High-Level Plenary
Charlene Barshefsky:Unnecessary fragmentation of the global economy results when this definition of national security grows unabated
December 21, 2023

Charlene Barshefsky

12th United States Trade Representative

Just a few general remarks if I may. Thank you, John Zhao. Thank you, James. Thank you also Victor Fung, who I've known for course, many, many, many years. I don't want to think about how many years and of course, the Ambassador who has just spoken. Let me also acknowledge Ambassador Max Baucus, a dear friend, as well as his much better half, Mel. And let me just say with respect to Tung Chee-hwa, I've known CH Tung for 35 years. And during that time, he has been a source of inspiration, a great source of advice. I didn't always want to hear the advice, but he was always right. Great kindness, and so generous with his time and attention to the bilateral relationship. And I simply wanted to salute him.

Let me begin in a conference on change in progress. That between 1970 and 2008, the volume of world trade grew at an average rate of 5.5% a year. GDP growth averaged about 3.5% a year. Trade drove growth. It drove cooperation and development, and it drove poverty alleviation. But following the global financial crisis, trade growth slowed considerably; GDP growth slowed even further. Many people now call this an era of slowbalization and with it, the early fragmentation of the global economy. There are lots of forces that account for slowbalization and fragmentation. And I'll name just a few: the global financial crisis and it's very long tail recovery; a jaded United States which had been a principal driver of globalisation; a changing China, a rapid increase in trade barriers globally, tripling since 2019 alone; the disruption of capital flows; restrictions on migration; sanctions; the weakness of global institutions; particularly but not only the WTO; wealth inequality among nations; income inequality within nations, which have driven a backlash against globalisation; COVID-19, war in Ukraine, including its geopolitical ramifications; now conflict in the Middle East. I could go on with this list and as we consider, slowbalization and fragmentation of the global economy, we have to also add, unsettled but certainly changing geopolitical alignments, which influence, and over time may permanently shift, direct investment and portfolio flows, supply chains, and the flow of goods and services.

This is a dizzying array of factors, putting pressure on globalisation, and impelling fragmentation. And the costs of this are very, very high, in geopolitical terms, fragmentation increases hostility, it reduces trust, it creates mistaken impressions, which then become concretized. In economic terms, while estimates vary, trade restrictions could reduce global economic output by as much as 7% over the long term, or about USD 7.4 trillion. That's the German and French economies combined; that is three times Sub Saharan Africa's annual output. And in part due to fragmentation, the IMF five year forward projection on GDP growth is the lowest it's been in 30 years. And when the pie shrinks, economic aggression tends to accelerate. These forces have fragmentation is also in part because of the outsized role the U.S. and China play in the global economy. We're 40% of the global economy, even though our economies are very intertwined. If you look on an inflation adjusted basis, trade has gone down a bit, but the relationship remains huge.

The problem now, though, that we have, is that the view of each is that the other poses a profound, almost existential, economic and security threat. One on the economic side, that can only be addressed through decoupling, or de-risking, and on the security side, through military buildup and global realignment. The balance between national security on the one hand, and economic interdependence on the other, will be increasingly pressured by the perceptions of risk and the continued likely expansion of the definition of national security. This word keeps growing, and growing, and growing.

We're entering an increasingly chaotic period, fragmentation, geopolitical realignment, and maybe blocks at the end of the day. This is very different from the concept of globalisation, as we came to believe, it would always be, it isn't. If we step back a minute, the truth is, China has been decoupling and somewhat insulating its domestic economy from the forces of globalisation for a long time. The Great Firewall of China, the initial fragmentation of the internet, happened more than 25 years ago. WTO entry, which initially led to convergence with market-based norms by China, has now resulted in a divergence from those norms. Decoupling in the technology sphere by China is quite intentional. China is very open and public about it. It wants self-reliance. It wants self-sufficiency. These are national priorities, at least since 2006, when it announced its science and technology programmes and from there indigenous innovation, the identification of strategic emerging industries, the mega projects programme, the integrated circuits programme made in China 2025. These are all import substitution projects, meaning, get the imports out, become self-sufficient, create homegrown substitutes, but at the same time, try and increase the dependency of third countries on the China market to increase China's leverage. The 14th Five-year Plan could not be more explicit on this very point.

The U.S. came a little late to decoupling, de-risking whatever we want to call it. And but for former President Trump's tariffs, which I fully agree were ill-advised and COVID-19, I'm not quite sure the U.S. would have gotten to the policies it now has. Supply chain decoupling of goods initially rose because of COVID-19 and the U.S. realised it was incapable of making essential products. The problem is that of course, the notion of self-sufficiency in critical products has expanded beyond critical products for even goods that are non- essential. On the technology side for the U.S, U.S. competitiveness on tech was always driven by the private sector in the U.S. government left it just that way but now, we see significant government intervention in the U.S. legislation, funding, so on and so forth, as well as restricting U.S. firms from investing in a variety of sectors in China. And then, of course, both countries have implemented sanctions, the U.S. frankly, far more than China. And this is also a decoupling, de-risking strategy, and neither side is through with any of this. No question, the relationships are becoming a little more stable now. Also, no question underlying it, the fundamentals aren't going to change. I hate to be the skunk at the picnic, but I do think that's accurate.

National security may be the impetus on both sides, but the unnecessary fragmentation of the global economy results when this definition of national security grows unabated. China now has 17 categories of national security. It's only a matter of time before the U.S. won't have 17, but will expand its definition slowly. We face a situation where great powers, geopolitical strategy in markets, or markets are entangled, but have collided. Where the U.S. and China have opposing economics, ideologies, systems, ambitions, and these can no longer be contained, or unfortunately divorced from the global economy. We face the fact that each side has weaponized interdependence toward foreign policy objectives, including but not only national security, and we face an intensely competitive dynamic between the two sides. And that competitive dynamic goes far beyond technology. It infuses and suffuses every aspect of the relationship: trade, finance, technology, global institutions, even geographically, China goes here, we follow. We go there, China follows, all over the world, it makes almost no difference. And this reinforces fragmentation of the global commons.

The danger to both sides is that competition is inherently oppositional. Aggressive competition is inherently oppositional, magnifying the differences, obscuring commonalities, and usually zero sum. Competition sets up a reactive cycle among the parties, redirecting resources, heightening the rhetoric, making changes in policy very difficult for both sides. Reactive policies like this, give rise to a negative feedback loop, action, reaction, escalation, repeat. This is very dangerous territory. And when competition is viewed as existential, as both the U.S. and China have posited, then fear and demagoguery take center stage. In business, competition, authorities say the company's cut it out. Stop. There's no regulator here. Can we think of a country? Can we think of an international institution that can actually force the U.S. and China to stop? No, there is none. The U.S. and China have to stop; the two of them have to stop. And I have a suggestion to make on that score. I think the current round of activities between the two are very positive, and to be welcomed, engagement is critically important. And trying to manage differences is critically important. But there is an area missing from formal agreement and that is cooperation. If you've noticed, cooperation is ad hoc, one off, it's held hostage to the broader relationship. It's narrow, and it doesn't have to occur. It's kind of nice to have maybe, but not viewed by either side actually as essential.

So my proposition is that if both countries entered a formal compact on cooperation, a kind of protocol on cooperation, you'd accomplish several things. Number one: cooperation would be not just a pillar to the relationship, it would be integral to the entire relationship. It would set up a habit of cooperation which no longer exists, frankly. It would force both sides into de-escalatory meetings on a routine schedule. All of this would be made public, so both sides are held to account. This would not be an optional exercise; it would be what is a part of the exercise and a part of the relationship. And more than anything else, the two sides might actually accomplish something more lasting.

So I will just leave you with the following thought that it should be important to both China and the U.S. that sober reflection rather than a reactive cycle, or escalatory momentum govern the relationship between the two sides. And it should be important to both sides to avoid further trade and economic fragmentation of a global economy from which the two countries derive disproportionately. The U.S. and China need to start focusing on a comprehensive agreement and agenda on cooperation to try and add some balance to the relationship. Thank you.

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