JOANNE MYERS: Good morning, everyone. I am Joanne Myers, and on behalf of the Carnegie Council I would like to thank you for beginning your day with us.
Our guest today is Gordon Chang. As an astute Asia watcher, Gordon will provide insight on a topic we have been hearing a lot about—and yes, you guessed it, it is Trump, North Korea, and China.
For many years Gordon has been writing and speaking about Asia. Early on, he recognized that Kim's nuclear ambitions extended far beyond the possession of a few weapons and that North Korea's missile program would soon present an existential threat to not only our Asian allies, but to ourselves. He wrote about this in his book Nuclear Showdown: North Korea Takes On the World, which was published more than a decade ago.
For America, the combination of North Korea's quest to be a global nuclear power and the role China could play in halting that ambition appears, at least at the moment, to be one of the top foreign policy priorities for this administration. However, there is one problem: No one seems to be quite sure where the president stands on the most dangerous international issue of the day. Not so long ago, Trump warned North Korea to prepare for "fire and fury," while just last week, when addressing South Korea's National Assembly, we heard a more temperate Trump saying that diplomacy could work, albeit with conditions. Then, on his visit to China, he asked the Chinese to confront North Korea, saying that the longer we wait, the greater the danger grows.
The resulting confusion would be difficult under any circumstances, but when there is a possibility for a military conflict, one with catastrophic consequences, deft diplomacy is required. This posturing is particularly worrisome.
The question is whether there is a morally desirable outcome. Is there a middle ground between capitulation and war, a willingness to negotiate, to come to the table and "make a deal?" Or, as they say in Washington, is North Korea just "a land of bad options"?
For more on this, please join me in giving a warm welcome to our guest, right off the set of Morning Joe, Gordon Chang. Thank you so much for joining us this morning.
GORDON CHANG: Thank you, Joanne.
With distressing frequency, the fiery leaders of the United States of America and the Democratic People's Republic of Korea (DPRK) tell us, make it sound as if, we are just moments away from history's next great conflict. And, unfortunately, Donald John Trump and Kim Jong-un may be right. Because there is so much war talk, there is too much news; and because there is too much news, we all need a framework for understanding developments. So today I will give you my explanation of how we got into this dreadful situation and how we can extricate ourselves, our friends, and allies.
So as to not leave you in suspense, I am going to summarize what I am going to say. If you can take home only two thoughts this morning, let it be these: The United States has overwhelming leverage over China and China has overwhelming leverage over North Korea. These two points lead to one conclusion, and that is, we can, without the use of force, disarm North Korea.
Oh, one more thing. I know that you are the Carnegie Council for Ethics in International Affairs, but let me rename you this morning as the Carnegie Council for Morality in International Affairs. With regard to morality, I believe that the United States has a moral obligation to exhaust all non-military options before we strike North Korea. So let's get started.
First of all, how in the world are we finding ourselves where we are today? Well, the answer is distressingly simple: Republicans and Democrats, liberals and conservatives, over the course of three decades have pursued misguided policies. Our policies have been misguided for many reasons, but one of them is that they were based on fundamentally incorrect assumptions, and this morning I am going to talk about four of those incorrect assumptions.
First of all, we have all heard people say, "The Kim regime, they only want security," and there is a variant of that. We have been told that the Kims have watched American presidents overthrow Saddam Hussein and Muammar Qaddafi and thought, Oh, all the Kims want is a deterrent to preserve their own regime.
Unfortunately, though, the North Koreans for decades have had a deterrent, that is, the ability to destroy Seoul, a metropolitan area of 26 million people, with nothing more interesting than chemical and biological agents and high explosives. Yet, the North Koreans have been pursuing nuclear weapons for decades.
In 1965 Kim Il-sung, the regime founder, talked to Mao Zedong, the founder of the People's Republic of China, and asked him for China's plans for their nuclear device. The Chinese exploded their first one in 1964. And indeed, there are some indications that the North Koreans have had a bomb program since the end of the Korean War, July 1953. So we should not be surprised that the world's most militaristic regime wants the world's most fearsome weapons.
The core goal of the Kim family is to take over South Korea. Indeed, extending the rule of the Kim family to the South is the key to the survival of the North Korean regime. The Korean Peninsula, after all, is the world's most interesting political experiment. You have one Korea chock-full of rich Koreans, and right next to it you have another Korea full of poor ones. The people in the poor Korea, of course, are willing to accept their destitution, but only if they think they are sacrificing for a goal, and that goal, the Kim family tells them, is the removal of foreign troops from the Korean peninsula as well as the extension of Kim's Juche system to the entire Korean nation.
Kim Jong-un, the ruler of North Korea, needs to show progress in this goal, and that makes the situation in North Asia inherently unstable. As soon as Kim feels confident in his arsenal, which I think could be somewhere between nine and fifteen months from now, I believe that he will use the prospect of the incineration of American cities to blackmail the United States to break its mutual defense treaty with South Korea, then get our 28,500 service personnel off the peninsula so that he can then intimidate South Korea into submission.
To us, this plan sounds outlandish. But we have to remember that there is a guy named Trump who in March of last year, during the campaign, said maybe the United States should walk away from its mutual defense commitments to both the Japanese and the South Koreans. Indeed, Kim Jong-un in recent months has been talking more and more about "final victory," North Korean code for taking over the South. So at least Kim is not giving us the impression that he thinks that this goal cannot be accomplished.
In short, we are just not responsible for Kim's nuclear weapons programs, and, in short, Kim Jong-un harbors dangerous ambitions.
Let's look at the second incorrect assumption, that the North Koreans know better than to take us on, that we can therefore maintain deterrence.
The Kim family, unfortunately, does not see us as particularly intimidating. After the end of the Korean War, Kim rulers have gotten the better of the United States and South Korea at almost every turn. Kim Jong-un may remember that his grandfather, Kim Il-sung, grabbed the Pueblo, an unarmed Navy reconnaissance vessel, from international waters. He held the crew for almost a year; he killed one of them. And what happened? He got an apology from the Johnson administration.
The year after that, 1969, Kim shot down an unarmed Navy EC-121 in international airspace, killing all 31 crew, the largest single loss of life for America during the Cold War at the hands of a Cold War adversary. In 1976 Kim attacked two U.S. Army officers in the demilitarized zone and hacked them to death. In none of these instances did the United States impose any costs on the North Koreans.
And indeed, the South Koreans do not look especially intimidating either. In addition to all the South Koreans that Kim Il-sung killed in the 1980s—and there are quite a lot of them—the North Koreans sunk the Cheonan, a South Korean frigate, in March of 2010, 46 sailors killed. And then, in that same year in November, they shelled Yeonpyeong Island, killing four, two of them civilians.
Although many people here say Kim Jong-un is "irrational"—maybe—but it wouldn't be crazy for him to think that he could kill more Americans and get away with it. Now, we know that we would retaliate, but Kim himself has many reasons to believe that we would not. Consequently, there could be this mismatch in perceptions, and whenever there is a mismatch in perceptions there can be a failure of deterrence. We can deter stable states; we know that. After all, we deterred the Soviet Union for decades. We are deterring China now. But the question is, can we deter a state that looks precarious all the time and may now be on the edge of failure?
Here is a third incorrect assumption, that North Korea's threat to the American homeland was always going to be just over the horizon, that it would be a long time before they could threaten us with their nuclear weapons and ballistic missiles. Despite all the proven capabilities of the Kim regime, many are downplaying the threat now, talking as if the Kimster cannot put a nuke on top of the three missiles that he has that can reach the American homeland, that his heat-shielding does not work, that his guidance systems are lousy. By now we can see—we can certainly assume—that he is making fast progress, not only improving his weapons but also integrating all of his capabilities. The least likely explanation for all of this is that the North Koreans have been doing this on their own.
That brings us to the fourth assumption, that China wants to disarm North Korea. We want the Chinese to help us disarm North Korea. It is in China's interest to disarm North Korea. But, unfortunately, there are disturbing implications that the Chinese are in fact arming their neighbor. On April 15 we witnessed a very large canister paraded through the center of Pyongyang during the Kim Il-sung parade. That canister was Chinese in origin, from what we can tell, and it is the canister that the Chinese use to carry their DF-41 missile. A DF-41 has a range of at least 8,700 miles, putting all of the American homeland in range.
Now, this of course is not to say conclusively that the Chinese gave the North Koreans the DF-41. After all, the North Koreans could have paraded an empty canister, the North Koreans could have stolen the plans from the Chinese, or the North Koreans could have gotten the plans for the missile from a country to which China proliferated the missile, perhaps Pakistan. But the parading of this ominous-looking canister should lead the administration in Washington to start asking Beijing some pointed questions.
And while they are at it, the international community should ask China where North Korea got the missile that it successfully tested on May 21. The missile tested on May 21 is the same that they tested February 12. Both of those are land-based missiles. The February 12 missile looks to be a variant of the missile that the North Koreans tested on August 24 from below the surface of the Sea of Japan and the missile that the North Koreans tested on August 24 looks an awful lot like China's JL-1 submarine-launched missile. Are you noticing a pattern, that missiles that look like they are Chinese are mysteriously showing up in North Korea's inventory?
There is some more bad news. The canister we saw on April 15 was being paraded through the heart of the North Korean capital on a Chinese vehicle. The 16-wheeled vehicle, we know where it came from; it was manufactured by Sanjiang Special Vehicle Corporation, which is a unit of China Aerospace Science and Industry Corporation. CASIC, as China Aerospace is known, is closely connected with China's People's Liberation Army.
Moreover, that enterprise also transferred the chassis for the transporter erector launcher that the North Koreans use for their KN-08, a three-stage missile. We know that because Beijing admitted it in 2012. The New York Times reports that Chinese officials told their American counterparts that they sold the chassis to the North Koreans because the North Koreans said they wanted the chassis for logging vehicles. That explanation does not make sense on many levels, but one thing we can point out is that those chassis are wider than the roads in North Korea's logging areas.
And indeed, American intelligence officials will privately tell you that the story is worse than what The New York Times said. Intelligence officials will tell you that the Obama administration talked to the Chinese before the sale of the chassis and Beijing went ahead anyway.
My sense? I cannot prove it, but my sense is that the Chinese not only sold the chassis for these transporter erector launchers but they also sold the rest of the vehicle, in other words, the missile interface. Supplying the vehicle is critical because it makes North Korea a real threat to the American homeland. We are not concerned about North Korea's longest-range missile being used as a weapon. That is the Taepodong-2 or the Taepodong-3, depending who you talk to. The Taepodongs take weeks to transport, to assemble, to fuel, and to test. We can kill them on the pad. But these other missiles are real threats because they are mobile. Because they are mobile, they can hide; because they can hide, we cannot with any assurance kill them before they are launched at us.
The intercontinental ballistic missiles that North Korea tested on July 4 and July 28? They rode to their launch sites on Chinese vehicles as well. China, we have to conclude, is weaponizing North Korea, giving it the capability to kill Americans by the tens of millions.
By the way, just for completing the conversation, the Chinese have also been supplying components, equipment, and materials for North Korea's nuclear weapons program. The flow of materials from China to North Korea has occurred over the course of decades and cannot be anything other than the result of conscious policy in Beijing.
Now, due in part to our wrong assumptions, we are reaching an exceedingly dangerous period, and last month President Trump said this is "the calm before the storm." So what can we do in this period of relative calm to prevent that storm?
Well, the Chinese as we have just discussed, armed Kim. So they can disarm him. Chinese diplomats love to tell us that "he who has tied the knot shall untie it." China has tied this particular knot, so China should untie it. Despite their repeated claims that Beijing has no leverage over the North Koreans, as I mentioned, Chinese leverage over Kim is overwhelming.
Because the Chinese tell us that they are good Marxists, let's start with economics. For instance, last year China accounted for over 92 percent of North Korea's two-way trade. China provides more than 90 percent of North Korea's requirements for crude oil, much of it on concessionary terms. China supplies somewhere between 35 and 45 percent of North Korea's food, and that is particularly important this year because the drought has been the worst since 2001. There are some years when China supplies 100 percent of North Korea's requirements for aviation fuel.
China, as we all know, is North Korea's primary backer in diplomatic councils, such as the United Nations. As they say, the Kim regime could "neither bark nor bite" without China. And clearly, without China there is no North Korea. China supplies many things to the North Koreans, but the most important is confidence, confidence in the minds of senior regime members in Pyongyang that they are safe—safe from the United States, safe from South Korea, safe from the international community.
I do not know if Beijing could change Kim Jong-un's mind. Maybe nobody could do that. But that does not matter. What China can do is change the minds of senior regime elements that it is no longer in their interest to support Kim's weapons programs, or even to support Kim himself, who, because of all the executions and purges, is increasingly unpopular in the North Korean capital.
Many observers, especially Chinese ones, argue that Kim Jong-un's defiance of Beijing proves that China has no influence in the North Korean capital. Yes, relations between Beijing and Pyongyang are icy, and there is no doubt that Kim Jong-un is deeply unhappy with the Chinese. But that does not mean that Beijing is not in charge.
Chinese officials do not expect obedience all the time. Beijing supports the North Koreans, whether they are compliant or not, because the Chinese feel that, at least over the long term, the North Koreans will know their place. The Chinese know they have influence, they just choose not to exercise it all the time. But when China really wants something, it pulls the strings.
The Chinese work hard at trying to convince us that they do not have leverage, but they "doth protest too much." In fact, if the Chinese had no leverage, then it is suspicious that the North Koreans, who this year have been launching missiles at the pace of once every two weeks, stopped doing so on September 15, in other words, in the run-up to the Communist Party's 19th National Congress, the most sensitive time in the Chinese political calendar. This is the time that Xi Jinping demanded calm so that nothing would disrupt his relentless drive to consolidate his position in China.
Also, after the conclusion of the Congress last month, Kim Jong-un sent a warm message to Xi Jinping. That certainly undercuts the narrative that there are terrible relations between the leaders of these two states. When Kim does something like that, a lot of people were surprised, but nonetheless it is an indication of the true nature of the relations.
At the same time, we have overwhelming leverage over China. The Chinese economy, after all, is built on trade violation after trade violation, and that makes Beijing particularly vulnerable to the penalties that the Trump administration could levy, such as tariffs that might follow the Section 301 investigation into China's theft of American intellectual property.
Many people say, "Oh, you know, we can't pressure China because that would just cause a trade war." Well, there are a lot of things that people can say about Donald Trump, but the one thing you cannot say is that he can start a trade war with China. We are already in a trade war, it is only the Chinese who are waging it, and we are completely oblivious.
In any event, even if the Chinese retaliated, so what? There are a lot of reasons why we do not have to care. First of all, last year we ran a goods and service trade deficit with China of $309.3 billion. Trade-deficit countries do not worry about trade friction. And we Americans out of everybody in the world should know that, because in the Great Depression and the trade friction, who got hurt the most? The world's trade surplus country, the United States.
Second, the United States does not have an economy geared to selling things to China, but China has an economy geared to selling thing to us.
Third, for all the faults of the American economy—and let me tell you, there are many, despite the 3.0 percent growth for the third quarter—our economy is stable. China's, on the other hand, is proceeding slowly but surely to a systemic debt crisis, perhaps the worst in world history.
Fourth, we can just push the Chinese around. Last year our economy produced $18.57 trillion of gross domestic product. China's, in comparison, produced $11.39 trillion. That number came from Beijing, and it is almost certainly exaggerated. China claimed a growth rate last year of 6.7 percent, but the World Bank about a month ago—I'm sure they did this inadvertently—released a chart that showed that in 2016 the Chinese economy grew by 1.2 percent. Bigger combatants always have the advantage in trade wars, especially when the gap is this large.
The United States, in short, holds the high cards. And by the way, China is vulnerable for another reason: Chinese banks have been laundering money for the North Koreans, and by doing so they have been violating federal law. The Treasury Department on June 29 designated Bank of Dandong, a small-fry Chinese company, as a primary money-laundering concern under Section 311 of the Patriot Act. That meant that Bank of Dandong could no longer do business in dollars. That is the world's dominant currency. In the last general survey of currency usage in the world, which was conducted a couple of years ago by Standard & Poor's, the greenback accounted for 51.9 percent of the world's transactions.
Of course, Bank of Dandong is just a small fry, but we know there are other culprits, such as the Bank of China, one of China's big four institutions. This financial institution was named in a UN report last year for devising and operating a money-laundering scheme for the North Koreans in Singapore, and it is clear that Bank of China has been involved in this dirty business in other places.
But as big as Bank of China is—and it is the world's fourth-largest institution as measured by assets—it is probably not the largest Chinese bank that has been money laundering for the Kim regime. That honor probably goes to the Industrial and Commercial Bank of China, China's largest bank. If Trump were to enforce U.S. law and declare one of these big banks a primary money-laundering concern, it would essentially be a death sentence for that institution, and it might be a death sentence for the Communist Party itself.
You have to follow the logic. If we designate Bank of China as a primary money launderer, that would mean that it would be mortally wounded. We mortally wound Bank of China, that destabilizes the Chinese financial and banking systems, especially if we designate other large Chinese banks for also being involved in money laundering. We destabilize the Chinese financial and banking systems, we push the Chinese economy close to the edge of the cliff. We push the Chinese economy close to the edge of the cliff, the Communist Party cannot be too far behind.
Designating the Bank of China, by the way, is not something that Trump needs permission to do. For instance, he does not need to go to the UN Security Council to get this done.
Of course, nobody wants to put Bank of China down. But on the other hand, we cannot allow anyone to use the U.S. financial system to commit crimes, and of course we cannot allow China to help the North Koreans become a real threat to the United States.
At the end of September, President Trump thanked Xi Jinping for getting the Chinese banks out of the money-laundering business with regard to the North Koreans. On the day after that, we do not know what happened, because the foreign ministry in Beijing said that Trump's statements were "fake news," that China actually did not do that. Now, it is not entirely clear what occurred here, but in any event, in the past when Chinese banks have cut their relationships with North Korean customers, they have gone back to doing business with them when the international community was not paying attention. So it is imperative, therefore, that Washington pay attention to what the Chinese banks are doing.
If those Chinese banks go back to helping the North Koreans, well, of course, that gives Trump a hammer over those banks and the Chinese political system because at the stroke of a pen he can probably put Xi Jinping, that arrogant, very prideful Chinese leader, out of business. That gives Trump all the aces in the deck.
For decades, American administrations have not enforced American laws, including these money-laundering statutes, against the Chinese for fear of angering the Communist Party. Because of that, the Chinese have taken advantage of that laxity. But that has to stop because we cannot allow any country, friend or foe, to do this. That is why President Trump's September 21 executive order, which tells the world "if you do business with the North Koreans, you are not doing business with the United States," is so important. It is a big step forward. Many people say that this rule is so sweeping that the president will never enforce it. I say he has to do everything in his power to enforce it.
Now, I cannot say, despite all that I have argued, 100 percent that we can disarm North Korea peacefully, but I can say that if we do want to disarm North Korea, we have a moral obligation to do so with only non-military means until we exhaust all of them, because I believe that we do have the power to accomplish this important goal without the use of our military.
Let me also say that right now in Washington you have American officials talking war. They are talking not just of preemptive war, which is war to stop an imminent threat, they are also talking about preventative war, a war to prevent an adversary from getting a capability to strike the United States. That gives me the impression that the mentality in Washington now says that it is easier to go to war than to impose costs on North Korea's backers. There are times in history when what is necessary, such as imposing costs on China, is not considered practical, and those times are always followed by uncertainty, turbulence, and death in great numbers. I fear that we are at one of those fateful moments.
QUESTION: Christian Wenaweser. Thank you so much. I am the ambassador of Liechtenstein to the United Nations. Thanks for a great presentation. Just one question really.
From what we have seen at the United Nations, the statement that the United States has overwhelming leverage over China is really not backed up by what we have seen in the Security Council and beyond. Actually, we see quite the opposite, that the United States keeps pushing and asking for things and ends up with results that are far, far beyond what they ask for.
How do you explain that discrepancy, or how is it that, especially this president, this administration, who has used this rhetoric before the election and after the election vis-à-vis China, does not use the leverage that he says it has? What is the explanation for that?
GORDON CHANG: That is a great question, and that goes to the core of the problem of American diplomacy. I believe that American presidents have not used all the elements of national power to protect the American people, and I think history is going to judge some American presidents pretty poorly for that.
You have to remember there is a corresponding period—that was the 1970s—when the United States was in that state of, as Jimmy Carter said it, "malaise." Everyone was saying that we had to live with the Soviet Union, it was a given, that we had to have détente. That was the thought of Richard Nixon and his secretary of state and national security advisor Henry Kissinger. That was what Americans assumed, that there was nothing we could do about it.
So what happened? You have a president called Ronald Reagan, who says, "No, no, no, the Soviet Union is not a given," and what he does is he goes about undermining the Soviet Union. As we all know, the year after he left office the Soviet Union falls apart.
So, yes, the United States does not want to use its power—I understand that—and, indeed, many people in this town and in Washington think we do not have that power. But you start to look at the underlying factors and it becomes inescapable that we have much more power than we think.
The one thing we do not have is political will. But I understand. The way you look at the United States, the way it interacts in the United Nations—yes, we think we are weak. But in fact we are not.
As I said, I think history is going to judge some American presidents very poorly, not only with regard to North Korea but with other issues as well, for not using those elements of American power because of their perceptions.
The other thing is—and this is a little bit different—in the sense that since Nixon it has been a primary objective of American foreign policy to integrate China into the international system. Because that was our objective, we tolerated a lot of behavior that we would not have tolerated from other nations. So the Chinese took advantage of that and the Chinese made themselves look pretty powerful. President Trump, however, has said, "Oh, no. Integrating the Chinese into the international system, that's not on my to-do list." His to-do list is to disarm North Korea.
Now, we can all disagree with what President Trump says, the insults that he hurls to North Korea, all the rest of it, but the one thing that he should get credit for is that he has said, "I am going to protect Americans from North Korea. I am going to make it the primary objective of my foreign policy." Indeed, a lot of people say, "Well, Trump's attitude toward China is inconsistent." No, it actually is not. For decades Americans have had a China policy. Trump, in reality, does not have a China policy. He has policies that affect China, but they are not China policies. He has a North Korea policy, and when he thinks that China is helping on North Korea, he has been very easy on the Chinese. But you go and look at that June 20 tweet where he expresses disappointment in Xi Jinping, you see the change in American policy with regard to China, and that is because he decided that Xi Jinping was foot-dragging.
So this is a very different president, a very different foreign policy. He has thrown out a lot of the accepted truths. We can say it is a good thing or a bad thing, but the point is there is a new sheriff in town.
QUESTION: Thank you very much. W. P. S. Sidhu from NYU. Thank you for a brilliant presentation.
China probably has more influence in North Korea than it says, but probably less than what a lot of others assume. But that being said, I think the key question still remains: What is the endgame for us in the United States vis-à-vis North Korea, and indeed China? You gave the excellent example of the Soviet Union. Is that also the end goal for China and North Korea? What exactly do we want vis-à-vis North Korea, to disappear or just be unarmed?
GORDON CHANG: In the United States policymakers will disagree violently on what the endgame is. The Trump administration has been pretty clear. I do not necessarily agree with them, but the Trump administration just says, "Look. If you disarm, everything is copacetic."
We have had a number of statements from senior administration officials saying "we do not seek regime change." That has been a constant theme, and it has actually been said in almost the same words by Secretary Tillerson, by, for instance, UN Ambassador Haley, and others. I guess that is U.S. policy: "Take away the missiles, take away the nukes, we are all fine with you."
Now, a lot of people say— and I believe that they are probably right—that you are not going to have a disarmed North Korea unless you do have a change in the regime. That change in the regime does not have to be a drastic one, it probably just has to be the elimination of Kim Jong-un. People can disagree—that is a two-hour conversation at minimum—about whether the North Koreans can be disarmed with Kim at the top. But at least American policy may be too simplistic, but the way they say it is very clear: "Give up your weapons, no regime change."
QUESTION: Thank you very much. It was really a terrific presentation.
I want to draw you out a little bit more on what you think is happening with China's economy and its implications. I had the privilege of talking with you here at the table before the meeting began.
My impression of what the international press has to say is that China is doing quite well, that China is leading the Trans-Pacific Partnership (TPP) free-trade-initiative countries. The United States is withdrawing or has withdrawn. Africa—I have been teaching about Africa—is heavily involved, heavily dependent on China's economy, to bolster Africa's economy.
You spoke here about an imminent debt crisis on the horizon and, as I got it, almost irreversible. You can clarify that. What is your perception of China's three-to-five-year economic policy, and what are the implications for all the different countries that are relying on China's economic investments, particularly in Africa, to do well? Are they heading for a disaster also?
GORDON CHANG: Joanne, how many days do I have to answer that question? [Laughter] That is a great question. That reminds me that my wife told me I should tell the audience that if you want to ask more than just North Korea, go for it.
I think that the Chinese economy is the most important topic in the world today, because as the Chinese economy goes, so goes the Chinese political system; as goes the Chinese political system, you see changes in China's external policies. This is "the straw that stirs the drink," for those people who remember Reggie Jackson, a famous quote.
I am probably the wrong person to talk about this because in 2001 I wrote a book called The Coming Collapse of China, in which I said that the Communist Party would fall from power within 10 years. That puts me in the middle of 2011. I am totally wrong. But that does not deter me from actually trying to answer the question.
I think the most important thing is that China has accumulated—they have basically been growing. I think the best way to illustrate this is let's look at the growth rates for China over the last seven quarters: 6.7 percent first quarter of 2016, 6.7 percent second quarter, 6.7 percent, third quarter, and the Chinese want to end the year on a high note so they report 6.8 percent. First quarter 2017 6.9—6.9, 6.8; this is stupid. Even mature economies show more variation in growth rates than China, which is a developing economy, which should be volatile.
The problem in China is not so much growth, but it is the accumulation of debt; 2016 saw an unprecedented amount of debt being created at an unprecedented pace. For instance, there are reports that show that China's shadow banking debt, which is really the most dangerous debt, increased something like 240 percent in 2016 alone.
Zhou Xiaochuan, who is the respected governor of the People's Bank of China—in other words, the central bank—last month said— first, in addition he talked about China having a "Minsky moment," which is startling when you have a central bank governor talking about the collapse of asset values in your country. But when Zhou Xiaochuan said that, he also said something else, and that was that China's off-balance sheet debt was $257 trillion yuan. Divide by 6.4 and you get—and I have not done this recently—something like $38.4 trillion. That is just one portion of their debt.
You are talking about a country that has probably got a debt-to-GDP ratio north of 400. Everyone thought that George Soros was exaggerating at Davos last year when he said, "Oh, China has a 350 percent GDP-to-debt ratio." No, he probably was not. He probably was underestimating.
But the real issue here is, what do the Chinese people think about this? In 2015 China had a net capital outflow of $1.0 trillion, according to Bloomberg. We do not have good numbers for last year, but it is probably about $1.1 trillion. This year net capital outflow will be much less, but only because China has sort of taken the Latin American banana republic tactics and has restricted capital outflows, plus doing this not only on the books but off the books. Because China has been doing that, people have decided not to put money into China. So last year, foreign direct investment for the first time in my memory fell on a dollar basis, and for the first seven months of this year it was down as well.
This is a real indication. Follow the money flow. You do not have to take it from me, who has been wrong, but look at what is happening. It is just inconceivable. To me, I think the Chinese, because they control state banks, they control state enterprises, they control the markets—as a matter of fact, there is more control than there has ever been —they are reversing and they are going back to more control.
All of this suggests that, yes, they can defer the application of the laws of economics, they can prevent a crisis as they have prevented a crisis since 2008, but as they do that, the underlying imbalances in China become bigger, which makes it more difficult for them to solve their problems. They have yet, for all their power, to be able to repeal the laws of economics.
So it is coming. I am wrong on timing, but it is coming. And when it comes, it is going to take all of us by surprise, but it is going to change almost every geopolitical issue that we now think about, including of course North Korea.
JOANNE MYERS: And what about Africa?
GORDON CHANG: The Chinese do not like the spot market, so what they do is they go in and they overpay for minerals and oil and all the rest of it. Great to do that when commodity prices rise. It is not such a smart tactic when commodity prices fall. I think the Chinese, as we have seen already at various times, have been dumping commodities on global markets.
I think that essentially Africa is in for problems because the Chinese are not going to require all of the zinc, the magnesium, the iron ore, the oil, and all the rest of it. Indeed, we have seen problems in certain resource-rich economies that have been selling to China, because the manufacturing sector at various times has been slow growth. Right now it is fast growth, but only because Beijing has poured on that debt, as I mentioned, last year. So, yes, their manufacturing is doing well, but of course there is no good end to that story.
QUESTION: Hi, I am David Pruden. I am a Master's student at Columbia University.
GORDON CHANGE: So you are a real expert, unlike me.
QUESTIONER [David Pruden]: The past five, six years Kim Jong-un has had more missile launch tests than both Kim Il-sung and Kim Jong-il combined. So what changed? What is the incentive structure for Kim Jong-un that is different from his predecessors?
Also, as a side note, Kim Jong-un went to boarding school in Switzerland. He speaks German and he speaks English in addition to Korean. I am just curious what your take is on him as a person. I know we do not know a lot about him, but what do you know about his psychology and his background?
GORDON CHANG: Let me do the easier question first. As a person, it does not really matter. The reason is the North Korean regime has a certain logic to it, certain constraints. You can take anybody and they are going to probably do the same thing, or at least try to do the same thing, because if you do not do that you are going to get killed or you are going to get sidelined or something really nasty is going to happen to you. So it is the logic of the regime. So, yes, Kim Jong-un could be a flaming liberal, a flaming democrat, he could be the pope, but you put him in that regime and he has to fight to survive because it is a snake pit.
Being the dictator of North Korea is a really difficult job, and it is because it is a balancing act. It has components. It has the Korean People's Army, the military, it has the Korean Workers' Party, the security services, and Kim family members, and he has to keep all of those elements in balance. If they are not in balance, things go really bad.
One of the reasons why there have been so many executions is because Kim, when he came in, decided to change the balance of the regime as he inherited it from his father. His father had a military-first policy, so the military got everything. What Kim—the younger Kim, current Kim—decided to do was take money away from the flag officers and give it to the party members, which is a dangerous exercise if you think about it, because they are the guys with the guns. He has been able to do that successfully. But he has killed a lot of people, at least 150-160 senor regime officials. When you add in the juniors, those people we do not see because they go to the camps, that is maybe another 300-400 people who have been put to death. So this has been pretty bloody. It is a very difficult thing.
So, as I said, it does not matter who you are, you are going to have to act in a certain way because that is just the way of the regime. Kim Il-sung built an incredibly complex, fascinating, unique regime, and basically the business of the Kim family since then has been to maintain it.
As to the reason why there is an accelerated pace of missile testing, I do not know. Maybe because they can do it. Maybe because Beijing wants them to do it. Remember, you have a deal in Beijing where the most hostile elements are actually running the show these days. The North Korean military has really good links with their Chinese counterparts. Despite the fact that the diplomats might have problems with each other on any particular day, and most of the time do, the military has pretty good links with each other. And you have Xi Jinping, who does not like the United States, who basically identifies us as his primary strategic adversary.
It could be something as simple as the Chinese saying, "Go for it. We'll protect you." But I do not know. This is one of those things that we will not know until the Kim regime falls and we get to look at the archives.
QUESTION: Have you seen any possible resolve of the United States government, Trump, pushing back on China stealing our intellectual property rights and the transfer of large corporations—whether Apple, Intel, Qualcomm—to not transfer our intelligence based on China wanting to be 2030, etc.?
GORDON CHANG: Great question. Robert Lighthizer, the U.S. trade representative, in August, I believe, started that Section 301 investigation that I mentioned into China's theft of intellectual property. They define it as not only just theft but also forced transfers, where American companies are forced to transfer technology in order to gain market access despite China's World Trade Organization (WTO) rules.
QUESTION: So, is it really pushing? We have known about this since Bush, but there has not been a resolve to counter it.
GORDON CHANG: I do not work in the Trump Administration. They do not talk to me, I do not talk to them. I do not know what Lighthizer is going to do. I do not. But when you start a 301 investigation, the Trump administration has the capacity to impose, let's say, across-the-board tariffs, which is what, for instance, the Blair-Huntsman commission of May 2015, I think, recommended as a last-ditch measure, which is probably where they are going to go, across-the-board tariffs.
But I do not know how serious they are. One of these things, as I said, is that Trump, despite what he ran on during the campaign, has made it very clear that if Beijing helps him on North Korea, they are going to get a free pass on trade. We saw this when Wilbur Ross announced the preliminary results of that 100-day action plan. Do you remember in Mar-a-Lago, when Xi Jinping goes to Florida, meets with Trump, and they announce a 100-day action plan on trade? Wilbur Ross, the commerce secretary, mentions 45 days out the preliminary results, and Ross says, "Oh, this is going to help us reduce our trade deficit with China." You look at the elements of what Ross announced, they actually probably increase our trade deficit with China. That is because Trump was saying, "Look, the Chinese are helping us."
Now, you get to June 20 and that tweet, things change. Right after that June 20 tweet, you have all sorts of thing the Trump administration does to make life really miserable for the Chinese. For instance, you have that warm welcome for Indian Prime Minister Narendra Modi, if you remember that—three bear hugs. You had the June 29 designation of Bank of Dandong, as I mentioned. China gets dropped to the worst category in the State Department's annual Trafficking In Persons Report. The Trump administration announces the intention to sell arms to Taiwan. Also, America's first Freedom of Navigation (FON) operation against the Chinese in the Trump administration. All of those things occur within eight days, I believe.
This is a president who has, as I said, no China policy. He has a North Korea policy. So the question is: If you can tell me how Trump feels about North Korea at the time that Lighthizer is finished with his 301, then you know what is going to happen. It is either going to be nice or it is going to be naughty, but it is really going to be dependent on, I think, how he feels on North Korea.
There is one joker in the pack, and that is that there is a guy named Steve Bannon who has publicly talked about making China an issue in every race in the midterms in 2018. I would imagine that that is going to have an effect on the way Trump views how he is going to deal with China on these trade issues.
It is not only the 301. There is also the Section 232 investigation into aluminum, which has still been deferred. And you have a number of other things which I will not bore everyone here with. But nonetheless there is a big backload of trade actions that the Trump administration could dump on China. I think, as I said, we will just wait and see.
QUESTION: Good morning, Gordon. Richard Valcourt, International Journal of Intelligence and Counterintelligence. A couple of questions.
For many years, with Deng Xiaoping's ascension to power, we heard that the Communist Party did not matter any more in China, and yet we see with Xi Jinping's consolidation of power that the Communist Party still matters. So, number one is: To what extent does ideology, or at least the organization of the Communist Party, matter in your view of China?
Second is regarding Trump's policy regarding China: To what extent is American business, or even the financial community, having some impact on whether or not we get pretty tight with China in terms of imposing sanctions or the like?
GORDON CHANG: Two terrific questions.
The general narrative is that ideology does not matter in China, and under Deng Xiaoping maybe that was correct—you know, you had the famous quote, "It doesn't matter whether the cat is black or white as long as it catches mice"—and everyone said socialism with Chinese characteristics really meant capitalism. That is a very long conversation, but it is about 65 percent right.
Under Xi Jinping, though, he actually is a true believer from all that we can tell. He really believes in Maoist doctrine. We can see this not only because of what he says about Mao, about his pilgrimages to historical sites connected with Mao, but also what he has been doing. For instance, he has taken state enterprises and he has been recombining them back into formal monopolies. He has been increasing state subsidies, especially the Made in China 2025 initiative, which is industrial policy on steroids. He has been closing off market opportunities for American companies through a number of different ways, not only through what are called national security legislation and regulations but also just discriminatory law enforcement actions against American companies. The list just goes on and on.
This is basically believing in the state, and that is not Deng Xiaoping. Deng Xiaoping believed in the primacy of the Communist Party in politics. Economics? He was willing to experiment.
Xi Jinping will talk globalization at Davos, as he did this year and as he just did at the Asia-Pacific Economic Cooperation (APEC) forum in Da Nang, but when it comes to what he has actually been doing, China has been moving in all the wrong directions. This is okay for about four or five years, to go back to your point. You can sort of even goose your economy upward by doing this, by closing off opportunities for foreigners. But long term, they do not bring money into a country where they are being—and I will not use President Trump's word for that, but if you remember in May of last year he used a word about what China was doing to the United States.
That is exactly what they are doing, and American business is actually starting to change its attitudes toward China, which really is the second thing. That is, American business still is trying to prevent the Trump administration from doing what many people would like in the administration, but nonetheless there is a lack of enthusiasm for it and there is a real concern. If you talk to the American Chamber of Commerce, they are very concerned about the issue that you raised, intellectual property theft, and what is the United States going to do. They are concerned about the 301. They know that the 301 can roil relations with China. They do not want to have their IP stolen, but they do not want to have China retaliate against them.
So you see American business really with an ambivalent attitude these days. I think that, just long term, American businesses become less and less supportive of China largely because they are being shown the door one way or another.
Now, if you are talking about General Motors or General Electric, yes, they are okay. But you talk about Qualcomm—someone mentioned Qualcomm—we do not have time this morning, I am sure, to talk about Qualcomm's problems in China and South Korea. But this is a case where you have a flagship American company which is being severely disadvantaged by local bureaucracies and the political establishments by both our friends in Seoul and by our potential adversaries in Beijing, and this has got to stop.
I think the administration needs—I do not know about the merits of Qualcomm's cases in China and in South Korea, but I do know that they have not been getting their procedural due rights in South Korea, for instance, and they have been totally slammed in China. We have to stand up for an American company's procedural rights, if nothing else.
QUESTION: I am David Hunt.
Gordon, are the Russians playing any role in egging the North Koreans on?
GORDON CHANG: Another really important question. The answer is not much.
Putin is a troublemaker, at least when it comes to the United States, but he would prefer—and his primary focus, of course, is Ukraine and the Baltics. Increasingly over the last year we have seen problems at home that have preoccupied him, because these problems are severe, including a downturn in the Russian economy that is difficult for him to reverse.
That is not to say that Putin will not give us a hard time in North Korea because, as I mentioned, he is a troublemaker. He has identified himself very closely with Xi Jinping and will support Chinese initiatives. That is why Ambassador Haley in August or September publicly said we can get China to move in the right direction, but we are worried about Russia "backfilling," which is the word she used.
Indeed, that is a problem, because when we look at the economic relations between China and North Korea and Russia and North Korea, there has been some evidence—not a lot—that Russia has indeed been backfilling; in other words, taking advantage of business opportunities that the Chinese, for various reasons being pushed by Trump, have sort of abandoned.
This is an absolutely critical question for us because of one other thing. That is there are indications that our campaign to cut off money to the North Koreans is actually starting to work. There are reports—unconfirmed, but reports nonetheless—that junior officials in Pyongyang, who are part of a favored class, are not getting their rations from the public distribution system. That is consistent with what we have heard, that the regime is asking everybody in North Korea for "loyalty donations," which is basically informal taxation. We have heard the regime talk about the sanctions as "brutal" and as "genocide." So we are getting to them.
The issue that you raise about Russia's relationship is going to be important, because Trump can spend all of his time working on China and may be successful, but it does not really mean anything if the Russians rush right in and do it.
One other thing, though, that is good for us. That is, in addition to all of Putin's problems at home and all the problems he has in Europe, the other thing is that he has never really had that much of an affinity for problems in the Far East. We saw that during the six-party talks during the administration of George W. Bush. Russia was one of the six parties. Russia was not a factor in that. That is a real indication that Putin just does not really care. That is the good news.
But nonetheless, we always have to be worried about him because he is Putin.
JOANNE MYERS: One thing I have to say that I am glad you have an affinity for Asia. Thank you very much. That was terrific. Thank you.
GORDON CHANG: Thank you very much.