January 9, 2025 • 39 mins
In a wide-ranging conversation, Dr. Elizabeth Economy and Dr. Melanie Hart discuss China’s economic coercion, its impact globally, and how the United States can most effectively respond. Hart draws on cases from her time at the State Department to illustrate how her team successfully combatted Chinese efforts to use the power of their market to force political alignment by other countries. She also stresses, however, that this is an ongoing battle.
Hart also describes the Biden administration's framework for reducing dependence on Chinese critical minerals and semiconductors. She underscores the importance of investing in domestic manufacturing, partnering with other countries to build alternatives to Chinese suppliers, and working with allies to coordinate effective policy and early warning systems to address supply chain issues before they occur.
ABOUT THE SPEAKERS
Dr. Melanie Hart is the senior director of the Atlantic Council’s Global China Hub. She leads the Hub’s efforts to analyze Beijing’s actions and their global impacts using rigorous analysis and innovative data to generate actionable policy solutions, enabling the United States and its allies to respond effectively to common policy challenges on China. Prior joining the Council, Hart worked at the US Department of State, where she served as senior advisor for China in the Office of the Undersecretary for Economic Growth, Energy, and the Environment. In that role, Hart was instrumental in crafting strategies to reduce nation-state vulnerabilities to Chinese pressure. She developed the Department of State’s playbook for responding to Chinese economic coercion and led an internal unit that provided coercion-response support to multiple nations. Before joining the State Department, Hart served as senior fellow and director for China policy at the Center for American Progress, where her work helped shape domestic and global approaches to China on issues such as 5G policy, economic competition, energy and climate policy, and global governance.
Elizabeth Economy is the Hargrove Senior Fellow and co-director of the Program on the US, China, and the World at the Hoover Institution. From 2021-2023, she took leave from Hoover to serve as the senior advisor for China to the US secretary of commerce. Before joining Hoover, she was the C.V. Starr Senior Fellow and director, Asia Studies at the Council on Foreign Relations. She is the author of four books on China, including most recently The World According to China (Polity, 2021), and the co-editor of two volumes. She serves on the boards of the National Endowment for Democracy and the National Committee on U.S.-China Relations. She is a member of the Aspen Strategy Group and Council on Foreign Relations and serves as a book reviewer for Foreign Affairs.
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ABOUT THE SERIES
China Considered with Elizabeth Economy is a Hoover Institution podcast series that features in-depth conversations with leading political figures, scholars, and activists from around the world. The series explores the ideas, events, and forces shaping China’s future and its global relationships, offering high-level expertise, clear-eyed analysis, and valuable insights to demystify China’s evolving dynamics and what they may mean for ordinary citizens and key decision makers across societies, governments, and the private sector.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
[MUSIC]
>> Elizabeth Economy (00:08):
Welcome to China Considered, a podcast that brings fresh
insights and informed discussion to one ofthe most consequential issues of our time,
how China is changing andchanging the world.
I'm Liz Economy, Hargrove Senior Fellowand Co-director of the U.S China and
the World Program at the HooverInstitution at Stanford University.
Today I have with me, Dr. Melanie Hart,
who who just stepped down from herposition as the Senior Advisor for
(00:30):
China and the Indo Pacific in the Officeof the Undersecretary for Economic Growth,
Energy and the environment at the U.S.department of State.
And she's now the Senior Director for theGlobal China Hub at the Atlantic Council,
Melanie, thank you somuch for joining me today.
>> Melanie Hart (00:43):
Thanks for having me, Liz.
>> Elizabeth Economy (00:45):
So you were instrumental at the State Department in
designing and driving forward a numberof the agency's most consequential
China initiatives, particularly aroundcombating Chinese economic coercion.
Can you start by just telling us a littlebit about what is economic coercion?
Why did you decide to focus on thisparticular issue at this particular time?
(01:05):
As you know, it's been around fora long time, but I've never seen a U.S
strategy to combat economic coercion,what made you take on this issue?
>> Melanie Hart (01:15):
Sure, so I joined the State Department in January 2021,
when the Biden administrationwas coming in.
It was the thick of when China wastargeting Australia, Australia called for
an independent investigation into theorigins of the COVID crisis, and Beijing
hit them with a wide array of ridiculoustrade measures, economic coercion.
(01:35):
And as I was going around the departmenttalking to the really great
career diplomats saying,what should the Biden team focus on?
Because the Biden team came in with ourown priorities but a really important part
of the process is going to the peoplewho've been in the trenches and
hearing from them wherethey think we should focus.
Economic coercion just keptcoming up again and again,
(01:57):
there was a real desire across thedepartment and across the interagency to
find a way to do more than just be therediplomatically, to be there economically.
And by happenstance, my boss,Under Secretary Jose Fernandez,
was confirmed finally bythe Senate in August of 2021 and
that was the exact time that Beijingdecided to go after Lithuania.
(02:22):
And what Jose told us was, look, here wego let's use Lithuania as our test case.
Their GDP is only 2% dependent on China,if we can't win this one,
we all know we have a problem.
Let's throw the toolkit,
let's figure out what our toolkit isby digging around the interagency and
(02:43):
finding every possible mechanism that wecan use to directly support Lithuania.
And I think that case was really the gamechanger on the one hand for other
nations who had been targeted by China orwere targeted by China afterwards.
When they looked at Lithuania,they saw a model for
(03:03):
how you can stand up for yourself.
Not back down in the face of bullying andnot just stand up, but
actually turn it into a win foryour own economy.
Lithuania replaced all of the Chinatrade that they lost with new
partnerships in Asia.
They started new embassies in Australia,South Korea and Singapore.
(03:23):
They're laser exports toSouth Korea doubled so
a lot of countries looked at that andsaid, hey, that's not a bad deal actually.
And we were really shocked actuallyafter the Lithuania case that other
countries started knocking on the door andsaying we want the Lithuania package,
is that an option ifBeijing gets mad at us too?
(03:45):
So that was just really the game changerand that was I credit Lithuania for
inspiring a lot of us forhow we can really step in and succeed.
>> Elizabeth Economy (03:54):
So let me take you one step back and just ask.
I mean when you look across the universeof Chinese economic coercion,
is there a certain issue or
set of issues that China tends toget particularly upset about and
then tries to use the leverage of itsmarket to change countries policies.
(04:15):
What prompted for example,the Lithuania case?
>> Melanie Hart (04:18):
In Lithuania's case they were allowing Taiwan to open
a local representative office andto use the name Taiwan in the title,
that doesn't violateEurope's one China policy.
But Beijing didn't like it but
some people assume that thisis a Taiwan thing, it's not.
You see cases on commercial issues lookat Australia that was because Australia
(04:40):
called for an independent investigationof the COVID crisis with Canada.
It was over Meng Wanzhou and that thatdetention issue, it really varies by case.
We've seen them target Philippine bananasin the past over South China Sea.
When you look at the empirical record,
there is almost no issue thatBeijing won't use as a trigger for
(05:02):
economic coercion, so unfortunatelythere's really no safe space.
>> Elizabeth Economy (05:07):
Yeah, I remember back when Daryl Morey,
who was the general managerof the Houston Rockets for
the NBA when he tweeted fight forfreedom, stand with Hong Kong.
And then the Chinese beganto target the NBA and
have the all their gear removed fromthe shelves and particularly went off
(05:30):
after the Houston Rockets, but alsostopped televising the games in China.
And I remember seeing on CCTV that itwasn't just you're exactly right it wasn't
just about Taiwan or the South China Seaor what China called its core interests.
What they said was any issuerelated right to sovereignty or
social stability does not fallwithin the purview of free speech.
(05:54):
And I think at that moment, just asyou said, it's kind of like there's,
there's no issue really around whichChina doesn't feel that it has the,
the right to try to pressure othercountries using their market to get
them to align with Chinese interests.
All right, so Lithuania became the caseand what did you do in particular,
(06:17):
what did the US do to support Lithuania?
But beyond that, then how did youdevelop a kind of bigger strategy around
countries that were being targeted foreconomic coercion?
>> Melanie Hart (06:28):
Sure, so the US rolled out a really innovative package to support
Lithuania, which was all in directresponse to what the Lithuanians
were telling us China was targeting andwhere they need assistance.
So for example, lasers are reallycritical for the Lithuanian economy
their laser industry is a big source ofpride and China had been buying them.
(06:51):
As I just mentioned, their laser exportsto South Korea have now doubled.
But also the U.S. defense Departmentsigned a bilateral procurement agreement
with Lithuania that wouldallow them to sell lasers and
other products to the US Militaryon equal footing with US companies.
The US Military sees some valuein a PRC free supply chain,
(07:11):
also Lithuania had been inthe pipeline to export eggs and
other agricultural productsto the United States.
And the State Department helped themmove through that process to get some
those regulatory process moving and
their ag exports to the US went up 19%,which is pretty significant.
(07:31):
The US ex IM bank gave them a $600million MOU to buy products from
the United States they had previouslybeen buying from China but
China was blocking both exports andimports with Lithuania.
And the great thing about that isLithuania was telling us Beijing has
canceled around 300 millionin export credits that
(07:52):
our companies were depending on.
And US ex IM bank said we'll not justmatch that, but we'll double it and
the important thing about that is the.
Those are numbers.
Those are real, concrete economic numbers.
And the US can't replace China andanybody's supply chain, nor
should that be our objective.
That's not how markets work.
But the US andother countries can help bridge the gap as
(08:15):
companies are looking for andfinding new opportunities.
And to Lithuania's credit, their foreignminister and other members of their
cabinet were all over the Asia Pacificmaking new friends, opening new embassies.
And where they went diplomatically,commerce followed.
And I think there was a greatcapstone on this Lithuania
(08:38):
crisis turned into opportunity.
In May of this year,
the Lithuanian government heldan economic coercion forum in Vilnius.
Representatives from 30 differentgovernments were there.
The US was there atthe vice ministerial level.
Japan was there at the viceministerial level.
Costa Rica was there,the Koreans were there.
(09:00):
30 different countries sentrepresentatives to Vilnius,
which is a bit of a trek from the ROK orCosta Rica,
to hear from Lithuania whattheir lessons learned were.
And I think they are now seen as kind ofa shining example that other countries
are interested to follow and learn from.
>> Elizabeth Economy (09:21):
So do you think now that there's a kind of playbook that
the United States, and
its allies and partners havedeveloped that can be deployed?
Is this something that the EU and
the US have come to some kind ofhere are the rules of the road.
Is there a formalized mechanism in anyway to address these kinds of cases?
>> Melanie Hart (09:42):
So in terms of formalized mechanism, I'll leave that to the current
State Department colleagues tocomment on what they have going on.
But I will say, when you look at economiccoercion cases, they are always different
because every country's relationshipwith China is different.
So for Australia, it was wine andbarley and lobsters.
For Lithuania, it was lasers andthese other agricultural products and
(10:06):
components.
So every economic coercion casewill involve different goods,
with Canada, it was canola oil.
So what we will really need to respondeffectively is a broad coalition.
And if shrimp is being targeted,the most important partners
will be countries who have spaceto buy and eat more shrimp.
>> Elizabeth Economy (10:30):
I think this isn't necessarily something that you worked on
when you were at the State Department,but I'm curious, was there discussion,
consideration given tothe targeting of just US companies?
Because, again, there's been a longtradition in terms of China targeting our
industries, whether it's the travelindustry, the airline industry.
I mentioned the case of the NBA.
(10:53):
China frequently says, if you don'talign with our government policy for
example on Taiwan or the South China Sea,we are going to punish you, right?
So are there lessons learned thatyou think are applicable for
the United States in terms of supportingour companies that end up being targeted
(11:14):
by the Chinese government, orthey're sort of two separate things.
>> Melanie Hart (11:19):
This is a really tough one and
timely given that Invidia wastargeted this week, right?
And I believe possibly intel as well.
I mean, I'm of two minds about it.
On the one hand, we always haveto be honest with US Companies
that China's a tough market,it's not a normal market economy.
(11:40):
The risks are astronomical.
And we don't want to see US Companiesbe dependent on the China market in
such a way that when they are targeted.
Because it's not,if it's a win when they are targeted,
that that would have an outsizedimpact on their bottom line.
But of course, at the same time,when China goes after US Companies,
(12:01):
there should be a response.
And I think the response tothat should be based on what
the companies are asking for,because it's the US Government's job
to be a representative on behalfof the citizens that elect it.
And that includes the companies thatthe US Government represents as well.
Some companies might say, you know what,just let us work this one.
(12:23):
Don't bring more heat to it,all you will do would bring heat.
And I think that the US Governmentshould listen to that.
Other companies are going to say,that's it.
We want the full package andthey should get the full package.
We should really defer to the companieswho are deferring to their own workers,
their employees, their shareholders.
(12:44):
We should represent their interests,and that might vary case by case.
>> Elizabeth Economy (12:48):
Yeah, fair point.
And so the issue that you just raised,
which is an issue of over dependenceon China, particularly by companies.
I think is another one thatyou worked on very directly at
the State Department interms of trying to educate.
I think, US Companies and provide aframework for them globally to think about
(13:12):
how to diversify their supply chains, howto develop more resilient supply chains.
And for the US government,right for our basic needs,
around things like criticalminerals like semiconductors.
Talk about that work, and was thatsomething that was of special interest to
you, or is that something that waskind of mandated from on high?
(13:32):
What sort of effort didyou personally undertake
around this supply chain diversificationissue, which has been, I think,
a very central issue forthe Biden administration.
>> Melanie Hart (13:44):
Yeah, so I'll focus on critical minerals and
chips because they're different in termsof the mandate for critical minerals.
I really credit my boss from the StateDepartment, Undersecretary Jose Fernandez.
When he came in, he looked atthe critical mineral issue and
recognized that our best advantage incompeting with China when we go out and
(14:06):
bid for mines and processing facilities tobring new supply to market is not cash.
The US government doesn't have boatloadsof cash to bankroll mines, unfortunately.
But we do have allies and partnerswho all share the same interest in
having access to supply that'snot controlled by Beijing.
Since Beijing has demonstrated they willall cut all of us off from that supply
(14:30):
whenever they choose to makea point about something.
So to his credit, Under SecretaryFernandez pulled a lot of experts
together, and came up with a veryinnovative idea that he then got allied
buy in for, which wasthe Mineral Security Partnership.
The Mineral Security partnershipbrings together 14 US-allies,
including the European Union, to jointlyidentify projects of interest and
(14:55):
pull together companiesfrom allied governments.
Might be US, might not be USfinancing from allied governments and
just get projects moving.
Because from a US perspective,we don't necessarily have companies that
are working in all of these mining sectorsor in all of the processing sectors or
(15:15):
that want to.
But if Australia does and they bring newcapacity online that supports US national
security, and if the US bringssomething online, that's good for
Australia as well, andthat's been wildly successful.
They announced two deals sofar this year, one on germanium.
A Belgian-based company teamedup with the DRC-based company to
(15:39):
develop germanium in the DRC.
And the other one's graphite,
a graphite mine in Tanzania that's a jointproject between a South Korean company or
South Korea's Posco andAustralia's blackrock Mining.
Those are real deals that are comingto market with allies coming together.
I think it's a tremendous success andsomething I I really hope to see the Trump
(16:01):
administration continuebecause it's a winner, and
I hope to see Congressput some money behind it.
>> Elizabeth Economy (16:08):
So you mentioned gallium or germanium and- Germanium and
graphite.
Germanium and graphite,which just happened to be two
metals that the Chinese haveput export controls on.
Is that why in fact wepursued those projects?
Or does this happen tobe luck of the draw?
>> Melanie Hart (16:29):
So the US and China both look at the same trade data.
So before China even startedwith the export controls,
we were looking at the same trade data andseeing these are our vulnerabilities.
So let's get moving now.
China was looking atthe same vulnerabilities and
that's where they decided to hit us.
But before they even went down that road,
(16:50):
the US Was already workingon alternative supply.
>> Elizabeth Economy (16:54):
So is the process then basically to look at those minerals
and metals where we havethe greatest dependence on China, or
is it a function of our national securitythat we're most concerned about?
How do we make the determinationabout where to go?
>> Melanie Hart (17:10):
It's both, so when the MSP started up,
it focused specifically on the criticalminerals for the energy transition.
And it's expanded over time.
On the other side,you mentioned semiconductors.
In the chip sector,
there are specific critical minerals thatwe need to make a semiconductor chip.
So when Congress passed the CHIPS Act,which gave the State Department a $500
(17:34):
million fund to do both 5G security andsemiconductor supply chain and
semiconductor security,which is a lot for that amount of money.
State immediately looked at that andsaid one of our priorities has to be going
out and finding the critical mineralsthat are needed to make a chip and
invest in capacity that'sfree from PRC control.
(17:56):
Because we cannot allow there to bea situation where your colleagues at
Commerce, Liz,
are doing such a great job bringing newfabs online here in the United States.
We cannot have a situation where thosefabs have to go get on their knees and
beg Beijing for the gallium and
their germanium that they needto make a semiconductor chip.
So recognizing that there is a need forspecific chip for
(18:17):
specific minerals where China hada stranglehold on global supply,
State had a specific effort underthe CHIPS Act focused on semiconductors.
>> Elizabeth Economy (18:27):
And the semiconductor effort was broader,
too, right?
There was more,there was educational component.
I mean, I think State Department reallycreated, along with European and
Asian allies, a pretty fullbore program for investment and
training in some emerging andmiddle income economies.
(18:47):
Can you talk a little bit about that work?
>> Melanie Hart (18:49):
Yeah, absolutely, so the semiconductor side of
the State Department CHIPS Act programfocuses on three big priorities.
The first is the one that I mentioned.
Well, and all of these prioritiesnest under one big objective,
which is provide the domestic US fabswith the international environment they
need to succeed.
(19:09):
So the international effort is inservice of the domestic effort and
domestic US jobs.
It has three parts, one, get the criticalminerals needed to make a chip,
make sure we have access to supplythat the PRC can't cut off.
Two, work with allies andpartners to get to a degree
of coordination on policy,particularly subsidy policy.
(19:32):
You don't wanna see a situation whereCommerce Department here in the US,
the Europeans, the Japanese,
the Koreans are all trying to subsidizethe same companies to come and build fabs.
And we're pricing each other outof the market by having to bid and
compete with one another.
So we wanted to do what we could toalign subsidy policy among nations.
(19:53):
And that required having somekind of early warning system so
that Europe could be dependent on chipsfrom the United States and have early
warning if a shortage is is likely ora supply gut and the same supply glut.
And the same thing from the United Stateswith Europe and Japan, and Korea.
We can be more confident with some friendsshoring if we have good transparency and
(20:16):
information on those supply chains.
So that was the policy pillar with allies.
And then the third and final piece waswhen chips come off the factory line
in Arizona and Texas,the fabs being built in the United States.
The model is you do a lot ofthe processing, the downstream processing,
the test testing, packaging,
(20:36):
assembly, getting it ready to pluginto your iPhone or to your laptop.
A lot of that happens inmiddle income countries.
That keeps cost lower forthe fabs here and
keeps the higher incomejobs in the United States.
And that capacity was concentratedin a few places, Malaysia,
particularly during COVID when Malaysiahad COVID, outbreaks, you couldn't
(20:59):
make a car in the United States becausethe chip supply line ground to a halt.
So that third piece of the chip strategywas identifying some clusters of nations
that were ripe to either expand theirdownstream processing capacity or
become a downstream processor.
And state selected a group inthe Americas and a group in Asia.
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And the group in the Americas wasCosta Rica, Mexico, and Panama.
And in Asia it was the Philippines,Vietnam, Indonesia, India.
And it was shocking to see howpowerful it was to give those nations
a ticket to enter into a US-centricsupply chain as sparkly and
exciting as one rooted inthe CHIPS Act as an alternative
(21:44):
to the lower value-addedChina supply chain.
And the way the program works isit's not suitcases full of cash.
It's not the Beijing model.
State deployed the OECD togo into these countries and
do a deep assessment of why isn'tTSMC building a plant right now.
Why isn't Intel building a plant rightnow and get a punch list of the things
(22:07):
that needed to be done to move them up andmake that market more attractive?
As you said,a big need was workforce development.
So State fundedArizona State University to go in and
train workers to work insome of these facilities.
And the reception has been tremendous.
The most exciting thing at State was abouta year after rolling out this program,
(22:30):
we started being deluged byother countries that would say,
I want to be the next Costa Rica,or I want what the Philippines has.
And so we created something that hadbeen missing, which is this pull factor,
kind of a the pull of an opportunitythat countries wanted to opt into.
So we weren't just going around saying,China, bad move away from China.
(22:53):
We had something to offer.
>> Elizabeth Economy (22:54):
No, that's exciting.
Of course, at a certain point,I guess that $400 million that
State Department got to do thiskind of work also runs out.
Is there still money left to be deployedor are we kind of at the end of the sort
of the gravy train, or is it beingpicked up in different ways by private
institutions, universities andcompanies that can keep moving it forward?
(23:18):
What's the sort ofsustainability of this program?
>> Melanie Hart (23:21):
So State and Commerce had different rules from Congress.
You guys had it easy, I think Commerce,
they just gave you 52 billion andyou could run from there.
>> Elizabeth Economy (23:32):
39 billion, because the science part never got funded, but
yes, okay.
>> Melanie Hart (23:36):
39 billion is a lot at state was 100 million year for five years.
And every year, Congress wouldapprove the next year's budget, and
they would one by one approveeach of the countries and
activities that we wouldwant to partner with.
The great thing aboutthat is that Congress was
(23:57):
deeply supportive andwonderful to work with.
The Republicans were as supportive asthe Dems on SFRC when we would do our
briefings.
So they got it because theyhad written the CHIPS Act.
So they got what we were trying to do,they were deeply supportive.
They have been with the State Departmentevery step of the way, so I have pretty
(24:19):
high confidence that that would notchange going into the new administration.
I think what Congress shoulddo is give State more money,
because if you actuallycare about 5G security and
rewiring the entire globalsemiconductor supply chain,
$100 million a year todo both is a bit sad.
(24:41):
I think we can do better, I think giventhat this is something the US has never
done before, it makes sense to startout where they started out and
not overload the financesin the beginning.
But at this point, the success speaks for
itself and there is clearly room andneed to ramp up.
And I think in particular, that criticalmineral piece would be a great way,
(25:05):
a great place to build in more funding,because now that the program has
moved from identifying where the mineralsare and where we should invest.
To doing some, being ready to do someof those investments, there's a lot of
space and they can, for example, maybea lot of that money can flow through DFC,
who can go in and finance somedeals in some of these places.
(25:27):
But, you know, I mean,the question I always ask Congress is,
do you want the US Fabs tohave to get on their knees and
beg Beijing for some for critical mineralsor not, it's really their decision?
>> Elizabeth Economy (25:39):
Right, I mean, and I think because it so directly serves
our national interest and becausethe Chinese have developed a retaliatory
toolkit now that directly targets thesekinds of critical minerals and metals.
I think maybe Congress will be morereceptive to more funding for the DFC and
for these kinds ofinvestments moving forward.
(26:00):
So, I think the major theme andnot surprisingly,
since you were atthe State Department of your work and
of your comments today, has been onthe partnership with our allies.
You've talked a lot about what I thinkhave been amazing successes that you've
had in the work that you've done.
(26:20):
Have there been any,if not failures, let's say,
any efforts that maybe didn'tcome fully to fruition things
that the U.S tried to pursue withour allies and partners, but
just somehow didn't get the kind of pickupthat you would have liked to have seen?
>> Melanie Hart (26:39):
Well, let me say this,
it is no accident that I have come to theAtlantic Council to do China work here.
I think we have a lot of work to doin the transatlantic partnership and
approaching the China challenge together.
It was pretty frustrating to watchthe dynamic play out when Europe
(27:01):
was assessing making the decisionsabout tariffs on PRC EVs.
The US tariffed PRC EVs at 100%,Canada did the same thing,
Brazil has tariffs on PRC EVs,Turkey has tariffs on PRC EVs and
the German Chancellor, German autos,more than any other stand
(27:22):
to lose by China's predatorymarket tactics in the EV sector.
And Germany voted against any kind oftariffs on Chinese EVs that really,
to me tells us that we havemore work to do there.
And we have great as you know,
there are really amazing China expertsacross Europe and America and elsewhere.
(27:46):
So what I'm most excited aboutleaving the US Government is coming to
the Atlantic Council,which has a transatlantic focus and
doing China work here.
We're looking at standing up some reallyinteresting things on the de-risking
front, at digging in on what US de-riskingshould look like going forward and
trying to find the Venn diagram ofwhere that overlaps with Europe,
(28:09):
where that overlaps with Latin America andother partners.
And I understand that Europe hasa different system it's not one country,
it's a group of countries thathave to work together and
the Commission has trade policy andthe capitals have foreign policy and
that's complicated, butwe have to get it right.
>> Elizabeth Economy (28:27):
Yeah, no, I think that's a really good point and
I know we both met with the sameEuropean delegation recently.
And I think one of the things that I spokewith them about is, is how, you know,
the U.S government, andcertainly at the Commerce Department, but
I think also at the State Department,how we worked to educate US business
(28:50):
about the risks inherent in beingtoo dependent on a China market.
And that this really did have,I think, a pretty profound impact,
I think business really didmove up pretty aggressively.
A lot of business on a learningcurve when it comes to this,
the idea of de-risking and soI think your work to educate more,
(29:11):
I think will be very welcomed and as yousay, I think probably pretty necessary.
So let me ask you one last touchto touch on one last area,
which is Taiwan,because you also worked on the sort of
US Taiwan Economic Prosperity Partnershipdialogue.
Everything you did had a big,like, mouthful of words,
(29:35):
I have to say [LAUGH] butTaiwan obviously is a really was a very
important part of US Strategyover the past four years and
talk a little bit about what this was andwhat came out of it.
>> Melanie Hart (29:52):
So a lot of the State Department programs do have really long
names and so they all have acronyms.
So we call the Taiwan dialogue the EPPD,look Taiwan is our seventh
largest trading partner,our tenth largest export market and our,
the sixth largest market for U.S. food andagricultural products, that's huge.
(30:13):
So it's natural that the US should haveeconomic mechanisms for talking to Taiwan,
commerce has a semiconductorsupply chain dialogue with them.
USTR has a trade more than dialogue now,21st century trade process with them and
State I think about the State Department'sEPPD as the US Taiwan Dialogue,
(30:33):
where economics meets foreign policy.
It's kind of the economic security,
economic statecraft dialoguewith Taiwan and State.
Under Secretary Fernandez and the teamjust had the fifth EPPD with Taiwan
in October and they shared the listof things that they covered.
It's economic coercion, working togetherto do infrastructure investments
(30:55):
jointly in third countries it isaddressing bilateral taxation.
I know Secretary Raimondowas really focused on that,
we were encouraging TSMC to comehere into the United States and
invest andthat the taxation burden is real there.
So supply chains, all kinds of things,I mean it's a, it's a great, it's a great
(31:17):
dialogue for figuring out how to align onthe economic security side of the coin.
>> Elizabeth Economy (31:23):
Okay, great,
if only we could have productive dialoguesthese days with the PRC as well but
I guess that's gonna have to wait forsome point in, in the future.
Okay, so lightning round, let me just askyou a couple of quick final questions.
What's your must readbooker article on China?
>> Melanie Hart (31:44):
So this is a little bit out of the box, but the book that I've
read over the past year thathas stuck with me the most and
really helped me put some of what Isee with China in a broader context.
Is a book by a historian,Calder Walton's book called Spies,
(32:05):
Epic Intelligence War between East andWest.
And it is a fabulous detailedhistory of how Russia approached
the West before, during,and after the Cold War.
And it has great source material,but really shows how the Soviets and
then the Russians alwaysperceive themselves as being
(32:27):
weaker than the West economically weaker,weaker military.
They didn't have the tech edge, and sothey felt that espionage, coercion,
subversion, everything was on the table tocatch up and to even the playing field.
And in their eyes, that was justthe legitimate way to do business.
(32:47):
I see some really big parallelswith China, both in the way so
many Chinese counterparts over the years,when you are talking to friends and
counterparts in Beijing, you can kindatell what's total talking points and what.
When they keep saying it forten years, even after drinks and
late at night,you figure this one might be real.
(33:08):
And one thing that always stuck out to meis a lot of people I deeply respect and
admire and like talking to in China,
they just can't conceiveof what our problem is.
Given that we're alwaysstronger than them,
of course they're going touse these other tactics.
And I felt that this put that incontext in a way that nothing else has.
(33:29):
And in terms of articles, there wasone article that I kept on my desk at
the State Department and my colleagueJonathan Fritz did as well, and
that's Xi Jinping's November 2020 articlein Qiushi where he just says blatantly,
our aim is to make internationalsupply chains dependent on China.
We kept that there asa reminder of what our job was.
>> Elizabeth Economy (33:51):
That is a particularly, I think, telling quotation.
It's good that he's always basicallysignaling exactly what he plans to do and
what he sees his mission as being.
I think it helps us a lot.
Okay, what do you miss most andleast about your time in government?
>> Melanie Hart (34:12):
I had a unique opportunity because the things I was
working on, there was no playbook.
After 911, the US built up a wholecounterterror apparatus and
reoriented the government forcounterterror operations.
I see the Biden administration asa time when we were reorienting
(34:34):
the government for economic statecraft and
figuring out how to operate in thispost COVID economic security space.
And working for Under Secretary Fernandez,he would just say,
achieve the objective don'tlet bureaucracy stop you.
And Secretary Blinken would just say,lean in.
And so our message was lean in.
(34:55):
Don't ask permission,just get things done.
And working with the amazing careerdiplomats at state in those trenches,
and my diplomatic partners from allies andpartner countries as well,
where nobody has a rule book,we all have kind of a green light from our
leadership to work together andfigure things out.
(35:16):
That was a, I think, tremendousopportunity and space for innovation.
And I'm just deeply humbled bythe brilliance that I saw in my career
colleagues and what they can do whenyou give them the space to do that.
And in terms of what I miss least, man,it's great being back on the think tank
(35:37):
side and just saying, just speaking formyself and being really direct.
When you're speaking for a government,it's different, as you know.
So being China experts who say whatwe think without the weight or
the carefulness of a broaderentity behind us is a lot of fun.
>> Elizabeth Economy (35:56):
Yeah, I'm not sure I ever mastered the ability
to just say what the government wastelling me to say, [LAUGH], but I tried.
Okay, quickly, what one thing do youwish that the administration had
done differently with regard to China?
>> Melanie Hart (36:11):
This won't be a shock to you, but trade deals with other countries.
That's the missing piece of our toolkit.
We've done a lot, butthat's the missing piece.
>> Elizabeth Economy (36:26):
Yes, US no trade representative.
Yep, [LAUGH], anyway.
Okay, quickly, what China issuedo we not know enough about?
>> Melanie Hart (36:36):
That's a great question.
I don't know if you hadthe same experience, but for
me, this was my first government job.
And being on the inside andgetting that deep understanding of
how the US policy process worksreally drove home to me how much I
don't know about the inner workingsof China's policy process.
(37:00):
Is there an interagency policy committee?
If there is one,to what degree is it real?
Does Xi Jinping see different ideas orare they filtered before he gets to them?
To what degree is there stillbottom up versus top down?
I think a great thing about the USsystem is there is a lot of space for
(37:21):
bottom up innovation.
I mean, how great was it to haveSecretary Blinken say, lean in?
And the Under Secretary say,just don't let bureaucracy stop you.
I don't think that's what they'regetting in Beijing for sure.
But we don't know enough about what'sreally going on inside that policy
process.
And I really wish we did.
>> Elizabeth Economy (37:42):
Okay, last one.
On a scale of 1 to 10, how likely, and
I think I already knowthe answer to this one.
How likely do you think we are to seea breakthrough in US China relations over
the next decade?
>> Melanie Hart (37:54):
Unfortunately, I'd say around zero.
There could be something short term.
President Trump has mentioned that he'shad communication with Xi Jinping.
A lot of the folks going into the Trumpadministration are talking about trying to
do a deal that Trump's tariffthreats are to gain leverage so
that they can do somekind of deal with China.
(38:15):
Unfortunately, there's nothingthat Xi Jinping is willing
to give the United States in any dealthat's in US national interests.
That's unfortunate.
So there could be short term blips, but
I think it'll be a whilebefore there's anything real.
>> Elizabeth Economy (38:29):
Okay, well, on that note, let me thank you so much for
taking the time to speak with me.
As always, Melanie,you are both incredibly articulate and
thoughtful and very much to the point.
So thanks again.
>> Melanie Hart (38:47):
Great, thanks for having me, Liz.
>> Elizabeth Economy (38:48):
If you enjoyed this podcast and want to hear more reasoned
discourse and debate on China, I encourageyou to subscribe to China Considered via
the Hoover Institution YouTube channel orpodcast platform of your choice.
[MUSIC]
[MUSIC]
>> Elizabeth Economy (00:08):
Welcome to China Considered, a podcast that brings fresh
insights and informed discussion to one ofthe most consequential issues of our time,
how China is changing andchanging the world.
I'm Liz Economy, Hargrove Senior Fellowand Co-director of the U.S China and
the World Program at the HooverInstitution at Stanford University.
Today I have with me, Dr. Melanie Hart,
who who just stepped down from herposition as the Senior Advisor for
(00:30):
China and the Indo Pacific in the Officeof the Undersecretary for Economic Growth,
Energy and the environment at the U.S.department of State.
And she's now the Senior Director for theGlobal China Hub at the Atlantic Council,
Melanie, thank you somuch for joining me today.
>> Melanie Hart (00:43):
Thanks for having me, Liz.
>> Elizabeth Economy (00:45):
So you were instrumental at the State Department in
designing and driving forward a numberof the agency's most consequential
China initiatives, particularly aroundcombating Chinese economic coercion.
Can you start by just telling us a littlebit about what is economic coercion?
Why did you decide to focus on thisparticular issue at this particular time?
(01:05):
As you know, it's been around fora long time, but I've never seen a U.S
strategy to combat economic coercion,what made you take on this issue?
>> Melanie Hart (01:15):
Sure, so I joined the State Department in January 2021,
when the Biden administrationwas coming in.
It was the thick of when China wastargeting Australia, Australia called for
an independent investigation into theorigins of the COVID crisis, and Beijing
hit them with a wide array of ridiculoustrade measures, economic coercion.
(01:35):
And as I was going around the departmenttalking to the really great
career diplomats saying,what should the Biden team focus on?
Because the Biden team came in with ourown priorities but a really important part
of the process is going to the peoplewho've been in the trenches and
hearing from them wherethey think we should focus.
Economic coercion just keptcoming up again and again,
(01:57):
there was a real desire across thedepartment and across the interagency to
find a way to do more than just be therediplomatically, to be there economically.
And by happenstance, my boss,Under Secretary Jose Fernandez,
was confirmed finally bythe Senate in August of 2021 and
that was the exact time that Beijingdecided to go after Lithuania.
(02:22):
And what Jose told us was, look, here wego let's use Lithuania as our test case.
Their GDP is only 2% dependent on China,if we can't win this one,
we all know we have a problem.
Let's throw the toolkit,
let's figure out what our toolkit isby digging around the interagency and
(02:43):
finding every possible mechanism that wecan use to directly support Lithuania.
And I think that case was really the gamechanger on the one hand for other
nations who had been targeted by China orwere targeted by China afterwards.
When they looked at Lithuania,they saw a model for
(03:03):
how you can stand up for yourself.
Not back down in the face of bullying andnot just stand up, but
actually turn it into a win foryour own economy.
Lithuania replaced all of the Chinatrade that they lost with new
partnerships in Asia.
They started new embassies in Australia,South Korea and Singapore.
(03:23):
They're laser exports toSouth Korea doubled so
a lot of countries looked at that andsaid, hey, that's not a bad deal actually.
And we were really shocked actuallyafter the Lithuania case that other
countries started knocking on the door andsaying we want the Lithuania package,
is that an option ifBeijing gets mad at us too?
(03:45):
So that was just really the game changerand that was I credit Lithuania for
inspiring a lot of us forhow we can really step in and succeed.
>> Elizabeth Economy (03:54):
So let me take you one step back and just ask.
I mean when you look across the universeof Chinese economic coercion,
is there a certain issue or
set of issues that China tends toget particularly upset about and
then tries to use the leverage of itsmarket to change countries policies.
(04:15):
What prompted for example,the Lithuania case?
>> Melanie Hart (04:18):
In Lithuania's case they were allowing Taiwan to open
a local representative office andto use the name Taiwan in the title,
that doesn't violateEurope's one China policy.
But Beijing didn't like it but
some people assume that thisis a Taiwan thing, it's not.
You see cases on commercial issues lookat Australia that was because Australia
(04:40):
called for an independent investigationof the COVID crisis with Canada.
It was over Meng Wanzhou and that thatdetention issue, it really varies by case.
We've seen them target Philippine bananasin the past over South China Sea.
When you look at the empirical record,
there is almost no issue thatBeijing won't use as a trigger for
(05:02):
economic coercion, so unfortunatelythere's really no safe space.
>> Elizabeth Economy (05:07):
Yeah, I remember back when Daryl Morey,
who was the general managerof the Houston Rockets for
the NBA when he tweeted fight forfreedom, stand with Hong Kong.
And then the Chinese beganto target the NBA and
have the all their gear removed fromthe shelves and particularly went off
(05:30):
after the Houston Rockets, but alsostopped televising the games in China.
And I remember seeing on CCTV that itwasn't just you're exactly right it wasn't
just about Taiwan or the South China Seaor what China called its core interests.
What they said was any issuerelated right to sovereignty or
social stability does not fallwithin the purview of free speech.
(05:54):
And I think at that moment, just asyou said, it's kind of like there's,
there's no issue really around whichChina doesn't feel that it has the,
the right to try to pressure othercountries using their market to get
them to align with Chinese interests.
All right, so Lithuania became the caseand what did you do in particular,
(06:17):
what did the US do to support Lithuania?
But beyond that, then how did youdevelop a kind of bigger strategy around
countries that were being targeted foreconomic coercion?
>> Melanie Hart (06:28):
Sure, so the US rolled out a really innovative package to support
Lithuania, which was all in directresponse to what the Lithuanians
were telling us China was targeting andwhere they need assistance.
So for example, lasers are reallycritical for the Lithuanian economy
their laser industry is a big source ofpride and China had been buying them.
(06:51):
As I just mentioned, their laser exportsto South Korea have now doubled.
But also the U.S. defense Departmentsigned a bilateral procurement agreement
with Lithuania that wouldallow them to sell lasers and
other products to the US Militaryon equal footing with US companies.
The US Military sees some valuein a PRC free supply chain,
(07:11):
also Lithuania had been inthe pipeline to export eggs and
other agricultural productsto the United States.
And the State Department helped themmove through that process to get some
those regulatory process moving and
their ag exports to the US went up 19%,which is pretty significant.
(07:31):
The US ex IM bank gave them a $600million MOU to buy products from
the United States they had previouslybeen buying from China but
China was blocking both exports andimports with Lithuania.
And the great thing about that isLithuania was telling us Beijing has
canceled around 300 millionin export credits that
(07:52):
our companies were depending on.
And US ex IM bank said we'll not justmatch that, but we'll double it and
the important thing about that is the.
Those are numbers.
Those are real, concrete economic numbers.
And the US can't replace China andanybody's supply chain, nor
should that be our objective.
That's not how markets work.
But the US andother countries can help bridge the gap as
(08:15):
companies are looking for andfinding new opportunities.
And to Lithuania's credit, their foreignminister and other members of their
cabinet were all over the Asia Pacificmaking new friends, opening new embassies.
And where they went diplomatically,commerce followed.
And I think there was a greatcapstone on this Lithuania
(08:38):
crisis turned into opportunity.
In May of this year,
the Lithuanian government heldan economic coercion forum in Vilnius.
Representatives from 30 differentgovernments were there.
The US was there atthe vice ministerial level.
Japan was there at the viceministerial level.
Costa Rica was there,the Koreans were there.
(09:00):
30 different countries sentrepresentatives to Vilnius,
which is a bit of a trek from the ROK orCosta Rica,
to hear from Lithuania whattheir lessons learned were.
And I think they are now seen as kind ofa shining example that other countries
are interested to follow and learn from.
>> Elizabeth Economy (09:21):
So do you think now that there's a kind of playbook that
the United States, and
its allies and partners havedeveloped that can be deployed?
Is this something that the EU and
the US have come to some kind ofhere are the rules of the road.
Is there a formalized mechanism in anyway to address these kinds of cases?
>> Melanie Hart (09:42):
So in terms of formalized mechanism, I'll leave that to the current
State Department colleagues tocomment on what they have going on.
But I will say, when you look at economiccoercion cases, they are always different
because every country's relationshipwith China is different.
So for Australia, it was wine andbarley and lobsters.
For Lithuania, it was lasers andthese other agricultural products and
(10:06):
components.
So every economic coercion casewill involve different goods,
with Canada, it was canola oil.
So what we will really need to respondeffectively is a broad coalition.
And if shrimp is being targeted,the most important partners
will be countries who have spaceto buy and eat more shrimp.
>> Elizabeth Economy (10:30):
I think this isn't necessarily something that you worked on
when you were at the State Department,but I'm curious, was there discussion,
consideration given tothe targeting of just US companies?
Because, again, there's been a longtradition in terms of China targeting our
industries, whether it's the travelindustry, the airline industry.
I mentioned the case of the NBA.
(10:53):
China frequently says, if you don'talign with our government policy for
example on Taiwan or the South China Sea,we are going to punish you, right?
So are there lessons learned thatyou think are applicable for
the United States in terms of supportingour companies that end up being targeted
(11:14):
by the Chinese government, orthey're sort of two separate things.
>> Melanie Hart (11:19):
This is a really tough one and
timely given that Invidia wastargeted this week, right?
And I believe possibly intel as well.
I mean, I'm of two minds about it.
On the one hand, we always haveto be honest with US Companies
that China's a tough market,it's not a normal market economy.
(11:40):
The risks are astronomical.
And we don't want to see US Companiesbe dependent on the China market in
such a way that when they are targeted.
Because it's not,if it's a win when they are targeted,
that that would have an outsizedimpact on their bottom line.
But of course, at the same time,when China goes after US Companies,
(12:01):
there should be a response.
And I think the response tothat should be based on what
the companies are asking for,because it's the US Government's job
to be a representative on behalfof the citizens that elect it.
And that includes the companies thatthe US Government represents as well.
Some companies might say, you know what,just let us work this one.
(12:23):
Don't bring more heat to it,all you will do would bring heat.
And I think that the US Governmentshould listen to that.
Other companies are going to say,that's it.
We want the full package andthey should get the full package.
We should really defer to the companieswho are deferring to their own workers,
their employees, their shareholders.
(12:44):
We should represent their interests,and that might vary case by case.
>> Elizabeth Economy (12:48):
Yeah, fair point.
And so the issue that you just raised,
which is an issue of over dependenceon China, particularly by companies.
I think is another one thatyou worked on very directly at
the State Department interms of trying to educate.
I think, US Companies and provide aframework for them globally to think about
(13:12):
how to diversify their supply chains, howto develop more resilient supply chains.
And for the US government,right for our basic needs,
around things like criticalminerals like semiconductors.
Talk about that work, and was thatsomething that was of special interest to
you, or is that something that waskind of mandated from on high?
(13:32):
What sort of effort didyou personally undertake
around this supply chain diversificationissue, which has been, I think,
a very central issue forthe Biden administration.
>> Melanie Hart (13:44):
Yeah, so I'll focus on critical minerals and
chips because they're different in termsof the mandate for critical minerals.
I really credit my boss from the StateDepartment, Undersecretary Jose Fernandez.
When he came in, he looked atthe critical mineral issue and
recognized that our best advantage incompeting with China when we go out and
(14:06):
bid for mines and processing facilities tobring new supply to market is not cash.
The US government doesn't have boatloadsof cash to bankroll mines, unfortunately.
But we do have allies and partnerswho all share the same interest in
having access to supply that'snot controlled by Beijing.
Since Beijing has demonstrated they willall cut all of us off from that supply
(14:30):
whenever they choose to makea point about something.
So to his credit, Under SecretaryFernandez pulled a lot of experts
together, and came up with a veryinnovative idea that he then got allied
buy in for, which wasthe Mineral Security Partnership.
The Mineral Security partnershipbrings together 14 US-allies,
including the European Union, to jointlyidentify projects of interest and
(14:55):
pull together companiesfrom allied governments.
Might be US, might not be USfinancing from allied governments and
just get projects moving.
Because from a US perspective,we don't necessarily have companies that
are working in all of these mining sectorsor in all of the processing sectors or
(15:15):
that want to.
But if Australia does and they bring newcapacity online that supports US national
security, and if the US bringssomething online, that's good for
Australia as well, andthat's been wildly successful.
They announced two deals sofar this year, one on germanium.
A Belgian-based company teamedup with the DRC-based company to
(15:39):
develop germanium in the DRC.
And the other one's graphite,
a graphite mine in Tanzania that's a jointproject between a South Korean company or
South Korea's Posco andAustralia's blackrock Mining.
Those are real deals that are comingto market with allies coming together.
I think it's a tremendous success andsomething I I really hope to see the Trump
(16:01):
administration continuebecause it's a winner, and
I hope to see Congressput some money behind it.
>> Elizabeth Economy (16:08):
So you mentioned gallium or germanium and- Germanium and
graphite.
Germanium and graphite,which just happened to be two
metals that the Chinese haveput export controls on.
Is that why in fact wepursued those projects?
Or does this happen tobe luck of the draw?
>> Melanie Hart (16:29):
So the US and China both look at the same trade data.
So before China even startedwith the export controls,
we were looking at the same trade data andseeing these are our vulnerabilities.
So let's get moving now.
China was looking atthe same vulnerabilities and
that's where they decided to hit us.
But before they even went down that road,
(16:50):
the US Was already workingon alternative supply.
>> Elizabeth Economy (16:54):
So is the process then basically to look at those minerals
and metals where we havethe greatest dependence on China, or
is it a function of our national securitythat we're most concerned about?
How do we make the determinationabout where to go?
>> Melanie Hart (17:10):
It's both, so when the MSP started up,
it focused specifically on the criticalminerals for the energy transition.
And it's expanded over time.
On the other side,you mentioned semiconductors.
In the chip sector,
there are specific critical minerals thatwe need to make a semiconductor chip.
So when Congress passed the CHIPS Act,which gave the State Department a $500
(17:34):
million fund to do both 5G security andsemiconductor supply chain and
semiconductor security,which is a lot for that amount of money.
State immediately looked at that andsaid one of our priorities has to be going
out and finding the critical mineralsthat are needed to make a chip and
invest in capacity that'sfree from PRC control.
(17:56):
Because we cannot allow there to bea situation where your colleagues at
Commerce, Liz,
are doing such a great job bringing newfabs online here in the United States.
We cannot have a situation where thosefabs have to go get on their knees and
beg Beijing for the gallium and
their germanium that they needto make a semiconductor chip.
So recognizing that there is a need forspecific chip for
(18:17):
specific minerals where China hada stranglehold on global supply,
State had a specific effort underthe CHIPS Act focused on semiconductors.
>> Elizabeth Economy (18:27):
And the semiconductor effort was broader,
too, right?
There was more,there was educational component.
I mean, I think State Department reallycreated, along with European and
Asian allies, a pretty fullbore program for investment and
training in some emerging andmiddle income economies.
(18:47):
Can you talk a little bit about that work?
>> Melanie Hart (18:49):
Yeah, absolutely, so the semiconductor side of
the State Department CHIPS Act programfocuses on three big priorities.
The first is the one that I mentioned.
Well, and all of these prioritiesnest under one big objective,
which is provide the domestic US fabswith the international environment they
need to succeed.
(19:09):
So the international effort is inservice of the domestic effort and
domestic US jobs.
It has three parts, one, get the criticalminerals needed to make a chip,
make sure we have access to supplythat the PRC can't cut off.
Two, work with allies andpartners to get to a degree
of coordination on policy,particularly subsidy policy.
(19:32):
You don't wanna see a situation whereCommerce Department here in the US,
the Europeans, the Japanese,
the Koreans are all trying to subsidizethe same companies to come and build fabs.
And we're pricing each other outof the market by having to bid and
compete with one another.
So we wanted to do what we could toalign subsidy policy among nations.
(19:53):
And that required having somekind of early warning system so
that Europe could be dependent on chipsfrom the United States and have early
warning if a shortage is is likely ora supply gut and the same supply glut.
And the same thing from the United Stateswith Europe and Japan, and Korea.
We can be more confident with some friendsshoring if we have good transparency and
(20:16):
information on those supply chains.
So that was the policy pillar with allies.
And then the third and final piece waswhen chips come off the factory line
in Arizona and Texas,the fabs being built in the United States.
The model is you do a lot ofthe processing, the downstream processing,
the test testing, packaging,
(20:36):
assembly, getting it ready to pluginto your iPhone or to your laptop.
A lot of that happens inmiddle income countries.
That keeps cost lower forthe fabs here and
keeps the higher incomejobs in the United States.
And that capacity was concentratedin a few places, Malaysia,
particularly during COVID when Malaysiahad COVID, outbreaks, you couldn't
(20:59):
make a car in the United States becausethe chip supply line ground to a halt.
So that third piece of the chip strategywas identifying some clusters of nations
that were ripe to either expand theirdownstream processing capacity or
become a downstream processor.
And state selected a group inthe Americas and a group in Asia.
(21:20):
And the group in the Americas wasCosta Rica, Mexico, and Panama.
And in Asia it was the Philippines,Vietnam, Indonesia, India.
And it was shocking to see howpowerful it was to give those nations
a ticket to enter into a US-centricsupply chain as sparkly and
exciting as one rooted inthe CHIPS Act as an alternative
(21:44):
to the lower value-addedChina supply chain.
And the way the program works isit's not suitcases full of cash.
It's not the Beijing model.
State deployed the OECD togo into these countries and
do a deep assessment of why isn'tTSMC building a plant right now.
Why isn't Intel building a plant rightnow and get a punch list of the things
(22:07):
that needed to be done to move them up andmake that market more attractive?
As you said,a big need was workforce development.
So State fundedArizona State University to go in and
train workers to work insome of these facilities.
And the reception has been tremendous.
The most exciting thing at State was abouta year after rolling out this program,
(22:30):
we started being deluged byother countries that would say,
I want to be the next Costa Rica,or I want what the Philippines has.
And so we created something that hadbeen missing, which is this pull factor,
kind of a the pull of an opportunitythat countries wanted to opt into.
So we weren't just going around saying,China, bad move away from China.
(22:53):
We had something to offer.
>> Elizabeth Economy (22:54):
No, that's exciting.
Of course, at a certain point,I guess that $400 million that
State Department got to do thiskind of work also runs out.
Is there still money left to be deployedor are we kind of at the end of the sort
of the gravy train, or is it beingpicked up in different ways by private
institutions, universities andcompanies that can keep moving it forward?
(23:18):
What's the sort ofsustainability of this program?
>> Melanie Hart (23:21):
So State and Commerce had different rules from Congress.
You guys had it easy, I think Commerce,
they just gave you 52 billion andyou could run from there.
>> Elizabeth Economy (23:32):
39 billion, because the science part never got funded, but
yes, okay.
>> Melanie Hart (23:36):
39 billion is a lot at state was 100 million year for five years.
And every year, Congress wouldapprove the next year's budget, and
they would one by one approveeach of the countries and
activities that we wouldwant to partner with.
The great thing aboutthat is that Congress was
(23:57):
deeply supportive andwonderful to work with.
The Republicans were as supportive asthe Dems on SFRC when we would do our
briefings.
So they got it because theyhad written the CHIPS Act.
So they got what we were trying to do,they were deeply supportive.
They have been with the State Departmentevery step of the way, so I have pretty
(24:19):
high confidence that that would notchange going into the new administration.
I think what Congress shoulddo is give State more money,
because if you actuallycare about 5G security and
rewiring the entire globalsemiconductor supply chain,
$100 million a year todo both is a bit sad.
(24:41):
I think we can do better, I think giventhat this is something the US has never
done before, it makes sense to startout where they started out and
not overload the financesin the beginning.
But at this point, the success speaks for
itself and there is clearly room andneed to ramp up.
And I think in particular, that criticalmineral piece would be a great way,
(25:05):
a great place to build in more funding,because now that the program has
moved from identifying where the mineralsare and where we should invest.
To doing some, being ready to do someof those investments, there's a lot of
space and they can, for example, maybea lot of that money can flow through DFC,
who can go in and finance somedeals in some of these places.
(25:27):
But, you know, I mean,the question I always ask Congress is,
do you want the US Fabs tohave to get on their knees and
beg Beijing for some for critical mineralsor not, it's really their decision?
>> Elizabeth Economy (25:39):
Right, I mean, and I think because it so directly serves
our national interest and becausethe Chinese have developed a retaliatory
toolkit now that directly targets thesekinds of critical minerals and metals.
I think maybe Congress will be morereceptive to more funding for the DFC and
for these kinds ofinvestments moving forward.
(26:00):
So, I think the major theme andnot surprisingly,
since you were atthe State Department of your work and
of your comments today, has been onthe partnership with our allies.
You've talked a lot about what I thinkhave been amazing successes that you've
had in the work that you've done.
(26:20):
Have there been any,if not failures, let's say,
any efforts that maybe didn'tcome fully to fruition things
that the U.S tried to pursue withour allies and partners, but
just somehow didn't get the kind of pickupthat you would have liked to have seen?
>> Melanie Hart (26:39):
Well, let me say this,
it is no accident that I have come to theAtlantic Council to do China work here.
I think we have a lot of work to doin the transatlantic partnership and
approaching the China challenge together.
It was pretty frustrating to watchthe dynamic play out when Europe
(27:01):
was assessing making the decisionsabout tariffs on PRC EVs.
The US tariffed PRC EVs at 100%,Canada did the same thing,
Brazil has tariffs on PRC EVs,Turkey has tariffs on PRC EVs and
the German Chancellor, German autos,more than any other stand
(27:22):
to lose by China's predatorymarket tactics in the EV sector.
And Germany voted against any kind oftariffs on Chinese EVs that really,
to me tells us that we havemore work to do there.
And we have great as you know,
there are really amazing China expertsacross Europe and America and elsewhere.
(27:46):
So what I'm most excited aboutleaving the US Government is coming to
the Atlantic Council,which has a transatlantic focus and
doing China work here.
We're looking at standing up some reallyinteresting things on the de-risking
front, at digging in on what US de-riskingshould look like going forward and
trying to find the Venn diagram ofwhere that overlaps with Europe,
(28:09):
where that overlaps with Latin America andother partners.
And I understand that Europe hasa different system it's not one country,
it's a group of countries thathave to work together and
the Commission has trade policy andthe capitals have foreign policy and
that's complicated, butwe have to get it right.
>> Elizabeth Economy (28:27):
Yeah, no, I think that's a really good point and
I know we both met with the sameEuropean delegation recently.
And I think one of the things that I spokewith them about is, is how, you know,
the U.S government, andcertainly at the Commerce Department, but
I think also at the State Department,how we worked to educate US business
(28:50):
about the risks inherent in beingtoo dependent on a China market.
And that this really did have,I think, a pretty profound impact,
I think business really didmove up pretty aggressively.
A lot of business on a learningcurve when it comes to this,
the idea of de-risking and soI think your work to educate more,
(29:11):
I think will be very welcomed and as yousay, I think probably pretty necessary.
So let me ask you one last touchto touch on one last area,
which is Taiwan,because you also worked on the sort of
US Taiwan Economic Prosperity Partnershipdialogue.
Everything you did had a big,like, mouthful of words,
(29:35):
I have to say [LAUGH] butTaiwan obviously is a really was a very
important part of US Strategyover the past four years and
talk a little bit about what this was andwhat came out of it.
>> Melanie Hart (29:52):
So a lot of the State Department programs do have really long
names and so they all have acronyms.
So we call the Taiwan dialogue the EPPD,look Taiwan is our seventh
largest trading partner,our tenth largest export market and our,
the sixth largest market for U.S. food andagricultural products, that's huge.
(30:13):
So it's natural that the US should haveeconomic mechanisms for talking to Taiwan,
commerce has a semiconductorsupply chain dialogue with them.
USTR has a trade more than dialogue now,21st century trade process with them and
State I think about the State Department'sEPPD as the US Taiwan Dialogue,
(30:33):
where economics meets foreign policy.
It's kind of the economic security,
economic statecraft dialoguewith Taiwan and State.
Under Secretary Fernandez and the teamjust had the fifth EPPD with Taiwan
in October and they shared the listof things that they covered.
It's economic coercion, working togetherto do infrastructure investments
(30:55):
jointly in third countries it isaddressing bilateral taxation.
I know Secretary Raimondowas really focused on that,
we were encouraging TSMC to comehere into the United States and
invest andthat the taxation burden is real there.
So supply chains, all kinds of things,I mean it's a, it's a great, it's a great
(31:17):
dialogue for figuring out how to align onthe economic security side of the coin.
>> Elizabeth Economy (31:23):
Okay, great,
if only we could have productive dialoguesthese days with the PRC as well but
I guess that's gonna have to wait forsome point in, in the future.
Okay, so lightning round, let me just askyou a couple of quick final questions.
What's your must readbooker article on China?
>> Melanie Hart (31:44):
So this is a little bit out of the box, but the book that I've
read over the past year thathas stuck with me the most and
really helped me put some of what Isee with China in a broader context.
Is a book by a historian,Calder Walton's book called Spies,
(32:05):
Epic Intelligence War between East andWest.
And it is a fabulous detailedhistory of how Russia approached
the West before, during,and after the Cold War.
And it has great source material,but really shows how the Soviets and
then the Russians alwaysperceive themselves as being
(32:27):
weaker than the West economically weaker,weaker military.
They didn't have the tech edge, and sothey felt that espionage, coercion,
subversion, everything was on the table tocatch up and to even the playing field.
And in their eyes, that was justthe legitimate way to do business.
(32:47):
I see some really big parallelswith China, both in the way so
many Chinese counterparts over the years,when you are talking to friends and
counterparts in Beijing, you can kindatell what's total talking points and what.
When they keep saying it forten years, even after drinks and
late at night,you figure this one might be real.
(33:08):
And one thing that always stuck out to meis a lot of people I deeply respect and
admire and like talking to in China,
they just can't conceiveof what our problem is.
Given that we're alwaysstronger than them,
of course they're going touse these other tactics.
And I felt that this put that incontext in a way that nothing else has.
(33:29):
And in terms of articles, there wasone article that I kept on my desk at
the State Department and my colleagueJonathan Fritz did as well, and
that's Xi Jinping's November 2020 articlein Qiushi where he just says blatantly,
our aim is to make internationalsupply chains dependent on China.
We kept that there asa reminder of what our job was.
>> Elizabeth Economy (33:51):
That is a particularly, I think, telling quotation.
It's good that he's always basicallysignaling exactly what he plans to do and
what he sees his mission as being.
I think it helps us a lot.
Okay, what do you miss most andleast about your time in government?
>> Melanie Hart (34:12):
I had a unique opportunity because the things I was
working on, there was no playbook.
After 911, the US built up a wholecounterterror apparatus and
reoriented the government forcounterterror operations.
I see the Biden administration asa time when we were reorienting
(34:34):
the government for economic statecraft and
figuring out how to operate in thispost COVID economic security space.
And working for Under Secretary Fernandez,he would just say,
achieve the objective don'tlet bureaucracy stop you.
And Secretary Blinken would just say,lean in.
And so our message was lean in.
(34:55):
Don't ask permission,just get things done.
And working with the amazing careerdiplomats at state in those trenches,
and my diplomatic partners from allies andpartner countries as well,
where nobody has a rule book,we all have kind of a green light from our
leadership to work together andfigure things out.
(35:16):
That was a, I think, tremendousopportunity and space for innovation.
And I'm just deeply humbled bythe brilliance that I saw in my career
colleagues and what they can do whenyou give them the space to do that.
And in terms of what I miss least, man,it's great being back on the think tank
(35:37):
side and just saying, just speaking formyself and being really direct.
When you're speaking for a government,it's different, as you know.
So being China experts who say whatwe think without the weight or
the carefulness of a broaderentity behind us is a lot of fun.
>> Elizabeth Economy (35:56):
Yeah, I'm not sure I ever mastered the ability
to just say what the government wastelling me to say, [LAUGH], but I tried.
Okay, quickly, what one thing do youwish that the administration had
done differently with regard to China?
>> Melanie Hart (36:11):
This won't be a shock to you, but trade deals with other countries.
That's the missing piece of our toolkit.
We've done a lot, butthat's the missing piece.
>> Elizabeth Economy (36:26):
Yes, US no trade representative.
Yep, [LAUGH], anyway.
Okay, quickly, what China issuedo we not know enough about?
>> Melanie Hart (36:36):
That's a great question.
I don't know if you hadthe same experience, but for
me, this was my first government job.
And being on the inside andgetting that deep understanding of
how the US policy process worksreally drove home to me how much I
don't know about the inner workingsof China's policy process.
(37:00):
Is there an interagency policy committee?
If there is one,to what degree is it real?
Does Xi Jinping see different ideas orare they filtered before he gets to them?
To what degree is there stillbottom up versus top down?
I think a great thing about the USsystem is there is a lot of space for
(37:21):
bottom up innovation.
I mean, how great was it to haveSecretary Blinken say, lean in?
And the Under Secretary say,just don't let bureaucracy stop you.
I don't think that's what they'regetting in Beijing for sure.
But we don't know enough about what'sreally going on inside that policy
process.
And I really wish we did.
>> Elizabeth Economy (37:42):
Okay, last one.
On a scale of 1 to 10, how likely, and
I think I already knowthe answer to this one.
How likely do you think we are to seea breakthrough in US China relations over
the next decade?
>> Melanie Hart (37:54):
Unfortunately, I'd say around zero.
There could be something short term.
President Trump has mentioned that he'shad communication with Xi Jinping.
A lot of the folks going into the Trumpadministration are talking about trying to
do a deal that Trump's tariffthreats are to gain leverage so
that they can do somekind of deal with China.
(38:15):
Unfortunately, there's nothingthat Xi Jinping is willing
to give the United States in any dealthat's in US national interests.
That's unfortunate.
So there could be short term blips, but
I think it'll be a whilebefore there's anything real.
>> Elizabeth Economy (38:29):
Okay, well, on that note, let me thank you so much for
taking the time to speak with me.
As always, Melanie,you are both incredibly articulate and
thoughtful and very much to the point.
So thanks again.
>> Melanie Hart (38:47):
Great, thanks for having me, Liz.
>> Elizabeth Economy (38:48):
If you enjoyed this podcast and want to hear more reasoned
discourse and debate on China, I encourageyou to subscribe to China Considered via
the Hoover Institution YouTube channel orpodcast platform of your choice.
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