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Sept. 19, 2019 - The Delingpod - James Delingpole
01:10:06
Delingpod 37: Stewart Paterson
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Welcome to The Delling Pod with me, James Dellingpole.
And I am so excited about this week's guest.
And I know I always say this, but I think it's quite possible that the book I'm about to mention could be the most important book I will ever have on the podcast.
I know that's a big claim, but all will be revealed.
The author is a guy called Stuart Patterson.
Welcome, Stuart, to the podcast.
Thank you very much, James.
I met Stuart at a dinner party in London a few weeks ago.
And as always with dinner parties, you go along and you think, oh God, what boring people am I going to be stuck next to?
And are they going to be Remainers?
They're almost certainly going to be Remainers.
And weirdly, it was a pretty much Remainer-free podcast, I think.
Are you a Remainer, Stuart?
I'm not actually, no.
Okay, which is quite unusual because you come from a financial background.
Tell me about your early career and where you got to before you wrote this brilliant book which I'm about to name.
So I began life in the city working at a pension fund manager, Hill Samuel, managing money in Japan.
And then from there I moved to India where I spent three years living in Mumbai, I'm researching the Indian stock market.
And from there, I moved to Hong Kong, where I spent a decade.
And that decade really spanned the period post-handover, so 1998, through to just before the global financial crisis.
So this was the period actually that is very relevant to the book, as we'll go on to discuss, during which time China was ramping up its sort of export engine into the world.
And then from there, from Hong Kong, I moved to Singapore, where I set up my own business there.
And then I moved back to the United Kingdom in 2012, where I became increasingly aware that the political discourse in this country was missing, I think, the link between globalization and a lot of the sort of social and economic trends and problems that people were talking about and that was dominating the agenda worldwide.
On my return to the UK. Right.
So your book is called China, Trade and Power.
And I love the subtitle.
Why the West's...
Why the West's Economic Engagement Has Failed.
Which gives you an idea of where the book is going.
It's a terrible...
It's a warning, isn't it?
And it's...
It's rather depressing, realising just how shafted we've been by a decision taken in 2001.
Well, I mean, something that happened in 2001.
Exactly three months after 9-11, is that right?
Well, that's right.
It was December 11, 2001 was the date of China's accession to the World Trade Organization.
And who's going to...
I imagine there's about 10 people in the world who think of that, well, in the West at least, who think of that as a significant date.
And yet, your book's argument, which I find very compelling, is that everything we've experienced since, all the weirdness ranging from the kind of the spending splurge that went on in the Blair era when everyone could suddenly afford black goods and white goods and everyone had just money to burn...
Everything from that to this terrible crisis we face in politics whereby roughly half the population feels that it has no stake in the economy because they can't get on the housing ladder and so on.
And they think that maybe the problem with communism, the only problem is that it hasn't been tried properly.
Maybe we should go back to that.
So all these different strands of our socio-political world are explained in this book.
That date and why it's changed the world for all of us.
Yeah, so China had been reforming its economy for a number of years.
Really the sort of Maoist orthodoxy died in 1978 and Deng Xiaoping started to implement some modest economic reforms and These were highly successful, but they were highly successful largely because the economic base from which he was starting was so low, Mao having put the country back to the Stone Age.
And resources in China were so hopelessly misallocated by the command system that really very simple reforms produced disproportionately positive results.
But as the low-hanging fruit, if you like, of the reform process was plucked, it became increasingly evident in China that deeper reform was producing winners and losers within Chinese society.
And this was really jeopardizing the social harmony of China.
So what China was looking for was A sort of a panacea, a silver bullet, if you like, to enable them to close the gap on Western living standards without undertaking a root and branch reform of the economy that would be very disruptive and potentially jeopardize the survival of the Communist Party regime there,
which obviously puts a very high price on social harmony.
And the obvious way to do this was to turn China into an export machine and to basically, if you like, steal demand from other countries and capitalize on China's low costs in labor and land.
And, of course, also low safety standards, environmental standards, etc., And so China began this process of trying to accede to the World Trade Organization, because for most of the 1980s and the 1990s, Economic engagement with China was conflated with human rights issues and other issues.
And what the World Trade Organization or membership of that organization would provide for China would be this guarantee of access.
to Western markets in a sort of unconditional fashion.
So they would no longer be exporting knowing that those markets could be closed to them if they made a misstep or what was perceived to be a misstep by liberal regimes.
Right, so where before their trade with the West was partly contingent on their Not harvesting too many organs and that kind of thing.
Suddenly, once they got access to the World Trade Organization, that control was taken away from the West.
That's right.
And part of the accession process was that the United States had to grant China what's called permanent normal trade relations.
Now, prior to that, every year there would be a debate in Congress, and the debate was whether to renew China's most favoured nation status.
And so that debate served to focus politicians and the general public's attention on the nature of the Chinese regime.
Once China was in WTO, one of the The principles of WTO is that all countries treat each other in the same way.
And therefore, China would be on an even keel with everyone else who was trading with the United States, obviously other than those people who had free trade agreements.
And so this debate would fade into the background.
There'd be no need for it.
And likewise, of course, going the other way, We're good to go.
You know, at the time the population was 1.2 billion people and there was a lot of hype around, you know, the money to be made by...
I remember this.
We were all told that China was the new thing.
And I remember myself feeling slightly unadventurous for not myself going over to China and learning Mandarin and joining this vibrant new economy because the West seemed more abundant and China seemed the future.
But...
I noted one of the fascinating statistics in your book, that how much Western companies have made from getting involved in China.
I mean, it's tiny, isn't it?
Can you remember what the figure is?
Well, I mean, this is an issue that obviously crops up now with the trade war between the United States and China.
And the...
The multinational corporation lobby, if you like, which obviously is very powerful and very vocal in the media, like to portray the economic engagement as having been a big boon to Western companies.
But, you know, the US economy is a $20 trillion economy.
And corporate profits in the United States, roughly speaking, are 10% of that economy.
So about $2 trillion, I think, is the latest number.
So out of China, the profits made out of China would account for maybe 2% or 3% at a maximum of the total corporate profits that US companies are making.
And, you know, given recent corporate profit growth, you know, if those profits were to go to zero, they would be able to make up for that with, you know, four to five months worth of profit growth.
So, given that China has been, or the economic growth of China has been the sort of the story of the 21st century in terms of the economic miracle, The amount of money that American corporates are actually making out of China is pitiful in relation to the hype that China has created.
But of course, it's not spread throughout corporate America.
This is the issue.
Of course, there are a few large companies that are very heavily involved in China.
And whose business models have definitely benefited from this engagement.
And of course, it's the people with the most to lose who shout the loudest.
Yes, yes, indeed.
Well, so...
How are the corporations, how are their PR machines spinning this particular problem?
Are they just pretending it's not happening?
Which problem, if you see what I mean?
I mean, right from the very beginning.
Let's cast our minds back.
When Bill Clinton was...
It was on an election promise, a platform of linking economic engagement with China to progress on human rights.
And it took about 18 months of intense corporate lobbying to induce Clinton to do a 180-degree U-turn and to champion China's accession to WTO.
And, you know, it's one of the most remarkable sort of episodes, if you like, of foreign influence on US policymaking, which, of course, is a topical subject today as well.
So there's been a long tradition of multinationals, American multinationals, trying to influence America's policy towards China.
And it's very understandable why, because bringing what was then a workforce or a working age population of 600 million people into the global trading system At a price of,
say, one-thirtieth of wage levels that were prevalent in the developed world presented this enormous arbitrage opportunity for multinationals.
Through outsourcing and offshore.
So in kind of layman's terms, what does it mean by arbitrage?
It means that the multinational companies can get cheap labour and sort of sell their goods, reduce their costs and sell them at an inflated profit in the West.
That's right.
So broadly speaking in the sort of five years or so after China's WTO accession, The United States lost about 5 million or about a third of its manufacturing jobs, and even allowing for the productivity differential between Chinese workers and American workers.
That delivered a cost saving to multinationals because they would close down the factory in America or Europe for that matter.
The UK lost a similar proportion of its manufacturing.
And either set up their own plants in China.
foreign direct investment into China tripled in the decade after WTO session from the decade before or just simply subcontract to a Chinese company the manufacturing of whatever it was the mops the the washing machine or whatever yeah and and and and pocket the difference basically now of course some of that was passed on to the consumer but we'll talk about why that was a false benefit perhaps a little later on but but
So one of the trends that came out of this unique opportunity, really, to have such a large percentage of the world's workforce so underpriced relative to the global averages, one of the trends that came out of that was, of course, that the value of labour in the West was denigrated because it was competing on unfair terms with this mass of the Chinese workforce.
But this was a big boon to corporates and to capital.
So the profit share of GDP started to rise in an unshakable trend.
And Labour's share of GDP started to fall.
As the relative bargaining power of labor changed.
So, that in itself, of course, explains a lot of the discontent that exists now, 20 years later, where, you know, in the case of America, where you have very good statistics on this...
The bottom three quintiles, which in a democracy is, of course, the middle quintile is the all-important one.
The bottom three quintiles have simply not seen their real incomes grow since China came into WTO. And that shouldn't really be surprising.
I mean, if policymakers have thought this through, and if you've got any grasp of market economics, if you increase the supply of a commodity incredibly dramatically at a fraction of the prevailing price...
What is going to happen to the prevailing price?
It's going to come under severe downward pressure.
Now, obviously, things like unionization and the natural rigidities of downward movement in price have meant that it's taken time for that to feed through and for people to realize that actually incomes, the trajectory of real income growth has changed.
But as time has gone on and the gap between where One's expectations might logically have been prior to WTO session, and the outcome is that gap has become evident and larger.
So people's discontent has risen.
Right.
So that totally explains the wealth gap, something I think that was...
For a lot of us, these things seem to have come out of the ether, like a kind of mysterious plague, which we didn't understand.
For example, I notice in your book that you mention that Mexico, if you looked at Mexico in, say, the 1980s, you would have imagined that that would have become a bit like East Germany.
It would have caught up with West Germany.
It would have become almost a sort of Southern American, a large Southern American state.
And You look at Mexico now and you think it's a hellhole of gangs and stuff, which presumably is a product of the de-industrialisation of its economy caused by cheaper Chinese labour.
Is that right?
Yeah.
So, I mean, prior to Chinese accession to WTO, Mexico looked really very well placed, didn't it?
It was part of NAFTA.
It was the low-cost manufacturing hub for the United States.
You had all these manufacturing facilities being set up along the border.
And then China came along and basically pulled the rug from under their feet.
China was able to undercut Mexican prices.
And so real wage growth in manufacturing in Mexico just hasn't happened for 20 years.
And so, you know, and as you say, Mexico now has all the hallmarks of a failed state.
So one of the effects of China's growth has been to obviously dampen manufacturing wage growth, but also to make manufacturing products cheaper.
That situation has been exacerbated, though, by our own policies.
And, you know, the argument made by people which is, in some circumstances, legitimate is that, well, Western consumers have benefited from the cheap washing machines, the cheap televisions that China has produced.
And that this has made those products available to the consumer at a fraction of their previous prices.
So they've got more disposable income and so on.
Absolutely.
So that's the argument.
The problem with that is that, you know, less than a year after we let China into the World Trade Organization, Ben Bernanke was making his speech to the Economics Club of New York, which earned him the moniker of Helicopter Ben.
If you remember, he was saying that deflation was pernicious, that we would not let deflation happen in the West, because as a student of the 1930s depression, he knew how awful that would be.
And therefore, he would do whatever it takes to stop deflation happening in the West.
Now, if we just take a step back and think about this, we've just let potentially the world's largest economy into the global trading system at a 30th of prevailing prices.
They're exporting manufacturing goods at ever deflating prices.
So we are heading for deflation.
And what he missed was, I mean, he thought that deflation was always a function of a lack of demand.
But in fact, the US and the UK and other Western countries were running big current account deficits.
In other words, we were already demanding more than we were producing.
We were over-consuming.
The last thing we needed was additional stimulus to demand because that demand would just be going to soak up more Chinese goods.
inadvertently, those Bush tax cuts were actually just inflating the Chinese economy because the marginal propensity of the US consumer to import from China had gone through the roof because these goods were so cheap.
What was probably required was actually the deflation so that the consumer got the benefit.
Now, the Fed target inflation of 2% per annum.
Now, if you've got deflation coming from China, then the prices of goods that are not coming from China are the ones that have to do the heavy lifting to get the average to 2%.
Now, obviously, the Fed have failed to produce that 2% inflation, not surprisingly.
But what it meant was that non-tradables, things like college fees, things like property, things like the cost of your medical care, which were not competing with China.
That was where the new money that was created stuck and had an impact on prices.
So you had what might be termed biflation, where washing machines and televisions got cheaper, but you couldn't afford a house to put them in, and you couldn't afford to send your kids to college without taking on exorbitant debts, and you couldn't afford the healthcare.
So...
So the confluence of inflation targeting and the deflationary impact of trade with China has created this incredibly lopsided economy.
Brilliant.
So Stuart, I think, as you know, this podcast is listened to by a special friend.
And the special friend is very intelligent and wonderful and just adorable and will understand all this stuff.
But I worry about how can we get this message out to the more stupid people, Owen Jones, Ash Sarka, all these people who seem to have completely overlooked the Chinese elephant in the room.
How does one explain in the simplest of terms what's wrong with inviting into the global economy a country where the wage level is, what did you say, 1 30th of the West?
That's where it was in 2001 upon a session, yes.
So you've got a sort of Stone Age economy suddenly merging with an advanced tech economy and Yeah, let's try and find a different way of explaining that so that Owen Jones could understand, or Ash Sarka.
Well, I mean, it's interesting that you mention them.
I mean, the left generally were, perhaps for the wrong reasons, much more reticent about letting China into the World Trade Organization.
I mean, they put a big premium on the human rights abuses, for example, in China, which, of course, the left did not have a monopoly on that, although they sometimes perhaps like to think that they do.
And, of course, there was no great consensus amongst business people either.
I mean, it was a clique of multinationals, Boeing being one, for example, who saw the Chinese market as being the engine of their corporate growth going forward, who lobbied so hard for this.
Smaller and mid-size American and European companies were much more reticent about this.
Of course, I focus a lot on America.
In Europe, There was much less of a debate about it for the very obvious reason that trade was an EU competence, not a national level competence.
And so that had a couple of manifestations.
I mean, in Europe, the EU, the various institutions of the European Union could present very different fronts.
So the Commission could go to China and say, yes, no, we're all in favour of this.
Whereas the Council of Ministers and the European Parliament might choose to elevate the concerns.
So the EU could be quite duplicitous about the negotiations with China.
It's odd to think that, isn't it?
The other way in which, in a way, they made bad negotiating partners was, of course, that the Chinese were...
Are masters of playing people off against each other.
And so every time the Americans try to stand up to China on issues, the Chinese would say, well, let's cancel that Boeing order and give the aircraft order to Airbus, for example.
And I think it was Winston Lord who said that...
The Europeans hang on to our coattails while they gobble up our contracts.
And so part of the failure to extract better terms for Chinese accession to WTO was down to the fact that the Chinese were able to divide the various power blocks of the Western world up.
And if there was the one big difference that could have been negotiated, there was no way that the Chinese were going to, for example, allow the Communist Party to step back from the allocation of capital in China, for example, the state ownership of the banking system.
That wasn't negotiable because, of course, that's the way the Chinese Communist Party choose the winners in the economy in China and how they exert a lot of their influence.
But the one thing that could have changed was that China was forced to accede with a flexible exchange rate.
And they weren't.
That was the big problem was that if market forces had been allowed to work, these huge current account surpluses that China started to run post accession to WTO, which peaked out just before the global financial crisis at about 10% of their GDP, that would have exerted which peaked out just before the global financial crisis at about 10% of their GDP, that would And in a market environment...
The exchange rate would have risen and that would have alleviated a lot of the deflationary pressure.
So the RMB would have become more expensive, making Chinese exports more expensive.
And that would have been the natural balancing mechanism.
Absolutely.
Why did economists...
I mean, I know economists can be pretty dodgy.
I look at Paul Krugman, for example.
Well, you've mentioned Ben Bernanke.
Aren't these people supposed to be the experts?
Aren't they supposed to foresee this kind of stuff?
And isn't it fairly basic, this?
Yeah, I think it is fairly basic, actually, particularly the currency manipulation issue, that if you allow an economy that has the potential to be as big as China to trade with a fixed exchange rate, it was going to cause all sorts of imbalances globally with far-flung and deep ramifications, and the global financial crisis being the most obvious one, which has obviously done...
More to damage the credibility of capitalism than any event since the 1930s.
Was that brought on by the China thing as well, or was that something else separate?
China wasn't the only cause of that, but it was definitely a major factor, because if you think about it, what China was doing was it was exporting all these goods, running huge current account surpluses, but it didn't want its exchange rate to appreciate that.
So the Central Bank of China would then go into the market and buy US debt, treasuries, if you like, more often than not treasuries, but later on some agency debt as well, housing-related agency debt.
And this artificially depressed interest rates in the West that led to the...
The credit boom and the housing bubble in the United States.
Now, there are other factors at work there as well in terms of poor regulation and just malfeasance on the part of various financial institutions.
But the underlying macroeconomic backdrop against which the global financial crisis was created was induced by the global trade imbalances in my view.
And so yes, the engagement with China had a direct link to the global financial crisis.
Presumably there were some people in the run-up to that 2001 WTO session.
Presumably there were voices saying, this is a really bad idea.
There were.
The issue was, I mean, in the UK, for example, there was no national debate because it was an EU competence.
In America it was the lobby groups, the multinationals that carried the day and I think it was a great example of a vested interest group capturing the legislature to work in their favour and against the national interests.
So Boeing, who else can we hate in this?
I've always hated the multinationals and now you've given me a really good strong reason for doing so.
Well, of course, Apple are now deeply involved in the China supply chain sort of nexus, as it were.
They were less so then, obviously.
We're talking 20 years ago when technology was very different.
So presumably, just taking a step sideways here, the cost of an iPad or an iPhone would be, without China, would be presumably way, way more than it is.
I mean, it isn't one of the reasons we can all afford a pocket computer with more tech than the entire Apollo space program had, the original one.
Is part of the reason for that, that we've outsourced labour and everything to China?
So I think it would be more expensive.
How much more is a moot point?
I mean, obviously, there is huge scale in the manufacturing in China.
But I come back to this issue of inflation targeting coupled with the trade and this confluence of things.
You know, we would be able to afford More iPhones, perhaps, if our housing and our education, our healthcare wasn't so expensive.
And since the Fed, if they had their way, and the Bank of England likewise, who have a 2% inflation target, they're trying to make the aggregate price level exogenous, if you see what I mean.
They're trying to predetermine the overall rise in the aggregate price level.
So if a company, through ingenuity and technological innovation or through outsourcing, make a particular type of product like manufacturing cheaper, then in the eyes of the central bank, something else has to become more expensive to keep the aggregate inflation going higher.
Now, you might ask, well, why are they so obsessed with keeping inflation A, in positive territory, and B, 2%?
Well, the answer really lies in the fact that They see inflation as being the way to erode the real value of debt and therefore favouring borrowers over savers.
Now, 2% might not sound like much, but over the course of a lifetime, it means that if you gave your godson a £10 note at his christening, You know, by the time he dies, it'll be worth about £1.50.
So over the course of a lifetime, it completely debases cash.
Now, the ramification of that is that it tilts the playing field in favour of borrowers over savers.
And who are the big borrowers?
Well, they're the governments, of course.
So inflation targeting, coupled with trade, basically sequestrated the benefits of trade from the consumer and passed them on to borrowers in the form of lower interest rates.
Because in order to generate that 2% inflation target...
Central banks had to slash interest rates, make them negative in real terms.
Then we had to have quantitative easing and basically money printing.
And so we've sort of bastardized money and the financial system in order to bail out borrowers in the West.
And the confluence of deflationary forces meeting unorthodox monetary policy required to prevent the deflation has been an asset price bubble.
Whether it's property or bonds or equities.
Now, that, of course, has massive distributive effects within society.
If you were old enough to have already acquired savings, you've done very well out of that.
If you're on the property ladder, you've done very well out of that.
But the cost of buying an old-age income now, with interest rates so low, and take the case of Germany, sort of severely negative, obviously the cost of buying an old-age income has gone through the roof.
The cost of getting on the property ladder has gone through the roof.
So we've had an intergenerational wealth transfer as a result of these factors.
And what's so debilitating about that, of course, is that we now have...
A generation who feel excluded from the property-owning democracy.
If you can't afford to buy property, what is your incentive to defend property rights?
And we see this in voting patterns, don't we?
In terms of your propensity to vote for property rights if you're young is much diminished.
Yeah, absolutely.
So just to retrace our steps, the reason really that Trump won the presidential election was ultimately because of what happened in 2001 when China was admitted to WWTO. Because what it did was it took the heart out of American industry.
How many jobs did you say it killed?
Five million.
So that's the loss of manufacturing jobs.
But what you've got to remember is that each manufacturing job, as a rule of thumb, might well support three jobs outside manufacturing.
So there's the man who drove the truck.
There's the accountant who audited the factory.
So the knock-on effect was much greater.
And obviously technology means that a much greater array of industries face international competition.
So it's not so much true of China here, but I'm thinking of business process outsourcing to the Philippines, say.
Call centers, you know, when was the last time you spoke to, when you phone up your insurance company or the AA or whoever it happens to be, Sorry, I've used the AA as a example.
I don't know where they do their outsourcing, but you know what I mean.
You're just as likely to go through to somewhere in India or the Philippines where these sort of business process outsourcing units are located.
So, the knock-on effect into the economy was much greater than just the loss of the manufacturing jobs.
But even in manufacturing, it was about a third of manufacturing jobs disappeared in the immediate aftermath of the WTO session.
And who, just going back to my question of who should we hate?
Boeing, obviously.
Bill Clinton, was he an idiot or was it kind of an understandable mistake that he made?
Because it was presumably on his watch, was it?
Well, ironically, Bush signed them in, but the negotiations had all taken place under Clinton.
So Bush couldn't see it coming either?
He was a bit rubbish anyway, wasn't he?
Well, he had the chance to go back on it and he didn't.
But the bulk of the negotiations had taken place under Clinton.
When you look at the speeches that were made at the time, I mean, Clinton makes this speech at John Hopkins University, which I quote in the book, and it's full of the hubris of victory in the Cold War.
He views these multinationals as being the warriors for freedom who are going to change China, that all you have to do is expose the Chinese population to Western institutions, to consumerism, and they will automatically demand a greater say in the way China is run, and that this will be the death knell of the Communist Party now.
Because as people get more affluent in China, they're going to demand democracy.
It was very naive, and it was a complete misjudgment of the power of the Communist Party, the lack of a sort of civil life outside the Communist Party in China.
The Communist Party were embracing market reform only insofar as it allowed them to fulfil their part of the social contract, which was basically, you guys give up your freedoms, but we will make you wealthier year in, year out.
And in fact, when the reform programme was jeopardising social harmony, The Chinese needed this easy way out and the export orientation of their economy was that easy way out.
We can take jobs from elsewhere.
We can export the surplus production that we're putting in place so we don't have to close down capacity.
A manipulated exchange rate was a key part of that, as was industrial policy aimed at subsidizing exporters, lowering the cost of production by making things like electricity available at below market prices.
The kind of manipulation of markets that one would expect from a planned economy.
So we were in fact doing the heavy lifting on behalf of the Communist Party and not jeopardizing their regime.
We were cementing them in power.
Yes.
With the consequence now, of course, that, I mean, as a result of the fact that the Chinese have executed on this model incredibly well, Well, the Chinese economy is twice as large now as the most optimistic forecasts from organizations like the World Bank and the IMF were forecasting it to be.
And we've now created a geopolitical rival, not just in Asia, but globally.
And the much hoped for move towards liberal values is as far away as it ever was, if not further.
As we're seeing in Hong Kong.
Where do you see that going?
I just can't see a good outcome, really.
You know, much as we in the United Kingdom might feel a moral obligation towards the citizenry of Hong Kong, and I think we're right to feel that moral obligation, There's actually very little that we can do and I really do fear for it.
I think that the current Chinese leadership Realize that their economic model is reaching perhaps some of the limits of its power and they're trying to reorientate the social contract away from just ever-increasing living standards of economic growth towards a sort of aggrandizement of the nation and being
proud to be Chinese because China is now a force to be reckoned with Around the world.
And it's the kind of Malvinas effect, if you like, you know, the sort of policies that the junta in Argentina adopted.
It's the same thing.
It's a recognition that the limits of your economic power have maybe been reached and therefore you have to refocus the population on a different objective.
And the unification of China, however one wishes to find China, and its aggrandisement is now the policy objective.
Right.
It reminds me slightly...
China now reminds me of Japan in the 1930s.
Is there any comparison?
It's a bit worrying if it is the case.
So...
China is deficient in resources and perhaps the most worrying are water, food and energy.
Inevitably, if current living standards in China are to be maintained and augmented, that thirst for resources will grow.
And there is plenty of potential conflict, albeit in the Himalayan plateau where the big rivers have their sources growing.
In the South China Sea, where there is both energy and protein.
So it is worrying that we now face a second largest economy in the world that has a strong geopolitical interest in extracting resources from beyond its borders.
And it's certainly going to be the challenge of the next generation I think as to how we reach an understanding with them.
Right.
Because we've presumably given them the money they need now to build up a massive fleet for example.
Yeah, I mean, they have been after what we might call a blue water, deep water navy and clearly the disputes about the various shoals and islands that rim the East China Sea and the South China Sea.
And have their origins in pushing Western influence beyond the sort of immediate hinterland of China.
Now, you know, we've got to put ourselves in China's shoes too.
And, you know, looking at Japan and South Korea and ASEAN and India, you know, there is a A sense in China that there is an encirclement of them and that they want to break that encirclement.
And a deeper understanding of their geopolitical needs and requirements and our own Western security requirements in the region and those of our allies is obviously a prerequisite for some kind of settlement.
So there is sort of a conflict in the making there and we have to hope that diplomacy can accommodate the requirements of both societies.
I think the key point I'm making in the book is that we were very naive to believe that we were going to make China more like us by trading with them and that what we have actually done is help them attain a level of economic success in very short order ahead of any convergence with liberal norms and that in fact The
sort of democratization in the extreme of democratization, but at least a more moderate and tolerant society, is probably more likely to be born out of economic failure than economic success in China.
Tell me a bit about Belt and Road, what that is.
So at its most simple level, obviously, China's engaged in a raft of infrastructure projects across the Eurasian continent, aimed at internationalizing the RMB, opening up new export markets for their manufacturing base because the West is tapped out on debt.
And obviously, as Trump has made clear, and the European Union to some extent too, that we're no longer going to tolerate their mercantilist approach to trade.
And obviously, that sort of geographical expanse, including Africa, is likely to be the source of the resources that China needs for its next leg of development.
So, In some ways, it's sort of inevitable that as trade relationships between China and other developing countries deepen, China's political influence in those countries is going to deepen with it.
And there is a sort of geopolitical conflict developing there, a geoeconomic conflict developing there.
And what the Chinese, I think, have demonstrated is a very developed skill set in leveraging their economic influence and turning it into political influence in third countries.
And that's really what Belt and Road is about.
I mean, they own huge chunks of Africa, which I find rather scary.
And it's amazing how little concern there is.
In fact, let me ask you, why is it that you're about the only person saying this stuff?
I mean, I only knew about this stuff because I chanced upon you at that dinner party and our mutual friend said, you've got to read Stuart's book.
But, I mean, this isn't stuff I read about very often in the papers.
Well I think the good news is that the consensus has shifted and Trump's tariffs on China and the initiation of the trade war have met obviously with a lot of criticism from the mainstream media.
Totally.
But what they have served to do is to highlight the pernicious nature of the relationship with China and to promote debate about the relationship and the future of it.
Okay, wait a second.
Everything I've read in the mainstream media has been critical of Trump.
You know, like Trump's been sparking a trade war.
Even conservative commentators are absolutely adamant that Trump is a troublemaker and, you know, he doesn't believe in free markets.
And this is a bad thing because, yeah.
I agree with what you just said, but the consensus has now moved.
So what you'll notice when you listen to the various Democrat candidates debating trade and what have you, and the relationship with China, is that there's a broad consensus now that the ex-anti-status quo, if you like, was unsustainable.
And so much as they like to have a go at Trump and his tariffs, they almost universally agree that they would do something different to China as well, and that they wouldn't be as accommodative as the Clinton-Bush-Obama administrations.
Obviously, they're short on detail.
But I think there's a lot of evidence that Trump's tariffs are working.
Now, in order to say that, of course, you have to have an idea of what they were designed to do.
And I think that the issue here is that China's share of manufacturing in the world...
China had basically quadrupled from about 6% to about 25% over the course of the last 20 years since WTO's session.
And China was developing this monopolistic grip on key areas of crucial manufacturing that our everyday life depends on.
And what the tariffs have done is to loosen that grip.
You're seeing multinationals relocating out of China into other countries.
There's a certain degree of unshoring that is taking place.
But even if the jobs aren't necessarily all coming back to the United States, they are moving to third countries outside of China.
So in that sense, I think the tariffs have worked in that they've made very clear to corporates that you cannot rely on the business-as-usual environment between China and the United States.
Right, so it's been more of a warning to corporates than it has been to China, because I can't imagine you can do much about China.
They're a big thug now, with a huge army and huge navy and lots of money.
Yeah, I think the issue, you know, I don't think we're going to end up changing the behavior of China dramatically, simply because the requirements for free and fair trade with any other country is that they simply because the requirements for free and fair trade with any other country is that they share the same aspirations to have resources allocated Okay.
That's where the efficiency gains from trade come from, if they're going to be equitable.
And the Communist Party is simply not going to give up control over the economy, because that's the largesse that they get from running that economy is what makes them powerful, the ability to choose the winners and rich, of course.
So, ironically, as China has become a wealthier place, the incentives to maintain power and maintain control over the economy have increased because, well, it's just that much more lucrative.
The apparatchiks must be rolling in it.
Well, yes, there's a statistic in the book, actually, which, you know, if I get it right, I think the 10 wealthiest congresspeople in the United States, if you add them together, have a net worth of about 1.8 billion US dollars, which is pretty good going.
I think it's skewed by one gentleman.
The top 10 members of the National People's Congress, I believe, have a net wealth of 185 billion US dollars.
So being a communist in China can pay very handsome dividends.
I'm pretty sure that even the kind of conservative think tankers in the UK are not wise to this.
They still maintain that free trade under all circumstances is good, which I think generally is true, but not in a world where China's doing that thing.
I mean, I'm a free trader, absolutely.
But we have to ask ourselves, why are we free traders?
And where does the benefit come from?
And if we're trading with an economy that's large enough to make a big difference in the way resources are allocated globally, And that economy itself is not allocating resources according to market principles, but using industrial policy to skew the structure of its economy.
Then you end up with an economy yourself that is simply the mirror image of their industrial policy.
Let me just give you an example.
Let's say the Communist Party tomorrow were to decide that under all circumstances they must dominate the robotics industry.
And there is no limit to the degree to which they are going to subsidize and allocate capital on soft terms or dedicate resources to it, not on market principles but based off a statist approach.
Then clearly a company trying to compete with them, a private company trying to compete with them out of, say, the United Kingdom, is going to fail.
And so resources in our own economy are therefore going to be allocated in a sort of mirror image to the way that the Chinese Communist Party have decided to...
Allocate theirs.
Now that is not doing anyone any favours in terms of enhancing growth through the efficient allocation of resources.
Yeah, yeah.
So what can we do at this stage?
So we've had, what, 18 years of complete misguided policy and we're ruining the day now with some of the things we've discussed.
Is it too late to save ourselves?
What can we do now?
So I think the question is, you know, is there actually an economic relationship to be had between a totalitarian...
And a liberal democracy.
Because in the past, when we've been faced with this dichotomy in the world, there simply wasn't a deep economic relationship of any sort with the Soviet Union.
And I think that we have to make that our base case, that where we face a geopolitical rival that does not share what we believe are universal human principles of Private property, life, the dignity of the human being, the rights of the individual.
I don't think that any organisation, any bureaucracy, whether it's the World Trade Organisation, the European Union or a free trade agreement, covering things like intellectual property and services and everything else, I don't believe there is a sort of legalistic infrastructure that can actually lead I don't believe there is a sort of legalistic infrastructure that can actually lead to a
And therefore, to me, the base case from which we should be working is that the economic relationship between the Western world and China is going to move quite rapidly towards the one that we had with the Soviet Union.
In other words, a very much downplayed needs-must kind of arm's-length relationship.
I'll tell you, you didn't get any of this stuff.
David Cameron and Theresa May.
They were all for, let's welcome our new overlords into our country and give them control of our telecommunication system.
Tell me about that.
Should we worry about Huawei?
Yes, we should.
We've got to start realising, I think, that the world is not a unipolar world.
There are people in power and countries that do not share our values and with which our national interests and theirs conflict.
And we should not really be letting Chinese multinationals, whether they're state-owned or not, I mean Huawei was set up by a former PLA general, it's in theory a private sector company, but...
You know, that distinction is simply not appropriate.
No, it's approach to people's liberation, isn't it?
And so is every economic agent in China, not necessarily linked to the PLA, but they are linked to the Communist Party.
The private industry in China...
It exists on sufferance from the Communist Party.
It's a totalitarian state.
And therefore, any economic agent in China can be called upon to do national service.
And what we need to do is be very aware of that in the designing of our relationships with China.
And in my view, there's There's no way we should be letting core infrastructure be owned by Chinese companies.
Yes, such as that new power station that the Chinese got involved in, didn't they?
I'm not quite sure of the status of that, but that was certainly the plan.
To me, this is ridiculous.
They are not just another trading partner.
They are a geopolitical rival and a threat to Western values.
And that needs to be understood.
I suppose lots of...
There is an awful lot of pro-Chinese propaganda one gets in the Western media.
I mean, they've got us quite well infiltrated, I think.
They would accuse you of being a China basher and that this is outrageous and actually it's perfectly reasonable that we should be trading with these people and that we should...
Yeah, that's right.
I mean, the Chinese soft power is very powerful.
And we saw that in the accession process to WTO in terms of how effective Chinese lobbying was.
And the tentacles of the Communist Party spread far and deep into the establishment in other countries.
And this ability of China to present itself in the West as a benign Merely seeking geographical integrity with the return of Taiwan and Hong Kong and Macau and they would like to present Tibet as being an integrated part of China.
Their ability to present this very benign image is worrying because it's a false image.
Well, presumably, it's partly just people don't know enough.
I mean, you're a specialist.
You spent time out in Hong Kong, in the East Germany.
You've been studying this stuff.
But most people seem to have bought into that idea that, hey, big country, great trading partner.
They're kind of like us.
You know, there is a few differences.
But actually, their economic model seems to be quite good because look how they've improved the lives of ordinary citizens.
That seems to be the version we get.
And that last point you make there is one that obviously you hear a lot, you know, the growth miracle and what have you.
And I think there are a number of points.
I mean, first of all, I wouldn't want to detract from the progress China has made since 1978, and it has lifted a lot of people out of abject poverty.
But we mustn't get too carried away either.
I mean, the first point I would make is that that abject poverty, you know, in part was a function of the great leap forward and the cultural revolution, you know, that China was put there by the Communist Party to some extent in the first place.
Now, of course, there are other factors, Japanese occupation, the war, etc., But the second point I would make is that when your base is very low, you can produce wonderful percentage growth rates, can't you?
But, you know, in nominal dollar terms, you know, at $8,000 per head, China is below the global average, which is about $10,000 a head.
You know, while China's economy has grown per capita since WTO accession from about $1,000 a head to $8,000 a head, so tremendous multiple growth, but adding $7,000 per head, you've got to remember that the US has but adding $7,000 per head, you've got to remember that the US has added perhaps $24,000 per head, added The market model stands up very well by comparison.
And so the growth rates, you know, are less important than the absolute change in value, if you like.
And China's power comes from the fact obviously the population's huge and therefore a modicum of economic success in a country of its size translates into global power.
But that's not the same thing as saying that their model has delivered superior results to the Western liberal model because it hasn't.
So my final question to you, isn't war inevitable?
And I don't think it is.
I don't think it is.
I think conflict is inevitable, but there are other ways of solving that conflict.
But what is required, I think, from the West and from Western allies in Asia, because of course...
It's our allies in Asia, like Japan and Korea and the Philippines and Thailand, that are in the front line here in terms of where national interests will conflict in the immediate short term.
What's required is a united front.
And to that end, we need to build a consensus.
And what doesn't help in building that consensus is, A, the sort of slightly disparate track records of the European Union and the United States in terms of their negotiations with China and the way that China has in the past been able to divide them.
The other thing that doesn't help, of course, is that when one looks at the European Union and in a global trade perspective… Germany is running the world's largest current account surpluses at the moment.
It has been You know, over the last five or six years, largely as a function of the fact that the single European currency is the major trade distorting factor in the world at the moment because Germany benefits from this massive undervaluation of the old Deutschmark, if you like, by virtue of the fact it shares its currency with Italy and Greece.
And Southern Europe.
And so when we look at this from a trade perspective, unsurprisingly, the Americans are looking at Germany and saying, well, hold on, you're no better than China was in the early 2000s because you're distorting your currency, manipulating your currency.
in order to gain an unfair advantage in trade.
Now, the distortion is much more subtle than in China's case because it revolves around this membership of a suboptimal currency union.
But that trade friction resulting from these huge current account services from Germany and more so the Netherlands relative to the size of its economy makes it harder to build an alliance against China on the economic front.
So I do think that there is an alliance to be built, but it does call for some apparently intractable solutions to intractable problems revolving around the European bloc and the single currency as well.
And that is looking difficult at the moment.
Is anyone reading your book?
I mean, is it reaching the right people?
I think it is.
I mean, it was never going to be completing with Tom Clancy or whatever for the...
Although it should.
Let me say, Stuart, right away.
In fact, you should recast it as a geopolitical thriller.
Maybe someone with more talent than I could rewrite it.
But I think what I find so encouraging is that the consensus among politicians in the United States has shifted from the Clinton-Bush-Obama era unconditional engagement with China as the way forward and eventually they will become more like us and adopt liberal values.
It has shifted from that stance to something much more realistic and And a much more critical analysis of the lose-win relationship of economics that exists at the moment and how we disengage ourselves from that vicious circle of trade with China.
And so I'm very comforted by the fact that that consensus is moving.
Thank you for listening to The Delling Pod with my very special guest, Stuart Patterson.
Before I go, can I gently remind you that coming up shortly is the Podcast Live Festival in London with me and guest Dick Dellingpole.
Can you imagine the excitement of Dick and me on stage?
There might be dogs, there might not be dogs depending on whether they're allowed in that particular building or There will definitely be games.
Don't forget there's an exciting competition.
The person who brings along the most famous person wins a prize.
And also the person who brings along the most interestingly famous, obscurely famous person wins a prize.
You've got that.
There could be other prizes as well.
So, yeah.
Dick will probably think about some other games too.
And we'll obviously have the yes or no game.
So that's definite.
The Podcast Live Festival, the website address is podcastlive.com.
Book your tickets and make sure obviously you book them to see me and Dick because then we get some of the dosh rather than going to other people like, I don't know whether those nutcases, those, what are they called, the Ramona podcast, whether that's going.
But obviously you don't want money to go to them.
You want to go to me and Dick, people like that.
That's it.
Podcast live.
Thank you for listening, dear special friend.
Bye.
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