Trading Pieces: A Look at Economic Statecraft in Asia with Kurt Tong
December 2, 2019
Andrew Schwartz: Welcome to The Asia Chessboard, the podcast that examines geopolitical dynamics in Asia and takes an inside look at the making of grand strategy. I'm Andrew Schwartz at the Center for Strategic and International Studies.
Ben Rimland: Amidst the on again, off again trade deal with China and roiling protests in Hong Kong, Mike is joined by Ambassador Kurt Tong, partner at The Asia Group, former Consul General of Hong Kong and Macau, and former State Department principal deputy assistant secretary for economic and business affairs. Mike and Kurt kick off the discussion with a look at Kurt's background and the behind the scenes role played by US embassies in shaping the economic strategy in Washington. The conversation then moves to how US economic policy fits into a larger grand strategy picture in Asia.
Mike: We're joined on The Asia Chessboard today by a friend of many decades and one of the most important thinkers and implementers of American economic policy in Asia of recent years, Kurt Tong, who is currently at The Asia Group as a partner, business consultancy and served in government last as consul general in Hong Kong, as principal deputy assistant secretary in the State Department's Bureau of Economic and Business Affairs and as the American envoy ambassador for APEC, the Asia-Pacific Economic Cooperation Forums, so rich experience on a bilateral and multilateral basis. We'll talk about economic architecture, trade policy as part of the chessboard, but we'll also talk a bit about Hong Kong and human rights, which was the most recent experience that Ambassador Tong had.
Mike: Kurt, let me start though with the question of how you got into this business. You went to Princeton undergrad, or I got that right?
Kurt: I went to Princeton-
Kurt: Undergrad, spent a bunch of time in Japan studying Japanese and other things and then also a little bit of time in Taiwan, joined a different consulting operation called Boston Consulting Group for a couple of years in Tokyo and then joined the foreign service after that.
Mike: What would you say to people today who want to join the foreign service? It's a somewhat different experience than when you joined?
Kurt: Yeah, my calculation at the time and I think it's probably something that would resonate with people considering their career moves even today was what is a good way to do interesting work in that international affairs space? A lot of us study foreign relations, international affairs, international economics, et cetera. And then the question is how do you put that to use if you really want to delve into how the U.S. interacts with other countries or how they interact with one another. And at the time my thinking was be a journalist, be an academic, and then I had an opportunity to do an internship at the Tokyo Embassy and it opened my eyes towards the foreign service.
Kurt: And not to go on too long, but my thinking at the time was that an academic tends to study decade long phenomena and then you put together a book and you and you really become very expert on a relatively narrow issue set. A journalist is a mile wide and inch deep, day to day writing deadlines and the like. So you don't really get to delve into things. And just as an analytic framework, the kind of month to month, quarter to quarter analysis that you do as a diplomat was appealing. The other aspect was that there's an operational side to being a diplomat. You're not just finding out what's going on and talking to people. You're also acting on it. And that turned out to be a lot of fun.
Mike: People say if you want to do policy, don't go into the foreign service, but your career is evidence that's just not true. I mean, I personally know that some of the most important decisions we made in the White House were because of cables you wrote from Korea proposing the idea of a U.S.-Korea Free Trade Agreement. You had policy oversight in the NSC as the PDAS. So is it still true that if you want to do policy, don't join the foreign service? Because it sort of seems like you may be the exception to that rule or maybe the rule is just not right.
Kurt: Well, I think some of both, maybe the conventional wisdom these days is that foreign policy making has gotten centralized and that the role of the NSC in the White House is greater than before, that think tanks are more influential than ever.
Mike: That parts definitely true.
Kurt: That's definitely true, Mike. I do think those are true, but I also think that there's so much complexity and so much opportunity for thoughtful consideration of options that the State Department is still and the diplomatic service is and embassies in particular are very relevant because embassies in particular have unique insight into what the counterparts are thinking as well as on the ground knowledge of trends and if they apply that to new creative thinking about what we ought to do, then that is policy.
Kurt: Then you're in the policy mix deciding important issues. Like you mentioned the Korea FTA. I mean, yes, from the embassy, we sent in suggestions that that would be a good approach to both our market access issues and strengthening the career relationship. But the decision to do that was the President's. It wasn't the economic counselor at the embassy. So you have to also be a little bit humble and realize that you're working for a large apparatus and a greater good.
Mike: You sent a cable though, and I guess it was 2004 or so when you were the Economic Minister Council in Korea that really captured everyone's attention in the White House. Rob Portman, who's now a Senator from Ohio, was U.S. trade rep and he called together a team and I was on it, Faryar Shirzad who was in charge of economic policy at the NSC overall. Wendy Cutler-
Kurt: Mm-hmm (affirmative).
Mike: A friend who was coming from USTR and we did deep long sessions based on your cable about whether or not we could pitch this to the President. So you can from an embassy on the other side of the world with a careful amount of research and diplomacy in a well-written cable, you can move the ball in Washington.
Kurt: Well, I think that's right and that then to elaborate, started I think the Korea piece, I then went and worked in the Bush White House in the NSC as you know, and then back over to the state department after that on the APEC issue set. And you're able if you maneuver well within the system and are thoughtful, you can also do some long-term projects. My point is that the Korea FTA led to a reconsideration of free trade area, the Asia Pacific as a general point of-
Kurt: Emphasis for the United States in APEC, which then led to TPP and the U.S. joining the Trans-Pacific Partnership Initiative. Tragically, at least postponed for now, the U.S. participation. But you can also connect threads as you're working on these various issues.
Mike: I want to come back to that, but let me just ask you first about who in your time in the state department shaped your thinking, especially on big questions of strategy and economic policy? Was it people in the foreign service, foreign officials?
Mike: You didn't learn all this at Princeton, I'm assuming.
Kurt: No, most often. I felt I got a good education at Princeton because it was policy oriented.
Mike: You went to the Woodrow Wilson school-
Kurt: Yeah. And it was long-term perspective type consideration of things. So, Kent Calder was my thesis advisor and he was pushing this East Asia edge idea, which you know is kind of the predecessor of the pivot if you think about it in 30-year timeframe. So there was a lot of deep thinking and ideas being tossed at the wall back then. But I think for me, one of the main influences, I think it was more just kind of conversation among experts.
Kurt: Tokyo in the 1980s and 90s was a very vibrant place. People were talking about issues a lot and they would have benkyoukais, these study groups, where people would get together and think about things. And I found that very, very stimulating so that for example, when I went to Japan in the mid-90s and got a chance to spend a year at Tokyo University and published a paper proposing actually a U.S. Japan Free Trade Agreement or Free Economic Arrangement.
Mike: When was that?
Mike: Mm-hmm (affirmative). So you were in the foreign service? You were in-
Kurt: I was in the foreign service, but I went on sabbatical and published a paper about the utility of using essentially using carrots as well as sticks to try and solve what then was considered the most important foreign economic policy problem, which was the challenge of Japan and just kind of worked at it from both a theoretical perspective, but I think reading widely is really important as well.
Mike: So you know your career, you're kind of like Zelick not Bob Zelig, Zelick the character who pops up all the time for art history and photographs and so forth. You were there. We first met in something like 91 or 92.
Kurt: Mm-hmm (affirmative).
Mike: When you were at the, I guess, the junior econ officer on the Japan desk.
Kurt: Japan desk, right.
Mike: And I was a PhD student at SAIS and there are others who are still in this field, some in the economic policy world, some like me, more national security.
Mike: So you were at that Japan piece, then you wrote this essay proposing U.S.-Japan FTA in-
Mike: 95. You went to Korea, did APEC. You were in China.
Kurt: Mm-hmm (affirmative).
Mike: Also, I believe-
Mike: As an economic minister. So you've sort of touched on all these different pieces. It built over the course of your career towards what you mentioned FTAP, Free Trade of the area of the Asia Pacific, which in turn I think had we done it would have given us a lot of leverage to get China to make concessions.
Mike: TPP, plus what probably would have come on the other side of the globe, T-TIP-
Mike: Transatlantic Agreement, would have given us a huge amount of leverage vis-a-vis China. How do we get that back now?
Mike: The president prefers bilateral free trade agreements he says, the diet of Japan just passed one with us, but it's pretty small-ball compared to what we were going for.
Kurt: It is small-ball. The strategy, as abandoned, was for the United States to do the Trans-Pacific partnership, the Transatlantic partnership, put the two together, you've basically recreated the WTO and with China on the sidelines, and then use that pressure to bring China around through structural reform. A useful grand strategy, difficult to execute as it turned out. But I think it's a good one. And getting back to that I think may require focusing on issue by issue rather than doing these comprehensive agreements because there's so much complexity in one of these across-the-board free trade agreements that you end up instigating political opposition in enough corners of a democracy in particular that then it becomes very politically difficult to deliver on the mechanism. So, for example, I think there's a lot of talk right now between the U.S. and Japan of now that they've done this digital services agreement bilaterally, how do we push that out and bring other countries on board and maybe move it at some point to the WTO?
Kurt: Those basic principles of how data trade should be governed and all the questions around data privacy and the proper approach to cybersecurity, balancing that with human rights, et cetera, all of that. There's a great potential. It's very important issue set, great potential for all these countries to come together with common views and have an effect on the future development of the economy. That may be a more realistic approach than a series of grand FTAs. I don't want to give up on that FTA strategy, I think it's useful, but maybe we need to build back up to it and restore confidence in U.S. leadership and our own confidence domestically that we know what we're doing in international economic relations before we jump in with both feet on it, say TPP.
Mike: 14, 15 years ago when you were in Korea and then in the White House and when I was in the White House, the question was whether Korea or in the case of what became TPP, Vietnam, or even Japan were up for this.
Mike: There were real questions about that. We had very little doubt about ourselves.
Mike: Because we had passed so many FTAs.
Mike: The irony of all of this is that the Japanese, the Koreans, the Vietnamese are up to this.
Mike: Because they're afraid of China and now we're the ones who’ve stumbled. But I wonder-
Kurt: And we've, in my opinion, misdirected our anxiety about China. The threat of China.
Mike: Explain what you mean.
Kurt: Well, I think that we're doing a lot of small-ball approaches to the China problem rather than working with like-mindeds and working at the level of general principle and then trying to push that toward China. Let's go after one company here or do a little bit of-
Mike: Mm-hmm (affirmative).
Kurt: Export controls there, or do these very transactional agreements that we're trying to do in the bilateral trade space, rather than really trying to focus on the big picture. I mean, I know that sounds, to some people that sounds Pollyannish and that we tried that, we had all these dialogues with China and it didn't work. So we need to just use specific leverage on very specific issues. But there's so many issues out there that if you come at it that way, it could take forever.
Mike: Your career sort of went from the bilateral, to the regional, to your last job in EB, in the Economic Bureau towards global-
Mike: Rules. It must be incredibly frustrating that TPP just collapsed in your-
Kurt: Quite frustrating.
Mike: Final years in the government. I'm not trying to [crosstalk]-
Kurt: Project that you've been working on for 10 years not succeeding.
Mike: Yeah. It's more just-
Kurt: Yeah and it's our first FTA that we haven't ratified.
Mike: Yeah, yeah.
Kurt: So it is frustrating.
Mike: But, here's the silver lining, to your point about the U.S.-Japan Digital Services Agreement. Tell me what you think. I mean, maybe we were spending a lot of time on things like state-owned enterprises and tariffs and AG in TPP and in these other bilateral agreements. But in 30, 40 years, what's really going to matter is the digital space. And we're talking about 5G, the Internet of things. So maybe if you think about the trajectory of technology, this Digital Services Agreement is actually something that may matter in the longer run more than TPP and the trade agreements.
Kurt: Well, I think that's right. And I think I wouldn't include state-owned enterprises as a sunset issue. I would think that's still very relevant-
Mike: Fair enough.
Kurt: But I think the amount of time that we spend talking about tariffs and dealing with tariffs is frankly a bit absurd. Tariffs are attacks on inward trade. You're hurting your own economy when you do it. You're protecting somebody that probably doesn't deserve to be protected. I know that sounds very hard, cold to people in struggling industries, but giving up your tariffs in order to get tariffs down. Too much attention on tariffs. The non-tariff issues and the structural issues, I would include SOE reform in there, but things like antitrust regulations, investment rules, accountability and transparency requirements and in financial transactions, all that stuff is extraordinarily important along with the digital piece and a lot of work can be done there if people emphasize it.
Mike: Where are you on the 5G and Huawei question? The criticism you had earlier was that the administration is picking on one company here, one company there. But when you're talking about 5G, it's Huawei-
Mike: And the de facto ban on Huawei participation in our 5G procurement, 5G market is being also taken by Japan, Australia, and other countries. But we've also put Huawei on the entities list.
Mike: So was that a bridge too far? Was that too much, do you think? Where do you draw the line?
Kurt: My personal view is that if we're not confident that we can monitor and regulate Huawei equipment used in the United States in a way that doesn't create a cyber security threat. Okay, great. So let's not buy-
Mike: Mm-hmm (affirmative).
Kurt: Huawei equipment and requiring U.S. procurement not to use that equipment makes perfect sense. Some countries say that they're confident they can do it like the U.K. is kind of trying to figure it out. I think each country can decide that for themselves and we'll just deal with it. I think going beyond that to then say, well let's try to just really damage this company because it's competitive on a technology, is a bridge too far. So the entity list piece, all it does is hurt U.S. companies who are trying to sell legitimate stuff. If they shouldn't transfer it because it's too high tech, then put a limitation on certain categories of technology export, but a blanket entities list designation because it's a competitive company I think sends the wrong signal about how global markets should work.
Mike: Yeah. I think it also puts us out of alignment with our closest allies.
Kurt: Well that's right. And also, even going around to different countries as the U.S. government is attempted to do and say don't buy Huawei. Their response is, well then what do we buy or, or why should we actually care if the Chinese are listening to our conversations? Because we're not the United States, we're not involved in a competitive military relationship with China and we don't really care if they hear what we're ordering for dinner and that's a legitimate response from these countries. It really I think crosses over into a containment strategy, which should not be the approach to China. I think the approach should definitely be one of entanglement, come up with rules, get the world to agree to them and, and tie China up with those rules.
Mike: And if you think of the problem as a chessboard, like this podcast, you want as many of us as possible and as few of them, and it seems to me that the debate in Germany and in Britain is shifting in directions that are probably not good for Huawei. It's still very much up in the air. But the British put off their decision because of Brexit essentially-
Kurt: Mm-hmm (affirmative).
Mike: And the German Bundestag is pushing back hard against the government. And I think a U.S. strategy focused on creating an ecosystem for an alternative to Huawei and at least in advanced industrial democracies, a ban on Huawei and procurement can create a team if you will or a scale-
Kurt: Mm-hmm (affirmative).
Mike: That's considerable. But, if we continue the entities list, I think we probably push China and Huawei toward creating their own operating system to compete with iOS and Android.
Kurt: That's right and you're stimulating-
Kurt: More market distorting, state down investment in the very sector where you're trying to compete. So it doesn't make sense as a tactic either.
Mike: And we're not talking about Japan in the 1980s or 90s. China has different scale and the reality is, as you pointed out earlier, a large part of the developing world and the developed world is going to buy Huawei because it's cheaper and it's better financing. So we're not going to strangle them. They're going to have-
Mike: Somewhere between 40 and 60% of the world market problem.
Kurt: And it's one generation of technology and it's a certain subcategory of one generation of--
Kurt: Technology that we're talking about. So I think it'd be much more important. And your colleagues here at CSIS, Matt Goodman and others, have been really working on this, trying to refocus people's attention on how does the U.S. actually strengthen its own competitive capability through domestic action. And I think that's important. If we have key firms or key technologies that are important to our national economic future, how do we make sure that those are built well and are made competitive, rather than trying to just knock down the other side. We need to be working on building up our own capabilities.
Mike: But there are different rules in China about data localization and data reciprocity. And so the U.S.-Japan effort reflects, I think prime minister Abe is pushing the G20 to create some rules around-
Mike: Reciprocity in data.
Kurt: I mean, ideally-
Mike: So, we do need to do that, right?
Kurt: Exactly. And ideally you create a set of rules that 80% of the global economy subscribes to, and then they'll eventually become the predominant rule set because the isolated economy will become non-competitive.
Mike: If the U.S. and Japan get on the same page on these issues, what do you think our chances are of getting the Europeans on board?
Kurt: Very high.
Mike: Good. So it's sort of the digital version of what TPP, T-TIP, and ultimately FTAP was meant to be. Not destroying China but shaping Chinese-
Kurt: There are other examples-
Kurt: Of this. There was something called Information Technology Agreement. There were two rounds of that. It was born out of APEC, but then brought to the WTO and a lot of countries signed up to it. It was tariff-free trade and IT goods, right? The environmental goods and services—these are smaller things, but the Environmental Goods and Services Agreement in the WTO again was another good example of a plurilateral approach to a global issue, creating critical mass around something that's useful.
Mike: So we've talked about trade and economics and that's been at the core of American strategy in Asia since 1784. The other pieces are values. You just came out of Hong Kong-
Mike: Where you were Consul General. How'd we get here? Where is it heading and what do you think it means for U.S. interests?
Kurt: Well, first of all, you mentioned those in the same sentence and I think that's right. I mean, economic interests and values are very closely intertwined. Our values of freedom of expression, freedom of information, fair competition are very closely related to how our economy operates with everyone being given an opportunity rather than the government running things. That is extraordinarily important and they all fit together.
Kurt: So, I think that Hong Kong is a really important example of those values, the values that we like, being operating in a Chinese language context. It's actually part of the People's Republic of China. So it becomes important not just because Hong Kong is an important city in the fabric of East Asian economic development, but also as, if you will, a proxy playground for the competing ideas of state-led capital versus a more values-based, open, information-based free enterprise system. And interesting thing about Hong Kong is that if it stays open, in terms of how it operates in terms of the values that are prevalent there—both economic as well as human rights—, it’ll actually work better, and it'll actually work better for China. So that's the irony of the whole thing is that what's good for China is what they don't like.
Mike: Mm-hmm (affirmative).
Kurt: Because Hong Kong is more useful for Chinese economic development if it runs like London than if it runs like Shanghai. If it runs like Shanghai, then it's just another Shanghai. They got a lot of those already. You know the old line about, you'd go to a Chinese city and they say, well this is a really small town, you ask how many people, oh it's just six or seven million. They've got a lot of cities and a lot of people, they've only got one Hong Kong, and it really adds a lot to China because it's also good for the U.S. and the rest of the world. So it's an ironic and difficult situation because Hong Kong is also just intensely irritating to China because it's successful and it has freedom of information. All these people running around saying what they think and it drives people in Beijing nuts.
Kurt: They don't like it. But they need to like it.
Mike: Do you think Xi Jinping looks at Hong Kong the way you just described Hong Kong?
Kurt: I think-
Mike: In other words, does he understand, you think, the value and importance of Hong Kong for China's own economy?
Kurt: Not as much as one would hope.
Kurt: And I think there's a change there. His predecessors were, certainly Deng Xiaoping, who saw Hong Kong as a big opportunity for China, Chinese economic development, particularly for South China. And then Hu and Jiang Zemin also I think saw it that way. Xi Jinping seems to be more concerned about control, about managing how people behave and think than kind of letting the economy and people cut loose and towards the benefit of China. And so I worry a lot that Xi Jinping sees Hong Kong more as a threat than an opportunity and that's shaping his, his policy towards the city.
Kurt: So, everything I did is as Consul General frankly was aimed at trying to convince Beijing that Hong Kong was good for China the way it was originally designed.
Mike: Were you surprised at this? I mean, I was a frequent visitor to Hong Kong. I didn't live there like you. I confess, I was surprised at how broad the demonstrations were and lesser prize, but still it's quite striking that 80% of these district council seats went to the democracy party.
Mike: Democracy activists.
Kurt: Yeah. So the protests, yes and no on whether I was surprised because certainly living there for three years, I tapped into and understood the level of anxiety that was building up among the Hong Kong people that the one country, two systems framework was starting to not be implemented the way that they had been told in the way they wanted it to be.
Kurt: So, that anxiety was there. The depth of it, frankly, people are polite and they kind of get along with each other and so you don't always get a real visceral sense of it until this bill that the Mrs. Lam put forward, which was a big mistake, really triggered a deep anxiety. And then it kind of snowballed from there. The election in Hong Kong, it's very interesting because these are really small constituencies voting for people who will look after issues. Very important issues like where the bus stops, where to put the bike rack, are the streets being cleaned properly, which is local politics. That's what district councils do. So, the interesting thing about these district council elections was that previously people treated them as local elections. But this time they treated them as a referendum on the citywide government. And so the vote was, as you saw, very overwhelmingly in favor of sending a message to the government that people weren't happy.
Mike: So, what do you think happens next and what do you think the U.S. policy should be?
Kurt: I am hopeful that the Hong Kong government and Beijing government will look at what's happened with the demonstrations and with this district council election and say, well, okay, maybe we need to figure out a way to meet the Hong Kong public halfway here and show some flexibility on some of their demands and at least have some really sincere dialogue about what is making people so anxious about Hong Kong. That's what I hope for. Whether that'll happen or not, I honestly don't know. The U.S. approach should be to encourage that kind of thoughtful, calm consideration of what's best for Hong Kong's future and really kind of push people in the direction of thinking about what do they want Hong Kong to be?
Kurt: What does this one country, two systems framework mean and how can it actually get implemented in a way that the people Hong Kong thrive? The U.S. policy is basically been in that direction and I think we should just keep doing that. There's a lot of detail about this bill that was just passed by Congress and the like, but the basic message of—you know, Hong Kong is a great place and the U.S. would like to see it continue to thrive, precisely because it's different from the rest of China, is a central message.
Mike: So Kurt, thank you for joining us. Thanks for your 25 years or so of incredibly important service to the country. I hear rumors you might be teaching for us at Georgetown on everything we just talked about. I hope that's true.
Kurt: I hope so. I think this whole question of... I love the name of this podcast, Chessboard, and thinking about long-term economic policy strategy in the Asia Pacific region, that's really a good metaphor for consideration of it. And I hope to continue to be active in this space.
Mike: I'm sure you will and many thanks.
Kurt: Thank you.
Andrew Schwartz: Thanks for listening. For more on strategy and the Asia Program's work, visit the CSIS website at csis.org and click on the Asia Program page.