China

From ‘strategic engagement’ to ‘competition’. Interview with William Yu

Ewelina Horoszkiewicz in conversation with Professor William Yu (UCLA) on USA, China and Europe.

Instytut Boyma 11.11.2019

Ewelina Horoszkiewicz: Let us begin with a simple question. Why is Los Angeles, where you work, so successful and rich? Other areas on the West Coast, take San Francisco and Silicon Valley, are major technology hubs, while the East Coast has some of the best universities in the world, such as Harvard or MIT. In comparison, why does wealth concentrate here, in the L.A. as well?

William Yu: Number one – the entertainment industry. People call Los Angeles the capital of the entertainment world. We have Hollywood, where a lot of movies and TV series are produced, and we are also seeing the rise of the so-called streaming business. Number two – the high technology industry. We have a hi-tech cluster called Silicon Beach. Maybe it is not as famous as Silicon Valley, but we do have a lot of well-known companies, like Snapchat. Number three – geographic advantage. We have beautiful weather all year and sunny beaches while, on the East Coast, it is very cold in the winter. Therefore a lot of rich people move here and buy properties. What is more, young people are attracted by career opportunities and easy access to entertainment. We have very rich areas like Beverly Hills and Bel Air. All these things contribute to real estate investment, which is related to wealth.

EH: Nowadays a lot of Chinese are moving to the US. They are willing to invest a lot both in their education and real estates. It affects market prices and the availability of goods. It is also getting more and more difficult for local Americans for whom it might be increasingly harder to keep the same standard of living as before. From your perspective, is this situation advantageous or disadvantageous for the US economy in the long term?

WY: That is right: successful cities like Los Angeles, San Francisco, New York, and Seattle attract a lot of people but the cost of living is also very high. For the middle class and blue-collar workers, it may not be affordable. Indeed we have affordability crisis. In Los Angeles we have a lot of international investors who buy properties here and contribute to higher prices for real estate. One of the main problems we need to face is homelessness. Local government is trying to find a solution for it.

EH: Why is it that in one of the richest regions in the US and maybe even the world there are so many homeless people? Surely the city could afford to support them.

WY: Good question. Actually, in 2016 Los Angeles voters passed a $1.2 billion bond measure to help funding housing for the homeless. We, at heart, are trying to help the homeless people. The city is planning to build shelters for them too. But, for example, there is a debate going on in Koreatown where the residents say they do not want a homeless shelter in their neighbourhood. It is a kind of ,,not in my backyard” mentality. We have the resources. We are trying to work on it but it is very hard to find good places to build homeless shelters.

America is a very diverse country. We have all kinds of people and we also have a history of social policies that did not work as well as they were intended. Some people have resistance to the homeless due to these historical experiences. For instance, we used to have so-called housing projects, which were huge apartment complexes for low-income people. It turned out to be a concentration of a lot of social problems. When you put poor people together, they learn bad things from each other and it exacerbates their problems. People might think shelters could bring the similar things to their neighborhood and that is why there is a lot of resistance. 

Furthermore, we have been providing shelters, but some people do not want to live there because of certain constraints. They want freedom and in California, especially in Los Angeles, where the weather is so nice, they can stay outside all the year. New York in fact also has a lot of homeless people, but because of the weather conditions they are pushed to stay in shelters so they are less visible.

EH: One of your reports mentions that many homeless people suffer a severe mental illness or are in chronic substance abuse. I am wondering if better access to healthcare may be the solution to get out of homelessness?

WY: It is more about a mental facility issue. It is a very complex issue. For example, there was a movie in 1975 called „One Flew Over the Cuckoo’s Nest,” about people living in a mental facility who were very badly treated by the guards and eventually they broke free. So we do not want to put people in a mental facility unless we have a very strong reason to do so. Therefore we changed the regulations in this aspect. Homeless people go out and have no home, no family. In contrast, many other countries practice putting such people in mental facilities. As a result, the problem is invisible, but it exists.

EH: Let us move from the local to the global stage, to the Chinese-US trade war now. Despite the fact that it is not obvious, if the US benefits from it, Trump administration keeps pressing. What is this war about? Economic benefits, politics, or power and ambition?

WY: This is a very deep issue. For sure it is not good for Wall Street, New York or Los Angeles. One of the major reasons, why President Trump is being so rigorous, is his plan to revitalize the manufacturing sector. The working class is mostly located in the Midwest – Ohio, Michigan, Pennsylvania, Indiana, etc, which are called the “Rust Belt”. In a globalized economy, many manufacturers moved from the US to China. Left behind were the working class people who used to be able to support a family with a good-paying job. Because of globalization, they lost their jobs.

International trade is supposed to bring a bigger pie. Under ideal conditions, people who lose their job should be able to find another job in a different industry. This is known as balance trade. In theory, when two countries trade with each other, one country will lose some jobs and those workers who lost their jobs should be able to find another one in a more competitive industry, usually in a different region, and get a better pay. But in reality they often do not want to move away from their hometown.

Another aspect of the problem is a huge trade deficit between the US and China. China has a policy and mentality we call ”mercantilism”, which means they believe exports are good and imports are bad and therefore they import less and export more. For example, Chinese people have to pay double the price for cars made outside of China. A Tesla in China costs twice as much as a Tesla in the US. As a result, exports of Teslas from the US to China are lower than it would be without tariffs. Without this kind of import constraint from China, Tesla would probably be able to export more and hire even more American workers to build more Tesla cars. 

Not only does China constrain American exports, they also seduce American manufacturers to come to China to build factories. Tesla did exactly that because they can circumvent the tariffs and also sell cars in the Chinese market. It seems like a great thing for China. They can attract foreign companies and investment as well as learn the technology. It is beneficial for China in terms of short term growth but not good for the US in terms of balanced trade. 

Trump administration recognizes this problem. As a consequence the US asks China to make structural change in its industrial and trade policies. But China opposes to change practices as it has enjoyed the fruits of this mercantilism for a long time. That is why there are tariffs for Chinese goods now.

EH: What are your predictions for the future of a trade war after the last G20 summit? How do you see the future of the global stock market in this unstable and uncertain situation?

WY: Four decades ago, President Nixon started a relationship with the People’s Republic of China and gradually embraced Beijing. Since then, the relationship was strategic engagement. The US wanted to engage with China and to help China become more prosperous and more engaged in the global economy in the hopes it would become more similar to democratic countries. More free, more democratic, and peaceful. 

But China turned out to be less free and even more oppressive with its security policy. Now it is competing with the US in areas such as 5G, artificial intelligence, and quantum computing. Therefore the relationship changed from ”strategic engagement” to “competition”. The US established a committee which must approve all the foreign companies investing in US companies and now this committee is much tougher on Chinese companies. Furthermore, it is even more difficult for Chinese brands like Huawei. Our Vice President, Mike Pence, made an important speech on this topic in October 2018 and it was a watershed moment, because the whole speech is about this strategy change. That is for sure and it will not change back to what it was like before. The threat to the US is not from Japan, South Korea, UK or France, but from China, Russia, Iran, and North Korea. China in particular, because China’s economic size is much larger than Russia’s, Iran’s and North Korea’s. In my view this situation will change in the near future.

There is no hope for engagement in terms of technology. China will not get help from the US in the technology field anymore. China will isolate itself more and more. Henry Paulson, former Treasury Secretary and former CEO of Goldman Sachs, loved China and had high hopes that China and the US could cooperate for their common prosperity. He used to be very optimistic but last year he said he was very worried, that if China did not change its course, it would face an ”economic iron curtain”. That would not be good for the Chinese people. But the PRC is led by the elite which is not hold accountable by the people, so we do not know what the Chinese policy would be. In my opinion, China’s economy would be very negatively impacted by these trade tensions over the next year. However, Chinese society looks very resilient. It survived all the bad events in its history so maybe it has the capacity to survive major downturns in the future. 

Anyway, that spectacular growth may never happen again. Going back to the global stock market, there will be ups and downs which is definitely not good for the Chinese economy.

EH: I am curious, if a further Polish cooperation with Huawei on implementing 5G may affect the relationship with the USA?

WY: Poland and other countries need to understand that adopting Huawei’s 5G system means taking a risk. All the people at high level governmental positions may be under monitoring. But it will not necessarily affect Polish-US relationships.

Let us take Turkey as an example. Turkey is a member of NATO. For whatever reason, it is buying air defense systems from Russia, but at the same time, it is also trying to buy the F-35 fighter jet from the US. Turkey is one of the major military participants of NATO, but at the same time, it has a close relationship with Russia for historical reasons. The US is not happy about that, but it will not try to push Turkey out of NATO.

It is up to Poland, if it is willing to expose itself to this potential risk. Under Trump’s administration, Polish-US relationships are very good. It is different than with Germany. Even Italy, which cooperates with China on the One Belt One Road project, will not be rejected by the US. Europe has a long history of freedom and democracy so we have a lot of common ground to work together.

EH: The last question I wanted to ask you is, how can the EU cooperate with the US in order to avoid escalating the conflict and minimize the cost of the trade war between the US and China?

WY: It is a good question. If you can avoid the conflict, stay independent, and benefit from both of the largest economies in the world. That is the ideal situation. 

But in reality, eventually the EU will have to choose a side. America is trying to be ”America First” which may cause some kind of discomfort. However, I am an American citizen so you may say I am biased, but it is better to choose America because of its freedom and democracy. Countries trading with the US usually benefit from it, because the US has a rich and strong economy. What is more, the US does not have a mercantilism mentality. The situation is different with China. China’s mentality is to extract as much benefit from their partners as possible, while giving as little as possible. After the last century full of suffering and loss, China wants to rebuild the country and will not refrain from unfair tactics like stealing intellectual property from the US and Europe.

The best strategy for China is to build allies through the One Belt One Road project in African and Asian countries and maybe in Europe too. However, China has enough financial resources to make much more expansion with this project. Some countries, such as Malaysia, Sri Lanka, and Pakistan, participate in the One Belt One Road project by taking Chinese loans to build infrastructure, but as of now, there is little benefit for them. They are unable to pay back the loans and China takes control of the area. I believe Italy and Poland are much smarter and that they seriously consider their own interests before engaging in this project. 

Eventually you will have to choose a partner and I do not see any reason to choose China. Poland and Europe are in a better position in terms of negotiations with China. Beijing makes a big mistake by disengaging with US, a free and one of the most prosperous countries in the world. Eventually it may isolate China from the rest of the world.

Professor William Yu  is an economist with the UCLA Anderson Forecast and specializes in the economies of Los Angeles and China. In his work, Professor Yu produces economic models and forecasts for both Los Angeles metropolitan area, and Asian emerging markets, especially China, analysing their impact on the USA. His research interests include a wide range of economic and financial topics, such as econometrics, stock, bond, real estate, commodity price dynamics, human capital, and innovation. Currently he teaches business forecasting, predictive analytics, and data science courses at the UCLA Anderson School of Management and the UCLA Extension.

This material can be found in Quarterly Boym – No. 2/2019

Ewelina Horoszkiewicz

Graduate of management and sinology at University of Warsaw. Member of Polish-Chinese Friendship Association, holder of HSK4 cerificate. Her main interests are Chinese studies, in her professional life, she combines the skills of analysis, market research, project coordination and cooperation related to China. In Boym Institute she is coordinating cooperation with other institutions and new projects.

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