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- [00:01]
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- [00:22]
Adam Tooze
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- [00:28]
Kaiser Kuo
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Adam Tooze
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- [01:02]
Kaiser Kuo
Welcome to this special edition of the Seneca Podcast, a weekly discussion of current affairs in China, coming to you this week from Dalian from the Davos On Air booth at the World Economic Forum's annual meeting of the New Champions, otherwise known as Summer Davos. In this program program we look at books, ideas, new research, intellectual currents, and cultural trends that can help us better understand what's happening in China's politics, foreign relations, economics and society. Join me each week for in depth conversations that shed more light and bring less heat to how we think and talk about China. I'm Kaiser Guo and for over 20 years now I've had the privilege of working as an official writer for the World Economic Economic Forum. As some of you listeners will know, and this year they've asked some podcasters to team up with them to bring you shows under both the WEF banner and the banner of their own shows. So I am delighted to be able to do this with Sinica listeners. Please support my work by becoming a paying subscriber@senecapodcast.com I do need your help to keep doing this. Please subscribe so I can continue to bring you these conversations. Last week in Brussels, the leaders of the European Union's 27 member states sat down to a working dinner. The single item on the menu read Global Macroeconomic Imbalances and their Implications for Europe's Competitiveness and Prosperity. Everyone in the room knew precisely what was actually being discussed, and that, of course, was China. As one diplomat put it, we all know the imbalances discussion is about China. It was the first time in three years that EU leaders had held a sustained debate about China policy, and they were so wary, I guess, of Beijing's reaction that they wouldn't even print the word on the agenda. The numbers behind that dinner are Quite stark in 2025, the EU's good trade deficit with China reached very nearly 360 billion euros. So if you think about that, close to a billion euros a day cumulative, so the largest so far in the bloc's and for the first time ever, every single One of the 27 EU member states was actually running a deficit with China. Jens Escalund, who heads the EU Chamber of Commerce in Beijing, captured the mood with an image that stuck. The relationship, he said, is less a partnership than a giant container ship that sails to Europe, stacked high and comes back to China nearly empty. By the end of the dinner, according to reports, the leaders had handed Commission President Ursula von der Leyen a mandate to develop new and, in the words of one official, very powerful tools, while carefully framing it all as resting on two European unity, of course, and dialogue with China. So that's the mood music. Now here's why I wanted today's guest in particular. For the past couple of years, as this overcapacity and imbalances, panic has built across the west, one of the very few prominent voices willing to look it in the eye and ask, wait, why are we panicking? And why now? He has been my guest many times now on Sinica. Listeners will know him well, but and this is what makes him, I think, the perfect person for this conversation, he is not some apologist, because he's also quite candid about the fact that there really is a China Shock 2.0, that it's unlike anything we've ever seen, and that this time the principal target is not the United States, it is Europe. Adam Tooze has been on the show, as I said, a bunch of times, most recently just a couple months ago after the China Development Forum in an episode that we rather cheekily titled Adam Tooze Is China Maxing. Adam is an economic historian at Columbia University, where he directs the European Institute. He's the author of a shelf of indispensable books, the Wages of Destruction Crashed, Shut Down. He is the force behind the Essential Chart Book Newsletter, the co host of the Ones and Twos podcast, and he's also got a book on the energy transition on the way, which I very much want to get my hands on. Adam, welcome back to Sinica. Great to see you again here in Dalian.
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Adam Tooze
It's a pleasure to be here.
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Kaiser Kuo
So let's start with exactly where you started in I think it was chartbook 1,000,442. But it was the question hanging over the whole Brussels dinner of why now the IMF and the World bank gathered in April, the word on every macroeconomic analysts lips was imbalances. But you point out that imbalances are hardly anything new. The US and the UK have run deficits for decades. China and Germany and Japan surpluses for decades. And by the IMF's own data through 2024, things aren't dramatically worse really than they were in any past moment. So I'll put your own question back to you. Why the alarm at this particular moment?
- [06:03]
Adam Tooze
Well, I think there is a general concern about this phase of China's development because it moves from, shall we say, the convenient phase of Chinese development, which was inserting China in a relatively subordinate position into Western led supply chains. That's the story of the 2000s. And unsurprisingly, there could be trade hawks in the US that would make an issue out of this. But what's happened in the 2010s is China moves up the value chain. I mean, Most notoriously, the 2015 program, Made in China, 2025, that dates obviously passed. That itself, in fact, it turns out ironically, was a borrowing from a German industrial initiative, in fact, closely associated with WEF, which was Industry 4.0, which was launched at the Hanover Trade Fair. I think in 2011. A bunch of Chinese engineers were there, thought that sounded like a pretty good idea and kind of went ahead and actually did it. And the consequences of that now are really very dramatic across the middle to top tier of manufacturing, where China is emerging as a key competitor. And here's the crunch point for Germany. And because they emerge as a key competitor for Germany, that changes the European conversation. Because up to this moment there was really a German roadblock on any tough talk about China trade because Germany actually ran a trade surplus or balanced trade with China. And key industrial interests in Germany, the Siemens, the BMWs, the Mercedes, the VWS of this world, were deeply invested in the China market. And so tough talk about China trade is still extremely sensitive for them. But it's a sign of the times that this is shifting. The other key component is what's at stake here are industrial jobs. And so with the industrial jobs question comes the European working class question. And with the European working class question comes the politics of populism and right wing populism in particular.
- [07:57]
Kaiser Kuo
And in discussing that idea, you reach for Carl Polyany, the author of the Great Transformation. And this idea idea that, well, globalization without political and social embedding eventually produces a backlash. What he calls this double movement. Can you explain who Karl Polanyi was and why he's relevant at this moment? Unpack for us, this, this idea of the double movement, and you know, why it's relevant to the EU trade impasse with China right now.
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Adam Tooze
So, I mean, he's an Austrian emigre, he's one of that group. But. But unlike, say, the Hayeks of this world, more from the center left, the Social Democratic left, a kind of Marxism figure, though never really explicitly identified with Marxism, leaves Austria in the 1930s, has a sojourn in the UK like so many, ends up, in fact at Columbia. Could never fully situate in the US because his wife had a Communist Party past and so she was stuck in Canada. He used to commute from, from Canada to Columbia to teach. Famous later in his career for his deep anthropologies of the economy and fundamental work on the emergence of trade and production organized around money in the classical period, in classical antiquity, but relevant in this context because in the 30s and 40s he began thinking very hard about crises of capitalism and in 44 published one of the great books of the 1940s, High X Ray to Serfdom, on the one hand, the Great Transformation, on the other by Polanyi, is one of the great products. And it's a book which argues essentially that economic liberalism of the 19th century form, and this is where his anthropology kind of mindset comes in, shouldn't be taken as a natural condition. It shouldn't be taken as the obvious reality. In fact, it should be viewed as the rather strange, shall we say, fetishistic superstition of the 19th century bourgeoisie who set about creating an essentially unreal world. He talks about fictitious commodities in which they took land and labor and money and turned them into abstract entities that functioned according to their own rules. All of this, of course, the artifice of a certain quasi theological kind of construction. And this always ran up against the reality that work is people's lives and people's livelihoods, and the gold is not necessarily the foundation of money, which is really a social artifact, and so on and so forth. And so those tensions explode for Polanyi and unload for Polany in the mass mobilizations for various types of protectionism in the early 20th century, people will be filling, if not with Polani, then people like Barry Eichengreen or o' Rourke and Williamson, who, in a very mainstream mode from the early 2000s onwards, were arguing that the glory days of globalization might actually have a ticking time bomb hidden within them, which would be the blowback against globalization that then finally came really on the large scale in the 2010s. So Polanyi since the advent of Brexit. And Trump has become a key figure for thinking about this phase of the backlash. And one would have to say that the current moment, the effort by the Europeans to craft a response to the success of China's industrialization, has about it the feeling of this kind of protective double movement defense. And I think that's something to take seriously and not just to dismiss. The key area here is not aluminium and steel, steel or cement or any of those old things which feature quite large in American debates about Chinese trade, but cars, autos, whatever you call them, and motor vehicles. Right, because that is the core of the European manufacturing sector. It's 12 million plus jobs. And to lose those to the Chinese in V invasion, quote, unquote, would, I think, unless undisputably be a huge challenge for the stability of the European political economy as we know it.
- [12:15]
Kaiser Kuo
European leaders aren't coy about this either. They talk directly about the jobs motive. I mean, von der Leyen says flat out she won't let unfair competition gut Europe's industrial base and cheaper EVs and all these good things that come of trade, supposedly they are cold comfort to a laid off autoworker in Saxony who then goes on to vote for AfD. Right, right.
- [12:39]
Adam Tooze
That's the, that's the narrative. I mean, and it's indisputable, I think, that China subsidized its EV sector. I mean, the most comprehensive assessment I know in the west, which really takes in even the consumer subsidies by csis, puts the total subsidy bill for the EV sector at $150 billion over a 10 to 15 year period. Now, looking at this from the green industrial policy angle, you say, how do I get that secret sauce that's $10 billion a year to transform the world. We put money into Tesla too. It's quite clear that Western industries benefit in a variety of indirect ways from various types of public support. But the consequence of that for the European auto industry, the fact that they were so ill prepared that they slept, really sleepwalked into this crisis over the last 10 to 15 years is now objectively a major problem for US political economy. My view is the sensible way to do with this is just to come clean about what the motives are to say. This is the timeline on which we need to manage this, to invite the Chinese in for various types of fdi. And this is exactly what is happening on the European side. But of course, in the European case, we've only so far spoken about, as it were, the technological change and the social Crisis. There is also the geopolitics. And for the Europeans, it's China's alignment with Russia in Ukraine that has just made the geopolitical cinch. And for somebody like von der Leyen, this is crucial because she's a hawk. She's a neocon hawk. The. That's what really then makes this very difficult. Because, you know, losing jobs to China would be one thing. Losing jobs to China, which is a, from the European point of view, essentially associate of the Russians in the aggression against Ukraine, that adds a whole nother level. So it's not about Taiwan for the Europeans as it is for the US in the CHIPS war. It's about Ukraine.
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Kaiser Kuo
And this is where that sort of moral layer enters into it. And this is something that I want to talk to you about. The second point of neuralgia, as you've described it before, the automobiles is one and Russia is the other. But let's turn this around and look at it from the Chinese side because they hear that moral valence to the way that this is discussed. There is an accusation of illegitimacy baked into this, even if the Europeans themselves don't hear it. For China, it's not just your exports hurt us, it's you cheated. It's a glut. You only won because the state bankrolled it. I've been calling it glut shaming. You spend a lot of time with Chinese economists and officials. I mean, especially this last couple of years. How does that moral framing land on a Chinese ear? And have you heard them answer it?
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Adam Tooze
Well, I mean, I actually was here and had some chats with people in Beijing, literally in the weeks in which the Europeans joined the Americans in slapping tariffs on Chinese EV. And admittedly, the Europeans didn't do the 100% prohibitive tariffs that Biden was, you know, getting cheers for in the US but it hurt. And my pitch to the Chinese was always, look, understand, look what the Europeans have done. They've done a WTO conforming assessment of the level of subsidy. They're imposing a tariff also on vw, which has clearly benefited from subsidies inside China itself. Many American listeners won't know, but VW actually has a dedicated EV brand which they only manufacture in China, which they want to sell to Europe. And on those vehicles, Brussels has imposed a tariff. In fact, VW has become the lead object of all of this. And so my pitch to Beijing was, look, please de escalate like the emotions here. This is an offer of negotiating from the Europeans. They want to talk to you. About details and modalities. They're not just slapping 100% tariff on. And I have to say it was hard to persuade Beijing to take this seriously, especially because it was timed so closely with what Biden was doing. And we know the Americans were pressuring Canadians and Mexico to shut the doors to Chinese vehicles too, because they fear obviously they'll be traded within North America. Overall, what struck me was precisely the sense of moral indignation. I actually rather cheekily suggested that they should go back to their Marxist textbooks and maybe consider that this was intelligibly predictable, that one should not lose one's much sleep over the moral issues, but that they should engage in just a hard nosed direct conversation with Europe. Of course the Chinese have subsidized, it's pretty obvious how much and there is really nothing to apologize for in subsidizing a photovoltaics industry or a car industry into existence, or a steel and a cement industry which overwhelmingly serve domestic Chinese needs and are about the urbanization of 24 million people. Stop apologizing. Recognize where the alternative position is coming from, which is that they will apply various types of metrics and then simply go to the table and say, look, if you want to meet any of your decarbonization objectives, any of them at all, if you want to diversify your energy supply away from Russia, away from the us, away from the Gulf, you know, you need to electrify. So what is the basis for a deal here? And I feel there's no other way out of this. I understand where the Chinese are coming from, but it does seem to me to be frankly, you know, falling back behind the sophistication of what a Marxist ideology really ought to give you, which is a certain sang froid when it comes to issues like this, like what do we expect? This is imperialist competition fundamentally at some level in which China itself is a player. And so a little less emotion, a little more, a little more focus on actually arriving at a deal. And that's what I hear. Also interestingly, at meetings like this or in Switzerland, from the key Chinese players, if you explain to, without naming names, leading Chinese EV brands what the stakes are, they know, they absolutely fully understand, and they're so competitive that any compromises they make are not going to affect their market position. I mean, the Europeans are asking them to set minimum prices for. Imagine if you're a Chinese producer and somebody literally offers you a market with a guaranteed fat profit margin. That's what they're asking for. Like why can't obviously Chinese producers can agree to this.
- [19:10]
Kaiser Kuo
So, Adam, you're learning Chinese. I wonder whether you've come across this word wei chi, yet. It's one of these hard to translate words. It conveys the kind of swallowed, slightly powerless sense of having been wronged despite having done everything right and of not being able to make the other side see it. This is, I think, the word that really captures the Chinese emotional sense of.
- [19:33]
Adam Tooze
Yeah, why stop being a people pleaser, I think is the crucial thing. It's like that is a vain hope. Yeah, yeah, it's a vain hope. Right. China's growth is a profoundly disturbing historical development for the West. I mean, it's an undeniable reality.
- [19:50]
Kaiser Kuo
Yeah, but for. Yeah, I mean, and we'll get to that. But, you know, I mean, I think that it's important that they understand that how China sees this, what is, you know, it ran the developmental playbook as it was supposed to. And you know, they worked hard, they built, they educated the engineers, they competed, and the moment it pays off in world beating products, the goalposts get moved and the achievement gets recoded as crime somehow. That's textbook wei chi.
- [20:17]
Adam Tooze
But I mean, the developmental playbook never imagined one sixth of humanity doing it on the scale that China has, let alone one led by the cpc. That wasn't the developmental playbook. The development playbook was kind of additive, incremental, or in the case of the Sustainable Development Goals, literally starry eyed liberal 19th century fiction. Yeah, One of the development goals is peace, happiness and, you know, love all around. It's literally there. I can't remember, it's 15 or 16, and it's like, why do people develop? They want sovereignty and security. Right. They want power. In other words, that's the purpose of development. So there's a deep contradiction here. And I think it's unbecoming for Beijing not simply to say, look, we get it, we understand.
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Kaiser Kuo
And again, I do want to ask you about that, but, you know, this inability to extend kind of basic cognitive empathy to China, if this isn't clear enough, the other night there was an absolutely perfect case study in this empathy gap. Fresh from the summit. Speaking in Brussels right after the dinner, Friedrich Mertz, he reaches explicitly for the 1985 Plaza Accord. Right now you and I might have a reading of the Plaza Accord that's very different. But we know how that lands in Beijing. We know what the Plaza Accord is code for in Beijing. And Merz should presumably know that too.
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Adam Tooze
No, no, no, Mertz. I mean, Merz really doesn't know, So, I mean, this is astonishing coming from a German, right? So the Plaza Accord is the effort by the west to contain the shock of Japan's rise, right, which is one tenth the size of China. But even that was enough because go back to the development playbook story. The development playbook, it turns out, maybe has space for a South Korea, maybe has space for a Taiwan, but doesn't really have space for Taiwan, for Toyota, for Suzuki, for Honda, doesn't really have 400 and whatever it is, million people pushing the envelope the way the Japanese did that is just not part of it. And so there was an agreement essentially to upvalue the yen, to devalue the dollar in a managed way. And this is widely seen as setting the, say, a, the geopolitical frame is transparent. In other words, it's a Western effort to contain the rise of an Asian challenger, and B, the consequences for Japan down the line are on the negative reading, the hostile reading, the unwinding of the Japanese boom, or rather the upsurge of the Japanese boom to the climax in the early 90s, followed by a bubble. So it's basically a trap which the west dragged the Chinese into, Japanese into. And if Beijing has one thing clear, it's not going to repeat that performance, right? So. And Mertz. Mertz has read recently, apparently, a couple of articles by Brad Barfred's Brad Setzer and Sando Todor and Shahin Vale. And so in Berlin right now they're talking about currencies and the Germans have persuaded themselves that the issue and these papers are persuasive in their own way. The problem is the systematic undervaluation of the Chinese currency. And so Berlin likes to talk about this now, which of course the ultimate irony is that the corresponding interpretation of the end of Bretton woods, the creation of the European Monetary System and the creation of the euro is that it's Germany's efforts to manipulate, to ensure that the Deutsche mark, as was, never becomes a leading alternative to the dollar. Because why? Because that would involve an overvaluation of the Deutsche mark and a crushing penalty on the competitiveness of German exports, which the Germans, after all, like to use to boast about. And so we have nasty, innocent Merz stumbling into this topic where all of a sudden he's found a talking point that he quite likes. And the rest of the world presumably is shrugging and going, look, but for the euro, Germany would be a mega Switzerland, and if you want to know, see a currency manipulator, look to Switzerland. Switzerland has in per capita terms 10, 20, maybe 30 times the dollar reserves that China does. Because Switzerland has a huge service sector which tracks vast amounts of inflows. It also has a high tech manufacturing sector and you can't have both unless you manipulate the currency. So again, yes, let's lower, let's just lower the emotional tone here and let's maybe ask the question about what the drives of demand are in the United States because America is running a 7% of GDP fiscal deficit at times of full employment. It's got an epic historic boom going on in AI which is highly reliant on imported inputs. Why are we surprised that America is running a current account deficit? Right. Everyone knows the Chinese economy is deflationary right now. So is it a surprise the Chinese don't want to revalue their currency upwards under conditions of deflation? Literally walking into the Japanese trap. No. So it strikes me there is a sort of, there's a, there's a kind of dug in set of positions which are stressed in various ways. And it would really help if we could, I mean this is a, you know, silly liberal utopianism on my part, but if we could just like spell out.
- [25:37]
Kaiser Kuo
But we are Davos.
- [25:39]
Adam Tooze
Yeah, exactly. Like let's, can we not please spell out what the relative stakes are and what the risks are for each side. And if we're not doing that, let's be clear about what the consequences are because it's just going to be this kind of rhetorical ping pong.
- [25:51]
Kaiser Kuo
Right, right, right. And China for its part definitely has a sort of dug in sense of aggrievement. Right.
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Adam Tooze
And they'll deny. And SETSA is, you know, Brad is brilliant in showing. Because something is fishy about China's balance payments data. They cannot be running the trade surplus. They are and not be accumulating foreign reserves and they're not showing up in the official Chinese data. So they're going somewhere. And that is prima facie evidence of exchange manipulation. And Beijing is not transparent about it, quite clearly. And so then that adds a layer of condemnation in the form that the Chinese are not being transparent, it's being furtive. But one could also just say, look, we see the trade deficit, we know it's persistent. Why do we even need to engage in a conversation about whether the exchange rate's being manipulated? Because it should be a one way upward bet and it's not happening.
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Kaiser Kuo
So I mean, when you look at that roughly $1.2 trillion Chinese surplus from last year.
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Adam Tooze
Yeah.
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Kaiser Kuo
China's on track to do it again.
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Adam Tooze
We should Pause over that. That is, that is, that is like nothing we've ever seen before.
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Kaiser Kuo
No, it's absolutely crazy.
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Adam Tooze
It's extraordinary. Mind boggling and sad. Clear. Let's be clear because the Chinese could be, could be consuming that stuff and they're not.
- [27:05]
Kaiser Kuo
Right, right, right. I mean, but you know, you say a lot of this is predictable, almost inevitable that inside of this aggregate there are these sectoral stories unlike anything we've ever seen. We've talked about some of these. The electrotech revolution, the surge in motor vehicle exports for the green transition. You've called it utterly transformative. This is the body of your book. Which of these sectoral shocks should Europe be more clear eyed about? We've talked about EVs and we've talked about, you know, solar PV, but I mean, is there, are there more of them where resistance is simply futile, where Europe should simply accept that this is how it's going to be and lean into it?
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Adam Tooze
Photovoltaics is the obvious case. Yeah, and probably batteries as well because they're not, I mean batteries are new. So this isn't an existing sector with a huge labor force that needs somehow to be shuttled into a just transition. Right. Same for photovoltaics. The Europeans had an industry, they themselves massacred it in the early 2000 and tens. This, I mean China, it was, it was hammer and anvil type stuff. Those are the two industries where I think everyone recognizes that it would just make no sense to try and build an autonomous photovoltaics industry in the Europeans. Batteries, I think the game is all about because we're going to need so many. The aim is basically to attract Chinese investment and manage it. Likewise, I think with EVs, those will be the three areas where really it's a matter of negotiating over existing realities which also have of course huge transformative co benefits in the sense that these are the vehicles to the energy revolution. Where you have conversations in the US includes items like shipbuilding and shipbuilding was an industry the west lost to East Asia 30, 40 years ago. It's utterly absurd. It's a complete red herring so that I would fit down that end. And steel, which is so often cited in these negotiations in the US is again it's this bizarre childish obsession with a heavy industrial product where US steel literally 100 years ago was a world bestriding.
- [29:24]
Kaiser Kuo
There's very polanyi, very double movement. It's West Virginia and Pennsylvania, but it's,
- [29:29]
Adam Tooze
but it's Polani double movement as cosplay. It's not the real thing which is the European auto industry. And I mean, the funny thing is the us, you know, let its auto industry go, right? And it just wasn't competitive. And so, you know, when we speak about the auto industry in the U.S. there's two different sectors. There's the big three in Detroit, of which one is actually European owned Stellantis. And then there's all the other manufacturers in the non union states who are Japanese and European who love making cars in the non union state if they get to do it because they don't get to, to do it at home. So but then over steel, the Americans will dig in because it just has this disproportionate status. Microelectronics is in another zone again because the Chinese are a big net importer of microelectronics equipment from Taiwan and South Korea, Japan. So we can break this down. This is not one story. And then there's the food story, which after all is fascinating and politically hugely sensitive. And China has actually moved into a heavy deficit position for the thing that matters most, which is meat consumption, which is a key index of Chinese prosperity. And pork in particular. Anyone who's eaten here knows that this is the staple now to get rice. It's all now really about the meat and the fish dishes. And that supply chain is entirely dependent on Brazilian and American soy. So it's not a one way story. There are different elements that maybe one more would be aviation. Right. That's the other thing that really weighs in the balance here. And I think sexually, by sector, technology, by technology, ultimate purpose, in each case regulating. We need a disaggregated series of deals on these issues and not the kind of, I mean, not the kind of, you know, dumb package deals that the Trump administration was stringed together, but that something that actually gets into the mechanics of modern trade and modern industrial supply chains.
- [31:23]
Kaiser Kuo
We're not well served if we continue to chant this mantra that China now is trying to seek comparative advantage in everything.
- [31:30]
Adam Tooze
Right.
- [31:30]
Kaiser Kuo
That we.
- [31:30]
Adam Tooze
Well, that also is a contradiction in terms because the whole point of the comparative advantage paradigm was to say it may be better absolutely, at everything, but the question is, is it relatively better at certain things? And it has been astonishing to me how far that really pretty elementary economics idea has drifted away from the center of the conversation. Of course, it's the daunting scale of China which compounds that because right, there's so many Chinese, it's hard to imagine. But I think this is also part of the kicking away the ladder kind of rhetoric about, you know, what is because we've been talking about the advanced economies. Another set of questions which are asked is like, what impact as China's growth Talked about this before African industrialization. It's just like, show me African industrialization and I'll show you where the problem is. The problem, of course, is that under the pre China shock regime, there was no African industrialization. There hasn't been any since the 70s. So China can't be blamed for the lack of something that, you know, was not happening. In any case, we should be going the other way and we should be asking ourselves what could an unprecedented flow of cheap and clean electricity do for the possibilities of development in poor countries which never had access to that kind of technology before? And up front, of course, that'll be a Chinese import down the line, who knows what will happen in African supply chains as a result of access to reasonably reliable power supply.
- [32:57]
Kaiser Kuo
But back to Europe, let's go back to Europe here. I mean, in typically Tuzian factory you've fashioned, you have urged everyone to be a little more dialectic. And one of the things that you looked at, you've written exhaustively on the Draghi Report. Draghi's diagnosis is quite brutal. Investment is too low. Productivity has stalled since 2010, real disposable income growing just half as fast as America. The auto industry's internal combustion fleet is at risk of becoming, in his famous phrase, roadkill. The provocation Is China the cause of Europe's industrial crisis or merely the thing that's finally exposing a malaise that has been essentially entirely homegrown?
- [33:41]
Adam Tooze
Well, it's really interesting because the Draghi Report sort of steps around China. The Draghi Report is centered on the US and there's been now an extensive, relatively public debate about the merits of the comparison that he makes. And the conclusion from that, and I think it was evident in the report, but once you just underline it, is that any comparison of the US economy with the rest of the world is distorted by the enormously outsized tech factor which drives everything. It drives GDP growth in certain parts of the US it drives the stock market, it drives measurements of corporate size and scale. There's literally never been anything like that anywhere else in the world. And it's presumably from a public welfare point of view, a mixed bag because it doesn't employ a lot of Americans. It produces the oligarchy problem and the technologies themselves are incredibly invasive and are really messing with our public sphere ecosystems. But that is the Europe US comparison. If you compare the rest of the US economy With Europe, let alone, if you get into the question of actual real living standard measures on which score the Europeans outplay the Americans for all the obvious reasons, much of the Draghi kind of hype kind of collapses because the contrast isn't there on the China front, I really think we've spoken about. It's hard to exaggerate just how significant the auto piece is here. When we spoke previously about globalization, overwhelmingly, the largest manufacturing sector that globalized was the auto industry and it never really fully globalized. It sort of regionalized North America as a system Europe and extensions as a system East Asia. The capacity of the Chinese firms to blast through that open up this new space just is a different type of shock. And it's one that goes to the heart of Europe. Why? And this is the Draghi port in that the Draghi report point is, if you look at the ranking of the top R and D spenders in Europe, and his main criticism of European capitalism is that private businesses in Europe are not in an ecosystem. This is where policy comes in which leads them to invest heavily in R and D, which is what the American firms do do.
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Kaiser Kuo
Right.
- [35:53]
Adam Tooze
If you look at the European firms which are R and D heavy, every single one of them is in the automotive sector and has been for the last 25 to 30 years. They're all big German automotive players, which is quite surprising. And so at that point, the critique of Europe in terms of America in the American mirror, which comes by way of the R and D thing, reveals a Europe which is incredibly exposed to the China shock in the other mirror. And so you end up from the European point of view in this like ghastly house of mirrors where you look bad compared to America and you manage to look bad compared to China. And this is what's doing everyone's heads in and causing this. Nowhere more so than in Germany.
- [36:37]
Kaiser Kuo
Well, the time we have left, let's talk about what's actually available to Europe. I mean, the toolkit so far, the 2024 EV tariffs that are, they're morphing into a sort of a minimum price scheme that we talked about that presumably China could, could, could handle. The European economists themselves say that just transfers money to Chinese producers, which I think there's some, some sense to. There's also this trade bazooka that gets talked about a lot, the anti coercion instrument, it gets brandished, but it's, it's not actually been fired so far.
- [37:08]
Adam Tooze
And they might have fired it against America. I mean, the more obvious person to fire it against would have been Trump. And they decided the better part of valor was discretion.
- [37:15]
Kaiser Kuo
Well, again, Ukraine factors into that as well, crucially. So you've been scathing about the European reflex toward austerity and defending the status quo. Draghi's prescription and yours, they run the other way toward bigger markets, more investment demand, innovation led growth, R and D, business R and D. So if you had Wander Leyen's ear right now, or if you had her mandate from that dinner which supposedly is now in her hands, what would you actually tell her to do?
- [37:45]
Adam Tooze
I mean, I think the Industrial Accelerator act is the latest instrument and I think that's pushing in the right direction in that what Europe needs to do is do investment linked talks with the Chinese. So the crucial thing here is to suck China into a cooperative, co invested, mutually interested relationship. And that should have two sides. The best news, we haven't spoken about it. The best news out of the last couple of months on European Chinese relations is VW's decision not to back out of the Chinese market but double down. Because that basically means that the European players are still in the game. I mean, at the development form you referenced in Beijing, we heard it from all of the German leading car manufacturers. This is the Champions League. This is a soccer reference to the top tier competition for European soccer. This is the Champions League. If you want to be anyone, you play here, right? So you can have your little national leagues for Europeans, this is hugely significant. But it's only the top, I think four teams from your national league that get to play at this European level. And that's where the real money and the real glamour is. So that's very significant when the Europeans say that. And that is the most important side of this. Because these are not national economies that are competing, these are private firms that are competing. And if the private firms are not willing to expose themselves to the possibilities, but also the risks of really serious competition, and it's nowhere more serious than in China. It's like trying to run a microelectronics program out of intel when Nvidia is the entire game, right? You can't do it. So that is a key, that is a key element of any policy. And then working within Europe to create a set of clear structures which, which on the one hand provide a degree of protection now, but with a clear timeline to exit so that this doesn't become a kind of permanent, underpowered kindergarten of industrial competition would be your next step. So you want some kind of phased program in which the path is clear. And I think you need discipline. In other words, the central problem of Europe in the 2010s was they talked endlessly about decarbonization, but no one in the European car industry seems to have realized that this would imply a shift to ev. So they kept investing in the turbo diesel model, or basically milking these businesses for large dividends, and that the trade off, as it were, the conditionality on protection, should be on the European side as well. Investment, investment, investment in the labor force and in the technologies that take Europe through to the achievement of a decarbonized energy transition.
- [40:37]
Kaiser Kuo
Adam, in your recent writings, you've laid out these four radical forces that define the moment that we're in right now. Trump's trade rampage that began in April 2025. America's, let's call it fiscal incontinence, the AI boom that's gone really quite global right now, and the gear shift in Chinese economic policy. If you had to bet on which of these four is most likely to shape the EU China relationship over the next, say, three to five years, which is it? And does AI eventually swamp the whole trade conversation the way it's already reshaping trade flows through the chip surpluses?
- [41:16]
Adam Tooze
Not with Europe.
- [41:17]
Kaiser Kuo
Not with Europe.
- [41:18]
Adam Tooze
So no. So of those and Trump policy, the Europeans are held in place by Ukraine. So to my mind, it's really considerably about the balance of European and Chinese domestic economic policy, both of which have a deflationary bias. And the Europeans are slowly moving away from that. And you know, the most. Another optimistic thing one can say about Europe and Germany in particular is it may take time for the fiscal stimulus that is coming to work its way through. We aren't yet seeing big steps towards common European fiscal funding, which would really be a game changer. But we're not seeing major impetus towards a reimposed austerity either. So that's holding the balance. The thing that could really change the game would be a major shift in Chinese policy. But everyone who watches China knows how complicated that is and how difficult to imagine.
- [42:10]
Kaiser Kuo
What about this clock that most of us aren't really watching? You know, the lapse of the actual US China trade truce that restored the rare earth flows. I mean, that happens in October. I mean, a year after Busan. And what are they if that lapses, you know, while EU China tensions are still already this high? I mean, this autumn could be full very, very, very ugly.
- [42:30]
Adam Tooze
Could get very, very ugly indeed. Yeah.
- [42:32]
Kaiser Kuo
Who's planning for that? I mean, is anyone planning for that?
- [42:35]
Adam Tooze
I don't see. Because then where, where's the European position going to be? Because, you know, tent relations between the Europeans and the Americans remain incredibly on knife edge and at the whim of an incredibly erratic president. A lot may depend on where Trump's at after the midterms. Right. Whether we're seeing a presidency that's essentially lame duck and in retreat, or whether we're seeing, you know, a bullish presidency that thinks now, you know, now or never. Let's, let's really put the stick about. I agree. It feels as though we're in a moment of truce right now.
- [43:08]
Kaiser Kuo
My own thinking is that there's no way he lets it lapse in October. I mean, it would be just suicidal
- [43:13]
Adam Tooze
ahead of the elections.
- [43:14]
Kaiser Kuo
Yeah.
- [43:16]
Adam Tooze
Why, why do I do that? But then what comes after the elections? Like, he lets it, he doesn't let it lapse. It stays in place. And then which Trump do we, which Trump are we looking at by December?
- [43:27]
Kaiser Kuo
Yeah, indeed. I mean, last question, like it is maybe straight up advice, strip away the posturing on both sides. This galling inability to sort of see how the other side sees the board. For Europe, it's tempted by the bazooka, and for Beijing, it's tempted to wave away every complaint is mere protectionism. What's the one thing each most needs to understand about the other if this is going to end in a managed rebalancing rather than a full blown trade war that neither of them can really afford right now?
- [44:02]
Adam Tooze
Well, I think that the Europeans, we start from them, really need to understand that indeed, China is not a WTO conforming market economy. It is a developmental state with certain very clear purposes, a huge arsenal, relatively soft budget constraints. It is going to move the envelope on you. And there is no point in running around like a scandalized headless chicken continuously repeating this obvious fact.
- [44:29]
Kaiser Kuo
Right?
- [44:29]
Adam Tooze
So you start from the consequences of whatever that Chinese policy is. That's the thing. You just have to start there.
- [44:37]
Kaiser Kuo
Take some of that moral impugning off the table.
- [44:42]
Adam Tooze
And China is doing this for incredibly powerful domestic reasons. This is not principally driven by the desire to take working class jobs in Europe. On the other hand, China has to recognize that democracies have political economies and the logic of those democracies will therefore be highly sensitive to these kind of pressure. And if you do run a highly successful industrial policy with very substantial commitment of resources and it has the consequence of radically changing the competitive playing field, do not be surprised if they respond with various types of protective measure and want to negotiate with you over the terms of access. After all, China has this within China in provincial competition. This is not as though China doesn't understand the logic of these kind of bargains. It's not. It is, in the European case, emphatically a question of democracy because the populace opposed that. But in terms of the small p. Politics of interest groups and regional development and local jealousies, that's part of the secret source of China's dynamism, right, is that every single province and every single major city and all the other ones as well are competing for slices of the China dream and compete by, you know, by hook or by crook, red in tooth and claw for the ultimate prize of success. So they just need to take that reality which is well understood in China and say, well, obviously this extends to Europe too. Okay, so given that, folks, how are we gonna, how are we gonna make this kind of bargain work, right? That.
- [46:13]
Kaiser Kuo
What would we do if these were but other provinces of China, right?
- [46:18]
Adam Tooze
Well, well, no. Think of the Europe as like a third the size of China, but with the same problem of essentially managing people say China can't understand Europe. I really think that's profoundly a profound misunderstanding. China knows only too well what it means to manage a complex, regionally diverse political economy. That's the reality, right? And both will be well served. And this is an agenda for the current five year plan to consolidate their internal markets first and foremost, right? Because that's one of the things that's missing in China still. And the Europeans also have a long way to go in that regard.
- [46:54]
Kaiser Kuo
Well, Adam, this is exactly the conversation I hope to have with you. And we will reconvene when the other shoe drops and figure out what's going on there. Thank you as always for the clarity and for the contrarianism. To our listeners, I am Kaiser Guo. This has been the Seneca podcast recorded in collaboration with Davos on air at the World Economic Forum's annual meeting of the new champions here in the beautiful city of Dalian. Thank you all for listening and we'll see you next week. Adam, thank you so much for joining.
- [47:25]
Adam Tooze
Pleasure.
- [47:48]
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