C (2:33)

I think the simplest way to define it is the use of economic tools, both punitive tools and positive tools to achieve a geopolitical objective. So most people are familiar with the punitive tools, sanctions, tariffs, export controls, investment restrictions. And they try to coerce or induce a foreign country or a foreign actor to behave differently than he or she otherwise would because of the prospect of being penalized or excluded from the US financial system or US Technology. If we're talking about export controls or US Trade, if we're talking about tariffs, the positive tools, I think are less appreciated, but they're more potent because they derive their strength from who we are as a country, our power to inspire, attract, and create. So these are tools like investment subsidies, infrastructure financing, price floors, offtake agreements, the kind of tools that you hear about when industrial policy is the conversation. And I think we're out of balance in terms of the amount and the frequency and the potency of punitive tools relative to positive tools. But that's partly why I've been pushing for a doctrine of economic statecraft that gives us a chance of having more strategic coherence in how we balance that mix.

B (3:50)

One thing you've noted in your writing over the past year or so, I'm sure, before that, but I'm just looking at the stuff that you've published in your kind of more free post administration role.

C (4:00)

Not totally free.

B (4:02)

Not totally free. I think, regardless, one thing you've pointed out is that there's been a remarkably quick shift in how the world's leading powers, especially the US have gone from using economic pressure relatively sparingly to making it, as you call it, a default feature of foreign policy. So you flag, for instance, since 2000, the number of sanctioned individuals and entities worldwide has increased 10x. Let's say a little bit more about what that shift has been and why it's happened, why it's, you know, whatever the difference is between the Biden approach to economic statecraft and the Trump approach, you can class them in a bucket. That's separate from the approach of the, say, the late 20th century.

C (4:41)

So starting with the late 20th century, I mean, this was the post Cold War unipolar moment. And the notion that many people held was that this was the end of history and we were undergoing a process of ideological convergence. We've clearly left that world and we now are back to the kind of old normal of intense geopolitical competition. And because today's great powers are mostly nuclear powers, I think it is channeling direct conflict away from the battlefield and into the arena of economics. Economics is shorthand for economics and technology and energy, because confrontation in those domains is not existential. And so I do think you're starting to see all across the world, not just in the US much more frequent, much more potent use of economic statecraft, particularly punitive economic statecraft, to achieve geopolitical goals. I think what we're seeing so far in year one of the second Trump term is a maximalist approach to using many of these tools. I mean, what we've seen in Venezuela over the past couple of weeks is an example of it's a form of economic statecraft that I've never even thought of prior to the last couple of weeks, the way it unfolded. We've removed and captured a head of state. We've declared that we're running the country. We've issued an EO that freezes the oil revenue in US Accounts. It seems as though we're shielding the assets from creditor claims, and we're now giving the secretary of state a debit card to decide how to spend the money. That is an entirely different category of economic statecraft than we practiced in the previous administration. And I can give you 10 other examples.

B (6:15)

That's a good segue for me and Peter, I want to ask you to talk about Venezuela in a second. And just to give you guys and listeners a sense of where we're headed, we're going to try and do entirely too much in this episode. So we're going to talk Venezuela just because I think we have to get a handle on what's happening there economically. I want to do tariffs, which would be an episode or two just to themselves. There's China, there's a bunch of domestic industrial policy of the new tools this administration's been using, and some developments of more recent tools. It's a lot. So I want to apologize in advance both to you guys and to listeners, because we're going to leave some good stuff, I think, out. We're not going to go as deep on everything here. But I think the upside of this approach is we're going to get hopefully more of a unified view of what tools are on the table for U.S. policy in the economic statecraft realm. So with that big caveat in mind, Peter, you've spent a lot of time thinking and writing over the last two weeks about Venezuela, and I guess I should say we're recording on January 14th, so there will be developments before we publish. But give me your read on the tools that we're using and the facts on the ground.

A (7:25)

Yeah. So I think Venezuela is a really, really interesting case study. And what did and didn't work on economic statecraft? You know, the Trump administration, I mean, President Trump, people around him have wanted to dislodge Maduro going back to Trump's first term. And Trump, during his first term, had this kind of maximum pressure sanctions campaign on Maduro. They started trying to reduce Venezuela's oil exports, had some success at reducing Venezuela's oil exports, had some success putting economic pressure on the government in Caracas, but were just objectively unsuccessful at achieving their stated outcome via economic pressure of seeing Maduro go. What was interesting last year, 2025, to see is that Trump, in some sense, after some early negotiations early last year, early 2025, tried to negotiate with the regime, then seemed to get back to trying to use sanctions to put more economic pressure on Venezuela. So they'd actually done some more designations of tankers or sort of threatening more sanctions, but it was objectively not working. You actually looked at the couple of months in the data before Trump started militarily seizing Venezuelan oil tankers, and what you saw was despite the economic pressure, you actually saw Venezuelan oil exports rising and rising somewhat noticeably, almost back to where they'd been a year before. And you also, last year, similarly out of Iran, saw Iran exporting volumes of oil that were basically the same volume of oil that Iran had exported during the Obama nuclear deal, almost 2 million barrels a day, despite Trump, you know, saying, we're going to maximum pressure Iran. And if you look at what's going on, what's going on is that essentially all of the. All of the oil from Venezuela and Iran, about 80% from Venezuela, 90% from Iran, are going to China. And China, over the intervening years, had built enough of a fleet, we call it the Ghost Fleet or the Dark fleet. They'd built enough of a fleet of ships that were sort of operating outside of U.S. jurisdiction, that the sanctions on ships, those kind of sanctions, were no longer, practically speaking, preventing the volumes of oil from going to China. So Trump had a. Had a choice. He could either get tough with China as a country using economic pressure on China. We do have a lot of economic leverage still on China at large, but he could either get tough with China via an economic factor to try to get them to buy less Venezuelan oil, or he could start taking the ships militarily. And he chose kind of late last year, I think, looking at the failure of sanctions to stop these flows and his unwillingness to blow up the trade deal with China. Right. Because if he got tough with China over Venezuela and Iran, it would probably blow up his trade deal. So what he does is he decides to go back to this kind of like 19th century version of we're just going to seize the ships and disrupt trade that way. I think he gave that a couple of weeks thought that maybe actually literally embargoing the oil from a military sense would force Maduro to go. Didn't go. Went in and seized Maduro and now obviously seems to be asserting that he's going to have kind of a pliant, you know, local government down in Caracas. I do think the economics of this are going to be quite interesting. As Dalip says, the. The idea seems to be that the US Will broker Venezuela's oil exports. The proceeds of those oil exports will go into some kind of account in the United States. And as Dalip says, Marco Rubio get to decide, you know, what to spend the money on, presumably American agricultural products and medicine and, you know, oil field equipment and this kind of, this kind of thing. We'll see how that plays out. I actually think there's a little bit, in a weird way, there is a little bit of a precedent for this. After George W. Bush took over Iraq in 2003, they actually did something kind of similar for a couple of years with a similar sort of more internationally monitored but similar sort of sort of mechanism here. So I think there's a little bit of a press. I think that what is striking to me about what Trump is doing is a little bit less, well, obviously going in and seizing a leader is totally in modern history, unprecedented. Right. But let's put that aside. It's a little bit like what went on in Iraq, except it's unclear A, what the exit strategy is like. Trump may just want to do this kind of long term and B, there seems to be much less pretense about sort of normative goals other than, you know, controlling the resources down there. And that really is strikingly different than anything we've seen in the United States since, you know, at least prior to World War II.

B (12:10)

I want to focus on the specific dynamics of the seizure of the oil or at least the plan that the administration has laid out and in broad strokes for what's going to happen to the oil. Because, Arnab, you've spent a lot of time and you've educated me quite a bit over the years thinking about the structure of the oil market and how you support American producers, how you keep prices down for consumers, how you kind of balance these things. Describe a little bit more what the vision is here for where that oil is going to go and then how that intersects with the American market, American producers and consumers.

D (12:44)

As Olivia And Peter alluded this isn't a new effort of the administration, that this was something they were trying in the previous administration as well. But I really start with President Trump's singular focus that he's been talking about, which is to get this oil to the market to bring prices lower. And I think that impulse is understandable. We're living in an affordability crisis. Americans regularly cite cost of living as their number one concern. But at the same time, prices in the oil market are pretty low. Right now they're averaging around 281 a gallon for when you're filling up your tank, which is as low as it's been since March 2021 and kind of the depths of the pandemic. And so is this really the right place to be bringing prices down? There's a hidden cost to adding more foreign product to the global market and bringing prices down. And that's our energy security put a bit more precisely and in a bit more depth. Since President Trump came into office, his strategy for more oil production and bringing it to the market has been foreign oil production. You know, his first week in office, he kind of pleaded with Saudi Arabia and OPEC to produce more. They've been producing more. Ultimately, the lower you go, this gets to a level where our domestic producers, the price starts to become too low for, for their break even points, you know, for the shale sector particularly, which following the shale revolution, which made us the number one oil producer in the world, you get to a level below 60 bucks where they start to shut in production. They start to.

B (14:18)

60 bucks a barrel to be clear.

D (14:19)

Yeah, 60 bucks a barrel to be clear. They start to cut back production. And you know, the cost of that to American consumers, whether you're refilling your tank, whether you're an industrial product producer, is relying on oil for inputs, is you are now at the whim of these foreign unstable governments, OPEC in a year could decide to cut production. And with our domestic shale sector weakened, they'll be much less responsive to fill that gap and you'll see prices go through the roof. So the idea of just pursuing the lowest price at all costs and has real energy security implications to it for American consumers. And I think that's where I'd really fault this strategy as kind of hindering our energy security. An alternative approach would be to capitalize on the fact that we have become the world's number one oil producer and try to really build that resilience here at home. And to the extent that we are building partnerships abroad and trying to secure more resilience with oil abroad, maybe we should look to countries like Canada, which we already have a very integrated oil market with and you know, is a stable country. As Peter mentioned, there's no exit strategy for us here in Venezuela. What happens in two months, six months, a year, if the government falls or something happens, we're not going to have the same level of access. So I think the strategy here of, you know, relying on foreign oil to increase our access is really putting American consumers in a vulnerable place long term.

C (15:55)

If I can jump in on that too. Because to underscore the point, in Venezuela, these oil assets, they're not turnkey assets, they're more like distressed assets. Okay, so the estimates are that at least $100 billion of CapEx initially is going to be needed just to rehabilitate productive capacity back to where it was a decade ago.

B (16:15)

Just put a little color on that for folks who are not familiar with kind of the timeline of Venezuelan oil. Why is that?

C (16:20)

During the post Chavez era, investments in the productive capacity of these oil fields has been extraordinarily low and so they've fallen into disrepair. And what we're talking about in Venezuela is that some of the heaviest oil on earth and so it does require a lot of upgrading of the physical infrastructure to produce what we can refine in the Gulf. In the US this is going to take years. It's probably going to take over $100 billion of capital expenditure. Even if the US government induces Chevron and Exxon to pay for some of this investment, they're not going to do so without providing some form of insurance, A first loss guarantee, Development Finance Corporation, political risk, insurance, these are all examples of positive economic statecraft. But they do incur a cost or risk to the US taxpayer. So the cost of the occupation, logistics, troops, aid, those are immediate. But revenues are years away. So there's a massive mismatch. And then as Arnab says, there's the price of success. If the US does manage to resurrect oil production back to pre Chavez levels, what does that do to the production incentive of shale producers in the Permian? With break even production levels somewhere between $40 to $60 a barrel, we're already about to breach below that threshold.

B (17:41)

Will you just say a little bit more about the the delta between current Venezuelan production and what that 100 billion in capex would theoretically get us? Because Venezuela is producing oil today, but at kind of far less than pre Chavez?

C (17:54)

Right. I think the best estimates are that right now Venezuela is producing about 900,000 barrels per day, most of which is, I think half is it half of which on earth is going to China, some outsized share. So the portion that's hitting the global market is only about 200,000 barrels per day. And so the ambition is to return production levels. I think the peak was somewhere between 2 and 3 million barrels per day pre Chavez. But that's what has a hundred billion dollar plus price tag.

D (18:24)

And just to, you know, to give you one little piece about how depleted, how degraded the Venezuelan oil infrastructure is, I believe it's an oil workers union reported a couple of years ago their pipelines leak oil every single day. That every single day there is a separate leak, which is, you know, just kind of tells you how degraded this domestic industry is. And the idea that we would subsidize US taxpayers would subsidize that production, rather than any number of efforts we could take to boost the resilience of our domestic sector is, I think, pretty absurd.

A (18:59)

It's also been interesting to see, you know, some of the news around some of the energy companies being reluctant to go back into Venezuela. And I think, unsurprisingly, it looks like like some of the trading houses that are just brokering oil have been involved in some of the trades and refiners will buy the oil. But if you are going to go in and expend the capital, if you're an energy major that's going to go in and expend the capital to actually try to bring that production up, you're frankly looking at a time horizon that is far longer than Donald Trump's presidential term. And so you actually, and you sort of see the energy companies talking about this, they kind of are going to need to understand what the mid to long term governance situation down in Venezuela is going to be, because I think for a lot of these guys, the last thing they want to do is start putting money in the ground and Donald Trump is out of office and the assets get expropriated again.

C (19:50)

And Peter, I'm actually curious because it seems to me like the message coming out of Washington right now to the oil majors is that if you want to satisfy your claims as a creditor, you need to fund the occupation and reconstruction right now. And if you don't pay up, we're not going to help you recover your seized property. So in other words, this is basically an ask of publicly traded companies to act as the financing arm of the US Military. And that's a pretty tough sell, if that's correct. It's A very tough sell for corporate boards that have fiduciary duties to shareholders, not to the State Department.

A (20:20)

I think that is very much kind of the messaging we're seeing out of the Trump administration. Right. They are sort of suggesting that if the companies that have a lot of claims want to get paid, they better start putting new capital, new expenditures down there. And it's interesting because like, you know, I have no idea exactly how any individual energy major is kind of marked these losses, but probably most of these companies, even though they have very large headline claims against Venezuela, practically speaking on their books, they probably mark them down to pennies on the dollar. You know, if you'd asked them a year ago, they didn't really think they were ever going to be paid on this. So I think from their perspective, they are focused more on do we actually want to put real dollars in Venezuela than they are on kind of the paper value of these claims that they have.

B (21:07)

Let me take us to a related topic, which is China. Dilip, you were talking about some of the calculus here from the administration is this kind of long running attempt to squeeze Chinese access to oil. And I think you can in some sense read the work in Venezuela, the pressure on Iran, I think, not solely as this, but as ways to try and constrain or limit Chinese options. Talk to me, I guess, about your just descriptively how you think the administration is thinking about this and then we can get into what the kind of strengths and weaknesses of that approach are.

C (21:42)

Yeah, I mean, it's a little dangerous to describe the actions in Venezuela as purely about resource denial to China because after all, the migration flow out of Venezuela and the supposed drug flows were a big part of what this administration has defined as our strategic objectives. But yeah, I think you can draw a through line if you step back between what the administration's talking about with the oil in Venezuela and controlling 30% of the world's proven oil reserves as a consequence, if we're quote, unquote, running the country and what the administration is talking about, for example, in Greenland, which is really the only plausible standalone alternative in terms of rare earths and critical minerals that could challenge China's scale. If you put those two together, you begin to see more of the contours of this Trump corollary to the Monroe Doctrine in which in our hemisphere we are going to control all of the resources that are needed to secure our national security and our economic growth potential. Now, that may be overstretching the rationale, but when you listen to administration officials, including the President, that's the impression I get.

D (22:52)

One piece on China as well is that there's a variety of reasons for this, but China has over the past half decade, let's call it, been making attempts to insulate itself from this type of oil market disruption as well. They built capacity for 2 billion barrels crude oil in their reserves. They've been building up the actual stored product in that reserve over the past five years between 1.4 and 1.5 billion barrels of oil. And I think recent estimates from Goldman to Citigroup claim anywhere from 500,000 to a million barrels per day would be added over the next year or two to those reserves. So they are stockpiling and also this is a globalized market. So you know, they can, it's not like you cut them off from Venezuela and simply they're not going to be able to access crude anymore. They've built a pretty sizable buffer stock to weather disruptions for a period of time and then they can respond in their own way to try to secure it with other countries. So I think it's important as well to view it in that context, like China has been building their own domestic resilience to this type of effort.

A (24:05)

There's also a very practical short term reality that in the short term China is one of the world's largest net energy importers and as a large manufacturing power is a massive beneficiary economically of global low energy prices. I hear this sort of meme of oh, maybe long term this is about building leverage over China. I not only think there isn't a ton of leverage that's to be gained here over the medium to long term. Also in the short run, it's actually quite good for China to see what's happening, see more production coming onto the market markets.

C (24:37)

One caveat though I would point out though is China is a massive creditor to Venezuela. And to the extent that the EO wipes out China's ability to collect oil in exchange for debt service, that's a de facto default that's forced by the creditor shield. We don't know how it's going to play out. In that sense, it does give negotiating leverage to the administration.

B (24:56)

Well, let me ask you guys, I'm really feeling pressed because economic statecraft vis a vis China is such a massive topic over the last year and yet we're going to try and get a handle on it. Let me throw this question to all three of you. Again, just diagnostically, how would you describe or understand how the administration has tried to use all these tools in the toolkit with respect to China, we've had tariffs, we've had export controls on some high end technology. There's been this kind of back and forth on rare earths. From your perspectives, as people who've, you know, two of you have been in the White House, Arnab, you've thought a lot about these issues. Just how would you describe this administration's approach to picking and choosing its tools?

A (25:37)

I mean, I think it's been very interesting to watch the Trump administration's overall approach towards China because what they're doing on the economic front is derivative of their overall approach to China. I think many of us who watched Trump during his first term thought he would come in quite hawkish on China, both on the trade policy front with tariffs and also on the export controls front and then also with other tools like restrictions on the use of Chinese technology here in the United States and that sort of thing. And obviously in some sense that is what he did. China, along with Canada and Mexico was the first set of countries that he increased tariffs on early last year. And then there was a very brief trade war where we went up to what, 145% tariffs on many imports from China back in April. But I do think that one of the big macro stories of the second half of last year was that Trump decided actually no, what he wanted is a day to tant with China and probably something that more resembles a managed trading relationship with China than it does to a really sort of high pressure campaign on China. And so we've, we've seen Trump very much back off on the tariff file where, as you know, tariffs on China are still higher than they are on most other countries. Though as the China tariff rate has gotten compressed, the differential on tariffs between China and some of the other countries where the US Imports stuff from like Vietnam and other countries in Southeast Asia actually gotten small enough. It's not clear how disadvantageous it is to China anymore. And then Trump, of course, has shown, you know, including just Yesterday on the January 13th, they put in the rule finally officially authorizing Nvidia to sell high end AI chips to China. So, you know, we really do see this data. We see, we see an administration that has quite a bit of tools that it did deploy earlier this year. But that, you know, story more recently has been, I think, much more of a moderated an approach and desire to see some sort of, you know, at least temporary detente with China.

C (27:46)

I was smiling when you asked the question, Santi, because, I mean, I really, I Don't, I don't have a clear idea of the strategy vis a vis China. I mean, I could, I could give you a flippant answer and say we're talking about one man's reaction function, to use a central banking term. And what he really wants is North Star is I want to get on Mount Rushmore, I want to win the Nobel Prize, and I want a dynasty. And so the symbolism of a Trump goes to China moment might give him objective number two. But leaving aside what they're trying to do, I can say, I think with a year to reflect on, China's had a very good trade war. You know, growth has held up close to 5%. That exceeds all of the expectations at the start of last year. It defied hard landing expectations. If you look at what's driving Chinese growth, net exports are about a quarter. That's a share we haven't seen since the China shock of the 2000s. And China is now literally exporting their way out of a real estate morass. And the way they're doing that is just reorienting exports away from the US to countries that are trans shipping them to the US or to ASEAN or to Europe or the global South. And in the process, China continues to gain global market share in the sectors that they deem are most strategic. And so do we, for that matter. As you look at ships or cars or drones or machinery or pharmaceuticals or chemicals, lagging edge, chips, minerals processing. And China's gaining market share from a baseline of one third of global manufacturing production. Right. So more than the U.S. japan and Germany combined. To me, that's, that's a pretty good year one for China. In the midst of the largest tariff increase since 1934.

B (29:27)

There's been good reporting from the Wall Street Journal about the Chinese goal that apparently, you know, according to the Wall Street Journal, has been applying maximum pressure in pursuit of as close to a full tariff rollback and a rollback of export controls as possible. So I'm curious just how you read, assuming that's correct, that Chinese posture, does the fact that they would really like to get rid of this, this full set of tariffs say something good about that set of the tariff policy? Does it say that the Biden admin should have been more aggressive about this? If they read it as damaging to themselves, how would you understand that?

C (30:02)

I don't think it's especially controversial that the tariffs and export controls hurt China, particularly at a moment when its domestic economy is, is struggling. They have structural weaknesses from the demographic trajectory, from deleveraging Going back to the property boom after 2008 and from the de risking that's taking place, those are all drags on Chinese growth. And so when you have external frictions in the form of tariffs and export controls, particularly export controls, you know, the crown technological jewels of the US no longer flowing to China in the way that they used to really harms China's ability to raise its productivity trend and to escape this demographic trap. I don't think there's any question that the tariffs and the export controls are hurting China, but I wouldn't go so far as to say that it means it's all working because I think they believe they still have a strong hand, as evidenced by the fact that they were able to get at least some partial licensing of H200 chips in exchange for not very much in return, some soybean purchases, the resumption of rare earth supply and a trip to Beijing for the President in Q1.

B (31:06)

I take your point on the soybeans, but isn't the resumption of rare earths exports a pretty big deal for us at this point in time?

C (31:13)

Oh, definitely. But I think what we're doing is just trading chips for rare earths. We're playing tit for tat. The question is who has escalation dominance. Beijing's self perception is that they have greater tolerance for pain and perhaps that they have more policy space to cushion the downside risks. And so I don't really think they've flinched very much in the past year. I don't think the fact that they don't want tariffs and export controls contradicts that.

B (31:38)

You know, I've talked to people who would say there's been real deflationary damage that the tariffs have done to the Chinese economy. Earlier this year, Goldman estimated that something like 16 million jobs in China are at risk due to the tariffs. That tariff increases will significantly weigh on the Chinese economy. Were obviously the number one trading partner with China. And so even if there's a kind of Chinese diversification for trans shipping, there's still some cost there. Will you just kind of flesh out your perspective on the impact of these tariffs on the Chinese economy? Maybe medium term?

C (32:10)

I think the State Council is much more focused on market share on scale in strategic sectors than they are monthly CPI numbers.

B (32:19)

This is the Chinese State Council.

C (32:21)

The Chinese State Council, yeah. Look at China's trade surplus. Never before in economic history have we seen a trade manufactured goods trade surplus of $1.2 trillion, which is what China registered last year. As I mentioned, about 25% of China's real GDP growth last year was from net exports. That's the largest share since the 2000s, the first so called China shock. And if you look at specific sectors to bring this to life, China continues to grow its share. In solar panels, it's 80% EV batteries, it's about 70% EVs, it's about 70% electrolyzers, 50% shipbuilding, 60% drones, over 70%. You know, you can go on and on and on. I don't know what people are referencing when they say that the more hawkish levels of tariffs have caused real lasting harm to China's own strategic objectives. You know, it may have dented China's export growth temporarily. But as I mentioned, China is still very successfully trend shipping quite a few of its exports to the US through Vietnam, Malaysia, many ASEAN countries. It's dumping a lot of its excess supply now to Europe, to the global South. The year over year growth in Chinese exports to Africa and the global south is nearing 30%. To Europe it's up double digits. I don't see any evidence of a domestic manufacturing renaissance in the U.S. such that we can substitute domestic production for foreign imports. I don't see much evidence that exporters to the US outside of Japanese automakers have absorbed the cost of tariffs into their profit margins. And I don't even see any evidence that US importers in tradable goods categories are absorbing the higher tariffs into their own margins because in many cases, most cases think about an industry like apparel or food, margins are very thin and these are a highly competitive category. So they can't afford to absorb higher tariffs on the margins, therefore they're passing it on to consumers. We see that in the data, both the inflation data and the growth data.

D (34:21)

The Trump administration certainly believes that they've got a toolkit and they're going to use it in an aggressive, robust way. I think when you look at some of the deals, for example, the MP Materials deal that they cut back in August that Peter and I did a longer kind of deep dive into, there's a lot of different tools as part of that transaction. It's over. You know, it's a multi billion dollar deal that includes a loan, an equity investment, a price floor for mind ndpr. It includes a guaranteed offtake agreement for Finnish rare earth magnets. It's got a guaranteed ebitda. The authorities that they're relying on for a lot of that, the Defense Production act have never really been used in this way to, you know, take an equity stake in a company for example. But I think also to pick up on Dalip's point, there is this question of like, what is the purpose of this? In the context of critical minerals markets, they're making big bets in individual companies, but these companies are still ultimately operating in a Chinese dominated market. There doesn't seem to be as much of a policy effort to reorient that market away from China towards something that is a bit more functioning, a bit more free, a bit more competitive. Whereas the allied kind of partnership here, I think it's very difficult to go into China's level of scale. But when you think about, if you take just for example, the critical minerals market, you have everything that we're trying to do. You have the EU, which is I think pushing for about 300 billion in public private mobilization over the long run to counter the Belt Road initiative. You've got Canada committing, you know, two to four billion dollars. You've got Korea, Japan, there's billions of dollars in commitments, hundreds of billions of dollars in commitments to counter China. And I think that the US should really be serving a coordinating function here to build this market, to build this market infrastructure, but you're not really seeing that. And so I think that question of like what is the purpose here outside of cutting a deal here and there is not totally clear to me. And you hear technological advantage sometimes alluded to by people in the administration. And they managed to convince the President not to export the Blackwell chip, but they gave this, as Peter mentioned, this license for the hoppers. And you know, our colleagues at IFP have written great reports. This essentially could eliminate our compute advantage, which is the one advantage we have in the AI race. What is driving the these two decisions which are very different.

B (36:55)

It looks like the actual number of hoppers that we're going to be sending is not nearly enough to be kind of substantially eroding the compute advantage that we have. So I think there's probably a win there. Arnab, you and I would describe compared to some of what was discussed about sending the high level Blackwells in mass.

C (37:13)

Quantities initially, just on this point, I do think on export control policy there is a real shift. We're shifting from a strategy of, you can call it containment, small yard, high fence around technologies that are foundational for our national security and economic growth.

B (37:28)

You called it that, that was the Biden language.

C (37:32)

That was definitely the term that we used in the, in the Biden years. And that's, that's now evolving to a strategy of monetization, if you want to use a metaphor. I would say it's something like a told drawbridge. And I think that's a, that's a seismic error. I mean, the logic of, the logic of the H200 deal, it may sound clever. Let's tax China's AI growth to fund American R and D. Let's extract rent from our key strategic rival while locking them into the Nvidia ecosystem. But when you look at the political mandate and the engineering realities in China, that logic collapses first because lock in is a myth. Beijing issued a document, I think it's document 79 back in 2022, and that legally mandated state owned enterprises to purge US Silicon by 2027. So we were debating in the Biden years where should we land on the continuum between de risking and decoupling. Beijing was already kind of setting the date for a divorce as it relates to US chips. And then the reality is China, I don't think wants H2 hundreds to get in bed with Nvidia. They want H200 to bridge the gap until Huawei's comparable version comes online. Let's say that's late 2027. So we're not capturing a customer, we're sort of bridging a competitor. The way I see it, maybe let.

B (38:52)

Me ask a couple of you guys about the inflation data here, because I think there has been a realization, and I think, Peter, you've talked about this, that the tariffs so far at least have not been as inflationary as was kind of widely expected in the weeks post Liberation Day, when I think every economist I talked to or read or listened to flagged inflation as kind of the core concern here. And I think my impression has been eight months later that while you can argue about other negative economic effects in the US as a consequence of the tariffs, inflation has not been at the kind of high levels that it were mooted in those first weeks. So say a little bit more maybe. Dalip and, and Peter and Arna, please feel free to chime in here.

A (39:32)

Well, maybe I'll just pick up on your question. And, and I should caveat by saying, you know, I'm a lawyer, I would defer to dilip on the economic numbers. But the first point I want to make, part of the story here is that actually Trump kind of starting over the summer actually began in a couple of different ways to back off some of his initially maximalist tariffs. Right. And some of that was quite overt and direct. Right. We had 145% tariffs from China for a couple of weeks and then those came back down and you know, steadily ratcheted lower. So there may be 4, 45%. There have also been lots of quiet exclusions of products in the tariff. So, you know, Trump has talked a lot about semiconductor tariffs and tariffs on cell phones and things like that. But if you actually look at what he has done, he has fully exempted semiconductor as of today. Semiconductors, cell phones, laptops, consumer electric, by and large, fully exempt from the tariffs. In fact, some of the recent data that has come out suggests that probably only about half products the U.S. imports, maybe right around, you know, 53% or something, have been subject to any new tariffs under Trump's second term at all. So, like part of this story as well, there's a lot of headline noise and it is still the largest increase in tariff probably since the 1930s. And so I don't want to minimize the impact here. But part of the story is actually, although the impact is dramatic, it is, you know, not nearly as dramatic as, as at the beginning of the year. It was looking like it could shape up to be in terms of the, the value of the product subject to the tariffs. I think there's another bit of a story which is going on and you know, here really I do defer to delete when I look at some of the Goldman estimates. You know, I think what we are seeing is that a lot of companies, you know, we are seeing some pretty quick tariff path pass through on low margin products highly susceptible to the tariffs. Right. So we've seen a lot of pass through on like furniture or seeing some on, on apparel in some of these.

B (41:38)

Categories where the margins are tiny and there's no slack to eat.

A (41:41)

The margins are tiny and the tariffs are quite high. Right. Trump has like 25% tariffs on upholstered furniture now and on vanities and cabinets. Right. So you just like you are seeing the pass through there, but in some other industries, I think you are seeing companies look at dragging out the pass through over time. You know, they didn't want to get in trouble with the White House by sort of suddenly hiking prices. They were willing to eat into margins. And some of the higher margin products are willing to eat into margins for, you know, maybe a couple of months. But we're going to see the price increase on those products. It will get passed through at least, probably 60, 70% will get passed through. But over the course of a year from last summer rather than over the course of two months from last summer.

C (42:25)

And just to chime in, I mean, I'll level set a bit with numbers. Remember back in January 2025, the effective US tariff rate. In other words, taking into account the fact that consumers will substitute lower tariff goods or non tariff goods for higher tariff goods, that rate was about two and a half percent. And that's that had been pretty steady for many many years. Just after April 2, that rate spiked to 28%. That was the shock and off phase of the post April 2nd period. And then as Peter mentioned, as of late 2025, that effective rate had declined towards 18% or so. That was the highest effective tariff rate since 1934, just after Smoot Hawley was passed. My conclusion, looking at the economic data over the past year is this has not been a free lunch. As I mentioned, the vast majority of exporters to the US have not absorbed these tariffs into their profit margins. We have not seen a domestic manufacturing renaissance in the US that substitutes for foreign imports. Manufacturing output has been flat or it's contracted for 10 consecutive months. We've lost about 72,000 jobs in the manufacturing sector. We have not seen the dollar strengthen to absorb the blow of tariffs. If the dollar had strengthened, that could have offset the impact of higher tariffs by making it cheaper to buy foreign goods. The dollar in the first half of last year depreciated by about 10%, which is on an inflation adjusted basis one of the largest declines in the past 50 years. So US importers by and large absorb the tariff increase. And because these are price competitive categories, about 80% of those costs, about $300 billion in tariff revenues have been passed on to consumers. And it hit the bottom 20% harder than the rest of the country because they spend a larger than average share of their consumption on tradable goods, food in particular, but also many other items that we import from abroad. And that translates into about a 6 to 8% decline in their inflation adjusted after tax income, or about four times more than what you see for the top 10%. They tend to spend more on services which have not been tariffed. And for a struggling family living, paycheck to paycheck, that has been part of this cost of living crisis. Now, on inflation in particular, and I'll stop there, I do think we've seen a less acute effect as Peter suggested, but I think it's going to be more protracted. And the reason why is businesses are smart. They saw the April 2nd announcements coming. They accumulated inventories to an historic degree about 2 to 3 quarters above the pre pandemic trend. I don't think we've fully exhausted those inventories that were accumulated before April 2, I think we will in the first half of this year and afterwards we will start to see higher levels of pass through that will be impacting our inflation numbers and the cost of living. And so I think this is going to go on. It's going to have a long tail.

B (45:21)

I always appreciate concrete predictions on this podcast. It's a epistemically valuable thing.

C (45:27)

Call me out later.

D (45:28)

No.

B (45:28)

Or say, dalip, you were right. When. And I will just say, I think I would certainly agree. At least the kind of domestic manufacturing renaissance that's been mooted is not showing up in the data. And I would agree with you that the admin's vision on what it will take to kind of reshore American manufacturing in a serious way, it will require a lot more than tariffs in this kind of model to actually achieve that goal.

D (45:51)

I think pick up on Dalif's point about Peter's point. I think being protracted, it does take time. And you're seeing our domestic, from a broader investment perspective, our domestic industries are struggling and I think it will take some time for that to play out. So every quarter the Dallas Fed does a survey of oil executives and they produce a lot of data and really rich insights. And there's a lot of comments coming from oil executives that they survey. And there's been a lot of constant, consistent consternation about the tariffs over the last three to four quarters. In the last survey that was published recently, I think they said about a half of executives said that at least a quarter of their oil field equipment was sourced from China. And the necessity to potentially reshore some of that and find domestic suppliers was running into quality assurance issues, basically that they could not guarantee and meet the high standards for quality insurance, quality assurance. And this was ultimately impacting their ability to get projects delivered on time. And I think that is like the type of, you know, it's a slow burn for some of these to take that sort of impact and you need some time for this to play out, for some of those things to play out. We haven't experienced, I think the full scope of what these impacts of these tariffs will have. And then just like one small piece too is as Peter mentioned, they've changed and there's these exclusions and I think the, the general environment there is of uncertainty. And that is something for businesses that's very difficult for them to react to. It's also very difficult for them to make fixed decisions on. And so over time, as these sustain potentially, I think you'll start to see more behavior change as well, just to.

C (47:41)

Be fair, because I can imagine if there are people listening who said, hey, didn't the Biden folks also support tariffs?

B (47:46)

And the answer was my next question to leave.

C (47:48)

Okay, so I'm mind melding with you. I mean, yes, terrorists have a. They're a tool that belongs in the toolkit. Our view is that they are one of the three prongs of a domestic revitalization strategy. The first and most important one is investment. So make public investments where we want to strengthen and scale up productive capacity in strategic sectors. Crowd in the private sector. That's step one. Step two is we're not going to build all the productive capacity we need at home. So let's work with our allies who are playing by the same rules. Invest in each other's productive capacity and lower barriers in those strategic sectors. And then three, where necessary to level the playing field, you use targeted tariffs so that our investments can be sustainable and pay off. It was not a tariff centric strategy in the Biden years. It was an investment centric strategy. And it's all a question of balance. I applaud the MP Materials deal, but I don't want us to create national champions. I would like there to be a portfolio of NP materials investments that would have the makings of a more sustainable competitive environment where we can win.

B (48:51)

I want to get to the MP Materials deal and equity stakes in a second. That, gosh, has so much to get to. Just one last question here on tariffs. I'm curious, especially Dilip and Peter. You guys are obviously pretty keen observers of the impact of tariffs as a tool. I'm curious, has the last year shaped or changed or updated your views on the use of tariffs as a tool? Have you learned anything that you might not have been aware of or you might have underweighted or overweighted about tariffs that you'd want to kind of leverage if you're in the White House.

C (49:23)

Again, I've been surprised by how much leverage a maximalist tariff policy gave us in the short term. When I look at which tools in our toolkit for economic statecraft are most potent, I would not have said tariffs are our most powerful one. Because if you look at the US as a share of global imports, we're about 15%. So the US consumer really does matter. But compare that to China's share of global imports, it's about 10%. And the EU share as a whole, if you, even if you exclude trade within the EU, it's about 14%. So that's not my definition of asymmetric strength. We have a marginal advantage in terms of the US Consumer's power relative to that of other trading nations. And it's less potent as a tool of statecraft than our dominance in finance and tech. So the fact that we've been able to use tariffs against our main trading partners and we've not seen any retaliation, I find that surprising. I mean, part of this has to do with the fact that the US has been growing faster than the rest of the world, at least most of the advanced economies. And so I think leaders in the EU accepted an asymmetric deal where we put 15% tariffs on them, and they had no retaliation against us because their growth remains relatively weaker and they have a relatively higher dependence on external demand from the US they had a weak hand. The last point I'll make is that while we do appear to have significant leverage in the short term, unsurprisingly, we're seeing the rest of the world actively hedging to reduce its vulnerabilities to the US over the longer term. I think that's my takeaway from what the EU is doing with mercosur. There are new trading blocks that are emerging in the Asian supply chain. I think that's going to continue. The world's going to hedge.

B (51:08)

Peter.

A (51:09)

I will start where Dalip did. I was quite struck last year by how readily most of our major trading partners just caved to a set of Trumpian trade demands made by tariffs. I mean, really, if you look back over the course of last year, only China. But what was really striking to me in a way was the countries that resisted US Pressure are essentially all global south emerging markets countries. Right? It was a European Union, despite a bunch of noise, caved pretty quickly. Japan, South Korea, despite a little bit of noise, caved pretty quickly. Southeast Asia, I think, made a very rational calculus. You know, at the end of the day, a 19%, 20% tariff on something we import from Thailand, there's not going to be any US Onshoring. And I think a lot of the Southeast Asian countries kind of concluded, okay, fine, this will be an Americans will just pay this tariff kind of tariff that's being applied for the stuff we're exporting. Doesn't really affect us much as long as our tariff rate is the same as our competitor country tariff rate. So they don't really care. But. But the countries that stood up to Trump have been China, which retaliated hard, and then Brazil and India, which has sort of eaten really exceptionally high tariff rates and refused so far to cave, though of course there is talk about, about deals and, and I would not have necessarily expected that it would be the large emerging market countries that would have stood up to this rather than the sort of close allied countries. And I think maybe that reflects the security dynamics in the relationship. You know, our close allies feel dependent on the US for security in the short term and so sort of felt more that they had to decay. So that's, that is one thing that has surprised to me. I have been surprised at how effective China in a short period of time has been at finding other export markets. It is striking that China's overall exports are up substantially last year and as Dalip walked through earlier, you know, major increases, sort of double digits to Europe and 25 to 30% to a bunch. I would not have thought that the rest of the world would have absorbed that industrial output from China as to the extent that they have. I think that's going to cause friction over time. We are seeing it cause friction but I thought we would see retaliatory measures quicker and we wouldn't have seen that much expansion out of China. So I was surprised on that. Another thing you look at sort of some of the micro data, some of the Southeast Asian countries, some of the latam countries just well, you know, 10, 15, 20% tariff isn't going to encourage any onshoring. American consumers will pay this tariff and fine. It has been interesting to me to see how little onshoring tariffs at this level have done. Right. I mean all the manufacturing employment is down, manufacturing is flat. Maybe best case scenario, manufacturing is flat. There's a lot of talk about US manufacturing, we're not seeing it in the numbers and it's really interesting to see that.

B (54:07)

Just quickly, what do you ascribe that to? Is it the uncertainty of the current tariff model?

A (54:12)

So I think a part of it is the uncertainty. You know, no one wants to invest when they don't know where the tariffs are headed. I think part of it is the indiscriminate nature of the tariffs which have hit a number of industrial inputs pretty hard.

B (54:28)

Right.

A (54:28)

I mean we can have a long discussion about steel and aluminum, but one reality is that steel in particular and aluminum to a significant degree as well are needed to build manufacturing capacity and are in lots of manufactured goods. And we now have by far the world's highest steel and aluminum prices. Right. So that doesn't actually on a cost competitive basis help US manufacturing. So I think the like indiscriminate nature has been bad for US manufacturing as well as, as well as the, the uncertainty and then the final point and it kind of comes to the, the integration of the tools of economic statecraft. Right. One thing we have seen Trump back off on, we can unpack some individual deals that are interesting, but the Biden administration's big bet on industrial policy was we were going to put a ton of federal government money, both through grants and tax credits, into a bunch of clean energy manufacturing. And that was beginning to work. And of course Trump is pulled a ton of that back. And I think what we're seeing is if you want manufacturing, it can't just be tariffs. You actually probably need to lead with the investment theory of the case, which we are simply seeing fewer dollars of this year though we are seeing some of those dollars deployed in interesting ways.

B (55:40)

One more sidebar and then we will get to the interesting domestic stuff. The NP materials dealing, equity stakes. I know Arnab is itching out of his skin right now to talk about that.

D (55:48)

I'm enjoying this. So you know, we can keep it going as much as, as much as.

B (55:53)

Are like I do want to talk just a little bit about some of the specific country deals that Peter, you mentioned a moment ago. There's a US Japan tariff deal where we established like a 15% baseline tariff on most Japanese imports and they committed to these big investments in U.S. strategic sectors. You mentioned there's like a Korea deal potentially upcoming. And last summer when I talked to people in Washington, people kind of familiar with the U.S. trade Representative Office is thinking a lot of the kind of canned model of what was going to happen with these big tariffs was seemed to be we don't need to land deals with everybody. We needed to land deals with a couple of the big trading partners with Japan and Korea and India or China and the rest of these, all these other deals, everyone will kind of fall in line or they'll see the model and that will be the copy pasted template. And so what really matters is just landing these deals with Japan and Korea early. A, would you how would you evaluate that strategy and B, what's the reality on the ground now?

A (56:54)

We now have a number of deals out there. There are only two countries where we have sort of what I would consider a fully developed deal text. That's Malaysia and Cambodia. What we have with the big trading partners, the eu, Japan, Korea, a couple of the other sort of larger trading partners, what I might call like trade MO deal mous, we have kind of high level parameters. Importantly, the thing the MOUs do is adjusted and frozen the US tariff rate so they have begun to provide some degree of certainty on the tariff rate. And in many of those cases, they did bring the tariff rates down a little bit from where they were prior to the, to the deal. I mean, I do think, if I'm just looking from a US Economic perspective, it is correct that a very large share of our trade comes from our top 10 or 12 trading partners. So if you get deals with those countries, you actually have covered most of our trade. The other important thing here, of course, that's been going on in the specifics is, although we don't have deals like new deals with Canada and Mexico, our two largest trading partners, practically speaking, Trump has exempted 80 or so percent of our imports from both Canada and Mexico from his new tariffs because he said the stuff complies with this USMCA deal. It's not tariff for now. Well, he negotiate. So. So that's also provided a lot of certainty on what's going on. So I, I do think from a sort of economic perspective, they're not wrong that, you know, you cover most of our trade by nailing down a couple of the big. I think they are finding it hard in practice to finalize the deals with the big countries. I think this is going to be the big story of the next couple, a couple of months where there's going to be a lot of friction in America's trading relationships as they try to finalize the deals.

B (58:37)

Which deals are kind of next on the conveyor belt. Theoretically, I think the EU deal, which.

A (58:42)

We have an mou and they're trying to negotiate what seems very tense right now. And I think we're going to hear a lot of friction about that. I actually think the Japan and probably the Korea deal will hold. Okay. But I think we're going to see a lot of friction over the next couple of months with the eu, with Mexico and with Canada, which, which are three of our top six trading partners and really very important. And the reason we're seeing all this friction is that the sort of preliminary deals are Trump's exemption for Canada and Mexico, for many Canadian Mexican products, in some sense, like it gave the other country what they wanted, which was certainty on rates and a little bit lower rate. But the other parts of these deals, beyond the US Tariffs are like a whole bunch of things that Trump thinks he got these foreign governments to agree to, or which Canada, Mexico, he wants them to agree to. Right. So he thinks he got, as part of this trade deal, Europe to basically say Europe is going to stop regulating big American tech companies. And it turns out that Europe doesn't want to stop regulating big American tech companies and does not think it agreed to stop regulating big American tech companies as part of the deal that was agreed to last summer. And that's just a source of tension that we're going to see, I think escalate over the next couple of months.

B (60:00)

Dewey, aren't anything you want to add there?

C (60:02)

Just that there's a huge opportunity to use this money that's been committed by Japan or by Korea as part of the truce with the US Administration on trade to use that money not just for the US but to use it as a pool of allied capital to actually compete with the Belt Road Initiative across the global south and in geopolitical swing states that have productive capacity in strategic sectors that we need back home. So think about nickel extraction and processing in Indonesia or like APIs and pharmaceuticals in India. If you keep it all domestic, it's going to be perceived right or wrong as protectionism or extortion or tribute. But if you deploy it globally, that's a strategic counterweight that more countries could actually get behind and maybe sustain over the course of time beyond just this administration. And I think, Peter, you've alluded to this and I think there's real upside there.

D (60:57)

One thing I would just add is maybe I'm a bit more pessimistic about Dalib's point about the long term decoupling that some of some of this could have. You know, I think Santi, as you know, I'm originally from Calgary in Canada and we've been trying to, you know, build export capacity out east to Asia for many, many years. It's a big important priority, has been an important priority for Alberta. It is the first time in, I think I've ever seen both amongst kind of the local population, all the way up to leading political leaders that this is described explicitly in terms of decoupling from the US Prime Minister Carney is leaving for China momentarily perhaps, and on his agenda potentially is testing the waters for increasing imports of Canadian oil and gas to China. And so going back to the point about businesses and certainty, I think our allies need certainty as well. And that's, I think the one of the challenges with this approach. Even if you can get some of these deals with Korea or Japan where they can commit to putting up certain amount of capital, I really worry about the long term kind of credibility here.

B (62:14)

Well, let me leave tariff deal question there because I do want to turn to some domestic industrial policy and some interesting moves. The administration has made on that front. This is kind of podcasters privilege. I'm going to kind of gloss you guys might have may have more openness or more interest in some of the specific tools being used on the domestic industrial policy side from the administration than I think this kind of broad tariff approach. You guys are more open to kind of more of these uses of, say, equity stakes or some of the other domestic tools we use at a kind of high level. Like am I totally misreading you or is there more overlap there than on the tariff side?

C (62:52)

Well, I absolutely agree with that statement. For the reason I mentioned before, Santi, is that if we're in, we're back in a period of intense geopolitical competition, and if that competition is primarily playing out in the arena of economics. The question is, does the private sector by itself have the incentives to invest at pace and skill to compete? I think the answer is no, and therefore I am very much a proponent of the US Government taking more risk to achieve strategic objectives. Not just loans, but also equity offtake agreements, price floors. There are a whole suite of tools. They're kind of latent, they're sitting on the shelf in various agencies, and if they're put to more creative and imaginative use, it can make a very big difference. So my biggest quibble is that none of this should be improvisational. It should be institutionalized. We should have a playbook or framework take it just as seriously as a doctrine of economic statecraft for punitive tools. We need that same type of rigor for industrial policy. I'm happy to talk about what I have in mind.

B (63:50)

Maybe let's take one of these recent deals, which we've mentioned a couple of times already here. The MP Materials deal. I'm guessing I'm just going to throw out a number. I feel like 25% of Statecraft listeners are going to be super familiar with this, and the remainder are going to be like, yeah, what are they talking about? So can I have you guys lay out just what is empty materials? What's the empty materials deal? Why has it been so, I want to say buzzy, for, for at least the four of us, it's been like a very interesting topic, even if it is not necessarily punctuated. Broader political discourse.

D (64:19)

I'm happy to start. So MP Materials is a company that owns a mine called the Mountain Pass Mine out in California. This is a mine that's been in operation since the 1950s. It's one of the largest sources of rare earths, and they have made up a lot of our Rares over that period. It's also a mind that sort of tells the story of the Chinese era of dominance in rare earths, where you know, they have over time built a dominance both in access to the materials, but also particularly in processing, where they process over 90% of the world's rare earths. In the 1970s, China set up a rare earth's office. They really started to accelerate their industrial policy in the 90s through the the 2000s and 2000s. They put more effort into dominating the market infrastructure, the means by which a lot of this is priced. In the late 90s, they suspended production of rarers because prices were weak kind of as that Chinese production was coming online. And over the course of the next few decades, it's really gone through this cycle of someone taking ownership of the asset, investing and then losing their shirt as Chinese product comes onto the market and bring just brings down the price. So, you know, one example of this is the company Mollycore, which took it over in the mid-2000s. And prices shot up in 2009, 2010, as China instituted a series of export restrictions and stopped shipments to Japan in wake of the Senkaku Islands dispute. As those restrictions were later released, the price went back down. And Mollycore, which had invested 1.5 billion into the mine, ended up going into bankruptcy and sold for about $20 million. So, you know, an order of magnitude less. So that was kind of the story. And in 2017, MP Materials took it over. And since that time, they'd been shipping all of their product for processing to China. But as the trade war heated up last year, China instituted a number of export restrictions and MP Materials had essentially no customers for their product. In the midst of that, the Defense Department undertook this pretty extraordinary intervention that I mentioned earlier, where they're providing loan capital and equity stake where the Defense Department is taking a 15% stake and the company, ultimately they're putting in a price floor for ndpr, which is one of the things that's mined that goes into Finnish rare earth magnets. And then they're also creating their capital. They're putting a bunch of capital in the form of a guaranteed offtake agreement for a new facility for MP that would produce finished rare earth magnets. So they're essentially putting a multi billion dollar investment into MP to create a vertically integrated from the mine all the way to the finished rare earth magnets. National champion. And so it's a very big deal. It deploys all of the tools.

A (67:27)

I want to pick up where Arnab left it so the US Government has now, over the last six, seven months, has now taken equity stakes or equity like stakes in, I think more than 15 companies at this point. By equity, like, I mean they might have options or warrants will give them a share. You know, if certain metrics are made.

B (67:49)

And the examples there, just to be clear, MP Materials, intel, what are a couple other ones that we should think of?

A (67:54)

Yeah, so you have, you have MP materials, you have intel where they have a 9.9% stake. That's probably the one that most people of people have been tracking this. The most people are aware of. There are a number of other mining and minerals companies, deals that the Trump administration has put equity into, like one company called Lithium Americas. But they're actually, you know, maybe eight or nine now in the minerals space. They're also doing them in ways people aren't, I think as mostly as closely focused on. So, for example, last fall the Trump administration announced a huge, new, potentially up to $80 billion nuclear deal that is involving Westinghouse Electric property manager out of Canada Brookfield. And if you read the SEC filings in that deal, actually, if certain performance and valuation metrics are met, the government will be entitled to a 20% equity stake in the project. Like, they're also sort of embedding contingent equity stakes in a number of other deals that seen in the news, but where equity maybe isn't granted on, on day one. What's interesting about the MP deal is that the MP deal is the one of these, or as Arnab walked through, you actually see the government thinking through how a number of different tools can be used together to achieve a desired outcome. Right. So it's not just sort of MP, DOD, the Defense Department taking a 15% stake in MP. They also have these lending for MP to scale up its facilities. They have the offtake and price floor agreements to make sure there's demand for the products coming out. So far that has not been the case with most of these other deals. Like basically the intel deal was the government basically telling intel, hey, you know, you have these grants to build fabs. Instead of grants to build fabs, we're going to give you a grant to take a 9.9% stake in your company. But they haven't really shown any other tools that they're putting into play to help intel actually build better chips in the United States. And some of these other minerals deals similarly, so far, all the government seems to have done is put in capital, which is valuable capital, probably needs to be part, but they haven't really brought to bear in some of these other deals. The kind of tools that I think probably you'll need to see brought to bear if we actually want to see more lithium refining in the US for example.

B (70:23)

Let me ask. There's a kind of a big philosophical debate about whether the government should be doing equity investments in general. And I think the arguments against are pretty well known. The arguments for, you know, is Arnab, as you and I have talked about, it's patient capital for technologically risky long term investments, maybe get a return for taxpayers, make it ownership. You get ownership in the event that there's like a bailout risk. But Arnab, talk to me about what might be wrong with taking this very company based equity approach to signing these one off deals.

D (70:55)

I do think it's important that we've ripped off the band aid here and shown, you know, like the world doesn't fall apart when the government takes an equity stake. But you know, you know, you mentioned the risks. I think it is worth mentioning one specific risk that gets less attention and it's not just intervention in the economy, I think, and private businesses. One risk is if you create an incentive by the federal government holding an equity stake, if it has an incentive in the value of that equity stake going up over time, does it create cross policy pressure essentially to maintain the value of that equity stake? Even if there's, let's say there's a competitor that arises, like America's great at technological innovation, if a technological innovation was on the horizon, that would wipe out the value of that equity stake, does it mean we're going to not support that innovation? I think that it could create those real cross pressures like that is a, that is a, a real thing. And so the approach that I would like to take in, you know, whether it's an equity stake in a facility of some kind, a financial facility that is seating multiple companies, I think the approach should be more oriented towards building a robust market ex China. And that's one which has many competitors. And that's where I think you need to take an approach that repairs one mechanism by which China dominates the critical minerals market. And that's essentially the market infrastructure, the benchmark contracts, the exchanges, all of which, that determine how one of these minerals is priced. If you don't address that, you're not necessarily creating an opportunity for U.S. competitors to compete with each other and ultimately succeed and get better. And so when you're just making a single equity investment in a company, you're not really addressing that other Part of the problem.

B (72:44)

So just slow down for there for a second to make sure I understand our listeners understand the market infrastructure you're talking about here that the US should be interested in, as well as potentially an equity stake in this or that company. What is that market infrastructure for something like rare earth or critical minerals? What does that mean?

D (73:01)

I think we should start with just like what are markets and what problems do they solve? Right? So when you look at modern commodity markets, many of which were, you know, pioneered by the US and the west, they solve these problems of coordination and risk intermediation. When you're talking about metals, for example, or commodities, these things can spoil. They're difficult to transport. If you're a producer and you're trying to get your product refined and transported to GM somewhere across the country, there's a ton of risk, a ton of challenges that can arise. And markets really solve a lot of these problems by making it easier to coordinate. They make it easier for risk to be transferred to different entities within that chain. And ultimately the value of that is more investment, more liquidity in the market. And that's something where, if you look at these critical minerals, that market really hasn't developed in the same way. And so China dominates it both in production processing, but many of the means by which those metals are priced are indexed essentially to the Chinese market, how Chinese supply and demand is. And that's what creates the pressure, the price pressure on US Producers and processors, on Western producers and processors. That's why they can't get investment, because the price is so low in the Chinese market essentially that they can't compete. And so building market infrastructure, where you took, you know, US demand, our allies, as I mentioned earlier, there's hundreds of billions of dollars that globally is being deployed to decouple from China's dominance here. If you organize that in a market where you had transparent mechanisms for prices and more kind of opportunities for intermediaries to enter and reduce some of that risk in transportation and logistics and things spoilage, things like that, it would make our effort more robust. So I think that's like an approach where I'd like to see more interventions in. And I will say that like I think the Trump administration does get this. If you look at specifically their deals that they signed, the deals that the President signed with the prime ministers of and Australia, those signed agreements between the two leaders, the second or third clause in the mentions that they want to support the development of liquid competitive markets. And I think that's like a real opportunity. I want to See the execution. I might kick it to Dalip as well to kind of get his thoughts on this, because we've written a lot about this.

C (75:34)

I think you laid it out perfectly. What we want is a place where buyers and sellers can predictably meet each other, exchange their goods, or hedge their risks in a way that's transparent and fair and dependable. That's market infrastructure. And it's lacking in a lot of critical minerals markets and rare earths, in large part because China can dominate supply and push down the price, so much so that producers in the west or outside of China are no longer solvent.

B (75:59)

Help me understand, in your model of good economic statecraft, how do you think about when to use equity stakes and when to try and do this market infrastructure? I mean, I'm sure they'll say both can be appropriate here. But if we're trying to build a better market for buyers and sellers to transaction, should we then be kind of sort of picking a national champion in that market? Are those two things at odds?

C (76:21)

So my answer to that question would be there is a class of investments in projects or companies that require a lot of upfront capital investment, that require a very long time to generate a commercially attractive return, let's say 10 years plus, and that have a lot of risk that investors feel uncomfortable modeling. It could be geopolitical risk, it could be regulatory risk. It's some type of risk that the government knows more about than they do. For those types of investments, a lot of these are deep tech investments or physical hardware investments. The venture capital community tends not to fund these projects at pace and scale. But these companies require equity because they don't yet have cash flows to service debt. And so that's, to me, the sweet spot of where equity stakes make sense. And particularly, you know, I think you have to start with the why. This gets to my kind of proposed playbook for industrial policy. The sector has to pass what I would say is a two part test. Is it critical? You know, does it power the military? Does it secure public health? Does it sustain a technological edge? And then is there a dangerous dependency? So is the production concentrated in a geopolitical rival or is it reliant upon a single company at home? Well, then you get to the question you just asked Santi was why hasn't the private sector solved this problem? And usually it's because there's some type of market failure. It could be that there is a capital constraint or a demand shortfall or an energy shortage, or the absence of a market where buyers can meet sellers and exchange their goods at a transparent price. And so that's how you design the appropriate intervention is around the failure you're trying to correct. So there's a vast toolkit. You have tax credits, loans, demand guarantees, deregulation, skilled labor and equity. And in certain areas of the economy, particularly in deep tech and in physical hardware and supply chains that are strategic, equity is appropriate. But I would say if you invest in equity, you have to also insist on a competitive market and you've got to protect the taxpayer. No free lunches. You know, if the public sector is absorbing the risk of a private company, yeah, the public should be rewarded with upside if it succeeds. But you also need strict conditionality to protect the taxpayer's downside. So you should tie the equity injections to milestones that are agreed up front, construction targets, production yields, and you should have sunsets because eventually you want the government intervention to be a temporary bridge to self sufficiency, not like a permanent lifeline. It's more than the answer you were looking for, but to me that's where equity fits into the broader picture.

B (78:53)

No, that's great. It's good to have the philosophy.

A (78:55)

Peter, I actually was going to go in a slightly different direction. I agree with Dalip on sort of high level where I think equity is an important tool. I think one tool we are not talking enough about in the industrial policy though is concessional lending capital. You know, if you look historically at countries that have done effective industrial policy and you look at sort of the post World War II, 1950s, 1960s, 1990s, 1970s industrialization, re Industrialization in Japan, industrialization in Korea, you actually saw quite aggressive use of concessional capital to help on a lending basis, concessional debt to help companies scale up their manufacturing capacity. Even in the US if you look at some of the very first uses of the Defense Production Act, Title 3, which is an authority to expand industrial based production in the US in the early 1950s, the government made zero percent loans to some aluminum and I think titanium projects in the US to try to, you know, make the numbers pencil on that. And you know, sort of just as the US has not done equity in recent decades, until last year, we largely got out of the business of doing concessional lending. Even where you saw, for example, whole, you know, loans and the CHIPS act implementation, they tended not to be particularly concessional and I think particularly not so much for breakthrough technologies, but for what you might call sort of critical base manufacturing capability. Whether it's some of these things in the mineral space or maybe in some of the shipbuilding industrial base. I think we're going to have to use some concessional lending as one of the tools here alongside potential equity, which serves sort of a different purpose in the corporate life cycle.

C (80:46)

And you could have hybrid capital where you initially lend and that can be converted to equity if certain targets are hit. That's the kind of creative tool that I think we could potentially design in future administrations.

B (80:59)

Great list, I think from the three of you of the increasingly broad set of tools that are available in the industrial policy toolkit and that I think all three of you are flagging. You'd like to see more use of these tools going forward, maybe more judicious use, maybe a different framework for deciding when to pick up these tools. But definitely you like the kind of breadth of tools in the toolkit. So I'm, I'd love to hear from all three of you. So far we've been more diagnostic, I think, than prescriptive. But I want to open it up. And all three of you are influential Washington figures on the Dem side of the aisle. What would you like the next Dem president to do based on kind of what you've seen in the Biden admin and in this first year of the Trump admin on economic statecraft? What will you be championing the next time it comes around?

D (81:48)

I'm happy to start the least influential of the three here, but I guess the thing that I have two lessons I think I would take from where things have evolved over the last four to five years and going into the first Trump administration as well, I suppose. I think it's important for these industrial policy tools to be grounded in an institutional structure that gives the private market confidence and credibility that it'll be sustained over time, I think in a lot of different domains, areas energy and here it goes beyond industrial policy. It includes permitting, which, you know, Sandy, we've obviously discussed a lot. I think it's important that the private sector feels confidence that policy and the use of these tools can sustain over time and that the discretion that is utilized is something that can withstand changes in administrations. And so, you know, I think it's been really harmful for the business community that a lot of subsidies, a lot of discretionary grants, a lot of discretionary permits have been pulled back over the past year. And, you know, I also, you know, criticized at the time, like the Biden administration for the LNG pause. And so I would like to see more of these tools grounded in an institutional structure that has some veneer of independence. Not veneer, actually like a genuine kind of decisions are being made in a technocratic, rigorous way, maybe technocratic.

B (83:16)

Can't believe you said the T word on this podcast.

D (83:18)

I know. In a rigorous way that gives the market confidence. And I think the Fed is a unique institution because of how important the bond market is. We all know the Carville quote for our listeners who don't Arnab James Carville said famously that if he ever died, he'd love to come back as the bond market because it controls basically everything that I'm paraphrasing, but controls everything that the president does. I think that that type of a model where whatever the institutional structure, it's communicating consistently clearly what its policy goals are and why decisions are being made so people in the business community can feel that they're being heard and they haven't chance at competition is really important. So that's one lesson, I think just one quick one as well, is that it does strike me that the MP materials deal, which was this robust use of The DPA Title 3 authority that Peter mentioned, it was lauded in a bipartisan fashion, like they pushed the bound of the authority. But you know, you've heard three people here talk positively about it at the time. I think there was a Heat Map article that said these Biden officials are jealous of the MP materials deal. I think that that kind of stuff can withstand over a longer period of time if you have that type of buy in. And so I think that these interventions should have some level of across the spectrum support when they're being deployed.

B (84:39)

Just before I hear from Peter and Dalip, I do think there's an interesting thread to pull on there. One takeaway for me from prepping for this episode is how much continuity there seems to be. And again, I fully take your point. There's a lot of these places like the LNG pause under Biden and a lot of these different kinds of energy pauses under Trump where there's not continuity. Obviously I think that's clear and I, I think I agree with you that it's a real problem for business certainty. But there's also this interesting kind of thematic continuity where I think from Trump's 2016 to the Biden admin, there was this like real kind of new awareness of China as the geopolitical threat. And then I think from Biden into Trump, you're seeing this kind of real awareness that this set of industrial policy tools exists and can be picked up and recombined in new and interesting ways. And so there's ways, I think in which you see each administration very much in the shadow of the previous one in terms of the kind of the big lessons that have been learned.

A (85:33)

Maybe picking up on that theme. I mean, I think of it in two ways in a big picture. You know, one is I do think there is by and large a bipartisan consensus now that China is our leading geopolitical challenger, though obviously it's not 100% consensus. So I think there's a broad bipartisan consensus there and that in order to compete effectively with China, we need to have a kind of fully developed economic statecraft toolkit. I also think there's a bipartisan consensus that is related to, but also frankly distinct from the views of China that the US should have more manufacturing base in its economy. We kind of got two services oriented, we got a little too tech oriented, a little too financialized. You know, I don't know if that is actually from an economic perspective the right call, but it's certainly a legitimate call that a democratic society can make. And I do think that is related to China, but is also distinct. We just want to be able to produce more stuff in this country. And I think that if that is the call our country is going to make wealth. We also just as we need a fully developed kind of economic statecraft toolkit to compete with China, we need a fully developed economic statecraft toolkit to have a better manufacturing base here in the United States. I think one lesson I would make that draw from the last year that I would encourage a future president of whatever party to take, not just a Democratic, but whatever, whoever the next president is to take. I do think you got to integrate these tools. Right? The lesson of the really tariff heavy approach of last year on most aspects of the economy is you're not actually just by using one of these tools getting the industrial policy outcome you want. So I think there's a very clear lesson if you got to integrate these tools together, if you want the industrial policy outcomes you want. Second lesson I would take, and I say this as an having served in a Biden administration that was legally risk averse, is he probably should be more prepared to take some legal risks in order to do creative things. I do think the Biden administration kind of tied its hands on some of these issues with an excessively cautious approach to statute interpretation of authorities there, and they should be more aggressive. But the third thing that is not really a lesson of the executive branch is while I think there is value to being legally creative, I also think over the long term, if we want to maintain bipartisan support for this toolkit. If we want to have the toolkit be as effective as it can be. And frankly, to get ahead of the inevitable governance problems that we're going to have with all of this, we need Congress to get more active in this space, like, yes, it's good for the executive, be creative and go out and lead, but ultimately we are going to want to see some congressional oversight. We're going to want to see some of this put on sort of regular order footing that will deal with some of the governance issues and force a more strategic approach to this. I do think over time there's a role for Congress to play here too.

B (88:39)

That's a great, I think, segue for Dalip. I want to hear from you, and in particular, you've thought a lot about concretely, how would you operationalize more robust, more. I really hate using the word technocratic, but having an actual system for deciding when to use some of these tools in the toolkit. How are you thinking about the next time?

C (89:01)

Yeah, and it doesn't have to be the next Democratic administration. I actually think most of these ideas have bipartisan appeal for anybody who's interested in economic security. But for me, the three big ones are, number one, we need a doctrine that lays down limiting principles for the use of punitive economic tools. As we mentioned at the very top, the frequency, the potency of economic weaponry, sanctions, tariffs, export controls, it's growing almost exponentially over the past few decades. And so we need guiding principles to govern at the highest levels of the US Why, when, to what extent and for what purpose we're using these punitive tools. And then I don't think doctrine should stop at our border ultimately, and this will take place over the course of decades, we should get on with the work of trying to create a more global framework. You know, it's the economic analog to a Geneva Convention, not out of altruism, but out of self interest. Because as the anchor country in the global economy, we have the most to lose from an uncontrolled escalatory tit for tat using economic weaponry. The second is really to your question. I think we have to institutionalize industrial policy. It's here to stay because the private sector doesn't have the incentives to invest at pace and skill to compete with China. And so part of institutionalizing is having a playbook that lays out the strategic objective of each intervention, the market failure, why the intervention addresses the failure, how it sustains competition, and what our exit strategy is. And then organizationally, I think we need a strategic investment fund that has an executive director nominated by the President, approved by the Senate with democratic accountability to Congress, that appoints a technocratic staff that really tries to look at where do our strategic opportunities intersect with a private sector deficiency. And been done before in our history. The RFC in the 1930s and 40s led to the arsenal of democracy, and we can do it again. The last thing is I think we need to have a Department of Economic Security. You know, the nsc, the National Security Council, was created at the dawn of the Cold War. We're at the dawn of a new era of economic competition. I think it's time for an organizational revamp. And the purpose would be to give us strategic coherence in our use of tools. Right now, they're dispersed. You know, tariffs are at USTR and sanctions are at treasury and state export controls are at the Commerce Department. The positive tools are spread across an Alphabet soup. So if we have a single department, we can strike the right balance between punitive and positive tools. We can create more connective tissue with allies, and we can really develop the analytical infrastructure that we need to make judicious use of this taxpayer money that we're seeking to deploy. That, to me, is how you take economic statecraft seriously.

B (91:42)

Duleep, Peter and Arnab, thank you guys for joining today and for in particular, for letting me drag us all over the map of economic statecraft. You guys have been very patient with me.

C (91:52)

Oh, glad you wanted to nerd out.

A (91:54)

This has been fun, really interesting.

C (91:56)

Five years ago, this podcast wouldn't have existed.

D (92:00)

Yeah, thanks, Auntie.