Setser Says China Auto Capacity of 55M Units Threatens Global Plants
The Ezra Klein Show
Beijing's redirection of state bank credit from a collapsed property sector into advanced manufacturing has engineered structural overcapacity that unilateral tariffs cannot stop without coordinated allied trade blocs.
China Shock 2.0 has shifted into advanced manufacturing, with China constructing approximately 55 million vehicles per year in auto capacity against a total global demand of 85 to 90 million units. (22:27)
Following China's property crash under the 'Three Red Lines' policy in 2021, Beijing rechanneled bank credit into manufacturing, driving net exports to account for 1.5 to 2 percentage points of China's 3 to 4 percent domestic growth. (13:07)
The second China shock exerts severe asymmetric pressure on Europe and Japan; German goods exports to China contracted by roughly one full percentage point of German GDP as Chinese auto imports halved and exports neared 10 million units. (15:19)
Chinese state-owned commercial banks conduct shadow foreign exchange intervention by purchasing foreign assets at an estimated pace of $50 billion monthly ($600 billion annually) to artificially suppress the yuan. (30:41)
A potential 'China Shock 3.0' threatens the foundation of U.S. services and technology platforms through low-cost, frontier open-source AI models backed by rapid, unconstrained domestic power buildouts. (56:40)
Detailed notes
## Background
Published on YouTube by The Ezra Klein Show on August 21, 2026, this episode features Council on Foreign Relations senior fellow and former trade official Brad Setser. According to the page description, Setser warns that the world has entered the early stages of a destabilizing 'China Shock 2.0,' where China's rapid dominance in advanced manufacturing like electric vehicles, batteries, and artificial intelligence poses severe threats to global economies and domestic politics.
## TL;DR
Ezra Klein and Brad Setser examine how China transitioned from the low-cost consumer export surge of 'China Shock 1.0' to an advanced manufacturing powerhouse driven by state-directed capital following its domestic real estate bust. Setser details how structural domestic imbalances—including low consumption, thin social safety nets, and vast industrial overcapacity—force Chinese firms to dump surplus production into international markets, heavily threatening European and Japanese automotive sectors. The discussion critically assesses the evolution of U.S. trade policy across the Trump and Biden administrations, arguing that unilateral, blanket tariffs failed to address fundamental imbalances while highlighting genuine Western supply chain vulnerabilities in critical minerals. Looking forward, Setser warns of an emerging 'China Shock 3.0' targeting software and artificial intelligence, urging democratic allies to convert traditional security pacts into coordinated economic blocs to safeguard technological autonomy.
## Atmosphere & style
The conversation is cerebral, forensic, and deeply analytical, trading sensationalist geopolitical rhetoric for methodical balance-sheet economics and hard industrial data. Ezra Klein acts as an inquisitive, synthesist interlocutor, translating intricate trade mechanics and macroeconomic distortions into clear political stakes, while Setser offers calm, encyclopedic insight rooted in decades of high-level policy experience. The overarching mood carries a sober, mounting gravity as the discussion moves from past Western policy blind spots to the immense scale of structural overcapacity and the daunting geopolitical choices confronting advanced democracies.
## Bulletin
- [22:27](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1347s) China Shock 2.0 has shifted into advanced manufacturing, with China constructing approximately 55 million vehicles per year in auto capacity against a total global demand of 85 to 90 million units.
- [13:07](https://www.youtube.com/watch?v=2PffKnEEY-E&t=787s) Following China's property crash under the 'Three Red Lines' policy in 2021, Beijing rechanneled bank credit into manufacturing, driving net exports to account for 1.5 to 2 percentage points of China's 3 to 4 percent domestic growth.
- [15:19](https://www.youtube.com/watch?v=2PffKnEEY-E&t=919s) The second China shock exerts severe asymmetric pressure on Europe and Japan; German goods exports to China contracted by roughly one full percentage point of German GDP as Chinese auto imports halved and exports neared 10 million units.
- [30:41](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1841s) Chinese state-owned commercial banks conduct shadow foreign exchange intervention by purchasing foreign assets at an estimated pace of $50 billion monthly ($600 billion annually) to artificially suppress the yuan.
- [56:40](https://www.youtube.com/watch?v=2PffKnEEY-E&t=3400s) A potential 'China Shock 3.0' threatens the foundation of U.S. services and technology platforms through low-cost, frontier open-source AI models backed by rapid, unconstrained domestic power buildouts.
## Key takeaways
- [01:33](https://www.youtube.com/watch?v=2PffKnEEY-E&t=93s) China Shock 1.0 decimated localized industrial centers across the American Midwest and South, contributing to persistent economic scarring, deaths of despair, and eventual political realignments.
- [03:49](https://www.youtube.com/watch?v=2PffKnEEY-E&t=229s) The original Washington consensus that global trade integration would naturally liberalize China and shift Western workers to higher-value sectors failed to materialize.
- [07:54](https://www.youtube.com/watch?v=2PffKnEEY-E&t=474s) China's economic model structurally represses domestic consumption through regressive taxation, a restrictive hukou household registration system, and a minimal social safety net.
- [11:03](https://www.youtube.com/watch?v=2PffKnEEY-E&t=663s) Exceptionally high Chinese household savings exceeding 40 percent of GDP are pooled by state-owned commercial banks to subsidize strategic manufacturing champions.
- [13:07](https://www.youtube.com/watch?v=2PffKnEEY-E&t=787s) Beijing offset the 2021 real estate collapse by channeling credit into advanced manufacturing exports, triggering China Shock 2.0.
- [15:19](https://www.youtube.com/watch?v=2PffKnEEY-E&t=919s) Europe bears the brunt of China Shock 2.0 due to its reliance on automotive and industrial machinery exports, directly threatening the continent's engineering and R&D base.
- [18:20](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1100s) China bypassed Western internal combustion engine dominance by aggressively subsidizing electric vehicles, batteries, and local supply chains.
- [22:27](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1347s) Chinese automotive and battery manufacturing capacity now significantly outstrips global consumer absorption, forcing factory closures abroad.
- [30:41](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1841s) Beijing executes shadow currency intervention through state-owned banks buying foreign assets to prevent the yuan from strengthening alongside trade surpluses.
- [32:45](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1965s) Western trade debate has moved beyond procedural WTO compliance toward defensive industrial policy aimed at national security and supply chain autonomy.
- [42:37](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2557s) Targeted 25 percent tariffs under Trump 1.0 were economically absorbable, whereas indiscriminate escalations up to 145 percent under Trump 2.0 exposed domestic fragilities.
- [48:28](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2908s) China's ultimate geopolitical leverage resides in physical supply chains, notably rare earth permanent magnets, rather than the threatened dumping of U.S. Treasuries.
- [49:43](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2983s) Tariffs and trade wars largely failed to shrink China's global trade surplus, merely rerouting final assembly through third-party countries like Vietnam and Mexico.
- [52:44](https://www.youtube.com/watch?v=2PffKnEEY-E&t=3164s) A failure to form a unified North American and European economic coalition has prevented democratic nations from creating resilient, shared supply chains.
- [56:40](https://www.youtube.com/watch?v=2PffKnEEY-E&t=3400s) China Shock 3.0 could challenge American software and AI dominance by producing highly capable open-source models supported by rapid energy buildouts.
- [01:00:00](https://www.youtube.com/watch?v=2PffKnEEY-E&t=3600s) Brad Setser advocates forming bifurcated economic alliances among democracies for strategic sectors like batteries and critical minerals, while retaining benign trade in non-strategic goods.
## Detailed walkthrough
### [00:00](https://www.youtube.com/watch?v=2PffKnEEY-E&t=0s) Introduction: From Cheap Goods to the Frontier of Advanced Manufacturing
Ezra Klein frames China’s surging dominance across advanced manufacturing as the single biggest economic story in the world today. While the first wave of Chinese trade focused on low-cost goods, this new wave cuts directly into high-tech sectors: electric vehicles, advanced batteries, solar panels, and software frontiers such as cutting-edge AI models. This shift directly threatens the core manufacturing pillars of advanced economies—especially in Europe—and is set to fundamentally reshape geopolitics.
Klein introduces Brad Setser, senior fellow at the Council on Foreign Relations and former senior trade official in both the Obama and Biden administrations. Widely regarded as one of the world's most astute observers of Chinese economic policy and international trade, Setser joins the show to explain how China reached this point and what the consequences will be.
[01:33](https://www.youtube.com/watch?v=2PffKnEEY-E&t=93s) Defining China Shock 1.0 and Its Local Fallout
Klein turns to the origins of this dynamic, asking Setser to define "China Shock 1.0." Setser traces it back to roughly 2002, following China’s accession to the World Trade Organization (WTO). The immediate effect was an enormous surge of Chinese exports in relatively low-end manufactured goods: furniture, household appliances, and apparel. At the time, Washington policymakers largely dismissed these sectors as legacy industries rather than "the industries of the future."
The academic literature later proved that this dismissal completely missed the localized nature of the damage. Millions of Americans—particularly across the Industrial Midwest and the South—relied on these exact factories. When a plant shuttered, the shock cascaded through the surrounding community: local real estate values tanked, diner owners lost customer bases, and entire municipal tax ecosystems collapsed into a generalized downturn. Later studies directly tied exposure to this import shock to rising "deaths of despair" and the tectonic political realignments that fueled the rise of Donald Trump. Klein and Setser agree that the United States never prepared a coherent policy response to cushion the blow or assist these communities in transition.
```mermaid
flowchart TD
accTitle: The Mechanics of China Shock 1.0
accDescr: Flowchart illustrating how WTO entry led to factory closures and political realignment in the US.
subgraph TradeShift["Global Trade Shock"]
A["China enters WTO (2001-2002)"] --> B["Surge of low-end exports:<br/>furniture, appliances, clothing"]
B --> C["US factories in Midwest & South<br/>undercut & shuttered"]
end
subgraph LocalSpillover["Local Economic Contagion"]
C --> D["Loss of direct factory payroll"]
D --> E["Plummeting home values & property tax bases"]
D --> F["Secondary business failures<br/>(diners, service providers)"]
end
subgraph SociopoliticalImpact["Social & Political Fall-out"]
E --> G["Long-term regional decline"]
F --> G
G --> H["Rising deaths of despair"]
G --> I["Voter realignment & support for Trump"]
end
```
[03:49](https://www.youtube.com/watch?v=2PffKnEEY-E&t=229s) The Flawed Consensus of the 2000s: "Taming the Dragon"
Klein asks Setser to reconstruct the dominant economic argument made at the turn of the millennium. Setser explains that the prevailing consensus rested on three core assumptions:
1. China's integration into global capitalism was seen as historically inevitable, and the WTO negotiated entry terms seemed to provide an adequate regulatory framework.
2. Trade theory posited that dynamic, flexible Western labor markets would smoothly reallocate workers from declining, import-competing sectors into high-wage exporting industries and the services sector.
3. Commercial interdependence was expected to act as a liberalizing force: commerce would "tame the dragon," moderating Beijing's foreign policy and nudging the domestic regime toward political and economic liberalization.
Alongside these strategic premises stood the consumer argument: if China was willing to subsidize cheap products for American consumers, it acted as a permanent gift that suppressed domestic inflation. Setser adds an essential asterisk to that narrative. While consumer manufactured items did become notably cheaper at retailers like Walmart and Target, China’s massive domestic investment and industrialization put fierce upward pressure on global commodity markets. The savings a family enjoyed on imported clothing and toys were frequently offset by soaring oil prices at the gas pump: "it cost you more to fill up your car to get to Target."
[06:53](https://www.youtube.com/watch?v=2PffKnEEY-E&t=413s) Where the Theory Broke Down
The consensus unravelled along two major fault lines. First, China never transformed into the open, voracious destination for American exports that Western negotiators had promised. In fact, starting around 2004—just two years after joining the WTO—China's imports as a share of its own gross domestic product began to decline.
Second, Beijing refused to converge with Western-style market capitalism. The reigning assumption had been that the state would "wither away," leading to the privatization of state-owned enterprises (SOEs) and the adoption of an American or European economic framework. Instead, China achieved unprecedented economic growth precisely by maintaining and refining a distinctly state-led, non-convergent economic system.
[07:54](https://www.youtube.com/watch?v=2PffKnEEY-E&t=474s) What Makes the Chinese Economic Model Distinct
Setser outlines the structural characteristics that make the Chinese economy unique, pointing out several factors that run counter to standard Western assumptions about a communist-led system:
- **A Thin Social Safety Net:** Despite its ideological roots, China has an exceptionally weak social safety net. It does not operate an Earned Income Tax Credit (EITC) or generous direct wage subsidies.
- **Regressive Taxation:** Personal income tax collections account for roughly 1% of China’s GDP (compared to about 8% in the United States). The regime relies heavily on consumption taxes, which disproportionately burden lower-income workers.
- **The Hukou System:** China does not maintain a unified national labor market. Under the internal household registration (*hukou*) system, citizens are legally tethered to their birthplace; migrating to urban industrial centers often means forfeiting basic social rights and civic benefits.
- **A State-Controlled Banking System:** Rather than relying on a dominant Wall Street-style capital market, savings are channeled primarily through deposits in state-owned commercial banks. The government and the Party direct this domestic credit to strategic industrial priorities.
- **Dominance of State-Owned Enterprises (SOEs):** The "commanding heights" of the economy are preserved for central state monopolies. Foreign firms looking to sell soybeans must negotiate with a state oilseeds monopoly rather than private processors; airplane sales must go through a unified consortium of the three state-run airlines; and telecommunications is controlled by three state operators whose executives are appointed directly by the Party.
- **Provincial Subsidy Races:** When Beijing declares an industrial priority—such as developing a domestic semiconductor sector—provincial governments aggressively compete to sponsor national champions. Local officials provide ambitious entrepreneurs with massive subsidies, direct equity capital, free land, and state-backed bank credit, sparking ruthless internal competition among domestic firms.
[11:03](https://www.youtube.com/watch?v=2PffKnEEY-E&t=663s) High Savings, Minimal Welfare, and State-Directed Capital
Ezra Klein highlights a profound structural contrast between China’s economic development and that of the West: as China grew rich, remarkably little of its accumulated wealth flowed into a universal social safety net. In the United States, rising prosperity funded Medicare, Medicaid, Social Security, the earned income tax credit, and child tax credits. In China, however, the state intentionally limited spending on social transfers. Basic public retirement benefits for broad segments of the population remain trivial, amounting to merely tens of dollars a month, while public health insurance frequently demands heavy upfront out-of-pocket payments at hospitals. Compounding this, the legacy of the one-child policy and an intensely competitive marriage market have compelled young men and families to amass personal savings simply to afford marriage.
Brad Setser points out that these social realities produce an economy that saves a staggering proportion of its national income—consistently exceeding 40 percent of GDP. Because the Chinese state retains sweeping control over the financial system, state-run banks are perpetually flush with domestic capital. Instead of borrowing from abroad or redistributing cash to fuel household consumption, the government can self-finance unprecedented rates of capital investment. State direction and intense domestic competition operate hand in hand, channeling hundreds of billions of dollars directly into subsidized production, technological innovation, and targeted sectors Beijing aims to dominate.
* **National savings rate**: Consistently over 40% of GDP, providing a uniquely deep pool of state-controlled capital.
* **Social safety net**: Basic universal pension payouts are just "tens of dollars a month," and health insurance still entails high out-of-pocket hurdles.
* **Demographic pressure**: The one-child policy and marriage market dynamics created strong cultural and structural incentives for families and young men to maintain high precautionary savings.
---
[13:07](https://www.youtube.com/watch?v=2PffKnEEY-E&t=787s) The Pivot to China Shock 2.0: Property Bust and Export-Led Resurgence
Setser dates the emergence of "China Shock 2.0" to 2021, when Beijing cracked down on its overheated real estate sector. With empty apartment towers proliferating, Xi Jinping introduced the strict "Three Red Lines" financing rules to curb developer leverage. The policy succeeded all too well, sending the entire real estate market into a tailspin. To fill the massive economic void left by collapsing construction activity, Xi instructed the state banking apparatus to redirect credit aggressively toward high-end manufacturing. In particular, financing flooded into sectors where China still relied on imports, which Xi viewed as dangerous geopolitical vulnerabilities.
Rather than domestic consumers picking up the slack, China’s growth engine reverted to an aggressive reliance on net exports. With its domestic economy growing at around 3 to 4 percent, net exports alone contributed 1.5 to 2 percentage points of that growth. The resulting export surge expanded well beyond the consumer electronics of China Shock 1.0 into heavy machinery, electric vehicles, batteries, and tunnel boring machines. Crucially, as Chinese exports multiplied two- to three-fold faster than overall global trade, Chinese imports flatlined, creating an asymmetric trade dynamic where China sells massive volumes to the world while purchasing fewer foreign manufactured products in return.
```mermaid
flowchart TD
accTitle: Origin of China Shock 2.0
accDescr: Flowchart illustrating the chain reaction from the property crackdown to surging manufacturing exports.
subgraph Domestic["Domestic Policy Shift"]
A["2021: 'Three Red Lines' Policy"] --> B["Real Estate Sector Tanks"]
B --> C["Xi Directs State Banks to Manufacturing"]
end
subgraph Targets["Targeted Expansion"]
C --> D["Eradicate Import Vulnerabilities"]
C --> E["Mass Credit to EVs, Batteries, Machinery"]
end
subgraph Impact["Global Market Impact"]
D --> F["Chinese Imports Stagnate"]
E --> G["Exports Expand 2x–3x Faster than World Trade"]
F & G --> H["China Shock 2.0: Massive Global Trade Surpluses"]
end
```
---
[15:19](https://www.youtube.com/watch?v=2PffKnEEY-E&t=919s) The Asymmetry: Gutting Europe and Germany’s Manufacturing Core
Setser underscores that the geographic brunt of China Shock 2.0 is hitting Europe and Japan far harder than the United States. While the US share of global economic output has held steady over the past 40 years, China’s industrial rise has largely come at the direct expense of other G7 nations. Germany serves as the prime casualty. Unlike the US, which pivoted toward dominant global software and tech platforms, Germany preserved a traditional, manufacturing-heavy export model. In the aftermath of the 2008 global financial crisis, German exports of high-end sedans, luxury SUVs, Airbus A320s assembled in Hamburg, and advanced tunnel boring machines to China totaled nearly 3 percent of German GDP.
Today, that symbiotic relationship has unraveled. Chinese auto imports have plunged from around one million vehicles a year to under half a million, while Chinese auto exports exploded from under one million to nearly 10 million in just five years. Because Chinese EV manufacturers achieved rapid technological scale and cost competitiveness that European rivals could not match, German exports to China dropped by roughly a full percentage point of German GDP. What was once the primary engine of Germany's post-2008 economic strength has reversed into a structural vulnerability, creating severe headwinds across Europe’s industrial heartland.
* **Automotive reversal**: Chinese car imports fell from ~1,000,000 to under 500,000 annually, while car exports vaulted from under 1,000,000 to nearly 10,000,000 within five years.
* **German trade impact**: German goods exports to China plummeted by roughly one percentage point of Germany's overall GDP.
* **G7 divergence**: The United States retained a stable share of global output, whereas European manufacturing hubs bore the brunt of Chinese import substitution.
---
[18:20](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1100s) How China Reached the Frontier: Joint Ventures, Supply Chains, and EVs
Ezra Klein questions how China leaped from low-value goods—like apparel and cheap calculators—to the technological frontier in solar panels, batteries, and electric vehicles so quickly. Setser explains that China spent decades building the foundational mass required for this transition. In the automotive sector, Beijing historically protected its domestic market with a 25 percent tariff, compelling foreign giants like Volkswagen, General Motors, Ford, and Toyota to establish 50-50 joint ventures (JVs) with Chinese state-owned enterprises if they wanted to compete. To support domestic manufacturing, foreign parts suppliers also established plants across China, driving down costs and training a vast local supplier base long before Chinese automakers mastered EVs.
By the 2010s, Beijing recognized that incumbent joint-venture manufacturers had grown "fat and lazy," profiting comfortably off legacy gasoline cars while indigenous brands lagged behind. Viewing the transition to electric vehicles as a strategic opening to bypass foreign dominance in internal combustion engines, Beijing mobilized the entire state apparatus. Local governments and state banks provided cheap credit, subsidized homegrown battery champions, and built an all-encompassing component ecosystem. When Tesla entered Shanghai without a mandatory JV partner, it was required to meet stringent local supply-chain content thresholds—effectively polishing and supercharging the domestic supplier network that now powers China's own fiercely competitive EV champions.
[22:27](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1347s) The Anatomy of Chinese Overcapacity
Chinese electric vehicle dominance was not created overnight in a frictionless free market; it was engineered through a deliberate sequence of foreign tech absorption, domestic mandates, and massive industrial policy. Western auto parts suppliers originally migrated to China, where domestic firms absorbed know-how through copying, emulation, and supply chain proximity. Crucially, Beijing mandated that electric vehicle subsidies applied only if the battery was made in China by a Chinese company. This single rule catalyzed not only world-dominating battery giants like CATL, but created a launchpad for China's entire domestic EV sector to surge.
```mermaid
flowchart TD
accTitle: China EV Industrial Policy and Global Spillover
accDescr: Diagram illustrating how domestic protection and state subsidies create global industrial displacement.
subgraph Phase1["1. Domestic Incubation"]
A["Forced Tech Transfer & Emulation"]
B["Local Battery & Content Mandates"]
C["Local Government Subsidies & Factory Buildouts"]
A --> D["Domestic Scale"]
B --> D
C --> D
end
subgraph Phase2["2. Structural Overcapacity"]
D --> E["55M Auto Production Capacity"]
E --> F["Domestic Market Saturation"]
end
subgraph Phase3["3. Global Spillover"]
F --> G["Export Flood to Open Markets"]
G --> H["Margin Compression & Factory Closures Abroad"]
end
```
When critics argue that China's industrial "overcapacity" has reached crisis levels, Ezra Klein notes that the term can feel counterintuitive: why should producing more vehicles than domestic consumers can purchase be treated as a global emergency? Brad Setser defines overcapacity as occurring when a nation systematically builds out production in sectors where domestic demand cannot absorb the output, while global capacity already exceeds global demand.
Automotive manufacturing and battery production are the clearest examples of this dynamic:
- **Global battery saturation:** China’s installed battery manufacturing capacity is already a multiple of total global demand, making it virtually impossible for new entrants in other countries to achieve viable market share.
- **Auto plant utilization:** While assembly plants across Europe and the United States already operate well below capacity due to flat demand, China has accumulated the capacity to manufacture roughly 55 million passenger vehicles a year.
- **Global market share comparison:** China's capacity of 55 million cars represents well over half to nearly two-thirds of total worldwide auto demand (roughly 85 to 90 million cars annually).
- **The displacement mechanism:** Because global automotive demand is relatively fixed, China's aggressive addition of new capacity inevitably forces the closure of assembly plants elsewhere rather than simply satisfying new consumer appetite.
[25:12](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1512s) America’s Rise vs. China’s Export Model
Ezra Klein raises an obvious historical comparison: when the United States rose as a global industrial juggernaut in the late 19th and early 20th centuries, Detroit displaced established manufacturers abroad, yet that transformation is broadly remembered as a positive-sum, win-win engine of global modernization. Why, then, is China’s rise viewed through such an adversarial economic lens?
Brad Setser points to a fundamental structural divergence in how the two nations developed:
- **The American continental model:** The rise of American manufacturing was driven by vast capital investments built to serve a rapidly expanding, consumption-heavy domestic internal market. The United States only became an overwhelming global net exporter for a brief window immediately following World War II, when foreign industrial competitors were flattened.
- **The Chinese export-first model:** China's industrialization has been anchored in systemic trade surpluses and export orientation from the start. Its manufacturing output dwarfs its domestic consumer spending, turning its structural surpluses into persistent, destabilizing trade shocks for its trading partners.
[26:17](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1577s) "China Is Winning": The Perils of Cheap Goods and Monopolies
Klein poses the unapologetic free-market counterargument: what if China is simply winning fair and square? If Chinese companies produce superior electric cars at lower costs and manufacture inexpensive solar panels that accelerate the clean energy transition, Western complaints could be dismissed as sour grapes. From a pure consumer welfare perspective, buying from whoever produces highest quality at lowest price is classical economics at work.
Setser counters that this consumer-first lens ignores the severe structural scarring left on economies when bedrock industries are hollowed out. China’s existing excess capacity could supply the entire European automobile market—roughly 10 million cars a year—without building a single new factory. If Europe's automotive base evaporates, the displacement will mirror the first China Shock, but with even fewer alternative paths for displaced workers:
- **No reciprocal export destination:** Workers cannot rotate into alternative export-oriented manufacturing jobs because China's market remains heavily insulated against foreign manufactured imports.
- **De-skilling into low-wage services:** Displaced manufacturing labor inevitably shifts into domestic service industries, which often offer lower wages, weaker labor protections, and less productivity growth.
- **Loss of foundational R&D ecosystems:** In Germany and throughout Europe, automotive manufacturing is the premier anchor for advanced engineering, materials science, and commercial research and development. Eradicating auto manufacturing dismantles the broader regional innovation ecosystem.
- **Geopolitical supply chain blackmail:** Total dependence on Chinese manufacturing creates vulnerabilities that Beijing has shown a willingness to weaponize. Setser points out that China commands near-monopolies over rare earth mining and permanent magnet fabrication; governments that dare to cross Beijing—such as Japan affirming support for Taiwan's security—routinely face backchannel export curbs.
Moreover, Setser dismisses the notion that China achieved this dominance through open-market laissez-faire competition. China built its EV ecosystem behind 25 percent import tariffs, aggressive local purchasing preferences, strict domestic battery mandates, and municipal governments that went so far as to build custom turnkey factories on behalf of favored domestic manufacturers.
[30:41](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1841s) The Return of Currency Manipulation
The conversation turns to foreign exchange policy, long a focal point of American trade anger that temporarily faded from headlines before re-emerging in an altered format. Setser explains that while politicians often use "currency manipulation" as a generic slur for any exchange rate they dislike, the practice has a strict, measurable economic definition:
1. **Structural undervaluation:** Running a current account surplus significantly larger than what the nation's underlying economic fundamentals and demographics would dictate.
2. **Direct, sustained state intervention:** Active central bank or state-directed purchases in foreign exchange markets to deliberately cap the value of the domestic currency.
Between 2003 and 2012, China met both criteria unambiguously, though the U.S. government avoided formally slapping Beijing with the official label for diplomatic reasons and because China spent the latter half of that window permitting gradual appreciation.
Today, state-sponsored currency management has returned in a shadow format. Rather than the People’s Bank of China visibly piling up foreign reserves, China’s state-owned commercial banks are actively intervening in currency markets:
- **Intervention scale:** Chinese state banks have been purchasing foreign assets at an estimated pace of roughly $50 billion per month, translating to roughly $600 billion per year, effectively neutralizing upward market pressure on the yuan.
- **Shift in political focus:** While Donald Trump shifted his trade rhetoric toward universal import tariffs rather than exchange rates, European policymakers are growing alarmed as a structurally undervalued yuan channels Chinese overcapacity straight into European markets.
[32:45](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1965s) Procedural Fairness vs. Existential Competition
Klein pushes deeper into the psychology of Western economic complaints. For decades, the dominant liberal critique relied on legalistic and procedural arguments: China was accused of cheating by flouting World Trade Organization rules, deploying prohibited state subsidies, or depressing its exchange rate. That worldview rested on the assumption that if trade were only made "fair" and compliant with international norms, Western industries would naturally hold their own.
Klein challenges whether that framing remains tenable. China is no longer merely finding clever loopholes in trade pacts; in sectors from batteries to commercial electric vehicles, its manufacturing apparatus, engineering scale, and vertical integration are simply superior. The central policy dilemma is shifting from whether China is "cheating" to how other major economies can survive the sheer scale of China's state-backed dominance when market principles alone cannot prevent total deindustrialization.
[33:48](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2028s) Moving Past Procedural Rules to National Security and Outcomes
Ezra Klein asks whether the core economic issue is truly an artificially cheap Chinese currency or if the fundamental challenge is national interest and weaponized interdependence. If countries like Germany, the United States, and broader Europe allow their industrial foundations to be wiped out, the question ceases to be an abstract theological debate over free trade and becomes a matter of maintaining a healthy domestic industrial ecosystem. Brad Setser agrees, noting that he increasingly leans toward prioritizing strategic capacity over adherence to outdated international legalities. In an era where the United States itself is no longer following baseline World Trade Organization (WTO) rules, legalistic complaints about procedural violations ring hollow.
The legacy multilateral rules are riddled with ambiguity. While governments are technically barred from granting subsidies aimed at import substitution, the boundaries blur when a country subsidizes an emerging sector that was previously entirely reliant on imports. Similarly, whether a state-guided fund funneling capital through private equity and venture vehicles into domestic chip manufacturing constitutes an illegal subsidy remains legally contested. Setser argues that in critical domains—especially military applications and critical inputs like rare earth elements—nations must care about outcomes rather than procedural fairness. Even if China complied strictly with every trade rule on paper, allowing 100 percent dependence on a single geopolitical rival for essential defense and industrial materials represents an intolerable security vulnerability, just as China itself has always prioritized strategic self-reliance over procedural norms.
```mermaid
flowchart TD
accTitle: Evolution of US Trade Policy Toward China
accDescr: Diagram illustrating the shift from WTO procedural rules to national security outcomes across Trump 1.0, Biden, and Trump 2.0.
subgraph Shift["From Rules to Outcomes"]
WTO["WTO Procedural Consensus<br/>(Rules & Litigation)"] --> Outcomes["Strategic Outcomes Focus<br/>(Supply Chains & Defense)"]
end
subgraph Eras["Policy Approaches Across Administrations"]
Trump1["Trump 1.0 (Lighthizer)"] -->|"25% Targeted Tariffs<br/>Unilateral Action"| Biden["Biden Administration"]
Biden -->|"CHIPS & IRA Subsidies<br/>Tech Export Bans (Semiconductors)"| Trump2["Trump 2.0"]
Trump2 -->|"Escalation to 145% Tariffs<br/>Unsustainable Economic Shock"| Retaliation["Chinese Counter-Retaliation<br/>(Rare Earth Export Restrictions)"]
end
```
[36:18](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2178s) Trump 1.0: Robert Lighthizer and the Shift Away from WTO Consensus
Reflecting on Donald Trump’s first term in 2017 and 2018, Setser finds an odd temporal disconnect: the American political system seemed to awaken to the devastation of the first China shock five to ten years after it had already peaked. Despite the lagging timeline, Setser views the fundamental policy pivot as necessary. The conventional belief that WTO rules would constrain China’s state-capitalist model had proven false; instead, those rules constrained the United States while Beijing skillfully skirted the edges of regulatory loopholes.
Under United States Trade Representative Robert Lighthizer, the administration took the pivotal first step in moving Washington from a naive WTO consensus toward a doctrine framed by reciprocal interdependence, supply chain vulnerabilities, and economic statecraft. Lighthizer favored targeted, 25-percent tariffs that applied specifically to China rather than across the globe, focusing on sectors where trade pressure made strategic sense. However, the first term retained a stubborn unilateralism. Setser recounts an anecdote where French President Emmanuel Macron approached the White House to suggest negotiating jointly with China during the Phase One talks; Trump flatly rejected the coalition approach, insisting that because the United States absorbed the pain of the tariffs, all negotiated concessions had to flow exclusively to America.
- **WTO Constraints**: Multilateral trade rules had evolved from a tool intended to integrate China into a mechanism that primarily tied American hands while Chinese firms exploited rulebook ambiguities.
- **Lighthizer's Strategy**: Trump's first-term trade representative instituted targeted 25 percent tariffs on Chinese goods, keeping levies at a level the broader US economy could digest without provoking systemic domestic turmoil.
- **Unilateral Instincts**: Trump dismissed European overtures to construct a unified negotiating front, insisting on keeping Phase One trade benefits bilateral.
[39:09](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2349s) The Biden Doctrine: Chip Bans, Industrial Policy, and Lingering Vulnerabilities
When the Biden administration took office, it did not dismantle the Trump trade architecture; instead, it entrenched and expanded it into comprehensive industrial policy and technological containment. Klein notes that the Biden team kept the original tariffs, enacted punitive new duties on Chinese electric vehicles, established stringent "Buy American" provisions within the Inflation Reduction Act (IRA) to manufacture wind turbines and solar panels domestically, and imposed sweeping export restrictions on advanced semiconductors and AI-enabling chips.
Setser views Biden’s semiconductor blockade as strategically justified—stemming from an acute reliance on Taiwan and a determination to deny China the manufacturing capability for the world's most cutting-edge microchips—yet he stresses that Beijing unambiguously perceived the move as an act of direct hostility. In turn, it spurred China to redouble its drive to engineer American technology entirely out of its supply chains. However, Setser contends that Biden’s industrial strategy did not go far enough. While the IRA and the CHIPS and Science Act made ambitious investments in clean tech and domestic fabrication, critical supply chains remained severely exposed. Washington took inadequate action on active pharmaceutical ingredients (APIs)—where the United States remains nearly 100 percent dependent on China for essential generic drugs and chemical precursors—as well as rare earth refining and permanent magnets, where domestic producers simply cannot compete against Chinese scale on market price alone without aggressive government intervention.
[42:37](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2557s) Trump 2.0: Tariff Escalation to 145% and the Limits of Leverage
Contrasting the two Trump administrations, Setser explains why he preferred Lighthizer’s calibrated stewardship in the first term over Donald Trump’s second-term playbook. Lighthizer restricted threats to measures the domestic economy could physically absorb, holding duties at 25 percent and leaving untaxed goods in reserve as negotiating leverage. In Trump's second term, the White House operated under an aggressive premise that foreign trading partners would unilaterally lower barriers without retaliating.
When China refused to yield, viewing the tariffs as pure coercion, President Xi Jinping deployed plans prepared over four years of strategic positioning. A destructive tit-for-tat cycle ensued: US tariff hikes were met by Chinese counter-retaliation, culminating in punitive American tariffs leaping to an astronomical 145 percent across nearly all Chinese imports. Rather than granting Washington supreme leverage, the blanket embargo exposed severe domestic fragility. The US industrial and consumer base could not survive a total, immediate cutoff of Chinese goods. Combined with Chinese export curbs on rare earth inputs essential for American manufacturing, the administration was forced into a corner where it had to negotiate a rollback. As Setser highlights, the pain reached down into everyday commerce: by the summer of Trump's first year under triple-digit tariffs, domestic retailers faced absolute paralysis trying to source staple holiday inventory, such as artificial Christmas trees and ornaments, which are manufactured almost entirely in China.
[45:01](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2701s) The Flaws of Overbroad Tariffs and the Aluminum Blunder
The mechanics of aggressive, indiscriminate tariffs often produce severe domestic disruptions rather than strategic victories. When tariffs spike to extreme levels—such as 150 percent—importers face impossible choices. A clear example arose with artificial Christmas trees, which are typically imported during the summer to prepare inventories for winter retail sales. Confronted with the prospect of tripling retail prices without knowing whether American consumers would ever pay that markup, importers simply halted orders entirely. Similar disruptions spread through other industries where domestic firms suddenly had to pay exorbitant prices for critical components, rendering their own exports utterly uncompetitive. The strategy was "too broad, too high, too fast." In contrast, Robert Lighthizer largely understood the fundamental rule in Trump's first term: never escalate tariffs to a level you are unwilling to maintain, because backing down signals weakness and shows the other side that you are desperate for a face-saving exit.
```mermaid
flowchart TD
accTitle: Downstream Failure of Broad Tariffs
accDescr: Diagram illustrating how high blanket tariffs cause economic disruption and diplomatic friction instead of strategic containment.
A --> C
A --> D
B --> E
C --> F
D --> F
E --> F
```
The second major flaw was targeting virtually everyone instead of focusing specifically on China. Blanket "Liberation Day" tariffs alienated international partners who were already worried about Chinese trade practices, eliminating any chance of constructing an international coalition. Furthermore, the selection of targets appeared economically irrational:
- **Canadian primary aluminum:** Taxed at punishing rates despite being produced cleanly via Quebec hydropower and integrated into the U.S. defense industrial base since World War II (when Allied bombers relied on it). Because the domestic primary aluminum market cannot clear without Canadian supplies, U.S. prices spiked immediately.
- **The electricity bottleneck:** Aluminum smelting is effectively "electricity distilled." High tariffs failed to spur new U.S. smelting capacity because the plants were directly competing for scarce electrical power against booming data center construction.
- **Trade surplus friction:** The administration picked trade fights with nations like Brazil, where the United States already enjoyed a rare trade surplus.
- **Carve-outs for elite tech:** While major tech players secured exemptions for microchips and electronics to shield data center buildouts, the heaviest effective duties fell on low-end household goods from Southeast Asia. Instead of a strategic industrial policy, it turned into an arbitrary "Walmart tariff."
[48:28](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2908s) Real Leverage Points: Treasury Debt vs. Critical Minerals
A persistent geopolitical myth holds that China’s ultimate economic weapon is the mass dumping of its vast holdings of U.S. Treasuries. In reality, the Treasury market is remarkably insulated from Chinese financial coercion. Although popular narratives suggest China is actively dumping U.S. government debt, Beijing has primarily shifted its holdings to third-party offshore custodians. More fundamentally, the Federal Reserve possesses an absolute countermeasure: it can always engage in quantitative easing (QE) and purchase Treasuries faster than China can sell them. This exact playbook succeeded during the 2008–2009 financial crisis—when the Fed stepped in to absorb Freddie Mac and Fannie Mae agency mortgage-backed securities as China divested—and again during the liquidity shock of 2020.
True Chinese leverage lies in physical supply chains rather than financial assets. If Beijing halts exports of rare earth permanent magnets required for precision weapon systems, electric motors, and defense electronics, the United States has no rapid fallback. Unless domestic stockpiles are already full, an embargo causes immediate, direct harm to military and industrial production, making physical resource dependency a far more potent threat than currency or bond sales.
[49:43](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2983s) Assessing the Trade Wars: Did the Tariffs Work?
Evaluating the trade wars against the stated goals of reducing trade imbalances, reviving domestic manufacturing, and checking Chinese mercantilism yields a blunt verdict: almost nothing worked. U.S. exports to China actually declined relative to overall U.S. GDP compared to pre-trade-war baselines. The core structural distortions of China’s economic model remain unchanged, and Beijing retains its agricultural leverage, regularly treating American farmers as hostages by threatening halts to soybean and beef purchases whenever tensions escalate.
| Metric / Objective | Pre-Trade War Status | Outcome Under Tariffs |
|:--- |:--- |:--- |
| **U.S. Trade Deficit** | Structurally high | Unchanged in aggregate; components still route through China |
| **U.S. Exports to China** | Baseline commercial flows | Lower as a share of U.S. GDP; farm exports vulnerable |
| **China's Global Export Footprint** | Large global manufacturing base | Ran massively larger global trade surpluses |
| **Supply Chain Relocation** | Concentrated in mainland China | Final assembly moved to Vietnam/Mexico; parts still sourced from China |
| **Diplomatic Alignment** | Frictions over WTO dispute systems | Key Western allies alienated by indiscriminate tariffs |
Instead of curbing China, the trade war coincided with China growing into an even larger global exporter with a more unbalanced, export-dependent economy. The primary structural shift was merely cosmetic: final assembly moved to third countries such as Vietnam, Taiwan, and Mexico, while the foundational sub-components and intermediate inputs are still manufactured in Chinese factories. Beyond collecting tariff revenue, the policy alienated allies and provoked legal challenges in domestic courts without rectifying the broader U.S. trade deficit.
[52:44](https://www.youtube.com/watch?v=2PffKnEEY-E&t=3164s) The Missed Transatlantic Coalition
There is no inherent inevitability to China dominating high-end manufacturing, but countering that momentum requires building allied industrial scale rather than fighting trading partners. During the early days of the Biden administration, trade officials tried to repair ties with Europe and pivot toward a unified China strategy, attempting to bring European tariff levels up to match U.S. duties rather than lowering U.S. protections. At that time, European leaders resisted, stubbornly insisting on procedural adherence to World Trade Organization (WTO) dispute mechanisms and framing themselves as the principled guardians of the rules-based order.
That European resistance eventually softened as Chinese overcapacity threatened Europe's core domestic industries—particularly automotive manufacturing. However, Trump-era strategy missed this turning point. Driven by personal disdain for multilateral structures and an expressed belief that European leaders are weak figures whose hands are tied by the European Union, the administration treated Brussels with the same hostility as Beijing. By dismissing traditional alliances, the U.S. forfeited the chance to form a unified North Atlantic economic bloc. A combined North American and European market would possess the massive domestic demand required to sustain an independent electric vehicle sector, viable battery production, and a self-sufficient rare earth magnet supply chain entirely independent of China.
[55:53](https://www.youtube.com/watch?v=2PffKnEEY-E&t=3353s) Confronting China’s Global EV Capacity and the Threat of China Shock 3.0
The conversation turns to how the United States and its partners should respond to Chinese industrial dominance. Brad Setser argues that democratic nations must coordinate their industrial policies and essentially "extend our security alliances into economic alliances." The West cannot afford to simply throw up its hands and accept a world where every electric vehicle is produced in China—an outcome Setser warns is entirely plausible. China already possesses enough spare manufacturing capacity to satisfy total global EV demand. While it currently supplies roughly 10 percent of Europe's auto market, that share could easily surge to 70 percent if left unchecked. If Western nations view that outcome as unacceptable, policymakers must actively work backward from that scenario to implement protective and competitive industrial strategies.
```mermaid
flowchart TD
accTitle: Evolution of the Three China Shocks
accDescr: Diagram illustrating China Shock 1.0, 2.0, and 3.0 across different economic sectors.
subgraph Shocks["The Three China Shocks"]
S1["China Shock 1.0<br/>Low- to Mid-End Manufacturing<br/>(Toys, Apparel, Electronics)"]
S2["China Shock 2.0<br/>Advanced Green Tech<br/>(EVs, Batteries, Solar Panels)"]
S3["China Shock 3.0<br/>Digital Frontier & Services<br/>(AI Models, Software, Compute)"]
end
S1 --> S2
S2 --> S3
```
Ezra Klein then raises the prospect of a looming "China Shock 3.0." If the first shock targeted low-to-mid-end manufacturing and the second is claiming advanced hardware like batteries and automobiles, the next frontier strikes directly at America’s core economic redoubt: high-end software, finance, and artificial intelligence. Klein points out that while the United States maintains a lead in AI frontier models, Chinese open-source models are remarkably competitive, significantly cheaper, and far less expensive to run. Furthermore, while the U.S. restricts cutting-edge chips, China can aggressively mobilize energy infrastructure without facing the local permitting battles and community protests that slow American data center construction.
Setser agrees that digital services and frontier AI could trigger a third shock wave. Historically, the United States maintained global platform dominance because Beijing walled off its domestic search and internet market for political control, preventing Chinese platforms like Baidu from succeeding globally and leaving the worldwide cloud, search, and software markets to American tech giants. That platform monopoly propelled U.S. equities to dizzying heights, making American equities account for roughly two-thirds of global stock market indices. However, Setser cautions that AI might not replicate the high-margin super-profits generated by Apple, Microsoft, or Alphabet. If AI becomes an intensely commoditized, low-margin global race—or if China captures major segments of the software and AI value chain—it could directly disrupt the most lucrative, profit-generating engine of the American economy.
- China currently supplies roughly 10% of the European automotive market, with the realistic capacity to reach 70%.
- Chinese EV manufacturing capacity has expanded to the point where spare domestic capacity alone could meet total global EV demand.
- U.S. equities represent nearly two-thirds of global stock market benchmark indices, heavily driven by big tech platform rents.
---
[01:00:00](https://www.youtube.com/watch?v=2PffKnEEY-E&t=3600s) The Chip War, Weaponized Interdependence, and Rival Economic Blocs
Klein and Setser dissect the core debate over trade strategy: is the goal to force China to import more Western goods and rebalance, or is it to decouple and break dependencies? Klein notes the conflicting approaches to semiconductor exports across administrations. While the Biden administration imposed strict export controls on advanced AI chips, Donald Trump proved somewhat more receptive to Nvidia CEO Jensen Huang’s pitch: keeping China hooked on Nvidia’s hardware creates a valuable reciprocal dependency, giving the U.S. leverage rather than pushing China to develop a fully autonomous chip ecosystem.
```mermaid
flowchart LR
accTitle: Strategic Frameworks for U.S.-China Economic Relations
accDescr: Comparison of weaponized interdependence versus rival bloc decoupling.
subgraph Decoupling["Rival Economic Blocs"]
B1["Western Ecosystem<br/>(U.S., EU & Allies)"]
B2["Chinese Ecosystem<br/>(Belt and Road & Non-Aligned)"]
B1 -.- B2
end
```
Setser expresses deep skepticism about relying on Chinese dependence. In his view, Beijing’s overarching, explicit goal remains unchanged regardless of short-term access: Xi Jinping intends to replicate the entire semiconductor stack internally, from advanced lithography and fabrication equipment to end-stage frontier chips. Once domestic capabilities mature, China will discard foreign suppliers entirely. Setser contrasts two overarching strategic frameworks for great-power coexistence:
1. **Weaponized Mutual Interdependence:** Employs military concepts of deterrence in the economic sphere. Both powers maintain offsetting, critical choke points—"you cannot supply chain restrict me because I can supply chain restrict you." The danger is that Xi Jinping’s stated aim is to make the rest of the world asymmetrically dependent on China, creating a shield that might deter the West from responding if China moves on Taiwan.
2. **Rival Economic Blocs:** A world where strategic sectors bifurcate entirely. The U.S., Europe, and their allies establish independent EV, battery, cathode chemistry, and critical mineral ecosystems, while China maintains its own supply chain, with non-aligned nations choosing between them.
Setser favors walling off critical high-tech and national security sectors while maintaining traditional commerce where risks are minimal. As he puts it, "We're not going to tell our farmers they can't sell to China. We're just not." The central policy challenge lies in deciding where to draw the boundary between benign trade and strategic vulnerability.
---
[01:03:46](https://www.youtube.com/watch?v=2PffKnEEY-E&t=3826s) Macroeconomic Distortions and Book Recommendations
The discussion concludes with a focus on China's severe internal macroeconomic distortions. Setser points out that while China's export machine is booming, its domestic economy is mired in high youth unemployment, deflation, and property fallout. Domestic automotive demand in China has dropped by 20 percent, forcing state-backed automakers to dump excess capacity onto international markets. Setser characterizes China as the world's second-largest economy burdened by the world's largest internal distortions, driven by an unsustainable model of suppressed domestic consumption and hyper-investment in factory output.
At the same time, the United States faces its own structural imbalances. Washington is running fiscal deficits equal to roughly 6 percent of GDP to sustain domestic consumption while simultaneously attempting to borrow unprecedented sums to fund the private-sector buildout of AI and energy infrastructure. Both models face clear economic limits.
Closing the episode, Klein asks Setser for his standard three book recommendations:
- ***The Party: The Secret World of China's Communist Rulers* by Richard McGregor:** Setser cites this foundational work by the longtime *Financial Times* Beijing bureau chief as the single book that best shaped his understanding of modern China. It demystifies how the Chinese Communist Party permeates society and business, illustrating party control with vivid scenes like the dedicated red telephone sitting on the desks of state-backed corporate CEOs to transmit party directives.
- Setser begins introducing his second recommendation, noting that it is another older work examining economic history.
- Domestic vehicle purchases within China have fallen by approximately 20%, intensifying pressure on Chinese carmakers to export their surplus abroad.
- The United States is borrowing roughly 6% of GDP at the federal level to fuel consumer demand alongside massive debt-financed private capital expenditures in AI.
[01:06:06](https://www.youtube.com/watch?v=2PffKnEEY-E&t=3966s) Book Recommendations: Financial Vulnerabilities and Modern Trade Wars
Continuing his book recommendations, Brad Setser highlights *The Volatility Machine* by Michael Pettis. While Pettis is widely celebrated today for his work on the Chinese economy, Setser notes that this earlier, relatively slim volume is actually not about China at all, nor is it an easy read. Instead, it is an essential framework for analyzing financial vulnerabilities across the global economy and emerging markets. Setser considers it a modern classic, pointing out that its conceptual framework is remarkably prescient and relevant today—not merely for dissecting sovereign debt and emerging market distress, but also for evaluating the complex financial structures and debt mechanics currently being assembled to underwrite the global AI infrastructure buildout.
For his final recommendation, Setser selects *How to Win a Trade War* by economists Chad Bown and Soumaya Keynes, a book that he admits far exceeded his expectations. Setser stresses that regardless of where one falls on the spectrum of the trade debate, the book offers indispensable insight because it refuses to be a polemic. Rather than framing international commerce strictly around the traditional textbook language of mutual gains and comparative advantage, it serves as the definitive guide to a new era in which policymakers and market actors view global trade fundamentally through the lens of strategic vulnerabilities and economic security. With the recommendations complete, Ezra Klein thanks Setser for joining the program, and Setser closes by reflecting on what a pleasure it was to participate in the discussion.
- **Michael Pettis, *The Volatility Machine*:** A challenging, concise examination of systemic financial balance-sheet vulnerabilities in emerging markets, whose analytical framework Setser finds directly applicable to contemporary risks, including the financing mechanisms behind the frontier AI buildout.
- **Chad Bown and Soumaya Keynes, *How to Win a Trade War*:** An even-handed, non-polemical breakdown of contemporary trade disputes, illuminating the modern shift from viewing trade purely as commercial opportunity to managing it as a domain of geopolitical and economic vulnerability.
## Notable quotes
> [03:49](https://www.youtube.com/watch?v=2PffKnEEY-E&t=229s) it cost you more to fill up your car to get to Target. — Brad Setser
> [11:03](https://www.youtube.com/watch?v=2PffKnEEY-E&t=663s) tens of dollars a month — Brad Setser
> [13:07](https://www.youtube.com/watch?v=2PffKnEEY-E&t=787s) Three Red Lines
> [18:20](https://www.youtube.com/watch?v=2PffKnEEY-E&t=1100s) fat and lazy — Brad Setser
> [45:01](https://www.youtube.com/watch?v=2PffKnEEY-E&t=2701s) too broad, too high, too fast
> [01:00:00](https://www.youtube.com/watch?v=2PffKnEEY-E&t=3600s) We're not going to tell our farmers they can't sell to China. We're just not. — Brad Setser
## Mentioned
Airbus, Alphabet, Apple, Baidu, Brad Setser, CATL, CHIPS and Science Act, Chad Bown, Council on Foreign Relations, Donald Trump, Earned Income Tax Credit (EITC), Emmanuel Macron, Ezra Klein, Fannie Mae, Federal Reserve, Ford, Freddie Mac, General Motors, How to Win a Trade War, Inflation Reduction Act (IRA), Jensen Huang, Joe Biden, Michael Pettis, Nvidia, People's Bank of China, Richard McGregor, Robert Lighthizer, Soumaya Keynes, Target, Tesla, The Party: The Secret World of China's Communist Rulers, The Volatility Machine, Toyota, Volkswagen, Walmart, World Trade Organization (WTO), Xi Jinping
## Video description
Brad Setser follows Chinese trade closer than just about anyone else on earth, and he thinks we’re in the early days of a China Shock 2.0.
The first China Shock was when China came to dominate low-end manufacturing in the 2000s, filling American shelves with cheap clothes, toys and electronics, while devastating American factory towns. This new China Shock could be even more destabilizing. China now dominates advanced manufacturing: electric vehicles, batteries, solar panels. It’s outcompeting nearly all high-end manufacturing around the world, and other countries are just starting to feel the pain. And China isn’t slowing down. It’s moving into software, too. Its frontier A.I. models are neck and neck with American ones.
China’s success poses a serious threat to the economies and domestic politics of countries around the world. So what should those countries do about it?
Setser is a senior fellow at the Council on Foreign Relations.He served in top trade and economic roles in the Biden and Obama administrations. And he is widely cited across the field as one of the top analysts of China’s economy and trade practices.
0:00 Intro
1:33 China Shock 1.0
7:54 What makes the Chinese economy distinct
13:07 China Shock 2.0
18:20 How Chinese manufacturing advanced
26:17 Is China just winning?
30:41 Currency manipulation
35:27 National security supply chains
36:18 Trump 1.0 trade policy
39:09 Biden administration trade policy
42:37 Trump 2.0 tariffs
48:28 China’s leverage points
49:43 Did the trade wars work?
56:40 China Shock 3.0?
59:50 Interdependence or decoupling?
1:05:19 Book recommendations
Read the full transcript here: https://www.nytimes.com/2026/08/21/opinion/ezra-klein-podcast-brad-setser.html
Watch more on @EzraKleinShow
Thoughts? Guest suggestions? Email us at ezrakleinshow@nytimes.com.
You can find transcripts (posted midday) and more episodes of “The Ezra Klein Show” at nytimes.com/ezra-klein-podcast. Book recommendations from all our guests are listed at https://www.nytimes.com/article/ezra-klein-show-book-recs.html
Former trade official Brad Setser argues that 'China Shock 2.0'—driven by Beijing channeling state credit away from real estate into advanced manufacturing—poses an existential structural challenge to Western industries that unilateral tariffs and World Trade Organization rules have failed to contain.
Domestic Distortions and the Surge in Overcapacity (13:07)
Setser contrasts the original 2002 trade shock in low-end manufacturing with China Shock 2.0, which he dates to Beijing's 2021 'Three Red Lines' real estate crackdown. To replace collapsing property sector activity, Chinese state banks aggressively redirected credit into advanced industries like electric vehicles, batteries, and machinery. Because China maintains a high national savings rate exceeding 40 percent of GDP alongside an intentionally limited social safety net, domestic consumer demand remained depressed. When domestic vehicle sales fell by 20 percent, state-backed manufacturers relied on foreign markets, allowing net exports to drive 1.5 to 2 percentage points of China's 3 to 4 percent overall economic growth.
This capital reallocation generated severe global overcapacity. China built approximately 55 million units of annual passenger vehicle capacity against total global demand of roughly 85 to 90 million cars, while its battery manufacturing capacity expanded to multiples of worldwide demand. Because global automotive demand is relatively fixed, Setser emphasizes that Chinese factory output directly displaces existing assembly plants and manufacturing jobs abroad rather than satisfying new consumer needs.
Asymmetric Fallout Across Europe's Industrial Core (15:19)
Setser points out that Europe and Japan, rather than the United States, have absorbed the primary damage from China Shock 2.0. While the U.S. pivoted toward dominant software and tech platforms over the past four decades, Germany relied heavily on high-end manufacturing exports. Following the 2008 financial crisis, German exports to China—including luxury sedans and machinery—accounted for nearly 3 percent of German GDP. That dynamic unraveled as Chinese auto imports fell from roughly one million to under 500,000 annually, while its auto exports climbed from under one million to nearly 10 million in five years, erasing approximately one percentage point of German GDP.
Countering free-market arguments that Western consumers simply benefit from cheaper clean technology, Setser warns that unchecked imports threaten bedrock European industries. With China possessing enough spare capacity to supply 70 percent of Europe's car market, the loss of automotive manufacturing would eliminate anchor R&D ecosystems, force skilled labor into lower-wage domestic services, and leave Western economies vulnerable to geopolitical coercion through Chinese supply chain chokepoints.
Policy Pitfalls from Tariff Hikes to Supply Chains (49:43)
Evaluating U.S. trade policy, Setser observes that multilateral trade rules failed to constrain Chinese state capitalism, instead restricting American responses. While Robert Lighthizer's targeted 25 percent tariffs in Trump's first term were calibrated for the domestic economy to absorb, subsequent second-term escalations to 145–150 percent blanket duties disrupted American commerce—such as halting retail inventory orders—and sparked domestic energy competition between data centers and aluminum smelters without curbing the aggregate trade deficit.
Setser concludes that broad tariffs largely shifted final assembly cosmetically to intermediate nations like Mexico and Vietnam while leaving core component manufacturing in China. Furthermore, he dismisses the threat of China dumping U.S. Treasuries, noting the Federal Reserve can easily absorb debt sales via quantitative easing. Instead, he identifies physical supply chains—particularly China's dominant control over rare earth mining and permanent magnet fabrication—as Beijing's true strategic leverage against the U.S. industrial and defense base.
Strategic Allied Blocs and China Shock 3.0 (55:53)
Rather than relying on unilateral actions or hoping reciprocal commercial dependencies will deter conflict, Setser advocates for an allied economic bloc uniting North American and European markets. A unified transatlantic industrial policy would command the scale required to maintain independent supply chains for electric vehicles, advanced batteries, and refined critical minerals. He recommends walling off critical high-tech inputs while preserving routine commerce in low-risk sectors like agriculture.
Ezra Klein and Setser caution that a looming 'China Shock 3.0' may soon reach digital services, compute, and artificial intelligence. While American tech platforms historically enjoyed high-margin global dominance, Chinese open-source AI models are proving competitive, cost-effective, and supported by rapid domestic energy infrastructure expansion. If AI becomes a low-margin, commoditized race or if China captures large segments of the software supply chain, it could directly threaten the platform profitability that sustains U.S. equity market valuations.
Setser concludes that managing Chinese industrial dominance requires Western democracies to replace procedural trade adjudication with proactive economic security alliances, though successful coordination remains hindered by unilateral political instincts and deep domestic macroeconomic imbalances in both China and the West.
[3:49] Brad Setser: it cost you more to fill up your car to get to Target.
[11:03] Brad Setser: tens of dollars a month
[13:07] Three Red Lines
[18:20] Brad Setser: fat and lazy
[45:01] too broad, too high, too fast
[55:53] Brad Setser: extend our security alliances into economic alliances
[60:00] Brad Setser: We're not going to tell our farmers they can't sell to China. We're just not.
Original transcript
[0:00] The biggest economic story in the world
[0:02] right now is China's growing dominance
[0:05] across advanced manufacturing sector
[0:07] after advanced manufacturing sector.
[0:09] From electric vehicles, batteries to
[0:12] solar panels to things that aren't even
[0:14] traditional manufacturing that are
[0:16] software like AI and open models where
[0:19] they become a world leader.
[0:22] What is happening here is very different
[0:24] than what we call the first China shock
[0:26] where China became a big exporter but of
[0:28] things that were not that important to
[0:30] advanced economies things that mattered
[0:32] maybe for particular communities
[0:34] mattered for many many jobs but weren't
[0:37] the frontier of economic growth but now
[0:40] it's different China is very much at the
[0:43] frontier and they're dominating it and
[0:45] that is going to transform geopolitics
[0:47] it is going to transform the politics of
[0:49] countries many [music] say in Europe
[0:51] where China is pushing them out of
[0:53] manufacturing that has been the absolute
[0:55] cornerstone of their economies. And so I
[0:58] think understanding it is about as
[1:00] essential to understanding economics and
[1:02] geopolitics in the coming era as
[1:04] literally anything else. Brad Settzer is
[1:07] a person who follows this about as
[1:09] closely as anyone on earth. He is a
[1:11] senior fellow at the Council of Foreign
[1:12] Relations. He has served in top trade
[1:15] roles [music] and economic roles in the
[1:17] Biden and Obama administrations. And so
[1:20] I wanted to hear his perspective on it.
[1:23] He joins me now.
[1:29] [music]
[1:30] >> Brad Sutzer, welcome to the show.
[1:32] >> Oh, thanks for inviting me.
[1:33] >> So you've been arguing that the world
[1:35] economy is going through a China shock
[1:38] 2.0. So for people not familiar with
[1:40] this, what was China shock 1.0?
[1:44] 2002.
[1:46] What happens is there's a big jump up in
[1:49] China's uh exports and at the time it's
[1:54] mostly in relatively low-end
[1:57] manufactured goods, furniture, household
[2:01] appliances,
[2:03] clothing. [snorts] Uh and I think there
[2:05] was a sense in the US that these were
[2:08] not the industries of the future. And I
[2:10] think what the China shock 1.0 do
[2:13] academic literature shows is [snorts]
[2:16] that even though these weren't the the
[2:18] industries of the future, they were
[2:19] still employing a meaningful number of
[2:22] Americans uh often in the south, often
[2:24] in the Midwest. And the China shock is
[2:27] how that impacted local, not national,
[2:30] local labor markets that had the most
[2:33] overlap with China. And this has sort of
[2:36] a a shortrun negative effect on parts of
[2:39] the economy. you know, when the local
[2:41] factory closes down, local real estate
[2:43] prices turn down. And so, uh, and the
[2:47] people who sell lunches to the factory
[2:50] workers have fewer people to sell to.
[2:52] So, it becomes a generalized downturn in
[2:54] those communities. That was clearly
[2:57] underestimated.
[2:59] And then people have done all sorts of
[3:01] further studies which correlate the
[3:03] areas that have the most exposure to the
[3:08] Chinese export wave to you know deaths
[3:11] of despair to political realignments
[3:15] >> voting for Donald Trump.
[3:16] >> Voting for Donald Trump. But the basic
[3:18] idea here is that you have a bunch of
[3:20] places in the Midwest and the South
[3:22] primarily that are manufacturing towns
[3:25] >> that their factories are outsourced to
[3:27] China or the goods are out competed by
[3:29] China and basically the community goes
[3:31] into sharp decline.
[3:34] >> Correct.
[3:34] >> And we never have a very good policy
[3:35] answer.
[3:36] >> I mean I think at the time we didn't
[3:38] even try to have a policy answer. Uh but
[3:40] it is actually conceptually difficult to
[3:42] deal with uh the decline of a small town
[3:45] when it's big industry. Let's live in
[3:47] that debate for a minute.
[3:49] >> What is the argument about whether or
[3:52] not this rapidly accelerating level of
[3:54] trade with China is good or bad for
[3:57] America?
[3:59] I think the overarching
[4:02] view at the time uh was that China's
[4:06] integration into the global economy was
[4:08] more or less inevitable. Um
[4:12] and that the negotiated terms of entry
[4:16] into the WTO provided a reasonable
[4:19] framework for China's entry full
[4:22] integration into the global economy.
[4:24] that trade was fundamentally good, that
[4:28] there would be shifts across industries.
[4:31] People would leave their jobs and import
[4:33] competing parts of the economy, but
[4:35] generally move to to exporting parts of
[4:39] the economy or into the services sector.
[4:41] And that we had a fairly flexible labor
[4:44] market. And by the way, integration
[4:48] would be a positive force for China's
[4:52] political development. It might lead to
[4:55] uh some forms of of liberalism within
[5:00] China. It might moderate China's global
[5:03] ambitions. It would sort of t commerce
[5:06] would tame the dragon so to speak. And
[5:09] the other dimension of the argument as
[5:11] I've heard it and remember it is if
[5:14] China wants to make cheap goods for
[5:16] Americans,
[5:18] people like low prices, they like low
[5:20] inflation. like why would we fight this
[5:23] gift?
[5:23] >> I mean in particular because the
[5:26] industries that were going to China
[5:28] [clears throat] were not the source of
[5:30] top you know cutting edge technology at
[5:32] the time not generating a lot of high
[5:34] wage jobs. So there was indeed a sense
[5:37] that you know consumers would benefit
[5:39] and did benefit from cheap goods and uh
[5:43] the adjustment
[5:45] would not threaten the core strengths of
[5:49] the American economy. I think that was
[5:50] the the belief. I would put a little
[5:53] tiny asterisk around the cheap prices
[5:56] thing. Unambiguously, China's explosion
[5:59] of exports lowered the price of
[6:01] manufacturers.
[6:03] If you look at the overall evolution of
[6:05] consumer prices during this period,
[6:08] there's not much of a change. China's
[6:10] integration into the world economy led
[6:13] in huge amounts of investment ended up
[6:15] putting a lot of upward pressure on
[6:16] commodity prices. So you see oil prices
[6:19] really take off during this period and
[6:21] that's an offsetting
[6:23] change. So you know you got to always
[6:25] look at both sides of the ledge.
[6:26] >> Yeah. So when you're going to Target or
[6:27] Walmart and you're buying clothes and
[6:29] toys. I mean they really are cheaper. Oh
[6:31] yeah. Like in real terms from when I was
[6:32] a kid, but you're saying that you know
[6:34] what we're not seeing there is, you
[6:35] know, the price of oil, the price of
[6:37] >> it cost you more to fill up your car to
[6:40] get to Target.
[6:41] >> Um but once you got to Target it was
[6:43] cheap.
[6:43] >> Okay. So China shock the reason we use
[6:46] this term is that this whole argument
[6:48] got re-evaluated and so which parts of
[6:50] it would you say panned out and which
[6:51] didn't
[6:53] I think the extent to which China would
[6:56] become a big export market was
[6:59] overestimated.
[7:00] Uh China never was fully open to US uh
[7:06] exports. I mean one of the more striking
[7:08] things is that after 2004 so two years
[7:11] after China's WTO entry China's imports
[7:14] as a share of its GDP start to fall and
[7:17] then it was not expected in a sense that
[7:20] China would succeed as much as it did
[7:23] while retaining the core aspects of its
[7:27] different economic system. there were
[7:29] the sense that China would have to
[7:31] converge have to become more like us
[7:33] maybe politically but certainly
[7:36] economically
[7:37] you know the state would wither away so
[7:39] stateown enterprises would be privatized
[7:42] you know 20 years after China joined the
[7:43] WTO China's economy was you know the
[7:46] thinking was it would kind of look like
[7:48] the US or maybe look like Europe it
[7:50] wouldn't be distinctively Chinese and
[7:52] that didn't pan out
[7:54] >> what is distinctively Chinese about the
[7:55] Chinese economy
[7:57] >> that's a hard question. You You opened
[8:00] the door, man.
[8:00] >> Yeah, I did. [laughter] I did. Um,
[8:04] one thing that is distinctly Chinese,
[8:06] which is not what you would normally
[8:08] think about in a communist
[8:12] le society is that China actually has a
[8:15] rather thin system of social insurance.
[8:19] It doesn't actually collect that much
[8:21] tax. Uh, personal income tax collections
[8:24] are like 1% of China's GDP. It's 8%
[8:28] here. If you're not collecting personal
[8:29] income tax, you're not going to be not
[8:31] going to have the resources to be very
[8:33] generous uh and helping, you know,
[8:36] low-wage work. There's nothing like our
[8:38] earned income tax credit where you get a
[8:40] subsidy, basically money back from the
[8:42] government if you don't get paid that
[8:44] much. The taxation system relies heavily
[8:47] on taxes on consumption. It's really
[8:49] quite uh regressive. It hits poor
[8:53] Chinese workers much more heavily. It
[8:56] also does not have uh a unified national
[9:01] labor market. The so-called hookos
[9:03] system [snorts] uh basically means, you
[9:06] know, you're supposed to work where you
[9:08] were born. You can migrate and leave,
[9:10] but when you migrate and leave, you give
[9:12] up certain social rights. You got a
[9:15] financial system that is fundamentally
[9:18] state controlled. uh heavily banked, not
[9:22] so much, you know, like the Wall Street
[9:24] part of the Chinese economy exists, but
[9:26] it's much smaller. The old-fashioned put
[9:29] your money on deposit in a state bank,
[9:32] [snorts] very much the dominant mode of
[9:34] savings. And then the state banks
[9:36] intermediate, so they can direct credit
[9:39] towards the goals of the party, towards
[9:42] the goals of the government. uh
[9:44] sometimes under the direction of local
[9:46] government, sometimes under the
[9:47] direction of the national government.
[9:50] The commanding heights of the Chinese
[9:52] economy are still primarily in the hands
[9:56] of centrallyowned stateowned
[9:58] enterprises. So this is, you know, why
[10:00] it's sometimes difficult to sell to
[10:01] China. You want to sell soybeans,
[10:04] actually you have to generally sell to
[10:06] the state oil seeds monopoly. Uh you're
[10:09] not selling to an individual soybean
[10:11] crusher. uh selling airplanes to China.
[10:14] You're selling to the big three state
[10:17] airlines who act as a coordinated block.
[10:20] Telecommunications, you're selling to
[10:22] three stateowned companies whose
[10:24] executives are picked by the party who
[10:26] take direction uh centrally.
[10:29] And then on top of that when the
[10:31] government sets a policy direction you
[10:33] know say we want to have a semiconductor
[10:35] industry
[10:37] ambitious provinces will say well we
[10:41] should be the province that builds up
[10:42] China's national champion. Here's an
[10:44] ambitious guy he or girl looks like they
[10:48] got a good idea. Here's a whole bunch of
[10:49] money. We're going to subsidize your
[10:52] factory. Uh maybe we're going to take
[10:54] equity. We're going to make sure you get
[10:55] bank loans. And so a whole bunch of
[10:58] different firms spring up in that sector
[11:01] with support and they start competing
[11:03] very intensely. So it's you know a mix
[11:05] of state directed and intensely
[11:09] competitive. I want to draw something
[11:11] out in the description which I thought
[11:12] was great of how their economy is
[11:14] different. China has gotten a lot richer
[11:17] and less of that wealth than you might
[11:20] have thought has gone into things like a
[11:22] universal health care system, a social
[11:25] insurance system for the elderly.
[11:27] America got richer. We built social
[11:28] security, Medicare, Medicaid, welfare,
[11:31] earned income tax credit, child tax
[11:32] credit. It China's gotten richer because
[11:35] it has not allowed a lot of that because
[11:38] also you have such power over the
[11:42] financial system. It has just been able
[11:44] to move much more of that money into
[11:47] subsidizing
[11:48] production, innovation in like new
[11:51] economic areas it wants to dominate.
[11:54] You know, the basic retirement benefit
[11:58] that anyone in China gets no matter what
[12:01] your your residency status is like tens
[12:05] of dollars a month. It's really really
[12:07] trivial.
[12:09] uh the health insurance system, you
[12:12] know, people aren't confident that when
[12:13] they walk into the hospital that the
[12:15] cost will be covered and frequently
[12:17] there's a lot of uh upfront payments.
[12:20] And some people also say the the one
[12:23] child policy and an incredibly
[12:24] competitive marriage market has made it,
[12:28] you know, a requirement for young men to
[12:30] save if they want to get married. All
[12:32] this has produced an economy that just
[12:34] saves an incredible share of its uh
[12:37] national income over 40% of GDP uniquely
[12:40] high. Uh and that means the state
[12:43] financial sector is just flushed with
[12:45] money. So part of it is that China has
[12:48] the capacity direct investment through
[12:50] the state. Part of it is just it can
[12:52] finance out of its own savings
[12:56] levels of investment that no other
[12:58] country has matched.
[12:59] >> Right? So this I think this is all true
[13:01] through China shock 1.0.
[13:03] >> The view is maybe more of it would
[13:04] change as time went on, but it didn't.
[13:07] >> So what is China shock 2.0? When do you
[13:10] date it? How do you describe it? So I
[13:13] date the start of China shock 2.0 to the
[13:18] collapse of China's property market in
[13:21] 2021. Now we all know there was an awful
[13:24] lot going on in 2020, the pandemic. She
[13:27] gets concerned that the there's too much
[13:31] investment in property, probably rightly
[13:34] so, that there were empty buildings
[13:36] piling up. He introduces a policy, three
[13:39] red lines, which sort of restricts
[13:41] finance for the property sector and it
[13:44] succeeds too well and the property
[13:46] market basically tanks. And then in
[13:50] order to offset the economic impact of
[13:53] this fall, she more or less gives the
[13:56] banking system guidance to lend to
[14:00] finance
[14:02] uh a new wave of manufacturing
[14:04] investment and particularly
[14:06] manufacturing in more cutting edge
[14:09] sectors. So electric vehicles being the
[14:12] the
[14:13] leading example, but in general it's
[14:16] investment in any sector where China has
[14:21] import dependence and for she that's a
[14:24] vulnerability and so he really directs
[14:27] the states financial sector and you know
[14:30] the party to throw money into building
[14:33] out sectors where China has an import
[14:35] dependence. The effect is China moves
[14:39] back to growing on the back of net
[14:41] exports. China's domestic economy is
[14:43] growing three four percent. So you know
[14:45] you're getting one and a half to two
[14:47] percentage points of growth from net
[14:50] exports. That's a lot of statistics. But
[14:52] what it basically means is China's
[14:54] exporting a ton of cars. China is
[14:56] supplying the entire world with
[14:58] batteries. Uh China is now the leading
[15:01] exporter of tunnel boring machines. you
[15:04] know, you name the the category of
[15:07] machinery, China's exports are growing.
[15:10] It's no longer just consumer
[15:12] electronics. So, China starts getting uh
[15:15] growth, big part of it growth from an
[15:17] expanding trade surplus.
[15:19] Imports stop growing.
[15:23] This is, you know, I think one of the
[15:24] key factors around the second China
[15:26] shock. Normally, you would say imports
[15:29] would grow with domestic demand. Chinese
[15:32] imports basically aren't growing and in
[15:35] key
[15:36] >> China is selling ever more to the world
[15:37] and then Chinese not buying more from
[15:39] the world.
[15:40] >> Exactly. And Chinese exports
[15:41] particularly in the years right after
[15:44] the pandemic after the currencies
[15:46] depreciated start growing at two times
[15:48] or three times the pace of world trade.
[15:51] So China's imports of autos used to be
[15:53] about a million cars a year. That's now
[15:57] down. It's now under half a million cars
[15:59] a year. And over this same period,
[16:02] China's exports of cars have gone from
[16:05] little under a million to now 10 million
[16:10] [snorts] in the space of 5 years. Just a
[16:12] stunning shift in a range of industrial
[16:16] sectors and heavily industrial sectors
[16:18] that compete with Japan and compete with
[16:21] Europe. And [snorts] so you sort of see
[16:24] bad economic performance in the
[16:26] manufacturing heart of Europe in
[16:28] particular, a little less so in the US.
[16:30] >> So I I think this point about the Europe
[16:32] versus US is really interesting. In one
[16:34] of the pieces you wrote about this, you
[16:36] wrote that the US share of global output
[16:38] has been remarkably constant over the
[16:40] last 40 years. China's rise has come at
[16:43] the expense of the other G7 countries.
[16:46] Can you talk about what that looks like?
[16:48] I mean, I know you've Let's use maybe
[16:50] Germany as an example.
[16:53] Germany didn't move as heavily into you
[16:56] know kind of software
[16:59] platforms they retained a more
[17:01] traditional manufacturing sector and
[17:05] focused on exports including to China so
[17:09] [snorts] you know Germany after the
[17:10] global financial crisis is exporting
[17:12] close to 3% of its GDP to China and
[17:15] manufactured goods that reflects the
[17:17] fact that Germany remained a very
[17:19] manufacturing centric economy, you know,
[17:22] the tunnel boring machines, the high-end
[17:26] sedans, the, you know, a lot of fancy
[17:30] SUVs, you know, also aircraft. The 320s
[17:33] made in Hamburg. All these industrial
[17:36] sectors tended to be industrial sectors
[17:40] which had a lot of overlap with China.
[17:43] Uh, and then you throw in
[17:46] uh the fact that the EV industry just
[17:49] took off in China. a lot of government
[17:51] support and the German companies they
[17:54] were made their own efforts to make EVs
[17:56] in Europe but those never took off
[17:58] globally in the way that China's EV
[18:01] industry has and nor are they Costco
[18:03] competitive so what you see is German
[18:07] exports to China have fallen [snorts] by
[18:09] about a percentage point of German GDP
[18:12] and what was a strength Germany
[18:14] benefited from selling to China right
[18:17] after the global financial crisis became
[18:18] a weakness I want to focus in on another
[18:21] dimension of this that's kind of inside
[18:23] the story you're telling which is so
[18:26] China shock one it's
[18:29] lower on the value chain of manufactured
[18:32] goods it's you know uh clothes and
[18:35] consumer calculators and and all these
[18:37] things that the story that was told was
[18:41] we don't want these industries in the
[18:43] long run
[18:44] what happens in
[18:48] the China shock too is that China is
[18:51] starting to dominate industries on the
[18:54] technological frontier. I mean, you
[18:56] mentioned electric vehicles, you
[18:58] mentioned batteries, right? You could
[18:59] talk about solar panels, we could talk
[19:01] about, you know, AI where they're, you
[19:03] know, basically neck andneck with us.
[19:06] How did they go
[19:08] from kind of low to mid-level
[19:10] manufacturing to the absolute frontier
[19:14] in batteries, solar, etc.
[19:17] that quickly
[19:20] there was certainly something in the air
[19:22] in China around manufacturing. The
[19:26] critical mass was built up and the
[19:30] foundations were laid and I think it's a
[19:33] complicated story. So if you think about
[19:35] electric vehicles being the like one of
[19:38] the famous uh sectors, what do you need
[19:41] to make an electric vehicle? You
[19:42] actually need to be able to make a car.
[19:43] It is you know a smartphone mixed with a
[19:45] car. So, how does China learn how to
[19:47] make cars, good cars? Well, a lot of
[19:50] foreign companies come in and Ford and
[19:52] GM and VW all had to partner with
[19:55] generally Chinese state companies to
[19:58] produce in China. That was just the rule
[20:00] and they didn't have really much of a
[20:03] choice because in China had a 25% auto
[20:06] tariff like for a very very very long
[20:09] time. So in order to, you know, if VW's
[20:11] on the other side of the tariff with a
[20:13] JV partner, they're going to have a big
[20:14] cost advantage. So GM had to also jump
[20:18] the tariff. Toyota had to jump the
[20:19] tariff. Everybody does the JVS, joint
[20:22] ventures. And then you want your part
[20:24] suppliers to come and produce high
[20:25] quality parts. So they come to China.
[20:28] Well, guess what? They probably once
[20:30] they learn how to make parts in China,
[20:32] they are making parts at a much lower
[20:34] cost in China because China's relatively
[20:36] cheap. and you're starting to use those
[20:39] parts to export to the world and China
[20:41] and then local competitors spring up.
[20:44] So, China ends up having worldclass
[20:46] automotive parts production
[20:49] uh well before its companies suddenly
[20:53] master EVs
[20:56] at a certain point. And China was sort
[20:58] of they liked the results of the joint
[21:00] venture, but they didn't completely like
[21:03] the fact that for a while most of the
[21:05] Chinese market was being met by auto
[21:07] market was being met by joint venture
[21:09] output. the indigenous Chinese-owned
[21:11] companies were not all that competitive.
[21:14] There was a sense that the auto
[21:15] manufacturers who had a JV were fat and
[21:17] lazy because they, you know, they were
[21:19] too happy producing through their JVS.
[21:22] So there was a sense that okay, well
[21:24] this sector was still a little too
[21:26] foreign dominated and [snorts] then
[21:28] there was a correct sense that well we
[21:31] should try to take advantage of the
[21:32] transition to EVs.
[21:35] So China you know makes it a priority.
[21:38] When China makes something a priority,
[21:40] credit is available to local firms that
[21:44] want to enter the EV market. The state
[21:46] banking system gets mobilized. Local
[21:49] governments start throwing money at it.
[21:51] You get a lot of small companies
[21:53] springing up. China supports the
[21:55] development of an indigenous local
[21:57] battery industry. Then, you know,
[21:59] Tesla's market entry is also viewed as
[22:01] significant. when Tesla enters is not
[22:04] required to do a JV, but in order to
[22:07] qualify for Shanghai government local
[22:09] support has to meet a lot of local
[22:11] content requirements. So a supply chain
[22:13] that serves Tesla can also serve others.
[22:16] [snorts] And when China sets up their
[22:19] consumer subsidies in order to qualify
[22:22] for that subsidy,
[22:24] the car initially had to be made in
[22:27] China. The battery had to be made in
[22:30] China. that that supported not just the
[22:34] Chinese battery industry but [snorts]
[22:36] the Chineseowned EV industry. And then
[22:40] you get the EVs kind of just taking off.
[22:44] And so all of a sudden you just get an
[22:46] explosion
[22:48] uh which has been built on a a
[22:50] foundation from the migration of western
[22:54] parts makers, copying, emulation and
[22:57] then an awful lot of industrial policy.
[23:00] So something people may have heard is
[23:02] this argument that China is over
[23:04] capacity that that over capacity is a
[23:06] crisis. This is sort of related maybe to
[23:08] trade imbalances. I don't think that
[23:11] makes a lot of intuitive sense like why
[23:12] is that a problem if they produce more
[23:14] cars than they buy? So how would you
[23:17] describe what the over capacity issue
[23:21] is?
[23:22] uh to me the most coherent way of
[23:25] defining the concern about Chinese
[23:27] overcapacity
[23:29] is a set of sectors where China produces
[23:34] more than its domestic market can absorb
[23:38] and where globally
[23:40] China's adding capacity in a sector that
[23:43] in aggregate already has more capacity
[23:46] than there is global demand. [snorts] So
[23:48] in batteries for example, China's
[23:51] ability to make batteries is a a
[23:54] multiple of current global demand. Uh so
[23:57] there just no scope for anyone else to
[23:58] enter the market. Um I think the concern
[24:01] in a sector like autos where there is
[24:05] over capacity globally, there are more
[24:09] auto factories in Europe and in the US
[24:13] uh with capacity than there is demand.
[24:16] So many factories are operating at low
[24:18] levels of capacity or being underused
[24:20] and there's overcapacity in China. A lot
[24:22] of Chinese factories are not being fully
[24:24] used and China is adding to its
[24:28] capacity. Uh so China you know has the
[24:31] ability to make 55 million cars which is
[24:33] you know well over a half close to
[24:36] twothirds of world demand.
[24:39] uh and there that is growing and so
[24:41] China's expansion necessarily means the
[24:44] exit of capacity elsewhere when there's
[24:46] already spare capacity now you can say
[24:48] that's just the operation of a market
[24:51] new entrance going to displace old
[24:54] capacity but it does feel different uh
[24:58] when a closed market suddenly is adding
[25:01] capacity to an industrial sector where
[25:04] in aggregate there's plenty of capacity
[25:08] and they're squeezing margin, squeezing
[25:10] production out of the rest of the world.
[25:12] >> One thing I've heard people ask is how
[25:14] is this different than America? America
[25:16] rises as a manufacturing juggernaut from
[25:18] being a much more modest economy at you
[25:20] know when the country is founded. It
[25:22] does over time displace great companies
[25:24] from other countries. It does lead to
[25:28] competition that you know is harder for
[25:30] other countries. But I do think
[25:32] economically America's rise is not in
[25:35] every respect but broadly considered to
[25:37] have been win-win in a lot of ways. So
[25:39] what is different about the rise of
[25:42] America as a manufacturer? Like the rise
[25:44] of Detroit, the rise of all these um
[25:46] dimensions from what China is doing?
[25:49] >> So our story is much more one of
[25:52] industrial investment for our own
[25:54] rapidly growing internal market. And we
[25:57] only really become a big exporter uh
[26:00] after World War II when the world's on
[26:02] its back and that doesn't last that
[26:04] long. China's industrial rise is much
[26:06] more tied to exporting
[26:09] uh and it's a much bigger exporter than
[26:12] we ever were except for that brief
[26:15] period after World War II. So one
[26:18] argument here is simply China is
[26:20] winning.
[26:21] >> They're out competing the world, you
[26:24] know, pretty fair and square here. And
[26:25] if the world doesn't like it, it needs
[26:26] to build better cars, build cheaper
[26:28] solar panels, create stronger supply
[26:30] chains. All this talk of China shocks
[26:33] and a China problem is just kind of a
[26:36] way to whine and keep China down. And
[26:40] that there's no problem here. Like it
[26:41] would be great to have cheap Chinese
[26:42] electric vehicles. It's good for the
[26:44] world and the climate transition to have
[26:45] cheap Chinese solar panels. How do you
[26:47] take that argument?
[26:50] Look, if your only goal
[26:53] is maximizing
[26:56] uh benefits to consumers in the short
[26:59] run,
[27:01] you should certainly import uh Chinese
[27:05] EVs, Chinese solar. Uh why not? open
[27:10] economics say buy from whoever is
[27:13] cheaper and then the competition will
[27:15] raise everyone else uh up.
[27:19] I think that misses a few things.
[27:24] one, it misses the the shock that
[27:29] happens to our economies if traditional
[27:34] even like traditional but still kind of
[27:36] cutting edge sectors disappear. China
[27:40] could supply out of capacity that it is
[27:44] already built the entire European auto
[27:47] market, all of it. 10 million cars, no
[27:50] problem. That's just giant compared to
[27:53] the global market.
[27:55] If an industry suddenly goes away, you
[27:58] have all the China shock 1.0 type
[28:02] effects. Communities that grew up around
[28:05] building cars will just kind of
[28:07] disappear. Now, in the China shock 2.0,
[28:11] [snorts] you're not going to be moving
[28:12] to an export sector because there no
[28:14] one's exporting to China. So, you're
[28:16] going to move to necessarily a services
[28:18] sector. So you're going to become less
[28:20] focused on producing traded goods. Now
[28:24] you might say, who cares? On the other
[28:26] hand, in Europe, an awful lot of
[28:29] research and development, an awful lot
[28:32] of uh of innovation actually has emerged
[28:36] out of their automotive sector. Uh so
[28:38] it's not clear these people are going to
[28:39] jump to a more innovative sector. They
[28:42] may jump to less innovative, less
[28:44] well-paid sectors. And in the end, your
[28:48] economy is going to going to suffer. And
[28:50] then I think there's a sense that people
[28:54] have discovered that supply chain
[28:57] dependence can be weaponized. Uh China
[29:00] dominates magnets, rarers. If you want
[29:03] those magnets, you want those rarers,
[29:04] you better not tire off China. You
[29:06] better not, you better say nice things
[29:07] about China. You better not crit, you
[29:09] know, you better not do what Japan did
[29:10] and uh say you're going to come to
[29:12] Taiwan's defense if something were to
[29:14] happen. you kind [snorts] of need to uh
[29:17] respect China if you want access to
[29:19] their supply chain. That's kind of the
[29:21] argument that they are making. That kind
[29:24] of dependence scares people.
[29:27] Finally, I would just say look, if you
[29:30] want to emulate China, if you admire
[29:31] China, you want to emulate, you like the
[29:34] way China's electric vehicle industry
[29:36] has developed, it did not develop just
[29:39] by throwing the
[29:42] uh doors open. It did not develop
[29:46] without industrial policy. China's EV
[29:48] industry developed behind some of the
[29:51] highest tariffs in the world at the
[29:52] time, 25%.
[29:55] Huge local preference, you know,
[29:57] Chinese-made battery, ideally from a
[29:59] Chinese company, Chinese-made car, could
[30:02] be a Tesla, but it was going to be Tesla
[30:03] made in China with 90% Chinese content.
[30:07] And then an awful lot of local
[30:09] government support. There are stories of
[30:11] entire factories being built not by the
[30:14] company but by the local government to
[30:16] the specifications
[30:18] of
[30:20] the company. So there's a a story of
[30:23] protection and industrial policy that
[30:26] leads to the creation of this sector.
[30:28] You throw your doors open to China,
[30:30] you're going to get the cheap cars, but
[30:32] you're not going to get the the EV
[30:34] industry. And I think many countries are
[30:36] are reluctant to just seed more
[30:38] industrial ground to China. So for a
[30:41] long time the critique that you heard in
[30:44] American trade debate most often of
[30:47] China is that they were a currency
[30:48] manipulator. Um then you stopped hearing
[30:51] that as much. I think your view is that
[30:54] that has actually become a bigger part
[30:56] of the story again. So let's do this in
[30:58] two parts. What is currency
[31:00] manipulation? Why does it matter? And
[31:03] then what has been the sort of roller
[31:05] coaster or where are we on the roller
[31:08] coaster of Chinese currency
[31:10] manipulation?
[31:11] >> Sometimes currency manipulation is just
[31:13] like a currency whose value we don't
[31:14] like. Um which is I think how the
[31:18] president sometimes uses used to use it.
[31:19] He hasn't been talking as much about it.
[31:21] But the the more accurate way of of
[31:25] defining it would be a country that has
[31:27] an undervalued currency. You can
[31:29] quantify that. And so you look for a
[31:32] surplus that's bigger than you would
[31:35] expect given the underlying
[31:37] characteristics of the economy. Factor
[31:39] one. And then factor two is government
[31:42] or quasi government intervention in the
[31:45] foreign currency market. So it's not
[31:46] just uh the outcome of differences in
[31:50] monetary policy. There's a government
[31:52] with its finger on the FX market buying
[31:55] currency to hold the currency down.
[31:58] China met both of those definitions
[32:01] unambiguously from 2003 to 2012. There
[32:07] [snorts] was a political decision not to
[32:08] call them a manipulator. Now during the
[32:11] latter part of their period, they were
[32:12] letting their currency appreciate. So
[32:13] they're kind of correcting the
[32:15] undervaluation, which is part of the
[32:17] reason why they weren't named. China is
[32:20] now back through its state banks buying
[32:22] a lot of foreign currency in the market.
[32:24] 50 billion a month, 600 billion a year.
[32:27] So there's a much clearer case that
[32:30] China is manipulating now than there was
[32:32] in the past. Trump hasn't taken interest
[32:36] in this. The Europeans though have and
[32:38] so I think the what you're seeing is
[32:40] this become shifting from being an
[32:42] American debate to being a global
[32:43] debate.
[32:45] When we were preparing for this
[32:47] conversation, something I found myself
[32:49] thinking about a lot was the question of
[32:52] whether or not it matters if the
[32:54] competition is fair. Mhm.
[32:56] >> I'd say for a long time the narrative
[32:59] that at least we were comfortable with
[33:01] in this was a very procedural narrative
[33:04] about China betraying the principles of
[33:07] free trade. They are a currency
[33:08] manipulator who is keeping their
[33:10] currency artificially cheap in order to
[33:12] make their exports cheaper or you know
[33:15] they're doing all these industrial
[33:16] subsidies and are you really supposed to
[33:17] do those under the World Trade
[33:18] Organization?
[33:20] And it's a very sort of liberals who
[33:23] believe in the system
[33:24] >> way of thinking about the problem that
[33:26] the problem is China's cheating.
[33:30] And I'm not saying cheating can't be a
[33:31] problem, but there's clearly quite a few
[33:34] places now where China is just winning
[33:36] or they've gotten to a place where they
[33:37] can win. And so I guess my question is,
[33:41] is the problem that some of China's
[33:45] advantages are unfair? Right? They're
[33:46] back to currency manipulation. and their
[33:48] currency seems artificially cheap or is
[33:50] just the problem that from a national
[33:53] interest perspective, from an
[33:54] interdependence and weaponization
[33:56] perspective that you know Germany,
[33:59] Europe, the United States,
[34:02] it would be a mistake to just allow
[34:04] their industries to get wiped out. That
[34:08] the question here is not an abstract
[34:09] commitment to free trade. It is what
[34:12] creates a kind of healthy national
[34:15] ecosystem.
[34:17] Look, I increasingly
[34:20] lean towards
[34:22] the look, we just want these kinds of
[34:25] industries. We don't want full-on
[34:28] dependence. Uh we don't have to rely on
[34:32] arguments about procedural violation of
[34:35] rules, which feel a bit dated in a world
[34:39] where we ourselves are clearly not
[34:41] following the most basic of the rules.
[34:44] And you know, the rules have a lot of
[34:45] complexity. You're allowed to subsidize
[34:47] under the rules. You're not supposed to
[34:49] subsidize if it's to substitute for
[34:52] imports. Well, if you subsidize a sector
[34:56] and everything in that sector previously
[34:57] was imported, are you import
[34:59] substituting or you just subsidizing
[35:01] that sector? Is a government guided fund
[35:04] that puts money into private equity
[35:06] funds and venture funds to invest in
[35:09] chip manufacturing, is that a subsidy?
[35:11] Yes and no. It may not be a subsidy
[35:13] under the rule. So the rules themselves
[35:15] are contested and not uniformly
[35:17] followed. And to some degree
[35:21] in certain sectors, I think we care much
[35:24] more about outcomes than about the
[35:27] rules. That's obvious in sectors uh of
[35:30] national security
[35:32] uh importance. So a lot of the rarer
[35:35] famous sector [snorts] uh have very very
[35:38] direct and important military
[35:40] applications. we should probably not
[35:43] even if China played completely fairly
[35:46] want to want to be 100% dependent on
[35:48] China uh for the supplies of those uh
[35:52] key materials and then you kind of have
[35:55] to work further from that where does the
[35:57] line come about what do you care about
[36:00] where do you just care about the outcome
[36:02] and where are you going to rely more on
[36:04] arguments around procedural fairness
[36:07] uh and then I think on the flip side.
[36:11] China itself clearly cared about the
[36:13] outcome, not the procedural fairness.
[36:18] What would you say the Trump
[36:20] administration across its two terms, and
[36:22] I realize they've been different in
[36:23] important ways, has gotten right about
[36:27] China? I mean, if Trump has been
[36:28] disruptive on how America has thought
[36:30] about anything, it has been China.
[36:32] >> And what you think they've gotten wrong
[36:34] in their either China orientation or
[36:36] their China policy?
[36:38] There is something a little strange
[36:40] about Trump's first term. Um
[36:44] because the first term
[36:48] 2017 2018
[36:50] it's like the US political system
[36:52] reacted to the China shock 5 to 10 years
[36:56] after the first China shock happened.
[37:00] So the timing was maybe strange but a a
[37:03] lot of the policy direction I would
[37:05] agree was more or less right. Um I think
[37:09] it was right to broadly say that the WTO
[37:15] rules which were thought to be
[37:17] constraining China have become a
[37:19] constraint on ourselves. China was
[37:22] really good at finding ways of achieving
[37:24] outcomes
[37:25] by living on the edge of the rules.
[37:28] I think the targeted
[37:31] first wave of tariffs were actually sort
[37:34] of in sectors where it was reasonable
[37:37] generally speaking to have tariffs
[37:39] >> and you're talking here in the first
[37:40] term.
[37:41] >> First term. Yeah. So like
[37:42] >> in the first term the tariffs were
[37:44] basically on China. In the second term,
[37:46] the tariffs are basically on everyone.
[37:48] And I am much more comfortable with
[37:50] putting tariffs on China, particularly
[37:52] now because, you know, China's economy
[37:55] has shifted dramatically and become much
[37:58] more export-oriented, much more of a
[38:00] competitive threat now than it was then.
[38:02] So, I think I think Trump one got that
[38:06] bit right. like Bob Lighheiser, the
[38:09] United States trade representative under
[38:11] in Trump's first term was sort of the
[38:13] first step of moving us from the like
[38:15] WTO consensus to a world of reciprocal
[38:18] interdependence, supply chain
[38:20] vulnerability, supply chain warfare,
[38:23] concerns about retal like a world where
[38:26] everything is using a more militarized
[38:28] vocabulary even around economic
[38:30] exchange.
[38:32] Trump won was still pretty unilateral.
[38:34] Uh there's a famous uh story I think in
[38:37] another newspaper
[38:40] uh where you know uh President Mackel
[38:43] asked like well maybe we should
[38:45] negotiate something together. when
[38:46] they're negotiating phase one the the
[38:48] deal and President Trump was like no no
[38:51] no no the we've done the tariffs all the
[38:54] benefits should go to us this has to
[38:56] flow to us and so there was an element
[38:59] in the first term of of unilateralism
[39:03] which obviously becomes unilateralism on
[39:06] steroids over time so maybe before then
[39:09] we get to Trump too it's worth talking
[39:11] about Biden
[39:12] >> because you know there's a lot of
[39:14] Democratic criticism of the way Trump
[39:16] talks about China to some degree of
[39:17] Trump's tariffs on China. But the Biden
[39:20] team comes in, they largely keep the
[39:23] tariffs, in some cases, expand them into
[39:26] new areas. They begin doing more to
[39:30] limit the export of what they consider
[39:32] to be strategically important
[39:33] technologies like advanced chips to
[39:35] China. Um they put on higher tariffs on
[39:38] on EVs and they do a lot of industrial
[39:40] policy that actually looks sort of like
[39:42] the way you're describing Chinese
[39:44] industrial policy. So the inflation
[39:45] reduction act is trying to build a
[39:47] domestic, you know, supply chain for
[39:50] things like solar panels and wind
[39:52] turbines. And now they're more okay with
[39:55] it being, you know, in friendly
[39:57] countries, too. But there's a lot of
[39:59] bi-American
[40:01] uh standards on all this and they begin
[40:05] talking a lot in terms of strategic
[40:06] technological competition. Uh AI is a
[40:09] big thing for them in the AI competition
[40:10] with China. How do you think about the
[40:12] way the Biden administration
[40:16] approached this and both kind of tweaked
[40:18] but didn't upend like the Trump one
[40:21] approach?
[40:23] It probably in my view at least didn't
[40:26] go far enough. Um [snorts]
[40:29] it wasn't just clean energy although
[40:31] that was certainly a big focus. It also
[40:34] included semiconductors
[40:36] >> and in semiconductors at the time the
[40:38] concern was dependence on Taiwan which
[40:40] was vulnerable to pressure from China.
[40:44] Certainly vulnerable you know put the US
[40:46] in a difficult position if China were
[40:48] ever to put an embargo or attack Taiwan.
[40:52] And at a certain point, the US just made
[40:54] a decision uh that we did not want China
[40:58] to have access to the world's best.
[41:01] Certainly not the ability to make the
[41:03] world's best chips. Too many risk
[41:06] associated with that. I think that was
[41:09] the right decision, but it unambiguously
[41:11] was viewed by China as a directly
[41:13] hostile act. And I think we if someone
[41:15] had done that to us, we would have
[41:16] viewed it as a directly hostile act. So
[41:20] it put us into a world unambiguous world
[41:22] of rivalry and competition and in a
[41:25] position where we don't there is no way
[41:28] China is not going to try to engineer us
[41:30] out of their chip supply chains. That's
[41:32] become a national priority and so we are
[41:35] and we are trying to reduce our
[41:36] vulnerabilities to Chinese economic
[41:38] coercion at the same time. Uh but it
[41:41] didn't really go far enough in
[41:45] uh critical minerals rarers. I mean
[41:49] there was plenty of talk about it but
[41:51] there wasn't enough action not enough on
[41:54] um active pharmaceutical ingredients
[41:56] where either the medicine or the key
[41:59] chemical precursors are almost 100%
[42:01] sourced from China. So I think you know
[42:04] it was a step in a necessary direction.
[42:07] It was controversial because industrial
[42:08] strategy industrial policy you know for
[42:10] a long time the thought was that was
[42:13] something other countries did. wasn't
[42:14] something that America did and it wasn't
[42:16] something we're necessarily very good
[42:18] at. And in some cases
[42:21] like uh rare earths and the magnets like
[42:26] active ingredients, it means finding
[42:30] ways to incentivize production in
[42:33] sectors where you know you can't compete
[42:35] with China on cost.
[42:37] >> So that then brings us to Trump too.
[42:39] >> Mhm. And so how would you rate what they
[42:43] have done and where it has hit the right
[42:45] balance and where it's been off?
[42:49] Um so in general uh I have uh noted on
[42:53] many times that I like Bob Lighheiser's
[42:56] trade policy i.e. Trump's first term
[42:59] better than I like Donald Trump's trade
[43:01] policy i.e. Trump's second term.
[43:04] Lighheiser was careful to only threaten
[43:08] things that the US economy could
[43:10] sustain. So, you know, the tariff level
[43:13] was set at 25%. Which, yeah, people
[43:15] didn't like paying it, but you could
[43:16] afford to pay it. He didn't cover all of
[43:20] trade. So, there was always a little
[43:21] more trade you could bring into that
[43:23] tariff. Trump had a theory of the case
[43:26] in his second term, which worked for
[43:29] most of the world, but didn't work for
[43:30] China. And the theory of the case is,
[43:32] well, trade's rigged against us. We need
[43:35] to raise our tariffs, and you need to
[43:37] lower your tariffs, lower your barriers
[43:39] to US exports to put trade on a more
[43:42] fair footing. You shouldn't, in other
[43:44] words, retaliate for our tariffs. China
[43:47] retaliated. China said, "This is
[43:48] coercive." Plus, China knew they were
[43:50] going to be in the crosshairs. You know,
[43:51] she did a good job of getting ready.
[43:53] He'd spent four years plotting this out.
[43:55] So, China retaliates. We counter
[43:58] retaliate. China retaliates some more.
[44:00] we retaliate again and we push tariffs
[44:02] up to 145%.
[44:04] You might think that gives us more
[44:06] leverage. We've completely cut off
[44:07] trade. It turned out to be the opposite.
[44:10] Our economy couldn't sustain 145%
[44:13] tariffs on pretty much everything coming
[44:15] from China. So the administration was in
[44:18] a position where they needed to
[44:20] negotiate a roll back in the tariffs.
[44:22] You know, there's a rare earth component
[44:24] as well. But I
[44:25] >> China where China was holding back rare
[44:27] earths which would our
[44:28] manufacturing.
[44:29] >> Yeah. So that was real.
[44:30] >> Mhm.
[44:31] >> But it's I think even if China had not
[44:33] done that, even without the supply chain
[44:36] restrictions, the administration knew it
[44:38] needed to roll back the 145% tariffs.
[44:41] You know, the the the example that uh I
[44:44] like to give is that in the summer of
[44:47] Trump's first year with 100ish plus
[44:50] tariffs, all the retailers who import
[44:53] artificial Christmas trees, which like
[44:55] all come from China. Think Christmas
[44:57] tree ornaments. think holidays. Well,
[45:00] those are are things that are actually
[45:01] typically imported during the summer.
[45:04] Now, if you're paying 150% tariff,
[45:06] you're going to have to triple whatever
[45:08] your retail price or, you know,
[45:10] something crazy. And the Christmas tree
[45:12] importers weren't sure because they're
[45:14] building up inventory ahead of a future
[45:16] sale that American consumers would be
[45:18] willing to pay that high a price. So,
[45:20] they just stopped importing.
[45:23] And you know when there's a hole and
[45:25] there are other places where companies
[45:26] were having to pay that price for a part
[45:29] and that would render their ability to
[45:31] export utterly uncompetitive. So it was
[45:33] just it was too broad, too high, too
[45:36] fast. It was disrupting the US economy.
[45:39] That was a mistake. And I think
[45:40] Lighheiser in his first term got it uh
[45:44] closer to right. Don't don't don't ever
[45:47] escalate to the point where you're put
[45:50] on tariffs that you aren't willing to
[45:52] maintain.
[45:53] the other side will realize that you
[45:56] would are looking for a face- saving way
[45:57] to pull things back. That was I would
[45:59] say mistake uh one. Mistake two was the
[46:04] breadth of the tariffs.
[46:07] not targeted
[46:09] reasonably by countries. Just everyone
[46:12] got hit with the liberation day tariffs
[46:15] in some cases very very very high
[46:17] tariffs
[46:19] that alienated a bunch of countries that
[46:22] themselves were worried about trade with
[46:24] China. So it kind of took away the
[46:26] possibility of building a broader
[46:28] coalition against China. So that's first
[46:32] problem with these very very broad
[46:33] tariffs. Second problem with the very
[46:35] very broad tariffs was that they ended
[46:37] up being done in kind of irrational to
[46:40] my mind ways. We were tariffing at
[46:43] really high levels Canadian aluminum.
[46:46] All right. Canadian aluminum is, you
[46:48] know, not that this administration
[46:50] cares, but it's made in a kind of
[46:51] greenway. H trapped hydro power in
[46:53] Quebec.
[46:55] It has been part of our aluminum
[46:57] industry since World War II. You know
[46:59] when the bombers were built with
[47:01] Canadian aluminum, there is no national
[47:03] security threat. It is essential to our
[47:06] market. There's the primary aluminum
[47:08] market doesn't clear in the US without
[47:10] Canadian imports, which meant that just
[47:11] prices shot up. And then the final
[47:13] problem was like, hey, aluminum is
[47:16] electricity distilled, incredibly uh
[47:20] energy intensive and electricity
[47:21] intensive. So it is competing with data
[47:23] centers uh for power. And so even with
[47:27] the really high tariffs, we weren't
[47:29] investing more in new aluminum. So it
[47:32] was pure self harm fully on board with
[47:35] limiting imports of aluminum from China,
[47:38] having a more self-contained North
[47:40] American market. But this was kind of
[47:42] silly. The getting into a trade war with
[47:45] Brazil when Brazil is one of the few
[47:46] countries where we have a trade surplus
[47:48] didn't make sense in Trump's own terms.
[47:51] And then we ended up weirdly because you
[47:54] know electronics got excluded, chips got
[47:57] excluded because you know you can't
[47:59] penalize data center constructions right
[48:00] or wrong. The richest companies
[48:02] basically found ways out. So the highest
[48:05] tariffs at the end of the day were on
[48:07] low-end household goods coming from
[48:08] Southeast Asia. So it became sort of
[48:10] more of a Walmart tariff and not a
[48:12] strategic tariff.
[48:14] I think all these were just kind of
[48:16] mistakes of design. We ended up with a
[48:18] tariff policy that wasn't in the second
[48:20] year of the second term not at all
[48:22] focused on China. China basically they
[48:24] got the same deal as everyone else which
[48:26] was a huge win for them. Most important
[48:28] development is China showed it can punch
[48:30] back. Yeah. People worried for years
[48:33] about them unwinding purchases of US
[48:34] treasuries. They didn't do that. I mean
[48:36] the sense that if this escalated they
[48:38] had more dependencies that they could
[48:41] weaponize I think has been very salient.
[48:44] There are multiple
[48:46] places where China has leverage.
[48:49] Ironically, the Treasury market turned
[48:51] out not to be one of them. It's not just
[48:54] that they didn't threaten it. It's it's
[48:57] been one of the harder places to
[48:59] weaponize partially because China isn't
[49:01] buying. I mean, some people think
[49:02] they're selling. That's not true. They
[49:04] just have moved to other custodians.
[49:06] Gets real technical. Uh but at the end
[49:08] of the day, we actually have a counter.
[49:11] If China sells treasuries, the Fed can
[49:13] always buy more treasuries QE than China
[49:16] can sell. We showed that in 2020. We
[49:18] actually showed that in ' 08 and09 when
[49:20] the China was selling agencies, Freddy
[49:23] Franny mortgage back securities and the
[49:26] Fed started buying them. It's not maybe
[49:29] ideal, but we have an alternative for
[49:32] the rare earth magnets that go into
[49:34] weapon systems. Unless we have
[49:37] stockpiles,
[49:39] we don't have alternatives. So, it's
[49:41] actually a more potent form of leverage.
[49:43] >> One of the charts as I was preparing for
[49:45] this that struck me is that if you look
[49:46] at America's trade deficit, the world
[49:49] doesn't look that different than at the
[49:51] beginning of Trump's term.
[49:52] >> Mhm.
[49:53] >> So, in terms of what we've been trying
[49:56] to achieve with our various trade wars,
[49:58] our trade policies,
[50:00] have we achieved anything? I mean, in
[50:02] Trump's own sort of conception of the
[50:04] world, manufacturing, trade imbalances,
[50:09] is there progress that they can point
[50:10] to?
[50:12] >> Um, not much. [snorts]
[50:14] We haven't grown our exports to China
[50:17] with the deals. Our exports are actually
[50:20] down relative to where they were.
[50:21] Certainly down as a share of US GDP from
[50:24] before the trade war. We have not
[50:27] stopped Chinese industrial policy. We
[50:29] have not generated a structural change
[50:30] in China's economy. We haven't changed
[50:33] the fact that China has, you know,
[50:35] agricultural hostages that it takes
[50:38] whenever we threaten. You know, you want
[50:39] to sell soybeans to us, you want to sell
[50:41] beef to us, you got to be, you know, not
[50:43] tariff us. We we have leverage over you.
[50:46] We haven't changed that. Uh and we
[50:48] haven't changed China's broad
[50:50] trajectory. China is a bigger exporter
[50:52] globally, runs a bigger global trade,
[50:55] not not just by small amounts, by
[50:57] enormous amounts.
[50:59] uh a more unbalanced economy now than it
[51:02] was when the trade war got started. We
[51:05] haven't changed our trade deficit in
[51:07] aggregate. Uh we have shifted final
[51:10] assembly for the US market away from
[51:13] China to Vietnam to Taiwan to Mexico but
[51:17] the components are still coming from
[51:19] China. Uh so I think you know the main
[51:22] thing you can say that Trump's second
[51:24] term trade policy you know unambiguously
[51:26] has achieved is it's alienated a lot of
[51:29] allies because it's not at all been
[51:30] targeted. Uh [snorts]
[51:32] it alienated the courts uh because
[51:37] not a lot of thought was put into
[51:39] conforming to reasonable expectations of
[51:42] what the law allowed. Uh and it
[51:44] generated a bit of revenue. And there's
[51:46] an oddness to the first part about
[51:48] allies to me because given everything
[51:50] that we were talking about with the
[51:52] second China shock being very focused on
[51:55] Europe uh among others, you really could
[51:58] have imagined something that was more of
[52:01] a like a united set of goals between us
[52:04] and Europe.
[52:06] >> Um we all want to protect our auto
[52:07] industries. We all don't want to be
[52:09] dependent on you know Chinese chips or
[52:12] China taking over Taiwan and then you
[52:14] know we have a huge chip problem.
[52:16] I guess a question is what what do you
[52:18] think our goals should be here right
[52:21] what do you think the set of outcomes we
[52:23] are trying to generate should be and can
[52:26] they be generated
[52:28] or is there an inevitability to all this
[52:32] given China's size given its
[52:34] manufacturing capacity people sometimes
[52:36] talk about where we're going as as
[52:38] having an almost a yeah an inevitability
[52:40] to it I'm curious if you buy that
[52:44] >> um I do not believe in the
[52:46] inevitability.
[52:48] Um but I do [clears throat] believe
[52:51] uh the changes to avoid
[52:54] growing [snorts]
[52:55] dependence on China for inputs of
[52:59] manufacturers and final goods are quite
[53:02] uh quite significant.
[53:04] Look uh I was I was part of the Biden
[53:07] administration at the beginning. I'm I'm
[53:09] implicated in some of those decisions.
[53:11] And in the early days of the Biden
[53:14] administration, the overarching goal of
[53:16] the trade policy was to avoid a trade
[53:20] war with Europe, which was sort of where
[53:22] Trump was heading had he won re-election
[53:25] that year, and convince Europe that
[53:30] whatever our traditional sources of
[53:32] friction, we had a common interest in
[53:34] thinking through how to handle China and
[53:37] taking real action against China. you
[53:39] know, make, you know, bring our policies
[53:42] into harmony, but by bringing European
[53:45] tariffs closer to US tariffs, not by
[53:48] bringing US tariffs on China down.
[53:51] At the time, the Europeans were not
[53:54] interested. Europe said, "The problem is
[53:56] that you guys aren't following the WTO
[53:57] rules. The rules are important. You got
[53:59] to go back to the rules."
[54:01] >> Nothing Europe loves like a procedural
[54:03] argument.
[54:03] >> H people love procedural. We We actually
[54:05] love procedural arguments, too. But the
[54:07] Europeans loved the notion that they
[54:12] were the rule abiding, rule creating,
[54:15] order enforcing
[54:18] uh power in the system.
[54:21] That has shifted and I think the Trump
[54:24] administration missed the shift. Didn't
[54:28] explore the possibility of shift nor was
[54:30] it interested because you know I think
[54:32] Trump came in and he said many times
[54:34] that Europe's almost as bad as China.
[54:36] Allies, not allies, not how he thinks of
[54:38] the world. She great leader. We should
[54:41] be doing deals with shei. Bunch of
[54:43] European leaders not great leaders. You
[54:46] know, they, you know, they they they've
[54:48] allowed themselves to have their hands
[54:50] tied by the European Union. Real leaders
[54:53] like she, like Trump, don't allow their
[54:56] hands to be tied by super national
[54:58] institutions. Just kind of disdain. And
[55:01] so he missed an opportunity to explore
[55:04] if Europe was willing to join the US in
[55:09] some kind of economic alliance.
[55:12] North America plus Europe and North
[55:15] Atlantic alliance. you know, they
[55:17] wouldn't it wouldn't be called against
[55:19] China, but it would effectively be an
[55:22] alliance to create a bigger market
[55:25] outside of China with a some common
[55:29] barriers to China that would, you know,
[55:32] have allied scale would be big enough
[55:35] that it would easily support a
[55:38] competitive EV industry that didn't rely
[55:40] on Chinese parts. uh a competitive
[55:44] magnets industry that didn't rely on
[55:46] China so forth and so on. So I think you
[55:48] know where should we have gone? I think
[55:50] we should have moved in that direction.
[55:53] There are ways to do better coordination
[55:55] of industrial policies too. But
[55:57] basically like extend our security
[55:59] alliances into economic alliances.
[56:02] Uh try to compete with China. Don't give
[56:04] up. Don't accept that every EV in the
[56:08] world is going to be made in China which
[56:09] is a realistic outcome right now.
[56:12] uh with fully you know China can expand
[56:15] its EV production capacity and has
[56:18] enough spare capacity to meet all global
[56:20] demand. So the entire EV industry could
[56:24] be Chinese production. You know China's
[56:27] supplying 10% of the European auto
[56:29] market. There's a future where it could
[56:30] supply 70. If that's not an outcome you
[56:33] think is acceptable, you kind of have to
[56:35] work backwards from that because that is
[56:37] now a realistic possibility. What do you
[56:40] think about the notion of a China shock
[56:42] 3 that you're beginning to see on the
[56:44] horizon which is we've been talking
[56:45] about how China shock one was kind of
[56:47] low-end middle-end manufacturing number
[56:50] two has been high-end batteries and cars
[56:52] and things like that but the thing that
[56:55] America has had that has insulated it
[56:57] that has made our stock market such a
[56:59] booming part of the global financial
[57:01] system is as we talked about sort of
[57:03] software finance
[57:06] and more recently of course AI Mhm.
[57:09] >> And we are still have real leadership in
[57:11] AI, but it's amazing how strong the
[57:15] Chinese open- source models are, how
[57:18] close they are. They're a lot cheaper.
[57:19] They're cheaper to run. And China is
[57:21] able to I mean, China does not have the
[57:24] chips we have, but they are able to pump
[57:28] energy into it. They're not going to
[57:30] have the data center slowdown that we're
[57:32] going to have, right? You're not going
[57:33] to have, you know, local data center
[57:35] protests that are stopping China from
[57:36] building enough data centers. So it's
[57:39] not crazy given how much more difficult
[57:41] it is to create the infrastructure for
[57:43] AI here that China will pull ahead in
[57:45] the coming years.
[57:48] >> So I do think that's that is a a
[57:52] possibility
[57:54] if you think of China shock 3.0 do as
[57:56] sort of services but services not as in
[58:00] haircuts but as you know software AI the
[58:04] models uh
[58:07] there is a world
[58:10] uh where
[58:12] China and the US compete directly in a
[58:15] way that they didn't compete in the big
[58:17] platforms you know
[58:20] China protected its search market
[58:22] because it wanted political control but
[58:24] that sort of meant that China's search
[58:26] engines never really that competitive
[58:28] globally which left the lion share of
[58:30] the globe you know using US platforms
[58:33] using US software using US cloud
[58:36] [snorts] huge businesses incredibly
[58:38] profitable businesses the businesses
[58:41] that have propelled the US stock market
[58:43] to a stratospheric heights that have
[58:45] made you know US stocks twothirds of the
[58:47] global stock market index so an
[58:50] enormously important part of the US
[58:51] economy and an even more important part
[58:54] of the stock market.
[58:56] Look, AI is up for grabs. We don't know
[58:58] if the US models will uh that people are
[59:01] willing to pay as much as the people who
[59:03] are spending tons of money to build all
[59:05] the data centers and buy all the NVIDIA
[59:06] chips are willing to invest. That's an
[59:08] open question. It is quite possible that
[59:12] uh it will prove to be a competitive
[59:14] market and no one will make the super
[59:15] profits that sort of Google, Alphabet,
[59:19] Microsoft, Apple generated out of the
[59:21] digital world we now live in. and that
[59:24] AI will either be dominated by China or
[59:27] will prove to be competitive and there
[59:29] won't be the kind of profits that people
[59:30] expect and so it will be disruptive and
[59:34] disruptive to the parts of the US
[59:36] economy that have generated the most
[59:38] high-end jobs and certainly the most
[59:40] profits. So to assume that we're going
[59:42] to have uh a lead in high-end digital
[59:45] services forever and that China is not
[59:47] going to compete, I think that's I
[59:49] wouldn't agree with that. is what we
[59:51] want or what we should want
[59:54] for China to be exporting less for them
[59:57] to have less of an over capacity as it
[59:59] gets called
[60:00] >> or is what we want for China to be more
[60:02] open to imports right this sort of bit
[60:06] around the fight over whether or not we
[60:08] should export chips to China the B
[60:10] administration really clamped down on
[60:11] that Trump opened up a bit uh somewhat
[60:14] under the push from Jensen Wong of of
[60:16] Nvidia
[60:18] >> and Nvidia's argument and the argument
[60:19] that I heard from Trump people around
[60:20] this was look we actually want China
[60:24] somewhat dependent on Nvidia's chipset.
[60:26] We have all these dependencies on China.
[60:27] The idea they're somewhat dependent on
[60:29] us is not a bad thing.
[60:31] Now even once we sort of open that back
[60:33] up, China's not been excited about
[60:35] Nvidia chips. They have, you know, made
[60:37] strides on their own. And yes, they
[60:39] would like the very best stuff and
[60:40] there's some things we're still holding
[60:42] back. But I felt like in there you saw
[60:44] this kind of emergent fight which is do
[60:48] we want to be more separated or actually
[60:52] is a problem that you know there's been
[60:55] more openness in one direction than the
[60:56] other. It's like that's the the thing we
[60:59] should be targeting. How do you think
[61:00] about that?
[61:02] I have complex, conflicted and probably
[61:07] incoherent thoughts. But the goal from
[61:11] China and I think it's independent
[61:12] whether you give them this chip or that
[61:14] chip today. They may or may not achieve
[61:16] it. The goal is to replicate the full
[61:18] chip ecosystem to be able to make the
[61:20] machines as well as make the chips and
[61:22] be at the frontier. [snorts] So the risk
[61:25] is that you would become dependent over
[61:27] time on both Chinese models and then
[61:30] then the Chinese ships will displace
[61:32] their dependence on you and I think
[61:35] that's in that sector that's a a real
[61:38] risk set of risk. So I I'd be a bit
[61:40] cautious there.
[61:43] I think conceptually
[61:47] mutual interdependence, reciprocal
[61:50] vulnerabilities,
[61:52] control over offsetting choke points is
[61:56] a way that competing
[61:59] great powers, great military powers now,
[62:02] great economic powers that are rivals,
[62:06] not allies, can coexist. you cannot
[62:10] supply chain restrict me because I can
[62:12] supply chain restrict you and the we can
[62:15] deter each other. You you apply
[62:17] strategic and military concepts of round
[62:19] deterrence. So it's it's a vision that
[62:21] allows trade but it's kind of hostile
[62:23] trade so to speak where you're always
[62:25] worried uh that you're you're that
[62:29] interdependence is shifting towards
[62:30] dependence particularly because she has
[62:32] said today's goal is is dependence. He
[62:35] wants the world to rely on Chinese
[62:36] supply chains. Arguably, that's one
[62:39] theory he has about how he could achieve
[62:40] victory in Taiwan without actually
[62:43] fighting. Everyone needs us so much they
[62:45] can't can't react, can't respond.
[62:49] The other vision is a vision where okay
[62:53] either fully
[62:55] uh split off into rival blocks. China
[62:59] has its EVA ecosystem. the US, US and
[63:02] Europe. Our block has its own EV
[63:04] ecosystem, own battery supply chains,
[63:07] own uh battery chemical supply chains,
[63:10] own EV companies, own EV designs. China
[63:13] has its there's a vast part of the world
[63:16] which gets to choose, but they're rival
[63:19] ecosystems that don't have a ton of of
[63:22] interdependence. I think you can hive
[63:25] off some of the strategic sectors and do
[63:27] that trade with allies
[63:29] uh and uh maintain some trade with
[63:33] China. I mean, we're not going to tell
[63:34] our farmers they can't sell to China.
[63:36] We're just not. Uh and there are certain
[63:38] products which I think we should be fine
[63:40] from China, but defining the lines is
[63:43] going to is is hard. On top of that,
[63:46] China cannot continue to rely on the
[63:50] world's demand to make up for the fact
[63:52] that it doesn't generate its own demand.
[63:54] There's a macroeconomic component.
[63:56] China's economy, the export side of the
[63:59] economy has done great. No question.
[64:01] Booming, growing faster than global
[64:03] trade. The domestic side of the economy,
[64:06] people doubt whether the domestic side
[64:08] of the Chinese economy is really growing
[64:09] faster than the domestic side of the US
[64:11] economy. It is not doing great. There's
[64:13] a lot of unemployment. There's
[64:15] deflation. There's real internal
[64:18] problems.
[64:18] >> An aging population.
[64:20] >> We have an aging population, too. But
[64:21] China's aging a little faster.
[64:22] >> Yeah.
[64:23] >> And now there's a looming problem of
[64:25] overinvestment, not just in property,
[64:26] but in manufacturing capacity. Too many
[64:28] auto plants, not enough demand, internal
[64:31] demand is down 20% for Chinese cars. So,
[64:34] they're forced to export because their
[64:35] own market is is shrinking. That's
[64:37] that's a real problem because China's
[64:41] internal economy is incredibly
[64:45] unbalanced. Like it's second biggest
[64:46] world economy in the world, but with the
[64:49] biggest domestic distortions across the
[64:52] board, the most unbalanced pattern of
[64:54] savings [snorts] and investment. There
[64:56] will need to come a time when China
[64:58] doesn't have to have an expanding trade
[65:00] surplus to grow. So, I do think that
[65:03] that is a problem. And of course, it's
[65:05] it's tied on our side to our fiscal
[65:07] situation. You know, we're we're going
[65:09] to borrow insane amounts to build AI and
[65:11] we're also borrowing 6% of GDP to keep
[65:14] our consumer engine going. [snorts]
[65:15] There there probably eventually are
[65:17] limits on our side, too.
[65:18] >> I think that's a good place to end.
[65:20] Always our final question. What are
[65:21] three books you'd recommend to the
[65:22] audience?
[65:24] >> Well, the the the one book that most uh
[65:29] shaped my own understanding of China is
[65:32] an old book actually. Uh it's by a
[65:34] friend of mine, Richard McGregor,
[65:36] uh longtime
[65:39] [snorts] Beijing correspondent for the
[65:40] Financial Times, who wrote a book called
[65:42] The Party. And he really showed that you
[65:45] can't understand modern China without
[65:47] understanding the modern Chinese
[65:48] Communist Party. And you know, vivid
[65:51] scenes with like red telephones where
[65:53] you know, your special party line where
[65:55] you get the instructions if you're the
[65:57] CEO of a big company about what you
[65:59] should be doing.
[66:01] Second book is is another old book
[66:03] actually. Um
[66:06] uh it's called the volatility machine by
[66:08] Michael Pettis. It is it is a thin book.
[66:12] It is not an easy read. Uh it is
[66:15] actually not even about China even
[66:17] though Pettis is now very well known for
[66:19] his work on China. It's about how to
[66:21] think about financial vulnerabilities in
[66:24] the global economy and in emerging
[66:26] economies in particular. I [snorts]
[66:28] think it's a modern classic and it's
[66:31] really important for understanding I
[66:36] think not just how emerging markets can
[66:38] get into trouble but somehow some of the
[66:40] financial structures that are now being
[66:41] used to finance the AI buildout could
[66:44] get in trouble that kind of that kind of
[66:46] framework. And the third book, a book
[66:49] that exceeded my expectations is, you
[66:51] know, how to win a trade war war by Chad
[66:53] Bound and Somaya Kanes.
[66:56] Whatever side of the trade debate you're
[66:58] on, you're going to learn something. It
[67:00] is not a polymic. It is, I think, the
[67:03] best guide to a world where people are
[67:08] thinking about trade in terms of
[67:09] vulnerabilities, not just in terms of
[67:12] opportunities.
[67:13] >> Brad Settzer, thank you very much.
[67:15] >> Uh, thanks Ezra. It's been a pleasure to
[67:17] be on this show.
[67:21] [music]
[67:29] >> [music]
