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Speaker 1: At the start of the year, a trade war with

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Speaker 1: China seemed more likely than a shooting war with North Korea.

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Speaker 1: Beyond rhetoric, what's really changed between the United States and

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Speaker 1: North Korea? Doesn't this follow a time worn pattern of

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Speaker 1: nuclear tests, harsh rhetoric, and then a deal that leads

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Speaker 1: to everything subsiding, albeit only for a year or two.

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Speaker 1: Welcome to Benchmark, a podcast about the global economy. I'm

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Speaker 1: Daniel moss, I cover global economics for Bloomberg View in

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Speaker 1: New York. My co host Scott Lammon is on vacation

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Speaker 1: this week, and I'm pretty sure he's not spending time

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Speaker 1: on a beach in North Korea. But stepping back, isn't

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Speaker 1: this just a distraction from the main game, which is

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Speaker 1: US China relations. Here to help us address this question

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Speaker 1: is Professor Graham Allison, a Harvard University's Kennedy School. He's

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Speaker 1: just published an acclaimed book handicapping the odds of a

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Speaker 1: conflict between the US and China. It's called Destined for War?

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Speaker 1: Can America and China Escape through Cydities Trap? Graham, It's

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Speaker 1: good to have you. Thanks so much for having me.

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Speaker 1: There's a lot more to your book than North Korea,

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Speaker 1: though it is one of the scenarios you sketch that

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Speaker 1: might result in a clash will dive into North Korea

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Speaker 1: in a moment. But first, what is the through cydities trap? Well,

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Speaker 1: this is an insight that was captured for us by

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Speaker 1: the founder of history, Lucidities, who was reviewing the circumstances

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Speaker 1: that created war between Athens and Sparta in classical Greece.

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Speaker 1: And through cydities trap is the dangerous dynamic that occurs

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Speaker 1: when a rising power like Athens or Germany before World

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Speaker 1: War One, or China today threatens displace a ruling power

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Speaker 1: like Sparta or Britain or the US. So trucidity strap

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Speaker 1: is the dangerous dynamic that occurs when a rising power

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Speaker 1: threatens to displace a ruling power, and unfortunately, in most

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Speaker 1: of those cases the results is war. And you're talking economically,

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Speaker 1: not just militarily rising. Well, the rise is a multidimensional phenomena,

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Speaker 1: but in which economics is essentially the substructure. So in

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Speaker 1: the case of Athens, Athens had come from nowhere to

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Speaker 1: be economically stronger, particularly because it got the wealth from

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Speaker 1: its allies or colonies. In the German case after your

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Speaker 1: reunification of Germany in eighteen seventy, country that was about

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Speaker 1: half the size of Britain's had become equal to Britain

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Speaker 1: in GDP by nineteen hundred and order larger by nineteen fourteen.

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Speaker 1: And I feel at the China story, which you're you've

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Speaker 1: covered many times, basically a country that wasn't even on

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Speaker 1: any of the international League tables in the economic world

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Speaker 1: in nineteen eighty or nineteen ninety has now come to

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Speaker 1: rival and indeed to eclipse the US in many many arenas,

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Speaker 1: including as the largest single national economy measured by purchasing

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Speaker 1: power parity, which is the yardstick that both CIA and

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Speaker 1: i MF believes is a single best yardstick for comparing

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Speaker 1: national economies. More on that in a second, but quickly

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Speaker 1: to North Korea. It does sound, professorlike we've heard some

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Speaker 1: of this stuff before, have we. Well, yes we have,

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Speaker 1: and actually it's a sad story. So there there are many,

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Speaker 1: many layers of it. As you suggested, the underlying driver

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Speaker 1: is the throucidity and dynamic between a rising China and

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Speaker 1: a ruling US, where a rising China thinks that the

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Speaker 1: anomaly in this situation is Americans being on the Korean peninsula.

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Speaker 1: I was in Beijing three weeks ago, where everybody wants

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Speaker 1: to talk about thucinities, trapping, how to escape it, and

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Speaker 1: in one conversation with somebody in the government, they said,

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Speaker 1: you know, really, there would be no problem on the

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Speaker 1: Korean peninsula except for the fact that you're there with

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Speaker 1: your troops. If you were to leave and not to

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Speaker 1: have a defense relationship, there would be a government that

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Speaker 1: would be unified. It would be a tributary of China.

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Speaker 1: We wouldn't allow it to have nuclear weapons, and there

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Speaker 1: would be no problem. Now, from the ruling powers perspective,

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Speaker 1: which I certainly subscribe to, we look and say, wait

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Speaker 1: a minute. South Korea is one of the great success

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Speaker 1: stories of the post World War two period. Uh An

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Speaker 1: economy that was nothing has become the thirteen or twelfth

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Speaker 1: largest economy in the world. They have a successful democracy.

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Speaker 1: We're very proud of South Korea. We're not going anywhere.

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Speaker 1: That's an underlying dynamic. Now, on top of that, you've

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Speaker 1: got a nutty regime in pon Yang which has been

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Speaker 1: marching down the track to build a nuclear capability first

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Speaker 1: and then the ability to deliver nuclear weapons again. South

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Speaker 1: Korea and against Japan, and it was now on the

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Speaker 1: cusp of developing a capability to deliver nuclear weapons against

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Speaker 1: San Francisco or Los Angeles. So yes, we have seen

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Speaker 1: this story before, and unfortunately in the Clinton administration when

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Speaker 1: we thought of acting rather than talking to prevent it,

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Speaker 1: we thought the risks of acting were too great. When

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Speaker 1: the Bush administration faced that same crossroads, they came in

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Speaker 1: the same conclusion. When the Obama administration looked at that,

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Speaker 1: they came to the same conclusion. So I think we're

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Speaker 1: all on our little bit the edge of our seats now,

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Speaker 1: as the thucidity and dynamic is the underlying driver. But

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Speaker 1: above this and the expression of it in the current

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Speaker 1: setting is this movement towards a showdown in North Korea

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Speaker 1: and which either North Korea is going to acquire the

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Speaker 1: ability to strike the West coast with nuclear weapons. Most

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Speaker 1: people are betting that's how that's how it'll turn out,

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Speaker 1: or alternatively, Trump is going to act to prevent them

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Speaker 1: doing that and including attacking North Korea. I'm glad you

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Speaker 1: mentioned that you described a natty regime in Pyongyang. What

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Speaker 1: about the new regime in Washington? Does that add an

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Speaker 1: extra dynamic to this that we didn't see in the

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Speaker 1: past three administrations when they deliberated on this issue. Well,

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Speaker 1: I think it certainly does. And there's the there's a

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Speaker 1: kind of you can tell the two sides of the

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Speaker 1: coin story. On the one hand, if you were to

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Speaker 1: go back a year or five years or ten years,

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Speaker 1: and you were to say there was a regime that

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Speaker 1: was led by somebody who was erratic, impulsive, uh, maybe

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Speaker 1: even a little crazy or nutty, there would be only

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Speaker 1: one candidate for that. Now we've solved that problem. So

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Speaker 1: Washington is in the competition. That's on the one side

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Speaker 1: of the coin. On the other side of the coin,

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Speaker 1: if you're going to make credible to North Korea, or

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Speaker 1: more importantly to China, who's the lifeline to North Korea

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Speaker 1: that you're simply not going to tolerate a North Korea

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Speaker 1: that can attack the Americans with nuclear weapons. You need

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Speaker 1: somebody who can appear a little nutty. How much leverage

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Speaker 1: does China actually have one raids and he is varied

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Speaker 1: opinions on this, Well, I think the it's complicated, but

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Speaker 1: it's a fact that of all the oil that North

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Speaker 1: Korea gets comes from China, so that pipeline is a lifeline,

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Speaker 1: and if China were to squeeze that lifeline, the oil

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Speaker 1: on which the North Korean military is dependent in order

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Speaker 1: to operate, and in which both Korean factories are dependent

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Speaker 1: in order to operate, would be at risk. So the

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Speaker 1: one occasion when China declared that there was a temporary

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Speaker 1: problem with the oil for three days, the North Korean

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Speaker 1: snapped attention. So that's a card China not being prepared

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Speaker 1: to play yet. And I think, if I understand, if

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Speaker 1: I try to read the method in what appears to

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Speaker 1: be madness in the in the Trump administration's messaging about

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Speaker 1: North Korea, it is to try to persuade she shamping

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Speaker 1: that he needs to squeeze that lifeline, to say to

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Speaker 1: Kim Jong un, now stop at this point, now, not later,

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Speaker 1: because if you continue, I really believe this fellow Trump

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Speaker 1: might attack you. And if you attack you, then, as

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Speaker 1: we've all gone through that scenario many times, were likely

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Speaker 1: to have the Second Korean War, and g she remembers

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Speaker 1: that the in the First Korean War, the Chinese and

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Speaker 1: Americans were fighting each other. One of the scenarios you

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Speaker 1: discuss in your book involves the death of a North

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Speaker 1: Korean leader and US and Chinese troops rushing in with

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Speaker 1: special forces to kind of control the situation and inadvertently

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Speaker 1: bumping into each other, and things progress will progress, maybe

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Speaker 1: the wrong word things developed from there? Are there any

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Speaker 1: other scenarios where the U, S and China could be

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Speaker 1: drawn into conflict as a result of North Korea? And

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Speaker 1: I think unfortunately, I mean yes, there are multiple ones.

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Speaker 1: I just described a couple in the in the book,

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Speaker 1: and uh, folks at the Pentegon have worked through. Oh,

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Speaker 1: I don't know a dozen scenarios, but the one that

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Speaker 1: I think is most troublesome right now, to go back

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Speaker 1: to your earlier question, is it's only five easy steps

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Speaker 1: from where we are right now today to Americans and

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Speaker 1: Chinese fighting each other on the Korean peninsula. So Kim

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Speaker 1: Jong un conducts some more tests. Trump attacks the missile

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Speaker 1: launch sites in order to prevent the tests being completed.

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Speaker 1: North Korea responds by shelling Soul with the artillery that

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Speaker 1: it is a thousand pieces able to kill ten thousand

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Speaker 1: or a hundred thousand people very quickly in Soul. The

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Speaker 1: US and South Korea then attack that a tailor as

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Speaker 1: well as other rockets and launchers that can kill hundreds

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Speaker 1: of thousands, even millions of people in South Korea if

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Speaker 1: they launch against them. At that point, we're into the

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Speaker 1: Second Korean War, and China in the First Korean War,

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Speaker 1: as we marched up the peninsula to unify the country,

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Speaker 1: entered the war and beat us back down to the

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Speaker 1: thirty parallel that was. That was when China was only

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Speaker 1: a fiftie our size. And as Chinese say, now, we

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Speaker 1: think we established that proposition then, so don't test that

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Speaker 1: once more. But if the events unfolded in this manner,

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Speaker 1: given the underlying dynamic of this slucidity and competition, I

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Speaker 1: can really imagine Americans and Chinese fighting each other in Korea,

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Speaker 1: which is something neither president and neither government wants at all.

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Speaker 1: Will Professor stepping back from North Korea for a second

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Speaker 1: and looking more broadly at US China relations, If I

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Speaker 1: read the book correctly, you're not actually predicting war between

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Speaker 1: the US and China. You do seem to be saying

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Speaker 1: the two countries are on a track. That makes it

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Speaker 1: more likely than many people realize is that the gist

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Speaker 1: of it exactly right, and you read it just right.

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Speaker 1: So basically this is a book motivated by trying not

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Speaker 1: to predict war but to prevent it, and it says

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Speaker 1: to prevent war, we need first to recognize that in

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Speaker 1: athucidity and dynamic there's inherent risk that doesn't make sense,

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Speaker 1: but it's there. So it's a risk that I see

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Speaker 1: everything you're doing as the rising power as part of

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Speaker 1: this effort to displace me, and you see everything I'm

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Speaker 1: doing as an effort to try to contain and prevent

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Speaker 1: you from from emerging. So under those conditions, events that

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Speaker 1: would otherwise be inconsequential, like the assassin a nation of

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Speaker 1: an archduke that served as the trigger for what became

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Speaker 1: World War One, or easily managed, can end up triggering

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Speaker 1: this set of actions and reactions by the primary protagonists

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Speaker 1: that take them to a place where they don't want

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Speaker 1: to go. You discuss the considerable gains that China has

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Speaker 1: made economically, Where has it pulled ahead of the US

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Speaker 1: economically and where is it still falling short? Well, I've

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Speaker 1: been surprised, actually, I mean how little Americans have appreciated

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Speaker 1: how far and how fast China has come. As I

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Speaker 1: say in the chapter on this uh I quote Facliffeveld

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Speaker 1: for President Czech Republic. He says, all this has happened

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Speaker 1: so fast, we haven't yet had time to be astonished.

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Speaker 1: So in the book, I give a short version of

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Speaker 1: a quiz. I give it to my students and my

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Speaker 1: class at Harvard, and says, when could China become number one?

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Speaker 1: And it has in the long version twenty six indicators

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Speaker 1: number one, manufacturer number one, trading number one, supercomputers number one,

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Speaker 1: artificial intelligence number one, g D p uh and students

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Speaker 1: guest not in my lifetime. Then I show him table

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Speaker 1: to the label of which is already already all these

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Speaker 1: things have happened. So China already has the largest middle class.

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Speaker 1: China already has the fastest supercomputers. China already has the

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Speaker 1: most billionaires. And in every arena, as we watched the paper,

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Speaker 1: almost every day, you see another space in which China

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Speaker 1: is emerging, took rival and as I say, often eclipsus.

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Speaker 1: I saw a pieces last week. Uh Starbucks, the chief

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Speaker 1: executive office says he believes they're gonna soon have more

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Speaker 1: Starbucks in China than they have in the US. And

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Speaker 1: when he started there fifteen years ago, and everybody said

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Speaker 1: Chinese only doing tea, they don't drink coffee. So basically,

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Speaker 1: if you start with one point four billion people, that

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Speaker 1: is four times as many people as we have. If

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Speaker 1: there are only one quarter as productive as Americans, they're

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Speaker 1: going to have an economy as big as ours. And

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Speaker 1: why should there only be one quarter as productive? Now?

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Speaker 1: What about the financial system? I was surprised on a

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Speaker 1: recent trip to Asia which coincided with the Federal Reserves

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Speaker 1: Open Market Committee meeting. In the days leading up and

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Speaker 1: the day of that f o m C meeting, there

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Speaker 1: was saturation coverage of every sentence, every nuance, And that

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Speaker 1: was even when it was widely predicted interest rates would

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Speaker 1: be unchanged and in fact they were. I was surprised

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Speaker 1: that there was very little or no reference anywhere to

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Speaker 1: the People's Bank of China. And yet, if China is

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Speaker 1: on the ascendency economically, surely there would have been at

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Speaker 1: least as much discussion. Can you break that down for us, professor?

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Speaker 1: What are we missing here? Well? I think that's a

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Speaker 1: very a student observation. I've noticed the same thing. In part,

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Speaker 1: it's because the chainee still keep control of their UH

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Speaker 1: financial system in ways that the US doesn't. They don't

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Speaker 1: have free flows of capital, they have many more instruments

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Speaker 1: to operate, and they make their choices in terms of

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Speaker 1: their overall picture. So I've had a good fortune to

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Speaker 1: interact on a regular basis with the fellow who's the

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Speaker 1: number one economic assistants to Jimping lou Hu, who was

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Speaker 1: a student here at Harvard at the Kennedy School twenty

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Speaker 1: years ago. He's extremely able person. But when he talks

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Speaker 1: about how China is thinking about their own financial system,

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Speaker 1: he says, Look, we imagined that finance was magical and

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Speaker 1: that Americans do all about finance and had that under

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Speaker 1: under control. So we were just taking lessons until two

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Speaker 1: thousand seven eight in the financial crisis, when we discovered

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Speaker 1: they don't understand how this works any better than we do,

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Speaker 1: and actually they allowed a degree of risk to develop

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Speaker 1: that we would never allow. So when people come back

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Speaker 1: and say to us, you know, relax controls of your

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Speaker 1: financial system, we say, forget about it. Look and see

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Speaker 1: what risks that entail. So I think, in part because

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Speaker 1: the FED is obviously an independent actor and is now

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Speaker 1: at a particularly important pointed as it looks at the

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Speaker 1: at the issue of unwinding, it's gathered more attention but

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Speaker 1: I think in part it's because on the Chinese side,

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Speaker 1: the actions of the People's Bank are really subordinate to

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Speaker 1: what the national government decides to do. Maybe in fifteen

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Speaker 1: years time it will be the p BOCS dot plot

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Speaker 1: and forecasts will be talking about before we go Professor

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Speaker 1: Devil's advocate. Why isn't China just like Japan? If you

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Speaker 1: go back thirty years ago, everyone was saying that Japan

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Speaker 1: was the rising power. H Japan is number one. It

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Speaker 1: permeated popular culture. You probably saw the Wesley Snipes Harvey

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Speaker 1: Kitel movie Rising Sun. Could we be missing something here?

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Speaker 1: That's a good it's a good point. And as Herbstein,

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Speaker 1: a famous chairman of the fenset, if a trend can't

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Speaker 1: continue forever, it won't. And I propose the Allison footnote

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Speaker 1: to Stein's law, which says it's much easier to predict

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Speaker 1: that something will happen than when. So can this trend

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Speaker 1: continue forever? No, of course not. But ten years ago

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Speaker 1: could it continue for another ten years? Most people bet not.

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Speaker 1: I bet that it would. If I look at it,

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Speaker 1: I don't see why China can't continue, at least for

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Speaker 1: the foreseeable future. Growing at three times the rate of

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Speaker 1: the U S, which is what it's been doing, and

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Speaker 1: since in this to sit it in story, it's the

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Speaker 1: relative growth of the two alreadies. I would say that's

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Speaker 1: the way about it, Professor. Thank you. Benchmark will be

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Speaker 1: back next week and until then, you can find us

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Speaker 1: on the Bloomberg terminal, Bloomberg dot com, our Bloomberg app,

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Speaker 1: as well as on Apple Podcasts, pocket casts and stitch it.

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Speaker 1: Why you're there, take a minute, rate and review the

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Speaker 1: show so more listeners can find us and do let

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Speaker 1: us know what you thought. If you can follow me

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Speaker 1: on Twitter at Moss Underscore. Echo Graham your Twitter handle please,

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Speaker 1: it's just Graham Allison. Benchmark is produced by Sarah Patterson.

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Speaker 1: The head of podcast is Alec McCabe. Thanks for listening,

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Speaker 1: see you next time, and once again, Graham Allison, thank you,

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Speaker 1: thank you so much