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- [00:01]
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Joe Wiesenthal
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Joe Wiesenthal
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Tracy Alloway
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Joe Wiesenthal
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Tracy Alloway
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- [02:04]
PGM Representative
Bloomberg Audio Studios Podcasts Radio News.
- [02:20]
Joe Wiesenthal
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wiesenthal.
- [02:25]
Dale Copeland
And I'm Tracy Alloway.
- [02:26]
Joe Wiesenthal
Tracy, we recently did that episode with Andrew Bishop of Signum on sort of geopolitical forecasting, et cetera. And I don't know if you remember, but the last question we asked him like sort of sent a shiver down my spine a little bit. Do you remember that?
- [02:40]
Dale Copeland
He was pretty pessimistic about the outlook for an actual conflict between China and Taiwan, one that would presumably maybe draw in other world powers, including the U.S.
- [02:51]
Joe Wiesenthal
Yeah, I think what actually really chilled me about that was, you know, I asked him, I said, you know, what are the prospects for some sort of Chinese invasion of Taiwan with the next five years? What chilled me was how quickly he Answered yes, right. Or it was not. The fact that he considered it to be a high probability is that he considered it to be a high probability without sort of humming and hawing about it. And I found that to be very disturbing.
- [03:17]
Dale Copeland
That doesn't surprise me that much. I think I told the story about. I wrote a dissertation in college about I thought China would invade Taiwan before the 2008 Olympics. So that turned out to be wrong. But I think, you know, lots of people have been kind of predicting this for a long time, and it brings up the question of, like, what exactly is the catalyst for these tensions between the Republic of China and the PRC to actually morph into physical conflict?
- [03:47]
Joe Wiesenthal
And then I guess the question of, like, how wars come about in general, how they come about in theory, the connection between trade wars and hot wars. Of course, there was that book several years ago, Trade wars are class wars, but trade wars can also become.
- [04:01]
Dale Copeland
Trade wars are also actual wars.
- [04:03]
Joe Wiesenthal
Trade wars, yeah, exactly right. Several years ago we did an episode with Christian Parenti about Alexander Hamilton, and one of his points was that while the popular history of the, the revolution, the war for independence, people say, oh, you know, it was about taxes or we didn't want to be taxed on tea or whatever. But that in his argument, it was really about British constraints on the US's inability to turn cane sugar into rum, move up the value chain, et cetera. And when you think about countries constraining other countries from moving up the technological value chain, once again, hard not to think about the tensions right now between the US and China with chip export controls and other such restrictions.
- [04:44]
Dale Copeland
In general, it does seem true that a lot of. Of history tends to. Well, it kind of leaves out a lot of economics sometimes. Like, there's so much you could write about international trade and the impact on foreign policy capital flows. I know you're a big fan of Adam Tooze's Wages of Destruction, which is basically.
- [05:03]
Joe Wiesenthal
I've mentioned that before.
- [05:04]
Dale Copeland
I know. I'm sure you're gonna bring it up in this conversation, but I really think it deserves more attention. And it probably doesn't get that much attention because I guess historians, maybe they like to talk about, you know, sexy military history and things like that, but it definitely has relevance. And I guess the question is, how much relevance?
- [05:23]
Joe Wiesenthal
Totally. Well, I'm really excited to say we're going to explore these topics further, and we do have the perfect guest. We're going to be speaking with Dale Copeland, professor of international politics at the University of Virginia. He's also the Author of a recent book, A World Safe for Commerce. American Foreign Policy from the Revolution to the Rise of China. So, Professor Copeland joining us now, thank you so much for coming on.
- [05:45]
Tracy Alloway
Great to be here.
- [05:46]
Joe Wiesenthal
Why don't you just give us the sort of concise version of how you think about this link between trade wars and hot wars.
- [05:56]
Tracy Alloway
Yes. So let me start by saying that we underestimate how much impact trade has on the geopolitical military stability of any system. I've explored, really 2,000 years of history. But in the last two books, both on the question of trade and conflict, I found that at least 75% of the big conflicts between great powers over the last 250 years have been directly related to the role of trade and commerce. But here's what's interesting. We have two big perspectives out there. The liberals believe trade always leads to peace because, hey, if US And China are trading extensively, why wouldn't they want to keep the peace going? And the realist school believes it's the opposite, that trade leads to high dependency and worries about the future. I'm going to be cut off, and therefore trade should lead to conflict. And you see this divide in lots of debates, Mearsheimer versus some of the liberals, for example. But my position is an intermediate one, and it says under certain circumstances, trade can be very good for peace. If states have positive expectations about the future trade environment, they expect to get the trade that helps them grow economically and militarily, then they want to keep the peace going. Think of China since 1990. It wants the peace, it wants the trade, and it wants to keep growing through that trade. And it's been great for China. The other aspect of this, though, in history, is if expectations of future trade start to fall or become negative, then the realist kind of logic kicks in, and you have states that become pessimistic about the future. Think of Japan, 1941, and they decide that they need to go to war to protect and to get access to the raw materials and markets that they need for basic domestic stability and economic success. So it could go each way. And what, of course, that means is that diplomacy matters a lot. US And China, for example, could be very peaceful over the next two decades if the expectations of future trade are positive on both sides. But if tariffs or economic sanctions kick in and both sides or one side start to believe that they're doomed to not have access to the world markets they need, then the 1941 scenario of Japan might kick in, and it might lead to China, for example, going after Southeast Asia. You mentioned Taiwan. Or it might mean the US decides it needs to be more aggressive to keep access to raw materials from Africa or from Latin America, South America. So you can see that the basic point here is that trade can go either way. For my argument and my case studies almost always show this, and I can talk about a lot of them. But the most recent book in fact starts with the one you mentioned, which is the American Revolution. And I have, I would say, a much more complex view, but it's rooted in commerce and how the Americans felt that they were being kept down by the British from growing and becoming the fullest kind of power they could be. And they had to fight a war to break those economic sanctions, or at least the trade restrictions and the restrictions that were built into the tax code that the British imposed. And ironically, and I say that the best case for thinking about US China today, or at least the one to avoid, is the 1750-1776 case, where in this case the rising state is China. And it was back then the British, North Americans and the declining state of Britain back then and the US now is a good lesson for us. If we avoid what the British did, which is the extensive trade restrictions on the rising state, we can avoid an intense Cold war and in fact, of course, avoid an actual hot war. So we can talk about this in a more general sense, but that's the bottom line. That's the overview about how trade leads to conflict or to peace.
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Dale Copeland
So I always thought of realism as a school of thought that emphasizes relative gains. So two sides can be trading partners, but if one of the trading partners is getting a huge advantage or grow enormously more than the other side, then that kind of leads to tensions. Whereas in the neoliberal framework, it's all about absolute gains. Right. If everyone is benefiting, even if they're unequal gains, then everyone is happy. So I'm curious, maybe help us understand your framework. I think you call it dynamic realism. Can you give us an example and sort of walk us through exactly how it works and how it differs from traditional interpretations of neoliberalism or just liberalism versus realism?
- [10:50]
Tracy Alloway
Sure. Tracy, you captured one aspect mostly the so called offensive realist perspective, John Mearsheimer and so forth, which is that states in that view are always anxious and worried about the future, so they never want to let an inferior state grow through trade. That relative gain you talked about and John Mearsheimer for 35 years has said, don't trade with China, it's going to grow. And of course, China did grow through trade. And he finds that very upsetting. He was one of my professors at my PhD level level, and that's one aspect. But my argument is that smart great powers actually balance or try to grapple with the trade offs in foreign policy. Yes, on the one hand, if you're really obsessed with the future, you don't want to let a Hitler grow, for example, so trading with Germany after 1930 or 1933 was a wrong headed thing. You want to constrain that state from growing. On the other hand, most states in history, including China, are not that bad. They may have some aggressive intentions, but they are not necessarily going to destroy you. And when you're faced with that kind of rising state, you want to balance off the desire to keep the other down from the willingness or the desire to, let's just say, constrain that other state through trade benefits. And you want to give China, for example through the 1990s and after the ability to grow and be relatively peaceful in that growth and have incentives to not go after the system. And China, we can talk about this, but China is quite a unique power. It wants trade, it needs trade for domestic stability. And it has good reasons not to want to take over the world, so to speak, because of its domestic situation. So helping that state grow and build up its power is actually not necessarily a good thing, but it's relative to the alternatives. Namely cutting it off is actually a lesser of two evils. And that's where we bring in this other school of thought we call defensive realism. And in my chapter two of my new book A World Safe for Commerce, I do talk about that, about the willingness of states making trade offs to accept a relative loss, that is letting China grow through trade for the benefit of making the overall system more stable and to convince the other that it does have positive trade expectations and therefore doesn't have to go on the war path, doesn't have to even go after Taiwan. And this if we want to get to my bottom line is the thing about Taiwan is Taiwan will not is very unlikely to be attacked in my view because of these economic constraints. And it's very important to realize that China knows this and doesn't want to upset the apple cart by doing something perhaps as foolish as over Taiwan and having huge economic sanctions and disruptions to global value chains and global supply chains kick in. And that would cause a declining situation for China that it does not want.
- [14:04]
Dale Copeland
So is the argument for dynamic realism is that basically that countries can kind of shift between offensive versus defensive realism depending on the situation and I guess their future expectations for the economy and respective growth and things like that. And if so, can you maybe give us an actual historical example of where that happened?
- [14:26]
Tracy Alloway
Sure. I'd love to come back to the Japan one, since people do know about it. In my second book called Economic Interdependence and War, I study through two chapters, three chapters really. Japan's growth from 1880 onwards and the number of conflicts it did get into with Russia for example in 1904 and of course with the US in 1941. But also the long periods of peace that Japan had. And why, why was Japan oscillating between relative peace and then all out major conflict? Well, it has obviously a lot to do with commerce and its expectations of the future. So I wouldn't say that the great powers are oscillating themselves between offensive and defensive realism. What I actually try to do is blend the two into one single argument so that what this means is that states are constantly grappling every moment really with this trade off between trying to expand their power sphere, economic power sphere, their economic connections so they can grow their own power base, their long term power base through trade and avoiding kicking in or propelling a cycle of mistrust and hostility with another state that might lead to a war that neither side wants. So think of the Japan case. Japan initially from 1880 to really 1900, was relatively moderate, had a small war with China, but it tried to avoid big wars with big powers. And yet it got itself into a Russo Japanese War in 1904. But that was largely because of Russia's bad behavior, you might say, in Manchuria, and its threat to Japan's willingness and effort to trade more extensively with China itself. So it's quite clear, bump from the document documents that Japan reluctantly, after trying diplomacy, got into a war with Russia that it started. Japan started the war, but it did so only reluctantly after diplomacy had failed. In other words, its negative expectations kicked it into a more aggressive mode. I wouldn't call that offensive realism. I would call it my dynamic realist approach which says if you believe you're declining because of trade cutoffs or expectations of trade cutoffs, you're going to become aggressive and you have to be aggressive to protect your long term trade position. Now guess what? After World War I, in the 1920s, Japan was very moderate. We call it Shidahara diplomacy, after the Foreign Minister Shidahara. But Japan worked with the U.S. it had arms control agreements with the U.S. it increased quite extensively its trade with the United States. And with all Great powers. And guess what? But 1930 comes along and with the Great Depression, the U.S. this is contemporary importance. U.S. kicks in. These very high tariffs, these high tariffs called the Smoot hawley tariffs of 1930, completely devastated Japan. Japan lost two thirds of its trade in one and a half years because of the Smoot Hawley tariffs. And that changed everything. Japan, even with Shidahara still in the government, decided to, as everyone knows, invade Manchuria and take over a huge part of China, take it over and control it militarily. That was September 1931. And then with China at least, things just went from bad to worse. And by 1938, 39, it was fighting wars with the Soviet Union on the Manchurian border. And that led the US to further restrictions on oil, in particular by 1941. And those oil restrictions that were coordinated with Britain and the Dutch led to Japan declining by my estimation about 20% per year. And that led to Pearl Harbor. Now there's a lot of details there. Japan trying to get the oil back through diplomacy, the US almost making agreements and then cutting those diplomatic agreements off and leading to the pessimism, the negative expectations of future trade that led to a massive of war we call the Pacific War. But that's a parallel, a very powerful one. And the Chinese understand that. They understand that. They do not want to get into a tariff spiral. Tit for tat. A decoupling of the two economies that could make China start to decline in relative power and make it turn to the ultimate weapon, which is this preventive war to restore trade, especially in Southeast Asia, which did not go well for Japan and everyone knows that. So China wants to avoid that. Probably the most pressing concern that I see with regards to the investable quality of our industry is that but it's so, so tied to fuel price. So you'll see that as fuel prices rise, our stocks go down and vice versa is just very difficult for people to manage through. But we have seen sustained periods of growth over the last decade and a few of the airlines have done very well. To learn more about the evolution and investment opportunities of the airline industry, subscribe to PGIM's the Out Thinking Investor path.
- [19:59]
Dale Copeland
Performance is not a guarantee of future results.
- [20:01]
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- [21:01]
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- [21:51]
Joe Wiesenthal
Want to like skip to the final chapter of the book here, the proverbial book, but Smoot Hawley, these various trade restrictions like it does not sound good. It sounds like if someone was listening to you about what is the optimal way to avoid war. It sounds like we're on the exact opposite trajectory as of right now.
- [22:12]
Tracy Alloway
Well, here's the thing and Joe, you in some ways embedded this in your point. If we at least in my view, if we understand history, if we understand good theory as well and have a more dynamic realist approach which shows these rational actors making trade offs in policy between two or three different forms of realism, if you will, then we can avoid the mistakes we made in the past.
- [22:36]
Joe Wiesenthal
We can. But I'm just saying, at least in terms of the policy choices that we've seen lately, that does not sound like we are making the choices that reduce the temperature.
- [22:47]
Tracy Alloway
Ah, but this is what's so interesting. Let's just just go back in time here. Think of early April and Trump initially, when he held up his big sign, had 33% or 34% tariffs on China and much higher tariffs on other states, Thailand and so forth. And that sign was a sign that Trump was going to go all out with tariffs on everyone, on every product. Most economists and myself included, I have a background in economics, would say this was a foolish policy. But guess what happened? Within a week or so he backed away from the massive tariffs on all the allies. But because I think he had to at least show that he was still tough, he went to 145% tariffs on China. And China, of course, retaliated. That's what you do in bargaining. You show your resolve and you stick to your guns and you show that you can hurt the other. And once China kicked in high tariffs or the prospect of it, and especially after it said to the we will not send you rare earth and critical minerals. We will not give you the kind of minerals you need to be a high tech economy, guess what happened May 12. There was an agreement and the agreement basically said, oh well, let's hold off on any big tariffs for 90 days. And we went back down to, I think for the US 30% and China 10%. Was it a victory? Not really. But what did it show? It showed that the learning curve, curve was very steep within an administration that is not known for having huge knowledge of history, let's be honest. But there were enough smart people in the Treasury Department, the Commerce Department, I think in the Defense Department that said if we keep this up, we could get the Smoot Hawley effect, we could get the 1930s all over again. We could get a decoupling of the two economies, which from China's point of view, and Bloomberg itself a year ago kind of of confirmed this, which from China's point of view could cause a 15 to 17% decline in China's economy should a full decoupling and trade sanctions kick in. So I'm not pessimistic, to be honest. I'm actually optimistic that there's enough learning already going on to make sure that we will get an agreement, I believe with China on tariffs. They won't be super high, maybe, I don't know, 35% or something, but they're not going to be the kinds of, of embargo type of tariffs that we saw in 1941, that they weren't even tariffs, they were just, Japan, you will not get any oil from us, the US or from our allies. And that was what was causing such distress within the Japanese leadership. So you can See, again that I have a bit of an agenda here. My agenda is to get this history out there so that people can understand what mistakes were made, why states were not fully rational, even if they were thinking largely in my terms, and what kinds of adjustments we can make now to avoid even a cold war, let alone a hot war.
- [25:57]
Dale Copeland
The example of rare earths just then actually reminded me of something I wanted to ask, which is in your analysis or your framework, does it matter whether the trade between two respective sides or maybe multiple respective sides is driven by exports or imports or capital flows? Like, is there a qualitative difference in how people are thinking about foreign policy depending on where the trade tension is actually coming in. Like if it's oil or like if it's rare earths, something that people deem crucial to their technological development?
- [26:33]
Tracy Alloway
Well, Tracy is a great question and very much understudied within the field of international relations. I should mention my background. I was originally born in Canada, but my background up in Canada was in business and economics and I worked as a finance and marketing executive in Toronto for a couple of years before I saw the light and studied international relations.
- [26:54]
Dale Copeland
Truly the perfect guest.
- [26:56]
Tracy Alloway
Well, there you go. And we can talk corporate policies as well. But what I learned from that time period of my life, but also from my knowledge and study of history, is that specific products matter a lot. The qualitative nature of the product matters. I'm going to give you an example I always give myself, students, which is if you have a car, you might say that the gas in the car is what, 1% of the weight of the car and maybe less than that in terms of its value. But you can't drive the car without gas. And so people say, oh, rare earths are only 1% of our imports. Well, if you can't have rare earths, you can't build the computers that we're talking through right now. You can't be at least at the technological edge and China will then overtake you technologically. And ironically, China knows this and is using this to say to the U.S. you want to stay equal with us or ahead of us in, let's say, the highest of high tech products like semiconductors and so forth. Well, you're going to need our rare earths and we want to be coupled with you economically because that means our domestic stability at home will be strong. So let's play this game together and keep our trade levels high. That's the Chinese position. And we can talk about China's domestic constraints later if you want that's my new book project and I'm writing an article right now on rare earths with a student of mine. And the bottom line here is that China has for 30 years had a very calculated strategy. America, we forget, actually produced about 30% of rare earths about 35 years ago. Now it produces almost nothing. And China has either produces all the rare earths at home, or more importantly, it creates connections with Congo and Indonesia and other places so that it can process the rare earths within China. That gives China complete, almost monopoly control over most of the rare earths that go into computers and AI systems and so forth. So it's a smart strategy because China is very vulnerable on food, on energy supplies, on other imports. But it has this one thing that it knows the US Needs and wants, and that's its leverage point for bargaining. And it used it. It played that ace of spades in April and it worked. Within two weeks, there was a deal. Oh, wow. How did that happen? Well, China knows that the Americans have enough smart people at the top to say to the President, Mr. President, you want to grow and develop a very high tech economy. You want to bring manufacturing at the highest level back to the US intel and so forth. Well, I'm sorry, sir, we can't do that without the Chinese rare earths. So let's keep that going. And I'll just say very quickly and we can talk about it. But China also has another levered lever, and that, of course, is China has been buying treasury bills from the US for some three decades and China still controls, oh, about a trillion, a little less than a trillion dollars worth of U.S. treasury bills. It could dump those and destroy the dollar's power, at least its relative strength. And it doesn't want to do that because, hey, it wants to keep the economy, economic relationship going, but it can threaten that. And that's another very vulnerable point. We know that part of the reason Trump backed away from the initial tariffs, as everyone knows, is not because of the stock market, but it was because people were fleeing from the US Dollar in that first weeks of April. And the real long term implications for US Growth were devastating because we have a huge deficit and a large debt. We have to get more money coming in from abroad to pay for it. And if the US Dollar makes the treasury bill yields, the interest rate go up, then that costs the American government a huge amount of money. So keeping interest rates low and treasury bill yields low was vital to all of this. So you can see again from a learning perspective, I think the Americans have already had cold water splashed in their face and they said, yeah, ooh, it's cold. We don't want to go down that road. So am I pessimistic about Brazil? Okay, maybe Brazil and Canada.
- [31:21]
Joe Wiesenthal
Yeah, Actually, I'm glad you said Brazil because I was gonna ask about this if so much of these questions hinge on expectations. Yes, it seems like very hard right now, I would imagine, for other countries around the world to calibrate expectations when President Trump announces that there's going to be 50% tariffs on Brazil and that a major reason for the tariffs is the treatment of former President Bolsonaro, which is like, you know, seems like it comes out of nowhere. It's not really an economic thing. You know, how do countries, other countries even begin to form expectations at a time when trade policy, the United States is so volatile, the policy itself is volatile. And the sort of rationale for the policy is seemingly quite unpredictable.
- [32:10]
Tracy Alloway
Well, it's a great question because it goes to the heart of how do I, in my technological language, operationalize this idea of expectations of future trade? How in political science terms do I measure this? And how do I understand how others see the US or the US sees others? Now, part of the way to do this historically is just look at the documents. If you think of it as a spectrum from 100%, I'm assured that we're going to keep trade going with 100% certainty. That's great. That was the US Canada relationship up until the last six months. Well, great. That's certainty at one end. There's also certainty at the other end where I absolutely certain you're going to keep cutting me off. You are cutting me off. And there's nothing I can do diplomatically to get the trade back. That was Japan by November of 1941. I've looked at the documents. The Japanese tried everything to get the trade back, including offers of major concessions. And for a very interesting reason, fdr Franklin Roosevelt could not do that. And he almost made deals three times and he cut them off each time. And I'll give you a quick, small hint at what the real reason is. He had to save the Soviet Union from a two front war between Germany on one end and Japan on the other. So by drawing the Japanese south, not against Pearl harbor, he didn't know about that, but drawing the Japanese south, he prevented the Soviets from having to fight a two front war that saved basically the world from Nazi Germany taking over Eurasia. That's a sideline. I don't want to get into it. It's the second book. But what is important here is the Japan leadership had relatively intermediate expectations in April of 41. Oh, you're cutting us off from some kinds of oil or gas and iron ore. So, well, let's work on that. So what I'm saying is, if you think of it as a spectrum, Joe, and you can then calculate out how do others deal with your policies and vice versa. So what does Brazil do? Brazil says, my gosh, this out of nowhere. I was relatively confident, let's say 70% confident we were gonna get some kind of deal. Now things are off the table. But knowing what Trump does, which is throw things out and then retreat from them, you'd have to say, what you're going to do is say, well, it's 50, 50. I don't know where he's gonna go with this. It could be 50%. Tariffs could easily be something he pulls away from in another six weeks. Let's hedge, let's wait, let's. Let's do the wait and see policy. And of course, that's just classic logic that we all know and love in our daily lives, which is when you're not kind of certain about things, you try not to overreact, but you also try not to do nothing. You try to hedge your bets, as they say, and you make sure you can deal with either scenario in the best way, and then you wait. And that's what we would call an expectations research, a kind of middle ground where I can't decide one way or the other. So for sake of argument, I'm going to say it's 50, 50 that he'll go one way or the other. Therefore, let's wait and see and hedge through other policies, aligning with the other BRICs, for example, the Chinas and Indias of the world. Diversifying is a great term that from all worlds, especially the business world, in situations like that, you diversify away from the big risk and you go towards lower risk items like trade with the Europeans. And then you use that as leverage in the bargaining. Because after all, the core thesis here is that it's not just that traditional realist view of deterministic wars that are caused by these things that you can't do anything about. And that's the traditional view that Mearsheimer and others often promote. My view is a much more subtle one which says these factors matter, but you have control, control over those expectations by your own policies. And therefore you can use diplomacy and leveraging through bargaining to affect the other's expectations and avoid the kind of conflicts that have so pockmarked history.
- [36:45]
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- [38:15]
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- [39:22]
Dale Copeland
So speaking of different policies, I mean, one of the things that has happened in recent years are the technological limitations imposed on China by the US So we've seen those carried on from the first Trump administration into the Biden administration and now into the second administration as well. And some people would argue that there's a sense that maybe those restrictions have led to China ramping up its technological progress or certainly feeling a sense of urgency that perhaps it didn't feel as much before. And so I'm curious to what extent can this sort of fear of external limitations on commerce or trade, how much of that could be solved domestically instead of through outward facing aggressive expansion or maybe even non aggressive expansion and partnerships with friendlier countries?
- [40:17]
Tracy Alloway
Oh, that is a fantastic question, Tracy. And I like the way you phrased it because it allows me to talk historically about countries who have seen or expect to see restrictions on certain products and therefore try to adjust. Let's talk about Japan and Germany in the 1930s, many years before the wars actually occurred. Both sides were trying to synthesize at home oil and gas. And they were trying to do so because they either expected or were already being cut off from certain kinds of energy sources, especially the Middle east oil, oil. And so Japan did not succeed. Germany was able to use coal and other things to synthesize quite a high percentage of its oil and gas that it needed during World War II. Quite surprising in a way. But here's the thing. States undergo those kinds of things reluctantly and there's almost always great inefficiencies in doing so. As you can imagine, you have to make trade offs once again and you trade away from other things that that could build your power more efficiently because you are reluctant to spend your money trying to do what you're talking about. Now China has been trying to build, let's not kid ourselves, they've been trying to build a very strong technological base for 30 years. And especially when Xi Jinping got into power, he announced right away that by 2025, that was his date, China would be largely self sufficient in semiconductor production. Well, hey, as the figure I saw, that is right now China still requires 70 to 75% of its semiconductors from abroad, at least the high tech ones. And almost all of those come from, ironically, Taiwan, but also Japan and South Korea and of course Nvidia and other US Companies are very important in all of this as well, because it's not just about the production, it's about the design of these semiconductors and the AI that goes with the them. So let's just put ourselves in the shoes of China. Would they have ramped it up a bit, as you say? Because of these restrictions that started in 2017. Sure, they ramped it up, but were they trying to do it anyways? Yes, that's what Xi Jinping announced in 2012. So they were already trying to do these kinds of things. So have they been slowed by the restrictions? Yes, I would argue it's quite obvious they have been. What is the alternative? Well, the alternative is to allow the free flow of all of our highest of high tech into China and allow Taiwan and South Korea and Japan and our other allies to allow them to produce whatever they want with the highest of high tech that comes from us. And this includes, by the way, the Dutch machines, the ASML machines that make the chips in Taiwan. Taiwan doesn't make the machines, it makes the chips. And those machines come from a little state called the Netherlands. And those machines, $200 million or so, they're broken into four or five parts and shipped on four or five separate 747s to get to Taiwan. Well, those machines are not allowed into China. They're not the highest of high tech ones. The lower level machines. Yeah. Okay, those can go in. So China still has a problem. It can't make the so called under 7 nanometer chips very efficiently. It has to jimmy rig it with old technology. And it's done an amazing job of jimmy rigging it and paying the efficiency costs to do so. But does that mean China will be able to be the high tech producer of the highest tech chips and then export those? No. Can it do it to make it so that it can supply its own Huawei and let's say Apple iPhone manufacturing within China? Maybe, but at a higher cost. And at the end of the day, those chips may not be the highest of high quality. And every year China knows it's falling behind, or at least let's just say Taiwan and the others, including now the US and Intel, are still at the cutting edge of the under 5 nanometer chips. Now under 4 nanometer chips. And those are what are essential to AI. So am I in favor of continued restrictions? Yes. Am I aware that there are ways to get around it? Yes.
- [44:39]
Joe Wiesenthal
This sort of goes back to something you were talking about, the types of countries that you want to trade with. And there are disagreements about how we should perceive China's ambitions. I'm sure there are scores of books out there and the book jacket is like bright red or something like that. And they sort of portray China as this like very aggressive power with global ambitions. And they talk about all the artificial islands they're building and the various Exercises that they're building, they're doing with their navy and disputed territories and all kinds of things like that. On the other hand, I read Henry Kissinger's book about China a couple of years ago and the way he depicts it is that from its earliest history, China has never had much, I would say, interest in some sense outside of trade, much interest in the goings on of the rest of the world. They're just not that excited about that. Unlike the Soviet Union, it didn't have a Comintern trying to foment communism in other countries, et cetera, that it, you know, besides trade, it did not have particularly expansionist visions. Talk to us about like where you land, sounds like you land more on the latter. But how we should just think about China's own ambitions vis a vis the rest of the world.
- [45:54]
Tracy Alloway
Well, in a way, Joe, this is the ultimate question because we know that China may or may not not overtake the US in total gdp. That's an open the air question. But whether China, if it does overtake the US or even if it doesn't, has ambitions to control more of the world or control Southeast Asia or militarily dominate Africa. Those are the kinds of questions that keep people up at night. And my argument, as always, is a nuanced one. I'm not a dove or a hawk. I'm a it depends kind of person. And here's where it depends. What is important is to understand both what I would call the propelling factors of history and the constraining factors. The propelling factors indeed are realist ones. All great powers when they rised, Germany and Japan after 1870, the US after 1890. All those rising powers do want to expand what I call their economic power spheres. They want to build navies to protect those spheres. They have a Mahanian, Alfred Thayer Mahanian kind of logic that says, hey, we need more trade to grow, but if we're going to protect that trade, we need a navy and we need to build a navy now. So China has done that and that's just classic. That's a strategy that all great powers have done and it scares the declining states. Let's be honest, Britain got scared of Germany and Japan. Other states got scared of the Soviet Union when it built a blue water navy. But especially with China because of its high trade, this is very scary because now China is the dominant economic trading partner for more than 100 countries. Southeast Asia especially, and let's be straightforward, they have built a navy that's almost second to none, certainly in Southeast Asian area and is starting to challenge the US for global positioning posturing, you might say, in the naval realm. That is worrisome. It's very worrisome as well because with a more realist hat on, again, you have to say you never quite know or are certain about the other's future intentions. You may even like them now as Truman liked Stalin in 1945, but you may be uncertain about what the other will be like in 10 or 15 years time. That's a classic, more offensive realist position to say, oh, the future intentions of China are uncertain. So we have to prepare now. We have to at least assume that they're gonna be bad that later, so let's contain them now. That's the sort of logic that gets hawks going at night. But if you understand this more dynamic, balanced view of realism, you would say, hey, it's one thing to contain, but it's also another thing to push the other through containment into a hard line stance. And you push them into a position they might not otherwise have wanted to be, which is namely an aggressive or expansionistic power. So you have to balance that off. How do you do that? This, how do you read the tea leaves of Chinese intentions even now, but especially in 10 or 15 years time? Well, you know, this is where Kissinger is right, but also wrong. He's right that the history, this is my new book, the History of China suggests that Chinese leaders do not like going abroad with their troops. They don't like taking over areas outside of China because whenever they've done so, they've had major problems at home. And I've looked at the last 2000 years of history and I can identify at least five times when dynasties have fallen because they've gone abroad or gotten too involved in overseas issues. We can talk about those if you want, but the Chinese leaders know their history and they know that going abroad can lead to domestic instability. And that's a constraint. Where Kissinger's wrong is that he ignores the new and quite unusual economic dimension of China's posturing towards the world. China for really most of its history has not been that economically involved in the world, at least beyond its immediate neighbors. And this is what's new. China now has 38% of its GDP tied up in exports and imports. That's an incredible figure. It's high, highest I've seen since 1905. And that was Britain. And Britain had most of its trade with colonies. And China's trade is with countries it doesn't control. So that's a very concerning thing for China, but it needs that. It needs that to grow the economy, to be technologically superior, and, of course, to keep domestic stability. Now, that's the kicker. Guess what? If China needs the trade to keep domestic stability because it needs to grow the economy and people need to feel that the Chinese Communist Party is legitimate, well, then it has to keep riding that tiger by having more trade. And if it's going to have more trade around the world, it needs to protect that with military or at least naval power. But that can also excite or create this spiral of misunderstanding with the very states that are on top. The US Is declining, relatively speaking, and it worries about that rising power. So where's my bottom line here? If we bring in the the Kissinger insight, which Chinese history shows that China doesn't like to go abroad because of domestic concerns, but then add in the economic dimension, which is China has to go abroad economically to keep the peace at home, then you see that you might be able to keep China peaceful by ensuring they have positive expectations about the future trading system. System. If China does believe that the US Is not decoupling, and Biden made sure of that in 2023 when there was some talk of it, he said, oh, we're de risking Mr. Xi Jinping. We're not decoupling. Oh, good. That was great. Trump almost implied that they were going to fully decouple in April. Then he backed away from that by early May. I don't think he will decouple. I will almost put 100 bucks on it if you want to say that. And that's important because that means peace can be kept through this mechanism of expectations.
- [52:07]
Dale Copeland
All we need is Trump to go to Beijing for a few big banquets. Sounds like there you go.
- [52:12]
Tracy Alloway
That's important.
- [52:14]
Dale Copeland
I just have one more question, and it follows on naturally, from one of your previous points about, I guess, the dangers of foreign entanglements and China's history trying to control and defend its very, very massive empire and also feed its massive empire. But you've talked about the Belt and Road Initiative, and in the context of countries caring a lot about future commerce, you know, striking all these deals and making all these investments in alternative allies or other countries makes a lot of sense. But in recent years, we've seen China sort of scale down some of those ambitions, some of the Belt and Road projects. And I'm just curious how that action fits into your framework and how you would interpret that.
- [53:03]
Tracy Alloway
Yeah, it's a good point. And although scaling down is an interesting point, if you're growing at 10% in terms of your sending money abroad and you go to 7%, you're scaling back, but you're still growing. So the way I read Belt and Road is they realized that the initial efforts were not as successful for China as they wanted them to be. And a lot of countries were not able to pay back their loans. After all, most of it is loans. And so that restricted China's benefits. But the Belt and Road is still the critical element in their larger global, call them ambitions, which is to have connections economically with pretty well every country and area of the world, including our backyard of South America. So Belt and Road is still, I would say, going strong, but it's being retooled and recalibrated to make it more effective for China. What is important to realize is where that came from. Now here's the thing that we forget. We think of this as 2012 and Xi Jinping announcing the initially it was called One Belt, One Road Yi Dai Yi Lu. And it was an interesting idea and he really went with it and he created a banking system to support it. Well, that was really back to the 1990s in this so called going abroad strategy. Can't remember the Mandarin for that, but the going abroad strategy was very similar. It was basically the idea that if we don't start to create major investments abroad and tie those to imports of raw materials, we will start to decline. We might not get even 7% growth, let alone 10% growth. And so they saw what we call the downside of the growth curve, the S curve, and they didn't want to have that happen, so they went abroad. That's a classic strategy. The US has done it too. And the Belt and Road was a formalization of this. There's a great book by Min Ye on this that traces this back to the 1990s and why this is a strategy that they need growth through trade. And trade requires us to invest and not just to form trade partners. And if we can develop their infrastructure, especially African countries or Asian countries that need the infrastructure to export the materials, then we will benefit, we will benefit strongly from that. So it's going to keep going, it's going to be retooled, it's going to be very strong. And it's a scary thing for the us US which has almost always controlled most of those global south states in terms of where that trade goes and the US Dollar of course being very much a part of that. So what I foresee is that China will keep that going, support it with the Mahanian naval strategy. The US will continue to see that as somewhat scary. But as long as, at least in South America, as long as that doesn't go along with military installments in South America, Caribbean, like the Cuban missile crisis, we will probably let it happen because we don't want to have the spiral of hostility backfire on us. So again, two rational actors, if they're rational, will balance off and trade off this desire for more power and economic connection with the fear that they might cause a spiral of misunderstanding that leads to war. And they'll play it right if I'm correct, or at least I hope they'll read it.
- [56:30]
Joe Wiesenthal
Yes, likewise. I have one last question I've asked a few different people. This Xi Jinping you mentioned, okay, he introduced the one belt, one road project. How much is he a continuation? How much is there a consistent red strain, red ribbon throughout all of the post Mao leaders versus how much is he a pivot it from the direction of say, Hu Jintao and his predecessors.
- [56:56]
Tracy Alloway
Well, I think one also has to say that when you deal with understanding the other's intentions in any school of realism or international relations, you have to deal with three different levels. You have to start at the personal level and is Xi Jinping himself different? You have to start at the domestic level and say, is he under certain domestic constraints or, or pressures that the others didn't have? Or is he dealing with a different systemic environment, namely China's place in the world and what it needs to accomplish? And there's a tendency of almost everybody to go after Xi Jinping's personal side and say, well, he's a dictator, he wants more power, he wants his place in history. He might attack Taiwan because of his desire for a place in history. To be honest, I think Putin is very much in that realm. He's driven by his, his personal aspects, not from rational calculations of geopolitics. But if you go to the domestic and the more systemic level, I think you can see Xi Jinping as being very much in line with what Deng Xiaoping laid down in the early 1990s, which initially was a so called strategy of hide and buy, to hide your power and grow your power, grow your economic strengths through trade and bide your time for long term growth. And that of course was the strategy until Xi Jinping. And a lot of people say, oh well, Xi Jinping threw over Deng Xiaoping. Not really think about 2023 once he was becoming very much aware that wolf warrior diplomacy and hardline tactics were backfiring and causing this spiral of Misunderstanding. He made concessions on that. He backed away from the more aggressive, call it, foreign policies that he had come to be known for propagating. Well, hey, that is still there under the surface. He still likes to sort of bully other states, that's true. But China's longer strategy is still to grow as a rising power and to use trade for that purpose. And so he's showing a lot more signs of being a moderate leader than he ever has before because he needs those trade ties. And he's using actually the Trump tariff chaos to create more trade ties with Europe and the brics and South America and so forth. So I suspect that it's not as much his personality as much as his realization of what is rational for China over the long term. Now, the final thing I'll say on this regard is Xi Jinping, of course, was a more minor official through those earlier periods of the 90s and 2000s. But all of the Chinese leaders understood that basic point, which is that we need to grow over the long term. We need trade to do so, but we also need to avoid having ourselves cut off from that trade by being overly assertive or aggressive on the world stage. What do we do? We balance. We sometimes strategize so that we use a little bit of a lever word, a lever over a state, like trying to tell Japan in 2010, we won't accept your policy over these islands and we're going to cut you off from rare earths. So the rare earth threat was first broached in 2010, and it worked. And Japan and China still trade very heavily. That didn't mean China had a new aggressive strategy. And that was before Xi Jinping. It just used those as levers. So in the end, and I see Xi Jinping as very. I would call him Machiavellian in the good sense of the word, of strategizing rational, calculating the future, making sure he pushes out, but pulls back when he's getting pushback from other states, and making sure, most of all because of China's economy and the importance of trade to it, making sure that it builds those trade ties and does not cut China off from those trade ties. And that is why, in the end, Xi Jinping keeps talking about Taiwan. As you implied, Tracy, we could have thought of China being ready for war against Taiwan 20 years ago. Well, it's still being postponed. And it's being postponed for a very good reason. That is the 17% decline that Bloomberg pronounced a year ago, that the decline in the Chinese economy, if economic sanctions kicked in after an Invasion of Taiwan. So if you bring it all the way back to your first points about Taiwan, I'm not optimistic or pessimistic. I just think for rational, strategic reasons, the ccp, the Communist Party and Xi Jinping have no immediate reason for wanting to invade Taiwan. And they know that the downside is so huge economically that whatever their other reasons, glory included, they are not going to do that if it means destroying everything they've worked for for 40 years, their economic growth.
- [61:48]
Joe Wiesenthal
Dale Copeland, very interesting conversation. Really appreciate you coming on. Thanks for coming on, Odlog.
- [61:54]
Dale Copeland
Thanks so much, Dale.
- [61:55]
Tracy Alloway
Great. Thank you.
- [62:08]
Joe Wiesenthal
Well, that made me feel a little bit better.
- [62:10]
Dale Copeland
I was about to ask.
- [62:11]
Joe Wiesenthal
Yeah, all right.
- [62:12]
Dale Copeland
Well, that's good.
- [62:13]
Joe Wiesenthal
I mean. I mean, what do I know? I don't have any view on this question, but I was freaked out after how confident Andrew Bishop was about the prospect for war. And I like the idea that there are compelling rational counter arguments for what some would see as just a matter of time or an inevitability.
- [62:31]
Dale Copeland
You know, you mentioned all those books with red covers where they talk about, like, the danger and the threat of China. It's funny. Cause I remember reading, I think it was reasonably well known, but there was a book that argued the exact opposite. So kind of, to Dale's point, this idea that, like, actually China has a history of having to worry about, you know, its domestic borders and things like that. And it was called the Great Wall and the Empty Fortress. And it too had a red cover. It's like both sides. They're always red.
- [63:00]
Joe Wiesenthal
It's so cliche. If you go to. You know, I sometimes stop at the Strand Bookstore on my way home because it's like, right there.
- [63:06]
Dale Copeland
I love that place.
- [63:07]
Joe Wiesenthal
Yeah. And I walk to the China section regularly. It's just a wall of red. It's like publishers. Come on. I get it. They're communist. Their flag is red. But come on, you gotta get a little bit more creative than that.
- [63:19]
Dale Copeland
Yes, indeed. One thing that I thought was really interesting, and I probably knew this already in the back of my mind, but I guess I hadn't really thought about it, but the length of time between the Smoot Hawley tariffs and Japan invading Manchuria was basically a year. So I guess the tariffs were 1930, and then Japan invaded Manchuria in 1931. That's extraordinary.
- [63:42]
Joe Wiesenthal
No, the connection to. And, you know, I made it through the whole episode without bringing up wages of destruction.
- [63:48]
Dale Copeland
Now you're gonna do it.
- [63:49]
Tracy Alloway
Well, here it comes.
- [63:51]
Joe Wiesenthal
There is a lot in there about Germany's turning coal into synthetic oil. A very detailed discussion of that which Dale brought up. But then also just more importantly, the link between the Great Depression in the United States and then the collapse of economic opportunities for all these countries and how that forced them into this more aggressive posture, so to speak. So revisiting that history, because in my mind, when I think about World War II, typically it's sort of easy to forget how the 1929 stock market crash and this sort of domestic economic crisis in the US And Western Europe, et cetera, how directly that led to a lot of the heightened conflict.
- [64:33]
Dale Copeland
We should start like a betting market or something to see if you can mention wages of destruction in every episode of Odd Lots from now until now.
- [64:42]
Joe Wiesenthal
I'm not that bad.
- [64:43]
Dale Copeland
No, I know you're not.
- [64:43]
Joe Wiesenthal
You triggered me by even saying it in the beginning, which was sort of cheating. I might have gone the whole episode without saying it.
- [64:49]
Dale Copeland
I know, but I believe you could do it in a relatively relevant way.
- [64:54]
Joe Wiesenthal
Yes, thank you. Well, it's true. It was relevant in this particular discussion.
- [64:58]
Dale Copeland
All right, shall we leave it there?
- [64:59]
Joe Wiesenthal
Let's leave it there.
- [65:00]
Dale Copeland
This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
- [65:05]
Joe Wiesenthal
And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our guest dale Copeland, he's OPLA 1492. Follow our producers Kerman Rodriguez at Carmenarmon, Dashiell Bennett at Dashbot and Kell Brooks at Kalebrooks. For more Odd Lots content go to bloomberg.com odd lots where we have the daily newsletter and all of our episodes and you can chat about all of these topics including China. There's a China Channel in there in our Discord Discord GG Oddlots and if.
- [65:34]
Dale Copeland
You enjoy Odd Lots, if you like it when Joe fulfills his destiny as a middle aged man talking about World War II, then please leave us a positive review on your favorite podcast platform and your remember if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple podcast and follow the instructions there. Thanks for listening. Every day has a to do list.
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Dale Copeland
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Dale Copeland
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Dale Copeland
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Joe Wiesenthal
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Tracy Alloway
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