One of the Trump administration’s main concerns will be how it deals with China. To get insights into the challenges the new administration faces, The Liberty Magazine spoke with Mr. Gordon G. Chang, the author of The Coming collapse of China and Nuclear Showdown: North Korea Takes On the World, about how the world will move forward amidst the current uncertainty. Chang gave us insights into President Trump’s trade policy, how jobs will be returned to America and how the world should deal with North Korea.

Interviewer: Hanako Cho

I Saw the Beginning of China’s Failure First Hand

Interviewer (I): Thanks for taking your time today.

Chang: Well, thank you very much for asking.

(I): What led you to speak out against China?

Chang: My wife and I moved to Shanghai in August 1996. When we got there, we thought like most expatriates – the place was marvellous! I can remember my wife getting on the phone and saying: “Mom! China’s not communist anymore.” I agreed with her. As we lived there, however, we saw the reality of the system. We saw all sorts of things that you don’t perceive when you first go there on a short trip. A lot of my clients would fly to Shanghai. They would stay at the Grand Hyatt, which is one of the most magnificent hotels in the world. They would come away and say: “China’s not communist anymore”, which is what my wife said when we first moved there. But, as you get to see the system, you live there, you talk to people, travel around the country, we saw a very different China. That’s what changed our opinion about the sustainability of the Chinese System. Although I didn’t think the system would last for very long, it’s lasted for longer than I thought. Nonetheless, we are starting to see China begin to fail.
So, for instance, in 2015, there was one trillion dollars of net capital outflow according to Bloomberg. Last year, we don’t know how much money was coming out of China but it probably approached 2015’s amount. Right now, Beijing is having a very tough time keeping money in the country. They’ve resorted to these unannounced and informal capital controls. Therefore, I don’t think the Chinese system can keep itself together. We see this right now. The economy’s very fragile. We see it in the incomplete leadership transition from Hu Jintao to Xi Jinping. We see the Chinese military becoming much more influential in decision-making. All of these are very adverse trends, and I don’t think the system will be able to survive for very much longer.
I wrote a book: “The Coming Collapse of China” in 2001 and I thought that the system wouldn’t last more than a decade. So, I’m obviously out of time. Nonetheless, we are starting to see symptoms of systematic failure.

China Will See Democracy

(I): It seems that the U.S. Administration has long believed that if China becomes rich, then democracy would prevail. Do you think this will come true?

Chang: The Chinese people aren’t morons. They want what everybody else in the world wants, which is more say in their lives; they want a peaceful society; and they want security. The communist system really cannot provide those over the long-term. Eventually, the Chinese people, one way or another, will get rid of the communist system. Now, it has taken longer than most people thought it would. We’re starting to see, especially in the last years of Hu Jintao, and now under Xi Jinping, we’re seeing the political system becoming more coercive. That’s an indication of the insecurity of the leaders. This is an indication that the Chinese people want something different. They may not be willing to go out on the street all the time because that requires courage and bravery that most people don’t have. Nonetheless, people are obviously saying they want something new and the Party is standing in the way of progress. That’s why the political system is leaving less space for dissent, for expression, for all of these things because they know that the people, if they had a choice, would get rid of the Communist Party. Otherwise, why would they be more coercive? There’s a real indication that things are going wrong.
After Mao, the system opened up and you had more and more freedom. You had greater space for developing your own business, for speaking out. Then that was reversed in the first stages of Hu Jintao’s rule, and it has only gotten worse since then. Since then, especially under Xi Jinping, we see a reversion to the old-time political system that everyone thought was gone forever. That was premature. Eventually, the Chinese people will get it right. They will have a liberal democratic system. They will have a more or less free market economy. It might not be next year, but it’s certainly going to happen. We can see it right now.

China Is losing Support

(I): The U.S. Administration has been lenient on the Chinese Government.

Chang: That’s for two reasons. First of all, this goes back decades – back to Nixon. U.S. administrations wanted to integrate China into the international system. So, they paved China’s way into World Trade Organisation, into all sorts of multilateral groups. The other thing I think American policymakers thought was that, eventually, China was going to dominate the world so they wanted to be on good terms with Beijing. Right now two things have happened. First of all, it is clear that China does not want to be enmeshed in the world’s rules and treaties, conventions and laws; it doesn’t want that. So, people are starting to see that China is not moving in the right direction. The other thing is that I think people are becoming less afraid of China because they see the fragility of the system. Now they worry more about an unstable, weak China than they do about a strong one. So, the two original reasons supporting the Communist Party have sort of gone away.
There’s now a reassessment in Washington and in other capitals about China. This is paving the way to less friendly policies towards Beijing. So, it’s not just what we’re seeing under Trump – Trump is, maybe, more forthright and bolder in his statements. We’re starting to see this in statements from other countries as well. So, the opinion about China has changed. Some countries are further along the curve than others but, generally, there is less support for Beijing in the world.

Trump Is Taking A Hard Line with China on Trade

(I): I think the Trump administration’s trade policy will change the tide with China. How will this affect relations between U.S. and China?

Chang: Whether it was a Trump presidency or Secretary Clinton’s, both of them were going to be much tougher on China with regard to trade. As a matter of fact, when Secretary Clinton was campaigning, she talked about appointing a trade enforcement officer to deal with issues posed by China and other countries, but especially China. So, this was going to happen. It’s only happening faster under Trump. It’s not only Peter Navarro’s appointment, but you also have Trump picking Wilbur Ross to be his Commerce Secretary. Yesterday, there was the announcement of the new U.S. Trade Representative, Robert Lighthizer. He’s consistently chosen hard-liners on trade. There are no softies on trade in this incoming administration.

China Is No Longer The World’s Low Cost Manufacturer

(I): Some may criticize Trump’s foreign policy because they may not be able to buy cheaper goods from China, and therefore it’s going to be hard for consumers. How do you respond?

Chang: Well, I think that is possible. You’ve got to remember, though, China is no longer the low-cost producer in the world. A lot of low-cost manufacturing has left China, and this is a process that’s gone on for more than a decade. So, you see, factories at the low-end of the manufacturing chain go to places like Bangladesh, Vietnam, Egypt and Mexico. If you went into a Wal-Mart, let’s say, fifteen years ago, almost all the jeans, all the low-end clothing, would have been made in China; that is, 95% of it. Now, go into a Wal-Mart and look where that stuff comes from. Very little of it comes from China. It comes from elsewhere. That’s because China has now become, first of all, too expensive. Also, people are starting to worry about the political risk. So, this is going to happen further up the chain. We’re going to see, I think, that China’s manufacturing could really stumble.

The Fall of Chinese Manufacturing

In 2015, it appears the Chinese manufacturing sector was contracting. It actually contracted about 3 or 4%. It was contracting in the first half of 2016. Now, it’s expanding a little bit, but only because China has put in an enormous amount of debt. China is now creating debt at least five times faster than it is producing incremental gross domestic product. Even if China is growing at the 6.7% rate that they claim, it’s five times more. China is not growing at 6.7%; it is growing maybe 3 or 4%. This means China is creating debt at maybe, ten times faster than GDP. You can do that for a little while, but you can’t do it for very long.
That’s why we see a fundamental lack of confidence about China. Foreign direct investment in dollar terms in 2016 contracted. People are not going to put their money into a country where you have so many problems, but especially China, as it is now restricting outbound payments. So, people are not going to put money into a country if they can’t get their money back out. This is a big issue for Beijing. You know, they’ve been trying to do this quietly with a lot of informal procedures which are not announced but people are starting to figure this out. So, who’s going to put their money into China these days? That’s why they have real trouble now with foreign direct investment. Inflow is stagnating and outflow is increasing. This is a critical situation for China.

Will Jobs Return to the U.S.?

(I): Do you think America can get some jobs back from China? You said that many of the jobs are now going to Vietnam, and other places than China.

Chang: America’s already started to get back some jobs. This was well before Trump. There are a couple of reasons. First, companies want to be closer to the United States where customers are. It’s considered to be important to be close to your customers. Second, the cost differential between China and the United States has narrowed considerably. There are a lot of costs that are lower in the U.S. than they are in China. China is getting too expensive. China will see wage increases well in excess of productivity gains and that, of course, is not sustainable either. So, jobs have come back. Now, automation will accelerate that process because a robot in China is no cheaper than a robot in the U.S. So, if labor becomes a smaller and smaller portion of the cost of a good, people are going to have an incentive to be in the US.
This is happening already. Obviously, Trump was influential with keeping the Carrier jobs in the U.S., and with Ford announcing that they’re not moving jobs to Mexico. He will accelerate that process. The one thing that Trump is doing is he has highlighted political risk, because he is saying: “I’m going to do certain things.” That is causing people to consider political risk and actually keeping them from moving jobs to China.
The other thing – this is more important – this has nothing to do with Trump or China. If Trump can reduce taxes and reduce regulation, he is going to create a boom in the United States. That, more than anything else, is going to convince companies to keep jobs here or to bring jobs into the United States.
There are a lot of things: Trump is going to go after China but more importantly, he’s going to create prosperity in the US.

(I): So, people will come back to the United States.

Chang: Or, they will keep jobs here.

(I): Oh, I see. They will do both?

Chang: Both. So, that’s a problem for China.

China Is Pulling Away from the Global Economy

Chang: China, right now, is delinking from the global economy. In 2015, two way trade, imports and exports, fell by 8.0%. In 2016, the decrease will be similar, maybe 7.5% or so. That shows China is starting to “pull away” from the rest of the world, and that is not good either. These things happened well before Trump. However Trump could very well accelerate this. There’s going to be a very different China going forward. It’s going to look a lot weaker than the one today. It’s not going to be the manufacturing powerhouse that people say, about being the factory of the world. People also say it’s the engine of global growth. Well, I don’t think that’s going to be the case.

What Role Should Japan Take?

(I): I see. Do you think Japan should follow Trump’s trade policy since we have a serious deficit with China?

Chang: Japan is going to do what the European Union and what America will do. They’re going to be much tougher on China in terms of trade. I mean they have to be. China has been gaming the international system, and people are just saying: “No more”.
There is one other thing Japan should be doing. Prime Minister Shinzo Abe talked about his three arrows to revive the economy. The third arrow is the most important, and most difficult, which is liberalization of the economy. Eventually, I think what will happen, if Trump is able to create this prosperity, this “boom” in the United States by reducing regulation, I think the Japanese will say: “Ah ha! We’re going to do the same thing.”

(I): Yeah.

Chang: … because they’ll be forced to. So, when you start to reduce regulation, you expand the scope for business. That means there’s more and more prosperity. I think we’ll see the same thing in Japan that we will see in the US.

(I): So, you think it’s better for us to liberalize following the Trump policy on the economy?

Chang: Japan, I think, should liberalize. Well before Trump, Abe was talking about the third arrow. So, this is something that is long-term. Abe has disappointed people with the third arrow, but he still has time to implement that. I’m relatively optimistic that he will do that. Likely, because everyone’s going to look at the U.S. and say: “Oh my gosh!”
Also, the other thing is India. Prime Minister Narendra Modi is slowly starting to open up the Indian economy. I think that is another positive example for Japan.

Do We Need to Change Article 9?

(I): Japan has not been able to revise Article 9 and it is not ready to enter combat with China or North Korea because of its pacifist constitution. How do you see the situation in Japan?

Chang: Japan doesn’t need to revise Article 9. It’s already defending itself. If you read Article 9, it’s apparent that Japan’s Self-Defence Forces are unconstitutional. Article 9 renounces the use of force. So, self-defence is a violation of the Japanese Constitution. You have Japan’s Self-Defence Force. It is perhaps the most capable of the conventional armed forces in Asia. So, you don’t need to revise Article 9. You’ve already, in effect, abolished Article 9. You eliminated it. All Japan needs to do is to reinterpret Article 9 in the way it has done in the past. So, actually, eliminating it or amending it is symbolic. It’s already been repealed!

Getting China to Help Disarm North Korea

(I): On the 1st day of January, Kim Jong-un announced that North Korea is on the verge of testing an intercontinental ballistic missile which might be capable of reaching Washington D.C. How should the Trump Administration deal with North Korea?

Chang: The U.S. has tried every single approach to solving the North Korea problem except for one. That is, to impose costs on China. I’m not saying that one hundred percent it will work, but I’m saying that all the other approaches have failed so we should try something new.

(I): They’ve been trying six-party talks.

Chang: The Six-Party talks completely failed. The reason is the administration of George W. Bush placed a higher priority on engaging China than it did on disarming North Korea. So, it was more concerned about China than it was with North Korea. That failed. We have ended up with a belligerent Beijing and a nuked-up North Korea. The Six-Party talks are not coming back.
The one thing the Obama administration did on September 26 last year was to impose secondary sanctions on a small-fry Chinese company. Unfortunately, the administration did not impose sanctions on Chinese financial institutions that were also involved in illicit commerce with North Korea. So, the administration really faltered. What happens, is, I think, that China will not get serious about disarming North Korea until they see that the U.S. is serious. The way to make China understand that we are serious is to do something that will take political will, which is to unplug those Chinese banks from the global financial system by imposing sanctions on them for facilitating the illicit commerce with North Korea. That will shock the global financial system, but it will show Beijing that we place the highest priority on disarming North Korea. Then we may be able to increase the cost so high that Beijing has no choice but to help us disarm the North. We haven’t tried that yet. I think we know what to do. We’re just not willing to do it. So, I hope that Trump actually sanctions Chinese banks that have been involved in this illicit commerce. Once we do that, we have hope.

The Threat of North Korea’s Nuclearization

(I): North Korea is now trying to develop SLBM. How much time do you think we have left to deal with North Korea’s nukes?

Chang: North Korea already has three missiles that can hit the lower 48 states: the Taepodong-2, the KN-08 and the KN-14. Now, they don’t have the heat shielding that is necessary to deliver a nuclear weapon long-range. They haven’t been able to make a nuclear warhead for the longest-range missiles. Their missiles are not very reliable or accurate. Those are only technical challenges, which they can solve because they’ve already solved them for their intermediate range Nodong missile. They’ve got the shielding; they’ve loaded nuke weapons to their intermediate missile. Now, loading it to a long-range missile is more challenging from a technical point of view, but they have the technology already. They just need to refine it. Within three years, maybe four years, maybe five years, they’ll be able to deliver a nuclear weapon to the American city of their choice. That means we don’t have very much time to deal with these issues.

(I): Trump has tweeted that it won’t happen.

Chang: Trump tweeted that. I hope he’s right. The North Koreans read that and say: “Oh my gosh! That’s a declaration of war.” From Trump’s point of view, he just tossed off a tweet. But from North Korea’s point of view, they see an imminent threat to use force. So they see a declaration of war.
Trump has created a confrontation.
Whatever his intentions were, he has created a competition. Now, there is a dynamic that is going to play itself out, and it’s going to be a scary one. At least Trump has decided to do something. President Obama, since the spring of 2012, has done virtually nothing about North Korea. That result is a North Korea that can threaten the U.S. So, at least Trump is doing something.

(I): That is a potential threat because North Korea is beside us. So, Japanese people see it as a potential threat …

Chang: … already, because the North Koreans do have a missile that could hit Japan.

(I): Yes.

Chang: With a nuke.

That’s also true of South Korea.

So, yeah, you feel the threat.

Will Japan Become a Nuclear Force?
(I): So, will the Trump Administration allow us to develop our own nuclear weapons?

Chang: Trump, in March last year, talked about that, and he also talked about South Korea developing its own nuclear arsenal. So, it’s out there. I think though, that’s Trump as a candidate. Trump as president is probably going to govern differently. I don’t think the Japanese people are ready yet to develop their own nuclear arsenal. I don’t get the sense that there is the political consensus to do that because you have the nuclear allergy.

(I): Right.

Chang: Japan is determined to defend itself. I think that what we’re going to see is Trump encouraging American allies – not just Japan, but also South Korea and also NATO members— to spend more on their defence. That’s going to happen, and that’s a good thing, because Japan spends a lot on its defence but there are some countries in Europe that do not. That is completely unsustainable, and that will change.

Asian Countries Are Building Military Strength to Combat China

Chang: Countries in the region are afraid of China, so they’re going to do more to protect themselves. That’s just natural.

(I): In what way?

Chang: To build up their conventional militaries. It’s already happening. Japan’s doing it. You’re shifting your defence focus from the northern part of the country to the southwest to defend against China. China not only wants the Senkakus but now talks about taking Okinawa and the rest of the Ryukyu chain. So, China has threatened to dismantle Japan. Japan is not going to sit there and just watch that. Also, the westernmost inhabited island of Japan is actually south of Taipei. It’s Yonaguni. That means, if the Chinese are going to threaten Taiwan and invade, they’re probably going to violate Japanese water and air space. I don’t think Japan is going to allow the Chinese to do that, because Taiwan in Beijing’s hands is a mortal threat to Japan.

(I): Yes.

Chang: The Japanese security establishment knows that.

A Japan-centric Asia

(I): China has a plan to take Taiwan in five years when the Chinese economy surpasses the U.S. economy.

Chang: They can’t do it. Look what’s happening in Asia. Prime Minister Abe went to the Shangri-La Dialogue, which is the big security conference in Asia. I think it was 2014. He talked about the “new Japanese providing security in Asia”. If any Japanese leader said that five years before then, everyone would have recoiled in horror that the Japanese were coming. But nobody objected to that in 2014 except, of course, the Chinese. That means there is acceptance of Japan providing security in the region. Japan has friends on both sides of the South China Sea and at the bottom. I think the region is going to become Japan-centric well before it becomes China-centric. I see a Japan which is much more assertive.

(I): You mean, those countries in the region will welcome an assertive Japan?

Chang: An assertive Japan is already being welcomed by countries in the region: by Taiwan – even the Philippines, which has now started to move away from the US. Japan is welcome in Vietnam. It’s welcome in Indonesia. It’s welcome in Australia, and it’s welcome, most importantly, in India. So you see, the region looks to Japan for leadership.
At the end of 2006, Taro Aso, the foreign minister, talked about the arc of freedom and prosperity. The idea in 2006 went nowhere because countries were optimistic about engaging China and bringing it into the international system. Countries aren’t that way anymore. They are now concerned about a belligerent, provocative, aggressive China. Countries are now starting to form this arc that Aso talked about in 2006. It’s actually starting to occur. The most important grouping there is what’s known as “The Quad”: Japan, India, Australia and the United States, which are actually working very closely together. So, we are seeing a growing coalition against China. Japan is a critical member of that coalition.

China and the Space War

(I): May I ask about the Space War because China has been developing the capability to destroy satellites?

Chang: China is obviously moving in a very public way to be able to take down the satellites of other countries. It’s not a war in space yet, but it is a confrontation and it is causing friction right now. Countries are developing their capabilities to be able to blind the other side. China has the most public attempts to do this. This is important because our military, our economy, our whole society is dependent on satellites.

Will Trump Follow “The One China Policy”?

(I): Trump gave a phone call to President Tsai Ing-wen. Is this a sign that his administration will not follow the one China policy?

Chang: It’s a clear sign. The phone call was not just something that happened out of the blue. The phone call was the result of deliberations between Trump’s staff and Tsai Ing-wen’s staff. That went on for weeks. So, this was the result of a deliberate change in policy. As a matter-of-fact, after the call Trump tweeted out saying: “Why should we be bound by the ‘One China Policy’?” Clearly, this is under review, and we are going to see changes. As I said: Look at the appointment of Wilbur Ross and Peter Navarro. It’s happening already. The people who are in place have a very sceptical attitude toward Beijing. The policy of course, is going to be Trump’s, but also you have to look at his advisors to see where they are going to push their boss. That is going to be, I think, an important factor in pushing America to a more resolute policy on China.

(I): I appreciate your taking the time to speak to me.

Chang: My pleasure. Thank you.

End of the interview