Putnam recently hosted a discussion featuring U.S. Senator Dan Sullivan, Robert Daly of the Wilson Center, and Brian Freiwald, Putnam Portfolio Manager. The discussion, moderated by Cathy Saunders, examined the history of the relationship between the U.S. and China, the current environment, and an outlook for the future.
Moderator: Cathy Saunders, Head of Corporate Sustainability and Public Policy, Putnam Investments
- Senator Dan Sullivan (R-AK)
- Robert Daly, Director, Kissinger Institute on China and the United States, the Wilson Center
- Brian S. Freiwald, CFA, Portfolio Manager of Putnam Emerging Markets Equity Fund
Cathy Saunders: For the past several years, our policy conversations at Putnam have focused on the growing economic and political impact of China on the world. The United States and China have multiple issues that are being monitored, including national security, geopolitical tensions, human rights, data privacy, tariffs, and taxation. Even with these issues, trade between the nations keeps breaking records year after year. Senator, how do you see the current state of the U.S.–China relationship?
Senator Dan Sullivan: I’ve just come from a meeting of the Armed Services Committee, and over the past hour, probably 65% of the questions focused on China. The United States has a long history in the Indo-Pacific region. Let’s recall in 1867, when the United States purchased my home state of Alaska from Russia for only $7.2 million, this was a strategic engagement within that region. China has served as a “bookend” for my career. My first deployment as a Marine Corps infantry officer was to the Taiwan Strait. When I served in the Bush administration, I had the opportunity to travel to China several times with Treasury Secretary Paulson when we launched the Strategic Economic Dialogue.
When I arrived at the Senate in 2015, it was clear to me that even though our policy conversations were dominated by concerns over extremism and the Middle East, China was really our primary geostrategic challenge. Today, everyone is talking about China — members of Congress, business leaders, and other nations. Our engagement is, for the most part, bipartisan. We are also suffering from “promise fatigue.” Chinese officials have repeatedly made promises, including pledges to refrain from militarizing the South China Sea islands, that they have not kept. Add to this non-reciprocal economic access and stealing intellectual property.
The challenges we face today in China are not of our choosing. They are the result of conscious decisions by Xi Jinping and China to overturn key elements of the U.S.-led, rules-based international order that we established after World War II. In my view, we should focus on the following key points.
- We all want to make sure our competition with China does not turn into conflict. And this concern is strongly bipartisan in Washington.
- We need to continue to have a strong military. This is one area where I think the Biden administration is failing. It has put forward inflation-adjusted budget cuts in the Defense Department, despite a massive military buildup in China.
- The United States should focus on other strategic advantages, particularly in terms of our critical energy and mineral resources.
- We should ensure U.S. dominance of quantum computing, high-end chip manufacturing, and AI.
- Also, our financial industry should consider whether investments they are making might end up supporting Chinese activities that could threaten our military in the Taiwan Strait.
Cathy Saunders: Robert Daly, from your position at the Wilson Center, why is our relationship with China so important?
Robert Daly: On the positive side, the United States and China are vital trading partners. Despite the “trade war” of recent years, our trade volume and our deficit with China has grown. China is the world’s greatest trading nation. It has the world’s largest middle class, is increasingly a source of innovation, and represents some 20% of the world’s population. Our engagement with China over the past 40 years has greatly benefited both nations.
On the other side of the question, China remains a security challenge over both the short and medium term. We should recall that American economic strength is founded on our world-leading companies. To remain great, these companies must engage China.
Cathy Saunders: Brian Freiwald, how do you see China from your perspective as a global investor?
Brian Freiwald: China has made remarkable strides. Air pollution has been reduced, and most of the cars I saw on a recent visit to Shanghai were electric. Western consumerism is alive and well, and in Shanghai, Starbucks opens a store every nine hours. China is the second-largest economy in the world, so it is hugely important for every company and every commodity. China consumes 60% of the world’s steel and 40% of the world’s copper. Texas Instruments, Apple, Nike, and Tesla all derive greater than 20% of their profits from China. So slower economic growth will have direct implications for the global economy.
Cathy Saunders: What are some of the implications of discussions about Taiwan?
Brian Freiwald: As a global investor, I’ve seen this conflict discussed more in the Western media than I have in other forums. The real experts think that the chance of a conflict over the next five years is exceedingly low. A more significant risk to global financial markets has been the rapid decoupling in key sectors such as semiconductors, where new FABs [fabrications] are being built in the United States, Europe, and Japan. We cannot change China’s basic position for Taiwan, but if we’re careful, we may be able to convince Xi Jinping and his successors to avoid a catastrophic scenario.
Cathy Saunders: What does the diversification of global supply chains mean for China?
Brian Freiwald: Supply chains have been diversifying away from China for the past decade. Nike used to make nearly all of its shoes in China; this is just 20% today. Apple still assembles over 90% of its products in China, but Indian production for Apple is projected to rise from 5% to 25% in coming years. Meanwhile, the macroeconomic environment is challenging.
This is all taking place against a challenging macro backdrop. China’s total debt-to-GDP ratio has reached 360%. The population is declining, and the median age is now older compared with the United States. Youth unemployment now stands at 21%, up from 11% pre-Covid. While some have projected 5% GDP growth for China, my base case is only 3%.
Cathy Saunders: What are some of the tools that the United States can deploy to improve relations with China?
Robert Daly: Even though many countries around the world have come to see China as we do, we have neglected diplomacy. But even diplomacy isn’t a single “tool” that we can use. Xi Jinping has made China into a bit of a fortress.
Brian Freiwald: I think the best course forward to improve our relationship with China would be to improve our communication and connection. Chinese enrollment at U.S. universities has declined significantly. The number of foreigners working in China is down well over 50%, and flights between the United States and China are still at less than 10% of the levels that they were pre-Covid. Opening up these channels of communications — between corporations, universities, and citizens — could really make a difference.
Cathy Saunders: Robert and Brian, and Senator Sullivan, thanks for sharing your insights.
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