Beyond the Data: China’s Economy with Leland Miller

>> Elizabeth Economy: Welcome to China Considered. I'm Liz Economy, Hargrove, Senior Fellow and Co-Director of the Program on US, China and the World at the Hoover Institution at Stanford University. Today I have with me Leland Miller. Leland is an expert on the Chinese economy, on US China relations, and is the co founder and CEO of China Beige Book, which I think has become over the past 15 years, the Go to guide for anyone who wants to understand what's going on inside the Chinese economy in real time.
Welcome, Leland.
>> Leland Miller: Thanks, Liz. Glad to be here.
>> Elizabeth Economy: Great to have you. So let's just start with a little bit of a description of what China Beige Book is all about. You began it, I guess, 15 years ago.
>> Leland Miller: That's right.
>> Elizabeth Economy: You know, it's really, I think, as I said, the go to guide for people who want to know how, what's happening, you know, almost on a daily basis.

I think you do monthly updates at this point, but you really have, I think, a unique resource for people. Tell us a little bit about why you started it and what it's all about.
>> Leland Miller: Well, you know, when, when I started this back in 2010, really, markets weren't asking for another product on China.

They weren't asking for better information on China to their detriment. Because I think what the idea was is they said, do we believe Chinese statistics? Maybe not. Do we think that they're accurate? No, but directionally they gotta be correct and it's good enough. It's a black box economy, they're a bunch of Chinese communists, you're not gonna get the real story no matter what you do.

So anything is good enough, we don't really need something new. And interesting, when we started China Beige Book there was a lot of pushback on what we were doing. They said, you know what, it actually complicates the picture for you to tell us what's really going on because markets react to what the official picture is.

So if you're telling us what's really happening and Beijing painting this beautiful picture something else. Markets typically, you know, typically react to the official picture, which is echoed by the World bank and the IMF and, and a lot of large traders. And so it might actually hurt us to know what's really going on.

I think that sort of view fell apart as you got into the Xi Jinping era and the economy slowed down. You started to have credit crises and capital outflow, panics and other things like that. None of these were foreshadowed by what was happening in official data. No weakness showed something was about to fall off.

A Cliff. So I think as we got in there, it was about five years in, six years in, people really started to understand that you need a check on what the Chinese government's doing. You can't just, you know, even if you buy into what they're saying, I don't think there's anybody out there who still does.

You know, it's just not enough information. You're not getting enough granular information, you're not understanding credit trends. You're not understanding government stimulus policies and what they're doing, fiscal and monetary stimulus, labor market inflation. You need a broader picture and you need one that reflects something that's more than just, you know, big state owned firms in tier one cities.

And that's often what Chinese data reflect. You know, during COVID when we were leaving, you know, we were with the Chinese economy shut down in 2020 and then it emerged the Chinese government announced 2.6, 2.7% GDP growth year on year. Absolutely impossible, coming off a quarter which the economy shut down.

Now that may have been very true for like a handful of state owned businesses in Beijing and Shanghai and Guangdong, but it wasn't true for the Chinese. So what we wanted to do at China Beige Book is paint a picture of the entire economy. We wanted to go across all the regions, all the key sectors.

We wanted to track state firms and private firms, we wanted to track large firms and small firms. We wanted to track all the different dynamics and not just growth, credit, shadow credit, the labor market, inflation, all these baskets which were really important. And by that we were able to tell the story of all the different Chinas and all the different China's in aggregate tell the story about China.

But what it did was allow us to paint a picture of what's really going on in China that was divorced from this idea that China was growing at this beautiful steady rate or eventually a very steadily but stable declining rate. Everything was beautiful. There were never negative prints.

And I think that when we got into the Trump years, it became more important, we got into COVID, it became more important. And so now I think people utilize China Beige Book as a way of just understanding China. In addition, official data instead of official data, it doesn't matter.

They need to know more because this is an extremely large and important bilateral relationship.
>> Elizabeth Economy: Right? So I have to say from the outset, I think I've known you for a long time and I remember when you started chucking, I thought it was brilliant. I never thought it was a problem.

I'm all in favor of getting, you know, real data.
>> Leland Miller: But you were one of the few ones though, I'll tell you one of the few, because the most people we went to said, look, you want to be part of this? You want to help us on this?

Do you want to have. And people were like, you can't do it, it's impossible, no. Very few people actually said, you know, this is doable. And you know, the small group that we went forward with said, we maybe we could do this, maybe we can, but if you can do this, it's a game changer.

>> Elizabeth Economy: Totally.
>> Leland Miller: Really low odds, so I think we were quite lucky.
>> Elizabeth Economy: But, but just say a little bit more about the data that you actually collect and how you are still managing to do it. Because, you know, we've certainly seen over the past, I'd say three to five years in particular, a real effort by the Chinese government to constrain the sort of range of data that outside experts have access to, even actually people inside China.

So how do you collect your data and are you still able to get the kind of data that you did 15 years ago today?
>> Leland Miller: Yeah, we survey thousands and thousands of corporates and we want to make sure that it's representative of China. Like I said, it's not representative of a key region, a key city, a key cohort like state firms or, or large firms.

And we survey across China to get this information. We always get the question, how are you still able to continue? Isn't this sensitive? Of course there's a sensitivity there. But I think what we did over time is show that we are calling balls and strikes. Regardless of what we are in our personal capacity back home, at China Beige Book we're calling balls and strikes.

We're not bulls, we're not bears, we're just calling the data as we see it. And for a long time, people thought of us through the bare lens because we were saying over and over, I mean, way early during the great financial crisis when things were still high and still Quite good in 2012 and some of the succeeding years because of all the big stimulus, we were saying, look, the Chinese economy is, here's all the vulnerabilities, here's what's happening in the credit markets, here's what's happening in terms of loan demand, here's what's happening in terms of all these other dynamics.

The Chinese economy is headed to much, much, much, much slower. And it doesn't matter what they do, best case scenario, worst case scenario, and we showed that through our data and explained why. But I think for a long time people said, these guys are such bears. You know, Beijing's out there calling 8% GDP every single quarter.

And these guys are saying, it's much lower, they must be bears. But the handful of times where markets got really, really worried about China and you start hearing that China collapsed stuff on CNBC and Bloomberg and, you know, you started to, to, you know, investors rushed for the exit, we sat there and said, look, here's what the data show.

And in August 2015, for instance, when the whole world was panicked that China was collapsing, we were the only ones who would come out and say, actually, nothing's going on right now. Our data are about the same as they were last quarter. Yes, manufacturing's much worse, the PMI scare people, but services a little bit better.

And so we told a nuanced story. So half the time where there's all these collapse panic, actually, all the time there's the collapse panics, we're out there saying, that's not what's actually happening. China's not collapsing, it's not going to collapse. So I think that over time we showed that we're truly calling balls and strikes.

Sometimes we're much more bearish than what the government is showing, sometimes we're more bullish. And our data actually recently has been a bit more bullish after being quite a lot more negative than official data from. For a while. So it go, it ebbs and flows. The key here is if you're the Chinese government and you're not acknowledging big weakness, then you're also not able to, to recognize or at least show real improvements.

You can't show the bounce back. So if everything's stable. You never see the downside, but you never see the upside too. So sometimes our data are actually better than official data, sometimes they're worse. But in any case, we're honest brokers on that. And I think that there's a, there's a certain amount of respect for that.

>> Elizabeth Economy: That's great. So I want to, I do want to dig into the data a little bit, but let's start again. Because you have such a long time horizon and so much experience looking at the Chinese economy, let's just start by looking back a little bit, maybe eight to 10 years or even if you want, B.C. jinping, and just give us a sense of the overall trajectory of the Chinese economy.

How do you see this economy, you know, developing over the past decade or so? And you know, we hear a lot about the middle income trap. And is China going to be able to escape the middle income trap? What's your sense for where the Chinese economy has been, you know, where it is, where it's going?

>> Leland Miller: Well, I think there's a couple points there. So the first is the economy is growing very fast, but it was growing from a relatively small base. So you saw these improvements year after year. And of course that kind of growth gets harder as you get bigger. But the other thing was the Chinese economy was governed very differently a decade ago than it is now.

You read the GDP numbers and they've always been historically beautiful and stable. And the key part of that is anything the Chinese government predicted always came to pass. And it wasn't because these guys are economic magicians, and it wasn't because they're prognosticators of legendary status. It was because GDP was created in a way that they would grow at a certain level organically, let's say it's 5%.

They had a 8% GDP target for that year or that quarter. And then they just juiced the economy through stimulus, typically through the property sector, by just extending lots and lots of credit. And then they would hit their target. So the targets were always hit. And that was the way the system ran.

Now it was funny because China watching a decade ago used to be this complete fraud where people who would walk, you know, run around predicting the GDP that the government would predict. Maybe they got in, you know, maybe they read the Chinese press, they had contacts at Chinese think tanks.

They knew the number was going to be forecast before it was released. They came out to their clients, usually at banks, and said, hey look, we think China's going to grow at 7.8%. China would then grow at 7.8% because it became the official number. And everyone walked around the room high fiving themselves, saying, look, we're really good at this.

And so this was this fraudulent exercise for many years now. It changed under Xi because eventually Xi, once he got into power, had his power solidified and got through some of the anti corruption stuff, said this model doesn't work for us anymore. We can't do this forever or we're going to be creating enormous vulnerabilities for the party, much less the economy in the state.

So we need to change this. We need to slow things down. And what we've seen in spurts over the last five years, three years, et cetera, has been a move away from the idea that they need to have high levels of growth, that the idea is slower, healthier growth.

The social compact the party used to have of the people was we'll deliver you high levels of growth and we're going to make everybody rich. And eventually that became impossible because the bad debt built up in the economy and it was changed around 2021 or so. You saw that in some of the campaigns, cracking down on billionaires and the tech crackdowns and other things, Common prosperity campaign, et cetera.

They moved away from the old social compact too. We're going to deliver slower, healthier growth and we're going to distribute the wealth more evenly. And so the idea here was we're not gonna target these extraordinarily high levels of growth. We're not going to worry about growth for growth's sake quite so much.

There is a little bit of a political sensitivity there. But what we're going to do is we're going to try to build a stronger China. And what that's moved over the last several years has been this incredible emphasis on national security priorities instead of growth for growth's sake.

That's building up a domestic chip ecosystem. It's supply chain diversification, it's building up the military, it's all these, it's lessening the reliance on the US dollar payment system because the entire Chinese economy is in some ways built on the US dollar. They've got all these vulnerabilities that's what keeps Xi Jinping up at night?

So more and more the economy has been moved towards growing at slower rates. They're not worried about the rate as long as it doesn't create a problem. A spiral downward and they're moving towards a completely economic parent, different economic paradigm, which is slower, healthier growth, focus on the national security and try to get the debt under control within limits.

>> Elizabeth Economy: Okay, so I think that takes us nicely into looking at what's taking place on the ground. And I'm wondering, you said slower, healthier growth, but is the securitization of the Chinese economy and sort of that effort to develop a fortress China with a lot more, in some ways autarky.

Right. A lot more, you know, independence around economic independence around food and energy, you know, and technology, is that actually healthier? It's definitely produced slower growth. But could you really characterize that as healthier growth?
>> Leland Miller: Not really, most of it it's not. I think where they, what they, where they get better grades is the fact that the economy, they talked for how long about a transition from an investment led economy to a consumption led economy.

They did cut the investment, they just never shifted to consumption. So they get, they get plaudits for what they did on investment, but they get a failing grade for what they did on consumption. And the property sector, this has been an impossible task. So Wall Street Journal, we're totally on the opposite side of Wall Street Journal.

A lot of our other friends who look at what's happening in China's property sector and say it's chaos, it's falling, everything's falling apart. You know, this shows the bankruptcy of the Chinese communist system. You know, there's a lot of things that show the bankruptcy of the Chinese communist system.

I don't think this is one of them because what they're trying to do is stage manage a massive diminution of the property sector as a growth driver for China's economy. So if you have something that's driving maybe 25% of growth and you maybe high single digits, whatever the number might be, you know, you can start and ramp up the, the, you know, the tightening of credit throughout the property sector in the broader economy.

But you can't just do that in a linear path or the bottom will fall out because y 60, 70%, whatever it might be, household assets in China are property. If you just see your property prices go down every single month and a straight line down, you're going to have a problem.

And that's actually what happened Last fall, I think you got to a low point where the Chinese government saw consumer sentiment falling off a cliff, investor sentiment falling off a cliff, corporate sentiment, which we track, is falling off a cliff. And it had the potential to create this doom confidence loop where everything starts falling, which is why they stepped in with something that wasn't as big as everyone thought it would be, but it was certainly louder and it did do a bunch of stuff to set a floor on the economy.

So I think that the idea here is not that they have stepped up and done all these healthy things, the economy, they have moved into the property sector, which is one of the big problems they've had. This is a multi year, many, many, many year process. The idea that it's over or almost over, it's a three year process, it's total nonsense.

They're gonna have to work on this over and over and over and over and over again. And the way you do it is, you know, you tighten credit, you tighten credit, you tighten credit. And then when things are starting to get problematic, then you have to step in and what the way we described this, starting in about 2020 or 2021 was, you C the herd, C the herd C the herd ventilate.

And what that means is they're trying to take out these weak zombie firms inside the property sector. You call the herd, you call the herd, call the herd. But when you get to the flow freezes up, the stronger industry players are starting to weaken and have real problems.

It looks like property stress can flow outside the property sector, the broader economy, then you start Step in, you ventilate, you give more credit access to these firms. But what's been so impressive about what Beijing has done, is it then they have not gone back for years and years and years.

They say they would do something, they tighten up, and then they panic and they go the other direction. The property sector story has been for years and years and years, tight, tight, tight, ventilate. But then they go right back to the tightening cycle. So you can actually see this on our credit data.

And they, they, they take care of the problem and they continue to tighten, continue to tighten, continue to tighten. Ventilate a little bit. Continue to tighten, continue to tighten. Now, we're in a ventilation cycle right now with property. It's why it's cyclically bouncing back. But from a structural standpoint, they're trying to do this just not in a straight line because that would cause potential panic.

So this is an extraordinarily difficult task to manage. The fact that they have had the wherewithal to continue it despite all the pain, I think that is actually one of the facets of healthier growth.
>> Elizabeth Economy: Right. And I think, you know, I took a peek at your most recent data, and it looks like what you're talking about is happening right now.

Right? So housing starts are up, new borrowing is up, so credit is up. So I think maybe, as you say, we're seeing a little bit of an upward trajectory in the sector. You know, one thing that occurred to me, though, is, you know, we've seen President Xi talk about moving away from the property and toward, you know, the three news and, you know, sort of the energy sector with regard to new energy and battery storage.

And a little bit, to my mind, it sounded like he was getting prepared to repeat some of the same problems that they had with the property sector, which is to say, you know, go all in an investment, you know, push local governments to invest in, you know, these new industries.

Is it your sense? And then you're going to end up with the same problem that you had in the property sector, which is a degree of, you know, over capacity, which you still have in the property sector. But do you see that happening again? Do you see China repeating that?

Or do you think what China's investing in now is ultimately has the potential to be more productive than the real estate sector, that somehow these investing in these industries is then going to gin up the economy further? So do you see it as a repeat, or do you see this as something fundamentally new and smarter?

>> Leland Miller: I think it's both. I think it's both. Because clearly what they're doing is they're throwing a lot of money at the problem. You saw that with EVs. There's a lot of talk about how great EVs are in China. They're fantastic, they're cheap, they're advanced. That happened because the sector was in a, is, was in a, you know, protected cocoon for about a decade.

They had consumer subsidies, producer subsidies. They had, they built up this massive ecosystem now that they sort of liberalize the sector. You're seeing battery companies and, and EV companies and everyone who supplies those types of firms, they're all dying right now because there's a price war. And so what are they going to do?

They got to find new markets and they're going outward. So I think Xi Jinping is comfortable with the fact that they're throwing this money because they don't want to be reliant on technology inputs from the West. They also want to dominate the fourth Industrial revolution, as is said quite often, which means they have to produce this stuff.

They're going to brute force it. That's the Chinese Communist Party way. But I think that the problem comes not from what they're doing, but where this is leading us. You know, right now, you know, China has the largest trade surplus in history. They have the largest goods trade surplus in history.

The bilateral, you know, relationship. The United States is, is a trillion dollars a year in terms, in terms of the, the, the trade surplus China has. It's the mo. Sorry, the broader, the broader trade surplus is it a trillion? Is it a trade. China is the largest single component of that.

So which, what you have right now is a dynamic where China has been a manufacturing powerhouse before. During COVID it ramped it up, ramped it up, ramped it up because of a lot of dynamics of supply chains during COVID. So the manufacturing sector went like gangbusters throughout COVID and increased its share.

And now you're at a point where Xi Jinping comes out in 2024 and says, we're going to double down on our double down through something called new quality productive forces. And what we're going to do through that is we're going to have a whole of government effort to manufacture more, to produce more, to export more, and especially on advanced technology, we're going to dominate the world on this.

Now, this comes at a time where they're already dominating the share of global manufacturing. If you look at some of the statistics that the UN has put out, that the numbers keep going like this, this causes trade friction. Now, it's not just because Trump is our president. I think any American president, I think, would have a political reaction to this.

Certainly both parties don't like what's happening in the trade relationship. It's happening in the eu. It's happening Brazil, South Africa, Southeast Asia, all these other places where Chinese overcapacity threatens to take out domestic indust back home. So I think that the problem here is not that Xi Jinping isn't willing to push forward this manufacturing plan, et cetera, it's that there is a, that there's going to be a political reaction from having doubled down and doubled down again globally.

And they're just simply not going to allow for Chinese EVs to take over all domestic markets. They're not going to allow Chinese, you know, legacy chips to flood across the world. There will be a political reaction. Some of that will be tariffs, some will be export controls and other things.

But I think that's where this has become very problematic. It's become problematic because there's going to be a political reaction to what Xi Jinping is doing at home. And that has just started right now in the early days of the Trump administration and with the European Union.
>> Elizabeth Economy: Okay, great.

So I want to come back to this in a minute, but let's just sort of wrap up with the domestic economy. So as you're looking at the Chinese economy and you see some, some signs, some positive signs, is the private sector in China coming back? I mean, is there a sense, is there a new confidence in the private sector?

Because we'd seen, and you mentioned sort of the crackdown on big tech in China a couple of years ago. You know, we've seen gradually the private sector recede in China, which I don't think is anything that anybody expected, you know, 10 or 15 years ago when you started China Beige Book, we thought that the private sector was expanding and the state was receding.

So do we see now a newfound confidence coming out of the private sector? And with that, do you anticipate that, you know, multinationals from the United States and elsewhere will start to come back and start investing in China? Because another consequence of Xi Jinping's approach to the Chinese economy has been, and other issues, you know, of course, as well, geopolitical tensions has been that foreign direct investment in China has largely dried up over the past few years.

So do you see some knock on effects that will actually propel the Chinese economy even, you know, faster and more forward as a result of the steps that she's been taking more recently?
>> Leland Miller: Yeah, I don't think so. So the issue with private firms is, and this happened pre Covid, but it really ramped up during the days of COVID zero.

Private firms don't want to invest their future. You know, we have all these growth metrics where we track whether, whether profits are going up in revenue and headline metrics, et cetera. But the under the rate, under the hood metrics are really important. Are they investing? Are they hiring, Are they borrowing?

And what we've seen from that for years now from private firms has been very, very disappointing. Now there was a little bit of bounce up recently and we're wondering, you know, is that part of a trend? Have things cyclically bottomed and they're bouncing back up? It doesn't look like it.

It's unclear though. But I think the bigger issue is that private firms, I think look at the horizon and I don't think they like what they see. They're seeing slowing growth, they're seeing international headwinds, they're seeing Xi Jinping's push to centralize everything and more responsibility on state owned firms at the disadvantage of private firms.

So I don't think their trends are particularly healthy or optimistic. And I don't think private firms in China feel particularly good right now when you have things that hit the headlines like deep seek and people get excited about individual private firms or individual Chinese technological advances. And so you do have foreign investor money.

Flood in to big Chinese tech companies and saying, well, maybe everything's changed. I don't think that that's what's happening. From a broad perspective, you may have some very, very sophisticated impressive Chinese technology firms. You do, and maybe some of those are attracting greater inflows. But I think from a broader perspective, if you're looking from outside of China into China, you're not seeing a particularly appetizing situation.

And part of that's because of what Xi Jinping is doing at home, cracking down on foreign firms, absence of rule of law, which has always been the case in China. All these other, you're, but you're, trade frictions, etc. You're not liking that from an investor standpoint. But if you're a private firm trying to dodge all this stuff at home, you're not particularly happy either.

So look, there's, there is the possibility that something happens, something bigger and maybe US-China trade tensions lessen significantly for some reason. And so the trade, the horizon looks better from a trade perspective and from a geopolitical perspective. And Xi Jinping does bigger stimulus and he talks about providing more to private firms and actually follows through for the first time, and which he says it all the time.

They never do it, they never really do it. So it's not impossible that you see this type of reversal. I don't think it's happening right now. I don't think the trends that we're seeing either domestically in China or, or outside of China looking in are particularly conducive to having a positive view on private firms in China.

>> Elizabeth Economy: Okay, so that kind of is a good segue into our discussion of the Three T's, Trump, tariffs, and trade. So let's just spend a minute on the tariffs. And we saw President Trump actually follow through with 10% tariffs across all Chinese goods. And the Chinese had their countermeasures, some tariffs, some export controls, a target on Google.

So where do you see this heading? Is this a movie we've seen before? Because clearly, obviously, we saw President Trump begin with the tariffs in during his first term. We saw President Biden continue. He didn't actually lower any of the tariffs or take them off completely, but actually put some new tariffs on in particular sectors, especially around clean tech.

And now we're back at it. I mean, is this just gonna continue ad nauseam? Is just this represent just a complete lack of creativity on the part of the United States in terms of how we can deal with what is a legitimate set of issues with regard to our trade relationship with China?

What do you see happening here?
>> Leland Miller: I think markets as a whole have been flummoxed in the early days of the Trump administration because they don't know what to expect. And they took all their lessons from Trump term one and most of those were the wrong lessons. So if you look at the way that the first administration ran, they were figuring things out.

Most of the tariff battles were about getting to a deal. They were tariffs for negotiating leverage. And I think that is why coming into the second term so many people were out there saying he doesn't really mean this stuff. He's not gonna really do the big stuff. It's all to get a deal.

He's not gonna follow through. And of course, Trump sent a lot of his top emissaries who became the Commerce Secretary, the Treasury Secretary, and others out onto financial media to say those types of things. They said, this, these are, these are tools for bigger deals. There's a little bit to, something to that, but it's, it's, it, it's by and large wrong.

So I think the way to look at tariffs is that there are several different reasons for, for why the Trump administration will push tariffs forward. The smallest of all of them is what was happened with Mexico and Canada, which is they're negotiating leverage. So Trump does not necessarily want a long term battle with, with the Mexico and Canada.

He has a priority on fentanyl, which is 1A and illegal immigration, which is 1B. He wanted to threaten big tariffs, get the Mexicans and the Canadians to do certain things. It's not at all clear whether he communicated those to them, clearly, but he wanted to do certain things and then call them off.

He wanted to get a success story here on Mexico and Canada. But I think because of the early experience of Mexico and Canada, markets are reading the wrong lesson into what the rest of the term is gonna look like. There are two other reasons to have tariffs. If you're, if you're the Trump White House trying to push them forward, one is to use them to restructure economic relationships.

There's a idea that other companies are, other countries are cheating, that they're being unfair. There's no reciprocity. We're hearing that, that, that word a lot now. And they want to restructure economic Relationships, but also the domestic economy. So the idea of setting up a tariff wall and then cutting tariffs for domestic manufacturers and bringing back, bringing back more production, you know, rewarding workers, rewarding taxpayers, et cetera, that's the economic component of this.

The other part of this is they want tariffs to be paid for, for the, for tax cuts. And you can't do that through bilateral, through bilateral tariffs. You need a broader type of tariff to apply, some sort of global tariff to bring in sufficient revenue. That's where all of this is going.

Now, where, in what order, what sequence? That's always the big question, because there is a plan and there has been a plan, and the plan is just whatever Trump decides he wants to change the plan to that particular day. So right now, would anyone have said that China would have gotten off easiest in the early going and maybe Canada the hardest and the EU next?

That wasn't necessarily the way I heard it was gonna be scripted out, but that's the way we're going right now. I think the 10% tariffs on China, for instance, are negligible. I think they're sort of a best case scenario for China, if you see Mexico, Canada tariffs, because, yes, they don't want 10% tariffs on their goods.

But if they can have a 10% tariff and Mexico and Canada, who are the rival producers, have a 25% tariff, that is going to shift the trade deficit even larger onto Chinese production. So we're gonna be buying more from China with a 25% Mexico Canada tariff and a 10% China tariff.

So I think Beijing right now is saying, I don't know what's going on, but let's just let this play out. It's certainly not a worst case scenario for us. I think we're gonna move to Europe next. I think we're talking about the global tariffs and the latest iteration of that is this reciprocal tariff where they're working on.

But I think that the big takeaway here is that tariffs are gonna play a much more fundamental role in the economic strategy of this administration. There's this idea that if Trump sees a 2% fall at the stock market, he'll get scared off and run the other direction. That's not gonna happen this time around.

They have much more desire to push forward a broader tariff program. They want to completely change these international relationships bilaterally and multilaterally. So I think we're gonna be seeing a lot of this tariff talk going forward. And I think that one of the lessons that I think Trump brought out, maybe not lessons, maybe his regret from his first term is if you listen to so many of these advisors around him telling him, back off, don't go too hard.

He doesn't have to run for reelection again. I think that he's gonna go hard until something really, really, really stops him to push back or he succeeds in what he wants.
>> Elizabeth Economy: So you're actually making these tariffs sound strategic, as though there's a comprehensive, well thought out plan.

It do you mean to convey that.
>> Leland Miller: There is a well thought out plan? Now you could say the plan is a good one or a bad one and you could say that let's do.
>> Elizabeth Economy: That then let's do that. Is the plan a good one or a bad one in your opinion?

>> Leland Miller: I think if done right this, so I spent a lot of time around economists and I was presenting on this issue last week. And every economist in the room is just tearing their hair out saying tariffs are bad, they'll raise the costs, blah, blah, blah. Fair, you have to worry about this.

And there are certain things you can't really do from a sequencing perspective, like tariff Mexico heavy at the same time you tariff China heavy, or you're gonna have enormous inflationary pressure building. You can't do a universal tariff. You can do it at a certain level, but if you do it at more of a level you don't have an exemption, then you're going to also have inflationary pressure.

So this could be done wrong. It could Create inflation. It could undo everything they want to do. If you look at this strategically, then there are a lot of things that this can accomplish. Mexico and Canada, you, hopefully you get out of this with an agreement, they're going to, they're going to, they're going to battle again in, you know, if, probably not a month from now, but certainly into 2026 when USMCA is revised so there'll be more tiffs between the Mexican Canadians, but for the most part, take that out of there.

Don't, don't have that. No ruffled feathers as, as, as much as you can. Look, if you look at China, there needs to be more of a, of a strategic plan to, how, how to make sure the supply chains need to be diversified outside of China. You know, the biggest, the biggest issue right now is not just technology and all these other issues.

We have flooding, potentially flooding in the United States, either now or next year or the year after that. Whether it's EVs or it's batteries or it's legacy chips. The biggest issue is supply chains that are reliant on China and that they could cut off pharmaceuticals, antibiotics in particular.

As long as you allow leverage over another country to be able to have these, you have nothing. So I think that being smarter, doing much harder, much more of a push against China in terms of supply chain diversification, using tariffs when necessary, using export controls or investment restrictions as necessary, I think that is a very thoughtful plan.

And then when you look at the eu, everyone says, you can't have the fight with the eu. Look, here's the problem with the eu. The EU is a bureaucratic mess. It's anti innovation, has no capital markets, it won't defend itself. If Trump went at Europe in a way and said, here's what we need from you, I think 2/3 of the Europeans would say thank you, Trump on this.

They'd say, thank you, Trump. Now, that doesn't mean it's going to be done nicely and it doesn't mean there's not going to be ruffled feathers there. But if you think if the end of this was a push to release the fiscal breaks in the eu, particularly by rolling Germany, you pushed for weapons to be able to be paid for outside the restrictions of borrowing.

So you actually could fund yourself sufficient weaponry to be able to defend your own continent, you were moving closer to some sort of capital markets union where you could actually fund innovation at the ground level. In Europe, you could see a Europe two or three years from now, that's saying, you know what?

We really don't wanna say thank you, Trump, but, man, he pushed us to do some things we otherwise wouldn't have been able to do because Germany's this stodgy bear in the middle that just sits there with his arms crossed and won't let any development happen. So if you get to that point and then you have an agreement between the, between Europe and the United States, can you move to China in concert and say, here are things we are going to not just unite on, but actually coordinate?

Whether it's export controls, whether it's investment restrictions, whether it's inbound investment, whether it's trade, you have the ability to have a much more powerful transatlantic relationship if you get some of this stuff out of the way early on. And so, look, things will happen in one direction, and they may be great or not, but the idea that this is not a plan that can be done if sequenced right and laid out, there are some strong prospects there.

So we'll have to see what the reality is. But the theory behind it isn't as cockamamy as a lot of people are trying to make it out to be.
>> Elizabeth Economy: Okay, well, I'm definitely having you back on to evaluate the, the success of this, because I have to say, generally, I find you very compelling.

Not sure I'm buying this one right now as I'm watching everything unfold, but maybe that's just a lack of strategic foresight on my part. All right, let me just ask you about one more thing, which is the Panama Canal. I just can't resist, I mean, is President Trump has come in hot and heavy.

I think it's even within the first two weeks of his administration talking about Chinese influence in Panama and specifically targeting what he sees as control over the Panama Canal. As far as I know, we have not had any issue with the transit of our ships and goods through the Panama Canal to date.

It is true that at both ends of the Panama Canal, the ports are managed by Hutchinson, which is a Hong Kong private port company. You know, was this a smart play? Was, you know, what, what was this all about? Why Panama? You know, right from the get go.

>> Leland Miller: It's about sort of a Newman Row doctrine. I think there's a lot of concern in this administration and broadly in the national security community that we are not doing enough in our near abroad, we're not doing enough to defend against Chinese influence in South America. We're not doing enough to defend waterways.

So I think that Panama Canal always been interesting because there's such a heavy Chinese presence there. And they do some things. Is Belt and Road that big a deal when some of these countries draw? Well, it's sending the wrong signal, certainly. So I think that what there is right now is this concerted effort at the beginning of the administration to say, enough, you know, we're now taking this stuff back again.

Is it done in the nicest way possible? No. Is it done tenderly? No, but it's, I think that the message behind it is, we are worried about our near abroad. We're worried about Chinese control of strategic waterways. This is why Greenland is coming to focus. It's about enough is enough is enough with the Chinese doing things in our hemisphere, and we're going to start pushing back against that as a priority.

So I think what you have to look at here is a strategy, you can critique the tactics, but I think the strategy itself is sound in that we have been too lethargic on pushing back against Chinese influence and Chinese movements for a long time. And I think that's where this is going.

>> Elizabeth Economy: We could have such a much bigger debate on this. I, I do think, frankly, that there are smarter ways to go about this. We could, you know, join, for example, you know, the UN Convention on Law of the Sea and, and therefore have access to things like seabed mining, which we now don't and are allowing the Chinese control.

And we're trying to think about big plays over the next decade and more. I think that's what we ought to be looking at rather than talking about taking over Greenland and Panama Canal, which, by the way.
>> Leland Miller: Focus on the street strategy, I'm not defending some of the tactics, but, yes.

>> Elizabeth Economy: Okay, okay, I mean, I think we're probably in broad agreement on the overall sense of needing to compete more effectively against China and with the Belt and Road, maybe, yes, as you say, a difference on the nature of the tactics. So I always end up with a couple of just quick, quick questions.

And so, number one, and I think you're going to have a great answer to this one because you've already started to talk about this. If you were sitting in the White House right now, and frankly, I kind of wish you were, what would you advise President Trump as you're looking at the US China trade relationship?

What might you suggest he do differently or in addition to what he's been doing?
>> Leland Miller: I think my biggest advice regarding the trade relationship is make sure the trade relationship isn't the sum total of the US China economic strategy. I think we need to look outside of trade.

Now. President Trump is going to do what President Trump wants on trade and tariffs. This is something that's, like, fundamental to the way he thinks about the world. So steering him away from any type of things like that, I think is not particularly a fruitful approach. But I think that the better way to look at this and what I have advised this administration to do, is to try to have a more comprehensive strategy towards China.

I think the reason that we on both sides of the aisle have failed in the past is every time somebody pushes one thing, it comes at the expense of another program. So if you have a focus on export controls, then something else gets minimized. You have a focus on investment restrictions, then something else gets minimized.

And so we're trying to hit that target, and we're trying to hit that target instead of coming across and saying, what do we need to do in order to have a smarter US China economic strategy. Now, I'm a commissioner on the US China Commission and anything I say is not reflective, of course, of what the Commission thinks.

But what we did do last year is have this hearing that I co chaired on key economic strategies towards China. China leveling the playing field. And the idea behind it was we need to think of a way to figure out where the vulnerabilities in the relationship are and go at those in a concerted ways with allies and partners.

Make sure we have thoughtful trade, make sure we have thoughtful technology controls to make sure that we're not providing the inputs for the PLA to build an army to kill us. Let's make sure we have investment restrictions so that all these funds that we refuse to identify and track as a US Government don't end up flowing to the party, to the military, to someone else, and going places we don't want to, to build up Chinese technology, to build up the Chinese military, to build up the party, whatever it might be.

So I think you need some of these defensive measures put into place on trade, on technology, on investment. At the same time, you need to be worried about what's happening back home. We have enormous supply chain vulnerabilities to China. And we have a deindustrialized economy that is in really, really bad shape.

We don't have the ability to build ships anymore, we don't have the ability to build icebreakers or we don't have the ability to build a lot of things anymore. We need to build up our manufacturing prowess here. And it's not just in the United States, it'll be with allies and partners in cahoots.

But we need to have an offensive defensive plan that's an integrated comprehensive strategy on China. If we do that, then that means we don't have to have some sort of, you know, build ourselves into a crisis. It means we're not going to have to, you know, throw every anti China thing against the wall and see what sticks.

You figure out what the real vulnerabilities are for the United States, this relationship, and what opportunities we should be taking advantage of. Focus on those three to five things and then build out from there and have an integrated economic security strategy for the United States that's principally based on our long term competition with China.

I think that there's a possibility the administration moves towards this. I think there's also a possibility that tariffs end up taking all the oxygen out of the room, which is why it's really important that people with sort of a nuanced take on keep pushing, keep pushing, keep pushing for people in charge to be doing the more sensible thing.

>> Elizabeth Economy: So I think that's really terrific. And I guess in that vein we've seen. I'm just going to push you a little bit. We've seen Just over the past week to two, the moves to shutter USAID and of course, hits on other organizations. And I sit on the board of the National Endowment for Democracy, so let me put that out there.

But those are organizations that are kind of frontline proactive in terms of bolstering US presence on the ground, whether it could be in technology training. But really helping to support democracy across the world. And in many respects, therefore being, I think, fundamental to our competition with China. Is that the kind of thing that we ought to be thinking about also in terms of a comprehensive strategy with regard to, to China?

Or do you see those as fundamentally divorced?
>> Leland Miller: No, those are important facets of the strategy as well. I think the problem here is that again, I defend the strategy, not all the tactics I agree with. And I think that what's happening right now are some huge broad strokes, big headline moves.

And I think the next year or so we'll be walking back from some of those things. They're going to look closely at some of the things that USAID funded and they're going to say, my gosh, we got to get rid of those. And then they're going to look at other things, say, hey, you know, that maybe is a pretty good idea.

This is focusing on the Chinese Communist Party in a way that maybe other think tanks and the government itself can't do. So I think it's about getting past this initial burst of sort of headline, you know, politics, and then moving into figuring out exactly the way that we need to fund some of these things.

I know very few China experts, you know, in the government or out right now who think that taking away all these things is a good idea, but it's happening as part of a broader sweep. So the hope is that the bad stuff gets swept away, the good stuff gets retained, maybe through another mechanism.

But yeah, I think, I think that's right. This is, again, the strategy makes sense, the tactics need some work, and I think that's the hope going forward that that's, that's going to be the improvement.
>> Elizabeth Economy: Okay, fingers crossed on that. Just quickly, like, what book or article is kind of your favorite that you would recommend that maybe people don't really know about?

>> Leland Miller: So I have a hard time with this because I spend so much time on China. I read a lot less, a lot fewer China books than I used to. I spent a lot of time reading technical stuff on semiconductors and quantum and biotech right now. But you know, what I advised some of our younger analysts to do is go back and Read some of the classics on Mao and Deng Xiaoping and see how we got to where we were.

I don't think you can do China policy, even as someone who's entering the field right now with a lot of technical expertise, if you don't understand the Cultural Revolution. You don't understand the Long March, Cultural Revolution, Great Leap Forward, and all these important parts of how we got to where China is right now.

It's also important in understanding Xi's mindset, since Xi was purged, that his family was purged and then he sort of went through all this. So, I mean, I usually recommend two books, it might surprise you. One of them, my favorite biography of Mao is the Jung Chang book, sorry, I'm getting my two books confused.

One of them was a ghost, that's by Jung Chang, what was that called? It's about three generations of women in China.
>> Elizabeth Economy: Sure, Wild Swans.
>> Leland Miller: Wild Swans, I think that-
>> Elizabeth Economy: Absolutely one of my favorite books as well.
>> Leland Miller: My gosh.
>> Elizabeth Economy: Absolutely.
>> Leland Miller: I thought that's fantastic.

It surprises people that I recommend that to everybody. I'm with you on that. The other is not by Jung Chang, although she did some work on Mao. I like the Mao book by, was it Li Zhisui, who was Mao's doctor?
>> Elizabeth Economy: That one was-
>> Leland Miller: That was a lot of fun.

>> Elizabeth Economy: Yes, that was a great read.
>> Leland Miller: Now there's a bunch of Mao books and a bunch of Dunn books and they're all quite good. But my recommendation would be that get a couple books that are modern. I know you put out some great ones in the last decade or so that people should read.

But in addition to doing the reading on what US China relations are right now and how we got here, go back and read the fundamental stuff from the 70s and the 80s and the 90s. That's really how we got here. And that would be my recommendation for people trying to get in the China field that maybe didn't have a background in Chinese history originally.

>> Elizabeth Economy: All right, I agree. I think those are two of my all time favorite books. So I'm with you on that last question. Likelihood that we have another Nixon Mao moment with Trump and Xi Jinping with President Trump and President Xi. Do you see a breakthrough in the relationship in President Trump's second term?

>> Leland Miller: I don't see a Nixon moment. If you're asking whether we could move towards a phase two deal, we could. Because all of this depends on what Trump asks from China. If he's asking to buy commodities, he's asking for a share in TikTok. He's asking things that are more transactional in nature.

Beijing will give that to him in a heartbeat. They may make him work for it. But that's absolutely, could be some sort of next, next, you know, separate deal. If the idea is we're going to move towards a phase two deal as it used to be described, which is we're going to fundamentally force a restructuring of the Chinese economy, then I don't think that we can get there easily because we're never going to be able to tell China to restructure.

What we could do is we could put the economic strategies in place via tariffs and tariff rate quotas, through export controls, through investment restrictions, through supply chain diversification, all these other things to make this restructuring happen, because we have such leverage in the economy as the big consumer base.

So I think we can make some of these structural things happen if we're willing to take some pain. But the idea that we're going to come to some grand agreement, I think that Trump could come to a phase two deal, but I think there'd be enormous pressure throughout the rest of the term to say, is that it, Is that good enough?

Are we doing what we need to do? So I think there'd be enormous pressure for them not to be it. So I'm not going to say that there can't be a deal. I just don't think there could be a Nixon moment, a Nixon-Mao moment.
>> Elizabeth Economy: Great, and I agree with you, and I think you might want to add in, to work with our allies and partners on this, right?

Because I think you said that at the outset as well, that this is having them on- Fundamental, this is- In order to restructure the Chinese economy. That's probably too big a job for just the United States.
>> Leland Miller: It's fundamental, and I feel so strongly about this. If you look at the hearing that I was talking about economic strategies, on Xi economic strategies for China, we had a bunch of panels.

The last panel was completely on allies and partners and how to coordinate your strategy. So you get maximum oomph for your export controls, maximum oomph for your trade and tariffs, maximum oomph for your investment restrictions. It's extremely important. The tension here is that most of our allies and partners don't want to do what we want to do.

Some of them want to do some of it, some want to do none of it. So how do we get there without causing some pain in the meantime? And I think that's the problem that President Trump is left with. How do we get, how do we get from A to D and not go through some problems in B and C?

I think we can, but I think that there's going to be some turbulence in B and C, so we will visit it together someday.
>> Elizabeth Economy: On that note, I can't thank you enough, Leland. You know, I had in mind sort of narrow discussion on Chinese economy and US China trade relationship, and you've just, I think, you know, opened the aperture in some really fascinating ways.

So thank you for coming on. And like I said, I'm going to have you back on again so that we can revisit some of your predictions and see where we stand.
>> Leland Miller: It's my pleasure. Happy to do it.
>> Elizabeth Economy: If you enjoyed this podcast and want to hear more reasoned discourse and debate on China, I encourage you to subscribe to China Considered via The Hoover Institution YouTube channel or podcast platform of your choice.

In our next program, I'll be speaking with Chris Walker, who is the Vice President for Studies and Analysis at the National Endowment for Democracy.