WEBVTT - How a Trade War With China Could Become a Hot War 0:00:02.720 --> 0:00:16.400 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.520 --> 0:00:22.760 Hello and welcome to another episode of the Odd Lots podcast. 0:00:22.840 --> 0:00:25.200 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:25.360 --> 0:00:28.920 Tracy, we recently did that episode with Andrew Bishop of 0:00:29.120 --> 0:00:32.720 Signum from Geopolitical Forecasting, et cetera. And I don't know 0:00:32.720 --> 0:00:35.400 if you remember, but the last question we asked him 0:00:35.479 --> 0:00:37.600 like sort of sent a shiver down my spine a 0:00:37.600 --> 0:00:38.040 little bit. 0:00:38.400 --> 0:00:42.080 Yeah, he was a pretty pessimistic about the outlook for 0:00:42.159 --> 0:00:45.880 an actual conflict between China and Taiwan, one that would 0:00:45.960 --> 0:00:50.320 presumably maybe draw in other world powers, including the US. 0:00:50.640 --> 0:00:50.880 Yeah. 0:00:51.080 --> 0:00:54.480 I think what actually really chilled me about that was, 0:00:54.600 --> 0:00:56.320 you know, I asked him, I said, you know, what 0:00:56.400 --> 0:00:59.959 are the prospects for some sort of Chinese invasion of time? 0:01:00.000 --> 0:01:02.960 I won with the next five years. What chilled me 0:01:03.200 --> 0:01:05.600 was how quickly he answered yes, right, or It was 0:01:05.680 --> 0:01:07.720 not the fact that he considered it to be a 0:01:07.800 --> 0:01:10.120 high probability. Is that he considered it to be a 0:01:10.160 --> 0:01:13.640 high probability without sort of humming and hawing about it. 0:01:14.160 --> 0:01:15.720 And I found that to be very disturbing. 0:01:15.840 --> 0:01:17.800 That doesn't surprise me that much. I think I told 0:01:17.800 --> 0:01:21.880 the story about I wrote a dissertation in college about 0:01:22.120 --> 0:01:26.240 I thought China would invade Taiwan before the two thousand 0:01:26.240 --> 0:01:28.800 and eight Olympics. So that turned out to be wrong. 0:01:29.200 --> 0:01:31.200 But I think, you know, lots of people have been 0:01:31.360 --> 0:01:33.600 kind of predicting this for a long time, and it 0:01:33.680 --> 0:01:36.920 brings up the question of, like, what exactly is the 0:01:36.959 --> 0:01:41.240 catalyst for these tensions between the Republic of China and 0:01:41.280 --> 0:01:45.600 the PRC to actually morph into physical conflict. 0:01:45.760 --> 0:01:48.440 And then I guess the question of like how wars 0:01:48.480 --> 0:01:51.320 come about in general, how they come about in theory, 0:01:51.760 --> 0:01:55.640 the connection between trade wars and hot wars. Of course, 0:01:55.680 --> 0:01:57.840 there was that book several years ago trade wars or 0:01:57.880 --> 0:02:00.040 class wars, but trade wars can all. 0:02:00.200 --> 0:02:02.160 Bears are also actual wars. 0:02:02.160 --> 0:02:05.680 Trade wars, Yeah, exactly right. Several years ago we did 0:02:05.680 --> 0:02:09.359 an episode with Christian Parente about Alexander Hamilton, and one 0:02:09.400 --> 0:02:13.400 of his points was that while the popular history of 0:02:13.919 --> 0:02:16.880 the Revolution the War for Independence, people say, oh, you know, 0:02:16.960 --> 0:02:18.720 it's about taxes or we didn't want to be taxed 0:02:18.720 --> 0:02:21.000 on tea or whatever, but that in his argument, it 0:02:21.040 --> 0:02:24.960 was really about British constraints on the US's inability to 0:02:25.080 --> 0:02:28.520 turn cane sugar into rum. Move up the value chain, 0:02:28.680 --> 0:02:32.359 et cetera. And when you think about countries constraining other 0:02:32.440 --> 0:02:36.280 countries from moving up the technological value chain, once again, 0:02:36.680 --> 0:02:39.120 hard not to think about the tensions right now between 0:02:39.160 --> 0:02:42.079 the US and China with chip export controls and other 0:02:42.240 --> 0:02:43.280 such restrictions. 0:02:43.320 --> 0:02:45.880 In general, it does seem true that a lot of 0:02:46.320 --> 0:02:49.360 history tends to well, it kind of leaves out a 0:02:49.360 --> 0:02:52.239 lot of economics sometimes, like there's so much you could 0:02:52.240 --> 0:02:55.519 write about international trade and the impact on foreign policy 0:02:55.919 --> 0:02:59.480 capital flows. I know you're a big fan of Adam 0:02:59.520 --> 0:03:01.760 Twos's Wages of Destruction, which is. 0:03:01.720 --> 0:03:03.080 Basically mentioned that before. 0:03:03.160 --> 0:03:05.280 I know, I'm sure you're going to bring it up 0:03:05.320 --> 0:03:08.600 in this conversation, but I really think it deserves more attention, 0:03:08.919 --> 0:03:11.680 and it probably doesn't get that much attention because I 0:03:11.680 --> 0:03:15.320 guess historians maybe they like to talk about, you know, 0:03:15.720 --> 0:03:19.960 sexy military history and things like that. But it definitely 0:03:19.960 --> 0:03:22.600 has relevance, and I guess the question is how much relevance. 0:03:22.680 --> 0:03:24.720 Totally Well, I'm really excited to say we're going to 0:03:24.760 --> 0:03:27.200 explore these topics further, and we do have the perfect guest. 0:03:27.440 --> 0:03:30.000 We're going to be speaking with Dale Copeland, Professor of 0:03:30.080 --> 0:03:33.600 International Politics, at the University of Virginia. He's also the 0:03:33.639 --> 0:03:36.320 author of a recent book, A World Safe for Commerce, 0:03:36.600 --> 0:03:40.600 American foreign policy from the Revolution to the Rise of China. So, 0:03:40.680 --> 0:03:43.120 Professor Copeland joining us, now, thank you so much for 0:03:43.160 --> 0:03:46.000 coming on, great to be here. Why don't you just 0:03:46.040 --> 0:03:49.880 give us the sort of concise version of how you 0:03:50.120 --> 0:03:54.760 think about this link between trade wars and hot wars. 0:03:55.360 --> 0:03:59.840 Yes, so let me start by saying that we under 0:04:00.120 --> 0:04:05.880 estimate how much impact trade has on the geopolitical military 0:04:05.880 --> 0:04:10.160 stability of any system. I've explored really two thousand years 0:04:10.160 --> 0:04:12.920 of history, but in the last two books, both on 0:04:12.960 --> 0:04:16.160 the question of trade and conflict, I found that at 0:04:16.240 --> 0:04:19.520 least seventy five percent of the big conflicts between great 0:04:19.560 --> 0:04:22.279 powers over the last two hundred and fifty years have 0:04:22.360 --> 0:04:26.080 been directly related to the role of trade and commerce. 0:04:26.360 --> 0:04:30.440 But here's what's interesting. We have two big perspectives out there. 0:04:30.600 --> 0:04:34.120 The liberals believe trade always leads to peace, because hey, 0:04:34.160 --> 0:04:37.680 if US and China are trading extensively, why wouldn't they 0:04:37.680 --> 0:04:40.600 want to keep the peace going? And the realist school 0:04:40.640 --> 0:04:44.760 believes it's the opposite, that trade leads to high dependency 0:04:44.920 --> 0:04:47.159 and worries about the future, I'm going to be cut 0:04:47.200 --> 0:04:50.440 off and therefore trade should lead to conflict. And you 0:04:50.480 --> 0:04:53.560 see this divide in lots of debates Merscheimer versus some 0:04:53.600 --> 0:04:56.880 of the liberals, for example. But my position is an 0:04:56.880 --> 0:05:00.799 intermediate one, and it says, under certain circums stances, trade 0:05:00.800 --> 0:05:03.880 can be very good for peace. If states have positive 0:05:03.920 --> 0:05:07.720 expectations about the future trade environment, they expect to get 0:05:07.800 --> 0:05:11.640 the trade that helps them grow economically and militarily, then 0:05:11.680 --> 0:05:13.880 they want to keep the peace going. Think of China 0:05:13.960 --> 0:05:17.400 since nineteen ninety. It wants the peace, it wants the trade, 0:05:17.800 --> 0:05:20.200 and it wants to keep growing through that trade, and 0:05:20.240 --> 0:05:23.919 it's been great for China. The other aspect of this, though, 0:05:24.040 --> 0:05:28.359 in history, is if expectations of future trade start to 0:05:28.560 --> 0:05:33.040 fall or become negative, then the realist kind of logic 0:05:33.160 --> 0:05:36.559 kicks in and you have states that become pessimistic about 0:05:36.560 --> 0:05:40.280 the future. Think of Japan nineteen forty one, and they 0:05:40.320 --> 0:05:43.400 decide that they need to go to war to protect 0:05:43.520 --> 0:05:46.880 and to get access to the raw materials and markets 0:05:47.240 --> 0:05:51.719 that they need for basic domestic stability and economic success. 0:05:52.400 --> 0:05:55.520 So it could go each way. And what of course 0:05:55.560 --> 0:05:59.000 that means is that diplomacy matters a lot Us and China, 0:05:59.080 --> 0:06:03.160 for example, could be very peaceful over the next two 0:06:03.279 --> 0:06:07.160 decades if the expectations of future trade are positive on 0:06:07.200 --> 0:06:11.400 both sides. But if tariffs or economic sanctions kick in 0:06:12.040 --> 0:06:14.880 and both sides or one side start to believe that 0:06:14.920 --> 0:06:18.719 they're doomed to not have access to the world markets 0:06:18.760 --> 0:06:22.280 they need, then the nineteen forty one scenario of Japan 0:06:22.400 --> 0:06:26.080 might kick in, and it might lead to China, for example, 0:06:26.120 --> 0:06:30.000 going after Southeast Asia you mentioned Taiwan, or might mean 0:06:30.000 --> 0:06:33.120 the US decides it needs to be more aggressive to 0:06:33.360 --> 0:06:37.159 keep access to raw materials from Africa or from Latin 0:06:37.200 --> 0:06:40.440 America South America. So you can see that the basic 0:06:40.480 --> 0:06:42.800 point here is that trade can go either way. For 0:06:42.960 --> 0:06:46.640 my argument and my case studies almost always show this, 0:06:47.120 --> 0:06:48.719 and I can talk about a lot of them, but 0:06:48.800 --> 0:06:51.560 the most recent book, in fact, starts with the one 0:06:51.600 --> 0:06:55.360 you mentioned, which is The American Revolution, and I would 0:06:55.400 --> 0:06:58.680 say a much more complex view, but it's rooted in 0:06:58.800 --> 0:07:02.520 commerce and how the Americans felt that they were being 0:07:02.800 --> 0:07:06.479 kept down by the British from growing and becoming the 0:07:06.520 --> 0:07:09.320 fullest kind of power they could be, and they had 0:07:09.400 --> 0:07:12.680 to fight a war to break those economic sanctions or 0:07:12.680 --> 0:07:15.960 at least the trade restrictions and the restrictions that were 0:07:15.960 --> 0:07:20.720 built into the tax code that the British imposed. And ironically, 0:07:20.720 --> 0:07:23.760 and I say that the best case for thinking about 0:07:23.840 --> 0:07:26.600 US China today, or at least the one to avoid, 0:07:27.320 --> 0:07:31.720 is it seventeen fifty to seventeen seventy six case, where 0:07:32.760 --> 0:07:35.840 in this case the rising state is China, and it 0:07:36.000 --> 0:07:39.400 was back then the British North Americans and the declining 0:07:39.400 --> 0:07:42.440 state of Britain back then in the US now is 0:07:42.480 --> 0:07:44.640 a good lesson for us If we avoid what the 0:07:44.680 --> 0:07:48.520 British did, which is the extensive trade restrictions on the 0:07:48.600 --> 0:07:52.200 rising state, we can avoid of an intense cold war 0:07:52.240 --> 0:07:55.520 and in fact, of course avoid an actual hot war. 0:07:55.920 --> 0:07:58.160 So we can talk about this in a more general sense. 0:07:58.200 --> 0:08:00.960 But that's the bottom line, that's the over you about 0:08:00.960 --> 0:08:03.320 how trade leads to conflict or to peace. 0:08:03.880 --> 0:08:07.000 So I always thought of realism as a school of 0:08:07.040 --> 0:08:11.440 thought that emphasizes relative gains. So you know, two sides 0:08:11.560 --> 0:08:14.160 can be trading partners, but if one of the trading 0:08:14.200 --> 0:08:19.200 partners is getting a huge advantage or growing enormously more 0:08:19.280 --> 0:08:21.760 than the other side, then that kind of leads to tensions. 0:08:21.760 --> 0:08:25.480 Whereas in the neoliberal framework. It's all about absolute gains, right. 0:08:25.520 --> 0:08:29.520 If everyone is benefiting, even if they're unequal gains, then 0:08:29.640 --> 0:08:34.320 everyone is happy. So I'm curious, maybe help us understand 0:08:34.679 --> 0:08:39.040 your framework. I think you call it dynamic realism. Can 0:08:39.080 --> 0:08:40.959 you give us an example and sort of walk us 0:08:41.000 --> 0:08:43.920 through exactly how it works and how it differs from 0:08:43.960 --> 0:08:48.920 traditional interpretations of neoliberalism or just liberalism versus realism. 0:08:49.160 --> 0:08:52.720 Sure, Tracy, you captured one aspect, mostly the so called 0:08:52.800 --> 0:08:57.320 offensive realist perspective John Meerscheimer and so forth, which is 0:08:57.360 --> 0:09:01.240 that states in that view are always anxious and worried 0:09:01.280 --> 0:09:03.760 about the future, so they don't they never want to 0:09:03.880 --> 0:09:08.240 let a inferior state grow through trade. That relative game 0:09:08.280 --> 0:09:11.240 you talked about, and John Meiershemer for thirty five years 0:09:11.360 --> 0:09:13.760 is said, don't trade with China, it's going to grow, 0:09:13.920 --> 0:09:16.760 And of course China did grow through trade, and he 0:09:16.840 --> 0:09:19.800 finds that very upsetting. He was one of my professors 0:09:19.920 --> 0:09:23.920 at my PhD level. And that's one aspect. But my 0:09:24.120 --> 0:09:28.920 argument is that smart great powers actually balance or try 0:09:28.960 --> 0:09:32.800 to grapple with the trade offs in foreign policy. Yes, 0:09:32.880 --> 0:09:35.800 on the one hand, if you're really obsessed with the future, 0:09:35.880 --> 0:09:38.160 you don't want to let a Hitler grow, for example, 0:09:38.440 --> 0:09:42.000 so trading with Germany after nineteen thirty or nineteen thirty 0:09:42.000 --> 0:09:45.839 three was a wrong headed thing. You want to constrain 0:09:45.920 --> 0:09:49.520 that state from growing. On the other hand, most states 0:09:49.520 --> 0:09:53.360 in history, including China, are not that bad. They may 0:09:53.440 --> 0:09:56.920 have some aggressive intentions, but they are not necessarily going 0:09:56.960 --> 0:09:59.640 to destroy you. And when you're faced with that kind 0:09:59.679 --> 0:10:03.640 of state, you want to balance off the desire to 0:10:03.720 --> 0:10:08.079 keep the other down from the willingness or the desire 0:10:08.440 --> 0:10:12.520 to let's just say, constrain that other state through trade benefits. 0:10:12.920 --> 0:10:15.280 And you want to give China, for example, through the 0:10:15.360 --> 0:10:20.320 nineteen nineties and after, the ability to grow and be 0:10:20.440 --> 0:10:24.520 relatively peaceful in that growth and have incentives to not 0:10:24.920 --> 0:10:28.120 go after the system and China we can talk about this, 0:10:28.240 --> 0:10:31.480 but China is quite a unique power. It wants trade, 0:10:31.520 --> 0:10:34.719 it needs trade for domestic stability, and it has good 0:10:34.760 --> 0:10:37.480 reasons not to want to take over the world, so 0:10:37.600 --> 0:10:41.640 to speak, because of its domestic situation. So helping that 0:10:42.080 --> 0:10:46.040 state grow and build up its power is actually not 0:10:46.120 --> 0:10:50.920 necessarily a good thing, but it's relative to the alternatives, namely, 0:10:50.960 --> 0:10:54.400 cutting it off is actually a lesser of two evils, 0:10:54.720 --> 0:10:57.000 and that's where we bring in this other school of 0:10:57.040 --> 0:10:59.959 thought we call defense of realism, and in my chain 0:11:00.080 --> 0:11:02.640 after two of my new book, A World's Safe for Commerce, 0:11:03.200 --> 0:11:06.640 I do talk about that about the willingness of states 0:11:06.679 --> 0:11:10.320 making trade offs to accept a relative loss, that is, 0:11:10.400 --> 0:11:14.959 letting China grow through trade for the benefit of making 0:11:15.280 --> 0:11:19.480 the overall system more stable, and to convince the other 0:11:19.920 --> 0:11:23.400 that it does have positive trade expectations and therefore doesn't 0:11:23.400 --> 0:11:26.040 have to go on the warpath, doesn't have to even 0:11:26.080 --> 0:11:28.959 go after Taiwan. And this, if we want to get 0:11:29.000 --> 0:11:32.200 to my bottom line is the thing about Taiwan is 0:11:32.360 --> 0:11:36.160 Taiwan will not is very unlikely to be attacked in 0:11:36.240 --> 0:11:40.320 my view, because of these economic constraints, and it's very 0:11:40.360 --> 0:11:44.760 important to realize that China knows this and doesn't want 0:11:44.800 --> 0:11:48.320 to upset the apple cart by doing something perhaps as 0:11:48.400 --> 0:11:52.720 foolish as taking over Taiwan and having huge economic sanctions 0:11:52.880 --> 0:11:56.480 and disruptions to global value chains and global supply chains 0:11:56.920 --> 0:12:00.480 kick in, and that would cause a declining situation for 0:12:00.720 --> 0:12:02.160 China that it does not want. 0:12:03.000 --> 0:12:05.960 So is the argument for dynamic realism is that basically 0:12:06.040 --> 0:12:11.199 that countries can kind of shift between offensive versus defensive 0:12:11.240 --> 0:12:15.080 realism depending on the situation, and I guess their future 0:12:15.160 --> 0:12:19.440 expectations for the economy and respective growth and things like that. 0:12:19.559 --> 0:12:22.120 And if so, can you maybe give us an example, 0:12:22.240 --> 0:12:25.040 an actual historical example of like where that happened. 0:12:25.559 --> 0:12:27.880 Sure, I'd love to come back to the Japan one, 0:12:27.960 --> 0:12:31.120 since people do know about it. In my second book 0:12:31.160 --> 0:12:35.560 called Economic Interdependence in War, I study through two chapters 0:12:36.280 --> 0:12:41.400 three chapters, really Japan's growth from eighteen eighty onwards and 0:12:41.480 --> 0:12:44.400 the number of conflicts it did get into with Russia 0:12:44.440 --> 0:12:47.440 for example nineteen oh four, and of course with the 0:12:47.559 --> 0:12:50.640 US in nineteen forty one, but also the long periods 0:12:50.679 --> 0:12:55.319 of peace that Japan had, and why was Japan oscillating 0:12:55.360 --> 0:12:59.560 between relative peace and then all out major conflict while 0:12:59.600 --> 0:13:01.960 it has obviously a lot to do with commerce and 0:13:02.000 --> 0:13:05.480 its expectations of the future. So I wouldn't say that 0:13:05.520 --> 0:13:10.880 the great powers are oscillating themselves between offensive and defensive realism. 0:13:11.120 --> 0:13:13.120 What I actually try to do is blend the two 0:13:13.280 --> 0:13:18.160 into one single argument, so that what this means is 0:13:18.200 --> 0:13:22.719 that states are constantly grappling every moment really with this 0:13:22.840 --> 0:13:28.040 trade off between trying to expand their power sphere, economic power, sphere, 0:13:28.360 --> 0:13:32.160 their economic connections, so they can grow their own power base, 0:13:32.200 --> 0:13:36.480 their long term power based through trade and avoiding kicking 0:13:36.520 --> 0:13:40.640 in or propelling a cycle of mistrust and hostility with 0:13:40.720 --> 0:13:43.559 another state that might lead to a war that neither 0:13:43.640 --> 0:13:47.640 side wants. So think of the Japan case. Japan, initially 0:13:47.679 --> 0:13:52.040 from eighteen eighty to really nineteen hundred was relatively moderate. 0:13:52.400 --> 0:13:55.640 Relatively moderate, had a small war with China, but it 0:13:55.720 --> 0:13:59.160 tried to avoid big wars with big powers. And yet 0:13:59.200 --> 0:14:01.680 it got itself in to a Russo Japanese war in 0:14:01.760 --> 0:14:05.800 nineteen oh four, but that was largely because of Russia's 0:14:06.040 --> 0:14:09.960 bad behavior you might say in Manchuria and its threat 0:14:10.000 --> 0:14:15.040 to Japan's willingness and effort to trade more extensively with 0:14:15.320 --> 0:14:19.440 China itself. So it's quite clear from the documents that 0:14:19.560 --> 0:14:24.120 Japan reluctantly, after trying diplomacy, got into a war with 0:14:24.280 --> 0:14:27.440 Russia that it started. Japan started the war, but it 0:14:27.480 --> 0:14:31.880 did so only reluctantly after diplomacy had failed. In other words, 0:14:32.000 --> 0:14:36.480 it's negative expectations kicked it into a more aggressive mode. 0:14:36.680 --> 0:14:38.880 I wouldn't call that offensive realism. I would call it 0:14:38.960 --> 0:14:42.520 my dynamic realist approach, which says, if you believe you're 0:14:42.560 --> 0:14:47.160 declining because of trade cutoffs or expectations of trade cutoffs, 0:14:47.200 --> 0:14:49.080 you're going to become aggressive, and you have to be 0:14:49.120 --> 0:14:53.240 aggressive to protect your long term trade position. Now, guess 0:14:53.240 --> 0:14:57.720 what after World War One in the nineteen twenties, Japan 0:14:57.840 --> 0:15:01.920 was very moderate. We call it Shitahara diplomacy after the 0:15:01.960 --> 0:15:05.520 Foreign Minister Shitdahara. But Japan worked with the US. It 0:15:05.600 --> 0:15:10.040 had arms controlled agreements with the US. It increased quite 0:15:10.080 --> 0:15:12.720 extensively it's trade with the United States and with all 0:15:12.760 --> 0:15:16.760 great powers. And guess what nineteen thirty comes along and 0:15:16.880 --> 0:15:22.520 with the Great Depression. This is contemporary importance. US kicks 0:15:22.520 --> 0:15:25.480 in these very high tariffs. These high tariffs called the 0:15:25.480 --> 0:15:30.840 Smooth Holly Tariffs of nineteen thirty completely devastated Japan. Japan 0:15:30.960 --> 0:15:33.640 lost two thirds of its trade in one and a 0:15:33.640 --> 0:15:37.400 half years because of the Smooth Holly tariffs, and that 0:15:38.080 --> 0:15:42.440 changed everything. Japan, even with Shiitdahara still in the government, 0:15:43.000 --> 0:15:46.880 decided to as everyone knows, invade Manchuria and take over 0:15:47.080 --> 0:15:50.480 a huge part of China, take it over and control 0:15:50.520 --> 0:15:54.240 it militarily. That was September nineteen thirty one. And then 0:15:54.520 --> 0:15:57.200 with China at least, things just got went from bad 0:15:57.240 --> 0:16:00.320 to worse, and by nineteen thirty eight thirty nine it 0:16:00.360 --> 0:16:04.360 was fighting wars with the Soviet Union on the Manchurian border, 0:16:04.720 --> 0:16:08.960 and that led the US to further restrictions on oil, 0:16:09.040 --> 0:16:13.080 in particular by nineteen forty one, and those oil restrictions 0:16:13.120 --> 0:16:16.720 that were coordinated with Britain and the Dutch led to 0:16:17.080 --> 0:16:20.840 Japan declining by my estimation about twenty percent per year, 0:16:21.400 --> 0:16:24.280 and that led to Pearl Harbor. Now there's a lot 0:16:24.320 --> 0:16:27.120 of details there, Japan trying to get the oil back 0:16:27.200 --> 0:16:31.440 through diplomacy, the US almost making agreements and then cutting 0:16:31.520 --> 0:16:35.720 those diplomatic agreements off and leading to the pessimism, the 0:16:35.800 --> 0:16:40.200 negative expectations of future trade that led to a massive 0:16:40.560 --> 0:16:44.040 war we call the Pacific War. But that's a parallel, 0:16:44.280 --> 0:16:48.360 a very powerful one. And the Chinese understand that they 0:16:48.440 --> 0:16:50.960 understand that they do not want to get into a 0:16:51.560 --> 0:16:55.720 tariff spiral tit for tat a decoupling of the two 0:16:55.800 --> 0:16:59.760 economies that could make China start to decline in relative 0:16:59.760 --> 0:17:03.280 power and make it turn to the ultimate weapon, which 0:17:03.320 --> 0:17:08.280 is this preventive war to restore trade, especially in Southeast Asia, 0:17:08.320 --> 0:17:11.879 which did not go well for Japan, and everyone knows that, 0:17:12.560 --> 0:17:14.199 so China wants to avoid that. 0:17:29.640 --> 0:17:31.800 I don't want to, like skip to the final chapter 0:17:32.040 --> 0:17:36.840 of the book here, the proverbial book. But smooth, Holly, 0:17:37.520 --> 0:17:41.359 these various trade restrictions, like it does not sound good. 0:17:41.560 --> 0:17:44.880 It sounds like if someone was listening to you about 0:17:44.920 --> 0:17:48.359 what is the optimal way to avoid war. It sounds 0:17:48.400 --> 0:17:50.880 like we're on the exact opposite trajectory as of right now. 0:17:51.200 --> 0:17:54.200 Well, here's the thing, and Joe, you in some ways 0:17:54.200 --> 0:17:57.199 embedded this in your point. If we, at least in 0:17:57.200 --> 0:18:00.240 my view, if we understand history, if we understand and 0:18:00.400 --> 0:18:03.800 good theory as well, and have a more dynamic realist 0:18:03.840 --> 0:18:07.800 approach which shows these rational actors making trade offs in 0:18:07.880 --> 0:18:11.560 policy between two or three different forms of realism, if 0:18:11.560 --> 0:18:14.800 you will, then we can avoid the mistakes we made 0:18:14.800 --> 0:18:15.399 in the past. 0:18:15.520 --> 0:18:18.439 We can. But I'm just saying, at least in terms 0:18:18.520 --> 0:18:22.520 of the policy choices that we've seen lately, it does 0:18:22.640 --> 0:18:25.399 not sound like we are making the choices that reduce 0:18:25.480 --> 0:18:26.080 the temperature. 0:18:26.240 --> 0:18:30.480 Ah, but this is so interesting. Let's just go back 0:18:30.520 --> 0:18:34.879 in time here. Think of early April and Trump initially, 0:18:34.960 --> 0:18:37.000 if when he held up his big sign had thirty 0:18:37.040 --> 0:18:39.639 three percent or thirty four percent tariffs on China and 0:18:39.720 --> 0:18:42.800 much higher tariffs on other states, you know, Thailand and 0:18:42.840 --> 0:18:47.040 so forth. And that sign was a sign that Trump 0:18:47.119 --> 0:18:49.320 was going to go all out with tariffs on everyone, 0:18:49.400 --> 0:18:53.880 on every product. Most economists and myself included, I have 0:18:54.080 --> 0:18:58.080 a background in economics, would say this was a foolish policy. 0:18:58.240 --> 0:19:01.400 But guess what happened. Within a week or so, he 0:19:01.520 --> 0:19:05.399 backed away from the massive tariffs on all the allies. 0:19:05.840 --> 0:19:09.640 But because I think he had to at least show 0:19:09.680 --> 0:19:12.000 that he was still tough, he went to one hundred 0:19:12.000 --> 0:19:15.000 and forty five percent tariffs on China, and China of 0:19:15.040 --> 0:19:18.199 course retaliated. That's what you do in bargaining. You you 0:19:18.359 --> 0:19:21.280 show your resolve and you stick to your guns, and 0:19:21.320 --> 0:19:24.200 you show that you can hurt the other. And once 0:19:24.320 --> 0:19:27.320 China kicked in high tariffs or the prospect of it, 0:19:27.720 --> 0:19:30.879 and especially after it said to the US, we will 0:19:30.920 --> 0:19:34.880 not send you rare earth and critical minerals. We will 0:19:34.920 --> 0:19:37.199 not give you the kind of minerals you need to 0:19:37.240 --> 0:19:40.600 be a high tech economy. Guess what happened May twelfth, 0:19:41.119 --> 0:19:44.399 There was an agreement, and the agreement basically said, oh well, 0:19:44.720 --> 0:19:47.720 let's hold off on any big tariffs for you know, 0:19:47.840 --> 0:19:50.920 ninety days, and we went back down to I think 0:19:50.920 --> 0:19:54.320 for the US thirty percent and China ten percent. Was 0:19:54.320 --> 0:19:57.440 it a victory? Not really? But what did it show. 0:19:57.600 --> 0:20:01.280 It showed that the learning curve I was very steep 0:20:01.480 --> 0:20:04.720 within an administration that is not known for having a 0:20:04.800 --> 0:20:08.080 huge knowledge of history. Let's be honest, but there were 0:20:08.200 --> 0:20:11.640 enough smart people in the Treasury Department, in the Commerce Department, 0:20:11.720 --> 0:20:14.359 I think, in the Defense Department. It said, if we 0:20:14.520 --> 0:20:17.440 keep this up, we could get the smooth Holly effect. 0:20:17.480 --> 0:20:20.359 We could get the nineteen thirties all over again. We 0:20:20.440 --> 0:20:24.080 could get a decoupling of the two economies, which, from 0:20:24.160 --> 0:20:27.440 China's point of view, and Bloomberg itself a year ago 0:20:27.800 --> 0:20:30.680 kind of confirmed this, which from China's point of view, 0:20:30.680 --> 0:20:34.520 could cause a fifteen to seventeen percent decline in China's 0:20:34.560 --> 0:20:38.480 economy should a full decoupling and trade sanctions kick in. 0:20:38.920 --> 0:20:42.840 So I'm not pessimistic, to be honest, I'm actually optimistic 0:20:43.000 --> 0:20:46.560 that there's enough learning already going on to make sure 0:20:46.600 --> 0:20:50.320 that we will get an agreement. I believe with China 0:20:50.440 --> 0:20:53.399 on tariffs they won't be super high. Maybe I don't know, 0:20:53.520 --> 0:20:56.359 thirty five percent or something, but they're not going to 0:20:56.400 --> 0:20:59.800 be the kinds of embargo type of tariffs that we 0:20:59.800 --> 0:21:03.719 saw in nineteen forty one. That they weren't even tariffs, 0:21:03.760 --> 0:21:06.480 they were just Japan you will not get any oil 0:21:06.600 --> 0:21:10.080 from us, the US or from our allies, and that 0:21:10.200 --> 0:21:13.840 was what was causing such distress within the Japanese leadership. 0:21:14.200 --> 0:21:16.720 So you can see again that I have a bit 0:21:16.720 --> 0:21:19.159 of an agenda here. My agenda is to get this 0:21:19.320 --> 0:21:23.480 history out there so that people can understand what mistakes 0:21:23.560 --> 0:21:27.120 were made, why states were not fully rational even if 0:21:27.119 --> 0:21:30.120 they were thinking largely in my terms, and what kinds 0:21:30.160 --> 0:21:33.520 of adjustments we can make now to avoid even a 0:21:33.560 --> 0:21:35.320 cold war, let alone a hot war. 0:21:36.440 --> 0:21:39.639 The example of rare Earth just then actually reminded me 0:21:39.720 --> 0:21:42.080 of something I wanted to ask, which is, in your 0:21:42.160 --> 0:21:46.720 analysis or your framework, does it matter whether the trade 0:21:46.800 --> 0:21:50.919 between two respective sides or maybe multiple respective sides is 0:21:51.000 --> 0:21:56.520 driven by exports or imports or capital flows. Is there 0:21:56.560 --> 0:21:59.960 a qualitative difference in how people are thinking about foreign 0:22:00.040 --> 0:22:04.480 policy depending on where the trade tension is actually coming in, 0:22:04.640 --> 0:22:07.560 like if it's oil or like if it's rare Earth's 0:22:07.560 --> 0:22:11.080 something that people deem crucial to their technological development. 0:22:12.119 --> 0:22:16.159 Well, tracy is a great question and very much understudied 0:22:16.320 --> 0:22:19.800 within the field of international relations. I should mention my background. 0:22:20.240 --> 0:22:23.000 I was originally born in Canada, but my background up 0:22:23.040 --> 0:22:26.560 in Canada was in business and economics, and I worked 0:22:26.560 --> 0:22:29.919 as a finance and marketing executive in Toronto for a 0:22:29.960 --> 0:22:32.680 couple of years before I saw the light and studied 0:22:32.680 --> 0:22:35.880 international Truly the perfect gust. Well, there you go, and 0:22:36.200 --> 0:22:39.240 we can talk corporate policies as well. But what I 0:22:39.359 --> 0:22:42.080 learned from that time period of my life, but also 0:22:42.280 --> 0:22:45.440 from my knowledge and study of history, is that specific 0:22:45.520 --> 0:22:49.640 products matter a lot. The qualitative nature of the product matters. 0:22:50.000 --> 0:22:51.720 I'm going to give you an example I always give 0:22:51.760 --> 0:22:54.119 my students, which is if you have a car. You 0:22:54.200 --> 0:22:57.040 might say that the gas in the car is one 0:22:57.160 --> 0:22:59.960 percent of the weight of the car and maybe less 0:23:00.080 --> 0:23:02.840 on that in terms of its value, But you can't 0:23:03.119 --> 0:23:06.920 drive the car without guests, and so that people say, oh, 0:23:07.000 --> 0:23:10.480 rarers are only you know, one percent of our imports. Well, 0:23:10.920 --> 0:23:14.320 if you can't have rarers, you can't build the computers 0:23:14.320 --> 0:23:17.000 that we're talking through right now. You can't be at 0:23:17.080 --> 0:23:20.960 least at the technological edge and China will then overtake 0:23:21.040 --> 0:23:26.520 you technologically. And ironically, China knows this and is using 0:23:26.600 --> 0:23:28.840 this to say to the US, you want to stay 0:23:29.400 --> 0:23:31.920 you know, equal with us or ahead of us in 0:23:32.520 --> 0:23:35.640 let's say the highest of high tech products like semiconductors 0:23:36.040 --> 0:23:38.920 and so forth. Well, you're going to need our rarers, 0:23:39.280 --> 0:23:42.600 and we want to be coupled with you economically because 0:23:42.600 --> 0:23:45.800 that means our domestic stability at home will be strong. 0:23:46.200 --> 0:23:49.920 So let's play this game together and keep our trade 0:23:49.960 --> 0:23:53.200 levels high. That's the Chinese position, and we can talk 0:23:53.240 --> 0:23:56.639