Orville Schell is the dean of Western China scholars. That's my term, but it's the truth. He's been visiting China ever since 1961. Or I should say he first visited Hong Kong in 1961 when it was a British crown colony. And in the mid-70s, he managed to get to China. And not just get to China, he fully immersed himself in life there, working both on the model agricultural work brigade and in machine factory, which is no mean feat.
Orville then went on to a stellar career as a journalist that included 60 Minutes, Dateline, NBC Nightly News, and The Atlantic. Not to mention a best-selling book. And in addition to regularly visiting China ever since, he has also regularly visited Taiwan and indeed studied there for three years in the '60s. Today, Orville is the director of the Center on US-China Relations at the Asia Society.
DAVID HOILE: David Hoyle is a global head of asset research at WTW, which means that he's responsible for the company's economics and capital markets research. He's also a member of WTW's Investment Assumptions Committee, which guides investment policy for clients worldwide. Welcome to both of you.
Thank you very much, Elisabeth. It's a pleasure to be here.
ORVILLE SCHELL: Yes. Same here, pleasure.
ELISABETH BRAW: Now currently, the news is dominated by the catastrophic events in the Middle East, which we all hope will come to a peaceful resolution. Although hope is not a very strong guide here. It can end in many different ways. But nevertheless, we have longer term developments as well that are consuming the world. One is the war in Ukraine, and one is the West's relation with China.
And that's something that the business community has been watching for a long time now and increasing the political community, both policymakers and commentators. And it's fair to say that it's occupying everybody's mind and nobody can really make sense of what's happening.
ELISABETH BRAW: Now currently, the news is dominated by the catastrophic events in the Middle East, which we all hope will come to a peaceful resolution. Although hope is not a very strong guide here. It can end in many different ways. But nevertheless, we have longer term developments as well that are consuming the world. One is the war in Ukraine, and one is the West's relation with China.
And that's something that the business community has been watching for a long time now and increasing the political community, both policymakers and commentators. And it's fair to say that it's occupying everybody's mind and nobody can really make sense of what's happening.
And more recently, when did the extremely harmonious relations that I think we thought had arrived and were demonstrated at the Beijing Olympics, when did that begin to change?
ORVILLE SCHELL: Yes. And now, if you look at the glide path of China, at least during my lifetime, I first got into it when, in fact, we were very completely decoupled, to use some modern parlance. We couldn't go there. Our passports as Americans were stamped with not good for travel to the People's Republic of China. And I watched China slowly-- I did go to China. Well now it's still alive and the cultural revolution still continued.
And I was, I felt, even though I spoke Chinese, utterly insoluble. But that wasn't China at eternum. It was China then. And as we all know, Mao died. The Gang of Four was arrested. Deng Xiaoping somehow managed to come back into power and to initiate this rather extraordinary period of reform. Well, that was a transformation. And now just not to labor through too much history, we come to a period with Xi Jinping, where in many ways, we see echoes of that period where economically speaking, autarky. Self-reliance were the watchwords of the day.
ELISABETH BRAW: Yes. And if I may add, isn't another problem that we have become accustomed to a world where everybody-- well, many people speak English. And so there are maybe not enough people who speak Chinese and are able to form a well-rounded view and a comprehensive view of Chinese society and instead make assumptions based on content available in conversations and interviews and other content available in English.
David, I want to turn to you as well. But Orville, just to follow up on what you said. In 2008, was that the peak of integration between China and the West, would you say? Or when did things begin to change?
ORVILLE SCHELL: Well, I think that was the high tide of globalization. That's the incarnation of the notion that if we all just keep trading, we will make slow progress towards a more integrated world. And even the assumption was perhaps naive but true that somehow politically, we would find greater accord and greater accommodation as well. And I think the financial crisis of 2008 and '09 not only represented a tipping point. But I think China was gaining great ascendancy, great economic cloud. Was quite proud and quite full of itself.
And then when the West hit the skids, particularly the United States, they got the notion that we were at a point where the West was in decline and China was rising. And that was a fateful moment, because true or not, it cast the die going forward. And then you got a much more aggressive, a much more confident, a much more assertive China.
And we can see the consequences of that today. It's evolved out in terms of a new contradiction. Not just ideologically between China and the outside world, much of it. But also an economic contradiction, which we see evolving in terms of competitiveness and sanctions and whatnot.
ELISABETH BRAW: And David, these cooling relations are having an immediate effect on Western companies, whether or not they have manufacturing facilities or other significant presence in China. And our listeners will need to be reminded of what that looks like in practical terms. But if I could summarize, what is taking place is that Western companies are trying to reduce their exposure to China by friendshoring. So moving operations to another country.
But that's a time consuming undertaking that will take a long time to execute. And also in addition to friendshoring, what seems increasingly clear is that companies are trying to build separate operations. So one for the West and one for China and countries in its orbit. So duplication, really. And this is even more complex.
Now how are companies going about it? We know absolutely in the abstract that this is what's happening. But can you tell us a little bit about how they are going about it and what is entailed?
DAVID HOILE: Yeah, thanks, Elisabeth. And maybe if I can frame my response by just linking back to one of your questions for Orville and his response. So I think we're firmly in a profoundly important shift from a unipolar US world order to a multipolar world where China is now challenging the US both geopolitically and economically. And at least in terms of economic size is expected to surpass that in the forthcoming years. And what that's doing is creating a much more significant environment of comprehensive competition between the two nations.
And a strategic imperative of developing leadership in critical areas, particularly technology, as I'll come back to. And I think it's absolutely right to say that that has impacted the investment and supply chain decisions of companies. So there's a great deal of discussion around a shift from supply chain cost optimization that has dominated business outsourcing strategy for the last couple of decades in favor of greater supply chain resilience.
But what's interesting if you start to dig deeper is how much of that is actually happening. And where and how is it happening? So in particular, what we've seen is improvements in supply chain resilience happening in the easier to achieve ways. So diversification of suppliers is one. And inventory overstocking is another. So those are significantly further along.
The things like reshoring and friendshoring of production is happening at a much slower gradual pace, reflecting the complexity of supply chains. And it's also happening in particular areas. So for example, certain technology sector areas. There we have seen important foreign direct investment shifts away from China, with countries like Taiwan and Vietnam being the beneficiaries of those in recent years.
But I'd say that it's a relatively slow moving and gradual process that doesn't reflect a lot of the headlines that you tend to see around the topic.
ORVILLE SCHELL: And just a little footnote. To the degree to which there is decoupling and moving of supply chains out of China, there also tends to be a tendency that once a company, let's say, sets up a big plant in Vietnam, it looks like it's moved to Vietnam. But they're buying all their parts from China. So it's a quasi incomplete form of decoupling. It's a shimmer of decoupling.
ELISABETH BRAW: Because it's difficult to find new suppliers, right? And David, if I can just follow up very quickly on that point. So I remember when the Fukushima disaster hit and there was one company in the world that made this particular shimmery paint that car manufacturers use for their cars, and it was located there and they had to shut. And as a result, car makers couldn't produce those kinds of cars for a while.
And so I wonder to what extent that is something that's hitting companies now that they're trying to shift to different suppliers. And as you said, Orville, in many cases, apparently they can't shift, because there is no other supplier. So David, any quick thoughts on maybe the shortage of alternative suppliers?
DAVID HOILE: Well, I think that's right. Maybe it's worth taking a step back, because we had an interesting set of case studies during the Trump administration in terms of various tariffs imposed by the US on imports from China and vice versa. Tariffs that China imposed on imports from the US. And what we saw was quite a large trade reorientation in electronics and computing. And so US imports from China dropped significantly.
And that was partly replaced by increased sales from US producers. But also imports from the rest of the world. So that was an example of particular aspects of that electronics computing supply chain could be adjusted. But I think, to both your and Orville's point, that isn't always possible. And it's actually these things are incredibly complex. I mean, just stepping away from the US-China just for a sec and looking at Russia-Ukraine. When that conflict significantly escalated, we, investor markets that my part of the business at WTW serves, we were well aware of the potential impacts through energy related channels and the implications that could have for broader growth and inflation.
And what we didn't realize was that Ukraine was also a significant part of the automobile supply chain. And so actually that there were these very important consequences for Euro auto manufacturers caused by the Russia-Ukraine conflict. And so it's a good example of how trying to track the complexity and interlinkages and unintended consequences of shifts in supply chains is an incredibly hard thing to do.
And so there are always these uncertainties as policies get enacted about exactly what the potential impacts on industry or companies might be.
ELISABETH BRAW: Indeed, another aspect that is crucial for companies is trying to read the politics and policy making of the countries in which they do business. And in this case, in China. And Orville, it's clearly-- especially with a crucial country such as China, it's imperative to try to understand Chinese politics. And yet, for most companies and apparently for most of us, it's very hard to understand what is happening. And it reminds me a little bit of the Sovietology that went on during the Cold War when analysts tried to figure out what was happening and what was likely to happen by seeing how Soviet leaders were lined up at various public events. Who was standing next to whom and so forth.
And in recent months, there have been two high profile events in China, which are the dismissal of the foreign minister and then of the defense minister. What do these really significant events, what do they say about President Xi's likely course? Or could it be that they say nothing? We should look somewhere else to try to understand what is happening and what course is likely to take.
ORVILLE SCHELL: Yes. I mean, I think in any government that has a big leader culture, which China most certainly does, it's extremely important to be able to come to some understanding about what it is that animates the leader. Because I think it's fair to say that in the case of China, it doesn't always act in a way that rationally seems to be serving its own national interest. It seems to be doing many things which in actual fact seem to be in contravention of its national interest.
Why would China not make every effort not to alienate Canada, India, Australia, Sweden, Norway? There's a whole litany of countries that have been really pushed into a state of quasi-antagonism by the policies of China. And I think that grows out of not a rational assessment of things, but something that emanates from the leadership itself and their weaknesses and aspirations and hopes and fears and whatnot.
And here, I think it's really important to note that we did have a reckless fling with globalization for several decades. And it worked pretty well. As long as you could get things quickly, cheaply. No one needed inventories. Didn't matter where they came from. Didn't matter what the governments were. But suddenly, we find ourselves now dependent on China. And it is not just the West or the United States that's decoupling. Xi Jinping himself is very neuralgic to the idea that he would be dependent on the West for anything that's critical to China's future, such as microchips.
So we have a double jeopardy here. Both the West German car industry, the American-- the litany of people who are heading for the doors if they can find a door, which as David has noted, is not easy. But on the other hand, you have China. Very skeptical about continuing any kind of dependence on Japan, Korea, Australia, the United States, even India.
So oil and water is separating not simply by the response from Washington. It's a complicated dance between Beijing and Washington. And both are reinforcing the tendency in the other country to become more self-reliant. And you will recall that that was a great mantra of Mao Zedong. Ziligensheng. In Chinese, self-reliance. And this is the aquifer from which Xi Jinping drank as a young man. And it's deep in his bones that China never wants to find itself reliant on the country that has a different political system.
ELISABETH BRAW: Just make a few comments. Because in particular, I mean, I completely agree with first on everything that Orville's just said. And an awful mention-- technology. And so I just wanted to pick up on that. But also Orville mentioned that it's both uncertainties created by Washington as well as Beijing, policy-making. And I think I completely agree with that.
When we look at it, we do expect a creeping tide of targeted measures by both the US and China that particularly are technology focused and at the forefront of the flow of knowledge and data between the two countries. And that's where we see the leading edge of economic decoupling. And it's been in very specific areas. So if you look at US policy, it's been focused on limiting the transfer of knowledge and products around computing related technologies, particularly micro technologies, quantum computing, artificial intelligence, semiconductors, at the heart of those.
But also biotechnologies, biomanufacturing and clean energy. And I think that's where we see the landscape of the economic battleground between the US and China over future years. And it's completely framing both the leadership and policy setting of Beijing. But also it's created a fundamental industrial policy shift in the US as well in relation to those technologies and the US's desire to lead in those emerging technologies.
ORVILLE SCHELL: Yes. I mean, we see companies, whether it's TSMC in Taiwan, Qualcomm, Samsung in Korea. All of these companies are deeply dependent on Chinese markets. And their ability to continue doing research and development depends on profits coming in from China. So the needle is deep in the arm of many, many global companies. And nobody quite knows what to do. What's the alternative?
Well, I always just like to say to them, there may not be an easy alternative. But as we see in the Ukraine, when push comes to shove, it doesn't matter whether you have an alternative. You're going to have to confront the problem. And of course, this is where the question of the Taiwan Straits, South China Sea comes in. Should something happen there? All of these ambiguities that we're struggling with, whether to couple or decouple or reshore, friendshore.
It's not going to matter whether you want to do it or not or whether there's a good alternative or not. Everything will come a cropper. So that's worth thinking about. Just having a plan in your back pocket. Yes, it'll be a nightmare. But what's the best thing you could do if push does come to shove? Which we've seen it happen now in the Middle East. We've seen it happen in the Ukraine. And I have to say, the Taiwan Straits is a very, very, very fraught place.
ELISABETH BRAW: And speaking of having a plan, that plan involves having the workers that you would need in the factories that you plan to set up or bring to another country, whether it's back to America, back to the UK, back to Germany, or wherever it may be. And since we started by talking about your experience, Orville, as a factory worker in China in the '70s, in the West, we don't have enough factory workers to make this reshoring undertaking successful in the short term. And the question is where those workers will come from.
So David, if I can just ask you to respond maybe in 30 seconds or so since we're out of time, is that the big bottleneck for companies? And how long do you think it will take companies to execute whatever friendshoring and duplication plans they have set in motion?
DAVID HOILE: Yeah, I think that the more granular you get in terms of the worker skills required for a number of those technologies that I outlined, that the skill set required for advanced semiconductor fabrication is exceptionally high. And so the notion that you can suddenly just friendshore or reshore production of advanced manufacturing chips, you need exceptional amounts of capital. And you need exceptional amounts of the right skilled people.
And that can be built, but it takes time. And it will take time for the US to do that and it will take time for China to do that.
But there's no question that, to Orville's point earlier, China's policy is leading it to significant rates of investment to achieve that greater self-sustainability. And so their principle of building national champions in particularly strategically important areas to them is a very clear part of their industrial policy. And actually to some degree is replicated just a little bit by the Inflation Reduction Act in the US under the Biden administration.
ELISABETH BRAW: And I have to close with you, Orville, since you are the person, China watcher alive today, with the greatest number of years of watching China. And you have seen these extraordinary iterations of China over the decades. It really is an extraordinary development this country has gone through from the worker brigade, agriculture brigade you were on, to where it is today.
And so this podcast has a business audience. And I'm keen to hear from you what your advice would be for companies that are trying to figure out what course to chart in this absolutely unprecedented environment in which CEOs find themselves today.
ORVILLE SCHELL: Yes, I think it's important for us all to remember that engagement as a policy which began basically in 1972 with Nixon and Kissinger actually did work. And it created an incredible boom in China. An incredible global boom in trade. But I think companies do need to be mindful of the fact that even though nine US presidential administrations wholeheartedly supported engagement. And I believe it was the right policy and worth a try. Because it was America trying to bend the metal of Chinese Leninism and try to make it all work out.
But it didn't. And that is the message, I think, Xi Jinping brings us that he is not a globalizer. And that comes as a very harsh slap in the face for companies that have spent the last 20 years diversifying their supply chains all over the world and becoming dependent on China. What is the answer? I think the answer is that the United States and other great countries have to be doing as much diplomacy as they possibly can to bring this thing to some less than unfriendly conclusion.
ELISABETH BRAW: That is the unfortunate reality. And we'll have to come back to it, because this is a development that will continue to not just occupy the brightest minds in business and elsewhere, but is likely to accelerate. So with that, I have to close for the day, and we'll come back to these thorny issues. So let me thank Orville Schell and David Hoile and also our producer Robin Pegg. And above, thank you all for listening to Geopolcast.
In upcoming episodes, we'll examine supply chain risks, ESG, and much else. So thank you, David, and thank you all.
DAVID HOILE: Pleasure.
ELISABETH BRAW: To get the episodes as soon as they are released, make sure to subscribe to Geopolcast. You can find us via your usual podcast players. And please recommend us to your friends and colleagues. Until next time.
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