KraneShares recently held a China Insights Series private briefing with former U.S. Secretary of State, Dr. Henry Kissinger. Dr. Kissinger is one of the most important diplomats of our time and a key architect of the modern US-China economic model. Dr. Kissinger joined KraneShares and guests for lunch in New York City, after recent meetings with both Chinese President Xi Jinping and President Trump. This memo captures his comments during the briefing.

The main takeaways from Dr. Kissinger’s comments were as follows:

• History and experience both indicate that countries must be very careful about how they interact in order to avoid negative unintended consequences.
• The current US/China trade dispute is likely to be resolved because both sides need a successful resolution and have already shown signs of compromise.
• However, the US and China need to recognize that the current state of US/China relations is delicate and both sides must work hard to establish channels of communication which prevent small disputes from becoming large ones and permit the successful resolution of future disagreements.

Dr. Kissinger also made interesting comments about the impact of social media on foreign policy as well as North Korea. Dr. Kissinger’s comments on each of these topics are covered in detail below.

1971 to 2018 – The Initial Opening with China & Today

In 1971, when Nixon asked Kissinger to reach out to China the US had no relationships at all with China. “We didn’t know any of the Chinese leaders. We didn’t know which door to knock on,” Kissinger said.

At that time, US trade with China was less than US trade with Honduras. China was one of the poorest countries in the world operating in an isolated manner, with very little trade and very little interaction with the western world.

Today, China is the second largest economy in the world and deeply integrated into the world economy. “China is in many ways our equal.” A whole lot has changed in 47 years.

History Provides a Cautionary Tale – Lessons from World War I

Kissinger began his remarks by noting that in the early twentieth century no one would have predicted that England and Germany would go to war. The two countries had no major conflicts, they shared many common values and interests, and Kaiser Whilhelm and the British monarchy were even related by birth.

By 1914, however, Germany and England fought a war that neither side wanted and neither side would have predicted. Each country also never fully recovered the relative power they enjoyed prior to the war.

While Kissinger does not see the current tensions between the US and China resulting in an actual war, political leaders and diplomats on both sides must remain ever vigilant to prevent such an event.

In this regard, Kissinger noted two important considerations:

First, the path of current negotiations is likely to color the future relationship, future conflicts, and future negotiations.

Second, establishing an effective means of communication can mitigate a lot of problems. Where there are effective and trusted channels of communication, conflicts and problems can be worked out. Where no such channels exist, even minor problems tend to be viewed as major strategic issues. Therefore, both sides need to encourage effective formal and informal, public and private, communications.

Currently, there appears to be a lot of mistrust and misunderstanding on both sides. As a result, both sides need to work hard to bridge the communication gap.

Despite these challenges, however, Kissinger remains confident that the US and China will resolve the current trade issues as described in greater detail below.

US and Chinese Approaches to Negotiations

A big part of the problem with US and China relations is that each side approaches problem-solving and negotiations in very different ways.

The US believes geopolitical issues are problems to be resolved and then both countries move beyond that particular problem. The Chinese, however, believe one set of problems is simply followed by a new, different set of problems.

US and Western diplomacy also tends to believe personal relationships can shape geopolitical outcomes. In the Chinese view, personal relationships between leaders and diplomats are not as important as the objective configuration of relative strengths and weaknesses and the goals of each party.

The Chinese study issues in extraordinary detail and focus on their own long-term interests. In the Chinese view, compromises only occur because it is in the long-term best interest of both parties.

The US will also tend to address problems one at a time and is more short-term oriented while China takes a longer-term view and addresses issues holistically.

This analysis does not mean that the US and China always take only these paths in negotiations. But they do represent fundamentally different approaches to problem-solving and negotiations and need to be taken into account.

These differences can also lead to a lot of misunderstanding and frustration on both sides.

Even with different approaches, which arise between any two nations, issues can be resolved. Understanding those differences is important to successful negotiations.

The Current Trade Dispute

Kissinger is confident the current trade dispute will be resolved because it is in the best interest of both the US and China. Trump and Xi and their respective administrations need a resolution of the conflict. Both leaders face economic and political pressures which currently compel each side to reach a solution.

China has already signaled a willingness to address the US’s main concerns. Kissinger believes Chinese movement on key issues in the negotiations is indicative of China’s desire to resolve the current trade dispute.

For four decades, China’s leaders have promised their people increasing prosperity in exchange for limited political freedom. China’s Communist Party, therefore, views threats to the Chinese economy as a threat to the Communist Party’s control. As a result, China will compromise on trade issues with the US if it perceives failing to do so will hurt the Chinese economy.

The trade dispute with the US is, in fact, creating challenges for the Chinese economy and leading the Chinese government to seek a resolution to the conflict.

There is a limit, however, as to how far the Chinese government will go in compromising with the US. The Chinese Communist Party will not do anything which may be perceived domestically as weak or which might impair its control of the country.

In addition, Kissinger notes that a trade resolution is only a near-term solution. The issues surrounding US-Chinese relations in both trade and other areas will persist for a very long time.

The US needs to be cognizant of these realities as it negotiates with China.

Looking Beyond the Current Trade Dispute

The Chinese have accomplished a lot in the last 47 years and the Chinese leadership has every right to be proud of its achievements. Kissinger, however, does not believe China is seeking “world domination”. Instead, the Chinese government believes its people will set an example the rest of the world will want to follow.

China has arrived as a world power economically, politically and even militarily, and US policymakers need to figure out how best to accommodate China’s power.

The US and the west both expected that as China became more integrated into the global economy, China would evolve like other western countries and other nations. The US expected that China would open up and even become more democratic. However, “there has never been much evidence of that democratization.”

Moreover, there is little in Chinese history that leads toward democracy. Could it happen? Possibly, but with very different rules.

Kissinger noted, “Every communist party faces the question of what to do with the party after the victory. The Chinese Communist Party is no different.”

China’s Communist Party is currently trying to deal with many challenges, including continued urbanization, globalization, the transition to a modern technology-driven economy, a rapidly aging population, and, of course, the maintenance of the Communist Party’s control over the country’s political life.

Urbanization, globalization, and technology, in particular, are all changing how Chinese citizens view themselves and are ushering in a new phase for China and the Chinese Communist Party.

Understanding China’s external policies requires also understanding these domestic political pressures. Given the magnitude of these challenges, China cannot afford a major trade dispute with the US and would like to resolve it.

Whether the trade dispute is resolved and how it is resolved will, of course, depend upon the actions of both sides.

The Trump Administration’s Approach to the US/China Trade Dispute

Kissinger said he would not have taken the approach Trump has taken with China. However, Kissinger also noted that Trump’s approach achieved a lot more in a shorter period of time than traditional diplomatic approaches would have accomplished.

Kissinger added that the trade issues with China needed to be confronted at some point. In addition, challenging China while it is still ascending makes a lot more sense than waiting until it had accreted a lot more power.

In Kissinger’s view, the Trump administration is so unique it cannot be compared with any prior US administration. Kissinger also believes that while Trump has successfully made a lot of progress in the trade dispute, he does not believe the experience is repeatable in the future.

Although Kissinger is confident a resolution of the current conflict will occur, he is more concerned about the long-term implications, precedents that may be established for future conflict and negotiations, and how the two sides can create a long-term sustainable relationship.

Successful diplomacy depends upon understanding each other’s needs and talking through and analyzing problems together. By doing so, each side has a basic understanding how the other side will see a situation when difficulties arise. This understanding will tend to minimize the number of conflicts and their severity. It also creates a path for resolving conflicts.

Both during and following the current negotiations, Kissinger believes both sides need to work together towards a more sustainable long-term relationship which will survive beyond the Trump administration.

Impact of Modern Media

Kissinger noted that modern technology, especially social media, has interjected a higher degree of drama into every global event.

When Kissinger was Secretary of State he once spoke off the record to press pool reporters on a flight to Egypt. Soon after he arrived in Cairo, Kissinger received a call from a senior editor at the Washington Post telling him that the reporters on the flight had misunderstood what Kissinger had said because the reporters did not understand the situation. Following the recommendation of The Post editor, Kissinger contacted the reporters and corrected the misunderstanding.

Kissinger observed that the series of events in Egypt would never happen today because reporters are trying to capture events in real time and have an incentive to capture sensational quotes. As a result, misunderstandings and comments being taken out of context have become commonplace. And the relationship between political leaders and the press has now become, in Kissinger’s view, “mostly adversarial”.

North Korea

Dr. Kissinger believes North Korea represents a very difficult and special case. The North Korean government has accomplished nothing other than survival. It is a very isolated country and has a unique experience that does not relate to the experience of the rest of world.

No great and lasting change will occur in North Korea without China’s support, Kissinger added. China shares a border with North Korea and views it as strategically very important. In the 1950s, a much weaker China even went to war with the US to prevent US domination of North Korea.

That reality still exists today. As a result, China is likely to be reflexively hostile to any warming between the US and North Korea.

Kissinger believes there has been no substantive change in North Korean behavior. Kim Jong Un had a single meeting with Trump. That is all that has happened. Nothing will change without full Chinese support.

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This material represents the managers opinion. It should not be regarded as investment advice or recommendation of specific securities.

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