Robert E. Rubin is co-chairman of the Council on Foreign Relations and an expert in economic policy. From 1995 to 1999, as treasury secretary under U.S. President Bill Clinton, he met with Chinese leadership in Beijing to foster mutual understanding between the two trading nations, negotiated with China for its entry into the World Trade Organization (WTO), and acted to stem the Asian financial crisis.
Since its start in 2009, Rubin has been an active delegate in the China-U.S. Track Two High-Level Dialogue, an annual meeting between seasoned American and Chinese diplomats aimed at discussing issues that are important to healthy progress in Sino-U.S. relations. In this interview, Rubin shares his views on the Trump presidency, including Asia-Pacific trade policy, managing relations with China, and more.
The Diplomat: In 2013, you wrote about economic tensions between the United States and China, with the discourse between the two “consisting largely of a dialogue of the deaf.” Drawing from your recent visits to China, what are both parties mostly concerned about with respect to one another?
Robert Rubin: The gravest threat to U.S.-China relations is China-specific tariffs that could trigger retaliation and an escalating trade war with ever-greater tariffs. Those tariffs would reduce growth in both of our economies and, in turn, reduce imports from other countries, therefore hampering already weak global growth and adversely affecting many economies. And that could lead to protectionist measures around the world and competitive currency devaluations, with the possibility of severe economic and financial impacts. For example, past Chinese currency depreciations sent large convulsions through global markets and depressed, at least temporarily, confidence in economic prospects. The probabilities of more severe impacts occurring are indeterminable, but not trivial. Hopefully, good sense will prevail in both the U.S and China, avoiding a trade war and all that could follow.
It is worth noting in this context that imports from China at lower prices than U.S. domestic production can benefit the U.S.: they reduce consumer prices, create productivity-enhancing competitive pressure in the U.S., and provide our producers with less expensive imports, thereby enhancing U.S. producers’ global competitiveness.
However, lower prices must be based on market factors, not subsidies, to provide fair competition and to optimize the global economy. Moreover, we must recognize that globalization and technological development put pressure on wages and jobs. The U.S. therefore needs to adopt an effective domestic policy agenda to enable American workers to succeed in this environment.
But each country has other bilateral economic concerns as well. U.S. concerns include Chinese reliance on subsidies that benefit its state-owned enterprises, including artificially low land and energy prices, and preferential financing; appropriation of U.S. companies’ intellectual property, both through hacking for commercial purposes and inadequate safeguards, and barriers to U.S. companies operating in China. Currency manipulation remains an expressed concern, but the concern is misplaced. China has recently used substantial foreign exchange reserves to support its currency and limit the decline driven by market forces, and China’s trade surplus with the U.S. declined in 2016.
China’s bilateral economic concerns include U.S. barriers to Chinese investment in the United States, export control laws, especially those restricting the export of technologies with military applications or other national security implications, and the U.S.’s unsustainable long-term fiscal trajectory.
Regarding your final point about the United States’ fiscal trajectory. China has been heavily investing in infrastructure to boost economic growth, and the U.S. intends to do the same in the new administration. However, both nations face fiscal deficits and piling public debt. What are your views on the financing (mostly debt raised by private partners) of infrastructure projects proposed by President-elect Trump, namely $1 trillion spread out over a period of a decade?
The U.S. has an acute need for infrastructure investment, both to address deferred maintenance, estimated at more than a trillion dollars, and to provide new capacities. Repairing and expanding bridges, railways, airports, and ports would create jobs immediately, tighten labor markets to improve wages, and increase the productivity and capacity of our economy for years to come. The major policy questions are how to pay for it and how to reduce political influence in spending decisions. The incoming administration’s focus on infrastructure accords with the widely agreed upon need, but their initial proposal seems unlikely to be enacted, and has many deficiencies.
One widely-advocated payment mechanism is a temporary tax holiday to repatriate overseas earnings at a preferential rate, and then use the tax revenue to fund infrastructure. Another possibility is to deficit-finance at what are still relatively low interest rates, but whether that is on balance beneficial economically is not a simple matter of interest rates but, rather, a complex equation involving judgments on many variables. A variant of this would be to deficit-finance infrastructure but, simultaneously, enact measures, effective at an appropriate future time, which address the unsound longer-term fiscal trajectory in the United States. This would involve increasing tax revenue, which should be done progressively, and putting federal social insurance and health-care programs on a sound and sustainable financial footing. A public-private infrastructure bank, with predominantly private capital and perhaps some element of public subsidy, is another possibility that could work for the types of infrastructure that would have revenue streams.
Both the U.S. and China collide with each other on a growing number of issues, with one particular issue you mentioned being trade. Do you think both nations should explore engaging in a comprehensive free trade and investment agreement? Wouldn’t it reduce economic tension and geopolitical competition, help both nations rebalance internally, and force the U.S. and China to address and resolve their differences on paper, rather than through coercive diplomacy?
The U.S. should continue its current policy of engagement with China and should work, in that context, on trying to make progress on issues of concern. China-specific tariffs would have the adverse effects and involve the risks already discussed. A bilateral trade and investment agreement, such as the one currently being negotiated, could be constructive, but is probably not politically realistic. More broadly, both of our countries have an enormous self-interest in an effective working relationship, bilaterally, for trade and investment purposes, and multilaterally, to provide global leadership on the transnational issues that can so powerfully affect us, such as climate change, mitigation, terrorism, nuclear nonproliferation, and trade. Anything that increases recognition of our mutual interest would be constructive. The current political environment, however, complicates these efforts.
With the Trans-Pacific Partnership (TPP) off the table, how do you suggest the U.S. should formulate regional trade policy in the Asia-Pacific?
Our regional trade policy should be to advocate for market-based production not subsidized in any fashion. More broadly, though technological development and globalization have contributed to productivity and growth, they have also put pressure on wages and jobs. We must adopt a domestic policy agenda that equips American workers to succeed in a rapidly changing U.S. and global economic environment. This agenda might include innovative measures such as transitional public employment to provide jobs and workforce readiness, free or low-cost lifelong learning, effective retraining, and a substantially-expanded earned-income tax credit. Other measures, such as immigration reform that provides a fair path to citizenship and recognizes the immense contribution of both high- and low-skilled immigrants, a more level playing field for workers to opt for collective bargaining, and improved K-12 education are also critical.
How can the new U.S. president solve short-term problems with China, without hindering the development of Sino-American relations and without forcing other nations to choose sides?
The optimal approach to the U.S.-China relationship is to recognize, and advocate for, the benefits of a constructive working relationship, while continuing to work on our various concerns about each other and putting in place the policies necessary for American workers to be successful in an era of great and rapid change. Before the incoming administration takes any action, they should engage with their counterparts in China’s government to try to work through their respective concerns.
Could you further elaborate on the benefits of a constructive working relationship and explain how this can be stimulated in times of uncertainty?
The key is to recognize that a constructive working relationship with China offers bilateral and multilateral benefits, and, conversely, a tense relationship presents serious risks. The greatest American threat to the economic future of China would be America’s failure to succeed economically, and, conversely, the United States’ greatest economic danger would be Chinese failure. By contrast, if each country gets its own house in order, and succeeds economically, that should increase confidence about the future, which should foster a constructive relationship.
The U.S. should pursue a strategy to promote broad understanding in both countries of the powerful stake we each have in an effective working relationship, and to work toward creating trust — at a time when trust seems to be declining. Many well-informed, practical, and experienced American and Chinese individuals — in both the private and public sectors — could be helpful in pursuing these objectives. The long-term result could be a reduction of irritants in the bilateral relationship and a better environment for working together on the full range of issues that affect us both. Geopolitical tensions and philosophical differences will not disappear, but they would be anchored in a framework of mutual interest and trust that helps to manage disagreements.
This interview has been edited for clarity.