The United States risks losing ground in Asia to the extent that it takes a hard line on trade policies and fails to find some natural areas of cooperation with China, notably in foreign direct investment, according to former Australian Prime Minster Kevin Rudd.

Speaking at the Wharton Global Forum in Hong Kong in a discussion led by Wharton Dean Geoffrey Garrett, Rudd, a former Labor politician, said that instead of working towards mutually beneficial economic policies, the Trump administration has at times tended to focus more narrowly on trade conflicts — something Trump repeatedly vowed to do during the Presidential election campaign. In the views of both Rudd and Garrett, that approach, plus less U.S. engagement in regional trade and investment efforts, is not good for the U.S. — or the world — in the long run.

Garrett noted that China’s President Xi Jinping and President Trump had offered starkly different visions of the world’s trade and investment regimes. Xi, noted Garrett, said that China’s economic growth and its “One Belt, One Road” plans for helping to fund development of infrastructure projects with 65 countries across Asia, to Europe and Africa, is an economic opportunity for China and for the world. China has benefited from economic globalization but also contributed to it, according to Xi, and China’s rapid growth has been a powerful engine for global economic stability and expansion. Garrett also noted Xi’s belief that the interconnection of China’s economy with other countries has made the world economy more balanced.

President Trump, meanwhile, offered in his inaugural speech a far more inward view that the U.S. must protect its borders from other countries that are “making our products, stealing our companies and destroying our jobs,” Garrett noted. He added that it seems the world is now a bit “upside-down,” with China being a defender of economic globalization and the U.S. taking the more go-it-alone stance. (For more, read this opinion piece by Garrett: The U.S. Needs a Proactive Asia Play — or Risks Losing Ground to China.)

Rudd noted that he is now more generally concerned about the fragility of world affairs than he has been since the financial crisis of 2008. “It’s not just the headline treatment of North Korea,” Rudd noted. It’s also the various confrontations between U.S. and Russian military jets. “I’m concerned not only that there are too many of these things” — that their frequency is “intensifying” — but also that “there are too many at once.

The world is now a bit “upside-down,” with China being a defender of economic globalization and the U.S. taking the more go-it-alone stance.

“What bothers me … is that these countries have had a great ability to manage crises in the past, even when acute. What worries me is the capacity for that machinery to hold up” and the political forces of “nativism,” or nationalism that seems to stoke the tensions, Rudd added.

On the positive side, Rudd said, was the victory of French President Emmanuel Macron over nationalist Marine Le Pen and the likely victory of Chancellor Angela Merkel in the upcoming German elections. Both Macron and Merkel are pro-European Union politicians. These events will likely spur more cooperation between France and Germany, and strengthen cooperation within Europe more generally.

Waning U.S. Influence?

Apart from the political tensions arising from nationalism are the negative effects on world economies brought on by a dampening of trade and investment. Rudd noted that the U.S. is losing preeminence in the Asian hemisphere through such acts as dropping out of the Trans-Pacific Partnership trade agreement even as China’s One Belt, One Road initiative will increase that nation’s economic sway in the region.

“The U.S. does not seem to be in the Asian game [when it comes to] the belt and road,” Garrett said, despite the fact that the project is valued at double the size of the Marshall Plan that rebuilt Europe after World War II. Added Rudd: What the U.S. right now does not seem to fully grasp about China is the implications of its scale globally, and diminished U.S. engagement carries risks of falling behind important economic trends.

Rudd, who was Australia’s prime minister twice, said part of the lack of engagement with Asia results from partisan politics. In Australia, politics can be “pretty rough,” but in the U.S. today it is “rough and dysfunctional, and very hard to make Congress work,” he noted. “And this presidency … has had a permanent set of rolling crises in just four months.… So yes, the American position in Asia is in serious trouble.” Rudd added that the U.S. seems “more crisis-driven while China is more strategy-driven.”

China does have one major concern, and that is debt. But Rudd noted that a lot of the corporate debt is owed by state-owned enterprises to the government, which gives the government some control. More generally, Rudd adds, “assuming no deep screw-up in Chinese macro-economic policy, I’ve long had the view that China will always, even in difficult times, muddle through because it has lots of experience [doing so],” including coping with domestic protests, the implosion of the Asian financial crisis and the global financial crisis, and a stock market collapse. “It has demonstrated time and again it is able to pull through.”

“I’ve long had the view that China will always, even in difficult times, muddle through because it has lots of experience [doing so]. It has demonstrated time and again it is able to pull through.” –Kevin Rudd

Another area in which China seems to be moving ahead of the U.S. is on climate change. Not too long ago, China was seen as having backward views. Now it is the U.S. that seems to be going backward by pulling out of the Paris climate agreement while China shows engagement and leadership, Rudd says.

At least, U.S. corporations are increasingly rejecting the pullback and forging ahead with more sustainable environmental policies of their own as shareholders demand it, noted Garrett. Corporations are also responsible, in his view, for holding together reasonably good economic ties with China and other countries, despite frictions between the Chinese and U.S. governments over trade policies.

As for U.S. investments by the Chinese, Rudd noted that such incursions began with the British, “then came the Japanese and the Koreans, and now the Chinese have arrived.” He added: “Obviously some areas will be off limits and the question is, where is the line drawn?” In Australia, only about one in 50 investment proposals from the Chinese were rejected. If the U.S. turns away too many offers, it can look like protectionism.

At the same time, the U.S. has legitimate complaints that China, for its part, has too many barriers to FDI. In Rudd’s view, it would be far more productive for the U.S. to avoid big conflicts with China over trade and instead focus on FDI agreements — something that those within China favoring more financial liberalization would likely support, and thus could exert influence on the government for looser policies.

Through history the “great defining characteristic of interconnectedness was trade relations,” Rudd noted. But global trade levels in Europe in 1914 were about the same as they are today “and that did not prevent World War I.” His point: FDI may offer better connections between countries to improve relations overall, better than trade ties. “That is where the magic lies.”

So what should the U.S. do about Chinese FDI into the U.S.? “Just chill,” Rudd said. When one country invests in another country that way, it’s different than trade deals. If China builds something in the U.S., it’s difficult to pull it “back to Beijing.”

Rudd’s biggest worry in U.S.-China relations: “We are between a rock and a hard place.” He said the concern is that soon America may conclude that China cannot — or will not — delve into what is needed to get North Korea to dump its nuclear arsenal, while North Korea may be well on its way to creating a ballistic missile with a nuclear payload capable of reaching the U.S.