52 Capital Partners, LLC’s Founder & CEO David P. Willard Delivers Remarks on U.S.-China Economic Relations at the National Committee on United States-China Relations

52 Capital Partners, LLC | April 25, 2019

National Committee on United States-China Relations Invites David P. Willard, Founder & CEO of 52 Capital Partners, LLC, to Lead Discussion on the Future of U.S.- China Economic Relations

April 25, 2019 – San Mateo, California – David P. Willard, the Founder & Chief Executive Officer of 52 Capital Partners, LLC, today delivered remarks at the National Committee on United States-China Relations in New York City, during which he addressed the topic of the future of economic relations between the United States and China. A member of the National Committee on United States-China Relations, David Willard discussed current trends and challenges in U.S.-China economic relations and his outlook for reforms to China’s financial system and capital markets. Below is a copy of David Willard’s prepared remarks:


“The Future of U.S.-China Economic Relations”, Remarks by David P. Willard, Founder & Chief Executive Officer of 52 Capital Partners, LLC, Delivered at the National Committee on United States-China Relations

New York City, April 25, 2019

David P. Willard, Founder & Chief Executive Officer of 52 Capital Partners, LLC:

Thank you very much.It’s an honor to be here.

And, for everyone gathered here this evening—friends, colleagues, Steve Orlins, friends of the National Committee, friends of Covington & Burling—let me extend a warm thanks.

The topic of U.S.-China economic relations is an important one.

It’s also timely.

The United States and China face a challenge of great significance at the moment.

Six years ago at a dinner in Virginia, my dinner partner Henry Kissinger asked me what I thought about the future direction of U.S.-China economic relations.

“What is your assessment?” Dr. Kissinger asked. I gave a three-part answer.
It went something like this:

(1) I see a high probability of continued strengthening of the U.S.-China economic relationship, with China continuing to accelerate the reform process and opening up its financial and capital markets.

(2) I see some probability of the economic relationship sustaining itself, but without meaningful strengthening—and even a“plateauing” of the momentum in China’seconomic reform process.

(3) Finally, I could see a low-probability scenario—not inconceivable, but still a low-probability—that the United States and China would retrench economically, with even a rolling back of reforms in China. But that third scenario—the least desirable scenario, in my judgment—would be a low probability.

My dinner partner nodded approvingly.

And so, at least at the time, I drew some comfort that economic trends and the state of play in U.S.-China economic relations would support the realization of the first scenario (strengthening economic relations and accelerating reforms)—and, short of that, the second scenario (sustaining economic relations and producing more measured reforms).

Well, six years on, it’s fair to say that the third scenario—a retrenchment in U.S.-China economic relations and economic reforms—has begun to materialize during the past 24 months.

It’s also fair to say that I approach this evening’s discussion with some mild trepidation. After all, we observe a lot of turbulence and uncertainty in U.S.-China relations today. And so, how does one begin to opine on—let alone predict—the future course of economic relations between the United States and China?

Addressing this question is a real challenge. It’s also an opportunity.

Many of us who have dedicated substantial portions of our careers to the cause of U.S.-China relations find ourselves asking:

How will the United States and China “get it right” in our economic relationship? And, when ?

Tonight, I want to discuss the current environment in U.S.-China economic relations.

I also want to offer several modest recommendations for improving U.S.-China economic relations: recommendations for our friends in China; and recommendations for American executives and policymakers.

I believe it’s imperative for our two countries, in due course, to restore a path of sustainability and strength in our economic relationship.

And that needs to be an economic relationship rooted in free and open markets, a level economic playing field, a commitment to reform, and the rule of law.

That’s required for the long-term. It’s also important for the near-term—especially given the current climate in U.S.-China economic relations.

And that’s what I want to talk about with you this evening.


First, I want to take a moment to address the current environment.

I believe America’s economic relationship with China has entered a new era.

Tariffs on both sides perpetuate an ongoing trade war. Economic sanctions abound. Financial networks and capital markets in both countries reflect increased volatility.

Moreover, concerns around intellectual property infringement, forced technology transfers and cyber-conflict risks from China elevate to deliberations of U.S. economic security.

In addition, ten years on from the Global Financial Crisis, concerns have begun to accumulate around the probabilities of diminished economic growth prospects in the United States and China.

That’s not to say that those probabilities have materialized yet.

It is to say that those probabilities have trended in an upward direction during the past 12 to 24 months.

So, it’s clear that a range of issues have created a greater level of uncertainty in America’seconomic relationship with China.

I want to take a moment to highlight the tariff activity in 2018. It bears mentioning. Andit’s important. I spent part of today reviewing these statistics again.

You may want to hold on to your seats.

In January 2018, the U.S. imposed a 30 percent tariff on solar panels and a 20 percent tariff on washing machines from China.

In March, the U.S. imposed a 25 percent tariff on steel imports and 10 percent tariff on aluminum imports from China.

The next month, in April, China responded with a 25 percent tariff on pork and aluminum and a 15 percent tariff on fruits and nuts.

Then in July, the U.S. imposed a 25 percent tariff on $50 billion of Chinese goods, covering over 800 different types of goods, including cars, semiconductors, aerospace goods, industrials, chemicals and appliances.

That same month, China responded with a 25 percent tariff on $50 billion of American goods, covering 659 products in the U.S., including aircraft and soybeans.

Two months later in September, the U.S. imposed a 10 percent tariff on $200 billion of Chinese goods, including fish and seafood, fruit, vegetables and nuts, chemicals, cosmetics, photography, home improvement, wood, commodities and machinery.

Also in September, China imposed a 10 percent tariff on $60 billion of American goods.

Today, conservative estimates suggest (and my firm’s own research concurs with the consensus) that over half of all goods shipped between the United States and China are subject to tariffs.

This totals over $360 billion in tariffed goods. Now, let’s set aside tariffs for a moment.

Let’s turn to the political climate, because macro-politics are very much interrelated with the current economic dynamics between the United States and China.

Advocates for U.S.-China relations appear to be dwindling in number in both the United States and China.

This is concerning.

In the current climate, the major political parties in the United States—who disagree on virtually everything—appear to agree that historical policies of strategic economic engagement with China have largely ill-served the American economy.

And a consensus appears to be emerging in Washington that a new and tougher approach with China—one rooted in protectionism and containment—may yield better outcomes for the American economy and for American workers.

Similarly, in China, protectionist policies toward the United States reflect an apparent trend in the direction of inwardness and retrenchment.

I happen to believe that this approach by both countries is misplaced in the current environment.

I believe the United States and China need to chart a more sustainable path together that restores strategic engagement. And I believe we will, eventually. And hopefully sooner rather than later.

But we need to focus. And we need to focus on concrete actions that can help our economies produce more success, prosperity, and broad-based economic growth that can help create more jobs, foster entrepreneurship and catalyze the kinds of innovations our economies and our citizens need in order to grow and succeed in the 21st Century.


I want to turn now to several modest recommendations for improving U.S.-China economic relations.

I first want to offer four modest recommendations for our friends in China.

And, I should preface this by saying that my core objective—always—in offering modest proposals for U.S.-China relations is to find constructive ways for the United States and China to continue to secure peace and prosperity for both countries and for the rest of the world. That is the central goal. And it’s always with that in mind that I offer any recommendation as it relates to U.S.-China relations.

First, for our friends in China—Get a trade deal done with the United States, and soon.

One important rationale, in my assessment, is this—The probability of continued short-term risks and deterioration to the economic relationship between the United States and China remains high. A completed trade deal in the near-term likely would not only reduce those short-term down-side risks; it would also soften the impact to our economies in the event that the probability of diminished economic growth begins to trend upwards in either economy.

Let’s keep in mind—We are far along in the economic cycle.

No one prevails in a trade war. And neither economy stands to gain much of anything if the United States and China continue the current trajectory of protectionism and retrenchment.

And that’s especially the case in light of the probability of a potentially lower-growth phase in our two economies.

Second—Open up China’s markets.
Continue with reforms to China’s financial and capital markets.

Encourage domestic reforms to foster greater transparency, liquidity and accountability inChina’s markets.

Support the growth and development of China’s biggest financial institutions.

And in doing that, accelerate reforms to safeguard the intellectual property rights and technologies of foreign firms that operate in China.

Level the playing field for foreign firms in China. Reduce onerous joint-venture requirements. Have faith and confidence that Chinese enterprises can compete effectively with foreign firms.

It is unlikely that China will be able to “joint-venture its way” into becoming a world-class industrialized economy. A world-class economy requires a world-class financial system. A world-class economy requires world-class capital markets.

And, in order to become a world-class economy, China needs liquid, free and open markets anchored by world-class financial institutions.

To do that, China also needs a legal and judicial system of integrity—a system that enforces laws and contracts, provides proper incentives for innovation and entrepreneurship, and protects the rights of private enterprises and individuals through fair due process.

In addition—As part of opening up its markets, China would be well-served to continue reforming and liberalizing the country’s property markets. Enforceable, transparent landrights are important to well-functioning industrialized economies.

China has made progress in opening up its property markets.

Yet, I believe more can be done. This requires new legislation in China. And it also requires a commitment by local and provincial officials to see the benefits of allowing citizens in China to reap the rewards of land cultivation, property investments and ownership—without fear of extra-legal expropriation and confiscation by local officials or large commercial developers.

By the way—China’s property markets also represent an extraordinary untapped source ofeconomic growth—my firm puts it at approximately $800 billion—for the Chinese economy and for investment firms in China.

An acceleration of property rights reforms can’t happen overnight in China. Yet, I believe,in due course, liberalizing China’s property system will redound to China’s long-term economic benefit. It would lead to a more consumption-based economy. It would help produce broad-based economic growth across the country. And it would produce more jobs in China and grow the middle class in China.

All of these reforms would be good for China’s economy. They would be good for Chinesecompanies and also a net-positive for greater investment in China—including investment from leading American multi-national businesses and foreign investment firms. And these reforms should be encouraged and welcomed in China.

Openness encourages confidence and investment and growth. Inwardness does the exact opposite.
We can’t afford inwardness in U.S.-China economic relations. China and the United States need openness in our markets. Third—Rein in shadow banking practices in China.

Reduce incentives for taking on excessive leverage. Today, China faces a growing collection of domestic economic strains: an overheated real estate market; over-levered corporate balance sheets; and excessive debt across China’s financial system.

For those of us who lived and worked through the U.S. financial crisis ten years ago—Dare I ask: Doesn’t that fact-pattern sound familiar?

The probability of those strains precipitating an economic slowdown in China—with systemic risks similar to the economic recession that undermined the U.S. economy ten years ago—is not inconceivable.

Shadow banking in China does nothing to reduce systemic risk in China’s financial system.It only increases risk.

Fourth—Improve corporate governance in China.

Requiring CCP members to sit on Chinese corporate boards only compromises independence, from a governance standpoint. Not only that, it creates the perception among American business executives that the Boards of Chinese enterprises may place Party interests ahead of prudent corporate stewardship focused on shareholders and other important stakeholders.

The composition of corporate boards in China should be market-oriented. Corporate boards should be committed to attracting talented men and women across industries and backgrounds in China. And it should be done without imposing a Party litmus test that is untethered to market dynamics.

Reducing CCP membership on Chinese corporate boards is in China’s best interests, not only socially but also economically. Doing so will attract more foreign investment in China. And it will increase confidence in China’s markets and the country’s commitment to reform.

I want to turn now to recommendations for American policymakers and American business executives who deal with China.

Let me offer several modest proposals.

First—Get a trade deal done with China, and soon.

For all of the reasons I mentioned earlier.

But I would add one supplement to this first recommendation—Tone down the rhetoric.

Second—Restore a commitment to free and open markets with China.

Trade wars yield many losers and few, if any, winners.

Levying protectionist measures may feel like a win initially. But it’s short-lived.

Moreover, the negative impact of tariffs on economic growth can far outlast any perceived positive effects of tactical, short-term protectionist measures.

Third—Set a better example.

And this recommendation has two parts.

The first part relates to international law. This new era requires a renewed commitment by the United States to international law. And that includes a commitment to international norms and rules for commerce, trade and sustainability. In the wake of the Second World War, international rules and norms shaped decades of U.S.-led engagement among major powers. Throughout the second half of the 20th Century, that constructive engagement sustained a U.S.-led world order that became committed to open markets, the rule of law and political liberalization in developing countries.

Engagement with today’s multi-lateral institutions and international frameworks should remain an imperative for America’s economic relationship with China. And, I happen to believe the United States can do more.

For example, I believe the decision in 2017 to withdraw from the Paris Climate Agreement reflected an inadequate recognition of the substantial economic—not to mention, environmental—benefits of the accord. The climate accord is an opportunity—yes, partially symbolic, but also substantive—to underscore America’s continued commitment to clean- water, clean-air and a clean environment.

And I can share with you—America’s decision to withdraw did not go unnoticed by China— the world’s largest emitter of carbon.

I believe there is a high probability that America will face continued resistance from China in negotiations to reorient or reconstruct existing multi-lateral arrangements or international trade agreements—including those involving the WTO—if America determines to unwind its own commitments in other important international accords—the Paris climate agreement being one of them.

I believe the United States can set a better example in its commitment to international law—including on matters of sustainability, the environment and trade. And in doing so, China likely will have greater incentives to look to international law across the country’s portfolioof concerns and interests.

Retrenching from international law poses risks. One big risk is that it heightens the probability that the United States and China will resort to ad hoc, high-risk maneuvers in advancing their respective national interests and economic security. This can result in brinkmanship—in trade, commerce, maritime and other important realms in our relationship. In this new era of uncertainty in U.S.-China relations, brinkmanship must yield to patient dispute resolution pursuant to recognized international norms and rules.

The second part of this recommendation is closer to home.

Americans can—and should—set a better example with respect to our own institutions. And by that, I mean setting a better example with American political institutions, our media institutions, and our major professional institutions.

I believe our country’s civic life needs renewal. And restoring the integrity of institutions would play an important role in renewing civic engagement across the country.

In the current environment, many Americans seem to work together less and shout at each other more. Common bonds of community that have been a pillar for American civic life need rejuvenation.

A recent Gallup survey underscores this imperative. The survey measured the Americanpublic’s views of the honesty and ethical standards of various occupations across the country. Gallup has performed this type of survey since 1976.

The survey was telling.

Only 8% of respondents had a favorable opinion of members of Congress.

For business executives—only 17%.

For lawyers—19%.

What are we to do about it?

Needless to say, my sincere hope is that those percentages go up—and significantly so. It’simportant for that to happen. And the sooner it happens, the better.

At the top of the Gallup survey—I should note that nurses and medics came in at 84%. And, another Gallup survey showed that nearly 70% of Americans have highly favorable views of small business owners, founders and entrepreneurs—compared to 20% for big business institutions. Other Gallup surveys and comparable polls show that American military servicemen and women consistently receive highly favorable views—in upwards of 75% to 80%.

And so, great institutions are possible in America.

But, sustaining great institutions requires hard work, persistence and tough choices.

Restoring trust and integrity in American institutions will set a good example at home. And it will set a good example for our friends in China. And our friends in China likely will see greater incentive to engage with American professionals and institutions that garner the respect, trust and admiration of Americans at home.

So, we need that to happen. And, all of us should do what we can to make that happen. In the workplace.
At home.
In our streets.

In our boardrooms.
And, at the ballot box, too.
And all of this will be positive for America’s economic relationship with China. Trust in our countries’ respective institutions goes both ways.

Fourth—Increase knowledge of China.

Simply stated—The economic relationship between the United States and China would benefit from more Americans learning Mandarin and developing a deep understanding ofAmerica’s economic relationship with China.

The number of American private sector executives today who possess any sort of proficiency in Mandarin is a small fraction of our total population compared to the number of Chinese executives with English proficiency.

There is no quick fix.

The American private sector needs to become a committed long-term stakeholder in this effort. Mandarin proficiency will help reduce economic flashpoints between the United States and China in the years ahead.

This is sound policy.

It’s also smart business.

So, if you haven’t had the opportunity yet, I would encourage anyone to study Mandarin. Start small. Learn 8 phrases each month. That’s 96 phrases each year. In your second year, if you increase that number to, say, 20 phrases each month, that’s 240 phrases. Within 5years, you’d be conversational in Mandarin. Think about that for a second. Encourage your friends, your family members and your colleagues to do the same. All of this is positive for cultivating stronger economic relations with China.

In addition to Mandarin proficiency, American executives should exercise leadership in encouraging their employees, officers, directors, partners and other stakeholders to acquire greater understanding of U.S.-China economic relations.

Encourage participation in conferences.


Trade organizations.

Civic engagement initiatives that focus on China.

The National Committee on United States-China Relations is a shining example of this type of leadership and engagement.

And we should have more of that type of leadership and engagement in other institutions across the country.

Finally, share perspectives with your counterparts in China. If you run a business, get to know a peer business or two in China. Set a recurring conference call invite in your calendar to catch up with your peer business in China every few months.

In addition, I want to highlight that American executives who lived and worked through the Global Financial Crisis possess a wealth of perspective. It’s a wealth of perspective on the pitfalls of overextended corporate balance sheets, flawed regulations and credit bubbles tied to real estate asset values. And so, for American executives who worked or managed firms during the Financial Crisis, engage with your counterparts in China to discuss what worked and what didn’t work during the Financial Crisis.

And that’s especially the case if American private sector executives can underscore to counterparts in China some of the recommendations I offered earlier—getting a trade deal done, opening up China’s markets and encouraging economic reforms in China, reining inshadow banking practices and improving corporate governance in China.

This is an excellent, informal way to help improve U.S.-China economic relations. I know we can all do a better job on this front.

And I’m confident we will. The times require it.
I’m an optimist. I’m optimistic for the future of U.S.-China economic relations. The United States and China have many differences.
We also have an extraordinary amount in common.
And that’s especially true in our economic relationship.

American and Chinese leaders need to “get this one right”. We need to get our economicrelationship “right” to ensure the continued peace, growth and prosperity, not only for the United States and China, but also for the rest of the world.

This current environment is not a “new Cold War”.

Nor should anyone be thinking about it that way, frankly.

Properly characterizing the current environment is important.

I believe the current period is a “test” for U.S.-China economic relations.

It’s an important test.

It’s a test that allows both countries to share grievances. And that’s partly what we’re in the midst of now.

I believe the United States and China will pass this test. And, by prioritizing concrete reforms and frank dialogue, we can go a long way in helping our countries get through this challenging period. And I’m confident we will.

I’ve offered some modest recommendations across a range of areas. And I believe thoserecommendations, if adopted in substantial part, would help produce very positive outcomes for our economic relationship, in both the short-term and long-term.

The United States and China should avoid an economic relationship of attrition.

Policymakers and private sector executives in both countries should seek an economic relationship of long-term mutual strength, strategic dialogue and partnership in the 21st Century.

Competition is inevitable. Any good partnership has it. Yet, competition is an opportunity to learn, together. To grow stronger, together. To become better, together. And I believethat’s how we should be thinking about U.S.-China economic relations.

I want to conclude by saying this—I believe the best is yet to come in America’s economic relationship with China. And I’m confident we will get there together.

Thank you again.


About 52 Capital Partners, LLC

52 Capital Partners, LLC is an independent advisory firm that provides strategic advisory services to the senior management teams, Founders and Boards of Directors of corporations, investment firms, family-owned enterprises and entrepreneurial ventures faced with transformational, complex or high-stakes transactions in North America and China. 52 Capital Partners, LLC harnesses its expertise on China matters and its breadth of experience in investment banking, mergers and acquisitions and principal investing to deliver high- impact, solutions-based advice in connection with consequential mergers and acquisitions and other strategic transactions in North America and China. 52 Capital Partners, LLC is headquartered in Silicon Valley.

For more information on 52 Capital Partners, LLC, please visit:http://www.52capitalpartners.com.

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