The U.S.-China tariff failure of 2019

Business & Technology

New research shows that in the first year of the U.S.-China trade war, the Trump administration’s tariffs and other actions elevated political risk for companies — but the American firms in China that were most exposed to tariffs were not more likely to exit the Chinese market, let alone repatriate to the U.S.

u.s. china trade shipping
Illustration by Derek Zheng

[Editor’s note: Below is a complete transcript of the Sinica Podcast episode with Samantha Vortherms of UC Irvine and Jack Zhang, director of the University of Kansas’s Trade War Lab.]

Kaiser Kuo: Welcome to the Sinica Podcast, a weekly discussion of current affairs in China, produced in partnership with SupChina. Subscribe to SupChina’s daily Access newsletter to keep on top of all the latest news from China from hundreds of different news sources, or check out all the original writing on our site, at SupChina.com, including reported stories, editorials, and regular columns, as well as a growing library of videos and, of course, podcasts. We cover everything from China’s fraught foreign relations to its ingenious entrepreneurs, from the ongoing repression of Uyghurs and other Muslim people in China’s Xinjiang region to China’s effort to eliminate poverty. It’s a feast of business, political, and cultural news about a nation that is reshaping the world. We cover China with neither fear nor favor.

I’m Kaiser Kuo, coming to you today from my home in Chapel Hill, North Carolina.

A much-anticipated talk last week by U.S. Trade Representative Katherine Tai, delivered at CSIS, the Center for Strategic and International Studies, offered the tantalizing possibility that we’d get a first look at the results of the Biden administration’s seemingly interminable policy review on China trade. Alas, with the talk over and with Secretary of Congress Gina Raimondo having given some somewhat confusing interviews and a speech of her own, the picture just doesn’t look that much clearer now, at least as far as I can see.

Now, while both Raimondo and Tai did make some very encouraging remarks, with Tai introducing new words like “recoupling,” and phrases like “durable coexistence,” she also said that the Trump tariffs will remain in place for the time being — though there will be exemptions — and did use the opportunity to chide China on what is by now a quite familiar litany of complaints that Beijing, she says, has failed to adequately address.

So, today on Sinica, we will be talking about the impact of the trade war and the tariffs the U.S. imposed. We will look specifically at whether, as Trump and his USTR, Robert Lighthizer, had hoped they would, whether the tariffs actually prompted companies to leave China and to relocate, ideally, back to the U.S. itself. Joining me to talk about this are two political scientists who have a keen interest in trade, who have published a paper for the 21st Century China Center at UC San Diego’s School of Public Policy and Strategy, GPS. The paper is called “Political Risk and Firm Exit: Evidence from the U.S.-China Trade War.” Its authors are Samantha Vortherms and Jack Zhang, and I am delighted to welcome both of them.

Sam Vortherms is an assistant professor of political science at the University of California at Irvine, with a research focus on comparative political economy, development, and social welfare. Her current book project, Manipulating Citizenship in China, examines the relationship between economic development on the one hand, and access to citizenship rights in China, and that sounds absolutely fascinating, and hopefully, Sam, this will be something we’ll talk to you about once you’re ready. Meanwhile, welcome to Sinica.

Samantha Vortherms: Thank you.

Kaiser: Great to have you.

Jack Zhang is an assistant professor of political science and director of the Trade War Lab at the University of Kansas. His research focuses on international political economy, international security, Chinese politics, and U.S.-China relations. He is a product of UCSD’s GPS himself, part of a crew of really impressive academics affiliated with that program. You know, we’ve had a bunch of them on recently. I mean, there’s Michael Davidson, two weeks ago. Deb Seligsohn was on twice just this year. Barry Naughton was of course on, Susan Shirk a bunch of times…

Anyway, Jack, great to see you again, and welcome back to Sinica, or welcome to Sinica. I have a fond memory of you visiting me, I can’t remember what year that was, at Baidu. Was that seven or eight years ago, maybe?

Jack Zhang: Yeah, 2015, doing my Fulbright at Beida that year. Long time fan of the show, and thanks for having us.

Kaiser: I seem to remember we spent a good 20 minutes talking about a strategy video game, though. Is that…

Jack: Oh, yeah. Total War. I wish I had time to play Three Kingdoms these days. It’s very sad.

Kaiser: We’ll do that on another podcast. Anyway, before we get into the paper… Well, first of all, welcome to Sinica. Before we get to the paper, I’m wondering, how do each of you read USTR Katherine Tai’s speech from last week? I’m sure you’ve both spent a little bit of time parsing it. I mean, I found it to be kind of a Rorschach. What were your interpretations? I mean, I wonder if there’s any daylight between what the two of you thought. Sam, why don’t we start with you?

Sam: Okay. In the Q and A after Ambassador Tai’s talk, she mentioned that she’s a highly practical person, and that was my primary takeaway from the whole endeavor. The approach that was laid out had strategic ambiguity in it, keeping all tools on the table, giving enough wiggle room for the administration to move forward.

One thing that I thought was particularly interesting was just the repetitive emphasis on multilateralism, and so one of my big takeaways was also, who is this talk for, right? So of course, we’re sitting here, hoping for policy details to come out, and this scorecard on Phase One to be discussed in a little bit more detail. But the intended audience, I think, was also to the much broader community, of how this administration is really focusing on that multilateralism that was neglected in the previous administration.

Kaiser: Yeah, some people have called it “Trump, with allies,” as it were. Interestingly, she didn’t make any mention of whether the steel and aluminum tariffs would be taken off for Europeans, either.

Sam: Yeah. And I think the most frustrating piece is the fact that the starting points, as Ambassador Tai pointed out, is working within the tariff regime that we’re currently in, and that the last administration left. And on the one hand, I can understand it, because institutions are the way that they are, and as an institutionalist, any time a rule goes out there, it creates winners and losers, and then the institutions themselves, because of the distributional consequences, have long-lasting impacts, right? They are self-reinforcing. And so, Ambassador Tai said, this is where we’re starting. We’re starting with tariffs because that’s the structure that currently exists, and I understand that mindset, but I also wonder if it has to be that way. And the administration does have significant tools to work around that structure, or to change that structure, and of course she was very hesitant to give any details of working outside of that framework.

Kaiser: Jack, what about you? What did you make of it?

Jack: Yeah, I think I want to echo sort of your insight in the intro about the speech being a Rorschach test, and I think Sam’s characterization of strategic ambiguity is a really apt phrase here, as well. I thought that a lot of the headlines that came out of coverage of the speech, emphasizing recoupling and reengagement miss the remarkable continuity in the policy positions that she really is talking about, and in some areas where the Biden administration seems to be willing to go even further and more towards industrial policy than the Trump administration.

I want to highlight two areas that I thought were pretty remarkable, in terms of continuity. The first is the reintroduction of the tariff exclusion process, which I’ve written about elsewhere as a pretty smart move to create collective action problems among businesses that would otherwise be opposed to tariffs, right? Because instead of spending political resources and having their associations counter-advocate against tariffs, instead you’ll have a bunch of companies using political resources to get exclusions and run the rat race of, at least in the Lighthizer USTR, a very small probability of actually getting products excluded. There’s all sorts of concerns about how the process was not transparent and arbitrary. And so, it will be curious to see what the rules are going to be, but I think the big strategy is still the same, and has this collective action problem sort of built into it.

The second thing to highlight is, I thought Dan Rosen had a really good question that she [Tai] sort of artfully dodged in the end about purchase commitments, right? Because those were a big part. About a third of the text in the Phase One agreement is about these purchase agreements, and the pernicious sort of problems of trade diversion. So, I have a piece with the Wilson Center Asia Dispatch’s blog highlighting some research that a student here at KU has done, which shows that China’s targeting of Australia with sanctions, I think eight out of the nine products targeted were products covered by the Phase One deals. So, we call that sort of “robbing the Australian Peter to pay the American Paul,” right? So, it hits the American ally with tariffs, and tries to satisfy the terms of the Phase One deal, and China probably sees that as a win-win, right? But it highlights this problem of bilateralism that she didn’t really sort of address whether that’s going to continue or not under the Biden administration. It flies in the face of the multilateral approach that they seem to be advocating.

Kaiser: Exactly. So, you say that the exclusion process, the exemption process, was opaque and not very transparent, but I thought it was pretty transparently the case that if your products are commonly purchased consumer items that are going to hurt Americans, or especially voting Americans around Christmas, they will be excluded. Anyway.

So, you’re the trade guy, so I’m going to focus on you for now, Jack, and we’ll get back to you in a second, Sam. But before we get too much further, you’ve got this paper. This really important concept in the paper though is, you distinguish between the trade war on the one hand, the blunt force of the trade war, and the specific opposition to tariffs. So, the paper itself looks at how multinational companies and their supply chains have responded to the blunt force of the trade war, and to the specific tariffs imposed in 2018 and 2019.

So you assume these can be treated as two separate things. I’m not sure I understand completely what the trade war is, separate from the tariffs. What is that? Is it just sort of the optics of belligerence, or what?

Jack: We see it as uncertainty, and the trade war as I understand it has a number of dimensions, or this effort of decoupling the U.S. economy from China have a trade dimension, and that’s the section 301 tariffs, but also 232 and other measures coming out of the USTR. There’s also an FDI dimension, or an investment dimension, and here we see a move towards CFIUS investment screening on the one hand, and then scrutiny about sort of U.S. companies, and who they partner with, and where they invest in China.

There’s also an export, what’s it called? An “entities list” dimension of blacklisting — this is out of Commerce — blacklisting certain Chinese companies that are practicing things that we don’t like, either on human rights grounds or on security grounds, and preventing American businesses from doing business with Chinese counterparts. There’s a currency dimension, of finally declaring China a currency manipulator, a thing that’s been debated endlessly for sort of decades, and in some ways comes late, where China certainly was guilty of undervaluing the RMB maybe a decade ago, but today that’s less true. But nonetheless, Treasury came out and did that designation.

There is also a people-to-people… this “whole of government” thing is pernicious, right? The DOJ, Justice Department, and the China Initiative has gotten a lot of flack, I think rightfully so, recently, as they’ve cast a pretty broad net about academic collaboration, about Chinese working in American universities and companies, and there was an active effort to try to exclude, deny visas, investigate and harass, I think, Chinese and Chinese-American folks involved.

So, the trade war is much more than the tariffs, the section 301 tariffs that we focus on, but it’s important to highlight historically, that was the big sort of, the intellectual framework and the warning shot that led to the series of subsequent policies.

Kaiser: Right, so a more stringent CFIUS, that’s very clearly got a strong trade dimension. And of course, the entity lists and things like that. Just all that, those efforts to kneecap Chinese technology companies, obviously. I hadn’t thought of the DOJ’s China Initiative as having a trade dimension, but obviously it does. You’re absolutely right.

So, that makes it much more clear. Just so we know what we’re talking about here for the listeners, we’re talking about the tariffs themselves, and then all the rest of the stuff that you just mentioned. And maybe before we go too much further, and staying with you for just one second, Jack, and maybe we can try to make this nice and tight, but maybe it would be a good idea to sort of revisit the major events of the trade war. So, from, I guess, people would say the opening solo might have been opening the 301 investigation in 2018, and then maybe all the way through the actual Phase One agreement, which kind of put an end to the trade war, as it were, in early 2020. So, Previously on the U.S.-China trade war — highlights.

Jack: I’ll try to do my best and be brief. We are in the middle of the largest trade war, in nominal terms, in history. This is because the U.S. and China are the most sort of economically integrated countries to go and try to do something like this. The volume of trade between the two is just huge, and the average tariff level from the U.S. and China has risen from about 3% to about 20%, in nominal terms, and it’s covering about two-thirds of products traded. So, it’s a big trade war.

How did it start? The intellectual framework of the trade war is laid out by the section 301 report that came out of USTR in the spring of 2018. The section 301s enable the president to impose tariffs and quotas when the U.S.TR deems that other nations are engaging in unfair trade practices to protect national security interest of the United States. So, as part of that, they outline basically four buckets of things that China was doing wrong that justified the imposition of tariffs, and they are uneven playing field by Chinese industrial policy, forced technology transfers, cyber security, and Made in China 2025.

The first three things are things that date back before the Trump administration, and have been long sources of complaint by multinationals in China. They’re also not really the traditional kinds of trade issues that you expect to see. The new part, I think, in the Section 301 tariffs, and the thing that broke the camel’s back, is the Made in China 2025 initiative, and the efforts by U.S. multinationals who felt threatened by that policy and started lobbying during the Obama administration to really see this as an effort to exclude American companies from new, emerging, promising markets within China, and competing with them worldwide. So, the original justification of the 301 tariffs, the first two lists, were designed to target industries that had benefited from Chinese state industrial policy in the Made in China 2025 initiative.

Kaiser: Right.

Jack: Other things to say about this, the background is, when this report came out, it was well-received. The Section 301 report, well-received in the spring, and I think the blob, if I remember correctly, was very, very excited that finally somebody is taking the fight to China, taking these issues seriously, and that this pressure sort of approach is going to be successful and finally get some of the reforms that have been long clamored for. Bob Davis and Lingling Wei’s book is very nice to illustrate kind of the Chinese conversations that were happening around the same time, and what we had happen by the summer of 2018 is basically a breakdown, right? The U.S. thought it was going to be tougher, and China was going to back down. China, for reasons they outlined, thought that they can tough it out, and if they don’t back down, the U.S. side is going to back down. So, we have this classic bargaining failure that leads to a war of attrition on both sides, where they throw tariffs at each other, in hoping that the other side will back down rather than paying sort of the cost of those tariffs, beginning in summer 2018.

Rounds of negotiations go on. They don’t go anywhere. When they break down, more tariffs are put into place. And so, finally, going into 2019, it looks like most of the goods that are traded between the U.S. and China would be placed under tariffs at some point, and really the pressure sort of ratcheted up for something to be done about this, for putting some sort of brakes on the escalation of the trade war. And I think that pressure, and sort of the collateral damage of the trade war led to what was negotiated as the Phase One agreement, which came into effect in January of 2020, to make sure that the remaining sort of corners of the economy, that both sides wanted to protect the most… For the U.S., it’s consumer products that would really hit the pocketbooks of voters. For China, it’s the products that aren’t easy to be sourced from elsewhere that its producers need from the United States.

And so, to try to not have that be covered, and have all trade under tariffs, they arrived at a deal in January of 2020, and we can unpack sort of the terms of that, but where we are now, I would disagree with your characterization of this as putting an end to the trade war. At best, it’s a truce, but it’s like a fighting truce, right? Because most of the tariffs that were put into place remain in place after the Phase One deal. Big parts of the Phase One deal was about these purchase commitments, which much of them have not been met. And so, we are at an interesting point in the trade war, because the Phase One deal, with all its problems, is set to expire by the end of the calendar year, and so I think that lends some urgency in the timing of the Tai-Leo summit, and we’ll see what the two governments are able to negotiate, and hopefully give us something better than Phase One.

Kaiser: Yeah, yeah. Well, that was admirably both comprehensive and succinct, so very good. Sam, let’s turn now to the actual dataset that you guys drew on. Your paper draws quite heavily on this Foreign Invested Enterprises in China dataset, which comes from the Ministry of Commerce, and it covers, if I’m not mistaken, the period from 2014 to 2019. Can you tell us about the dataset, and how you used it, and maybe talk about some of its limitations, as well?

Sam: Yeah, absolutely. The origin story of the FIEC dataset is, for a different project, I needed to kind of disaggregate foreign investments in China, so not just levels, but where it was coming from, and in particular, the skilled need of foreign investment in different cities in China, and that data just wasn’t available. So, after some very strategic Baiduing, I came across this Ministry of Commerce website that has this census of foreign invested enterprises in China.

And so, the website is meant to operate as a lookup function, where you can search the registration records of these foreign invested enterprises. So, every enterprise that has foreign funding, at least partial foreign funding, or all foreign funding, has to submit an annual report to the Ministry of Commerce, and this includes large multinational corporations, all of the big ones that you can think of, Microsoft and Exxon, et cetera, but it also includes individuals investing in firms. So, it runs the full gamut of foreign invested enterprises.

And so, with the very gracious assistance of a friend, we scraped the data to put the dataset together. Now, what was available online at that time was from 2014 through 2018. We did another round of data collection in 2019, and unfortunately, the Ministry of Commerce changed their website, and so now our access to future data is limited, and is a problem for future data collection and future projects extending the dataset. But it provides really rich data that wasn’t accessible to, say, a poor graduate student, who I was at the time, who needed disaggregated data, looking at what type of foreign money was going where, and for what purposes.

Sam: So, on the one hand, the dataset is extremely rich. It’s a census of foreign invested firms that are reporting to the Ministry of Commerce. It includes things like location, like where they’re operating, including their industry class, business operations, their investors, so we can see not only the country of origin, but who’s investing in them. We have things like joint venture status as well, so we see the domestic investors, as well as the foreign investors for those joint ventures. And we also have registered capital, especially for the later years.

Now, some of this data, as the dataset gets more recent, that data is fuller. Some of those earlier years, we don’t have the detailed investor work, or investor data. But overall, it’s quite rich. Unfortunately, it’s kind of the embarrassment of riches almost, where we have all of this data, but it also has very important limitations. The time limitation. We were able to get through 2019, but 2020, we have to find an alternative way of getting this data, or updating the dataset.

Additionally, there are some variables that we would like to know that we don’t have, like number of employees, I think, is really high on our wishlist. So, Jack and I have talked a lot about things that we would like to add to this dataset. We have a nice running wishlist of things to look for and add on in the future, when we have both time and resources to do it, because this is a pretty major data effort.

Kaiser: At least for the larger companies, it would seem like — certainly for the public ones that are on that list, and there are, I imagine, quite a few of them — you should though be able to get things like turnover, or even some of them will break out China as a percentage of global sales. And it would be interesting to see that, but we’ll get to that. That’s fantastic, and I’m sure that this dataset that you’ve created out of this, having scraped it, will be useful to a lot of people in their work.

Staying with you, Sam, in the plainest possible language, you look at the impact of the trade war as an instance of elevated political risk, and how it was going to impact firm exits from China, and then you also looked specifically at firms that would be impacted by tariffs, and how they were marginally going to be impacted by the tariffs, either from the PRC or from the U.S. So, what did you find? What did you discover about the propensity to exit based on the blunt force of the trade war that Jack described, and the specific tariffs?

Sam: Yeah, before I get into those specific results, I have to talk a little bit about Jack’s major data effort, which was identifying which firms were likely impacted by tariffs, right? So, the FIEC dataset provides the blanket list of firms, and the industries that they’re operating in, but that had to be joined with essentially a tariff dataset.

Kaiser: Yeah, for sure. Yeah, that makes sense.

Sam: And so, Jack’s team, Jack and his team went through all of the tariffs, both coming out of the U.S. side and the China side, and matched the individual products that faced tariffs with their industry classes. So, there were just over 100 industry classes that different sectors are broken down into, that distinguished between, say, woven textiles and leather textiles, and matching the actual products with the industry classes, we could then use that industry class variable to map on to the FIEC dataset.

So, now we have the universe of foreign firms that are likely impacted by the trade war, because of the industry classes that they’re in, and the problem is that we really want to isolate the effect of tariffs.

Kaiser: Right.

Sam: So, one option is to narrow the sample down to just industry classes that have tariffs, and compare exits before the trade war and after the trade war. That would show us how many tariffed firms are leaving after experiencing tariffs. But the difference in the before and after includes both the effect of the tariff, right? Going from zero to one on that tariff variable, and also the —

Kaiser: And the trade war.

Sam: And the trade war, exactly, the effect of time, right? What’s different in dropping out between 2017, 2018 and between 2018 and 2019? Well, there’s this massive trade war that’s going on, with all of those other measures that Jack outlined earlier. So, that variable then gets confounded by the souring relations, all of the heightened political risks, and the fear of potential future tariffs that might be coming down, or might not. All of that ambiguity that we understand as the blunt effects of the trade war’s political risks.

So, in order to isolate the impact of tariffs themselves, we needed a comparison group. You can think of it as a control group, if you will, that will help us estimate the impact of time, that blunt effect.

Kaiser: Right.

Sam: So, we compare changes in the exits of the tariffed industries over time to changes in the exits of the non-tariffed industries over time.

Kaiser: Non-tariffed but still affected by trade war?

Sam: Exactly.

Kaiser: Right, right, right.

Sam: And so, this helps us separate the tariffed effect from the blunt effect, that time-determined effect. So, what we’re calculating in these estimates is the difference in the change over time.

Kaiser: Right. And you guys call that “difference in difference,” or something like that. Is that so?

Sam: Yeah, so there’s two differences. You take two subtractions, two differences. One is between the tariffed and the non-tariffed industries, and one difference is the before and the after, and then you take the difference between those to get an estimate. So, it’s the difference between two differences.

Kaiser: A-ha! Very cool.

Sam: Yeah.

Kaiser: Okay, drum roll, please. What were the results, and what did we discover?

Sam: Yeah, so we started by just looking at U.S. firms, because we think that the U.S. firms are the most likely to bear the brunt, because they’re the most likely to be engaged in U.S.-China trade. And what we find is that the biggest effect is the blunt trade war, and this is consistent across a wide variety of statistical modeling decisions. And U.S. firms before the trade war are exiting at about 8%. We’re seeing 8% of firms leaving, and after the trade war, we’re seeing 11% exiting.

Kaiser: Wow.

Sam: Yeah, so the marginal effect there is approximately 3%, just from the before and the after. We also find that U.S. firms that are facing U.S. tariffs don’t exit at a higher rate than those without U.S. tariffs.

Kaiser: Interesting.

Sam: Yeah, so there’s no statistical difference in this sample, by the way, of experiencing tariff and not when the tariff is from the United States. We do see a small impact of tariffs when we just isolate it to Chinese tariffs. So, if you’re facing… So, post-trade war, or in the trade war period, if a U.S. firm has PRC tariffs, they’re exiting at a rate of approximately 11.7%, whereas the non-tariffed, those who don’t have Chinese tariffs, are exiting at a 10.5%. So, there’s a small impact there of Chinese tariffs.

Kaiser: So apparently, the lesson to be learned here is that if you really want your firms to exit, you saber rattle, and you wave the flag and ask your businesses to follow, and then you goad China into imposing tariffs. You don’t need to do any of your own, and harm American consumers in the process. That’s brilliant.

I’m curious though, how fast typically do you see firms exit following on a spike in political risk, or a call from the home country’s government to follow the flag? I mean, could it be that since you’re only measuring to 2019, you don’t capture the full extent of firm exit events, Jack? I mean, is that…

Jack: Yeah, I can drop in on this. The short answer would be yes, and I think the probability of a firm leaving is going to depend on what kind of industry it’s in, and how invested, how much sunk cost it has in China, how big it is, and that is actually consistent with what we find, right? So, depending on how tied you are to China and how important China is for you, it’s going to be different. But what we’re reporting here is the aggregate effect, and so on the margins, only the companies that were… if companies were planning to leave China already, some of them are going to leave China in that year, right?

Kaiser: Right.

Jack: It’s the companies that were maybe thinking about sort of leaving China, that maybe the trade war pushed over the edge, and that decision could have been made in 2019. It could have been made back in 2017, right? So, we believe that something is going on, because we have this overall rise in exits, and what Sam didn’t mention earlier is we compare U.S. also against non-U.S. firms, big investors in China, and U.S. firms are not more likely to exit. They’re not following the flag, if you will, and leaving in response to policy. So, we really believe that that suggests that the trade war’s effect is in elevating political risk for all the companies that are operating in China, and that whether you exit or not, you’re going to be marginally more likely to do so for any variety of reasons. We don’t have those mechanisms sort of well-identified and specified, but we can imagine sort of what those might be, right?

Jack: But this is also why we don’t see, ironically, in the sectors that you would expect the trade war to be the fiercest, manufacturing, information technology. The probability of exit in those are actually less than industries that are not central to the trade war. And it’s because the companies there are probably much more invested and have more capital sort of at stake in China, and they can’t leave as fast. But we are only looking at the short term sort of impact, the one year out, pre-Phase One deal impact of the trade war.

Kaiser: You have a limitation in the dataset that you have, so yeah.

Jack: Exactly.

Kaiser: Interesting that you saw that American companies weren’t exiting any more than their foreign counterparts. Could we attribute part of this, and is it possible to tease out the effect of unfriendly domestic Chinese policy on stimulating these things? Or do you roll that in as part of the negative environment of trade war? Is that considered in it?

Jack: It would be possible, right? Because yeah, the second difference we’re comparing is just across time periods. And so, the differences in treatment could be coming from the Chinese side in responses to American efforts. I mean, decoupling is not just the U.S. sort of initiative, right? There’s a lot of efforts in China to do the same thing. So, yeah, it’s possible that that is happening.

I will say though, the worry, I guess, would be if China was differently sort of applying policies across different countries of origin. But instead, I think the evidence we see is more consistent with the idea that multinationals are multinational, and their business models are not necessarily tied to their country of origin, right?

Kaiser: Right, right.

Jack: That is to say, an EU company could be exporting to the U.S. market, and therefore it’s exposed to tariffs, or a Japanese company could be importing stuff from the U.S. and be exposed to Chinese tariffs. That’s just the nature of the global supply chain, right? And so, this disruption is felt not just among American companies, but among any company that’s engaged in international trade. We don’t look at Chinese companies, because we don’t have the data to do that, but I imagine some sort of version of this is playing out among domestic companies that are entirely, wholly-owned Chinese companies, because as long as they engage in international trade, they’re going to feel the effect of tariffs.

Kaiser: Yeah, that makes a ton of sense. So, you guys discovered pronounced heterogeneity, though, among these firms that exited. You found that the smaller firms tended to exit, and the ones that were less entrenched, that hadn’t been there quite as long. And you also looked at international institutions, in this case, mostly the presence of bilateral investment treaties between two given countries, to see whether that was a factor in diminishing the propensity for any given firm to exit following a spiking political risk event. So, what did you guys find there, in terms of, let’s start with the international institutions. What did you guys find there?

Jack: Sure. We wanted to know — this paper we really wanted to identify the international factors, and the international drivers of firm exit, and so we looked at two sets, economic agreements between countries, and political or security agreements between countries. And the expectation would be that both would protect friendly countries that are covered by these, or friendly companies, rather, that are covered by the shield of their home governments, or if they lack that protection, maybe they will be more exposed to political risk.

Kaiser: Right.

Jack: And we only find an effect that bilateral investment treaties in the trade war period reduces firm exit. Which is what you would expect if it works, right?

Kaiser: Right.

Jack: And this is kind of cool, because there’s a big literature out there about BITs that expect that they mitigate political risk, and that’s why companies lobby for their governments to negotiate them.

Kaiser: BITs, bilateral investment treaties, right.

Jack: And so, BITs don’t have an effect in the pre-trade war period, when there’s not this elevated risk, and then when risks are elevated, lo and behold, countries that have BITs with China, their companies are not exiting China at a faster rate.

Kaiser: As advertised. Yeah.

Jack: Right. U.S. doesn’t have a BIT with China, by the way. It was in negotiations. The U.S. doesn’t have a BIT with China. The other finding is, we thought that maybe alliances mattered. It was certainly a central part of the Trump administration rhetoric about China, that you were going to have this alliance of democracies all pulling together to try to decouple and isolate China economically. And so, we looked at whether, if you were a company that’s from a country that’s allied with the United States, or a country that has a defense cooperation agreement with China… China doesn’t have as many formal alliances, but DCAs, there’s a fair amount, and it indicates sort of friendly political military relations, right? Do those things impact whether your companies are going to leave? And the results are, no. They don’t have a significant effect, and companies that are from U.S. allies are no more likely to exit China than from non-U.S. allied countries.

Kaiser: Interesting. Let’s turn to Sam and ask about the other variable that you looked at, which was entrenchment. You looked at that on the hypothesis that the more entrenched a firm is, as measured by how long it’s been operating in China and how much registered capital you have, and these are two things that you actually did have in the dataset, the less likely you’d see firm exit following on a trade war or tariffs or whatever political risk event you’re talking about. So, did that turn out to be the case? Did entrenchment matter?

Sam: Yeah, so firm entrenchment definitely had a significant impact on the likelihood of exit. And so, we used how long a firm has been operating and how much registered capital they had to kind of proxy for how integrated they are locally. And so, in terms of entry year, firms that have recently been established, they are the most likely to exit. So, if you had just registered for the first time in the previous year, you had an exit rate, or an exit probability, of around 26%, which is quite high. Much higher than average.

Kaiser: Yeah. Average being 11%.

Sam: Yeah, the average being 11%. Whereas if you registered your firm, if you entered in China in 1998, even before WTO ascension, you had a probability of exit just around 5%. And so, we see huge differences here in how long you’ve been there, and we thing that firms enter under different conditions, right? You were just speaking about some domestic policies, and a firm that entered in 1998 was entering under policies that are very different from the policies that exist now. There’s quite a bit of research out there about how these policies on trying to get foreign investments, and to attract foreign investment, and the carrots that they use have changed over time. And so, we think that this is kind of picking that up.

But it’s also, as anybody who has done any social science research, or lived in China, knows, this is a little about guanxi, right? And so, one way you can kind of protect yourself from political risk is to really build up your connections, and to have alternatives, to be able to shift your production when necessary, all of those types of things. And those things take time. They take time to develop.

Kaiser: I think that the firms that exited were just handing their business cards over at banquets with only one hand.

Sam: Faux pas. Serious faux pas. They didn’t lower their glass of beer or baiju when they cheers.

Kaiser: Exactly, when they clinked. Yeah. So, so far, we’ve found that a more entrenched firm is less likely to exit. A firm protected under bilateral investment treaties is less likely to exit. None of this seems at all counterintuitive to me, right? I mean, look, smaller, newer firms, they’ve got less sunk cost in China, as we said. I mean, they’ve probably not established those deep networks. So, you’ve made the case pretty well that the blunt effects of the trade war had a substantial impact, that tariffs didn’t add much marginal propensity to exit, but one conclusion I’m hesitant to draw, and maybe this is so… Am I premature in thinking that maybe the decoupling hasn’t advanced as badly as many people have feared? Is that a fair conclusion so far? That it really… Look, these companies haven’t been just pulling up stakes and skedaddling, and following the flag. And also that maybe reshoring isn’t happening in the way that Donald Trump promised. Hmm.

Sam: Yeah, so I mean, I think that’s right. Jack can speak to the decoupling narrative, but I’ll just jump in with, our findings here, yes, they’re what we kind of expected going into it, especially hearing all this rhetoric about decoupling, and we’re like, it’s not that easy to just get up and leave.

Kaiser: Yeah.

Sam: But also, the results that we find are right in line with a lot of other research out there that’s looking at these effects, including other academic research by [inaudible 00:40:51], and also some surveys that the American Chamber of Commerce out in Shanghai has been doing. They recently asked if firms were planning on exiting China, so looking forward, to also address this maybe our timeframe is too short here. And 72% of firms in their survey said they had no plan on moving any production out of China. So, a small, a minority of firms are considering it, and only 2% said they planned on moving all production out of China. So, that’s a clear minority.

And then, in asking where they would go, none of them said that they would return to the United States. So, most of them had plans to diversify, in terms of moving to different regions within China, or to move some of their production to other countries, but none of them reported the plans, at least to return to the U.S..

Jack: I think you’re right in some way that our results are sort of consistent with the business as usual sort of narrative about what we expect happens among multinationals, how they respond to political risk. I think where they deviate from at least the consensus and the policy thinking on this is that I think policymakers have thought about the trade war primarily in national terms, companies nested inside sort of countries and how they’re going to behave. But the literature on businesses as usual really is about how companies of different sizes have wildly different political resources, and their responses are going to differ dramatically.

Kaiser: Right.

Jack: What we find, the entrenchment results hold before and after the trade war. So, basically big companies do well prior to the trade war escalating, and they continue to do well after the trade war. Small companies have a hard time, and they’re going to exit at a greater rate, and they continue to do so afterwards. Where politics kick in is not in the way that policymakers anticipate with the targeting of tariffs on these stick parts. The only evidence we see where politics matter is in the signing of BITs that are specific to things that companies care about, right? The terms of BITs have a lot of company input, and if you have one of these in place, it does seem to matter. If you don’t, the other stuff that I think gets a lot of emphasis in this decoupling narrative just doesn’t really kick in.

Kaiser: So, that’s interesting, and it doesn’t surprise me, but are we able… So now, you have a gigantic number of companies to begin with, but you’ve already winnowed it down. You kind of know which firms are these small firms that did exit, right? So that’s maybe a more manageable number. Could you look at some of those and maybe take a core sample of them and see, did they go to Indonesia or Vietnam? Where did they go? And I mean, maybe that’s outside of the… that’s obviously, that is outside of the scope, but I’m just curious whether you learned the destination of firms that did exit. And how many of them basically dissolved?

Jack: Yeah. Glad you asked that. We did take a sample of companies, hundreds of thousands of companies. We took a sample of 500 American multinationals and try to chase down what they’re doing elsewhere, because an observation in our dataset currently is just the subsidiary of a company. We haven’t even organized that, nested into a parent company yet, so we likely are undercounting… we’re overcounting exits, right? The shutting down of a subsidiary would be counted as an exit, even though the whole company might be in China, even though they might be opening up more branches in China. So, we think we have a pretty conservative measure of exit in the first paper as a result of this.

But we had, in a second paper, we over-sample sort of large companies. We do the sample based on how representative of capital it is, right? Foreign investment into China follows a power distribution, so a few companies account for a huge amount of the investment, and you have a long tail of smaller companies making small contributions. So, we take the sample where it reflects sort of the capital distribution within China, and then we had research assistants basically try to chase it down through all available information, like 10K reports, searching through Chinese databases, searching through U.S. databases, on what’s happening.

And we are able to differentiate sort of exit a little bit more clearly. Some of these are restructuring. Some of these are renaming. Some of them are just small companies that sort of disappear. We do this for a couple of big multinationals in a case study that we put together where you do see over a longer period of time, one major multinational manufacturer of agricultural equipment did shut down, and not in 2019, but two years later, a major manufacturing facility, while it seems like they were scaling up sort of R& D in China, as well as exporting other items that were made elsewhere. So, you see this readjustment.

And not to go too much into the details, I think the key insight from this sample of 500 us multinationals that we find is that large multinationals are already pretty well diversified. China’s represents a smaller portion of their workforce. They represent a smaller portion of their total number of foreign subsidiaries, and your smaller companies by lack of diversification have more a dependency on China. And that might point to why we see this difference in large and small companies, and whether their propensity to exit, because if you’re a small company and 50% of your foreign production is in China, and you’re hit by tariffs, and as we show in our case study, and you apply for tariff exclusion, you don’t get it, what do you do? The company at least we looked at hasn’t pulled up stakes and left China yet, but one would imagine some number of these companies that are overexposed to China, and yet can’t find ways around tariffs would do so.

Just a couple of things more I want to highlight from the second paper, is the purpose of the paper is really to unpack what multinationals can do that is not exit, and also not voicing political opposition in the United States, which we find is in line with other research out there, is pretty surprisingly rare, right? We would think that given how common, or how deeply integrated American companies are with the Chinese economy, and how they’ve been vocal advocates for interdependence and market opening, that when the wave of protectionism comes, and the market is closing, they would speak up. But it turns out that, this is according to work by Zhu Boliang, that less than 2% of all U.S. firms have actually publicly spoken out against tariffs. It’s a surprisingly small number, and that’s consistent with what we find as well.

And the reason, I think, is in the third category that we look at our paper. So, if you don’t voice political opposition, and you don’t exit China, what is it that you’re doing? And we find that companies have a wildly different sort of set of options available, depending on how much political resources they have. Large companies have options like using tariff avoidance, duty avoidance sort of schemes, through foreign trade zones, through the first sale rule, through essentially trans-shipping things around their global network to try to adjust so that they have the least tariff exposure.

Kaiser: So, let’s dig into this. I mean, you talk about this Zhu Boliang paper, and so he did this paper that you guys cite in yours, with some co-authors who are also mainly from Penn State. And he seems to think that it’s rare for MNCs to voice opposition to tariffs out of basically fear of political backlash, right? That seems to be their finding. Were your findings consistent with this observation? Is it a fear of political backlash? His research says that ones that are headquartered in heavily Republican districts are less likely to voice opposition than others.

Jack: Yeah, I think our results are consistent, but we look at a different set of explanatory factors. We didn’t look at where companies are headquartered. Instead, we focus on something else they also find in their paper, which is, big companies and small companies seem to have different options. And we think that, as I mentioned earlier, the trade war and the exclusion process creates a collective action problem, and your large companies that were the most vocal in advocating for MFN access or market opening to China are the most ambivalent when it comes to China, because they’re shielded, for the reasons I talk about earlier, from some of the negative effects of the trade war.

What I didn’t mention is they also have a lot of leverage over their suppliers and over their customers, right? They can pass on costs much more easily, and not lose business, because they might be the only game in town, or they’re the best at what they do. And so, they’re insulated from tariffs.

On the other hand, they also have been vocal in the last 10 years, especially about problems, long-festering problems that are spelled out in the Section 301 report that multinationals have with China. So, they’re frustrated, and they were initially, the U.S.-China Business Council and organizations like that were pretty positive on the section 301 reports, right? They just don’t like tariffs, and would like to have those problems resolved and tariffs also go away.

So, big multinationals are ambivalent, and small multinationals don’t have the political resources or government relations, know-how, or the money to employ lobbyists to really influence, move policy as much. And so, as a result, we see this problem: big companies that have the ability to change policy are sitting, we think, probably more likely to sit on the sidelines. Smaller companies are kind of going down and spending the resources in doing tariff exclusions, and not succeeding in that, either. And so, you have this hollow lack of a coalition, right? Even though you have surveys that show that overwhelming majorities, 70-80% of American companies don’t like tariffs or say they’re harmed by tariffs. You don’t have anywhere near that kind of coherent and organized political opposition to them.

Kaiser: Right. I had thought the same thing as I was reading your paper. I figured, it can’t be only that they’re afraid of being shunned for being pro-China. I figured, look… because I remember what those AmCham reports looked like from 2016, right? You saw a lot of… And even in 2017, you saw USCBC and AmCham both seeing a lot of their members grumbling a lot. They figured, look, there are pros and cons to all of this, but if we can remove some of the cons by changing Chinese policy through pressure, let’s do that too. And so, a lot of them actually did support sort of the heavier-handed tactics.

Sam, I want to ask you about the paper again. As political scientists, your purpose was to get us closer to being able to actually say something about the phenomenon of firm exit, whether heightened political risk or state-level conflict was actually apt to cause businesses to pull up stakes, fold up the tents and leave. But is China maybe just generous? Isn’t China, just given its sheer gravity and its centrality to the global supply chain, its allure just as a market, doesn’t that create a very different situation? It’s far from typical, right? So, granted, the Follow the Flag pressure coming out of DC was also unprecedented. We’ve all talked about this from the beginning of this conversation as an unprecedented trade war. But we end up with something maybe that just says, China’s force of gravity, its importance to these MNCs, is going to make companies ignore the Follow the Flag commands. I’m not sure how generalizable that becomes then.

Sam: Yeah, so this is a question of what are you actually trying to say, and what is the information you’re trying to get across? So, if we’re trying to understand the relationship between tariffs and trade in the world as it is right now, China and the U.S. is a necessary case, right? We have to understand this case in order to understand the role of trade and political risk in the world right now. And so, for that understanding, we have to include China, even if the Chinese market makes it exceptional and unique and not applicable to others.

If we’re trying to understand the specific role of tariffs, so rather than the impact on trade more broadly, but tariffs itself, then the results from our research should be seen with caveats, right? With understanding that certain conditions are necessary, versus sufficient.

Kaiser: Right, right, right.

Sam: So, our research is showing that tariffs themselves are not necessarily sufficient conditions to push firms out. That’s also to say that the local market that these firms are operating in are necessary conditions to consider, as well. And one thing that I like about research, and as somebody who studies China for a living, is that this is one piece of the puzzle. And so, we are adding one glimpse at a really important case, at a really important time, to say, okay, well, what does this tell us? And down the road, if we see another trade war between two other countries, then the question is, okay, what holds and what doesn’t?

Because that’s an empirical question, of what is actually generalizable. And I think it’s absolutely correct to understand our results in the context of our case, of just how important the Chinese market is, the importance of U.S.-China trade relations influencing global relations, but in and of itself, it adds one piece to the broader puzzle.

Kaiser: So, I want to wrap this up with one kind of big question for both of you, and that is this: what’s the gist of what you would say, having now completed this paper. You’ve written a couple of great op eds that were based on it. But what would you say if you were asked to, let’s just come up with a hypothetical here, if you had Gina Raimondo and Ambassador Katherine Tai in a room together, and they had to sit, they were a captive audience for 10 minutes, or if you were going to testify before the House Ways and Means Subcommittee on Trade, what would you say to these guys if you had your five minute?

Jack: Sure. I can start. If I had 10 minutes, I’d use nine minutes to ask questions, burning questions that I have about this research. But if I were to make a policy recommendation, it would sound something like this, that I think our research and others show that tariffs are not creating the kind of effects on companies as we initially thought, or as some policymakers think, and therefore it’s not generating as much leverage as the initial architects of the trade war believed, which is one of the reasons why we have a stalemate on these negotiations, right? Because they’re creating a lot of collateral damage without doing the, sort of generating the political leverage that was anticipated.

And the reason is because, and the need to think about tariffs differently than at least the Trump administration has, is that we can’t treat all multinationals as the same, and we can’t assume that they see the world in the same way as governments do in the world of borders that we have, right? What our research shows very clearly is that the trade war has very different effects on large multinationals versus your smaller ones, and that tariffs potentially risk serving as… I think everyone agrees that tariffs are taxes, right? But they’re a regressive form of taxation, and they may be hurting those consumers and companies that are the least able to afford it, and the least guilty of generating this unbalanced sort of global trading structure that we have.

Jack: And the largest, big multinationals that are responsible and benefit from creating this dynamic of economic relations between the U.S. and China are actually doing just fine in the trade war. We should listen to them. When they say they’re not planning to leave, we shouldn’t expect that they’ll change their minds magically two, three, four, five years down the road. And therefore, other tools might be more attractive that are less blunt than tariffs, to achieve the goals that the U.S. government has vis-a-vis China, which are totally legitimate.

Kaiser: It’s interesting that you only raise this issue of the regressive nature of tariffs, that they hit Americans, they hit the very Americans who can least afford it, here. You sidestepped that issue entirely in your papers, which I thought was actually a good tactic. I think we’re all familiar with that argument, but you used a completely new one.

Okay, and to you, Sam, what would you say if you had your five minutes?

Sam: Yeah, so my comments would be right along the same lines as Jack, and my first gut reaction would be to ask questions, and quite explicitly, it would be, what are you trying to achieve with the policies? Because if you’re trying to achieve souring economic relations, then yeah, the trade war is doing what you want. The tariffs themselves are not creating the targeted effect that a lot of, especially the previous administration had hoped, and this leverage that Jack talked about, and that we talk about in our Monkey Cage op ed. And instead, what we have is the collateral damage, right?

Kaiser: Right.

Sam: Is the small firms, the distributional consequences, I think, is where I would focus. And it’s not just a question of the aggregate trade numbers, but the knock on effects, right?

Kaiser: Exactly.

Sam: One of the reasons that we don’t talk about the pain felt by American consumers is, one, our data doesn’t speak to that, but that’s an implication of our research — that when we don’t see firms leaving, the next step in that logic is that they’re absorbing the cost, and then passing the cost along. So, my comments would be focused on how the distributional consequences are really hurting the people that they weren’t necessarily thinking of, in at least the rhetoric that we get. And the question of is that worth the blunt effect, and the perceived leverage that the trade war gives them?

Jack: Yeah, and we can link to back to the Biden administration’s Build Back Better, because I think there are elements in there that I think would work to attract more investment into the United States, and improve the quality of the labor force, and correct some of these structural imbalances. But the policy, by framing tariffs as part of this tough on China sacred cow that you can’t change and risk sort of political damage, I think that’s a big mistake, and I wish the administration would, in some ways, do the opposite of what the Trump administration did, which is educate the American public in a way to understand these issues, right? There was a lot of, unfortunately, sort of misinformation and misframing by the previous administration that had a real effect, right? You saw unfavorability ratings of China go up from like 50% to 70% in the wake of the trade war. I think this administration, having inherited that, could try to frame tariffs as a thing that affects Americans, and therefore we should make a judgment about whether that’s the right policy or not on those terms, not on this, we’re doing tariffs to be tough on China bit, which I don’t think our research supports.

Kaiser: Right. I mean, they basically took [the paper by] Autor/Dorn/Hanson China Shock, and they turned it into an argument to say, well, no, let’s lay all of this directly at the feet of China. I mean, it’s an easier message to sell, because it’s a lot more complicated when you really break it all out. But you’re absolutely right. The distributional consequences have come back to very much bite us in the ass right now. I mean, much of what we face today as a country really sort of grows out of that, and we hadn’t thought it through. I say we. We, people who were sort of rootless cosmopolitan globalist types like me.

But no, I look at the country, and you have this resentment-fueled uprising, this populism, that this is what gave us Trump, which gave us January 6th. It’s not even close to being spent. We have this GOP that is still just helplessly enthralled to Trump. And we have to have a better way to talk about China and American manufacturing. I mean, the irony right now is that China is sort of forestalling, or it seems to be in an effort to forestall those kind of distributional consequences, the negative ones, from its decades of neoliberalism, right? And we just… I don’t know, it just sort of accentuates our… my feeling of kind of helplessness, just to watch them able to do that, and us seemingly unable to, where we have people like me, these 10-percenters, whatever, the elites, who all went to good schools, and whose solution to everything is more education, and we have these blithe kind of chestnuts that we call out about reskilling and upskilling, which is never going to do anything. Not in the short term. We have a population that’s 70% high school educated or lower, and we imagine that, what, continuing education, adult education is going to miraculously give all these people jobs?

I don’t know, I also have my doubts. I mean, Build Back Better, absolutely, but you think that all these West Virginian coal miners are going to end up building offshore wind farms off of Martha’s Vineyard? I just don’t know. I don’t know if that’s going to be the solution.

Jack: Yeah, I’ll play the devil’s advocate, here. Kaiser, I think, you live in North Carolina, and I spent time there in school, and North Carolina and Jesse Helms were among the most vocal opponents of China’s succession to the WTO, because it’s the home to the textiles industry and the furniture industry, two industries that have been wiped out by Chinese competition. But North Carolina has, the research triangle is vibrant, and it had some of the best research in health tech, and a number of other areas, and the state is doing well relatively. So, that adjustment does happen, I think we just have to make sure that the folks who are… that it’s not going to happen automatically, I think is the problem of this assumption that…

Kaiser: Yeah, I see your North Carolina, and I raise you a West Virginia. I mean, it’s just, it’s really not. It’s not even. Sure, of course, I mean, and that’s part of the reason I moved to this state, is I kind of —

Jack: And it’s because of the good schools in Chapel Hill, right?

Kaiser: That’s exactly what it is.

Jack: And affordable housing.

Kaiser: Sam, what are your thoughts, though, about what can we do to quickly sort of reinvigorate American manufacturing? Because I think that, I mean, one thing that I have really learned from my many years on this planet is that manufacturing matters, that it is absolutely critical. If we want to sustain innovation, we actually have to make things. We’ve had guests on the show like Dan Wang from Gavekal Dragonomics. I mean, he talks about the importance of keeping process knowledge alive, and warning how dangerous it is that somehow in the U.S., we’ve persuaded ourselves that the absolute apotheosis of innovative genius is freaking Facebook and Twitter. I mean, that all the engineers in the world from the best schools should go and work for freaking social media companies. Now, that just seems so fundamentally wrong to me, and industrial innovation is just at a low ebb. What do we need to do?

Sam: Yeah, so speaking well outside of my professional purview here…

Kaiser: That’s what I do every week.

Sam: But I’ll bring us back to where we started, with Ambassador Tai’s talk. So, normally in these types of high-level representative talks, I tend to be a pessimist in that things change a lot slower, so there tends to be a lot more hangover from things. But one thing that I found in her talk, and in the Q and A thereafter, that was kind of optimistic, at least for me, was this discussion of the need to invest positively in American markets, and in American manufacturing. So, such focus on the trade war and trying to change the way that things are produced outside of this country is only half, or even probably less than half of the equation.

And so, when things turn more inward, and looking at our own process and our own economic integration, not only social integration, but also economic integration, there are some carrots you can put there instead of sticks, if you will. So, the positive reinforcement. And so, as someone well out of her depths here, my general thought is just that positive investments within the United States, and within our own economic structures, that make it more cohesive.

Kaiser: Well, if you are speaking out of your depth, you are still the kind of person I would much rather have making decisions than people who claim to be well within their depths and are making very bad decisions.

Jack: Yeah, can I add something too? I agree with Sam, and I want to add that this is a moment where we could be drawing precisely the wrong lessons from China, right? There’s a lot of talk and envy of Chinese industrial policy in the last couple of years, but I think this is to Sam’s research area. I think the success of the China model does not come from centralized policies, or at least not alone, but in allowing for local experimentation, and adapting to sort of local circumstances, and investing in those small examples that work, right? We don’t have sort of successful clusters emerging around Shenzhen because the government said you are going to make drones, and you are going to make OEM electronics per se. And I think the danger is in the U.S., and China has this massive bureaucracy to do industrial policy, and they still do it, according to our peers, they do it poorly a lot of the time.

And so, for the U.S. to take the lesson and say, we got it, we need to have the American industrial policy, and yet our bureaucracies… the U.S., built into its DNA is a small state, right? The federal government’s dramatically under-resourced. You want the under-resourced federal government to try to do this massive, ambitious kind of policies, you’re going to get something like the USTR exclusion process, where you hire 90 random people off the street and tell them to figure out if a product is helping or hurting the Made in China 2025 initiative. It’s a disaster.

Kaiser: Yeah.

Jack: So, I really hope that we don’t go down that road, and learn the wrong lessons, and undermine kind of the source of American strength.

Kaiser: This is 10 foot tall syndrome. This is what it comes from. We suddenly see… But we’ve misdiagnosed what it is that has made China apparently 10 feet tall. It’s just, ugh.

Anyway. I look forward to having both of you guys back on again. I’m looking forward to reading that next paper of yours, and you guys seem to work really well together as a team, so I hope that continues, that collaboration. Thanks so much to both of you. The paper, again, is called “Political Risk and Firm Exit: Evidence from the U.S.-China Trade War.” We’ll put a link to it on the podcast page, so you can download it from the 21st Century China program at UCSD’s GPS if you want to look more closely at the data and everything. I can’t wait to have you guys both back on here. You’re fantastic.

But let’s move to recommendations. First, let me quickly remind people that the Sinica podcast is powered by Sup China, and if you like the work we’re doing with the podcast, or the other shows in the network, like this new one that we’ve got coming out really soon, which you’ll be listening to next week, I hope, then you know, the way to support us is to subscribe to Sup China’s daily Access newsletter, which is just a fantastic Monday through Friday round up of… I mean, it’s more than a round up. It’s a really comprehensive set of links and summaries to all the stuff you need to know about that’s happening in China. So, check it out. Help us out. And if you are a school program, if you are an NGO, if you’re a diplomatic mission somewhere, if you’re a company and you’re interested in a group discount, write to Alex@SupChina.com, and he’ll set you up.

Kaiser: Okay, on to recommendations. Sam, why don’t you start us off? What do you have for us?

Sam: Sure. I’m going to recommend another podcast, and specifically an episode, a recent episode from that podcast. This season on Invisibilia, from NPR, they’ve been focusing on friendships and friendship dynamics. And so, just off the bat, I think it’s a really interesting topic, as we emerge from our stay at home orders, and as someone who has traditionally lived a very mobile lifestyle, we’ll say, with friends very widespread geographically, it’s kind of made me rethink social dynamics and friendships.

Sam: But specifically, there’s a recent episode titled “International Friend of Mystery.” It introduces the memoirs of Dr. Katherine Verdery, and she’s a distinguished professor of anthropology at the City University of New York and the graduate center. And Professor Verdery spent many years doing her research in Romania in the ’70s and the ’80s, at a time when the state security was running a very bottom up surveillance state. And in her memoirs, which the episode is based off of, which I can’t recommend because I haven’t read it yet, but I’m sure it will be excellent when I do get to read it a little bit later this year, she talks about discovering the secret police file on it. And so, it’s 3,000 pages of documents, of pictures, of reports that her friends and her acquaintances wrote, and that builds this case of how she herself was a spy while she was doing her academic research on peasants and agriculture.

Kaiser: Oh my gosh. And she was not, of course, a spy.

Sam: Right. She was not, of course, a spy. But it makes her reexamine, on the professional level, it makes her reexamine her positionality in research as a foreigner, but also the friends and connections that she made. And as somebody who spent… Jack and I are friends from the field, right? He arrived —

Kaiser: But you don’t know what he’s reported on you, right? You have no idea.

Sam: Yeah, and I had friends who admitted to me after years that they had conversation amongst themselves about whether or not I was a spy. And they decided in the end that I wasn’t, which I’m not.

Kaiser: Or so they told you.

Sam: But they decided in the end that I wasn’t because my apartment was too low-quality to be a spy. That surely a spy would have more resources than a graduate student had in finding housing in Beijing. But yeah, I thought it was really, really interesting.

Kaiser: That’s just really good cover, that’s what it is. You know, it reminds me, your description of it sounds so much like this book by Timothy Garton Ash, called The File. He’s a really well-known historian, and the Stasi had an extensive file on him, and he got to see it. So, yeah, that sounds great. I’ve seen my file from the outside when I was detained once. They slammed this thing down, and they flipped through it, just to show me how many photos they have of me. That was an unpleasant experience, but I’d love to…

Sam: Yeah, I don’t think I would want to know.

Kaiser: I do want to see that file, though. Okay, good one. That’s Invisibilia, that episode, International Friend of Mystery. Jack, what you got for us?

Jack: Yeah, so mine’s a little bit more prosaic. I have to check out that episode. That sounds great.

Kaiser: Yeah.

Jack: I started listening to this podcast when I was a student, and I think you have a lot of students in your audience who’s interested in China, and maybe studying in China. So, my recommendation is the Masters of Chinese Economics and Political Affairs MCEPA degree at UC San Diego’s GPS program. It’s the best group of colleagues and mentors that you’ll be able to find, and you’ll get to hopefully write for the China Focus blog, which I advised for like five years while was there as a graduate student. So, it’s a really good community.

Kaiser: That’s great. That’s a really great blog. I totally recommend it. You did a fantastic job with that, Jack. You did a really good job.

Jack: Thanks, Kaiser.

Kaiser: I mean, that’s how you registered on my radar first. I mean, that’s how I knew who you were first, from reading that.

Jack: Very cool.

Kaiser: Okay, so my recommendations. First of all, I just want to catch you up that I did finish Jonathan Franzen’s novel, called Crossroads, which I recommended last week, and it just kept getting better. It was so great. I did not cry, like I did after reading Freedom, but on balance, I think it’s a better novel.

But my recommendation today though is another novel by Guy Gavriel Kay, who’s my favorite fantasy and historical fiction writer. I’ve recommended his faux Tang Dynasty book, Under Heaven, and his faux El Cid on the Iberian peninsula, 10th-century book, called The Lions of Al-Rassan before. This time, my recommendation is A Song for Arbonne, A-R-B-O-N-N-E, which is set in a fictionalized Occitan, or Languedoc as it’s sometimes called — the southern part of France — and it’s based very loosely, less tightly than some of these other sort of loosely historical ones, on the Albigensian Crusade, when they went after the poor Cathars in Southern France. This guy’s work is super addictive. He’s just so good. He knows how to just sort of tug at the heartstrings of that 16 or 17 year old boy in you, that kind of… It just reminds me of that feeling the first time I read Tolkien. This kind of soaring, expansive, heroic, romantic thing, and it’s a great feeling. So, check him out. He actually wrote most of The Silmarillion. He worked with Christopher Tolkien on it.

Jack: Oh, really?

Kaiser: But he’s really the guy who’s behind it. And one thing that he does, which he’s unafraid to do, is he embeds real poetry in his work. I mean, he just will… “And then the jongleur read this poem, or he sang this song,” and then the lyrics are in there. They’re all really good. They’re all really good.

Jack: Is there a good audiobook for this, Kaiser?

Kaiser: There is. I’ve read most of them on audiobook. They’re all really good. I think all of his stuff is on audio. It’s quite good.

Jack: Have you read, what is it, the River of Smoke, the poppies sort of trilogy? Do you know about this one?

Kaiser: No.

Jack: You might, I think you’d probably like this one. It’s also historical fiction. It’s about the opium trade in China, linking to India, linking to Southeast Asia.

Kaiser: Yeah, that sounds great.

Jack: And following through it. Amitav Ghosh, I think.

Kaiser: Oh, yeah. I know Amitav Ghosh. Great, great. Oh, I know, now that you mention it, I do know that series. I will put that on my list. Thanks a lot. Let’s put that on the recommendations list as well. Here, I’ll make sure that it goes on.

So, you guys, thank you so much. That was a lot of fun, and congrats on the paper, and on the pieces that you placed afterward.

Sam: All right, thank you very much for having us.

Jack: Thank you, Kaiser.

Kaiser: The Sinica podcast is powered by SupChina, and is a part of the Sinica Network. Our show is produced and edited by me, Kaiser Kuo. We’d be delighted if you’d drop us an email at Sinica@SupChina.com, or just give us a rating and review on Apple Podcasts, as this really does help people discover the show. Meanwhile, follow us on Twitter or on Facebook at @SupChinaNews, and make sure to check out all the shows in the Sinica network. Thanks for listening, and we’ll see you next week. Take care.