Irwin Stelzer and TAI Editor-in-Chief Jeffrey Gedmin recently spoke with former U.S. Treasury Secretary Lawrence H. Summers in a wide-ranging conversation. They discussed the debate over “decoupling” with China, how to reform capitalism to address legitimate grievances, what an effective response to COVID-19 might look like, and the shape of a post-pandemic U.S. fiscal policy. This transcript has been edited for length and clarity.
Irwin Stelzer & Jeffrey Gedmin for TAI: Let’s start with China, Secretary Summers. There’s a “decoupling” debate emerging now, about whether we should economically disengage from China and diversify our supply chains. If you were advising a new administration, would you keep the tariffs in place? Would you subsidize U.S. production of essential goods? How do you think about this challenge?
Lawrence H. Summers: I think that there’s no more important task for a new President than reconceptualizing the U.S.-China relationship. The strategy of “engagement and hedge” that was conceptualized during the Cold War as a way of gaining leverage against Russia is no longer viable at a time when China and Russia are closer to each other than either is to the United States, when China exists on a very different scale than it did 50 years ago, and when so many of the most pressing security challenges involve cooperating globally rather than balancing powers.
It certainly has not happened that continued economic engagement has led to the convergence of China towards the United States, nor has it led consistently to greater bilateral cooperation. That has to be acknowledged as a starting point. At the same time, there is an American tendency to glom onto prime threats and overreact in ways that can be problematic. The hysteria that prevailed in the United States post-Sputnik was in some ways constructive, but also contributed to fears in Moscow that culminated in the Cuban Missile Crisis and brought the world closer to nuclear war than it has ever been. The Japan hysteria of the late 1980s looks vaguely ridiculous today, but at the time, it was a commonplace within both political parties that the Cold War had ended and Japan had won. Russia was not an economic threat, and Japan was not a security threat. China is potentially both, and so the alarm in the United States is that much greater.
The challenge for a new administration is to harness that alarm constructively to support necessary renewal in the United States, and to assure that our deep security interests are well protected, without succumbing to paranoia that could generate a cycle of hostility between the United States and China, without lapsing into a desire for a degree of U.S. control that’s not plausible given the economic reality, and without putting at risk the capacity to cooperate on the issues that are most important—like pandemic, like climate change, like the risks and opportunities associated with Artificial Intelligence.
We do need to develop our own capacity so that we are much less vulnerable to others in terms of our procurement capacity for key materials. We need the kind of thought that has traditionally gone into export controls and the review of foreign investment to go into the issue of supply chains and U.S. dependence.
by Irwin Stelzer and Jeffrey Gedmin, The American Interest | Read more:
Irwin Stelzer & Jeffrey Gedmin for TAI: Let’s start with China, Secretary Summers. There’s a “decoupling” debate emerging now, about whether we should economically disengage from China and diversify our supply chains. If you were advising a new administration, would you keep the tariffs in place? Would you subsidize U.S. production of essential goods? How do you think about this challenge?
Lawrence H. Summers: I think that there’s no more important task for a new President than reconceptualizing the U.S.-China relationship. The strategy of “engagement and hedge” that was conceptualized during the Cold War as a way of gaining leverage against Russia is no longer viable at a time when China and Russia are closer to each other than either is to the United States, when China exists on a very different scale than it did 50 years ago, and when so many of the most pressing security challenges involve cooperating globally rather than balancing powers.
It certainly has not happened that continued economic engagement has led to the convergence of China towards the United States, nor has it led consistently to greater bilateral cooperation. That has to be acknowledged as a starting point. At the same time, there is an American tendency to glom onto prime threats and overreact in ways that can be problematic. The hysteria that prevailed in the United States post-Sputnik was in some ways constructive, but also contributed to fears in Moscow that culminated in the Cuban Missile Crisis and brought the world closer to nuclear war than it has ever been. The Japan hysteria of the late 1980s looks vaguely ridiculous today, but at the time, it was a commonplace within both political parties that the Cold War had ended and Japan had won. Russia was not an economic threat, and Japan was not a security threat. China is potentially both, and so the alarm in the United States is that much greater.
The challenge for a new administration is to harness that alarm constructively to support necessary renewal in the United States, and to assure that our deep security interests are well protected, without succumbing to paranoia that could generate a cycle of hostility between the United States and China, without lapsing into a desire for a degree of U.S. control that’s not plausible given the economic reality, and without putting at risk the capacity to cooperate on the issues that are most important—like pandemic, like climate change, like the risks and opportunities associated with Artificial Intelligence.
We do need to develop our own capacity so that we are much less vulnerable to others in terms of our procurement capacity for key materials. We need the kind of thought that has traditionally gone into export controls and the review of foreign investment to go into the issue of supply chains and U.S. dependence.
In general, economic thinking has privileged efficiency over resilience, and it has been insufficiently concerned with the big downsides of efficiency. Going forward we will need more emphasis on “just in case” even at some cost in terms of “just in time.” More broadly our economic strategy will need to put less emphasis on short-term commercial advantage and pay more attention to long-run strategic advantage.
A great deal of what was in the Trump program was fundamentally irrelevant. Who cares whether China buys soybeans from us or whether Brazil buys soybeans from us? It was rearrangement of trade flows around the bilateral deficit to no particular purpose. Some of the tariffs that were placed on China had the effect of diverting production from China to Vietnam. I think that was to no real purpose.
But I do think that it is incumbent on us to make sure that we have the resilience to not be dependent on China and potential adversaries of the United States for goods that are going to be crucial for us, just as companies do contingency planning around situations where their revenues go to zero for some interval. Now there are many ways to respond. There’s the accumulation of inventories; the kind of thinking that’s behind the Strategic Petroleum Reserve should probably be applied to a much wider range of goods. There are contingency plans to build manufacturing facilities in more flexible ways so that they can be repurposed if need be.
The challenge for the U.S. system will be to implement these policies in a way that is genuinely strategic and in which the national security rationale doesn’t let itself be captured by those whose real motives are protectionism for a particular business interest. The Committee on Foreign Investment in the United States (CFIUS) has done this relatively well, and I think that’s the model that we should be looking to. But there’s no question that the spectacle of the Chinese airlifting masks to the United States should be a spur to much more thought about our own resilience.
Dependence as a concern goes beyond supply chains. We need to assure that we remain central to global standard setting as technologies develop, to assure that our allies are not unduly dependent on China and that there are American companies at the forefront with respect to key technologies. I am no fan of industrial policy generally, but somebody should have done something that assured that there was a serious American competitor in the 5G space.
At the broadest level, we need to craft a relationship with China from the principles of mutual respect and strategic reassurance, with rather less of the feigned affection that there has been in the past. We are not partners. We are not really friends. We are entities that find ourselves on the same small lifeboat in turbulent waters a long way from shore. We need to be pulling in unison if things are to work for either of us. If we can respect each other’s roles, respect our very substantial differences, confine our spheres of negotiation to those areas that are most important for cooperation, and represent the most fundamental interests of our societies, we can have a more successful co-evolution that we have had in recent years.
TAI: You’ve written about the need for “responsible nationalism.” What does that actually mean in terms of economic policies? How do we reform capitalism but preserve it, while making it more popular and sustainable in a democracy?
LHS: Let’s take the global dimension first. We have done too much management of globalization for the benefit of those in Davos, and too little for the benefit of those in Detroit or Dusseldorf. (...)
Someone put it to me this way: First, we said that you are going to lose your job, but it was okay because when you got your new one, you were going to have higher wages thanks to lower prices because of international trade. Then we said that your company was going to move your job overseas, but it was really necessary because if we didn’t do that, then your company was going to be less competitive. Now we’re saying that we have to cut the taxes on those companies and cut the calculus class from your kid’s high school, because otherwise we won’t be able to attract companies to the United States, and you have to pay higher taxes and live with fewer services. At a certain point, people say, “This whole global thing doesn’t work for me,” and they have a point.
A great deal of what was in the Trump program was fundamentally irrelevant. Who cares whether China buys soybeans from us or whether Brazil buys soybeans from us? It was rearrangement of trade flows around the bilateral deficit to no particular purpose. Some of the tariffs that were placed on China had the effect of diverting production from China to Vietnam. I think that was to no real purpose.
But I do think that it is incumbent on us to make sure that we have the resilience to not be dependent on China and potential adversaries of the United States for goods that are going to be crucial for us, just as companies do contingency planning around situations where their revenues go to zero for some interval. Now there are many ways to respond. There’s the accumulation of inventories; the kind of thinking that’s behind the Strategic Petroleum Reserve should probably be applied to a much wider range of goods. There are contingency plans to build manufacturing facilities in more flexible ways so that they can be repurposed if need be.
The challenge for the U.S. system will be to implement these policies in a way that is genuinely strategic and in which the national security rationale doesn’t let itself be captured by those whose real motives are protectionism for a particular business interest. The Committee on Foreign Investment in the United States (CFIUS) has done this relatively well, and I think that’s the model that we should be looking to. But there’s no question that the spectacle of the Chinese airlifting masks to the United States should be a spur to much more thought about our own resilience.
Dependence as a concern goes beyond supply chains. We need to assure that we remain central to global standard setting as technologies develop, to assure that our allies are not unduly dependent on China and that there are American companies at the forefront with respect to key technologies. I am no fan of industrial policy generally, but somebody should have done something that assured that there was a serious American competitor in the 5G space.
At the broadest level, we need to craft a relationship with China from the principles of mutual respect and strategic reassurance, with rather less of the feigned affection that there has been in the past. We are not partners. We are not really friends. We are entities that find ourselves on the same small lifeboat in turbulent waters a long way from shore. We need to be pulling in unison if things are to work for either of us. If we can respect each other’s roles, respect our very substantial differences, confine our spheres of negotiation to those areas that are most important for cooperation, and represent the most fundamental interests of our societies, we can have a more successful co-evolution that we have had in recent years.
TAI: You’ve written about the need for “responsible nationalism.” What does that actually mean in terms of economic policies? How do we reform capitalism but preserve it, while making it more popular and sustainable in a democracy?
LHS: Let’s take the global dimension first. We have done too much management of globalization for the benefit of those in Davos, and too little for the benefit of those in Detroit or Dusseldorf. (...)
Someone put it to me this way: First, we said that you are going to lose your job, but it was okay because when you got your new one, you were going to have higher wages thanks to lower prices because of international trade. Then we said that your company was going to move your job overseas, but it was really necessary because if we didn’t do that, then your company was going to be less competitive. Now we’re saying that we have to cut the taxes on those companies and cut the calculus class from your kid’s high school, because otherwise we won’t be able to attract companies to the United States, and you have to pay higher taxes and live with fewer services. At a certain point, people say, “This whole global thing doesn’t work for me,” and they have a point.
by Irwin Stelzer and Jeffrey Gedmin, The American Interest | Read more:
