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Clyde Prestowitz: How Communist China Entrapped America’s Elite, from Washington to Wall Street

Nearly 20 years after China was admitted to the World Trade Organization, China has not become more democratic or free. And Western capital has ultimately only strengthened China’s communist regime.

“We were fooling ourselves,” says Clyde Prestowitz.

Prestowitz was a leader in the first U.S. trade mission to China in 1982, and he’s served as an adviser to four presidents, both Republican and Democrat. He is the author of “The World Turned Upside Down: America, China, and the Struggle for Global Leadership.”

By investing in Chinese companies with intimate ties to the Chinese regime, companies in the free world have inadvertently strengthened “this anti-free speech, anti-liberty, anti-soul Communist Party,” Prestowitz says. “It’s about fundamental human values.”

Jan Jekielek: Clyde Prestowitz, it’s such a pleasure to have you on American Thought Leaders.

Clyde Prestowitz: Thank you, good to be here.

Mr. Jekielek: Well, I’ve just had such a, frankly, wonderful and educational time reading your book.

Mr. Prestowitz: Oh, great.

Mr. Jekielek: A lot of what I’ve been reading in there is highly applicable to what we’re seeing happening in the world as we speak. Before we go into all the details of your book, I wanted to talk a little bit about current events because, again, I feel like you’re going to have a very interesting vantage point on a few points.

First of all, the Chinese seem interested in Afghanistan right now as the U.S. has withdrawn. We’re hearing that they’re thinking about running Bagram Air Base. We’re hearing that the Taliban is saying that China’s going to fund them. Aside from, I suppose, the propaganda victory here, what is the significance?

Mr. Prestowitz: It’s a mixed bag for China. There is a propaganda victory here, and they are milking it for that. But let’s not forget that all of this program that they’ve had to redo, the Uyghurs in Xinjiang, arises out of their fear of Islamic nationalism.

I think that there’s some nervousness in Beijing about the Americans now being out of Afghanistan. That opens it up for the Taliban and other similar types in the Muslim community to make trouble for China. So on the surface, they are playing it as a great defeat for America and a positive result for China. But internally, I don’t think that they believe that.

Mr. Jekielek: Fascinating. So what do you expect they will do at this point? Because right now, it’s just all basically rumors and statements.

Mr. Prestowitz: Actually, I don’t think that they’re going to do a lot. I wouldn’t be surprised if there’s some announcement of a belt and road project, and China will put up $50 billion or something like that. But it’ll be a long time before you see the $50 billion.

It’s not just China involved here; Russia is involved here and, of course, Pakistan. And Pakistan has an internally contradictory role. On the one hand, they have propagated or given refuge to the Taliban.

But on the other hand, Pakistan itself is divided and they don’t want to lose control. So it actually creates a lot of complications. Aside from the propaganda piece of it, which is going to disappear quickly, I don’t see that there’s any great gain for China. It could complicate China’s life.

Mr. Jekielek: Interesting. Let’s jump to another headline, which I’m sure you’re very aware of. I’ll read it to you: “Beijing Demands the US Fulfill its Wishlist in Exchange for Cooperation on Climate Change.”

Mr. Prestowitz: Right, right. This is so interesting, isn’t it? China is the biggest emitter globally, double America’s emissions, and China is saying, “Well, we can’t do anything about that unless you Americans talk more nicely to us and respond to our ridiculous requests or demands from you.”

This is a revelation, I think an unwitting revelation, by China of its true self. Effectively, it’s not honest. Effectively, it doesn’t care about emissions. What it cares about is maintaining the power of the Chinese Communist Party. It has revealed that in that kind of reaction.

Mr. Jekielek: What comes through in your book, to me, probably a central point, is how important the supremacy of the Party is to the leadership, and frankly, to anything anyone ever does there, right?

Mr. Prestowitz: Right. It’s important for people in the West to try to get a grasp of the extent and intent of the Chinese Communist Party. We say Chinese Communist Party, but in this context, we could say a communist party or we could say a Leninist party because actually, the Chinese Communist Party doesn’t exhort so much communism, but it is purely Leninist.

What’s the difference? The point here is that Lenin established a model for governing in which complete power is concentrated in the hands of very few people who are the party. The characteristic of a Leninist party is one that it seeks to control everything very narrowly, in very few hands.

And secondly, it’s paranoic. It’s constantly looking because it, itself, is suspicious because it knows that it, itself, would cheat and scratch and bite and kick. It assumes everybody else does, too. It’s always looking around for some small deviation that it has to stamp out in order to maintain its power and control. So it’s a paranoic party.

That means that it has to survey constantly what’s going on in every element of the society, be it medicine or arts or engineering or whatever it is. The party has to know what’s going on and surveil that and be sure that there’s no threat to the party there.

You see that in what is developing in China with surveillance using artificial intelligence to track people and social scores and so forth. That grows out of this paranoia of the party. Imagine that the president of the United States named, appointed, every governor of every state, every mayor of every city, every CEO of every major corporation.

Imagine that the army, the United States Army, is not the United States Army, but it’s the Democratic Party Army or the Republican Party Army. That’s very important because when people talk about the PLA, People’s Liberation Army, most people in the West think this is a Chinese army. It is not. The army is an arm of the Party.

The army does not defend the country. It defends the party. Imagine that the president of the United States has his own army, and he names every important person in the country. That’s what Xi Jinping does.

We talk about the president of the United States being the most powerful man in the world. He’s not, not by a long shot. Xi Jinping is. It’s absolutely critical for people in the West to understand that. Because of that concentration of power, what it means is that the holder of the power, in this case, we think Xi Jinping or the Politburo, the few top leaders of the Chinese Communist Party, have a program.

They have a complete strategy. They’re thinking about, … what is our technology strategy? What is our military strategy? What is our welfare strategy? They have a completely coordinated strategy across the board, and nothing is being left to chance.

This is so alien to the West, and particularly to the individualistic United States, that it’s very hard for us to grasp. But if we don’t grasp that, we can’t adequately respond to the challenge that China poses.

Mr. Jekielek: Something that you mentioned, which is even less intuitive, or that may be the least intuitive, I would argue, is this idea that Xi plays a central role in choosing the CEOs of all the major corporations. Is that really true?

Mr. Prestowitz: Well, think about it. One-third of the Chinese GDP is generated by state-owned corporations. The heads of the state-owned corporations are directly named by the Party. So already, he’s naming at least one-third of the major CEOs.

Mr. Jekielek: Those are the massive companies.

Mr. Prestowitz: Yes, right. Those are the huge state-owned things. They’re spread all over the world. I mean, the Port of Piraeus in Greece, several of the ports in Australia, are run or owned by state-owned Chinese corporations.

Half of the pipelines in Australia are run and owned by state-owned Chinese corporations. These are very, very big and important operators.

The Chinese businessman who’s probably most well known is Jack Ma of Alibaba. Now, I give him credit. He is an entrepreneur, and he did start Alibaba, and he built the company. He wasn’t named by the Party.

But Jack got to the point where he thought that he could criticize the Party. He thought that he could be critical of the regulatory system that was being imposed, and Xi Jinping just cut his legs off, and cut them off at the knees. And Jack is now donating something like $15.5 billion to help the social equalization of the Chinese economy.

Even when the Party doesn’t directly name the head of a corporation, the head of that corporation, whoever it is, is subordinate to the Party.

More important even than that is this: let’s take an American corporation. Everybody knows Apple. Many people have iPhones or they have some Apple product, right? Now, in America, we call Apple an American company, and it technically is because it’s incorporated in America.

But think about it this way. In Washington, D.C., Tim Cook is a very powerful player. He spends millions of dollars in Washington on lobbyists, lawyers, advertising, you name it. He has power in Washington. He has instant entrée. If he wants to talk to President Biden, he picks up the phone and he talks. If he wants to see a Senator or a Congressman, he gets that meeting. He makes big donations.

Apple, the corporation, makes political donations. He is a powerful force in Washington. In China, he’s on his knees. He kowtows, just like all the other Chinese. He has no political influence at all in China.

To give you what this means, in 2015, the FBI in the United States was investigating a case. In order to solve the case, they needed to be able to open an Apple iPhone. They asked Apple to help them. And Apple said, “No way. We are not opening anything for you. FBI, go jump in a lake.” The FBI said, “Okay, we’ll take you to court.” They began court proceedings against Apple.

Now, as it turned out, the FBI found an independent technologist who helped them open the phone, and so they dropped the cases. But Apple absolutely refused to cooperate with the U.S. government and the FBI.

Okay, fast-forward to 2019, and kids are demonstrating in Hong Kong against the imposition of the communist system in Hong Kong. Apple has, in its App Store, an app called Hong Kong Map Live, which if you have the app means that you can look at Hong Kong in real time.

What the kids were doing was they were looking at Hong Kong in real time and they were saying, “Okay, the police are over there. We’ll demonstrate over here.” Well, that just drove Beijing crazy. The China People’s Daily, the mouthpiece of the Chinese Communist Party, began writing very strong editorials against this app.

Within two days, that app was out of the App Store. That gives you an idea of the relative [power]. In America, Tim Cook would not have taken the app out of the App Store, but in China, he takes it out.

Everything that Apple makes is made in China. Given that, in China, Tim and his team have virtually no power. Given that everything they make is in China and given how dependent they are on the Chinese infrastructure, we need realistically to recognize that Apple is a Chinese company. It’s not an American company.

Apple will respond more quickly to what Xi Jinping wants than what Joe Biden wants. Xi Jinping is much more powerful vis-a-vis Apple than Joe Biden. Many other American companies, General Electric, FedEx, you name it, are all kowtowing. They have to kowtow to the Chinese Communist Party. They effectively have become captives of the Chinese Communist Party.

Mr. Jekielek: That’s very interesting, but there’s also this element of the market for Apple. I don’t want to rag on Apple here because there are plenty of corporations, as you mentioned, that are pretty much in exactly the same position. Essentially, Beijing has the power to turn off the market. That is an incredible power, right?

Mr. Prestowitz: Well, it does have the power to turn off the market. It’s not a complete power, but we have seen that when China is upset with some American or some foreign company, it finds ways to push that company into more difficult waters. All the companies’ CEOs know that. There’s a thing in China called the death of a thousand cuts. No single cut will kill you, but after a while, they accumulate.

What’s important again for a Western audience to grasp is the informality of the power. If the U.S. government doesn’t want Apple or doesn’t want General Motors to do something, the government can’t just pick up the phone and say, “Tim, I want you to stop doing that.” The U.S. government doesn’t have the power to do that. It has to issue an order. It has to be a formal order. Then the company can decide to accept that or not accept it.

Mr. Jekielek: Or go to court.

Mr. Prestowitz: Or go to court, right. In America, the company can win in court. Well, in China, you don’t go to court against the government, against the Chinese Communist Party. You can’t win. What it means is that the government doesn’t have to issue an order.

It can just lift its eyebrows and say, “Well, you know, we have an inspection coming up next month. Who knows what might come out of an inspection?” And so you’re always under the potential of some informal wound that you don’t know is coming if you don’t shape up and respond in the desired way.

Mr. Jekielek: And follow the Party line.

Mr. Prestowitz: Follow the Party line.

Mr. Jekielek: Let’s use that, right?

Mr. Prestowitz: Exactly, yes, right.

Mr. Jekielek: I can’t help but think about this recent editorial actually written by George Soros criticizing BlackRock. At this very interesting time in history, when there’s a lot of talk of decoupling, BlackRock is investing billions as we speak, and pushing everyone to do more, right? George Soros is coming out criticizing this. I thought that was fascinating.

Mr. Prestowitz: Really fascinating. It reflects Soros’ unique background. Soros grew up in Hungary under the Nazis and then got out before the communists could take them, but he knows what communism is.

Normally, you think of George Soros as a pirate on Wall Street. He broke the British pound. And obviously, he’s made a lot of money. He has been a backer of liberal Democratic Party kinds of causes, but he knows who the communists are.

He knows what the [Chinese] Communist Party is. Effectively what he was saying was, “Listen, Larry Fink of BlackRock, you may be a smart financial operator, but you have a blind spot. You think that this Chinese financial market is a financial market like the European or the American financial market. It’s not,” says George Soros.

You can lose a lot of money in that market, not necessarily because of market forces, but because of Communist Party forces. It’s not just Wall Street, but it’s American CEOs, American political leaders, American journalists who don’t grasp the true significance of the fact that China is not a Western-style market economy, and it never will be.

Mr. Jekielek: There’s also this question of trying to withdraw your investment.

Mr. Prestowitz: Exactly, try to take your money out of China. Exactly right. This is something that I get apoplectic about sometimes. I keep reading these articles about how the RMB, the Chinese yuan, is going to replace the dollar as the world’s main reserve currency.

I’m thinking: but wait a minute, what are the requirements of a reserve currency? Well, you have to be able to move the money. You cannot move the money in China. It’s just a fundamental contradiction.

If the Chinese Communist Party were to allow free movement of money into and out of China, it would lose control. It cannot lose control. It’s a Communist Party. It’s not going to allow free movement of money and it’s not going to become a reserve currency.

Mr. Jekielek: Well, but it’s kind of positioning this new digital yuan, right?

Mr. Prestowitz: Right.

Mr. Jekielek: Many people I’ve spoken with think that this is going to be their play.

Mr. Prestowitz: They are trying. … They do, obviously, a lot of trade. And most of their trade is done, actually, in dollars. What they want to do is to shift so that if they’re selling something from China to El Salvador or whoever it happens to be, that the payment is not in dollars, but in RMB. They want to make it RMB. Having a digital RMB will facilitate all that.

Mr. Jekielek: Which then they can tie to their social credit structure.

Mr. Prestowitz: They can tie it to their social credit structure. Exactly, right. But you get back to the fundamental point: okay, you can make your payments in some currency, but what are you holding your reserves in? If you’re holding your reserves in a circumstance in which the reserves can’t be moved. It can’t be activated; you don’t have reserves. That’s the fundamental conundrum or contradiction of the [Chinese] Communist Party notion of reserve currency.

Mr. Jekielek: Clyde, this is actually really fascinating. It reminds me of something that I learned reading your book, which I wasn’t fully aware of. That was that Hank Paulson, when he was working as the head of the Asian division of Goldman Sachs, had a foray into China in the 1990s, and what he did with the state-owned enterprises. It’s sort of unclear to me whether he was fully aware of what he was doing, even. Maybe tell me a little bit about this.

Mr. Prestowitz: I think that Hank suffered, and still suffers, from the illusion that China wants to become and is becoming a market economy.

What Hank did for the Chinese was—at that time, Zhu Rongji was the main guider of the Chinese economy. And Zhu’s problem was that China had decided to go onto the capitalist road or use more market forces.

They had all of these state-owned enterprises. The state-owned enterprises, we think of them as corporations, but they had schools and hospitals and cafeterias. They were like a whole community. And Zhu was trying to clean them up.

His strategy was to just close down the ones that were the worst or unnecessary, but on the other hand, to rebuild and redo and make stronger those that were considered necessary and had great longer-term potential.

Think of it. Here’s Zhu Rongji, and he’s the top Chinese economy guy, but China has never had a real market economy. There’s not a lot of people there who know how to run it. Particularly, how do you finance it?

I mean, they’d just been taking the money out of the government account and giving it to the state-owned enterprises. So how do you really get money into these things?

Hank shows up. And Hank says, “Ah, no problem at all. We’ll do a public offering. We’ll write up some shares for state-owned enterprise number one. We’ll just take that to New York, and we’ll float it on the New York market. Investors will buy the shares, so you’ll have the money.” Well, the Chinese just love Hank. They just love Hank. They paid him well.

It’s all built on finding a way to take American money and put it into state-owned enterprises to rejuvenate state-owned enterprises. I mean state-owned, not private enterprises, but state-owned enterprises that are going to stay state-owned enterprises in China.

And, of course, Hank gets rewarded and Zhu Rongji got rewarded and the Chinese economy gets rewarded. George Soros is saying, “You know what? Maybe the American investor is not going to get rewarded.”

Mr. Jekielek: We’ve seen that also with these recent IPOs that basically got cut off at the feet.

Mr. Prestowitz: Yes, they just cut them off. Right, exactly. What Xi has done in the last couple of months is really remarkable in terms of really sending [a message]. You couldn’t send a more direct, louder signal to the global investor world about what the reality of China is than what Xi has done in the last several months.

Yet, Larry Fink is taking a billion dollars to put into investment in China. Go figure. Xi isn’t kidding. He’s not hiding anything.

Mr. Jekielek: There’s been a lot of discussion, especially in recent years, about the role of ideology in decision-making in America and all over the world. Something that really comes through in your book is how the idea of free trade, against all semblance of reality or signals, became a quasi-religion to the whole of the U.S. government, and certainly Wall Street. Could argue conveniently so.

Mr. Prestowitz: Well, in the wake of—you have to go back a little bit in history. Realize that the global economy was reinvented in 1948. So go past, back beyond 1948. If you look at the global economy, let’s say after World War I, we had the Roaring Twenties and the New York Stock Exchange crash in 1929.

Then in 1930, the U.S. Congress passed and President Hoover signed a bill called the Smoot-Hawley Tariff, which dramatically increased American tariffs on certain imports from the rest of the world. That was immediately followed by the Great Depression.

Many people, many economists and many business leaders, felt that the tariff had, if not caused the Depression, greatly contributed to the Depression.

Then, because the Depression had contributed to the outbreak of World War II, they blamed the Smoot-Hawley Tariff not just for the Depression, but for the war.

In 1944, as it became clearer that the Allies were going to win the war, then the question became, okay, what do we do after the war? Right now, we’re all running wartime economies, but we’re not going to do that after the war, so what are we going to do?

That gave rise to what’s known as the Bretton Woods Conference in 1944, at which economic leaders from all the countries, the major countries, sat down to think through how are we going to set up the global economy post-war?

Part of that was to say, “We’re going to have fixed exchange rates. The dollar will be the major currency, and the dollar will be valued at 35 ounces of gold. All other currencies will be tied to the dollar. We’re going to have free trade, so we’re going to get rid of tariffs. And we’re getting rid of trade barriers of various kinds so that we can have a truly open world economy.”

Now, that coincided with what I call the mathematization of economics because economists increasingly thought of themselves and wanted to think of themselves as a hard discipline.

I mean, politics is a soft discipline. You can say anything and get a PhD in political science. But if you get a PhD in chemistry or physics, you have to know the math. You have to be able to crunch the equations.

The economists wanted to be able to say, “Hey, we’re just like the physics and the chemistry guys. We crunch the equations.” Economics became very mathematical. But the problem was and is that, ultimately, economics is not about physical or chemical laws. There are no laws in economics.

It ultimately is about human behavior. Human behavior often can be anticipated; there are tendencies and trends, but they’re not laws. They change sometimes.

What has been happening, in my view, is that economists, in their efforts to make themselves scientific, have ignored the realities of the political, business, and technological world as it impacts economics.

… For most of our history, the United States had been protectionist and mercantilist, just like China is today or like Japan was back in the 1970s and 1980s. We had been the same way. That’s how we got rich.

But we moved away from that and we said, “No, we are going to have free trade, open markets, free trade.” That’s what we tried to do.

As time has progressed, what we have found is that on the one hand, there have been a lot of positive elements of free trade. We and other countries have profited from a lot of the free-trade policies, but particularly the United States has been a victim of, some people say, cheating.

I don’t like to use the word cheating. Other countries have pursued mercantilist policies. Let’s take a country like Korea.

Korea protected its domestic market and subsidized its exports. It has become a powerful economy based on that policy. But Korea could only do that because the United States accepted that Korean products would be dumped, sold below cost, in the American market.

This was sold to Americans because, hey, you’re a consumer. You’re getting all these cheap products. You buy your shirts and everything—your shirts and your shoes are cheap. You should be happy.

Yes, yes, that’s right, the shoemakers will lose their jobs, and the guys who make suits will lose their jobs, but they can get other jobs. The continuation of this imbalance in trade policy, in my view, has worked and is working to undermine the longer-term productivity and innovation of the U.S. economy.

Mr. Jekielek: It’s very interesting. You made the case in the book that prior to 1989, when the West was in the Cold War with the Soviet Union, there was also always this case that was being made for free trade, even when it was clearly not beneficial, when the other party was cheating or not following the rules.

Because you could say, “We need them as an ally.” The Pentagon people would come and would make that case if anyone ever talked about anything protectionist. But then after 1989, of course, the specter of communism wasn’t looming, but the same policies were maintained, nonetheless.

Mr. Prestowitz: Yes, yes. And there was another element in the post-1989 world, which was there was a conviction that free-trade liberal political countries that this was the end.

Francis Fukuyama wrote a book famously called “The End of History.” In the book, what he effectively said was, “Yes, from here on out, it’s obvious that liberal democratic politics and free-market economics are the future for everybody.”

Some people said, “Yes, but wait a minute. Here’s China, and it’s an authoritarian country with a planned or semi-planned economy.”

The response from the elite, from the American economics, political, diplomatic foreign policy elite was: don’t worry, they’re going to become like us. Bill Clinton ran in 1992 on a slogan: no dictators from Baghdad to Beijing.

But as soon as Bill became president, that changed, and we started talking about positive engagement with China. We began negotiating with China about opening our market and enabling American investment in China and transfer of technology to China.

George W. Bush, when he became president, said that free trade plants the seeds of democracy. Wherever it goes, free trade plants the seeds of democracy. We need to promote more free trade with China because, inevitably, that will make China become more democratic.

Every president. I mean, George H.W. and Ronald Reagan. I worked for Ronald Reagan; I worked for George H.W. Bush. I knew them pretty well.

They were both in this notion that the future is democracy and free trade, and that’s where China’s going to go. Bill Clinton, W., Obama. It wasn’t until you get to Trump that people began to say, “Wait a minute. Maybe it’s not working.”

There was this just overwhelming confidence having won the Cold War. America had emerged as the only superpower. It was just this incredible confidence that we knew where the future was going to go.

There was a dinner in 1997 or ’98 here in D.C., and George H.W. Bush was no longer president, but he was at the dinner, and Zhu Rongji was at the dinner. And Zhu at that time was wrestling with this problem he had of how do I reorganize the state-owned enterprises?

That whole reorganization that China was doing had been presented in the U.S. by the U.S. press as doing away with the state-owned enterprises and making China really a completely free-market capitalist economy. Bush had it in his head that that’s what Zhu Rongji was doing. And so Bush said to Zhu, “How are you doing with getting rid of all the state-owned enterprises?”

Zhu, very honestly and forthrightly said, “No, no, no, Mr. President, we’re not getting rid of the state-owned enterprises. We’re reorganizing them.” And Bush looked at him, winked his eyes, and said, “Ah, we know what you’re doing.” So Bush firmly believed that Zhu was doing what Bush thought he was doing, even when Zhu said, “I’m not.”

That was the level of conviction that was held by the American foreign policy establishment about what the future was going to look like. This establishment has been completely wrong. As George Soros just pointed out in the case of Larry Fink, it’s still completely wrong.

Mr. Jekielek: You could also argue, for many people, it was very conveniently wrong.

Mr. Prestowitz: For many people, conveniently wrong. Absolutely, yes, yes. You could argue that.

Mr. Jekielek: America, as you say, was convinced that it would reshape China, the Chinese regime perhaps, in its own image, but you say, “Well, actually it was America that was reshaped somehow.”

Mr. Prestowitz: What was happening was that the American assumptions about how China was really organized, and they’re making assumptions about the Chinese intent, were completely wrong. But the Americans didn’t know it.

The Americans had a view, and it became the view of the establishment. When I say the establishment, Democrat and Republican, the Council on Foreign Relations, Foreign Affairs Magazine, The New York Times, Washington Post, Wall Street Journal, they all reported the same way. Whether they were Republican or Democrat, whether they were liberal or conservative, they all were fixed on this view, this concept of what the future was going to look like.

They were all convinced that it was going to become a liberal, free-market, democratic world. Globalization, of course, became a watchword. Yes, China is not quite there yet, but it will be.

In my view, what we have seen and are beginning to realize, although not entirely, is that we were fooling ourselves. Bob Zoellick, former U.S. trade representative, former deputy secretary of state, and former head of the World Bank, famously preached the notion that we want China to be a responsible stakeholder in the liberal, global rules-based order.

That encompasses a lot of assumptions. Was there, in fact, a liberal, global, rules-based order? What rules? Many countries were manipulating their currencies. We didn’t do anything about it. Where were the rules? Who was enforcing the rules? Or to turn it around, liberal rules-based order—we attacked Iraq. We just decided that we didn’t like what Iraq was doing. We attack Iraq and occupy the place. We go to Afghanistan. What’s liberal about that? What’s rules-based about that?

The reality that we were living was very much at odds with the reality that we carried in our heads or that our intellectual establishment carried in its head. We’re now going through a readjustment.

It’s now obvious that China is not going to become like us. It’s obvious that the Chinese are not aiming to become part of our rules-based order.

They’re going to become part of their own order. They’re setting up their own order with the belt and road program. They’re setting up their own order with different alliances. They’re snuggling up with the Russians.

Look at Latin America. The Panama Canal, of course, is a critical waterway globally, particularly for America. The Panama Canal was built by Americans. We tend to think of the Panama Canal as an American thing.

But if you look at Panama and you look at investment in Panama, you will find that virtually everything except the canal in Panama is owned by China. If you look at Brazil or Portugal or Greece or Hungary, you find the same phenomenon.

China is building its own order. It’s not that they want to become part of our order or we want them to become part of it. They don’t want anything to do with our order.

Mr. Jekielek: But they pretend that they do.

Mr. Prestowitz: Well, they try to make use of the order that we have created. I mean, they’re in the UN, and we created the UN. But what they do is that they try to find ways to operate and manipulate in the UN to block where we want to go or to push the UN in directions that China wants to go. You can’t complain about that. All the countries are in the UN want the best deal they can get.

The Chinese happen to be very good at figuring out how to control these kinds of organizations and staff them.

Think about this. Biden has proposed that Rahm Emanuel become the U.S. ambassador to Japan, right? Now, he’ll have to be approved by Congress, by the Senate, but that’s the appointment. I’m sure it’ll go through. Probably Rahm will become ambassador to Japan.

Does Rahm speak Japanese? No. Has Rahm ever lived or worked abroad? No. Has Rahm ever been an ambassador anywhere? No. What does Rahm actually know about Japan? Not much. Why are we sending Rahm to Japan? Well, he’s close to the president and this will reassure the Japanese that the president will listen to what Rahm says.

But wait a minute. Why do we want our ambassador to be the reporter of what the Japanese are telling him to the president? Shouldn’t the ambassador be the guy who listens to what the Japanese are saying and tells the president what he thinks is good for America?

Now, who’s the Chinese ambassador to Japan? I’ve forgotten his name, but he majored in Japanese in university. He’s lived in Japan for something like 25 years. He’s held many positions in China and in Japan, in dealing with the two countries.

This guy, the Chinese guy, knows Japan. He knows how to play in Japan. He can go on Japanese television and speak in Japanese to the audience. He can talk on Japanese talk shows in Japanese.

Rahm can’t do any of that. Why are we sending Rahm to Japan? Because we don’t get it. The same thing is true—I could go on and on. But we have handicapped ourselves by not studying objectively the reality of the situations that we get into. Why did we spend 20 years in Afghanistan, for pity’s sake? We totally misread Afghanistan. We keep doing this to ourselves.

Mr. Jekielek: We talk about the Chinese Communist Party. You actually mentioned something that I think is very, very important, in a very astute way. I’m going to read it back to you and get you to comment for me.

It says: “The fundamental threat, to be clear, is not the people of China. Taiwan and Hong Kong demonstrate not only that Chinese people can operate democratic governments, but that when they are able to speak freely, they prefer them. The threat is the Chinese Communist Party and its ambition and ability to create a global authoritarian order.” There’s a lot in this line.

Mr. Prestowitz: Yes, but it’s true. I think particularly looking at Hong Kong today, you can see dramatically the essence of the conflict. These kids organized the celebration of the commemoration of Tiananmen Square demonstrations in 1989. In Hong Kong, of course, that date has been memorialized every year since.

Well, now some of the students who organized those commemorations are being put in jail. There’s not going to be any more commemorations. The records of those commemorations are being erased. The Chinese Communist Party doesn’t want anybody to know about that or to refer to that. They just want to get it out of history and make it a non-event.

What’s so fascinating to me is that, actually, these young people, and not just young people, but people like Martin Lee and Jimmy Lai in Hong Kong, lived in Hong Kong all their lives. Let’s remember, Hong Kong has never actually been democratic. It was a British colony. It had a rule of law because the Brits imposed British law. It had free speech because the Brits supported free speech. It had a kind of a legislature, but it was the queen who ruled Hong Kong, not the citizens of Hong Kong.

Yet, these citizens of Hong Kong imbibed enough understanding and knowledge of freedom and liberty and democracy that they’re fighting for it. Jimmy Lai, my good friend, is in jail now because he’s fighting for it.

But we know that if we go to Taiwan, Taiwan wasn’t always a democracy. When Chiang Kai-shek went to Taiwan from the mainland in 1949, he imposed a dictatorship, but it evolved into a real democracy.

We know that there’s nothing in the Chinese genes that is anti-democratic or anti-free speech or anti-free markets. It’s not in the Chinese genes; it’s in the communist genes. I think that is an absolutely crucial distinction.

Our battle is not with the Chinese people. It’s with the Chinese Communist Party. We don’t want the Chinese Communist Party to be able to get into the position of using things that we say about China as evidence of prejudice or evidence of wanting to humiliate China. We always have to be careful to walk the line that we have nothing against the Chinese people. We have nothing against Chinese traditions. Our concern is the Chinese Communist Party.

Mr. Jekielek: Right, and how many times have we heard the CCP representatives say, “You’re hurting the feelings of the Chinese.”

Mr. Prestowitz: Yes, 1.4 billion Chinese people, you’re hurting their feelings. It’s so amazing that party leaders presumably think that you might believe that all 1.4 billion people are totally adopting exactly the same line.

Just as we have people like Hank Paulson, who has, in my view, a twisted perspective, the Chinese also have a lot of twisted perspectives. If you’re an important or a significant player in the Chinese Communist Party, your perspective, your understanding, of what America is all about is probably pretty messed up.

Mr. Jekielek: Clyde, before we get into your prescription, you mentioned something earlier—and I’m not sure even if this was on camera or not—that Xi is kind of a true believer. You also talked about how the CCP is not exactly communist, but it’s Leninist. In some ways, it’s not communist anymore. In some ways, it very much is.

Mr. Prestowitz: Yes. You can look at the Chinese Communist Party, and you can say, “Look, it’s not really a communist party.” You cannot say it’s not a Leninist party. It is definitely a Leninist party. But even if you say it’s not a communist party, I think you have to be careful because I listen carefully to what Xi Jinping says and I read extensively what he and the major Party releases are saying.

I am amazed at the extent to which it seems to me Xi Jinping really certainly has read Marx and he certainly has imbibed a lot of Marx. To a much greater extent than people in the West are cognizant of, he’s a true believer. I really think that he is a true believer in the fundamental elements of Marxism.

When he talks about things unseen in a hundred years, he’s doing what the communists famously do, as the correlation of the balance of forces and looking at social evolution of different countries and how that’s creating conflict and resolution. It’s very Marxist stuff.

If you’re a Western policymaker, an analyst, it’d be wise to brush up on your Marx because Xi reads that stuff. Whether he totally believes it, I’m not sure, but he certainly has read it, and he uses it.

Mr. Jekielek: Xi Jinping thought, as it’s called, is being introduced to replace other schools of thought.

Mr. Prestowitz: I’m waiting for that little red book of Xi Jinping. Remember that people famously carried the Little Red Book of Mao Zedong? I’m waiting for Xi Jinping’s little red book.

Mr. Jekielek: It also reminds me: you list, and this I think is very apt, Xi’s Document Number 9 from 2013, which lays out exactly what.

Mr. Prestowitz: It does, it spells out what the Chinese Communist Party is for and against, particularly what it’s against. Think of what we in America learn early in our education, of all men are created equal with certain inalienable rights.

Document Number 9 says there’s no such thing as universal values. We don’t believe in universal values. I mean, the document doesn’t say: all men are not created with certain—but it says: we don’t believe in universal values. That universal value, throw it away. We don’t believe in that.

It goes on to say that it does not accept as advisable or viable Western constitutional democracy. It further makes the point that speech unedited by the Party is not acceptable. So forget free speech. Whatever you say has to be edited by the Party.

Document Number 9 particularly talks about doctrine. It talks about the need for the Party to stand solidly for its doctrine and to inculcate that into the people. Now, can you imagine a Republican or Democratic candidate for president in America or for president in France or chancellor in Germany or prime minister talk about inculcating the doctrine? But that’s what Xi is doing. Unless we recognize that, we’re just not going to be able to properly respond.

Mr. Jekielek: We’ve just started on our final foray here. It seems like everybody agrees that China is an issue for the West. They recognize, at least to some extent, that the system is fundamentally different. Maybe not as different as we were just discussing, but they realize that.

There are these different approaches, all the way from constructive competition, I forget what the exact term you used was, to the full decoupling on the other end. Give us a bit of a flavor of them. I’ve recently been reading books that I’m just encouraging people to read. I hope people do read yours.

Mr. Prestowitz: Thank you.

Mr. Jekielek: Give us a sense of where you’re going.

Mr. Prestowitz: Probably the most important point is that it is now widely recognized that China is not going to become a stakeholder in the Western rules-based order. The huge shift here is that everybody pretty much understands we did get it wrong in the last 20, 30 years—that China’s not going where we thought it was going to go.

Having acknowledged that, then you get a shakeup. There are those who say, “Okay, it’s not going to be the way we thought it was, but we’re really coupled. And decoupling is just going to be terribly expensive. I mean, here’s Apple. Everything they make, they make in China. We have to tell them they have to come back and make everything in America? It’s just hugely expensive.”

In one important element of our free-world society, there is an attempt to satisfice and say, “Okay, we have to recognize that they’re not going to be like we thought they were going to be. They’re not going to become like us. But we have a lot invested here, and we’re still making a lot of money there. Let’s try to finesse this so that we avoid the worst negative impacts, but we hold on to the good part here.”

The way I interpret, the way I personally see this is: let’s put some sanctions on what they’re doing in Xinjiang to the Uyghurs, where they’re putting Uyghurs in concentration camps and trying to turn them into Han Chinese. We’ll put sanctions on that.

Companies importing stuff from Xinjiang; we’ll stop that. But we’re not going to stop Apple from sending iPhones from China over here. That’s what I call the satisfice direction.

Then there are others who say, “Yes, okay, China’s not going to act the way we anticipated, but so what? Actually, when we were a young country developing, we were mercantilist, too. We were just like them. Why are we complaining about them?” That’s another element here which militates against taking any significant change in how we’re dealing with China.

Then you have another element, like Larry Fink, particularly Wall Street, Hank Paulson, who are saying, “No, no. They’re going to become like us. Let it go. It’s a market, and we know how to do markets. Let’s make money,” without much thought about the moral implications of all of this.

Then there are others who are saying, “Really, there’s a fundamental conflict here, and we need to decouple as much as possible. Ideally, completely decoupling. Maybe there are some things we can’t decouple, but we need to decouple a lot.”

My own sense of where it’s going is that increasingly, it’s going to be difficult to satisfice because if you object to genocide in Xinjiang, but wait a minute, Tim Cook is making a lot of iPhones in China, and he’s paying taxes to the Chinese government. What he’s doing in China is strengthening the ability of Beijing to commit genocide in Xinjiang. Why are we only embargoing exports from Xinjiang? It’s not consistent.

I like to compare what I call the two Apples. There’s Apple iPhone and there’s Apple Daily, which just closed yesterday in Hong Kong. It was owned and run by Jimmy Lai. Jimmy was a strong opponent of the Chinese Communist Party, and a strong supporter of free speech in Hong Kong and globally. Jimmy’s in jail today because he believes in free speech.

And Tim Cook just sold $750 billion, almost a billion dollars, $750 million of stock options that he had been awarded by Apple. I talk about the two Apples.

Jimmy Lai is 72 years old. He’s probably going to die in a Chinese jail. How many iPhones are worth Jimmy’s life? Tell me, Tim Cook. Can you tell me how many iPhones would make up enough to offset Jimmy’s life?

Well, he can’t. Because, ultimately, the division here is moral. Ultimately, the division is not material. The fundamental difference is moral. It’s about what’s right and wrong. It’s very simple.

Xi Jinping is now taking measures to impose greater control and greater oversight of individuals in China to control them more. The more a free-world entity invests in China and helps to strengthen this anti-free speech, anti-liberty, anti-soul Communist Party, the more it’s not about money. It’s about fundamental human values.

I think that increasingly, corporations, major corporations, are going to find it very difficult to justify making money at the expense of human values. It’s not going to happen overnight, but I’m optimistic that that’s the direction it’s going to go.

There are some other things we need to keep in mind. China has been growing, of course, economically, very rapidly. It probably today is the biggest economy in the world. Depends on how you count, but it’s a huge economy.

But it’s aging rapidly. Its workforce is already shrinking. Its population is going to shrink dramatically. Today, there are 1.4 billion Chinese. By the end of the century, it’s going to be down to about 700 million. So about half of today’s present population at the end of the century.

China’s environment is horribly polluted. You’re just in a black cloud everywhere you go in China. And China is going to run out of water. The Yellow River doesn’t run about half the year anymore.

They’re building dams like crazy in the Himalayas to try to capture the flow of the Himalayas. That is going to cause enormous conflict with India and Pakistan, other countries that depend on the flow from the Himalayas.

Looking at over the longer term, I think that China has a lot of huge challenges. We in the free world should not despair, but we need to get our act together, and we need to get our act together in intelligent ways that do not oppress the Chinese people, but that preserve our values and that, frankly, preserve our wealth and our productivity.

If Joe Biden called me and said, “Clyde, what should I do?” I would say: first of all, really do a lot of forgetting about China. You’re not going to be able to change what China wants to do or tries to do. There’s the whole thing of John Kerry going to China to try to make some deal on emissions.

Forget it. The Chinese are not going to change their emissions to satisfy John Kerry, so don’t send him.

Let’s focus on what we can do. That means that we need to get manufacturing back here. Today, China accounts for about 30 percent of global manufacturing, and we account for about 15 percent.

That’s the reverse of where things were in 1990. That’s not healthy for our economic welfare, for our defense welfare. We need to be a much more robust manufacturer.

Rather than encouraging, in any way, Larry Fink to put a billion dollars of American money in China, let’s find ways to force Larry Fink to put a billion dollars of American money in America. There are lots of things that can be done.

The semiconductor industry—we need to think of semiconductors as the oil of the 21st century. It’s the key. If there’s a single key industry, it’s the semiconductor industry. Think about this. In 1990, about one-third of all the world’s semiconductors were made in America. Today, it’s 13 percent.

You may say that it’s cheaper to make them overseas. No, it’s not. This is the crazy thing. Semiconductors are not labor-intensive. The labor costs in a semiconductor are maybe 1 percent of the whole product. It’s not labor-intensive. It’s capital-intensive; it’s technology-intensive. We’re supposed to be a country of rich capital. How is it that this all got moved abroad?

The answer is that if you’re a semiconductor company, like, let’s say, Intel or Texas Instruments, the government of Singapore has a thing called the Economic Development Board (EDB). The job of the Economic Development Board in Singapore is to attract investment and production in Singapore.

The EDB, I know these guys well, will go to TI in Dallas and say, “TI, we know you guys probably need to invest in a new plant. Why don’t you come to Singapore?” And TI will say, “Why should we go to Singapore?”

“Well, the plant’s going to cost about $12 billion, but you know what? We could put up about 6 billion of that. The land will be free. No taxes for 20 years, utilities at half cost.” Huh. TI says, “Well, that sounds pretty good,” right? Now, if you decide to put a semiconductor plant in America, do you get free land? No. Do you get no taxes? No. Do you get the utilities at half price? No.

The crazy thing is that when you throw in the whole mix, it’s cheaper to make the semiconductor in Singapore or South Korea or Taiwan, but there’s no good reason for that. There’s no good economic reason for that. It’s policy. Well, we can change the policy.

If there were one thing I could do, I hope that the new secretary of commerce is going to recognize that she needs to spark the revitalization of American industry, particularly high-tech manufacturing, and it needs to be done in America.

There’s another element here that’s very important, which is that economists and other business analysts will constantly talk about how it’s less expensive to make these things in China or someplace else. But when they do that, they typically are not including the total cost. People talk about the global supply chain.

In the case of, let’s say, your iPhone, if you have one, there are chips in that iPhone. Between the time that somebody decides to make that iPhone and it winds up in your pocket, some of those chips are going to cross the Pacific three or four times in airplanes.

Now, airplanes and ships generate about 14 percent of total global greenhouse gases. They’re the worst kind of greenhouse gases. They have a huge negative impact on global warming.

The cost of that is not picked up anywhere. It’s not in the economists’ model. It’s not in the accounting books. It’s a huge cost to the global economy, to global welfare. It’s not included.

We should be throwing on a border carbon tax. If you’re going to send those chips back and forth, every time they come into the United States, you have to pay a tax, a carbon emissions tax on those chips. You know what? Pretty soon, those chips would be made in America.

What we need is to think comprehensively, not just about the immediate materials costs, but the total cost and the total implications. When you shut down something like an auto plant or a semiconductor factory, obviously, workers have to find other jobs. Then you say, “Let’s make cars in America.” “Oh, we can’t because we don’t know how.” We need to re-skill. We need to stop the loss, the drain, on the skills.

In my view, we need to make America the leading manufacturing country and the leading technology country. We need to do that with our allies. It’s not just about America. It’s about the EU, it’s about Japan, Taiwan, Singapore, and Australia. We need to pull the free world together.

Let’s take the case of Australia. The Chinese are unhappy with Australia because the Aussie prime minister called for an independent investigation of the origin of COVID in Wuhan, and the Chinese don’t like that.

So what did they do? China, to take a slap at Australia, stopped buying coal. They stopped buying Aussie wine. They stopped buying some of the iron ore. They’ve stopped sending students, and they’re restricting tourism to Australia. They’re slapping the Aussies around.

Basically, they’ve sent Australia a letter of 14 points, where they’ve said, “Carefully consider, sit down and really think about these 14 points that we want you guys to respond to.”

Now, Aussie wine is really good. The free world should have a consortium. Whenever China decides to slap somebody around, the free world together, we ought to be buying the Aussie wine. We and the EU and the Japanese ought to be buying that Aussie wine to offset the impact of this slap that the Chinese are taking at Australia.

The same should be true more comprehensively across the board. There needs to be a coordinated offset to the disciplinary measures that China is likely to take economically against countries that are not shaping up the way China would like them to shape up. But you can only do that if you’re strong and relatively independent in your own economy.

As long as you’re dependent, you’re vulnerable to coercion. Coercion is China’s way of operating. So we need to make ourselves independent of coercion.

Mr. Jekielek: Clyde Prestowitz, it’s such a pleasure to have you on.

Mr. Prestowitz: Thank you. It’s been my pleasure, too.

Mr. Jekielek: Hello, everyone. We have some exciting news. This week, I’m heading to Orange County, California, and I’ll be hosting a live American Thought Leaders interview with John Moorlach, a former California state senator, and we’ll discuss California after the recall. I’d love to meet some of you in person this Friday at the fundraiser. It’ll be an intimate gathering of American Thought Leaders fans.

There will be a VIP reception at 5:30 p.m., and doors open for dinner and the live interview at 6 p.m. We’ll be at the Pacific Club at Newport Beach, and you’ll find more details about the event and how you can buy tickets in the description below. And for folks who can’t make it this time, don’t worry. This won’t be the last live event. We’ll have more live events soon.

This interview has been edited for clarity and brevity.

California After the Recall: A Live, In-Person American Thought Leaders Event

Join Jan Jekielek in Orange County for a three-course dinner and live interview with former California State Senator John Moorlach.

When: Friday, Sept. 17, 2021
Where: The Pacific Club
4110 MacArthur Blvd, Newport Beach, CA 92660

Doors Open: 6:30 PM | Dinner 7:00 PM | Program 7:30 PM
VIP Reception: 5:30 PM

Dresscode: Business Casual

You can register below:

GENERAL ADMISSION $150

Buy tickets here or call 949-940-8848

VIP $300

Buy tickets here or call 949-940-8848

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