WEBVTT - How Science Fiction Explains the U.S.-China Trade War 0:00:12.119 --> 0:00:15.560 Hello, and welcome to another episode of the Odd Thoughts Podcast. 0:00:15.680 --> 0:00:20.360 I'm Tracy Allaway and I'm Joe. Wisn'tal Joe? Do you 0:00:20.400 --> 0:00:23.200 like science fiction? You know, it's one of those things 0:00:23.239 --> 0:00:26.079 where I like it more in theory than in practice. 0:00:26.239 --> 0:00:28.640 And by that, I mean I like the What does 0:00:28.680 --> 0:00:31.440 that mean by that? I mean I like the idea 0:00:31.440 --> 0:00:34.160 of being into science fiction, and I try to get 0:00:34.200 --> 0:00:36.720 into it every once in a while, and then I 0:00:36.840 --> 0:00:38.720 forget about it, and I'm like, oh, I should read 0:00:38.720 --> 0:00:42.680 more science fiction, and it never seems to happen. Does 0:00:42.720 --> 0:00:46.199 that make sense? You know, most people don't like the 0:00:46.240 --> 0:00:49.720 idea of being into science fiction but secretly actually like 0:00:49.840 --> 0:00:52.760 it and really read or watch a lot of science fiction. Yeah. 0:00:52.760 --> 0:00:54.800 I didn't know that. You're the opposite that, because it's 0:00:54.800 --> 0:00:57.520 like seeing this like dorky or geeky or something like that. 0:00:57.720 --> 0:01:00.160 Or yeah no, I could see that, Yeah exactly. No, 0:01:00.360 --> 0:01:02.440 Like I I every once in a while, I try, 0:01:02.520 --> 0:01:05.760 but then I just like forget. Okay, But you know 0:01:05.880 --> 0:01:08.200 Star Trek, right, Yeah, yeah, I used to watch it 0:01:08.200 --> 0:01:12.880 pretty regularly. Oh okay, So then do you remember what 0:01:13.080 --> 0:01:17.880 the mission or the prime directive of the Star Trek 0:01:18.480 --> 0:01:26.720 Star Fleet was no, no, no, I don't think so. 0:01:27.240 --> 0:01:29.920 All right, well, I'm going to read it off Wikipedia. 0:01:30.040 --> 0:01:31.640 I don't want people to think that I know this 0:01:31.920 --> 0:01:36.600 like by memory. Um So, the prime directive is a 0:01:36.640 --> 0:01:40.720 guiding principle of star Fleet, prohibiting its members from interfering 0:01:40.720 --> 0:01:44.840 with the internal and natural development of alien civilizations. The 0:01:44.880 --> 0:01:49.080 Prime directive applies particularly to civilizations which are below a 0:01:49.120 --> 0:01:54.440 certain threshold of technological, scientific, and cultural development. So basically, 0:01:54.840 --> 0:01:58.480 you know, the more advanced civilization that is, star Fleet 0:01:58.520 --> 0:02:04.480 shouldn't go around bullying or influencing less developed civilizations during 0:02:04.520 --> 0:02:08.080 their space exploration. So at first I was about to 0:02:08.120 --> 0:02:10.520 ask what on earth this had anything to do with 0:02:10.560 --> 0:02:14.280 the markets or economics or anything that we normally talk about, 0:02:14.800 --> 0:02:19.160 But that last point kind of makes me think that 0:02:19.200 --> 0:02:22.440 there might be an analogy to some developments that we're 0:02:22.440 --> 0:02:25.960 seeing today. Yeah, I think you know where we're going 0:02:26.000 --> 0:02:28.639 to go with this, and that is, of course, the 0:02:28.720 --> 0:02:32.880 technological war. I guess you could say between the US 0:02:32.960 --> 0:02:36.800 and China, right, And we've talked about this before on 0:02:37.040 --> 0:02:42.440 the show, but the implications are so massive. These tech fights, 0:02:43.040 --> 0:02:48.359 the rays to control certain important technologies so critical that 0:02:48.720 --> 0:02:52.519 we really probably can't talk about it enough. Yeah, and 0:02:52.760 --> 0:02:54.600 the person that we're going to speak to you on 0:02:54.639 --> 0:02:57.360 this is Uh, as far as I can tell, a 0:02:57.440 --> 0:03:00.040 science fiction fan. And I have to say one of 0:03:00.200 --> 0:03:04.680 the more unusual analysts that I have met in my 0:03:04.960 --> 0:03:09.760 entire career in financial journalism. Before I came onto the show, 0:03:09.960 --> 0:03:12.760 I actually just looked up his profile because I wanted 0:03:12.800 --> 0:03:14.520 to make sure that I got the job title right. 0:03:15.080 --> 0:03:20.639 And his job description on LinkedIn is Galactic Energy Commodities, 0:03:20.720 --> 0:03:26.760 space mining and unobtanium research at Jefferies. So uh, that's 0:03:27.440 --> 0:03:30.240 that gives you some idea. I can't wait. So who 0:03:30.320 --> 0:03:32.239 is this we're talking to? Who is such an awesome 0:03:32.320 --> 0:03:37.040 job title? All right, it's a Leiban you. He is 0:03:37.080 --> 0:03:41.360 an analyst over at Jeffrey's actually an energy analyst, I believe, 0:03:41.600 --> 0:03:46.520 but writes a lot about broader issues in China. So Leban, 0:03:46.720 --> 0:03:50.080 it's really good to have you on the show. Yeah, 0:03:50.120 --> 0:03:52.720 thank you for having me. Thank you for that introduction. 0:03:53.400 --> 0:03:55.520 I have to say that wasn't the only job title 0:03:55.560 --> 0:03:59.400 on your LinkedIn. I also saw Galley slave at mcquarie 0:04:00.160 --> 0:04:06.120 and Padawan learner at Lehman Brothers. Yes, I guess my 0:04:06.240 --> 0:04:13.120 LinkedIn profile was a bit of my um my little 0:04:13.200 --> 0:04:17.440 joke against LinkedIn for using our content for their profits. 0:04:17.520 --> 0:04:20.599 So I did have a little laugh at their expense. 0:04:20.640 --> 0:04:25.440 I guess. So are you a science fiction fan? I 0:04:25.440 --> 0:04:27.680 have to say I am. I don't think I am 0:04:27.720 --> 0:04:31.160 a raging science fiction fan, but I I do follow it. 0:04:31.680 --> 0:04:35.440 And uh and and you know, it's it's important more 0:04:35.440 --> 0:04:37.600 and more because there's a lot of things in science 0:04:37.600 --> 0:04:41.360 fiction now that really pertained what we what we see 0:04:41.400 --> 0:04:44.800 happening in the world. What are the key things that 0:04:44.880 --> 0:04:47.960 you read and think about in the science fiction realm 0:04:47.960 --> 0:04:51.200 that you see happening in the world. Obviously, Tracy brought 0:04:51.279 --> 0:04:55.279 up the Star Trek Prime directive and the US inner 0:04:55.440 --> 0:05:00.160 attempting to interfere with Chinese technological development. What are sort 0:05:00.160 --> 0:05:03.320 of the big themes in sci fi that influence you're 0:05:03.360 --> 0:05:05.279 thinking right now on what we see in the world. 0:05:06.000 --> 0:05:08.839 The one thing is we have to introduce this Chinese 0:05:08.880 --> 0:05:11.760 science fiction writer. He's probably right now the most popular 0:05:11.920 --> 0:05:14.880 science fiction writer in China. He wrote a series of 0:05:14.920 --> 0:05:20.000 books that everybody reads in China as kind of a 0:05:20.320 --> 0:05:25.839 representative of the cultural, facivilizational craft clash between the US 0:05:25.880 --> 0:05:31.119 and China, and in his book. He has one civilization, 0:05:31.680 --> 0:05:36.000 which is a Trice Lawrence civilization, and they figured that 0:05:36.040 --> 0:05:39.000 they're gonna take over Earth, and one of the ways 0:05:39.000 --> 0:05:44.200 that they are going to accomplish this is by sabotaging 0:05:44.760 --> 0:05:49.719 all the scientific progress on Earth. So when um, the 0:05:49.839 --> 0:05:54.440 US put the export ban on Huawei, that came to 0:05:54.520 --> 0:05:57.320 mind of a lot of people who have been, you know, 0:05:57.440 --> 0:06:01.720 following the situation, have been fans of the seeing where wow, 0:06:01.800 --> 0:06:05.680 this is actually happening in real life. It's never quite 0:06:05.760 --> 0:06:08.720 been done. I don't know if there's ever been a 0:06:08.760 --> 0:06:14.359 historical president where one nation tries to hinder the scientific 0:06:14.600 --> 0:06:18.880 progress of another. H It's just kind of new. So 0:06:18.960 --> 0:06:24.560 that therefore, I think as technology developed so quickly, this 0:06:24.720 --> 0:06:29.799 becomes kind of a new way that the conflicting nations 0:06:29.839 --> 0:06:34.960 will present itself. So you used the allegory of the 0:06:35.120 --> 0:06:38.400 Chinese science fiction writer, Um, I think the name of 0:06:38.440 --> 0:06:42.240 the first book is the Three Body Problem. Is that right? 0:06:43.120 --> 0:06:46.480 That's correct? You use that as an allegory for the 0:06:46.600 --> 0:06:52.200 US trying to basically stymy technological progress in China. But 0:06:52.279 --> 0:06:55.160 I guess my question is do you think that is 0:06:55.279 --> 0:06:59.040 ultimately the goal of the US's trade policies and what 0:06:59.080 --> 0:07:01.960 they're doing with things like Huawei. Is it that strategic? 0:07:02.839 --> 0:07:08.039 I actually personally don't really think so. I think it's 0:07:08.080 --> 0:07:12.640 actually just a you know, panicked anxiety, let's do something. 0:07:13.400 --> 0:07:17.960 It's uh, it's a function of ignorance and anxiety and 0:07:18.000 --> 0:07:22.440 with some truth all mixed in there. However, there is 0:07:22.560 --> 0:07:28.000 the Department of Energies Business Advisory Board. They actually came 0:07:28.040 --> 0:07:32.200 out with a policy paper that actually tried to think 0:07:32.280 --> 0:07:35.640 through all of this. And when they thought throughout this, 0:07:35.720 --> 0:07:39.880 they still advise that the US be very aggressive with 0:07:40.160 --> 0:07:44.480 export bands of China to steiny Huawei, even if it 0:07:44.680 --> 0:07:50.920 will ultimately result in the the acceleration of technologlogical catch 0:07:51.000 --> 0:07:54.840 up of China. And they still said this is the 0:07:55.000 --> 0:07:58.680 correct policy to take the themes like, there are some 0:07:58.880 --> 0:08:05.480 parts of the American policy apparatus that has thought through 0:08:05.520 --> 0:08:10.280 this and has made this recommendation. Now, whether it's in 0:08:10.400 --> 0:08:16.760 everybody's head, it's unclear. You're reading through your notes and 0:08:16.800 --> 0:08:20.400 you sort of talked about the two prongs of Trump's 0:08:20.440 --> 0:08:24.960 trade approach. One on the tariff side, you say, you know, 0:08:25.000 --> 0:08:27.760 that might actually be sort of brilliant and it might 0:08:27.880 --> 0:08:33.079 actually begin to cause global multinationals to move their supply 0:08:33.200 --> 0:08:36.880 chains out of China, uh, and that might have some effect, 0:08:37.280 --> 0:08:41.439 whereas on the other hand, the export band to Huawei, 0:08:41.440 --> 0:08:44.640 which as of right now when we're recording this, which 0:08:44.720 --> 0:08:48.800 is in early July, has been softened a little bit, 0:08:49.360 --> 0:08:52.400 as you put it, well, may have the perverse effect 0:08:52.440 --> 0:08:54.920 where the supply chains move out of the US so 0:08:54.960 --> 0:08:59.320 that companies can export technology to Huawei, and also will 0:09:00.040 --> 0:09:03.240 have the effect of accelerating China's own efforts to build 0:09:03.240 --> 0:09:08.600 its homegrown technology. Yeah. So so that is where um, 0:09:08.679 --> 0:09:12.439 once I saw these policies come through, you scratch, scratching 0:09:12.440 --> 0:09:15.920 your head to think how well thought through a lot 0:09:15.960 --> 0:09:19.440 of these policies were. Because once the export band was 0:09:19.440 --> 0:09:23.360 put in place, especially the extra territorial parts of it, 0:09:24.040 --> 0:09:29.640 immediately I thought, this is exactly the opposite of putting 0:09:29.720 --> 0:09:34.480 tariffs on Chinese exports, because now all of a sudden, 0:09:35.320 --> 0:09:40.640 anything with US origin in it becomes kind of tainted. 0:09:41.559 --> 0:09:45.520 So a lot of the tech development that needs to 0:09:45.559 --> 0:09:48.960 find a Chinese market, because China's market is now the 0:09:49.080 --> 0:09:53.120 largest semiconductor mark in the world, it will try to 0:09:53.280 --> 0:09:56.839 move out of the US either. You know, there are 0:09:57.040 --> 0:09:59.800 the minimus rules for the products if you're below twenty 0:09:59.840 --> 0:10:04.960 five percent. So if for example, some product had US 0:10:05.040 --> 0:10:08.720 content in there, all kinds of efforts will be made 0:10:08.800 --> 0:10:13.920 to make that below. In recent weeks, we have heard 0:10:13.960 --> 0:10:19.479 that a lot of US companies are still supplying Huawei 0:10:19.920 --> 0:10:24.680 because they are manufacturing outside the US. Those kinds of 0:10:24.720 --> 0:10:28.520 efforts will continue if the export ban is remains in place. 0:10:29.040 --> 0:10:32.600 I think one of the reasons that Donald Trump ultimately 0:10:32.679 --> 0:10:37.520 relaxed the export ban is because of very heavy lobbying 0:10:37.640 --> 0:10:44.120 from these American companies trying to explain this point to him. Right, So, 0:10:44.240 --> 0:10:47.480 Bloomberg has actually reported that there are companies like Intel 0:10:47.559 --> 0:10:51.240 who think that they found a legal I don't want 0:10:51.240 --> 0:10:53.560 to call it a loophole, but you know, the illegal 0:10:53.640 --> 0:10:56.400 thing that does allow them, to your point, to ship 0:10:56.480 --> 0:10:59.480 to Huawei. Joe just mentioned this, But talk to us 0:10:59.520 --> 0:11:04.920 about self reliance, notion when it comes to developing China's 0:11:04.960 --> 0:11:09.959 own domestic technology capability, because again that's where the sci 0:11:10.040 --> 0:11:13.360 fi analogy sort of comes in again, and that's where 0:11:13.400 --> 0:11:16.800 people start talking about the three body problem and what 0:11:16.960 --> 0:11:21.599 happened to Earth when basically the alien civilization tried to 0:11:21.640 --> 0:11:25.520 stop them from developing technology. Right, So we're right, right 0:11:25.520 --> 0:11:29.719 when uh right, when a civilization is under threat in 0:11:29.880 --> 0:11:33.880 this way, now, developing on technology isn't just an economic problem, 0:11:33.920 --> 0:11:37.559 it's a national security problem. China, which had already been 0:11:38.240 --> 0:11:41.559 throwing all kinds of resources into developing its in my 0:11:41.640 --> 0:11:45.520 conductor industry, um, we think right after the Huaweidan, whatever 0:11:45.920 --> 0:11:49.000 huge amount of resources they already committed, there is now 0:11:49.200 --> 0:11:52.160 very likely a multiple on that. I don't know what 0:11:52.280 --> 0:11:55.320 multiple it is. But the US has pushed China the 0:11:55.360 --> 0:11:58.840 direction to try to stop China from doing something, it 0:11:58.920 --> 0:12:03.600 has actually you know, accelerated that process. So the long 0:12:03.720 --> 0:12:08.080 term likely ramification of the US threatening Huawei with this 0:12:08.320 --> 0:12:13.480 UH technology export limitations is China then doubles down or 0:12:14.160 --> 0:12:18.840 really increases its investment on domestic technology. What about the 0:12:18.880 --> 0:12:22.560 short term gains, Because one of the concerns among many 0:12:22.600 --> 0:12:25.839 people in the US government and industry is just who 0:12:25.880 --> 0:12:29.800 wins the race to five G rollout. And there's a 0:12:29.840 --> 0:12:33.520 perception out there in your own research at Jefferies has 0:12:33.800 --> 0:12:35.920 talked about this that there are big gains from the 0:12:35.960 --> 0:12:40.199 first country that really rolls out five G wireless technology, 0:12:40.320 --> 0:12:43.440 all kinds of revenue advantages, the ability to set all 0:12:43.559 --> 0:12:47.360 kinds of standards and so on. Is there an advantage 0:12:47.440 --> 0:12:51.160 just in the short term win if the US can 0:12:51.200 --> 0:12:55.600 slow down Chinese technological dominance right now in this area, 0:12:56.160 --> 0:12:59.679 I suppose there is some, But the most the US 0:12:59.720 --> 0:13:03.200 will get out of it is UM technology will catch 0:13:03.280 --> 0:13:07.640 up on the u S side itself. So whereas right now, 0:13:08.120 --> 0:13:11.720 if beings standards they are, China can't quite do five 0:13:11.760 --> 0:13:14.200 G because it needs a lot of the US parts, 0:13:14.880 --> 0:13:17.320 and the US can't quite do five G either because 0:13:17.440 --> 0:13:21.160 it needs a lot of the Huawei technology. So both 0:13:21.200 --> 0:13:25.440 sides have kind of hobbled each other. I guess if 0:13:25.520 --> 0:13:29.120 this was the u S strategy from being well ahead 0:13:29.120 --> 0:13:32.280 of the pack, then now the race is kind of 0:13:32.360 --> 0:13:36.719 even if you will, so the short term there might 0:13:36.720 --> 0:13:40.480 be some benefit in one very specific industry. I think 0:13:40.520 --> 0:13:45.360 the problem with all this is that in the longer term, 0:13:45.559 --> 0:13:51.200 the trust that technology developed in the US will have 0:13:51.320 --> 0:13:58.800 a global market has been damaged. So in the longer term, 0:13:58.920 --> 0:14:02.199 all kinds of R and D that was that would 0:14:02.200 --> 0:14:05.400 have been carried out in the US might now have 0:14:05.480 --> 0:14:10.600 to be either relocated from the US or replicated elsewhere. 0:14:11.120 --> 0:14:16.040 It's hugely inefficient UM, and it's damaging to everybody but 0:14:16.280 --> 0:14:38.440 mostly damages actually the US if that happens the long term. 0:14:38.480 --> 0:14:42.160 So speaking of inefficiencies and and just going back to 0:14:42.160 --> 0:14:46.160 the notion of China accelerating its own technological progress because 0:14:46.200 --> 0:14:49.280 of what the US is doing. I mean, we've seen 0:14:49.440 --> 0:14:54.240 China try to develop its own semiconductor industry before and 0:14:54.400 --> 0:14:58.680 they haven't been that successful. So what are the chances 0:14:58.920 --> 0:15:01.800 that there are six festival in doing this now and 0:15:01.840 --> 0:15:05.480 what are the chances that they avoid, you know, ramping 0:15:05.600 --> 0:15:11.880 up technological capacity to the point of ridiculousness or mass inefficiency. 0:15:12.600 --> 0:15:18.080 China has taken multiple stabs at developing its semiconduct industry 0:15:18.080 --> 0:15:20.480 and has never done a very good job. In the 0:15:20.560 --> 0:15:24.560 late nineties at at an effort, and in the early 0:15:24.600 --> 0:15:28.360 two thousands had an effort. There's two major reasons why 0:15:28.480 --> 0:15:31.640 it did not succeed in the past. One of the 0:15:31.680 --> 0:15:35.480 major reasons is that China just did not have the 0:15:35.640 --> 0:15:39.440 human capital at that time. At that time, China had 0:15:39.640 --> 0:15:42.600 but a third or in the in the early part 0:15:42.640 --> 0:15:46.080 of the two thousands, half the number of engineers as 0:15:46.120 --> 0:15:51.520 the US. However, over these years, the Chinda's graduates of 0:15:51.600 --> 0:15:54.880 engineers from the year two thousand on where they graduated 0:15:55.000 --> 0:16:00.000 about as many engineers every year as the US to two. Today, 0:16:00.360 --> 0:16:05.160 China graduates eight times the number of science and engineering 0:16:05.720 --> 0:16:11.240 students every year, and the researcher the stock of talent 0:16:11.640 --> 0:16:16.040 has now surpassed the US. So now there's a lot 0:16:16.200 --> 0:16:20.920 of human capital in the market that can do this 0:16:21.040 --> 0:16:24.000 kind of work. So there is the resources to throw 0:16:24.080 --> 0:16:28.880 at this problem. The other thing is that the thing 0:16:28.920 --> 0:16:31.040 that held everything up is that there was no real 0:16:31.240 --> 0:16:35.240 market for the chips made in China. The chips made 0:16:35.280 --> 0:16:38.880 in China was subsidized products, and they were always somewhat 0:16:38.920 --> 0:16:42.360 behind what was already available stuff made by Intel or 0:16:42.360 --> 0:16:46.760 am D, and they were probably more expensive and performed worse. 0:16:47.000 --> 0:16:51.440 So nobody bought them except for the defense industry in 0:16:51.480 --> 0:16:55.200 China that was required to buy them. But now that 0:16:55.280 --> 0:16:58.400 you have a company like Huawei and UM, you have 0:16:58.560 --> 0:17:03.640 also the threat of you know, further export bands. I 0:17:03.720 --> 0:17:05.960 read an article a while back that now a lot 0:17:06.000 --> 0:17:10.560 of companies they described suppliers UM from the US as 0:17:10.600 --> 0:17:14.920 suppliers of the last resort. I mean, first you buy domestic, 0:17:15.040 --> 0:17:19.560 then you buy from the US if all else fails. 0:17:19.760 --> 0:17:24.040 So now because of the engineers there and now all 0:17:24.119 --> 0:17:28.200 of a sudden a market has been created, so that 0:17:28.640 --> 0:17:32.640 chips are sold, revenue is generated, and R and D 0:17:33.000 --> 0:17:37.240 in the semi conduct industry is just a function of revenue. 0:17:37.240 --> 0:17:40.560 If the revenue is there, about your revenue spent on 0:17:40.680 --> 0:17:45.040 R and D, So that creates a virtuous circle. So 0:17:45.119 --> 0:17:49.800 there's a much higher chance of success this time around, 0:17:49.840 --> 0:17:53.040 just because you have two pieces in place. Now, which 0:17:53.119 --> 0:17:57.800 is the human capital, and then now which is a 0:17:57.920 --> 0:18:01.880 market has been created. How far behind right now would 0:18:01.920 --> 0:18:06.240 you say still the Chinese semiconductor industry is so kind 0:18:06.240 --> 0:18:10.600 of a thumb in the air is about six years now. 0:18:10.640 --> 0:18:13.840 The six years you've gotta be somewhat careful on that. 0:18:13.920 --> 0:18:20.960 This assumes a static situation, assumes that the US stops 0:18:21.600 --> 0:18:27.520 technological advancing, and then, based on prior track record, how 0:18:27.600 --> 0:18:30.600 long it will take China to catch up in the 0:18:31.119 --> 0:18:36.359 different generations of chip manumating process. However, you can't quite 0:18:36.359 --> 0:18:41.080 assume that the US will stop advancing. But also something 0:18:41.119 --> 0:18:45.080 else has changed now. Now what we believe is that 0:18:45.560 --> 0:18:50.840 the prior rates that China was catching up on has 0:18:50.880 --> 0:18:54.520 now been thrown out the window because of all the 0:18:54.640 --> 0:18:59.240 resources that China will throw at the semiconductor industry, and 0:18:59.280 --> 0:19:04.520 also the rate of advance for the U S semiconductor industry. 0:19:04.520 --> 0:19:08.920 There's a big question mark on that now because China 0:19:09.119 --> 0:19:12.800 is the world's largest market for semiconductors. If that world's 0:19:12.840 --> 0:19:15.239 largest market has a big question mark where there will 0:19:15.280 --> 0:19:18.320 be export bands on, it will be R and D 0:19:18.720 --> 0:19:21.840 be done in the US to to service that market. 0:19:22.400 --> 0:19:27.280 So the advance of the US technology could slow down 0:19:28.240 --> 0:19:33.480 and the catch up speed of China's technology could accelerate. 0:19:34.000 --> 0:19:37.399 But you know, in a static environment it's about six years, 0:19:38.000 --> 0:19:40.800 but you know, we we think it could be less 0:19:40.840 --> 0:19:45.600 than that. Let's talk about the pure tariff side of 0:19:45.760 --> 0:19:48.840 the tensions that are going on right now, and again 0:19:48.880 --> 0:19:52.720 we don't know exactly what the final trading relationship is 0:19:52.760 --> 0:19:56.720 going to look like between the US and China as 0:19:56.760 --> 0:19:59.679 of right now. The more stepped up tariffs are on 0:19:59.720 --> 0:20:01.680 the whole old a lot of analysts expect that maybe 0:20:01.720 --> 0:20:05.320 there will be some deal later in the year. You've 0:20:05.359 --> 0:20:10.120 written somewhat positively about Trump's tariff strategy, so I'm curious 0:20:10.280 --> 0:20:13.199 what potential gain you see from it. We touched on 0:20:13.240 --> 0:20:15.639 it in the beginning, and how you see how the 0:20:15.720 --> 0:20:19.160 Chinese government is going to play its cards in response, 0:20:20.560 --> 0:20:25.760 I'm not too sure. I'm all that positive on Trump's strategy. 0:20:26.080 --> 0:20:29.880 What I think is that he he is quite innovative 0:20:29.960 --> 0:20:32.600 in using tariffs. Tariffs I've never really been used in 0:20:32.640 --> 0:20:36.440 this way before. Tariffs historically have been used to protect 0:20:36.480 --> 0:20:42.080 the domestic industry, where you know there's a domestic beneficiary. 0:20:42.160 --> 0:20:45.040 When he used this tariff, domestic consumers are heard, but 0:20:45.119 --> 0:20:50.000 you actually have a domestic beneficiary. In Donald Trump's case, 0:20:50.440 --> 0:20:55.160 he has no domestic beneficiary really in mind. All he 0:20:55.240 --> 0:20:59.840 has is a foreign businesses that he really wants to 0:21:00.000 --> 0:21:03.080 cause some pain on. At the same time he's causing 0:21:03.119 --> 0:21:10.520 pain on domestic consumers. However, if this foreign adversary caves, 0:21:10.960 --> 0:21:14.400 then there is no harm done to domestic consumers because 0:21:14.400 --> 0:21:16.960 the terrorists will be lifted and then the US will 0:21:17.040 --> 0:21:21.520 collect the trade concession from whichever foreign adversary cave. And 0:21:21.840 --> 0:21:30.040 this strategy works extremely well with small economies South Korea, Mexico, Canada. 0:21:30.160 --> 0:21:34.440 They all caved and the US collects its concession. However 0:21:34.480 --> 0:21:38.439 minor they are concession concession concession. However, if you have 0:21:38.560 --> 0:21:42.520 an adversary that is not small and that is not caving, 0:21:43.240 --> 0:21:48.359 then your tariffs are causing harm for your domestic consumers. 0:21:48.560 --> 0:21:52.280 You may be hurting the suppliers from the foreign country, 0:21:52.800 --> 0:21:56.600 but your consumers are being hurt. So then I think, 0:21:56.960 --> 0:21:59.520 me personally, I think it's the the level of pain 0:21:59.560 --> 0:22:03.400 and both It's almost symmetric, So then it just becomes 0:22:03.520 --> 0:22:09.080 a game of who can withstand more pain. So as 0:22:09.160 --> 0:22:14.399 it's playing out, I think both sides right now think 0:22:14.960 --> 0:22:18.359 that they can stand more pain than the other. China, 0:22:18.480 --> 0:22:21.320 I think, believes that the US will cave because special 0:22:21.359 --> 0:22:24.920 interests will force Donald Trump to throw in the towel. 0:22:24.960 --> 0:22:28.960 Whether it's the farm lobby, the consumer lobby, or whatever. 0:22:29.080 --> 0:22:32.520 The politician China believe that the US is controlled by 0:22:32.520 --> 0:22:39.760 special interests. Donald Trump's strategy is probably betting on their 0:22:39.960 --> 0:22:46.520 belief that China's economy is pottering because of the huge 0:22:46.640 --> 0:22:50.240 debt that China is built up in recent years. Without 0:22:50.280 --> 0:22:55.919 that being true, China will not cave, and then it 0:22:55.920 --> 0:22:59.679 will just be a long drawn out trade war before 0:23:00.200 --> 0:23:07.040 someone realizes which side is suffering more pain. So I've 0:23:07.040 --> 0:23:11.320 always wondered this, but the Trump administration seems to simultaneously 0:23:11.400 --> 0:23:15.040 believe that China is on the brink of a massive 0:23:15.160 --> 0:23:18.480 financial meltdown. Or economic slowdown of some sort. But at 0:23:18.480 --> 0:23:21.840 the same time they seem to be very, very scared 0:23:22.080 --> 0:23:28.199 of the potential for economic progress and eventually strength in 0:23:28.240 --> 0:23:31.959 the country. How how did they square those two positions 0:23:32.000 --> 0:23:34.560 in their minds? Do you think? Yeah, I, from from 0:23:34.560 --> 0:23:37.879 what I see a lot of UH commentary out of 0:23:37.920 --> 0:23:41.400 the US does hold like a schizophrenic view of China. 0:23:41.520 --> 0:23:44.080 At the same time, they think China is advancing at 0:23:44.080 --> 0:23:48.040 such a pace that it will dominate everything and things 0:23:48.119 --> 0:23:52.359 must be done now, otherwise nothing can be done in 0:23:52.920 --> 0:23:56.520 five ten years time when China controls everything. But also 0:23:56.680 --> 0:23:59.720 at the same time, they also believe that China's economy 0:24:00.119 --> 0:24:05.160 um so over leverage, overstretched, that it's on the brink 0:24:05.160 --> 0:24:10.399 of collapse. And those two kind of opinions exists almost 0:24:10.440 --> 0:24:15.480 simultaneously in the minds of a lot of American policymakers. 0:24:15.520 --> 0:24:20.639 I think, and I'm not too sure that that is 0:24:21.600 --> 0:24:25.200 healthy or correct and will lead to any kind of 0:24:25.680 --> 0:24:29.920 intelligent strategy. I just want to go back to what 0:24:30.000 --> 0:24:34.600 you said about the Chinese perception that the US can't 0:24:34.640 --> 0:24:38.879 win the trade war because special interests will ultimately force 0:24:38.960 --> 0:24:42.520 the administration or force the government to relent in some way. 0:24:42.520 --> 0:24:47.520 I mean, arguably that view was somewhat vindicated just by 0:24:47.640 --> 0:24:52.200 the recent actions with Huawei in which chip companies came 0:24:52.240 --> 0:24:56.600 and said and urged the administration to relax the export controls, 0:24:56.600 --> 0:25:01.240 and that's exactly what happened. But more big sure, does 0:25:01.320 --> 0:25:06.240 this essentially represent a fundamentally pessimistic view on the state 0:25:06.400 --> 0:25:10.199 of US politics right now that our government sort of 0:25:10.200 --> 0:25:14.040 regardless of who is in control, is incapable of doing 0:25:14.080 --> 0:25:18.080 anything long term strategic because there will be these powerful 0:25:18.160 --> 0:25:22.359 special interests that will demand that be undermined for short 0:25:22.480 --> 0:25:27.600 term profits. I think that is the opinion of the 0:25:27.760 --> 0:25:32.359 leadership in China. Rightfully or wrongfully, I think that is opinion. 0:25:32.680 --> 0:25:36.360 There is a man by the name of Wang hu Ning. 0:25:37.080 --> 0:25:42.240 He just recently ascended to the Standing Committee of the Politburo. 0:25:42.720 --> 0:25:45.720 You know, these are the seven people who pretty much 0:25:45.800 --> 0:25:50.760 run China. He has a very interesting background. He was 0:25:51.040 --> 0:25:54.600 never a politician. He never ran a province, he never 0:25:54.680 --> 0:25:58.040 ran an s V, he never ran any ministries. He 0:25:58.560 --> 0:26:05.240 just extended the bureaucracy from academia and as advisors for 0:26:05.320 --> 0:26:09.840 the last three presidents, from John Zaming to Hoo Jing 0:26:09.840 --> 0:26:15.600 Tao and now Shi Jing King. He is the ideological 0:26:15.760 --> 0:26:20.760 theorist for China, and he wrote a book about I 0:26:20.760 --> 0:26:23.399 Don't Know fifteen twenty years ago. He's spent a number 0:26:23.400 --> 0:26:27.879 of years in the US studying in universities and researching universities, 0:26:27.920 --> 0:26:32.959 and he wrote a book titled America against America, pretty 0:26:33.040 --> 0:26:36.919 much saying that the US is controlled by what he 0:26:37.000 --> 0:26:43.840 calls minority shareholders and special interests control all of US 0:26:43.920 --> 0:26:48.600 politics and therefore it leads to gridlock and nothing that 0:26:48.680 --> 0:26:51.840 can be done with um, you know, where big money 0:26:51.880 --> 0:26:57.040 controlled things. This is not at all a very unique analysis. 0:26:57.640 --> 0:27:02.199 People like Manser Olson in the US political scientists and 0:27:02.240 --> 0:27:05.639 Francis Fukuyama, who more or less come out with the 0:27:05.680 --> 0:27:12.399 same conclusion. Where Francis Fukiyama calls it re patrimonialization with 0:27:13.000 --> 0:27:16.320 it's a long drawn out phrase that he coined, which 0:27:16.640 --> 0:27:21.840 is the late stage democracies he will develop in such 0:27:21.840 --> 0:27:26.600 a way that special interest control everything. And that's Manser 0:27:26.680 --> 0:27:32.400 Olsen's theory as well, where what he calls distributional coalitions, 0:27:32.440 --> 0:27:36.560 which is special interests will dominate the political landscape. And 0:27:36.720 --> 0:27:41.360 both Manser Olson and Francis Fukuyama, their conclusion is that 0:27:41.800 --> 0:27:47.200 once it happens. They can't think of any way that 0:27:47.359 --> 0:27:51.359 it can be resolved. This is kind of a steady state. 0:27:52.480 --> 0:27:54.920 I have to ask, who do you think is ultimately 0:27:55.200 --> 0:27:57.360 going to be able to withstand the most pain when 0:27:57.359 --> 0:27:59.840 it comes to the trade war. Is it the U 0:28:00.119 --> 0:28:04.879 US with you know, a fractured political system, beholden to 0:28:05.119 --> 0:28:07.800 lots of interest groups, but that is coming from a 0:28:07.840 --> 0:28:11.320 position of strength and power to some degree. Or is 0:28:11.320 --> 0:28:15.680 it China with its command economy, able to develop industries 0:28:15.760 --> 0:28:18.520 very quickly, but coming from a lower base, which one 0:28:19.080 --> 0:28:22.119 I have to say, China. You know, time is on 0:28:22.320 --> 0:28:27.359 China's side. China's government has much a lot more tools 0:28:27.400 --> 0:28:30.320 that it can use if the community really were to, 0:28:31.040 --> 0:28:33.959