiveness if they were left out of the agreement. Toward the end of the obama administrations term, the chinese were saying, like, hey, keep us informed. Were interested. That was quite extraordinary, right . It would have been so much nicer to bring them in willingly than to try to beat them with a stick. I agree with you. It was an important agreement. I dont think we should have walked away from that. As long as we have, again, these sort of carrots that go along with the sticks. To me, its going to do more to encourage reform in china. Question . In the back there. I had a question about 5g and chinas advantage in that technology. Kind of impacts this discussion. I disagree that china has an advantage in the technology. It does have an advantage in the rollout because huawei has outcompeted erickson and theres a lot of chatter about this in washington. Theres no direct u. S. Competitor the technology, though, let me make a prediction, rather than anything else. Within three years, 5g will be increasingly software driven, not now, not next year or the year after. Within three years, five years, well be software driven. Software is a field dominated by competition and innovation not by scale and the chinese will lose. In other words, they will fall behind progressively in 5g technology. Does that mean that huawei wont supply a lot of the world with cheap, decent products . They will. The technology side, i dont agree the chinese are ahead. Hence, the reason huawei is they will be increasingly behind because 5g will move from a hardware driven environment to a softwaredriven environment. It might be four. I might be wrong. Thats the time frap were talking about. Just add that 5g shares many of the characteristics that were addressed in the 301 submission certainly subsidies, intellectual property, forced Technology Transfer stayed on enterprise and cyber. Those are the five major issues that were identified in the 301. So in my view, this is a complex, extremely complex issue. How do we deal with the chinese to create a more conducive, Global Environment for innovation . And right now thats perhaps its very difficult, if not impossible because of the five issues identified in the 301. And thats why, at least in my view, it would be wonderful if we could focus on the original complaint series of complaints within the 301 and address them rather than National Security and a lot of other things, bringing them into the debate. Were never going to get an agreement as wayne intimated, moving the goalposts and expanding. If we could get to an agreement on the 301, that would form a foundation by which the rest of the relationship could perhaps come into a little bit more orderly and smoother future. Right now that looks a little bit far off but not impossible. I would just add that there seems to be a growing trend toward looking for possible china threats to the United States. And im sure that anything that has to do with technology, there are always going to be those kind of concerns. I guess the chinese must also be concerned about u. S. Technology in china. I think to me theres a very theres a serious problem when countries cant trust each other and there are issues of technology and whether that can be hacked into and what have you. I was amazed to see a debate going on in congress about prohibiting the chinese Stateowned Enterprises from supplying subway cars to the washington metro. Because it was a concern they have cameras and they could be used to spy on people, on the way to the white house. Someone said the trains go under the pentagon. I remember a few years before that, there was concern because a Chinese Investment company was buying smithfield ham. There was a concern that that had National Security. There seems to me there has to be a rational discussion and evidence, right . If the administration is going to say that huawei is state security in china and et cetera, its controlled, its owned, whatever, they really need to put that evidence forward so that everybody can judge this. What is a threat and what is really not. Right . I dont really think we want to get carried away. I fwru grew up in the cold war. This rhetoric i remember from that time. Go here next. Hi there. Jay jang with rich foyer anderson. I appreciated the discussion around this. I want to frame my question around what i see as the u. S. s role in the Global Economy and what i see as the eroding of that. Im looking at a couple different things. Im worried about the bifurcation, starting out with the internet, the great fire walls, that extending to alternate currency systems, the challenging of the u. S. Dollar Central Reserve currency and you know, you look at things where Big Technology companies now in china, like alibaba and is there a question anywhere . Five other people want to ask. The concern is, are you worried about alternate Payment Systems . Is that something we should be worried about, especially things with should we be trying to stop that . Mark my question is about relationship between chinas slowing growth and its defense spending. Are we seeing any relationship, are we seeing a decline in defense spending or is defense spending doing anything to impact chinese growth . Someone from the back. Thank you. Leon piece. My question is, what is the impact of any of the tradebased Money Laundering on the chinese economy . All right. So we have three questions. The first one is sort of a bifurcation of payments. Are we going to have competition in just the way that we compete, i guess, through currencies or other types of Payment Systems. The second one, defense growth, spending. Ment the third one is tradebased Money Laundering. The first question on Payment Systems is interesting. Theres no evidence at all of the dollars role in currency. The recent data shows the juan has flagged. Unless you count hong kong. Payment systems are a different issue. I think the questioner knows this. But for everybody else, everybody can be using dollars in protected Payment Systems. So the dollar is still the worlds reserve currency, but peoples use of the dollar is shielded from u. S. Sanctions. That is a drawback to applying sanctions too frequently, that people will create systems to still use u. S. Dollars but do it in a way that we cannot monitor in order to be able to respond. That is sort of related to trade based Money Laundering. The issue on trade based Money Laundering is tied to what i said about confidence in the currency. The chinese have a balance of payments problem. Its driven partly by subjective feelings of asset holders and the way they respond to chinese policies they dont like. They send money out of the country in huge amounts. Some of that is trade connected. So i read trade based Money Laundering as an expression of asset holders. They dont want to be involved in china anymore. It is offset by capital out flows. Thats a vote of confidence. Sometimes that is done through Money Laundering through trade. Then the last question on defense spending, look, you know the problem here, we dont have good numbers on Chinese Defense spending. Ive done some statistical filtering of the official numbers. I dont know that that helps at all. It appears that internal security spending is rising faster than defense spending. That may be wrong. Obviously Slower Growth means whatever your level of defense spending is more of a strain. I think the footprint of the xi gjinping government so far other government actions will be cut before internal security spending is cut. I think that the bifurcation question is really interesting, particularly over the longer term, particularly with regard to cyber. The world is already bifurcated behind the chinese great wall its very difficult to do business. I think thats one of the legitimate concerns within the 301. The new york times, Washington Post should be able to sell behind the great wall and theyre not able to now. So its something very interesting to watch. Google just withdrew Android Software from huawei. So let us see. Will they come out with another operating system or will they fail . One of the great dramas over the next couple of months. On defense spending, derrick is right that we dont have clear numbers, but certainly our military planners see vast growth within Chinese Military capabilities both quantity taaty and qualitatively. The chinese are doubling down on their defense spending. The American Military is quite respectful of the Chinese Military. I think that our ability to act unencumbered, unimpeded without worrying about the chinese within the first island chain is gone. Its becoming much more competitive in that space as a result of massive Chinese Investment. And on trade based Money Laundering i would say theres ancient history here going back many, many years. The chinese have been very expert at trade based Money Laundering for a long, long time. I would say that the state administration of Foreign Exchange has recently clamped down on that. And thats one of the reasons behind the drop of Chinese Investment into the United States in 2018, is the new safe restrictions. So theyre trying to control that. But good luck because theres a lot of money that probably wishes to leave china and it will probably find a way. Ill just add a few comments. On the dual payment issue, i think the broader question really has to do with these competing systems, competing economies, u. S. And china. Theres a lot of concern. How do we deal with a rising china . Do we have to confront them . Do we try to stop them . Do we try to stop the belt and Road Initiative . I think the biggest thing we can do is really to maintain our traditional role as supporter of the multilateral trading system and free trade. To me, its quite shocking to see president xi going around and saying the chinese Economic System is one that other countries can emulate. Thats pretty shocking that he would say that. And also sort of like putting on the white hat that the u. S. Used to wear of like the defender of free trade around the world, right . President trump taking this more of America First protectionist policy, that to me doesnt really provide u. S. With a lot of soft power if every agreement we have has to benefit us more than other countries. President xi says we have this belt and road. It gives him some soft power. Our traditional values, really our main focus is what we should do. I cant respond on the defense issue butly tell you this. The chinese are smart in the sense that theyre spending a ton of money on research and development. Why is that . Because they see innovation as the key for their Economic Development. Theyre number two after the United States. That probably has a lot of defense implications as well. But if the chinese can become innovators, if their Economic System can be reformed, china could be a huge economic power. But if they cant, i think they will begin to suffer some serious economic decline. Last 30 seconds. Real quick. One more. I work on u. S. Mongolia relations. You mentioned the rural disparities. Im curious specifically if theres any data points in inner mongol mongolia, wheres the economy these days . Because rare earth was mentioned the World Bank Says previous reserves are under the ground in mongolia. I think the rare earth story is complete nonsense from top to bottom and the u. S. Press should be taken out and shot for propagating it yesterday. We dont have good data on how theyre doing because its very politically sensitive. Chinese periodically do these National Census where they usually find more gdp because its under reported. Mongolia is one of the three provinces that had to be find less because they lied so much. We know the data are falsified. My guess is that Inner Mongolia is struggling economically but thats a guess. I would add that belt and Road Initiative, a big focus of that is to try to promote Economic Development in some of those poorer regions of china. Also the government definitely is making Economic Growth in rural areas a top priority. President xi spoke on that extensively in his report to the communist party. I think the chinese are doing what are the smartest thing they can do. Theyre building mega cities and moving people there. Cities are much more Economic Centers for business and commercial activities. Now theres more People Living in cities in china than ever before. I think thats a smart strategy. Last 30 seconds. How do you project the next 612 months . Whether its on chinas Macro Economic situation, the business perspective in congress. Most of this is driven primarily from the executive right now. Where is congress in this . Im going to stick to chinese macro other than saying i really disagree with my colleagues on the panel about the characterization of u. S. china relations. The chinese are going to see this year a similar pattern to last year where they flooded the economy with credit in the First Quarter. The return on that flood of credit has diminished over time. The First Quarter was clearly better than the Fourth Quarter of last year. By the Fourth Quarter the chinese economy will again be weakening. If you read the Chinese Press every day, the level of propaganda has soared since the breakup of the talks. If theyre in a trade conflict with the u. S. , the chinese are going to be reporting much more exaggerated numbers than they would be otherwise. The true trend of the chinese economy is pretty easy to see. You had a manufacturing rebound into the Second Quarter that has nothing to do with demand. That stimulus will fade out. The actual state of the chinese economy in the Fourth Quarter of this year is going to be along the lines of, i dont know, 2. 5 or 3 gdp growth. I would just note that the two president s will be meeting on june 29 in osaka at the g 20. I think that just logically there are three things that could happen. One is that there could be an agreement and that would be the best scenario i think for everyone. The second one would be that they would agree to hold and extend negotiations. And the third possibility is full tariffs and yet more tit for tat retaliation which in my view will have a significant Economic Cost on everyone. I would just say that if you really want to know, read the most recent report on the section 301. Because that report is very good because it states that congress should demand that the administration do an analysis on what these tariffs are going to do to the economy and what the u. S. Objectives are. This is something that Congress Really needs to understand. Congress is in a tough position. On the one hand everybody wants to be tough on china. The whole idea of like we hold on, hold on, eventually the chinese will cave and then well have a big win. But what were also going to see is two weeks of hearings by u. S. Business people who are going to be affected by all these increased tariffs. Now, imagine business person after business person coming in and talking about how this is going to put them out of business, what thats going to mean. I think members are going to hear more and more and more flak from their constituents about these Economic Impacts of that. The whole idea is, well, if theres no end in sight and were suffering, whats the end result . Your report does a very good job at doing that. Congress should try to assert itself in my opinion a little bit more. You look at this section 232, this National Security bill to sort of like that the administration has used now to say that cars are National Security. Congress really needs to speak out on that kind of thing. Section 301 means the same thing. They shouldnt really even be using section 301. The main focus really should be reforming the wto so we have a stronger system and we get china to play by the rules. Doesnt seem smart to beat up on the wto, our trading partners and china at the same time. We need a better strategy. If you want to learn more about what wayne was mentioning regarding our reports on section 301 and 232, i encourage you to go to the heritage. Org website. You can find it all on there with a simple search. Lets thank the panel for today. Thank you all for coming out. [ applause ] i know we only spent about an hour talking about the state of chinas economy. Next time we maybe go a little bit longer