In this week’s episode of China Insider, expert Miles Yu unpacks the latest announcements from the Department of Defense regarding United States involvement in the Russia-Ukraine War and the North Atlantic Treaty Organization, and the implications of the shift in strategic focus toward the evolving China threat. Next, Miles analyzes the latest universal and reciprocal tariff announcements, and what we can expect from Beijing in response. Lastly, Miles explores China’s model of self-enrichment, the threat it poses to the current global economic order, and potential countermeasures available to the US and its allies.
China Insider is a weekly podcast project from Hudson Institute’s China Center, hosted by Miles Yu, who provides weekly news that mainstream American outlets often miss, as well as in-depth commentary and analysis on the China challenge and the free world’s future.
Episode Transcript
This transcription is automatically generated and edited lightly for accuracy. Please excuse any errors.
Miles Yu:
Welcome to China Insider, a podcast from the Hudson Institute's China Center. I am Miles Yu, Senior Fellow and Director of the China Center. Join me each week for our analysis of the major events concerning China, China threat and their implications to the US and beyond.
Colin Tessier-Kay:
It is Tuesday, February 18th, and we have three topics this week. First, Miles examines the different approaches taken by the US and China toward transatlantic relations and collective security, particularly as they relate to the evolving Ukraine War, NATO, and the EU. Second, we look to unpack the new universal and reciprocal tariffs on steel and aluminum and the implication these developments carry for US trade and economic relations. Lastly, Miles takes an in-depth look at China's model of self-enrichment, a strategy for economic development through dependence and coercion, and outline potential US led countermeasures. Miles, how are you doing today?
Miles Yu:
Very good Colin, and nice to be with you again.
Colin Tessier-Kay:
Likewise. So let's jump right in here and start things off today with a focus on transatlantic relations. A lot to unpack here, given the week's events. Earlier this week in his opening remarks at the Ukraine Defense Contact Group, newly appointed Secretary of Defense, Pete Hegseth, announced a considerable shift in the new administration's approach to the Ukraine War, carrying significant implications for transatlantic security cooperation and US involvement in NATO. Hegseth noted a twofold need for coupling allied strength with the realistic assessment of the battlefield to end the devastating conflict and revisit the current division of labor in the transatlantic relationship. So Miles, let's start here with what exactly are the key takeaways we should focus on from Secretary Hegseth’s remarks?
Miles Yu:
Yeah, actually, you mentioned about this statements as a shift. From my perspective actually it's not a major shift. It's been there. It's more like a clarification and it's a final announcement of Trump administration's stance on war in Ukraine, on European collective security and a whole bunch of other issues too. But because if you look at the first Trump administration, everything that's been said in the last week or so about Ukraine, about European security situation, was discussed and was announced, was made. One of the most important strategic movement by the Trump administration in the first term, which continues today, is that we announced to the world, particularly our European friends and allies, that American strategic focus has now shifted away from Europe, away from the Middle East, to focus on the preeminent threat of the Chinese Communist Party. So with that, we can no longer afford this preponderance of responsibility for European security during peace or during war. So our friends in Europe must take up their share of the cost to maintain this bilateral multilateral collective defense system called the NATO. So that has been said multiple times in multiple years. So there's nothing new about that. With that, I think now, guiding the second Trump administration is the move to end the war in Ukraine quickly so that our strategic assets, financial or military will not be drawn into that ongoing conflict which has seen no end at all. So this is basically the approach of the Trump administration. I see tremendous continuity. There's nothing new there.
Secondly, this is also a surprise, some people say to our NATO allies. This is not a surprise. We want NATO to increase their spending on NATO defense. We want them to develop capabilities of self-defense. This has been going on for years and years, even before Trump administration. So this is nothing new. What's really interesting here is that NATO leadership has been with us all along, the former Secretary General Stoltenberg and the current one Rutte, they all agree with the Trump approach, with the American’s approach, that to spend more it's the member states who are unwilling to do so. That's why we're so frustrated. And so this is very interesting. It's a country, individual countries, who were not willing to spend the appropriate money, proper amount on their defense. It's collective defense. So that's why this is a reflection of the American’s strategic shift of its focus to Asia Pacific. Secretary Hegseth said very, very clearly, that we are now facing China, which is a very daunting and formidable adversary. We want our NATO allies to basically pony up more and we are not going to abandon NATO. We're still a member of the NATO and we are going to be the leader of the NATO, but our friends and allies definitely would take up much more of the burden sharing responsibility. So that's all there is.
Colin Tessier-Kay:
Yeah, and I think there's a great context to add to that too for our listeners. Currently, NATO contributions are typically measured as a percentage of each individual nation's GDP with the US currently contributing roughly, I think the last metric was 3.4% of its GDP and part of these requests have been for NATO allies to up their expenditure to, I think that the 2% was kind of the benchmark set for their contributions within that context. But I think as you keenly pointed out here, Secretary Hegseth, I think remarked even in those statements earlier this week that the stark strategic realities are preventing the United States from really contributing more to that NATO sphere and with the ongoing conflict in the Middle East, I'm sure that is certainly a part of it, but the principle focus, I would have to think here is the threat from the PRC and that shifting focus to the Indo-Pacific region. I kind of want to ask then, do you think that there might be any kind of potential for a collectivized security approach to the Indo-Pacific via NATO or through another infrastructure format perhaps in that regard?
Miles Yu:
That's a very good question, and I see the willingness from the NATO leadership. And Asia-Pacific country, which saw the brunt of Chinese aggression, have reached out to NATO and this group of nations in Asia-Pacific led by Japan has made that very clear. Japan changed its strategic posture, a defense posture, several years ago under Prime Minister Kishida, who is really a visionary, and they believe that Japan is going to abandon their purely defensive posture to focus on development of counterstrike capabilities. At the time of that announcement of the new posturing, they're going to say Japan is going to increase its defense budget to 2% of the GDP, which is unprecedented, very bold, and they're going to reach out to NATO. So after that announcement, dramatic announcement of Japan's new defense posturing, Prime Minister Kishida’s first trip was to Brussels, to NATO headquarters, and then come back to Washington DC.
So we have no problem with NATO leadership. As a matter of fact, General Secretary Stoltenberg has said many, many times that he support peace and stability in Asia-Pacific, in Taiwan Street in particular. He didn't mince words at all. So it is the member states that really should make a stronger posture to ally with the United States, and I think Japan wants to have a NATO office in Tokyo and many of the leading European countries or friends and allies are in support spiritually, but they are led by France and they kill that initiative, which is unfortunate. But I think in terms of American led freedom of navigation passages in some of the key areas that China is making trouble in, particularly South China Sea and the Taiwan Strait, and some of the key NATO member countries, including Germany by the way, follow our footsteps whenever we do it. We have conducted several joint freedom of navigation passages through Taiwan Strait, which is a very good sign. Germany, Canada, UK, and several other countries have joined us. This is very important, the development. So I do see a formation of a NATO like defense pact in the Asia-Pacific. It's not fully in existence yet, but Quad has potential, AUKUS is another one. But the whole idea is we have to end this bilateral defense arrangement in Asia-Pacific. America's defense alliance in Asia-Pacific is exclusively bilateral, country by country, but there's no multilateral collective defense alliance like the NATO. So that’s basically the idea. Expansion of NATO membership is possible, it is more daunting. It's difficult because there's a 32 NATO members states. It's hard to get the unanimous votes on that, but I think at least the NATO principle, which is a multilateral collective defense should be applied to Asia. It is inevitable in my view.
Colin Tessier-Kay:
And keeping with that focus kind of on China's approach here for a second, especially as it's related to the current global conflicts both in the Middle East and the Ukraine War, what exactly is Beijing's strategy in light of the United States’ new posture towards transatlantic relations? And do you think Beijing will seek to play a larger role in any potential negotiations for conflict resolution like we saw with their attempts in the Middle East to influence the outcome of that conflict there?
Miles Yu:
So that's two parts in your question. One is Beijing's countermeasure to the American's strategic shift of focus. Secondly, is the role of China as the peace broker or honest broker of peace. First of all, China's traditional approach still applies. That is to divide and conquer. They're going to play the transatlantic partners against each other. And every time US and China have some kind of a tough negotiation, tough talk, they always go to the European countries, go to the Canadians and to say, see, America is hegemonic and we have to be more friendly toward each other. And that basically has failed. It doesn't work anymore because there is some kind of quasi united front, at least on the common threat of China to us all. China is also trying to peddle in this narrative, which is a farce, that the predominant problem in the world today is Washington's cold war against China, as if the whole world is permeated with the US-China confrontation and nothing else. That's not true. The real problem here is China versus the rest of the world. China is a threat not only to the United States, and to everybody, and Secretary Hegseth said that very clearly. So I think that's the thing.
Secondly, China as an honest broker, I don't think China has the credibility to do so. China has never been honest to broker anything. For example, China put out a sort of a peace settlement plan for the Ukrainian-Russian War, but China has never blamed Russia as the aggressor. China as a matter of fact, not only not blaming Russia for the aggression, China has been substantially supporting Russia's efforts in Ukraine, killing a lot of Ukrainians. So there's no honesty involved whatsoever. And also secondly, China doesn't have the capability because it doesn't have the international reputation as the trusted broker, and nobody in their right mind would use China as some kind of paragon of virtue to negotiate any kind of a fair just settlement. China's obsession is to damage American's leadership globally, is to discredit the United States, and that's that's all there is. Everything they do, that's a central focus and their mission. So I don't think China is able to do anything like that. I mean, if you like, ask any Ukrainians. By the way, China has signed several strategic partnership deals including a nuclear security guarantee for Ukrainians in the nineties and first one and a half decades of the 21st century. None of them means anything when Russia invaded Ukraine. China basically decidedly went to the Russian side. So China is, CCP is, basically the master of deceit and the strategic manipulation. So I don't think it can play any important role at all.
Colin Tessier-Kay:
And this conversation kind of reminds me actually of an event that you participated in, I think it was about two years ago, now at the Oxford Union at the University of Oxford in a debate where the central core topic was debating NATO's efficacy as a collective security organization. And I wanted to give you a chance to hold court here and probably bring that back now to the relevancy, to the current debate and kind of see where that now applies.
Miles Yu:
Well, actually did hurt my feeling a little bit because I was given this unwinnable proposition that we should have no confidence in NATO. This was at the height of the Ukrainian War. NATO was a savior of Ukrainians, right, and against Russian’s aggression. But my argument was valid. My argument was that United States has shifted its focus on China and the Europeans still obsessed with the Americans preponderance, influence and leadership in Europe, which is no longer America’s focus. As long as most of the countries in NATO would not go along with America’s new strategic focus, there should be no confidence in NATO. So it's conditioned on that. So I lost the debate, but I won the argument. Everybody on the other side agreed with my assessment about China being number one threat. They just think America should continue to pay more money and to be leading Europeans in their defense, which is not a bad idea, but I think there is a new reality we have to face.
Now, you mentioned about China's role. I just forgot to mention something. China right now in the Ukraine situation has been trying to be opportunistic. In other words, they're trying to take advantage of our policy failures in the postwar reconstruction era. We have done terrible deeds in the past. For example, Americans shed their blood and lives in Iraq, in defeating Saddam Hussein, but in the postwar Iraq, the Chinese move in and took advantage of situation and signed a lot of contracts with the Iraqi government. So the peace dividends went to China, not to the Americans. So that's why you see Treasury Secretary Bessent went to Ukraine just a few days ago to talk to President Zelensky, and here is the plan. We have the reconstruction plan for you, and we're going to provide economic reconstruction assistance to you so that the Iraqi syndrome would not repeat. And that's why everything's related by China. You know President Trump talking about Iraqi, about, I'm sorry, President Trump talking about helping Ukraine in exchange for Ukraine providing rare earth materials to the United States. That's China related, because China has a virtual monopoly of all rare earth materials. China used that as a leverage to force the West to agree to be compliant with its demands. So I think Ukrainians should realize the mutual beneficial effort proposed by President Trump. Rare earth is not rare, but to extract them is very costly and environmentally cumbersome to stay least. So that's why I think this partnership in the economic ground and for the national security ground is actually very good.
Colin Tessier-Kay:
China and everything policy related, and that certainly leads us into our second topic for today and is also somewhat of a continuation of our conversation from last week regarding Trump 2.0’s tariff policies. Earlier this week and actually yesterday as well, President Trump announced plans to impose universal and reciprocal tariffs on every country that charges commensurate duties on US imports, specifically targeting a 25% tariff on steel and aluminum imports. Speaker Mike Johnson of the House commented this week as well, saying he believed President Trump is considering exemptions for automotive and pharmaceutical industries as well as several others. And while this hasn't been formally confirmed yet, countries such as Japan and Australia both have stated that they would seek exemptions from these duties once imposed. Miles, what can we make of these latest reciprocal tariff developments?
Miles Yu:
Well, first of all, the steel and aluminum is very important, is key. This, kind of, problem with over capacity did not start with the Trump administration, started even in Obama’s administration. Obama administration imposed heavy tariffs on Chinese dumping steel and aluminum. But it is intensified. What really happened is, the real problem is over capacity. Global demand for steel is about 1.5 billion tons a year, but global production capacity well exceeds that, it’s about 2 billion tons a year. China has the steel production capability of about 1 billion ton a year. In other words, China can supply two thirds of global demands. That's very, very powerful. So the issue is over capacity of China. So realizing that, President Trump in his first term in March 2018 issued something called the Proclamation 9705, and that's in March 2018, imposing 25% steel and aluminum tariffs on China on national security grounds. But there's a loophole. The loophole is exemptions. So exemptions were for those countries with a security arrangement with the United States, and we give them the exception. So they're not going to be charged with a 25% tariff on steel, on steel and aluminum. And those countries include Argentina, Australia, Brazil, Canada, South Korea, EU countries, Japan, the UK, Mexico, Ukraine. So that's the problem. The exemptions were very, very, very, very terrible.
Two things happened since that Proclamation 9705 in 2018. One is import of steel and aluminum to the United States from these exempted countries, increased quite a bit. Two, import of steel and aluminum to these exempted countries from China increased quite a bit. So this is a loophole. In other words, this is a case of transshipping. China took advantage of our friendly countries with the exemptions, and export a lot of steel and aluminum to those countries then those countries came to the United States tariff free. And this is one of the reasons we have this reciprocal tariff on all countries no exemptions. And I think, there's also, this fits into a general pattern that has occurred in many other products categories too. Not just the steel and aluminum. For example, autos, textile, pharmaceuticals. And this transshipping is a very big problem.
One of the major achievements of the Trump trade deals in the first term was the renegotiation with Canada and Mexico. So we came up with something, get rid of NAFTA, which is an obsolete product of the mid 1990s. So it's USMCA. With USMCA, Mexico and Canada can trade with the United States, literally tariff free, and that's where the problem is. So China see Mexico and Canada as an easier way to evade tariffs. So they basically move their manufacturing capabilities, even sometimes direct sales to those countries, Canada and Mexico, and through those two countries get into United States. So the trade partners, its changed. Mexico become number one, Canada become number two, and China is number three, but much of the stuff is China's manipulation of the system. So that's why the reciprocal tariffs is very, very important no matter which country you're from, we're going to basically, this is all common sense. If you impose 20% tariffs on United States, we do the same thing to you, right? So that's very important.
In China, we keep saying US is tough on China in term of trade deal. Chinese government has been consistently imposing tariffs on American goods, products, going to China, average about 21%. Which is kind of the national strategy. The tariff is made artificially high so that American companies will be forced to move the manufacturing capability to China to make things from where they steal these American intellectual property. So that's been a pattern for decades. And this is a very interesting. EU countries also have the same problem with the United States. For example, automobile. Every single car made in Europe come to the United States, come into the United States, either BMWs or Mercedes, United States impose about 2.5%, very nominal tariffs. That's low. However, American’s cars going to Europe is 10%, 10%. On top of that, Europeans have this thing called the value add tax, the VAT, that's 19%. So you put together is essentially close to 30% of tariffs on American products. That's fundamentally unfair, right? So that's why President Trump said, we're going to do reciprocal tariffs and that's good for America. And also it's good for everybody because it's fair. Canadians the same thing. Canadians have a very robust trade relationship with the United States, but they also do the similar thing. For example, Canada, one of the major products to the United States is lumber. Canada subsidize its lumber industry killing America's lumber industry. So that's a problem. And we have a lot of trees along the borders. I have some interest in the state of Maine, for example, go there all the time. I mean Maine 15 years ago, lumber industry or lumber based like paper mills, they're robust. Now, all of them are gone. Some of them gone to China. But a lot of things have to do with the Canadian practice of its tariff policy and the economic trade policy. So all in all, I think the reciprocal tariffs is fair and it is necessary.
Colin Tessier-Kay:
Yeah, and I think there is a, kind of pulling from our conversation last week as well, there is an importance to clarify the multifaceted approach to these tariff policies and the fact that the reciprocal tariffs, they target every single country that imposes commensurate duties. And these targets obviously fall to Canada, Mexico, and the EU, but China still very much remains the clear focus of the current administration's tariff policies. And I think there was actually a report released from Brookings earlier this week by Robin Brooks who actually categorized three broad categories, I should say for the purposes of these tariffs. One of which being the leverage in negotiations, which is likely more the case for Canada and Mexico, especially considering for Mexico border security outcomes, and those negotiations. In regards to the steel and aluminum reciprocal tariffs obviously the geopolitical considerations. Brooks pointed to domestic productive capacity of military transportation and hardware. And the underlying tone, the third category that they outline is a notion of fairness in economic reciprocity, and that's specifically targeting China's economic coercion and especially currency manipulation. I think when you mentioned back in March of 2018, when the tariff policies under Trump 1.0, you saw a lot more tit for tat and an immediate meeting of tariffs raised by the US and a response from China. But also there was considerations for artificially devaluing their currency, the renminbi even further, which is something that they haven't yet done. Which some economists and analysts are saying may signal a willingness to negotiate at least a bilateral trade agreement similar to the phase one trade deal. Do you think there's any kind of credit to that kind of approach here? And do you think China would even be willing to approach a bilateral agreement at this point?
Miles Yu:
I don't know. I don't think the bilateral trade agreement with the United States, its primacy is gone. The first trade deal was never implemented. You can say, there was COVID, but COVID has been gone for a number of years now. China has never been willing to implement those things. China right now tried to pick it up, but I don't think Trump administration is terribly interested in that. It's a good start. We can start with that. But it needs basically institutional fundamental changes of the system of China, which is probably something that we should talk about. Why is that system that benefits China, why is that to the detriment of the rest of the real world?
Colin Tessier-Kay:
Absolutely, and I think that brings us very naturally into our final topic for today. Though it's something we've been directly referencing in each of our topics thus far and certainly in last week, and that is China's model of self enrichment or sometimes called the Chinese economic model. A brief explanation here for our listeners. The self-enrichment model has been the CCP’s principle strategy for economic development and growth for decades and is characterized primarily by centralized planning and control of key industries and export oriented economic strategy, particularly for manufactured goods to generate foreign exchange, massive investments in infrastructure and development domestically and a heavy, heavy reliance on state owned enterprises in sectors such as energy finance and telecommunications backed by substantial government subsidies. And while this model has led to exponential economic growth in past decades, it is certainly not without issues. And we've seen China's annual GDP growth margins have plateaued, especially in recent years. So Miles, perhaps we can start with how exactly this model has over the past few decades at least, become a significant concern for the international community.
Miles Yu:
You mentioned about some of the measures taken by the Chinese government, as if that's really the reason why China enriches itself. People always ask if Chinese system is so bad, why is it so powerful economically? Why is it so rich? I mean, I think it has more to do with the mistakes made by the free world. We have to understand the Chinese reality, despite all the things focused on SOEs, all the things, the China's economic reality base is a three thing, is a threefold. Number one, China is fundamentally a non-market economy. Number two, China is a communist country. The major economic decisions were not made by market, but by the Politburo, by Xi Jinping himself in particular, who controls the Politburo. Number three, China does have a global ambition to export its economic and political system globally for global dominance through creating global dependencies on China. So that's basically the three realities.
Specifically, I said more important factors are actually external. China has been able to make itself rich almost in spite of the CCP, not because of it. And these three factors are number one, full membership in global trading system. It's a non-market economy, but we embraced it enthusiastically into organizations like WTO. The WTO membership is where China took off. So without that, China could not take advantage of global free trading system. The membership of China is not really qualified, doesn't deserve, but it's there. Unlike all America’s adversaries, Russia, Iran, North Korea, China is the only one and the biggest one that has this kind of undeserving opportunity and privilege. That's why China has become so rich and powerful economically. Secondly is this joint venture. Joint venture, China has tried to lure all the western companies to China, through tariffs as mentioned earlier, also through special tax benefits once you go to China to force Americans to join Chinese companies.
Now Chinese companies are all controlled by the Chinese Communist party, and by law Western companies cannot have a majority holding in a joint venture. Joint venture is a bonanza for intellectual property theft. And that's how China was able to get all the Western trade secrets, technologies, and to develop its homemade brands and competition to kick out the original partners of the Western companies. This, the pattern is so obvious. I'm surprised it hasn't become a main talk of the town. [So what exactly…] Thirdly, I would say this, thirdly, China is basically, you are right, you're right. China is a country that deliberately provided massive subsidies to its own companies, particularly state owned companies. The purpose of that is drive global prices down and to kill the competitions from abroad. And that's why the state subsidy is really, really malicious and particularly now in new energy products like electric vehicles, solar panels and batteries, right? So this is why. So three things of Chinese Communist Party’s economic model, that is, WTO membership, the joint venture, intellectual theft, and subsidies. So, there are solutions.
Colin Tessier-Kay:
Yeah, I was just about to ask that essentially. So given these three sins here, what exactly are the countermeasures available to the US and more broadly to the international community here?
Miles Yu:
First of all, we have to see the Chinese reality. That is, we have to revisit China's WTO membership. And I know that's a little bit of a tall order, but we can at least create an alternative international free trading system. I think the CPTPP is a beginning, right? China is not a member of that. And so we can expand that or US should really lead the creation of a new global trading system without China's participation. Because China, unless changes economic nature from the non-market economy to a market economy, China doesn't deserve that kind of things. So I'm glad US Congress is picking up the new debate about China's PNTR, their permanent national, what PNTR is, basically China's tariff free trading system as if we're gonna treat China as a free trading system. And that's picking up the steam in the US Congress. That's very good.
Secondly, we really, really should end this whole idea of joint venture, a venture with China because it is really, really a solution, it is a road to ultimately sucker them, if that's the word. That means we have to strengthen our export control. Export control, we try to do it, but America cannot do it alone. We have to do it internationally. We have to go back to the Cold War methods where we have something called the COCOM, the Paris Coordinating Committee. That really, that's an organization based in Paris to coordinate all technology and arms export control to Eastern Bloc countries, and that's the only way you can do it. So that all the Dutch companies cannot give China all this very high tech, nanotechnology chip making equipment. And the French could not really look for the loopholes. So the British and a lot of people do this kind of stuff. So we have to have a multilateral joint export control mechanism set up and also ultimately is really decoupling. Decoupling in some kind of a dirty word as if this is really terrible. It's inevitable. The confrontation between the two economic systems was so obvious. Ultimately if you continue this path of coupling with China it’s suicide for Western model of economic cooperation.
And lastly, I think really tariffs. Tariffs, tariffs. It’s to offset the CCP subsidies. It's not the best thing. In a perfectly formed, operated free trade system tariff is taboo. We should never have tariffs. But we're not living in the perfect world, we're living in the real world. The real world has a big problem. The biggest problem is that the free trading system embraced a non-market, non-free economy. That's China. So that's reality. Unless you change that reality, tariff is absolutely necessary for self-defense. We can also, another thing which I provided to the Congressional China Committee last year, that is, Chinese companies all want to do business in the United States, but we should really force every company from China who wants to do business in the United States to pledge to American government that its business operating in the United States is purely business. It will not be interfered by the Chinese government or it would have to say no to the Chinese government’s non-business intervention. So we put the burden of proof on those companies. If they realize, if they violate their own pledge, then they should get out of the United States. As Seinfeld would say, no soup for you.
Colin Tessier-Kay:
And I think for our listeners, as you continue to hear all of these conversations develop around evolving trade policy and decoupling from China, keeping that three sins of the Chinese economic model and framework in mind. And unfortunately this is all the time we have for today Miles, but thank you as always for your analysis and insight and we'll check back again with you next week.
Miles Yu:
Alright, see you next week.