← BG2Pod with Brad Gerstner and Bill Gurley 
BG2Pod with Brad Gerstner and Bill Gurley
Tariffs, Free Trade, Export Controls, H20 & Rare Earth Ban | BG2 w/ Bill Gurley & Brad Gerstner
01:02:36
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- [00:00]
Bill Lee
Almost everyone in the AI space that I see with a microphone in front of them says the US has to win the AI war. I don't know what that means, and if I guess as to what it means, I don't think it's possible. Right.
- [00:15]
David Sachs
Because it's an infinite game.
- [00:16]
Bill Lee
It's an infinite game. And no one that I talk to would argue we're going to somehow prohibit them from moving forward in AI. Let's not forget it wasn't that long ago that OpenAI they'll say borrowed or copied the innovation that happened at Google and deep seat like, this is how innovation works.
- [00:49]
David Sachs
Bill, great to be back in person.
- [00:51]
Bill Lee
Good to see you, sir.
- [00:51]
David Sachs
That was fun last night. We have to give a little shout out to our friends Vinnie and Bill Lee and some others who we got together with in Austin last night for some poker. I think you did all right last night. You had some winnings and. Yeah, some more winnings. In fact, I brought you some flowers. This is for your Florida Gators. Bring you your flowers.
- [01:08]
Bill Lee
Thank you. I'm sure the listeners are tired of hearing. I started the last two podcasts, one before the Sweet 16 and one before getting into the Final 4. And then, of course, everyone knows the Gators went all the way. I had a bunch of friends out. We spent the whole day, the Monday of the game day, on the River Walk outside the team hotel. Hotel. Saw a bunch of old friends. I know fandom is a weird thing because you don't actually do anything. You just go along for the ride. But it creates. It creates a very special experience, and I'm super proud of. Of what they did in that team and how they won. I had talked about it before, and it was dramatic, too, so. But it was a great time. Just a great time. What have you been up to?
- [01:46]
David Sachs
Speaking of games, that was an exciting upset by the warriors in Game one.
- [01:50]
Bill Lee
Yes, it was.
- [01:51]
David Sachs
Over Houston the other night. I hope our guys make a run at it this year. Certainly looks like they're a totally different team with Jimmy Butler on the team. And no doubt, I think they're 25 and 4, something like that, since the Jimmy Butler trade.
- [02:03]
Bill Lee
Completely.
- [02:05]
David Sachs
I'll tell you, man, I'm thinking a lot. In fact, this is something you really drilled into me ages ago about thinking about just complex systems. When I look at all the things this new administration is trying to change. Right. Simultaneously. You and I talked three months ago. I said I was worried about the markets. Discount rates had to go up. There was more uncertainty in the world. But when I start thinking about what's going on, what this administration is trying to accomplish, all at very large scale. So think about this. Whatever you think about each one of these individual things, they're trying to totally transform global trade. So that's trade negotiations with 100 countries. We effectively have an embargo between us and China today. 140% tariff, export controls, you know, and so we have to renegotiate that deal. Besants said today really hasn't even started. That's going to be a slog. On top of that we have taxes. If we don't, you know, lock in the tax bill, it doubles at the end of the year. We have this reconciliation package, we have doge and deficit reduction. You know, we have questions around the 10 year and whether or not deficit is going to actually be larger this year. We have the war in Ukraine. Right. And lots of back and forth there. We have dealing with the volatile situation in the Middle East. I mean it sounds like we were on the verge maybe of seeing an Israeli attack on Iran. And all of these things are happening simultaneously. And so one of the things that's just on my mind, if you look at the discounted rate of dealing with any of them successfully and then you multiply those discounted rates together, right. The probability that you're going to land this plane and just a really smooth landing I think is challenging to see. Right. We're gonna have some wins, we're gonna have some losses. And so today I know we wanna revisit some of these conversations around tariffs and free trade and these export controls and kind of where we are in the market. But I would just say like we're attempting something very high difficulty level. And if, you know, if this administration is able to land the plane on all these, it will be quite an accomplishment.
- [04:21]
Bill Lee
Yeah, you bring up comple. This is the reason I spend so much time down at the Santa Fe Institute, because that's all we talk about. But a couple of features of those things that relate to exactly what you said. First, it's very hard to know which variables are dependent in a complex multi variable system. And there may be one you don't know about, that it flips and the whole system takes on a different shape. And this makes these things very hard to predict. Which is why I don't like talking about macro for that exact very reason that there's so many variables. Very hard to be accurate and correct. And even if you are, it might just be by happenstance.
- [04:59]
David Sachs
Exactly.
- [05:00]
Bill Lee
You might not know the exact variable that caused it. So it is, it's difficult. And unfortunately, and I'll state again, I don't like talking about macro, but we're kind of forced into it because the market and even the destiny of many of the high tech companies that we would prefer to focus on seem to be caught up in this whole thing. For sure.
- [05:21]
David Sachs
For sure. I mean, I just saw a random tweet before we came in here. You know, somebody estimating that the revenue hit to Meta this year from reduced advertising by the merchants, Chinese merchants on Meta, like temu is like $7 billion. Wow. Now think about that. That's pure profit. Right. There's no incremental variable costs against serving those advertisers. So if that just disappears, you know, it's very, very high margin business. And so again, just the downstream consequences.
- [05:52]
Bill Lee
A little less because they'll backfill with something else that may not pay as much.
- [05:55]
David Sachs
Yeah, you know, perhaps. But I think, you know, what it reminds me is, you know, it feels like there's news every hour. It's pretty exhausting. But we gotta lock in, you know, there's a super busy calendar ahead. So why don't we start with just maybe updating where we are on tariff negotiations and revisiting I think some important arguments about free trade. So last time we were together we really framed this by saying on the one, it seemed there were two different kind of sides in this administration. On the one side we had kind of a more tactical narrow view of tariffs, maybe the Besant consensus I called it, which was a fully loaded gun, rarely discharged and have targeted tariffs to re onshore critical national industries. And on the other side of this we had what I described as more the nuclear Navarro approach. This is that we generate trillion in tariff revenue, that we tariff everybody high structural tariffs. We replace the Internal Revenue Service with the External Revenue Service. And this is much more structurally different, not tactical at all. Well, where are we now? Markets are now down 15% during this period since quote unquote liberation day on April 2nd. The markets are clearly worried about a global trade war. We now have export bans. So China implemented an export ban on Rare Earths on April 5. We retaliated or at least implemented an export ban of our own last week on Nvidia chips. We'll get into. And all of these bans and tariffs are quite controversial, even among Republicans. Remember the Republican party on Capitol Hill has historically been against tariffs. And so I think there's an increasing concern on Capitol Hill about where all of this is headed. And what it means for the economy. And so many people are saying this is. Is feeling quite chaotic. They're nervous about the 10 year. They're nervous about the impact on the dollar. Besant saying it's gonna be a slog and this is gonna take a while. But the president says on Friday he thinks it'll all, you know, we'll have it resolved in the next three to four weeks. So what is your reaction to all of this? What I wanna do is take it up a level because I think there's an important conversation. Republicans have historically been a party of free trade and lower taxes, right? I think of Reagan or Milton Friedman. And yet today there seems to be this grow around tariffs. So let's just go back, make the case for U.S. steel man, the case for why this may be a misadventure in the first place.
- [08:31]
Bill Lee
Bill, when we were talking at the beginning of this podcast journey about skilled immigration, we played a short clip from Ronald Reagan, which was one of his last speeches that he gave in office. And this week, with all this tariff discussion, there was another Reagan clip floating around that I think does just as great a job of kind of summarizing something in a very efficient way. So if you don't mind, let's play that clip real quick.
- [08:59]
C
And today, many economic analysts and historians argue that high tariff legislation passed back in that period called the Smoot Hawley Tariff, greatly deepened the Depression and prevented economic recovery. You see, at first, when someone says, let's impose tariffs on foreign imports, it looks like they're doing the patriotic thing by protecting American products and jobs. And sometimes for a short while, it works, but only for a short time. What eventually occurs is first, homegrown industries start relying on government protection in the form of high tariffs. They stop competing and stop making the innovative management and technological changes they need to succeed in world markets. And then, while all this is going on, something even worse occurs. High tariffs inevitably lead to retaliation by foreign countries and the triggering of fierce trade wars. The result is more and more tariffs, higher and higher trade barriers, and less and less competition so soon because of the prices made artificially high by tariffs that subsidize inefficiency and poor management, people stop buying. Then the worst happens. Markets shrink and collapse, businesses and industries shut down, and millions of people lose their jobs. The memory of all this occurring back in the 30s made me determined when I came to Washington to spare the American people the protectionist legislation that destroys prosperity.
- [10:27]
Bill Lee
So, I mean, for me, you know, everything I learned up until this point in time is congruent with what Reagan said. You know, tariffs lead to increased inflation, they lead to reduced innovation, putting a protective blanket over our companies in our country lead to them being less globally competitive. And then fourth, which you mentioned, you know, it leads to retaliation. And you know, I've just been kind of revisiting a lot of my priors. One of my favorite economists who spends time down at Santa Fe, Ricardo Houseman, put out a great piece who said we're not adding up everything the right way. We're only looking at physical goods, their services and intellectual property and net income that comes from companies like Meta operating around the globe. You know, Neil Ferguson did an incredible hour with Barry Weiss that I would just tell everyone to go listen to. And every one of these things takes me back to what I learned over 20 or 30 years, that these things aren't going to work out in the long run. And so I'm skeptical. I mean I'm always open minded to revisiting my priors and if someone wants to put out an argument while this is all going to work. But I, and you and I were talking earlier, but I find there's a lot of conflation going on, you know, about different, different reasons arguing for why different actions are happening. You know, the tactical, you know, we need to have these specific technologies, you know, be, we're be resilient. So we're not overly dependent on one country to this bigger thing where we're going to repl all of tax income. And I think you could do a little bit of the first. The latter just violates all my priors. So I'd have to start fresh and I'd have to be convinced that all these great thinkers that came before us were wrong.
- [12:22]
David Sachs
Right. So if our friend David Sachs were here, and I think he brought you up on the all in pod last week, if he were here, he would say okay, free trade is all well and good, very Jeffrey Sachs, but he'd bring up John Mearsheimer and he would say the reality is we're in a great power struggle. We have a peer rival in China today and that national security must take priority over free trade. And might make the argument, I think that in particular creating resilience in these industries, rare earths, chip fabs in the United States, auto manufacturing, steel, aluminum, et cetera are essential to our national security. And so therefore it's not inconsistent with free trade. What would you say to that?
- [13:11]
Bill Lee
Well, you know, we, we talked in the past, I think to the extent you were doing something very tactical it could be proposed as such. The, the tone and the bravado of, of the description of what we're doing isn't consistent with that. There's also, if you're using the word resilient, you know, that can include other countries that, that doesn't have to be on the shores of the US And I know people who in the first Trump administration were told to diversify away from China and they built supply chains in Vietnam and now they're worried about tariffs there. And so we talked about this. But there needs to be a consistency in order for people to adjust to those things. One more piece I would mention we'll put links to all these things is Thomas Friedman has an op ed in the New York Times that says, I, I just saw the future and it was not in America. He takes it further. He believes that in advanced manufacturing, we're not just not doing it here, but we're not on the cutting edge of what it would take to do here. If you recall back in a day and age when Japanese manufacturing, and just in time was this huge thing where all of America was convinced Japan was ahead of us in auto manufacturing. And he says we need to adopt that philosophy about manufacturing in China. And he goes to the point of saying, look, we need to force them to do JVs here so we can learn from them.
- [14:45]
David Sachs
Yes.
- [14:46]
Bill Lee
Now no one's talking that way in the administration because there's so much vilification. There's no recognition of where they might be better than us. But those problems. I guess the point I'm making is those problems are worth solving. But I'm still not convinced that. I think we have a huge labor problem trying to be competitive in manufacturing. Neil makes a great point about the argument that, oh, we shouldn't have done this, we regret global trade. That argument takes. You're allowing yourself to imagine you're taking where we are today and competing with an imaginary version of how things evolved. If we didn't embrace global trade and assuming that we would have manufacturing and be in a better place. And I think that's. He used the word fanciful, which I would agree with.
- [15:38]
David Sachs
I mean, I might also argue in response to Mearsheimer. It was an incredible debate last year, the all in summit between Mearsheimer and Jeffrey Sachs. And he comes out of the realist school of political international relations. And I think there's a lot of truth to it. Right? I mean, you can't stick your head in the sand and pretend that we don't operate in an international system. In the middle of the Cold war, in the 1970s, we had all sorts of embargoes on Soviet Russia that were probably smart embargoes. A lot of people think that the historical telling is that what brought the Wall down ultimately against Soviet Russia was that our economy was triumphant. And so I look at the situation today and I think part of the problem is that it's not clear out of the White House what the goal and objective is. Right. If the goal and objective is Navarro, then I think there's broad opposition within not only, you know, the Democratic Party, but also the Republican Party to the scale of tariffs and disruption that that's going to have on the economy. But I think it's fairly non controversial that we should have tactic tactical narrowly tailored tariffs and tax subsidies and incentives in order to reinsure some critical capabilities. You know, I mentioned a few chip fabs, some pharma critical rare earths and production. I mean we don't want to be dependent on the Chinese for whether or not we can produce an automobile or whether or not we produce a phone, you know, etc. And so I think that, I think that some of that makes a lot of sense to me. What doesn't make a lot of sense to me is that we launched what was kind of this nuclear style tariff war against every country on the planet. Right. And so just the sequencing of events here I think is a bit confusing. It should not be this McKinley style multitrillion dollar tariffs. If what your objective is principally agreement is, is to re onshore some of these critical industries. And what I think is missing from this, all we're talking about is tariffs, right? We need to be talking about what is the accelerationist agenda that we're going to put together in order to get these chip fabs. There's a lot of things we could put together, AI funds, we can put together tax incentives and other packages to get people to build, you know, to build here. I think that gets lost in the conversation. If we think that this alternative path is all about this reinsuring bill. Is that consistent, do you think, with the Reagan and Milton Friedman view of free trade? Like if it was more tactical like that.
- [18:17]
Bill Lee
I think we were more tactical. I'd probably push back on you and disagree. I don't think our current democracy is set up in a way that's really good for the country to deploy dollars to help industry. And I gave this speech at the original all in summit about regulatory capture and I, I can't imagine that if our. Well, first of all The AI boom in the US has attracted more capital dollars than I've ever seen accumulated in the history of mankind. So why sprinkling a little more on would be helpful. But also you get into this game of picking winners and losers. Now, Friedman highlights, and I think this is true, the Chinese government is just much more successful at state involvement in innovation. And if you maybe go back to the space race or the Manhattan Project, we were capable of kind of mustering forces in that way, but I haven't seen it done recently, like the past 40 or 50 years.
- [19:21]
David Sachs
In many ways, the private sector has done a more efficient job of, you know, of taking on the Manhattan Project, you know, style project. I mean, you look at what's going on in Abilene, Texas and Denton, Texas, you know, around building out incredible supercomputer clusters, all done really without government involvement. And I think that's, you know, an efficient and preferred mechanism, you know, where a lot of, to your point, there's a lot of capital available, but there.
- [19:48]
Bill Lee
Are areas where I don't think we will move forward much without government involvement. A great example would be in energy. So, so, you know, as we talked about many episodes ago, you know, Korea and China are delivering fission nuclear at 1/4 the price we are. And I think that Korea example, South Korea is very important because that is a democracy. So here's one country that's authoritarian, one that's a democracy, and they're both achieving it, and we are 4x over that. That's going to require some type of government involvement to figure out why we can't build that better and faster. And to be fair, there's a lot of, have movement around the country, mostly at the state level, about removing red tape as a, as something governors celebrate which, which is helpful and, and may move us in this direction. So those I tend to, if we're going to help something along, I think, I think figuring out why our governments become friction and mud and changing that. Right. Is probably going to be more impactful than the government doing the work themselves or picking winners with capital.
- [21:01]
David Sachs
We're, we're quick to blame others around the world for our challenges. Right. But I think we need to spend at least as much time accelerating ourselves. And part of that acceleration is getting rid of needless regulation. It's looking at our own systems and asking that question, why does it cost forex more to build a fission reactor today in the United States than it does in South Korea?
- [21:24]
Bill Lee
Hey, yeah, totally. And by the way, one thing you just spurred in my brain, I was listening. Friedman also did a podcast with Ezra Klein and yeah, I'm just going to steal his story. I don't know that it's true, but he says that when China attacks a new industry these days that they encourage a ton of startups. I didn't know this. He said so when they went after solar powers, they encouraged like a hundred startups. So rather than pick a winner, they give money to everybody. So in a, in a thousand flower bloom kind of way and that those hundreds compete their way down to five. And he said there's a lot of fraud and grift and waste for the ones in the losers. But what you get out of the five are, is something that's actually honed by a market force. And I don't think anyone that thinks about authoritarian China thinks about the state using market forces to get to a higher level of efficiency and production. But if we're what Thomas said is correct, they're actually using this kind of competitive market force to hone the better players in these industries.
- [22:36]
David Sachs
Let's talk a little bit about. I think a lot of things get conflated when we talk about tariffs. And one of the most important is export controls. So an export control is effectively a license requirement that acts almost as an embargo on all trade in a particular good. So on April 5, China implemented this rare earth ban. And then we reciprocated last week with a ban on all Nvidia H20 chips going to China. So when you look at the rare earth ban, and I have a list here of the materials that were banned on April 5th, and you have things that go in critical elements into magnets, samarium, terbium, and so these are. About 60% of these materials are mined in China. Okay, so you do have other places on the planet that are, that are mining these rare earths. The problem is 90% of them are refined in China. When they banned those rare earths, these are the magnets that go into EVs, phones, computers, machines of all sorts. This was called by some in and around the White House as a kill shot, A kill shot against the US economy that causes massive problems in industrial production. You know, when I think about again the destabilization that comes from over dependency on something like if every magnet that goes into every machine in the United States is coming from China and now we've effectively banned it, even though the ban was in response to the tariff tariffs by the United States. Right. What is the off ramp to this? You know, I now see just this afternoon, while we started recording the pod. Trump has said that, you know, he doesn't expect the tariffs to stay anywhere close to where they are in China. He doesn't think they're gonna be zero, but they won't be anywhere close to where they are. You know, and we see kind of a unilateral walking down of these tariffs. But these export bans are really dangerous, Bill. So what are your thoughts about an export ban? Perhaps just compared the tariff itself.
- [24:45]
Bill Lee
Well, I mean, I go back to the Reagan video, right? He says this will eventually lead to retaliation and escalation. And the fact that this video was recorded, whatever 80s, what is that, 45 years ago? This isn't a new perspective. So you could argue, oh, my God, I can't believe this happened. Or you could say, well, if you studied history, you should have explained, expected to stand.
- [25:11]
David Sachs
Right. In fact, there's this Milton Friedman video going around, and he talks about retaliatory tariffs, and he says, okay, let's say that somebody shoots a hole in the bottom of your boat, right? And so, you know, it's taking on water. A retaliatory tariff would be like you shooting another hole in the bottom of the boat. And then they shoot a hole in the bottom boat, it just sinks faster. Yeah, right. And he's saying, you know, but in fact, what we did last week is the US did ban H20s going to China, and this was a pretty controversial move. And in fact, I was looking at some of the analysis that was done this week, and the newly launched Huawei cluster, Matrix 384 is China's competitor to the GB200. So semianalysis is out with an assessment of this and many others. And basically what they concluded is that Huawei is already on the frontier or near the frontier with respect to chips. In fact, in fact, one of the analysts on CNBC this week said, to be honest, we basically just handed the China AR market to Huawei anyway. Right? And as Bernstein analysts, because they said what it effectively does is clears the decks for Huawei to have monopoly profits in China. They no longer have to compete with Cuda and Nvidia in China, even though we were sending them. The H20 was a nerfed chip, Right? It was a chip that was two or three generations behind what we have in this country. But it was, you know, some people think in retaliation to the rare earths. Other people think it's just part of, you know, the AI strategy to try to win the AI war against China.
- [26:50]
Bill Lee
Well, and let's just take the argument that it was a retaliatory move. How good must it feel to be Nvidia and Jensen and the executive team there that you become a pawn in these games that you had nothing to do with creating. And in fact you designed this product specifically to meet the expert control rule that was in place before this one, which is very similar to this Vietnam thing that we were just talking about. So you can't be happy with that. I reposted when this all happened a great video that Deirdre did over at CNBC about how this will be good for Huawei. And I think if you asked Jensen, he would say, yeah, this is great for Huawei. And it's not just that you get an isolated market where everyone but, but every participant in the AI market in China may have been working with Nvidia. Now they start working with this and they all collectively help improve it over time. And you know, there I read one article that said that China's, you know, getting some of their very first commercial planes off the ground. One of the reasons is they became reliant on Boeing and Airbus. And so. So by denying your exports to a market, you increase the incentive they have to develop their own technology.
- [28:10]
David Sachs
Well, particularly when they have the capability of China. I mean, the fact of the matter is if they had no capability to develop it, it would be one thing, right? I think more like the race around nuclear arsenals, if you will. There's some countries that will never have the capacity to build said nuclear arsenal. But the fact of the matter is China is so close in this regard with respect to the H20s. From my perspective, it's a very close call. I don't think we should be sending GB200 or cutting edge chips to China. I think that there's a legitimate national interest in quote, unquote, staying out in front on AI. I think there's a debate to be had about that. That's where I come down on that side of the issue. But the H20s, it seemed to me was a very self defeating way. I think that the competition with CUDA in China distracted the competition, denied the monopoly profits within China for these Chinese Internet companies. There was some insinuation last week that Jensen was intentionally right, skirting all of this, these rules around China and that there was maybe 30 or 40% of all their sales were going into China. As I look at this, I think we have to be really careful. I think that these tariffs all of a sudden can find us in a place where we're demonizing. I think Nvidia And Jensen are national heroes for the work that they've done and the leadership they've given us in global AI American success stories.
- [29:43]
Bill Lee
Totally agree.
- [29:44]
David Sachs
And this idea that somehow they comply with the exact attributes of the age 20 prescribed by the US government, I want to go back and then they sell those in China, and then after the fact we go back and somehow start demonizing them, I think is a very dangerous thing.
- [30:01]
Bill Lee
So when I gave that speech a while back on regulatory capture, I made the argument that when in America, inside of America, when we want to accomplish something through policy, we gather a bunch of people and we get a bunch of ideas and then we write some complex piece of legislation. And what I highlighted is that in many cases it fails, and in some cases it spectacularly fails. So what does that mean? You get the exact opposite outcome from which the policy intended to create. Now, the fact that this happens all the time inside of America is an interesting fact because in some ways, expert control is external regulation. So we're trying to implement a policy now not just in a place where we control most of the pieces, but in a world where we don't control many of the pieces. And then we expect that policy to work perfectly. And the problem is borders are porous, money finds a home. I always tell people that try and build Internet businesses. Internet arbitrage is undefeated. And global markets kind of have the same thing. Like we're just coming off of a remarkable. I would use the word spectacular again. Spectacular failure of Russian sanctions, economic sanctions. Right. So why do we think, oh, that didn't work?
- [31:30]
David Sachs
Right.
- [31:30]
Bill Lee
But I'm going to go do this and make it work. I heard people who said we have to ban age 20 saying, oh, well, the Biden rules didn't work. They failed.
- [31:41]
David Sachs
Right.
- [31:41]
Bill Lee
So. Oh, so. So you mean global expert controls didn't work, so we're going to redouble them and see if they work again. And I just, you know, I think if there were a piece of technology like say a fighter jet that you're giving to maybe one other country or two, that's a super deep ally, that's one thing. If you're going to sell something in 120 countries around the world and try and tell one country they can't have it, right? There's no effing way that's going to work. Especially these goods have digital attributes. I mean, you know, it's just, it's gonna, it's gonna work around. And, you know, I think it's gonna get worse before it gets better. I have Seen hints that the same people that push the H20 want to, you know, put even more restrictions on ASML, which is a Dutch company, or fine TSMC for building Huawei chips. That's a company that's headquartered in Taiwan.
- [32:37]
David Sachs
Right.
- [32:38]
Bill Lee
So I'm sure Jensen's miffed that his company's become a pawn in this game. How do you think these companies, we talked about ASML in the past where the management there has already expressed some reluctance to be our whipping post or whatever, but I don't know that we just are allowed to start grabbing pieces of chessboard that we don't even own and bringing them into this competition. And you said earlier the way we implemented tariffs, we've, We've alienated many of our allies and partners. You know, I won't be surprised at all if we wake up one day and one of these companies tells us no.
- [33:17]
David Sachs
Right. You know, again, it comes back to defining the objectives narrowly enough that you don't end up in this big retaliatory and escalatory posture. Again, I think it's a reasonably close call around H20s. My sense is that. But Nvidia understands and is on board with not selling leading edge chips to China. Right. Like, they didn't fight the fact that they weren't selling GB2 hundreds to China. And the H20 is, if you just looked at the facts on the table, the Huawei Ascend 920s. The number of these that they're now producing, the way that they're interconnecting these things together. Yes, they may be slightly less efficient. It may take two or three times the number of chips and amount of power in order to end up at the exact same place. But we just talked about there are 100 nuclear power plants under construction in China. Power is not their limit and they.
- [34:12]
Bill Lee
Produce those plants at one fourth the price we do. So if it comes down to power, and many people in the AI world like to say it's going to come down to power, well, I guess they're going to win.
- [34:21]
David Sachs
Well, I mean, so there's an interesting question here. If you think about the off ramp on these for President Trump, again, there's a lot of suggestions over the weekend that, you know, if you think we're going to land the plane in three to four weeks, Bill, the only way you do that is basically through unilateral concessions. Right. That you define as victory. So all of these countries are calling us, they want to do deals. And so we're gonna walk the Chinese tariffs back to 30 or 34%. And we're gonna suspend maybe for 90 days, the H20 ban in the hopes that they will reciprocate by suspending the rare earth ban or something like that. So I don't think we've seen the end of this when it comes to this Nvidia ban. But, you know, the flip side of this is Nvidia just had a big announcement, right, with the White house about a $500 billion investment, right. In combination with a bunch of other companies, Foxconn, tsmc, et cetera, building fabs in the United States. I know the first GB200 is rolled off the assembly line out of those fabs in Arizona. To me, again, we need to rebalance and focus on accelerating. Right. And re. On shoring these critical industries in the United States. I think the distraction that we can keep China away from frontier level AI, that will be a losing strategy in my mind. I don't think we need to go out of our way to make it easy on them. But I think the obsession and the time spent and the distraction for US CEOs to try to. How to. How they comply with all of this, I think is not particularly great. And I'll just. I'll just give you where, you know, maybe the next frontier where this is going. I've heard you know, increasing chatter that somehow we're going to try to ban deepseek models. Yeah, right. And somehow prevent US hyperscalers or cloud companies from integrating Deep Seq models into their.
- [36:14]
Bill Lee
I've heard the same thing.
- [36:15]
David Sachs
So talk to me about that and the slippery slope associated with that.
- [36:19]
Bill Lee
Well, before I go deep in on Deep Seq, which I want to do, I want to mention a couple things from a very broad level. One is back to this Friedman post. He mentions a quote from a book, how why, how we do Anything Means Everything. And the quote is, interdependence is no longer our choice. It's our condition. Our only choice is whether we forge healthy interdependencies and rise together or maintain healthy interdependencies and fall together. And, you know, there's a book that I've been rereading that the Collisons talked about once, called Finite and Infinite Games by James Carr. And there's a reality that a lot of our strategy that we think about and how we compete in the world comes from finite games. A finite game is a game that has a beginning and an end and a winner. So a football game, a basketball game, that kind of thing. Infinite games are different. Different. They just go on Forever. Stock market, you know, most large companies, they're infinite games. Like, they're not. There's no clock that ends. There's no one that declares a winner. I fear that a lot of the attitude, the vitriol, the, the language, the tone that's used between us and China is borrowed from, from finite game thinking. Like that we're some, you know, win the AI war. What does that mean? Like, is it, is there someone that's, is the clock getting in? Like the warriors versus the roc and they say, oh, we won like that, there's no chance of that. And most of the people that are even the biggest China hawks, I said, I say to them, do you think you're going to prohibit China's long term AI development? And they said no. And I just think there's a lot of zero sum thinking going on. Win, lose. I totally believe in this interdependence. I think there's zero chance that you're going to stop China or somehow, like I even I use the phrase increase the gap. There's, there's a lot of arguments that the AI gap has been shrinking, not, not rising. Eric Schmidt had a big interview today where he said it was shrinking or this week. Right. We'll put show notes on that. And a lot of people are saying they're catching up. That semianalysis thing says Huawei's getting there. And so, so this argument that, oh, we've got to do everything we can, we have to act now to win the AI war, that like almost this belief that we're going to increase the gap and that it's a finite game that's just going to end one day. And I don't believe in either of those things.
- [38:53]
David Sachs
Right.
- [38:53]
Bill Lee
And so I think the tone's wrong. I think you got to get out of this enemy threat. Like all those words allow you to hate. You know, there's a great, great quote from the Godfather which is, don't hate your enemies. It clouds your judgment. One of my favorite quotes ever, the, the piece of this Friedman article, which I think everyone has to read, he just went over there and spent time. It's not what you think. Like, they are way ahead in a lot of different areas. They're super smart. They're not. You know, I think a lot of people thought, oh, we have a democracy and capitalism. And people get confused between those two. And they think we've got the perfect American exceptionalism. We're the only place where you can have innovation. And because we talk about, oh, they steal, they steal, we don't ever spend the time to go see if innovation's happening over there. It is happening over there. And these people are educated in the same schools and universities. The thought that they couldn't be educated or can't innovate is going to lead you to a lot of really bad policies.
- [40:01]
David Sachs
And worse yet, if you believe they're on the frontier and they're going to have a frontier compute stack with frontier models, whether we help them or not, which I think even those people who are more China hawkish agree with that statement. Right? And if you wanted the rest of the world to run on US Compute and US Models, what's the number one thing you would not do? You would not anger the rest of the world by launching a tariff assault on them simultaneous with your tariff assault on, on China. And so it is a mysterious policy. And when you look at all of these headlines that are coming out, the EU now negotiating directly with China, right? We now have Japan and South Korea and Vietnam negotiating with China. You have the Middle east, you know, entering into, you know, deals with China. I'm not sure, again, that we're advancing our cause, right, by making it harder on everybody else in the world and telling them they are the cause for the demise of the US Middle class.
- [41:06]
Bill Lee
And I'll go even further. Like, the tone they're adopting is more statesmanlike than us. If you read the tone in those discussions and they highlight that they haven't invaded anybody in a very long time. The US has been involved in a lot more wars around the globe. So our ability. And I brought this up a few podcasts ago, I think you mentioned deep sea. So we all believe that there's a imminent deep sea ban, the level of which I don't think we fully know right now. But my immediate reaction is, oh, I guess Europe and South America will run on deep sea. Because the minute we start vilifying even that, it is, I believe right now the best performing, most open. You know, if you had a quadrant, the one that's it's on the upper right on performance and openness, you know, and if we ban it, boy, it's just kind of one, you know, even more people working with Huawei chips and deep seek trying to optimize it. But two, you know, in this world we've created where there's so much animosity, I think people will be glad to use it in this other country.
- [42:20]
David Sachs
Well, the first thing it dawns on me is I ultimately don't think, you know, somebody asked me on CNBC you know, I said your decision as to whether be in the market comes down to whether you think the president is more, you know, kind of tactical free trader in the spirit of the besant consensus, fully loaded, gun, rarely discharged, or whether you really think he wants to reorient the world in the way Navarro discusses it. I still believe the President is fundamentally a free trader, that this really is about making the US more resilient and he has to bring us back there.
- [42:56]
Bill Lee
Right.
- [42:56]
David Sachs
Because if we head in the direction of Navarro, it's quite clear to me that we're gonna so anger the rest of the world that the chance that the rest of the world is gonna run on us compute. I think what we do in that instance is you move everybody in the direction of China, it backfires. We don't widen the gap with China with respect to AI or global trade or anything else. In fact, we shrink the gap.
- [43:22]
Bill Lee
By the way, there's one, I think, hilarious irony with the Navarro point of view and combined with the export control, which is if we're upset that there is this trade imbalance, the last thing you'd want to do is start penalizing our best creators, our best manufacturers, our best companies. How are you going to solve the trade imbalance? If we tell people they can't buy our best stuff, we're going to make them buy our shitty stuff.
- [43:53]
David Sachs
Well, just as an example, I think Nvidia sold 12 or 15 billion dollars worth of H20s. So if you ban those, then your trade deficit with China goes up by $15 billion.
- [44:04]
Bill Lee
To my very point. And let's not wash over that. I think Nvidia is such a high performing company, it's worth so much money, such a large market cap, so much cash, no liquidity issues, that this $5 billion write off they're gonna take is kind of NBD, move on. It didn't affect the stock that much. But a $5 billion write off, they're just gonna throw a bunch of inventory in the trash can. Well, I mean, that's remarkable.
- [44:31]
David Sachs
Think about that Bill, right? Some of the people who are arguing, right, including some USAI companies, that they shouldn't be able to sell the H20s to China, right. If Jensen or the team at Nvidia turned around and said, great, you buy them, them, nobody would buy them because they're so underperforming. Right? And yet it makes the point for them. But think about this. 15 billion in sales of H20s, right, that probably results in, you know, 8, $9 billion of earnings, you know, back to Nvidia, you tax that at a corporate rate, that's 2 or $3 billion to the U.S. treasury. Right. We are effectively taxing the Chinese on a nerfed product to provide profits to Nvidia to further distance the lead against Huawei and to put money in the U.S. treasury. And we just unilaterally disarmed around that in a way that doesn't even advantage us against Huawei because their chips are already surpassing the H20.
- [45:27]
Bill Lee
And that leaves out, and I agree with 100% of that, and there's even more because of escalation. So once again, I go back to this finite gain, same mindset. I, I think people are evaluating a decision on an expert export control or a tariff or a ban without totally in isolation as that one decision, and what will its impact be? But any one of these decisions, and certainly the combination of them, could lead to escalation that could go as far as leading to a hot war. And so you have to accept responsibility of making any one of these decisions that there are, you know, butterfly effects and escalatory effects that you may wade into. Right. By doing that. Right.
- [46:20]
David Sachs
I mean, you can think about it this way. We define, some people define artificial intelligence as existential, right? Like that it's absolutely essential to your national security. It's essential to your national economic security. Now, if you are firing a shot at somebody that says, I'm going to deprive you of being able to build your national security or your national economic security, right? Like it's a serious thing, I want.
- [46:48]
Bill Lee
To go on record as saying, like, almost everyone in the AI space that I see with a microphone in front of them says the US has to win the AI war. I don't know what that means. And if I guess as to what it means, I don't think it's possible. Right?
- [47:05]
David Sachs
And so because it's an infinite game.
- [47:06]
Bill Lee
It'S an infinite game. And no one that I talked to would argue we're going to somehow prohibit them from moving forward in AI. Let's not forget it wasn't that long ago that OpenAI, they'll say borrowed or copied the innovation that happened at Google and deepseek, like, this is how innovation works. Ideas spread. Like, to win, they move fast. People study what other people do. It happens all the time. And when, only when we apply these labels of theft or copy or steal do we start vilifying. But it happens all the time in our own ecosystem. It's how these things evolve. And so, yeah, I don't think there's a finite game to win. It's funny, I did some research on something because I was very curious. I went back and studied and it's so easy with AI. I went back and studied the space race and when the space race was underway, if you go back and look at the quotes from all the senators and, and President JFK and everything, one of the reasons, maybe the primary reason they said we got to win the space race is they all believed that the entire globe would be covered in this mesh of rockets and satellites that would be used to control the military of the globe. And whoever got to space first was going to have this control. Now that never played out, but I see a very similar vein in AI where people, especially people that believe in AGI and ASI and magical AI think that it's just going to explode. And then whoever controls this uncontrollable force will control the globe in a zero sum way. And I just, I don't buy it. Like, I don't think that's going to happen. If that does happen, we're going to have much bigger problems.
- [48:57]
David Sachs
I think you and I would maybe find a point of agreement here, like what is the North Star that should guide us? And I think the point of agreement, if we were giving advice, would be that the re on shoring of critical national industries through some tactical means is an important objective. But I think you and I would also agree that we need to shift the focus radically on accelerating our own race and refocus from spending all of our time trying to slow down everybody else. And the objective should be the KPI should be do we widen the gap? Right? Do American companies, are they as successful in AI as they were in the Internet? Like I think anybody who looks back at the last 20 years would say that the United States has won both in terms of free trade and in terms of the global Internet competition. 1 as defined by improved the standard of living driven the economy in the United States in a way that was successful for the United States.
- [50:07]
Bill Lee
You know, in one argument with someone, I used the simple metaphor that comes from swimming. Anyone that becomes a competitive swimmer within a year or two, you know, a coach tells them, don't look to the side, you know, because that's wasted energy. And someone might pass. You just swim as fast as you.
- [50:26]
David Sachs
Can, just look ahead.
- [50:28]
Bill Lee
And I feel like, you know, it's, it's almost worse than just looking to the side. We're trying to intentionally inhibit the other player. Now going back to fight since, since.
- [50:39]
David Sachs
I mentioned trying to deflate the football.
- [50:40]
Bill Lee
Yeah, yeah, it's exactly. Imagine if you were just watching a finite game and one team insisted that the other team have a technical disadvantage. What would your reaction be? How would you think about that player? Right. You, you would probably assume they're scared, that they're unsure of themselves. Like, like.
- [51:02]
David Sachs
And also if you told your team at the start of the season, don't worry, you don't have to train very hard because I've handicapped the other team. They don't even know what I've done to them. But I've, you know, I've tainted their system. So they're not going to be very good. Good. As opposed to just focusing on your own training and winning the game.
- [51:19]
Bill Lee
But I might end by going back to this argument from the Friedman piece that it's an interconnected world and there are a lot of very smart, successful, capable, innovative engineers, researchers, founders in China. And if you think you're going to keep them down or permanently, you know, prohibit them from playing in AI, I think that mindset is going to lead to some spectacularly problematic policy.
- [51:52]
David Sachs
Yeah, I agree. Well, maybe talk about we can wrap Tesla reported tonight and the markets are clearly struggling. Down one day, 4% up the next day 4% clearly struggling, trying to get their hands around where we are. So, so since we were here last time, the S&P's down 10%. Nasdaq I think as of yesterday was down 20% peak to trough. And the question people ask me all the time is this all priced in how many units of risk do you have in the market? We have Besant doing a talk tomorrow morning on the financial system. The Vix is still over 30. There are fears and rumors out there about is our tenure. You know, do we have demand for it on a global basis. The dollar Miller is under assault here.
- [52:40]
Bill Lee
And many of these conversations weren't happening five months ago.
- [52:43]
David Sachs
Right, exactly.
- [52:44]
Bill Lee
We were just talking about AI and Nvidia and I mean I go back.
- [52:47]
David Sachs
To the Stan Drucken data centers. Right. The Stan Druckenmiller quote where after the President's election he said this is the biggest shift from an anti business administration to a pro business administration in my 50 years of being in the business. Right, right. That is how CEOs generally felt at the beginning of January moving into this new presidency. And it's really mind boggling to think in a few short weeks how quickly we went from that level of optimism to this level of concern. And I was just looking at a chart. Apple's down 21% Nvidia's down 25%, Google's down 20%, Tesla's down 40%. Right. We have major moves in the market.
- [53:31]
Bill Lee
Well, and look, I mean, both Tesla and Apple have a huge amount of revenue in China. And when you sense that this thing may be escalating or that there are ripple effects going back and forth, one plausible thing that could happen is either one of them get kicked out of the country. That could happen.
- [53:50]
David Sachs
Yes.
- [53:51]
Bill Lee
And so of course you have to discount discounts.
- [53:54]
David Sachs
And the question now of course is, is enough discount given where we are? And so, you know, I said at the end of January, early February, when you and I did the pot, I said, we've taken down our units of risk because there's just more uncertainty in the world. Discount rates need to come up. Multiples are coming down. And we did. And I would say over the course of the past several weeks, we've had very little risk on directional risk long the market. You can like Nvidia, but if you wake up one morning and 12 billion of their sales are gone because they can no longer sell, you know, chips in China, that's something again, that is the macro that is hard for you.
- [54:29]
Bill Lee
To forecast going to Nvidia. I've heard rumors that they want that the US government not to sound like a victory lap, but I said a few episodes ago the biggest risk on Nvidia was the government, and that turned out to be true here. And they may not be done. I've heard arguments that they want to do a customer audit. I don't know what that is or involves.
- [54:52]
David Sachs
Well, they were suggesting it last week. I think even on our where maybe you should look into all these shipments or all these sales that are going to Singapore or whatever. And again, I welcome all of that. I think all companies should have to comply with U.S. rules and regulations. I suspect that they do. But again, if I just step back here, Gold's outperforming the S and P so far this year by about 40%. Right. What does that tell you? People are moving into safe havens. They don't know where, where this is all going to land. Here's one of the things that really concerns me, Bill. If we look at consensus earnings expectations for the S and P so far this year, we started the year we expected 15% growth. We expected the S&P to do $273 a share. Now the consensus is 12% growth. So $265 a share. So consensus earnings expectations for the S and P have barely moved down. And When I think about the chaos of the last eight weeks, every CEO that I talk to says, we're on hold. We're tightening our belts. We're taking a more cautious approach to the year. We can't make decisions. We don't know where tariffs are going to be. We don't know where this is going to be. It's hard for me to think that you can literally wipe two months out of the year in terms of, you know, where decision making is going on in these companies and only have a 3% adjustment to S and P earnings. Now, what are we seeing this over the course of the last two weeks? Well, Scott Kirby from United Airlines comes out, he gives two different guides, and he says, you know, if there's a recession, which we may have, you know, then earnings are gonna be seven to eight bucks, and if there's not a recession, earnings will be 12 bucks. So you have companies that are doing highly unusual things in terms of saying, we don't know the future. So we're either not gonna give you a guide at all, or we're gonna give you this wide dispersion in a guide. So I think for most managers, people are looking at this. They're at max caution. I think from an altimeter perspective, we were pretty cautious, and now we're looking at again leaning back into markets on some of these down days where it's big risk off, because I think ultimately the president is going to make deals, you know, Besant is going to get deals done. I think we're gonna probably land somewhere in this kind of 5 to 10% tariffs for the rest of the world. Right. If you add that up, that's going to be somewhere order of magnitude. $200 billion of tariffs, and you're not going to end up at 140 on China. We're probably going to get rid of these export bans and embargoes and land the plane somewhere around 25 or 30%. Now, mind you, that's still a 3 to 4x increase over the tariffs from last year. But I think what the world needs is predictability, and they need it soon. I think if we're still having this conversation in 8, 12, 16 weeks, with this level of uncertainty around tariffs, I think it's going to have a much bigger headwind to those S and P earnings for the year. And as those earnings come down, we know that the market's going to have to come down with it. So the S and P, as of end of the day today, is only down about 10% for the year. And if you think about all the things that have changed, that feels to me like just the air coming out of the balloon in terms of like the certainty and the uncertainty that we have in the market. I think the next move down, if we have it, is going to be around growth and we really haven't gotten a lot of growth earnings. Tesla's out tonight and even though earnings came in a lot lower than expected, I think people are looking through that as kind of one time. But by the time we get another month or two into the next earnings season, if we continue to see this level of uncertainty and drifting down, I think we're going to have problems for the problems in the market.
- [58:37]
Bill Lee
I admire your hopeful optimism and the data points that I see in the past 24 hours about how soon something might come together. I think there was an announcement that India we had finalized the terms of reference. I don't know what that means, but it doesn't sound like you're very close to being done. Right.
- [58:59]
David Sachs
That was J.D. vance today in meetings with Modi. Came out of the meetings, said we had a big breakthrough. We came to terms on terms of reference on what the trade deal will be, but it will still take months, months in order to hammer out.
- [59:13]
Bill Lee
I think months is too long. I think the reflexivity already starts to take place. Everything you just described and once it does, some of it is certainly self reinforcing. So you start decommitting Capex, you start decommitting basic capacity on different manufacturing lines, planes, whatever, and it will become self reinforcing. You raise prices when you decommit because you have less land, like that's inflationary. Everything starts. The fear of it starts to become the reality.
- [59:48]
David Sachs
Right. I guess a thought experiment. If I described everything to you that has happened thus far this year and I asked you should the market be higher or lower from the all time highs where we started the year you would say of course it should be lower. Right?
- [60:06]
Bill Lee
I would.
- [60:07]
David Sachs
I don't think that down 10% on the S and P sounds to me like irrational given the level of uncertainty that we've injecting in a very short period of time. And so to me, if you're, you know, if you're thinking about units of risk, you know, it still feels to me like you're in that bottom third. Right. Of whatever your normal exposures are, you're in kind of that bottom third. You know, everybody wants to buy the dip and go all in and you know, I think we need a lot more certainty as to where this is going. I do think that it would be very helpful and it sounds like the president is starting to make some of these comments just this afternoon to disavow ourselves of this, you know, Navarro style, replace the Internal Revenue Service. If we can just get a four year forecast that it's about reinsuring a few industries, land the plane on China or on, on Japan and India and then on China, I think that gives us what we need to plan, you know, but there are a lot of other things that have to come together in order, in order to keep the market moving forward. So, you know, we didn't even get to talk about the impact this is going to have on startups and on, you know, what we're seeing in kind of the startup ecosystem. We'll come back and do that next time. But I think that, listen, I'm kind of tired of talking about tariffs, but it is the most important thing and it is impacting everything that we're looking at both on the public and on the venture side of the business today. So, you know, it's unavoidable. We have this really important divergence I think in terms of points of view. And what's interesting to me is kind of the free trade side of this argument has largely been drowned out. And so I appreciate you steel manning that side of it.
- [61:52]
Bill Lee
I mean, look, I assume most people that have at least had a finance class of study comparative advantage, but it's very mathematical, it's very deterministic. Like doing stuff you're good at and letting other people do stuff they're good at is a win, win, win, win, win. And you start backing that up and you're gonna get lose, lose, lose. I, I'm certain of it.
- [62:17]
David Sachs
Yeah. Here, here, here, here. Let's land the plane and get back to building America.
- [62:22]
Bill Lee
Okay, Take care, man.
- [62:32]
David Sachs
As a reminder to everybody, just our opinions, not investment advice.