WEBVTT - Thucydides's Trap Has Implications for Economics, Not Just Conflict

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<v Speaker 1>At the start of the year, a trade war with

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<v Speaker 1>China seemed more likely than a shooting war with North Korea.

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<v Speaker 1>Beyond rhetoric, what's really changed between the United States and

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<v Speaker 1>North Korea? Doesn't this follow a time worn pattern of

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<v Speaker 1>nuclear tests, harsh rhetoric, and then a deal that leads

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<v Speaker 1>to everything subsiding, albeit only for a year or two.

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

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<v Speaker 1>Daniel moss, I cover global economics for Bloomberg View in

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<v Speaker 1>New York. My co host Scott Lammon is on vacation

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

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

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<v Speaker 1>this just a distraction from the main game, which is

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<v Speaker 1>US China relations. Here to help us address this question

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

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<v Speaker 1>just published an acclaimed book handicapping the odds of a

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

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

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<v Speaker 1>good to have you. Thanks so much for having me.

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<v Speaker 1>There's a lot more to your book than North Korea,

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<v Speaker 1>though it is one of the scenarios you sketch that

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<v Speaker 1>might result in a clash will dive into North Korea

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

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<v Speaker 1>this is an insight that was captured for us by

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<v Speaker 1>the founder of history, Lucidities, who was reviewing the circumstances

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<v Speaker 1>that created war between Athens and Sparta in classical Greece.

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<v Speaker 1>And through cydities trap is the dangerous dynamic that occurs

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<v Speaker 1>when a rising power like Athens or Germany before World

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<v Speaker 1>War One, or China today threatens displace a ruling power

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<v Speaker 1>like Sparta or Britain or the US. So trucidity strap

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<v Speaker 1>is the dangerous dynamic that occurs when a rising power

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<v Speaker 1>threatens to displace a ruling power, and unfortunately, in most

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

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<v Speaker 1>not just militarily rising. Well, the rise is a multidimensional phenomena,

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<v Speaker 1>but in which economics is essentially the substructure. So in

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<v Speaker 1>the case of Athens, Athens had come from nowhere to

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<v Speaker 1>be economically stronger, particularly because it got the wealth from

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<v Speaker 1>its allies or colonies. In the German case after your

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<v Speaker 1>reunification of Germany in eighteen seventy, country that was about

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<v Speaker 1>half the size of Britain's had become equal to Britain

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<v Speaker 1>in GDP by nineteen hundred and order larger by nineteen fourteen.

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<v Speaker 1>And I feel at the China story, which you're you've

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<v Speaker 1>covered many times, basically a country that wasn't even on

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<v Speaker 1>any of the international League tables in the economic world

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<v Speaker 1>in nineteen eighty or nineteen ninety has now come to

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<v Speaker 1>rival and indeed to eclipse the US in many many arenas,

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<v Speaker 1>including as the largest single national economy measured by purchasing

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<v Speaker 1>power parity, which is the yardstick that both CIA and

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<v Speaker 1>i MF believes is a single best yardstick for comparing

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<v Speaker 1>national economies. More on that in a second, but quickly

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

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<v Speaker 1>of this stuff before, have we. Well, yes we have,

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

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<v Speaker 1>many layers of it. As you suggested, the underlying driver

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<v Speaker 1>is the throucidity and dynamic between a rising China and

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<v Speaker 1>a ruling US, where a rising China thinks that the

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<v Speaker 1>anomaly in this situation is Americans being on the Korean peninsula.

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<v Speaker 1>I was in Beijing three weeks ago, where everybody wants

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<v Speaker 1>to talk about thucinities, trapping, how to escape it, and

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<v Speaker 1>in one conversation with somebody in the government, they said,

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<v Speaker 1>you know, really, there would be no problem on the

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<v Speaker 1>Korean peninsula except for the fact that you're there with

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<v Speaker 1>your troops. If you were to leave and not to

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<v Speaker 1>have a defense relationship, there would be a government that

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<v Speaker 1>would be unified. It would be a tributary of China.

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<v Speaker 1>We wouldn't allow it to have nuclear weapons, and there

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<v Speaker 1>would be no problem. Now, from the ruling powers perspective,

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<v Speaker 1>which I certainly subscribe to, we look and say, wait

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<v Speaker 1>a minute. South Korea is one of the great success

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<v Speaker 1>stories of the post World War two period. Uh An

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<v Speaker 1>economy that was nothing has become the thirteen or twelfth

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<v Speaker 1>largest economy in the world. They have a successful democracy.

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<v Speaker 1>We're very proud of South Korea. We're not going anywhere.

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

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<v Speaker 1>got a nutty regime in pon Yang which has been

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<v Speaker 1>marching down the track to build a nuclear capability first

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<v Speaker 1>and then the ability to deliver nuclear weapons again. South

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<v Speaker 1>Korea and against Japan, and it was now on the

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<v Speaker 1>cusp of developing a capability to deliver nuclear weapons against

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<v Speaker 1>San Francisco or Los Angeles. So yes, we have seen

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<v Speaker 1>this story before, and unfortunately in the Clinton administration when

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<v Speaker 1>we thought of acting rather than talking to prevent it,

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<v Speaker 1>we thought the risks of acting were too great. When

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<v Speaker 1>the Bush administration faced that same crossroads, they came in

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<v Speaker 1>the same conclusion. When the Obama administration looked at that,

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<v Speaker 1>they came to the same conclusion. So I think we're

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<v Speaker 1>all on our little bit the edge of our seats now,

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<v Speaker 1>as the thucidity and dynamic is the underlying driver. But

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<v Speaker 1>above this and the expression of it in the current

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<v Speaker 1>setting is this movement towards a showdown in North Korea

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<v Speaker 1>and which either North Korea is going to acquire the

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<v Speaker 1>ability to strike the West coast with nuclear weapons. Most

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<v Speaker 1>people are betting that's how that's how it'll turn out,

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<v Speaker 1>or alternatively, Trump is going to act to prevent them

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<v Speaker 1>doing that and including attacking North Korea. I'm glad you

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<v Speaker 1>mentioned that you described a natty regime in Pyongyang. What

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<v Speaker 1>about the new regime in Washington? Does that add an

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<v Speaker 1>extra dynamic to this that we didn't see in the

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<v Speaker 1>past three administrations when they deliberated on this issue. Well,

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<v Speaker 1>I think it certainly does. And there's the there's a

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<v Speaker 1>kind of you can tell the two sides of the

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<v Speaker 1>coin story. On the one hand, if you were to

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<v Speaker 1>go back a year or five years or ten years,

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<v Speaker 1>and you were to say there was a regime that

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<v Speaker 1>was led by somebody who was erratic, impulsive, uh, maybe

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<v Speaker 1>even a little crazy or nutty, there would be only

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<v Speaker 1>one candidate for that. Now we've solved that problem. So

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<v Speaker 1>Washington is in the competition. That's on the one side

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<v Speaker 1>of the coin. On the other side of the coin,

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<v Speaker 1>if you're going to make credible to North Korea, or

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<v Speaker 1>more importantly to China, who's the lifeline to North Korea

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<v Speaker 1>that you're simply not going to tolerate a North Korea

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<v Speaker 1>that can attack the Americans with nuclear weapons. You need

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<v Speaker 1>somebody who can appear a little nutty. How much leverage

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<v Speaker 1>does China actually have one raids and he is varied

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<v Speaker 1>opinions on this, Well, I think the it's complicated, but

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<v Speaker 1>it's a fact that of all the oil that North

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<v Speaker 1>Korea gets comes from China, so that pipeline is a lifeline,

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<v Speaker 1>and if China were to squeeze that lifeline, the oil

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<v Speaker 1>on which the North Korean military is dependent in order

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<v Speaker 1>to operate, and in which both Korean factories are dependent

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<v Speaker 1>in order to operate, would be at risk. So the

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<v Speaker 1>one occasion when China declared that there was a temporary

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<v Speaker 1>problem with the oil for three days, the North Korean

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<v Speaker 1>snapped attention. So that's a card China not being prepared

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<v Speaker 1>to play yet. And I think, if I understand, if

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<v Speaker 1>I try to read the method in what appears to

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<v Speaker 1>be madness in the in the Trump administration's messaging about

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<v Speaker 1>North Korea, it is to try to persuade she shamping

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<v Speaker 1>that he needs to squeeze that lifeline, to say to

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<v Speaker 1>Kim Jong un, now stop at this point, now, not later,

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<v Speaker 1>because if you continue, I really believe this fellow Trump

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<v Speaker 1>might attack you. And if you attack you, then, as

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<v Speaker 1>we've all gone through that scenario many times, were likely

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<v Speaker 1>to have the Second Korean War, and g she remembers

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<v Speaker 1>that the in the First Korean War, the Chinese and

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<v Speaker 1>Americans were fighting each other. One of the scenarios you

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<v Speaker 1>discuss in your book involves the death of a North

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<v Speaker 1>Korean leader and US and Chinese troops rushing in with

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<v Speaker 1>special forces to kind of control the situation and inadvertently

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<v Speaker 1>bumping into each other, and things progress will progress, maybe

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<v Speaker 1>the wrong word things developed from there? Are there any

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<v Speaker 1>other scenarios where the U, S and China could be

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<v Speaker 1>drawn into conflict as a result of North Korea? And

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<v Speaker 1>I think unfortunately, I mean yes, there are multiple ones.

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<v Speaker 1>I just described a couple in the in the book,

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<v Speaker 1>and uh, folks at the Pentegon have worked through. Oh,

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<v Speaker 1>I don't know a dozen scenarios, but the one that

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<v Speaker 1>I think is most troublesome right now, to go back

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<v Speaker 1>to your earlier question, is it's only five easy steps

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<v Speaker 1>from where we are right now today to Americans and

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<v Speaker 1>Chinese fighting each other on the Korean peninsula. So Kim

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<v Speaker 1>Jong un conducts some more tests. Trump attacks the missile

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<v Speaker 1>launch sites in order to prevent the tests being completed.

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<v Speaker 1>North Korea responds by shelling Soul with the artillery that

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<v Speaker 1>it is a thousand pieces able to kill ten thousand

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<v Speaker 1>or a hundred thousand people very quickly in Soul. The

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<v Speaker 1>US and South Korea then attack that a tailor as

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<v Speaker 1>well as other rockets and launchers that can kill hundreds

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<v Speaker 1>of thousands, even millions of people in South Korea if

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

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<v Speaker 1>Second Korean War, and China in the First Korean War,

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<v Speaker 1>as we marched up the peninsula to unify the country,

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<v Speaker 1>entered the war and beat us back down to the

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<v Speaker 1>thirty parallel that was. That was when China was only

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<v Speaker 1>a fiftie our size. And as Chinese say, now, we

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<v Speaker 1>think we established that proposition then, so don't test that

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<v Speaker 1>once more. But if the events unfolded in this manner,

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<v Speaker 1>given the underlying dynamic of this slucidity and competition, I

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<v Speaker 1>can really imagine Americans and Chinese fighting each other in Korea,

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<v Speaker 1>which is something neither president and neither government wants at all.

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<v Speaker 1>Will Professor stepping back from North Korea for a second

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<v Speaker 1>and looking more broadly at US China relations, If I

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<v Speaker 1>read the book correctly, you're not actually predicting war between

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<v Speaker 1>the US and China. You do seem to be saying

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<v Speaker 1>the two countries are on a track. That makes it

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<v Speaker 1>more likely than many people realize is that the gist

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<v Speaker 1>of it exactly right, and you read it just right.

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<v Speaker 1>So basically this is a book motivated by trying not

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<v Speaker 1>to predict war but to prevent it, and it says

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<v Speaker 1>to prevent war, we need first to recognize that in

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

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<v Speaker 1>but it's there. So it's a risk that I see

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<v Speaker 1>everything you're doing as the rising power as part of

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<v Speaker 1>this effort to displace me, and you see everything I'm

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<v Speaker 1>doing as an effort to try to contain and prevent

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<v Speaker 1>you from from emerging. So under those conditions, events that

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<v Speaker 1>would otherwise be inconsequential, like the assassin a nation of

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<v Speaker 1>an archduke that served as the trigger for what became

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<v Speaker 1>World War One, or easily managed, can end up triggering

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<v Speaker 1>this set of actions and reactions by the primary protagonists

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<v Speaker 1>that take them to a place where they don't want

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<v Speaker 1>to go. You discuss the considerable gains that China has

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<v Speaker 1>made economically, Where has it pulled ahead of the US

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

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<v Speaker 1>been surprised, actually, I mean how little Americans have appreciated

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<v Speaker 1>how far and how fast China has come. As I

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<v Speaker 1>say in the chapter on this uh I quote Facliffeveld

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<v Speaker 1>for President Czech Republic. He says, all this has happened

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

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<v Speaker 1>So in the book, I give a short version of

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<v Speaker 1>a quiz. I give it to my students and my

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<v Speaker 1>class at Harvard, and says, when could China become number one?

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<v Speaker 1>And it has in the long version twenty six indicators

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<v Speaker 1>number one, manufacturer number one, trading number one, supercomputers number one,

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<v Speaker 1>artificial intelligence number one, g D p uh and students

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<v Speaker 1>guest not in my lifetime. Then I show him table

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<v Speaker 1>to the label of which is already already all these

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<v Speaker 1>things have happened. So China already has the largest middle class.

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<v Speaker 1>China already has the fastest supercomputers. China already has the

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<v Speaker 1>most billionaires. And in every arena, as we watched the paper,

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<v Speaker 1>almost every day, you see another space in which China

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<v Speaker 1>is emerging, took rival and as I say, often eclipsus.

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<v Speaker 1>I saw a pieces last week. Uh Starbucks, the chief

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<v Speaker 1>executive office says he believes they're gonna soon have more

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<v Speaker 1>Starbucks in China than they have in the US. And

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<v Speaker 1>when he started there fifteen years ago, and everybody said

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

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<v Speaker 1>if you start with one point four billion people, that

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<v Speaker 1>is four times as many people as we have. If

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<v Speaker 1>there are only one quarter as productive as Americans, they're

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<v Speaker 1>going to have an economy as big as ours. And

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<v Speaker 1>why should there only be one quarter as productive? Now?

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<v Speaker 1>What about the financial system? I was surprised on a

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<v Speaker 1>recent trip to Asia which coincided with the Federal Reserves

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<v Speaker 1>Open Market Committee meeting. In the days leading up and

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<v Speaker 1>the day of that f o m C meeting, there

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<v Speaker 1>was saturation coverage of every sentence, every nuance, And that

0:14:34.880 --> 0:14:38.160
<v Speaker 1>was even when it was widely predicted interest rates would

0:14:38.160 --> 0:14:41.760
<v Speaker 1>be unchanged and in fact they were. I was surprised

0:14:42.280 --> 0:14:46.680
<v Speaker 1>that there was very little or no reference anywhere to

0:14:46.760 --> 0:14:50.160
<v Speaker 1>the People's Bank of China. And yet, if China is

0:14:50.200 --> 0:14:54.480
<v Speaker 1>on the ascendency economically, surely there would have been at

0:14:54.520 --> 0:14:57.560
<v Speaker 1>least as much discussion. Can you break that down for us, professor?

0:14:57.640 --> 0:14:59.800
<v Speaker 1>What are we missing here? Well? I think that's a

0:15:00.080 --> 0:15:05.320
<v Speaker 1>very a student observation. I've noticed the same thing. In part,

0:15:06.080 --> 0:15:10.640
<v Speaker 1>it's because the chainee still keep control of their UH

0:15:10.720 --> 0:15:14.240
<v Speaker 1>financial system in ways that the US doesn't. They don't

0:15:14.240 --> 0:15:17.960
<v Speaker 1>have free flows of capital, they have many more instruments

0:15:18.000 --> 0:15:21.080
<v Speaker 1>to operate, and they make their choices in terms of

0:15:21.120 --> 0:15:24.560
<v Speaker 1>their overall picture. So I've had a good fortune to

0:15:24.800 --> 0:15:29.280
<v Speaker 1>interact on a regular basis with the fellow who's the

0:15:29.360 --> 0:15:33.920
<v Speaker 1>number one economic assistants to Jimping lou Hu, who was

0:15:33.960 --> 0:15:36.480
<v Speaker 1>a student here at Harvard at the Kennedy School twenty

0:15:36.560 --> 0:15:41.160
<v Speaker 1>years ago. He's extremely able person. But when he talks

0:15:41.200 --> 0:15:44.520
<v Speaker 1>about how China is thinking about their own financial system,

0:15:44.600 --> 0:15:50.080
<v Speaker 1>he says, Look, we imagined that finance was magical and

0:15:50.120 --> 0:15:53.160
<v Speaker 1>that Americans do all about finance and had that under

0:15:53.440 --> 0:15:57.080
<v Speaker 1>under control. So we were just taking lessons until two

0:15:57.120 --> 0:16:00.880
<v Speaker 1>thousand seven eight in the financial crisis, when we discovered

0:16:00.920 --> 0:16:03.960
<v Speaker 1>they don't understand how this works any better than we do,

0:16:04.280 --> 0:16:08.120
<v Speaker 1>and actually they allowed a degree of risk to develop

0:16:08.200 --> 0:16:10.920
<v Speaker 1>that we would never allow. So when people come back

0:16:10.960 --> 0:16:13.800
<v Speaker 1>and say to us, you know, relax controls of your

0:16:13.880 --> 0:16:16.560
<v Speaker 1>financial system, we say, forget about it. Look and see

0:16:16.600 --> 0:16:19.400
<v Speaker 1>what risks that entail. So I think, in part because

0:16:19.520 --> 0:16:24.600
<v Speaker 1>the FED is obviously an independent actor and is now

0:16:24.640 --> 0:16:28.240
<v Speaker 1>at a particularly important pointed as it looks at the

0:16:28.720 --> 0:16:32.280
<v Speaker 1>at the issue of unwinding, it's gathered more attention but

0:16:32.360 --> 0:16:35.440
<v Speaker 1>I think in part it's because on the Chinese side,

0:16:35.560 --> 0:16:38.960
<v Speaker 1>the actions of the People's Bank are really subordinate to

0:16:39.080 --> 0:16:42.920
<v Speaker 1>what the national government decides to do. Maybe in fifteen

0:16:43.000 --> 0:16:46.200
<v Speaker 1>years time it will be the p BOCS dot plot

0:16:46.240 --> 0:16:50.000
<v Speaker 1>and forecasts will be talking about before we go Professor

0:16:50.320 --> 0:16:54.960
<v Speaker 1>Devil's advocate. Why isn't China just like Japan? If you

0:16:55.040 --> 0:16:58.560
<v Speaker 1>go back thirty years ago, everyone was saying that Japan

0:16:58.800 --> 0:17:02.440
<v Speaker 1>was the rising power. H Japan is number one. It

0:17:02.640 --> 0:17:07.399
<v Speaker 1>permeated popular culture. You probably saw the Wesley Snipes Harvey

0:17:07.480 --> 0:17:11.720
<v Speaker 1>Kitel movie Rising Sun. Could we be missing something here?

0:17:12.520 --> 0:17:17.040
<v Speaker 1>That's a good it's a good point. And as Herbstein,

0:17:17.119 --> 0:17:20.960
<v Speaker 1>a famous chairman of the fenset, if a trend can't

0:17:20.960 --> 0:17:26.399
<v Speaker 1>continue forever, it won't. And I propose the Allison footnote

0:17:26.520 --> 0:17:30.520
<v Speaker 1>to Stein's law, which says it's much easier to predict

0:17:30.720 --> 0:17:34.800
<v Speaker 1>that something will happen than when. So can this trend

0:17:34.840 --> 0:17:38.800
<v Speaker 1>continue forever? No, of course not. But ten years ago

0:17:38.880 --> 0:17:42.159
<v Speaker 1>could it continue for another ten years? Most people bet not.

0:17:42.880 --> 0:17:45.280
<v Speaker 1>I bet that it would. If I look at it,

0:17:45.320 --> 0:17:49.080
<v Speaker 1>I don't see why China can't continue, at least for

0:17:49.119 --> 0:17:52.639
<v Speaker 1>the foreseeable future. Growing at three times the rate of

0:17:52.640 --> 0:17:54.959
<v Speaker 1>the U S, which is what it's been doing, and

0:17:55.000 --> 0:17:58.159
<v Speaker 1>since in this to sit it in story, it's the

0:17:58.280 --> 0:18:02.320
<v Speaker 1>relative growth of the two alreadies. I would say that's

0:18:02.359 --> 0:18:09.240
<v Speaker 1>the way about it, Professor. Thank you. Benchmark will be

0:18:09.280 --> 0:18:11.679
<v Speaker 1>back next week and until then, you can find us

0:18:11.680 --> 0:18:15.920
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0:18:16.200 --> 0:18:19.680
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0:18:19.800 --> 0:18:22.159
<v Speaker 1>Why you're there, take a minute, rate and review the

0:18:22.200 --> 0:18:25.560
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0:18:25.640 --> 0:18:27.639
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0:18:27.760 --> 0:18:33.000
<v Speaker 1>on Twitter at Moss Underscore. Echo Graham your Twitter handle please,

0:18:33.359 --> 0:18:37.560
<v Speaker 1>it's just Graham Allison. Benchmark is produced by Sarah Patterson.

0:18:37.680 --> 0:18:41.120
<v Speaker 1>The head of podcast is Alec McCabe. Thanks for listening,

0:18:41.280 --> 0:18:44.600
<v Speaker 1>see you next time, and once again, Graham Allison, thank you,

0:18:45.000 --> 0:18:45.920
<v Speaker 1>thank you so much