Is China's Economic Rise Overhyped? Debunking the Myth of an 'Inevitable' Superpower

00:00:00:00 - 00:00:26:06
Unknown
China's not nearly as impressive as it claims it is, and as our government likes to say, it is. And it's a strange phenomenon in that China likes to say it's 12ft tall for domestic political reasons and also for natural reasons. And instead of our government coming back and say, you're not 12ft tall, I give this weakness, this quickness.

00:00:26:08 - 00:01:00:15
Unknown
What our government says is, yep, you're you're 12ft tall. There are incentive jobs in both Washington and Beijing that are perpetuating this dynamic. For example, when officials in the Biden administration were coming in, there was a lot of writing being done, basically saying that it was in the interests of Washington to hype up the China threat, because and having a, you know, really strong China to compete with, there also is significant impetus in Washington to pass legislation to aid in that competition.

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Unknown
And we have very different viewpoints on many things. But a lot of these issues are American issues. They're not Republican or Democrat issues.

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Unknown
Welcome back to Elevated Thoughts. Today we are joined by Ben Vago and Steven Brooks to discuss the brewing US-China economic war, which they break down in detail in their upcoming book, Command of Commerce America's Enduring Economic Power Advantage Over China. Ben is a policy analyst on US-China economic strategy at the Department of Treasury, and Stephen is a professor of government at Dartmouth specializing in international relations.

00:01:45:23 - 00:02:10:04
Unknown
Ben. Stephen, thank you guys very much for joining us here on Elevated Thoughts. How are you doing? I'm doing great. So thank you for having us. I look forward to the conversation. Likewise. Awesome. Well, Ben, we were joking around. You're probably our first government official. We've ever had on the show. At least current. So don't say anything that's going to get you in trouble with Mr. Musk or whomever else has been invading your offices.

00:02:10:06 - 00:02:30:16
Unknown
But can you actually maybe start off a little bit telling us about how you got into the Treasury Department and maybe what you've been seeing over the last month or two? Sure. I'm happy to talk a bit about that. Just to be clear, the book that Steve and I wrote together is based off of research that we did together when I was a student at Dartmouth, and it's continued since then.

00:02:30:18 - 00:02:49:20
Unknown
It doesn't really have too much affiliation with my work at the Treasury Department, but at Treasury, I'm a policy analyst at the Committee on Foreign Investment in the United States. And so we review investments that are coming into the country and in the event that they present some kind of a national security risk, we are able to mitigate them.

00:02:49:22 - 00:03:10:05
Unknown
That is to either stop them from occurring or to, request that the terms that then be changed to better suit our national security interests. It's then a lot of fun. The work that we're doing is, you know, really apolitical. There's a lot of great people, and so, you know, thankfully, there haven't been too many changes over the past several months.

00:03:10:06 - 00:03:29:14
Unknown
It's work that stays constant from administration to administration. Very interesting. Yeah, it does seem like that would be an important one for national security, but that's handled that Treasury. So so all of the foreign dollars that are coming in to invest in United States companies, the government takes a look at it and says, okay or not. Is that basically it?

00:03:29:16 - 00:03:52:05
Unknown
Not all of them. You know, based off of the regulations that we have in place, we're really only looking at transactions in which, companies or entities from other countries are gaining a quote unquote controlling interest, in American assets. So if you're just investing, you know, passively, into an American company as a foreign entity, we don't really care that much about that.

00:03:52:06 - 00:04:20:19
Unknown
That, you know, doesn't really result in apology transfer, in exchange for a controlling stake or anything of that sort. Very interesting. And and, Steven, can you tell us a little bit about yourself? What do you do at Dartmouth? How long have you been there? And, what attracted you to write a book like this? Well, I've been at Dartmouth for my entire academic career, so 25 years at this point, and I teach classes on international relations.

00:04:20:19 - 00:05:00:06
Unknown
I teach two classes particularly, which is one is an introduction to international relations. That's like for first year students and then I teach a seminar for seniors, and that's on U.S. security policy and terms of writing this book. It was not a not a plan. It was a function of the fact that, the thesis that Ben had, finished that I was the supervisor for was, was so good that all of this, not just me, all the professors in my department said this has to be published in some form.

00:05:00:07 - 00:05:37:01
Unknown
But it's not really feasible for an undergraduate to easily publish. And we also realized pretty quickly that Ben's thesis had essentially an articles worth of material that needed to be out there. That eventually became one chapter in the book. But we realized in part so that people would believe the results that we had in that chapter, that we need to say a lot more about how to measure China's power, because otherwise people wouldn't probably believe the results in that chapter.

00:05:37:03 - 00:05:59:06
Unknown
So basically, we realized pretty early on that it was a subject that worked best as a book. Yeah, I like to say that when we started trying to get this published after I graduated, we were thinking of condensing the thesis just into an article. But then with the additional research that we started doing, we realized that we had another couple of articles worth of material that we wanted to get out there.

00:05:59:06 - 00:06:17:04
Unknown
And so at that point, putting it all together in the form of a book, dealing with the balance of economic power between the U.S. and China made sense. No, no. Sorry. Yeah. That's actually how we, this all got started. We. I reached out to you because I caught your article. Big fan of, Foreign affairs. I read that magazine pretty regularly.

00:06:17:06 - 00:06:38:07
Unknown
And we've had a guest from there on there as well, and we read their book for it was also very enjoyable. So, and then I guess my question to you is, where does the research start on this? Right. So, you quickly got deep into, you know, in the water, past your knees, and you realize that there's a lot here, and I guess and a lot of it also, too, is, it runs counter to a lot of the preconceived notions that we have about China's power.

00:06:38:07 - 00:07:00:09
Unknown
So, like I said, how do we start this research? And where did you get some of this knowledge from the book overall addresses to conventional wisdom and overturns, in our view, both of them. One conventional wisdom is that the gap between the US and China has become very small. And I actually used to believe that myself before I wrote this book.

00:07:00:09 - 00:07:28:05
Unknown
What I would say now is that the gap is actually extraordinarily big. Still, the second conventional wisdom is that the United States, if there was some sort of conflict regarding Taiwan or some other major, conflict in Asia, that the conventional wisdom is that the United States cannot cut off China without hurting itself almost as much as China, with the notion being that the countries are so tightly linked.

00:07:28:07 - 00:07:50:00
Unknown
They. Yes, you can hurt China if you cut it off, but you'll hurt yourself a lot in the process as well. And that's true if the United States cuts itself, because China off by itself. I mean, if we cut off China by itself, as we seem to be moving in the direction of doing, then we'll be hurt as much as China by 70%, as much as China.

00:07:50:02 - 00:08:13:07
Unknown
But if we were to cut off China with our allies in response to an attack, then what the analysis showed that began with this thesis is that China would be hurt at a minimum five times more the United States, and then a maximum 11 times more than the United States. So the notion that the US can't cut off China in a conflict, because it would be hurt as much as the US.

00:08:13:09 - 00:08:40:17
Unknown
That's only true if the US does it by itself. If it does it with its allies, then China would suffer massive, disproportionate harm. So I want to talk something over to Ben. I don't want to say, China is a paper tiger, but maybe we can dive a little bit deeper into statistics, right? So while they may do a lot of dollars in terms of economic activity, there's a big difference in the types of industries that, you know, the US is excelling in versus what China is predominantly investing.

00:08:40:17 - 00:09:22:12
Unknown
And can you talk a little bit more on that, Ben. Yeah, I'm happy to. I think that one of the big reasons that many people have come to view China as, you know, becoming a peer or nearly a peer of the United States economically is just that they're preoccupied with statistics such as manufacturing output or gross domestic product, that either are not really that geopolitically relevant in the case of manufacturing, or that just don't capture the extraterritorial economic influence that countries hold in, today's really globalized economy, gross domestic product is looking really specifically at what countries are producing within their own borders.

00:09:22:12 - 00:09:46:15
Unknown
Right. But we live in an era where multinational corporation are just incredibly important to how exactly commerce functions. They hold a lot of their cards with respect to high tech output in particular. And so what Steve and I did at first was to just look at what the distribution of multinational corporations and the world economy is. And so we compiled a lot of data on this.

00:09:46:17 - 00:10:11:09
Unknown
We were looking at the world's largest listed corporations, and we found some pretty shocking statistics just based off of all of that. When you aggregate all this data together, American firms generate around 38% of profits globally. And we can talk about why we use profits separately. But Chinese firms, on the other hand, are generating roughly around 16% of the world profits.

00:10:11:11 - 00:10:36:22
Unknown
You know, even when you're taking into account Hong Kong. So the US has quite a large lead when you're factoring in, globalization and the globalization of production. And that lead is even more pronounced in high technology sectors. Right? Ethically, American firms generate around 56% of high tech profits. And Chinese firms, on the other hand, generate around 6% of high technology profits.

00:10:36:22 - 00:10:58:23
Unknown
That's a level that's comparable to Taiwan and Japan, for example. And so American firms really are just massively leading in this area that is just so crucial to geopolitical competition. And the other thing that I would just add is that, you know, Steve mentioned that, the US needs to work with its allies if it wants to impose sanctions on China or cut off China.

00:10:59:00 - 00:11:24:07
Unknown
The reason for that is that America's allies comprise much of the rest of the, world's output with respect to these multinational corporations. They really hold a very dominant share, of this. And, that presents just a substantial obstacle for China as a revisionist power, trying to have its way in East Asia and elsewhere. Yeah, I just, follow them.

00:11:24:07 - 00:11:49:08
Unknown
I've been said to note that, you know, the statistics that are most alarming to people in Washington, DC about the rise of China are statistics that were were designed for a world from 100 years ago. Yep. You know, a world in which the most complex product had hundreds of components, but now the most complex products have millions of components, right?

00:11:49:08 - 00:12:15:05
Unknown
The previous world was one where, you know, almost all of any good was made in a single country and then exported from that country. But any complex good now is made by the using the parts from dozens of countries. And so what that means is that if you understand, you know, the relative economic balance between the US and China, you have to look at firms, you have to look at firms.

00:12:15:05 - 00:12:44:06
Unknown
And what we found essentially is that if you look at the production that occurs within China's borders, it's quite impressive. But a lot of that production is driven or controlled by or owned by foreign firms. So if you make a distinction between what's made and within China's borders versus what do Chinese firms make, it's a fundamental difference. What occurs within China's borders is quite impressive.

00:12:44:08 - 00:13:05:19
Unknown
What Chinese firms make is far less impressive. Sure, that makes us think so. So normally when we're judging companies, it would be by revenue. Is that right? And now profit is a way of measuring the productivity. Am I interpreting that right. Yeah. I mean you can use all sorts of metrics to look at the output of firms assets, profits, revenue or sales.

00:13:05:19 - 00:13:32:08
Unknown
Right. We check out yeah. Market cap. That's exactly right. We chose to focus in on profits because we think that it is, one of the more geopolitically relevant metrics that you can look at, profits, that is, revenues, less costs are basically representing what, you know, firms are able to, take in, in addition to, you know, whatever they're actually charging in order to make the product.

00:13:32:08 - 00:14:05:07
Unknown
Right. And when you have a level of perfect competition in an economy, it's very difficult for firms to actually generate profits. Right? You would kind of expect them to generate, you know, very few economic profits ultimately. But I mean, when you are in a situation in which there are significant barriers to entry, in a given industry, it actually is the case that you can have firms that are generating really substantial profits because no other firms are able to go into that sector easily and cut into their margins.

00:14:05:09 - 00:14:34:18
Unknown
Right. And as a result of that, we think that profits are a really good way of identifying the quote unquote, choke points at the world economy. Right? Those areas in which it is quite difficult for, other firms to enter because, you know, maybe there are technological barriers, maybe there are, monopolies. And, it basically means that it's difficult for, you know, a country that is cut off from firms for or that are generating high technology profits to actually replace that output.

00:14:34:20 - 00:14:57:00
Unknown
Right? Okay. So yeah, absolutely. I could just create those firms and there wouldn't really be very many profits to begin with. Yeah. Just to say one other thing, which is consistent with what Ben said is, you know, if you're a firm or a sector that's making lots of profits and it's easy to make what you're making, then other firms will enter and drive the profits to zero, right?

00:14:57:01 - 00:15:17:17
Unknown
So existing the distance of profits is telling you you're doing something that's really hard to do. And the point in matter is, if any country is cut off from a huge chunk of the world's firms that make a lot of profits, then what it's telling you is that country is going to be cut off from most of the things that are hard to do.

00:15:17:19 - 00:15:38:15
Unknown
Yeah, I think it becomes more pronounced with, semiconductors. Right. I think that's a big choke point on that. And you mentioned, Chris Millers chipper and we're trying to get them on here, one of these days. But I think that's become the most pronounced. Right. And even though they have a new process where they can produce a five nanometer chip, it remains to be seen if they can build on that and actually get to the bleeding edge.

00:15:38:20 - 00:15:58:23
Unknown
And then I but I think it's interesting. Is it kind of pronounces the point that, you had in your article, in your upcoming book. The technology around Deep Seek is, is based on Nvidia's, you know, perhaps smuggled, you know, semiconductors that came into the market. So maybe you could talk a little bit more about how critically important these are, but also because it's also via allies.

00:15:58:23 - 00:16:20:09
Unknown
It's not just the US. So there are a lot of U.S. firms that get involved. But if we do this unilaterally versus multilaterally, a kind of will have a blunted effect. And I'll throw it over to Stephen first, and then Ben can, chime in if he wants to. Yeah. I guess what I would start is by saying is that, you know, as big as the US is and it's big and is technologically advanced, is it?

00:16:20:09 - 00:16:50:09
Unknown
And it's very technologically advanced for for any complex good, like advanced semiconductors or the lithography machines that are used to make advanced semiconductors, the US just cannot make something like that by itself. China can. No country can. These things are just so ridiculously complicated. The lithography machine, which is made by the Dutch firm Asme, MBL, which is used to make the most advanced semiconductors, just the laser that's inside that machine.

00:16:50:09 - 00:17:26:21
Unknown
Just the laser has 457,000 parts, right? ASML makes this massive, complex machine. ASML only contributes 15% of the parts that go into that machine. The other 85% are coming from the rest of the world's firms, but not the whole world. They're coming from U.S. firms, Japanese firms, Taiwanese firms, German firms, but not very much Chinese firms because Chinese firms are not actually, for the most part, producing super high tech, cutting edge equipment that goes into machines like that.

00:17:26:23 - 00:17:53:14
Unknown
Okay, that's very interesting. We've seen a lot about these massive machines that are 100 million plus, and it's shocking to me that this is the only manufacturer in the world that can provide them. It seems like, okay, I actually have a question, because what we've been seeing now in government, right, with between Trump and Elon and slashing a lot of the foreign spending and creating a little bit of friction with potential Europe or other NATO countries, right.

00:17:53:14 - 00:18:10:10
Unknown
We need a multilateral alliance here. We need a multilateral strategy. And I'm curious if are we shooting ourselves in the foot here, or are we going to get cut off from ASML? Are we going to get out from the Germans? Or even worse, is China going to be able to back door and ASML and build their own micro lithography machine?

00:18:10:12 - 00:18:37:11
Unknown
Guys, this doesn't look like it's good writing on the wall in my opinion. How do you respond? The Arctic? Yeah. It's we are shooting ourselves in the foot. Right now we have, with our allies said to China, you cannot buy the most advanced semiconductors, and you also cannot buy the machines to make them. And that's led China to be scrambling.

00:18:37:12 - 00:19:01:00
Unknown
They're spending huge amounts of money to produce chips, which are equivalent to chips that were made by the most advanced producer, TSMC, about 6 or 7 years ago. 80% of those chips are being thrown away. So they're they're really in a bind. And there's not like some like fix that will allow them to get out of that in six months or a year or two years.

00:19:01:00 - 00:19:29:04
Unknown
This is like, you know, ten years before they could maybe, maybe be making something like the machine that ASML provides. However, ASML didn't want to cut off that machine. You know, they were making tons of money selling them to China. They, you know, decided to not sell that machine anymore after our government told the Dutch government, hey, we're allies.

00:19:29:04 - 00:19:57:16
Unknown
China's a threat. Can you cooperate? And the point of the matter is, the whole point of having an alliance is to make sure that when you need cooperation on anything, that your allies will be like. Yeah, well, I'll help you because you've helped me in the past, and we're very quickly moving away from from that kind of arrangement that the United States has had with other countries, which has worked extremely well for 80 years.

00:19:57:18 - 00:20:25:22
Unknown
Yeah. I mean, just to quickly add on to that point, we have been Europe security umbrella for that 80 year period. We have an extensive history of cooperation with them. And that, I think, very much leads to cooperation in the economic realm in addition to the security realm. And so to the extent that we start to pull back from Europe and the security domain, especially with respect to Ukraine, I wouldn't be surprised if that leads to increased friction as we tried to coordinate with Europe.

00:20:25:23 - 00:20:47:07
Unknown
Right. With respect to China, it's yeah, a fun a fun fact. I like to pull out. And again, this is a very, very rough estimate. But I, I've been able to kind of come to a number of about $1 trillion has been sent to Europe, either investment including the the the Marshall Plan after World War two. So right after World War two, up to the present, I estimate it's maybe about $1 trillion.

00:20:47:07 - 00:21:10:14
Unknown
But I also remind folks that we have about an annual trade value with them of $1.7 trillion. So we make up a 60 plus year investment in Europe, security and economic revival. We make it up almost double every year. You know, in the end, you can't really quantify, I guess then the value of those relationships in the complexities of the industries that could be compounded on top of that.

00:21:10:19 - 00:21:36:15
Unknown
So that's something I always like to add to the conversation. And I think, what I very much agree. And one thing I'd say in addition is that you know. You know, people, humans were very poor for hundreds of thousands of years, right. And they started to become a little bit richer in the early 20th century. But then a lot of that wealth went away as a result of war after World War Two.

00:21:36:15 - 00:22:03:15
Unknown
It's only after over two that you see, you know, the United States and and other rich countries become incredibly wealthy. Well, that's because the world was essentially peaceful. You know, the whole point was we are out there trying to keep your peaceful, keep Asia peaceful because peace is good for growth. And that's something which, seems to not be well understood these days.

00:22:03:17 - 00:22:22:11
Unknown
Yeah. So folks, read your article or in the upcoming book, they might think that this is a blueprint for, oh, you know, we should go to war with China. I think you guys make a very compelling case that, you know, we do know that we would fare better. I don't want to say farewell, but we would fare better, you know, in that if as long as we deployed all of our tools and alliance systems properly.

00:22:22:13 - 00:22:42:03
Unknown
But, as you talk about it, and you use the perfect pun, you know, playing the trump card or you're essentially playing your ace, you know, you know, too soon, I guess. You know what? What leverage do we give away if we start, you know, going unilaterally or too aggressively too soon? And I'll throw this over to Ben and then we can take it over to Stephen.

00:22:42:05 - 00:23:06:06
Unknown
Yeah, yeah. For sure. I mean, a lot of the economic leverage that the US has over China is predicated on the United States having an economic relationship with China, right? Right. And if we were to, decouple from China, either unilaterally or with our allies, we would essentially be casting that away. And of course, China would be hurt.

00:23:06:06 - 00:23:44:07
Unknown
It would be very hurt if we were to cut it off with our allies. It also would at that point have not very much to lose. I definitely buy into the idea that a lot of what is keeping China's behavior constrained at the moment is a concern that its leaders have over what might happen if they lose access to globalization, which has been instrumental to, the pretty miraculous economic growth that China has had over the past 40 years in the event that they, you know, perceive that the rest of the world is going to cut them off and that they're no longer going to be able to benefit from that globalization.

00:23:44:09 - 00:24:13:12
Unknown
They may simply conclude that, they can act in whatever manner they want to in the very short term. Because in the long term, they're going to be substantially weaker if the United States and its allies again, choose to exclude that from their economic sphere. And then if the United States cuts China off unilaterally, while this is a big part of the modeling that we did, not only would we be hurting China, I mean, we would just not be hurting China to the extent that we could and we would be hurting ourselves quite a bit as well.

00:24:13:12 - 00:24:33:03
Unknown
So we would be losing all of our courage, without really, maximizing any of the potential benefits from that. So that would really be, I think one of the worst of all outcomes. Obviously, we need to have some guardrails in our economic relationship with China. We probably should pursue our derisking approach, as the previous administration had done.

00:24:33:03 - 00:24:51:06
Unknown
But, we don't want to cut it off completely. So I will give Steve, the chance to add a little bit more to that. But I do want to just get, a little bit more from you, Ben, because you're during the Department of the Treasury. You know, what are some of the designations, like favorite trade statuses that a country, you know, the US does afford to certain countries.

00:24:51:07 - 00:25:08:11
Unknown
And why does China not want, you know, as you said, act more constrained, at risk of losing these certain statuses. What are they? You know, just for the layman out there and for folks like me, you know, well, I focus mostly on investment, and not too much on trade. So I'll keep this answer pretty brief, actually.

00:25:08:11 - 00:25:26:00
Unknown
But, you know, China has had most favored nation trading status for, the past couple of decades. And that is obviously enabled a huge amount of trade, between China and the United States. And then also much of the rest of the world understood. We really tried to bring China into, you know, the world economy, two decades ago.

00:25:26:00 - 00:26:00:03
Unknown
And if it were to lose that, well, it would lose a lot economically. Sure. That makes sense. Over to you, Steve. If there's anything you want to add to that for me. Well, one thing I would add is just that you can only cut off China once, right? So, if Ben's right that China is now constrained and feeling like, well, you know, if I attack Taiwan or if I check, you know, the Philippines, or if I do something else, you know, I may lose access to globalization if we've already cut them off.

00:26:00:05 - 00:26:24:14
Unknown
Right, then what would happen is that China would be in the same position that that Russia has been, which was Russia cut itself off largely from the global economy. And so when we cut it off, it didn't really have much of effect. You know, the results that we have, which show that the US and allies could cause China to have 5 to 11 times more damage than the US.

00:26:24:16 - 00:26:58:20
Unknown
That's only because China is tightly linked with foreign firms, including US firms. So the point of the matter is this is leverage that you can use once and you know what I would, I guess, say in the current context is, maintaining peace in Asia has an immense economic value. You know, bringing manufacturing jobs back to the United States also has some value, but tiny in comparison to the economic cost that be associated.

00:26:58:20 - 00:27:25:23
Unknown
If, you know, Taiwan was attacked because China felt like it wouldn't be hurt very much economically. So I think, you know, therefore, in the calculation of kind of the economic benefits of engagement, we have to ask, you know, we only have so many tools of leverage. What do we use them for? I think Trump is correct that we have the United States a lot of leverage.

00:27:26:01 - 00:27:47:23
Unknown
I just wouldn't be using that leverage now in the way that he's used. Right. It makes sense. Yeah. Over the past couple of months we've conducted some different interviews. One with Dmitri Alperovitch who wrote the book world on the brink, and he's telling us or his readers that we are in Cold War two. And when I even said, what is the competition with China look like?

00:27:47:23 - 00:28:15:18
Unknown
He corrected me to say, don't use the word competition, right? It's not even strong enough. But coming off of that interview just last week, we interviewed Eric Olander, who's the editor in chief of the China Global South. That interview, I was like, wow, I just went from a China hawk to, like, not really knowing how I should feel about this because he showed their military investment is really below where we would even expect it to be for such a large country.

00:28:15:20 - 00:28:34:04
Unknown
Their, their rhetoric is actually very defensive. When you break it down. They're, they're an economic partner to the global South in a major way through the Belt and Road Initiative. And now, as we're saying, we're pulling these levers here from the over. And now it seems as though China's getting this kind of vacuum tunnel to get sucked up into.

00:28:34:08 - 00:28:55:12
Unknown
They're the ones that these nations will go to. I mean, where where should the average American fall on the scale of we are totally petrified and China is an existential threat, or China's a very valuable, favored trading partner with us. I really don't know how to think about this. Sure. It's a great question. Stevie Wonder in the capacity.

00:28:55:12 - 00:29:24:13
Unknown
And then I can fill in. Yeah. Well, I think that, you know, a key thing that the first half of the book is emphasizing is that China's not nearly as impressive as it claims it is. And as our government likes to say, it is. And it's a strange phenomenon in that China likes to say it's 12ft tall for domestic political reasons, and also for your national reasons.

00:29:24:15 - 00:29:51:06
Unknown
And instead of our government coming back and say you're not 12ft tall like you have this weakness, utilities weakness, what our government says is. Yep, you're you're 12ft tall, and it shouldn't be up to, you know, the two of us to be saying, if you want to measure China's economic power accurately, these are the measures you have to use, you know, but our government is is not doing that kind of work.

00:29:51:07 - 00:30:25:10
Unknown
And as a result, I think what I would say is that, our government and our country is much more scared of China than they should be. Which is not to say that China, you know, isn't an issue, but, we're building them up to be this, you know, Superman, when you know what our results show is that you know, instead of having a GDP, an economy size that's about two thirds of our size, what our analysis shows is it's actually less than half.

00:30:25:12 - 00:31:11:08
Unknown
So. Wow. That's impressive. And that means that they're a significant competitor. But being at half is much different than being at two thirds. Sure, sure. Yeah. Just to add on to that, I think that there are incentives in both Washington and Beijing that are perpetuating this dynamic. For example, when officials in the Biden administration were coming in, there was a lot of writing being done in places like Foreign Affairs by Taryn Chopra, for example, who was at the National Security Council, basically saying that it was in the interest of Washington to hype up the China threat, because and having a, you know, really strong China to compete with, there also is significant

00:31:11:08 - 00:31:39:06
Unknown
impetus in Washington to pass legislation to aid in that competition. You know, it's hard to say, but I think that the Inflation Reduction Act and the Chips act that were passed a couple of years ago, had a much easier time being passed because of the looming threat of China. And then in Beijing, meanwhile, of course, the officials there want to make China's economy look strong because they are trying to keep their citizenry happy.

00:31:39:07 - 00:31:59:19
Unknown
Right? So, sure, we're kind of feeding off of each other in a bit of an unhealthy way. Obviously, I mean, the competition with China is real. This is why Steve and I took the time to write this book. We don't think that China presents, you know, an especially, significant threat on the national security front relative to, the height.

00:31:59:19 - 00:32:25:02
Unknown
But it does obviously still a really important challenge, both, from a national security perspective and also economically, there's been a lot of good writing that's been done over the past 15 or so years on the so-called China shock, namely, the fact that trade with China has had on US manufacturing communities. And, I think that's absolutely something that's worth taking seriously with the level of overcapacity that we have in China right now.

00:32:25:02 - 00:32:47:16
Unknown
I do think that it is worth, thinking about how we can protect, communities here in the United States that basically stand to be, washed away by very cheap Chinese exports. That's from the national security side. But can we talk a little bit about overcapacity to to whatever knowledge base that you have? Because I think that's an important conversation because a lot of folks don't realize that.

00:32:47:16 - 00:33:07:23
Unknown
Yes. You know, China is is running afoul of a lot of, you know, trade norms and regulations there. And I think we're we're really shooting ourselves in the foot because a lot of folks, countries are very upset with China's overproduction crisis. And it could be a really good time to kind of, you know, band together and really have a united front.

00:33:08:03 - 00:33:27:08
Unknown
But I think most Americans don't even know what overproduction means and what goes on. And then maybe if Stephen, could chime in a little bit to because I think it has a lot to do with way their government, you know, the Chinese, I'm not sure if it's called the federal government, but their central government, with their state government, local governance is and the debt trap that they're kind of finding themselves in.

00:33:27:10 - 00:33:53:11
Unknown
So I'll throw it over to Ben first. Right. Well, I also want Steve to chime in here, but, just as a quick note, I'm really glad that you asked about this, because this issue of China's overcapacity actually, played a big role in the analysis that Steve mentioned earlier of China's GDP that we did. The basic point is that China has historically had a very low level of consumption in its economy.

00:33:53:11 - 00:34:23:16
Unknown
Basically, Chinese workers are actually consuming a huge amount of what they produce relative to what you see in other countries. You know, specifically the United States. Instead, and historically, the way that China has been able to achieve growth, has not been through consumption. It's been through either exporting a huge amount of goods or through investment. Prior to the 2008 financial crisis, China was exporting a huge amount to the United States and Europe.

00:34:23:16 - 00:34:48:15
Unknown
It was running massive trade surpluses. But, when those countries, saw major economic downturns, it had to find a way to grow its economy, in a different area. And so they wound up investing a huge amount in real estate and infrastructure during that time. There's a famous statistic that I think between 2011 and 2014, China poured more cement than the United States poured in 100 years.

00:34:48:20 - 00:35:08:23
Unknown
Yeah, over the course of the 20th century. Yeah. No. It's crazy. That was a function of the economic stimulus that they were rolling out during that time. But, frankly, they oversaturated their economy with that infrastructure and real estate. It was generating growth in the short term, but it wasn't really viable in any kind of, long term sense.

00:35:08:23 - 00:35:27:01
Unknown
And so China was racking up a huge amount of debt from that, recently. This is all really come to haunt them with, you know, bankruptcy of Evergrande, for example, in the general real estate crisis that China has been dealing with. And so once again, they've had to find growth through another route. And they're not, trying to increase consumption.

00:35:27:01 - 00:35:46:21
Unknown
Instead, what they're doing is just juicing up exports once again. And this is where this issue of overcapacity is really come into play. Over the past two years, China is really massively subsidizing, some of its export sectors. Electric vehicles and solar panels are good examples of that. And it's been running massive trade surpluses with the rest of the world.

00:35:46:23 - 00:36:05:18
Unknown
And I think, I think folks should question why those products from Tamu and Cian and Primark are so cheap. This is a product of that and it's kind of a zero sum market, right? So all these cheap products they dump on there doesn't leave many much room for the domestic companies in each of those respective importer countries to really, you know, sell their products to.

00:36:05:20 - 00:36:33:05
Unknown
Yeah. That's right. I mean, China has engineered this trade surplus internally in many ways. And it stands to displace, you know, many of the industries that exist in Europe and the United States, not in these very high technology sectors that Steve and I have talked about in our book, but definitely in areas that, you know, are going to affect the well-being of many Americans, Europeans, and, you know, also many from places like Japan and South Korea.

00:36:33:06 - 00:36:59:20
Unknown
Right, right. So it is an issue and, it's a separate from a lot of the national security discussions that Steve and I have been having. But, we will need to find a way to, deal with this, subject. It almost seems like an industry capture strategy from China. If I were in their shoes, may actually be more important and more crucial than driving up the amount of profitable firms that I controlled.

00:36:59:20 - 00:37:43:15
Unknown
Right. Because if I am the one that you're looking to for the whole world as the factory, you can't really cut us off like we're saying. So I'm not actually cutting off Stephen, though I'm sure you had something to add to that. No, I think your your your question is a good one. And I think, you know, going back to the question was asked to Ben, I think a really important point to know is that, what our book shows and, and other books show is that if you want to constrain China, if you wanted to get it to be peaceful or behave better economically, it has to be the US and its

00:37:43:15 - 00:38:09:23
Unknown
allies working together. Right. And for a long time, the US was kind of more concerned, you know, more hawkish, then then Europe, then Japan, then South Korea. And so the US is like, come on. Like they're doing all these mercantilist things which are hurting you, is hurting us. Like we need to do something. And our allies weren't ready yet.

00:38:10:01 - 00:38:37:12
Unknown
But then China became so mercantilist in terms of doing things to help its firms and doing things to advance its exports. That then the Europeans, Japanese, South Koreans was like, this is a problem. You know, we need to work together to kind of make sure that that China is not, you know, kind of manipulating the global economy too much to its advantage.

00:38:37:14 - 00:39:01:20
Unknown
And so we finally had the rest of the world's firms ready to kind of act with us. And they did work with us on semiconductors. But, you know, why would the rest of the world's firms and governments work with us if we're putting tariffs on them? You know, and so the point that, again, was like Trump is right.

00:39:01:20 - 00:39:29:21
Unknown
We have a lot of leverage. But you know, from our book what it would suggest is use that leverage with your allies against China. It's a confusing things to be using leverage against China and our allies at the same time. And probably is not going to produce much in terms of a positive effect. Don't ask either of us to make a national security case for tariffs on Canada.

00:39:29:23 - 00:39:51:16
Unknown
Yeah I don't I'm not going on there. Think that I'm the Trump supporter on the podcast. I won't support that. My my moniker recycle Mike is because I come from the recycling industry. And selfishly, it's going to do, you know, in the short term, very well for metal generators. Right. But it's going to cost a lot of those producers, like an end users of aluminum and steel a bit more.

00:39:51:18 - 00:40:08:07
Unknown
And, I think a quote and I'm going to butcher it a little bit because I don't have it in front of me. But, you talked about and it's right towards the beginning of, the, your literature and it was saying about, you know, do you want to be the blue collar workers? Do we want to have an economy of the blue collar workers or do we want one that's a little bit heavier in white collars?

00:40:08:08 - 00:40:36:04
Unknown
You know, folks who design, direct and finance the operations in those high value industries. Right? I think that's the direction we're probably heading, just inherently I am curious. So we've heard time and time again, multiple of our interviews, including the UK journalist Johnny Miller, who, you know, was a little bit sympathetic towards Russia, but describing how he's seeing Europe in his own backyard, pulling away and further and further away from, the United States, especially now under Trump.

00:40:36:04 - 00:41:03:01
Unknown
And, you know, you can't avoid it, right? It's on the news. So I guess my question for you guys would be if we're going to enact sanctions against China, while we're also kind of perturbing our allies, wouldn't this show like China's buying gold? China's moving away from buying bonds. Aren't we actually again, again, shooting ourselves in the foot here because now we're almost we're dollar izing China, but we need them on the dollar, right?

00:41:03:01 - 00:41:26:15
Unknown
We don't want them to decouple. But our sanctions is forcing that can. So can you guys speak to that and maybe explain am I missing something here or is that what's happening? And it's pretty foolhardy. It's a tough question to answer, but I think the point of the matter is that the US has leverage, and if it uses it correctly, it can produce good outcomes for itself.

00:41:26:17 - 00:41:57:13
Unknown
But it doesn't have a magic wand that it can just like, literally like by itself, you know, say I used to have 20% of my workforce in manufacturing. Now I have ten and one. Now I'm going to have 20 again. Like, that's not possible. You know, it's not possible. And so I think it's it's laudable to be saying, you know, how in what areas can we bring manufacturing back to the United States.

00:41:57:15 - 00:42:26:16
Unknown
But to take that so far as an and that you are going to, you know, sanction essentially your allies through tariffs and cause them to back away from you, not only politically but also economically. That's that's going too far. You know, it's it's we we don't have the power to to make that kind of shift in a way that isn't going to produce lots of other negative downside effects.

00:42:26:16 - 00:42:56:10
Unknown
And I think that's something that's really important for people to recognize is that, you know, if we do something like, you know, back away from our NATO commitment, it'll have a direct effect, you know, which might even be good, but it's going to have a lot of indirect effects also. So as an example, like if we say, you know, we're not, you know, sure, if we're going to honor our NATO commitment, that will get the Europeans to spend more, which is something the US Democrats and Republicans have long wanted.

00:42:56:12 - 00:43:23:08
Unknown
However, you know, in the past five years, two thirds of Europe's arms, purchases have been from the United States. And so basically, like our arms industry, our manufacturing, you know, arms industry, has prospered immensely because Europe, Asian countries have been like, I want to buy weapons for the United States, but now they don't want to do that.

00:43:23:10 - 00:43:53:00
Unknown
And so basically, like we're sanctioning, you know, our allies to try and get some manufacturing back that way. But in the process, we're going to end up harming our weapons, our industries, and having way less manufacturing capacity there. So it we have to be very careful when we start pulling on these strings. See, the global economy and the overall international system has lots and lots of connections.

00:43:53:00 - 00:44:18:00
Unknown
And, my guess is, and I don't think I'm the only one that like, you know, tariffs on allies are going to have a few good effects, but they're going to have an incredible number of negative indirect effects such that will eventually say, why did we do that? Unfortunately, we won't be to like rewind the clock and be like, hey, let's be friends again.

00:44:18:03 - 00:44:43:14
Unknown
You know, let's can you buy two thirds of our weapons again? You know? Right. They'll be like, no, because trust is something which requires an immense amount of effort to build, but it can be eliminated extremely quick. And we've essentially done that now to our European allies. And the real question that I have is, are we going to do it to our allies in Asia?

00:44:43:14 - 00:45:12:04
Unknown
Also because they've been spared a lot of what's happened so far? My hope is that they won't be attacked also. But I don't know. Yeah, I echo that. And I add that if the goal is really to restore manufacturing in the United States, tariffs on Europe and even tariffs, how many countries in East Asia are probably going to be a roundabout way of achieving that?

00:45:12:04 - 00:45:34:02
Unknown
China accounts for roughly 32 or 33% of the world's manufacturing value added at the moment. As Steve and I have noted in the book, much of that is being operated by foreign firms, but nonetheless, it's coming from China. I mean, if you're really trying to, you know, optimize for getting manufacturing back in the United States, I'm skeptical.

00:45:34:02 - 00:46:08:09
Unknown
That's actually possible. But if you are, Europe is probably not the logical target. We have bigger fish to fry. Sure, sure. And this is my personal opinion. You know, I hate tariffs. I prefer either a trade agreement or preferably free trade, because then you kind of let market pressures decide. And, I just really think that these tariffs are not going to bring anything back, but I'm, I'm more of a proponent of things like the Inflation Reduction Act, which is a misleading name, because if folks actually look into it, it's subsidized an incredible amount of American industry.

00:46:08:15 - 00:46:34:14
Unknown
I guess what frustrates me is if we were going to do the tariffs fine. But the tariffs today now they're off tomorrow paused for a month. They're doubled now I mean it's it's sending such mixed signals. So it's one thing if you were going to have a tariff strategy targeted, one that says we want to protect this industry, you know, or these industries, I should say, but like a tariff is just kind of shooting first to ask questions later approach.

00:46:34:14 - 00:46:51:22
Unknown
Mike, I want to add for context to Ben and Stephen here that last week in our interview with Eric Olander, he brought up a really interesting point where Trump is not up for reelection. Right. So Trump doesn't need to appeal to Rust Belt states anymore. He doesn't care, even in a way, if you got into his head about the MAGA base, it doesn't matter.

00:46:52:04 - 00:47:11:22
Unknown
What he cares about is what his goals are now. It's not meant to get reelected. So I'm wondering if you guys feel like the institutions, is it strong enough to withstand this bull in a China shop? Yeah, it's mainly on tariff policy. I fear for our institutions, but that probably is in, in my area of expertise.

00:47:12:00 - 00:47:34:18
Unknown
The extent that I want to opine on it. But, you know, on tariffs, I mean, yes. We have a lame duck president and, if the goal of the tariffs really is to, bring manufacturing back to the United States or to move it from other countries, you probably want to signal that they're going to be in place for some time.

00:47:34:20 - 00:47:57:08
Unknown
Right? Right. If you're going to bring $100 million in investment, you want to know the tariffs are going to stay there. Yeah, exactly. So it seems to me that they're being used as, from a blunt negotiating leverage. And we'll see what, things look like over the next year with them. But, Stephen, was this the final chapter of Art of the deal, the tariff or what are we missing?

00:47:57:10 - 00:48:33:08
Unknown
Sometimes there is a focus by politicians on on the use of a tool without knowing where they're trying to go. And we can use tariffs as a tool. But, you know, as Ben was just saying, like, we have to use them in a way which is strategic towards producing an outcome which, which makes sense. So if we identify a particular industry that we're like, you know, if we just had a little bit of protection, this industry would flourish here in the United States.

00:48:33:10 - 00:48:58:15
Unknown
You know, and this industry is actually pretty important for us to have in the United States. You know, then you could focus on that sector and focus on using tariffs and other things to build up that sector. But, you know, just using tariffs for the sake of using tariffs, it's not necessarily going to produce the effect of bringing manufacturing jobs back.

00:48:58:17 - 00:49:18:13
Unknown
You know, one thing that a lot of recent reporting has noted is that, you know, there are a lot of firms that because of the discussion of tariffs, they're they're more interested than before in terms of moving out of China, but not to the United States, you know, right, to the Philippines, to Indonesia, to India and so forth.

00:49:18:15 - 00:49:48:18
Unknown
So if we're going to, you know, kind of disrupt the global economy to move manufacturing jobs out of China and then have them go to other countries, that wouldn't make much sense. So you have to know in this area, if I place tariffs, I will be that'll bring manufacturing jobs back. Another point to note, though, is that we're just not going to have the level of manufacturing jobs that we had before, and that's not because of NAFTA.

00:49:48:18 - 00:50:12:16
Unknown
Our globalization is because of technology, because of robots. You know, the all factories, whether they're here or in China, will be mostly driven by robots, which means that, yes, if you bring manufacturing back to us, you'll have a little bit of increased employment, but it's not going to be for the kind of jobs that we traditionally think of as manufacturing jobs.

00:50:12:18 - 00:50:38:09
Unknown
It's going to be very, very high level jobs of people that know how to program and fix the robots. Right? Not for people to be, you know, welding things and so forth to make cars. And so I think we're going to have to recognize that, it would be very nice to go back to the world that we had before of having so much manufacturing employment, because those were really good jobs.

00:50:38:09 - 00:51:16:21
Unknown
And it allowed people to, in many parts of the country, live really great lives. But, you know, technology would have removed those jobs even if we hadn't done NAFTA or, you know, the World Trade Organization or anything like that. And, and, and so therefore to kind of harm our alliances and cause our markets to decline and to have inflation all to bring back manufacturing jobs, it's going to be a very small number of jobs because the nature of factories today.

00:51:16:23 - 00:51:38:10
Unknown
Right? Yeah, yeah. It is strange. I mean, I I worked in manufacturing for a period, before I was in the elevator industry, which is where I have my career. But you walk into these foundries and much of it is robot computerized, right? You have the CNC moving, and it loads and unloads itself. But then you have a person with a hand cart that brings it over to the finishing area, and you have somebody with their hand grinding it.

00:51:38:10 - 00:51:57:03
Unknown
And I couldn't imagine having that job. In fact, that person doesn't want that job. You know, make make it a robot, right? We went into an episode about artificial intelligence, and we put a really great chart on the screen that showed in the 1800s, 90% plus of people were farmers, right? In agricultural. Now it's like less than 2% of people are in the ag industry.

00:51:57:03 - 00:52:14:06
Unknown
But everyone still working. We saw GDP growth. We still have industries. Right. So hopefully it gets it's short sighted. Right. If he was out here saying the tariff is to accomplish X, Y and Z is for this direction, it's that. But instead we're saying the tariff is on aluminum out of Canada because they're sending us fentanyl and they're not.

00:52:14:07 - 00:52:37:03
Unknown
Okay. So it's like, yeah crazy guys. Exactly. And again on the Trump supporter here I don't get it. Yeah I mean and even if these tariffs are being used primarily as negotiating leverage, I think a lot of the work that Steve and I have done has shown that there are other, you know, elements of the American economy that are probably a better source of leverage for us.

00:52:37:03 - 00:52:59:06
Unknown
Right? Like so much of the work that we did was looking at what the firms that the United States are capable of producing and what they are basically able to deny China access to. In the event that, you know, there's a high level of tension between the United States and China, depriving China of access to high end semiconductors is going to hurt China a lot.

00:52:59:07 - 00:53:17:17
Unknown
It's going to hurt its geopolitical aspirations a lot, and it's probably going to hurt more than implementing tariffs on, you know, a set of goods that are coming in from China right now. So I think if we really are aiming for leverage, there are just better ways to do it. So I say tariffs are part of a toolkit, right.

00:53:17:17 - 00:53:33:03
Unknown
They they're useful when they're applied in the right way. Stephen, how would you reply this quote that I've been throwing around a little bit that I say that tariffs are like bringing a lead pipe to brain surgery. It's just not the right place and time for it.

00:53:33:05 - 00:54:00:16
Unknown
Well, traditionally in, you know, economic thought, you know, the notion was tariffs are always bad. They never help them. And you know recently there been some writings by some economists are like, you know, under very specific conditions, if you implement tariffs in this specific way, you might if provided there's no retaliation, you might be able to get some benefits.

00:54:00:20 - 00:54:44:09
Unknown
But like if there's retaliation tariffs won't work. Yeah. They will end up, you know, essentially hurting you and hurting the person that you're engaging the tariffs with. The other way to look at it would be, you know like you could think of our economy is like a big pie right. And has all sorts of slices in it. And basically you know, what Trump is, I believe, correctly, kind of noticing and talking about is that there are some sections of our economy, you know, manufacturing sectors, a lot of which are in the middle of the country, and their slice is actually gotten smaller, even though the overall pie is gotten much bigger.

00:54:44:13 - 00:55:08:23
Unknown
Right? You know, and so he's like desktop there, which it's not. But the answer is not to make the entire pie much smaller and then have that slice get bigger. The answer is you take money from the people that are benefiting from the fact that the pie has gotten a lot bigger, and you give it to the people whose slice has shrunk.

00:55:09:05 - 00:55:40:14
Unknown
And so that currently is the kind of big disjunction in kind of, you know, thought, I believe, on the, you know, Republican side of things is that they're like, these people deserve help, you know, but not in the form of new training. You know, money, not in the form of better child care, not in the form of maybe money that you could use to move from one part of the country to another, you know, not in the form of getting free community college.

00:55:40:16 - 00:56:05:13
Unknown
Those are the things that you should do if you want to be helping these people. And there's actually a really, really good article in Foreign Affairs, this issue by another David Fessler, Matt Slaughter. And that's what he's saying. He's like, you know, there are problems we need to fix them. But tariffs are a tiny aspect of what you would need to do to fix these problems.

00:56:05:18 - 00:56:39:08
Unknown
The bigger issue is really getting our government to be directing resources to these people, and also spending a lot more money on research and development, because what the article shows is that, you know, what drives our economy's growth is innovation. What drives innovation is research and development and work very low levels of research and development historically to what we've done and before when we've grown quickly, we should be increasing research and development and grazing assistance to these to these workers.

00:56:39:10 - 00:56:57:05
Unknown
That's what we should be doing. Tariffs are a small thing. That is part of that overall kind of approach but small. So what we've been hearing about I do I do all the scheduling here. So it sounds like I'm going to have to reach out to Matt if he'd like an opportunity to come on our show. I'm sorry I didn't catch that.

00:56:57:07 - 00:57:15:17
Unknown
The, the article in this week's, this bi monthly issue. So I'm going to have to check that out. I don't think Trump and Elon Musk are going to listen to this podcast, but maybe we can find a way to mail a copy of your upcoming book, Command of Commerce, over to the white House and highlight a couple key chapters or a couple of the levers that we think they should be pulling.

00:57:15:18 - 00:57:32:15
Unknown
Ben, can you tell us when the book comes out? And I'm sure people can get it anywhere they buy books? That's right. It comes out mid April. We'll be awesome. Awesome. So it just about, a month or less. Wow. Very exciting. Yeah. Awesome, guys. Well, do you have a website or anything set up that we can send our listeners to so they can preorder where?

00:57:32:16 - 00:58:01:00
Unknown
Take a look at it. Now, where can I find you? Please check out Command of commerce.com. You could also just go to Amazon or another. It's already ready for preorder. It's just it won't be shipped until April 18th. That's beautiful. In that case all the links will be below. Guys, this was an awesome, enlightening conversation. I still have to do some soul searching on where exactly my meter falls, mihawk or a dove, or just an American Patriot perhaps, but that's also a dirty word now.

00:58:01:00 - 00:58:19:12
Unknown
So guys, thank you very much for your time. We really appreciate it. You've made us smarter. This has been elevated thoughts and thank you. It was really fun to talk to you guys.