Alice Han (2:04)

Welcome to China Decode. I'm Alice Han.

James King (2:06)

And I'm James King.

Alice Han (2:08)

In today's episode of China Decode, we're discussing how China's stepping in as Trump's ceasefire wobbles. Plus, Ike Freeman joins us to discuss China's outreach to Taiwan's opposition, the real risk of a Taiwan conflict, and how the US can actually deter Beijing. That's all coming up, but first let's do a quick check in with how the Chinese markets are starting the week. On Monday, oil prices shot back up after negotiations between Iran and America collapsed. The Shanghai A Share index was flat on the day the Hang Seng share index fell about 1%, Alibaba slid 2% and 10 said 3.3percent as investors rushed to safe haven assets. However, EV maker BYD rallied over 5% on new data showing an accelerating interest in Chinese vehicles abroad. As a reminder, China Decode now has a weekly newsletter. We go beyond the topics we cover here on the podcast and give you even more data and analysis on the most important stories coming out of China this week. Subscribe@chinadecode.profg media.com it's free for now, so so be sure you get subscribed very soon. That's chinadecode. Prof. Gmedia.com all right, let's get into it. What was supposed to be a fragile ceasefire is quickly becoming something bigger, a global power play. Chinese President Xi Jinping is stepping into the spotlight, nudging Tehran towards diplomacy while avoiding ownership. Beijing wants the credit, not the responsibility. But the balancing act is getting harder as US Intelligence reports suggest that China may be preparing to send air defense systems to Iran. President of the United States Donald Trump is already firing back, threatening 50% tariffs on Chinese goods, tying Middle east tensions directly to US China economic stakes ahead of a possible May summit in Beijing. On the ground, escalation is accelerating. On Monday, the US Began a blockade of the Strait of Hormuz. And after failed talks in Pakistan, Iran is warning that if ports are targeted, no shipping in the region will be safe. James, since we last spoke, it seems like things have gotten worse. The talks in Pakistan completely failed, which isn't surprising many experts on this topic. But what is actually interesting to me linking this back to China is the fact that China's back in the firing line per Washington's perspective, not only because of the tariffs that Trump is now threatening, but also potentially because China may be getting more involved militarily. There's a bigger question about the extent to which China is aiding Iran militarily or has been in recent months. But I think that the linkage of the US China relationship to the Iran issue has been, I think, the biggest change in the last week. What's your take?

James King (5:02)

Yeah, absolutely Alice. I mean we're recording on Monday mid morning US Time and the blockade that the US Was going to impose on the Strait of Hormuz has just started a few minutes ago. No news from that that I've managed to see in the last few minutes. But of course this is a very fast moving and highly unpredictable situation. But as you say, Alice, I think the key takeaway right now is that China appears to be back in the crosshairs of the US Only a week ago we were talking about China as a potential mediator to the conflict with, or maybe even a peacemaker. You know, China has this five point peace plan, but now I think we flip flopped and it looks like China could be again a loser from this situation. And it looks like, as you say, the military tension between the US And China could grow considerably. So just quickly on the first point of China being a loser, it's a rather obvious point, but let's stated again, China gets 37.7% of all of the oil exports that transit through the Strait of Hormuz. That's the most that any single country gets. So given that the US has just started a blockade, obviously China has more to lose from this situation in terms of imported oil than any other country. A quick caveat on that very necessary, necessary caveat is that although China is the country that loses most in terms of the total volume of oil imports through the Straits of Hormuz, this amount only amounts to about 6% of China's total energy usage. So, you know, although China gets hit hard, it is a weatherable storm for China. I think the area that is most pressing right now is the one that you've already alluded to, and that is China and its military relationship with Iran. Because President Trump said last week that the US would impose tariffs of 50% with no exemptions on imports to the US from any country that supplies Iran with military weapons. And we, we're already seeing the U.S. defense Intelligence Agency saying that the Iran Revolutionary Guard Corps is using technology from a Chinese firm called Mizar Vision that's been feeding AI enhanced satellite imagery of US Operations in Iran to the Iranians. And so, you know, this is kind of a gray area. It's not exactly weaponry, but it does seem to be assistance China is providing Iran in its conflict with the US So that's point number one. Point number two is that CNN had a report last week quoting again US Intelligence to say that China's preparing to deliver new air defense systems to Iran within the next few weeks. Of course, this hasn't happened yet. We don't know whether it will happen. But, but if that was to happen, then it seems very clear that China will be back in the US crosshairs. There could be, you know, a big trade, sanctioned follow through. China's Foreign Ministry spokesman, Guo Jiakun has made a statement related to this situation in Beijing. This was a regular press briefing in Beijing on Monday. He said that China has taken a consistently prudent and responsible approach to arms exist exports. Obviously he's talking about arms exports to Iran. In this case, it isn't any kind of a secret that China has been selling arms to Iran for decades. That's no secret at all. What's really key is whether China has been selling arms to Iran since the end of February, when this war between the US And Israel and Iran began. That's the key point and that's where quite a lot of ambiguity lies right at the moment. But it does seem like a potentially incendiary situation. I don't know how this is going to pan out, but obviously we're all watching closely. What are you seeing on this front, Alice?

Alice Han (9:42)

Well, you know, what was interesting was that about over a week ago, there was an Atlantic Council piece about this in which they were showing how the Russians and the Chinese had been historically, including most recently militarily aiding the Iranians through pure military, but also dual use technology. So the peace cites what you mentioned, anti aircraft defense systems, missile fuel precursors, drone components, things that could be classed as dual use technologies as well. But you're completely right, James. The real issue is the fact that politically, Trump seems to be very worried about this and is going to make a big deal out of it, potentially even targeting China with these 50% tariffs. And I think this will probably scupper any kind of May visit that Trump may have believed he could have in China in the next month or so. Because fundamentally, I think this sets back some of these trade talks and negotiations. Because if the Chinese have to convince Trump that they're not doing this in order to avoid tariffs, that's something that I think could really destabilize the relationship. If we look back to even the Russia relationship, after Russia, Ukraine, the Chinese have long maintained the view that they are not exporting military technology to the Russians. But there's enough research out there to suggest that there is a fine line when it comes to dual, yes, technologies. But we're in a new realm where it's not just dual use technologies that are increasingly on the list, but also what you just mentioned, James. You know, publicly available AI generated and enhanced satellite imagery created by a Chinese company that is being used by the Iranians. Now there's a bigger debate about the intentionality, whether or not China intended for the Iranians to use it. But putting all of that opaqueness aside, what worries me is that now we have to your point, James, China in the firing line again, because Trump sees China as being in The Iran Russia camp at a time where we were hoping for continued detent or improved relations that I think has been dealt a major blow in the last 24 to 48 hours.

James King (12:06)

Yeah, completely. But I also think that given the way that this conflict has flip flopped with regard to China's role in is possible that we might be back with China being a mediator or a peacemaker. Let's not forget that behind the scenes China's Foreign Minister Wang Yi worked very hard to try to create a more positive outcome. When US Vice President J.D. vance met with his Iranian, well, met with his Iranian interlocutor in Pakistan last week to try to talk this through. They spoke for 21 hours. It does seem that there was at least some traction in that. And apparently the talks broke down over the question of the Iranian reserves of enriched uranium and they couldn't find any kind of a solution on that front. But. But I wouldn't be surprised if at some point in the future China will be back in the frame as a kind of a mediator helping to influence Muslim countries like Pakistan with which China has very close relations to try to mediate some kind of a settlement in this.

Alice Han (13:24)

Well, it's good also, James, I think to remind people where we're at. You know, six weeks into this conflict, we're close to two months. You know, by conservative estimates, China has three to four months of strategic reserve. So we're getting to the halfway mark fairly closely, I would say. And I think it is in China's interests for the strait to be opened up as quickly as possible. Right. Because if you think about not just the pressure on energy prices but also the supply chain for a lot of petrochemicals, things that polyethylene, these long names of chemicals derived from hydrocarbons, that and fertilizers, the supply chain has really been broken by the blockade in the strait and we're starting to see in some cases massive increases in the prices domestically of helium of polyethylene that has knock on effects across the supply chain for Chinese producers and then as a result global ramifications. So I think that China is under pressure, especially if this conflict escalates and prolongs itself beyond the two month mark. And that is where I could foresee the Chinese to your point, James, getting more involved and putting more pressure on the Americans to give concessions in order to reopen that strait. But just very quickly. The market movements since the start of the war, pretty staggering. Brent oil Futures are up 41%. The daily Hormuz ship traffic has decreased by over 90 ships. The price of gasoline in the US is up over 36%. European gas benchmark is up 49%. Gasoline prices in China jumped 11% in March. Global stocks are down 2.3% and the S&P is down about 1%, recovering from losses as steep as 8% in the last few weeks. The Dollar Spot Index is up 1.3%. This is the market that we're in right now and I think the rollercoaster ride continues. I think we're in for a rough another week or so. But I want to end by saying that China geopolitically may be benefiting from some of these disturbances and disruptions that the US Is creating in the Middle east, but domestically and economically we're starting to see signs that it is suffering from this prolonged blockade of the Strait of Hormuz. All right, we're going to take a short break. When we come back, we'll get even deeper into how the Iran conflict has heightened US China tensions as we talk with Ike Freeman, author of the new book Defending Taiwan. He spoke with us on Friday before news of the US Blockade broke. Stay with us.

Claire Miller (16:15)

Support for the show comes from Samsara. Companies have to get product from point A to point B and that means hiring drivers, which in turn means vehicle insurance, dash cams and accepting the fact that accidents happen. That's exactly where Samsara can help. It brings AI dash cams, vehicle tracking and asset visibility together in one simple platform. Samsara can help you protect your driver's cut costs and operate smarter. Their AI dash cams capture real time video that proves when your drivers aren't at fault, protecting them from false claims. Their data shows companies have reduced fuel costs and improved driver retention thanks to better visibility and coaching. Here's a case study for that. DHL's focus on safety and more effective coaching through Samsara helped lower driver turnover by 50%, according to Samsara data. Their AI helps reduce crash rates by nearly 75%. It's trusted by a 20,000 customers worldwide, including major companies across transportation, construction and logistics. Don't wait for the next accident to take action. Go to samsara.com profg to request a free demo and see how Samsara can bring visibility and safety to your operations. That's samsara.com propg samsara operate smarter. Support for the show comes from Huel. We all know we're supposed to eat breakfast every day, but come on, who has time for that? Wouldn't you rather use that extra 10 minutes in the morning to doom scroll in bed. But the reality is you deserve to fuel your body even when things feel chaotic. That's where Huel comes in. Huel is the perfect solution for high protein routine support on those busy days. Their black Edition Ready to Drink is a complete meal. 35 grams of protein, 7 grams of fiber, 27 essential vitamins and minerals, no artificial sweeteners and it's under five bucks, which is kind of amazing because it's cheaper than a latte and might actually keep you full till lunch. Our own Claire Miller has tried Huel. Claire, your experience.

Alice Han (18:09)

I love all the things Huel has sent me so far. They've sent me 66 pounds of their product, which is amazing. Their protein shakes are great. They keep me fueled up throughout the day.

Ike Freeman (18:22)

I really love Huel.

Alice Han (18:24)

So yeah, thanks to huel for the 66 pounds of product. It's keeping me full.

Claire Miller (18:31)

If you're trying to stay consistent, this combo makes it stupidly easy. Limited Time Offer Get Huel today with their exclusive offer of 15% off online with the code Prof. G@huel.com Prof. G new customers only thank you to Huel for partnering and supporting our show. Foreign. The number one dermatologist recommended hair growth supplement brand trusted by over one and a half million people. Nutrafol now offers hair growth supplements tailored to men at every age because the root cause of hair thinning change over time and your routine should as well. Nutrafol men for ages 18 to 49 can help improve hair growth and achieve thicker fuller hair in three to six months. And their new product Nutrafol Men 50 plus is the first and only hair growth product specifically formulated for men 50 and older, you can feel great about what you're putting into your body. Since Nutrafol hair growth supplements are backed by peer reviewed studies and NSF Content certified, the gold standard in third party certification for supplements. Adding Nutrafol to your daily routine is easy. You can order online, no prescription needed. Plus with a Nutrafol subscription you can save up to 20% and get added perks to support your hair growth journey. Start Nutrafil today and make the hat optional. Visit nutrafil.com and enter promo code Prof. G for $10 off your first month subscription and free shipping. Find out why Nutrafol is the best selling hair growth supplement brand@nutrafil.com spelled n u t r-a f o l.com promo code Prof. G that's nutrafol.com promo code Prof. G.

Alice Han (20:04)

Welcome back. Today we're joined by Ike Freeman. He is a Hoover Fellow at Stanford University and a research fellow at the U.S. naval War College's China Maritime Studies Institute. He's also written a new book called Defending a Strategy to Prevent War with China. Ike, thanks so much for joining us today and welcome to China Decode.

Ike Freeman (20:24)

Thanks Alice, for having me.

James King (20:26)

Ike, terrific to have you on. Let me just kick off with I think what is a Today angle on this story. Chung Liwen, the leader of Taiwan's main opposition party, the Kuomintang or the kmt, just met with China's leader Xi Jinping on Friday and therefore she became the first KMT leader to visit the mainland in over a decade. I'm just wondering what you make of this. Is this just a sideshow or is it a sign of some interesting movement perhaps between mainland China and Taiwan?

Ike Freeman (21:01)

Well, the first thing to understand is that Zheng is a controversial figure within Taiwan and she hasn't fully consolidated her control over her own party. Within the kmt she's seen as relatively pro Beijing or at least soft on Beijing. And part of the point of meeting with Xi Jinping is to show no, I'm the boss, even he says so. Of course, the price of the meeting was she had to make some comments harshly criticizing the idea of Taiwan independence, essentially blaming the current president Lai Ching Du for the tensions. So I think if I'm Xi Jinping, I see this as a prime opportunity to drive a wedge between the US and Taiwan and to encourage a more friendly KMT going into the 2028 elections.

Alice Han (21:47)

Great. Well, Ike, I wanted to take us back into history. And for listeners out there, you may or may not know this. Ike and I were in the same history program at Harvard. So this is definitely something that we were looking into when we were back there in our undergraduate degree. But can you walk us through through 1949 period onwards why we're ending up in the situation of two Chinas and frame within that what Xi Jinping's personal goals are when it comes to a so called reunification. How do you think he is thinking about this in historical terms?

Ike Freeman (22:21)

In 60 seconds or less?

Alice Han (22:23)

In 60 seconds or less, yes.

Ike Freeman (22:25)

I'll do what I can. So look, Taiwan is the unfinished business of China's civil war. The Chinese Communist Party in the Guomintang, Mao Zedong and Chiang Kai Shek, they fought for control of the mainland. Chiang Kai Shek's forces eventually lost control of northern China and over the course of 1949 they withdrew to Taiwan, taking many of the treasures of the Imperial palace with them. They had been the ruling government of China preceding 1949. So they brought with them an unbroken chain of government extending back to the Republic of China constitution, which had been signed in Nanjing. And that is the reason why the Guom Dang today claims that it's the unbroken, sole legitimate representative of a China that happens to have been divided since 1949. Now, the issue is the KMT ruled as an autocratic regime for several decades, but in the 90s, Taiwan turned into a democracy. And now there's another party that has been in charge for the past decade, the dpp, which has a very different view of history. In their view, Taiwan is and always has been an independent country called Taiwan. It just happens, for some legacy historical reasons, to be called the Republic of China. So this is the fundamental problem. The question of Taiwan status is not just about Taiwan. It's about the definition of what China means. Is there such a thing as one China that involves Taiwan, or is there one China that doesn't include Taiwan?

Alice Han (23:57)

Or.

Ike Freeman (23:58)

Or is there one China, but different interpretations of what that one China means? Much of what Taiwan's domestic politics are about is really this core question. And from Beijing's point of view, it's willing to negotiate with anyone on Taiwan who acknowledges that there is only one China and Taiwan is part of China. And this is why not just Xi Jinping. But his predecessors have always been open to dialogue with the kmt. But Xi Jinping is particularly interested in meeting KMT figures. He met former Taiwan KMT President Ma Ying Zhou in Singapore in 2015. And I think if the KMT wins the next presidential election in 2028, he would be very happy to return back to the negotiating table, but with much more leverage than he had last time.

Alice Han (24:41)

What would that look like if we were to see the KMT win in 2028? How do you think Beijing is going to play that?

Ike Freeman (24:48)

So let's go back to 1949. After Mao takes over the mainland, the dust settles. He's in charge in 1949. The first thing he does is instruct his generals to prepare the invas to take over Taiwan. This is the unfinished business of the war. And they do the analysis, and they conclude, sir, it can't be done, not even close. The Taiwan Strait is one of the most difficult waterways in the world. The weather is unpredictable. The meteorological tidal conditions are very difficult. Taiwan is this mountain fortress. There's only a small number of beaches you can land on. And there is an attempt to squeeze Taiwan out of some of its offshore Islands which might be easier to seize. But then there's two Taiwan Straits crises with the United States where Washington says, not on our watch. So Beijing essentially has been denied this prize, and they have been building over time the military capability to increase their chances of pulling off an amphibious invasion. But in my analysis at least, they are still not at the point where they could have confidence that that will work. Despite all of these decisions, the United States has made to spend down stockpiles of critical munitions in the Middle East. So that is why diplomacy remains Xi Jinping's preferred vector for achieving what he calls reunification. But of course, he doesn't care about whether it's democratically acceptable to the people of Taiwan. He wants a very coerced form of diplomacy, one in which Taiwan feels squeezed on all sides and therefore has no choice. And what he's willing to offer Taiwan is probably something similar to what he offered Hong Kong. One country, two systems, Taiwan plan. And basically, it means Taiwan has to capitulate on the principle. It has to admit, yes, there is only one China in the world, we're part of it, and Beijing is the legitimate government. And the offer on the table is if Taiwan will accept some version of that principle, it can maintain self government. It can maintain its own control over its economic affairs. Maybe it can get subsidized energy, other perks. It can essentially enjoy some of the benefits of being part of China without the drop acts of being subject to authoritarian communist control. The reason this has gotten to be a harder sell is that after 2019, when the people of Taiwan watched what happened to Hong Kong, one country, two systems is clearly a weasel word. It means as soon as you step out of line, Beijing will seize the opportunity to bring the hammer down. So that's the reason Taiwan is only ever going to accept some kind of deal along these lines. If it's truly under duress, it has nowhere else to turn.

James King (27:23)

It's so useful to get the proper historical perspective and how all of the politics of the moment fit together around this issue. But as a China watcher, you know, whenever, pretty much whenever we attend a public event, the first question or one of the questions we always get asked is, do you think China will invade Taiwan? And you've just mentioned what you think Xi Jinping's diplomatic priorities are with regard to Taiwan. But let me just draw you, if I can, into that kind of invasion scenario. We hear about a quarantine strategy or a quarantine scenario that the mainland could undertake with regard to Taiwan. Could you just clear up what you think of that whole nexus of really sort of incendiary questions lead to, do you think that Xi Jinping could invade Taiwan?

Ike Freeman (28:17)

Well, let's break down these scenarios one by one. Xi Jinping wants to build a full menu of options, options that he can take either simultaneously or in sequence. So one of them is obviously an amphibious invasion that's cross the strait on amphibious ships and deposit men on the beaches or deposit them by air through paratroopers and helicopters. And the way that works is you have to seize a beachhead or an airhead, which is a position that you can hold under fire, and then use that to deliver some number of tens of thousands of men, plus all their vehicles, their medical, their food, their fuel, the whole logistics tale. And then if they meet resistance, if necessary, fight into the island, seize control of the capital, mop up the remnants of Taiwan's armed forces, and install a friendly government. That's the invasion scenario. It's plausible given that, you know, Beijing's military is almost 20 times the size in its total budget. But in order to make an amphibious invasion work, a great number of things have to go correctly, and they have to go go correctly in a highly synchronized way. There's lots and lots of ways that these things can go wrong. It's the hardest kind of military operation to do. And even famous successes in history like D Day, the invasion of Normandy, came very, very close to going disastrously off the rails. Another option is he can bombard Taiwan with missiles with drones. He also has options to use cyber attacks to take out or otherwise manipulate Taiwan's critical infrastructure. He can use false flag attacks, decapitation attacks against Taiwan's political leadership, because he surely has special forces on the ground in Taiwan right now. Undercover, he can squeeze Taiwan economically through a whole number of tools, including a blockade, which is a sort of medieval move. No one in or out, or we shoot at you or something that is softer or more selective, that tries to filter or incrementally seize control. And then he's got options in the gray zone to bluster and posture that may or may not just lead Taiwan's morale to collapse. For example, he can mobilize his forces to potentially do any of these things and just see what happens. And maybe Taiwan gives up, maybe the US Throws in the towel. So the argument I make in the book is the United States should seek to deter a crisis, not just a war, because a crisis would be terrible. It would be in many ways like the Cuban missile crisis, but also more dangerous in some respects. So we need to deter the crisis, not just the war, which means building the capability so that Xi Jinping doesn't believe that an invasion would be straightforward to pull off, or that a blockade would be checkmate, but also showing him that we have ways to respond in the gray zone on the road to war that would match him basically proportionally to show that we're resolved if he wants to take us to the edge, but that we're also showing restraint and we're not going to push a precarious situation into a war unnecessarily. And that's a delicate art and it requires you to think pretty systematically about his options and make sure that we have a way to close each of those off.

Alice Han (31:36)

Ike, on top of being a Taiwan and US China expert, you're also a bit of a military geek. And I'm sure in this book there are a lot of details about the military balance of power from your best estimates or net assessments of the capabilities on both sides as they've changed and they constantly in flux. How do you map out the capabilities? China v the US Both in military combat, but also in some of these gray zone operations that you mentioned? And have these capabilities been altered by what's happening in Iran? Are both sides learning from this or are they being weakened, say in the case of the Americans, by spending down precision missiles, thaads and ammunition?

Ike Freeman (32:14)

The first thing to say is that the US enjoys tremendous advantages and these advantages are more qualitative than quantitative. US forces have experience in combat. The personnel, like the officers in question, have experience in combat that China's officer corps doesn't have. China's last experience fighting a foreign war was 1979 in Vietnam and it didn't go particularly well. And they've never fought a naval war. The US does these multi domain combined arms operations all the time. The US also has these qualitative advantages in space, in some cyber capabilities. A lot of that is secret. Its special forces are believed to be the best in the world. Its submarines are the best in the world, and it's counter submarine warfare is the best in the world. So yes, China has more ships. The US Navy is larger by tonnage, but obviously China's navy is right there. The US Navy is spread out. China has more aircraft available. China has more missiles and drones. But the hard thing about doing what we would call a net assessment about a naval war is that air and naval wars just work differently from land wars. We know this from history. In land wars you've got lots and lots and lots and lots of units and each of them are basically interchangeable, one for another. In air and naval war, you have a small number of platforms and they're more differentiated and specialized. So if you take out one or two of these key things, like if you take out the carrier, all of the ships around the carrier then get easier to kill. So it's like dominoes falling. That's why in the past, the major engagements in naval history, once they start, tend to be the outcome is determined within minutes to hours. And that means so much depends on whose forces are deployed, where, when the actual engagement begins, who has the element of surprise, and then who can blind the other and take out the other's communications in that critical opening phase to land an effective first punch. And so many of the details of how this is done are highly, highly classified. They're above top secret. They're accessible only to people with a need to know. But my hunch, based on talking to people in this business and just based on observing China, is that if China thought that they could defeat the US in a high end war, they would be acting more assertively and the US problem would not be Taiwan, it would be the defense of Japan and South Korea and the homeland. And I think China is treading more cautiously, which suggests they think they have more work to do. And it's partly because it's hard to know when they're ready, when it's stuff that they can't count. The CCP is good when it's things that you can count. They're less confident when it's things you can't.

James King (34:51)

Very interesting. And I mean, at the moment we're all focused on what's happening in Iran and in the war in the Gulf and obviously the shipping in the Strait of Hormuz. If there was to be some Chinese action toward Taiwan, and you've sketched out a broad spectrum of what that might involve, what kind of a hit could we expect for the global economy? I mean, one of the most famous Taiwanese companies is of course the Taiwan Semiconductor Manufacturing Corporation, tsmc, with a huge share of global chip manufacturing. But that's just one Ike. I mean, what kind of a hit are we talking about for the global economy?

Ike Freeman (35:33)

Well, if there's any kind of kinetic fight, which is bullets and missiles flying over Taiwan, TSMC's fabs get taken off the board. Neither side, if things get hot between the US and China, neither side is going to let TSMC's facilities fall into the hands of the other. And that by itself throws the world economy into recession because there's no strategic reserve of chips. There's no backup facility. TSMC makes 90% of the advanced semiconductors, but 99% of the advanced Nvidia GPUs that are training the Frontier models. So bye bye AI, goodbye Nvidia and OpenAI and Microsoft and the whole tech trade that is holding up the US economy and the US stock market. So that by itself is a potential financial shock, which could mean not only a recession, but a Lehman Brothers type moment that could lead to financial contagion unless we swoop in and do something about it. But then obviously, if the US and China are at loggerheads over Taiwan, even if they're in a crisis short of war and TSMC continues to produce, there's a risk that markets front run the crisis. Because if I'm an investor and I'm heavily invested in tech and it looks like the US and China are going to the brink, I don't want to be the last one to liquidate my positions in China or in TSMC or for that matter in South Korea. So you could potentially get a moment where in the heat of a crisis, the US government and Beijing too, they lose control of events because the markets get a vote and the financial shock comes before the first shots have been fired. And the argument I make in the book is we need a plan for this. When we war game this scenario, we assume that day one is when China starts shooting. But that's not how history works. The crisis comes from somewhere. And if we reveal ourselves in this moment to be completely unprepared for the economic shock, then we're not going to have a war at all. We're just going to give up. And China will get Taiwan and its fabs intact. That means overnight they seize leadership in AI and then they learn, hey, we can use this toolkit to blackmail the Americans for everything they've got. Why not do South Korea next? So it's a very frightening prospect. Like Iran is a country where the leader's in hiding. We don't even know if he's alive. They don't have a navy, they don't have an air force. They supposedly don't have missiles anymore, but they can take 20% of global oil supply offline just by saying so. China can do the same. So China can manipulate the market and supply chains to impose economic pain on us. And we have to be ready for that. Which is again why we should be focusing more on these crisis scenarios. We have to deter the crisis, not just the war.

Alice Han (38:26)

Ike, we're so excited to read this book. Thanks so much for talking with us today.

Ike Freeman (38:30)

Thanks for having me on.

Alice Han (38:31)

Ike's book Defending Taiwan is available everywhere today. Okay, let's take one last quick break. Stay with us.

Ike Freeman (38:47)

Hi, I'm Brene Brown. And I'm Adam Grant. And we're here to invite you to the Curiosity Shop, a podcast that's a place for listening, wondering, thinking, feeling and questioning.

James King (38:57)

It's going to be fun.

Ike Freeman (38:58)

We rarely agree, but we almost never disagree and we're always learning. That's true. You can subscribe to the Curiosity shop on YouTube or follow in your favorite podcast app to automatically receive new episodes every Thursday. How is Trump's psychology having an impact on the great power conflict?

Claire Miller (39:16)

There were folks who for years could

Ike Freeman (39:18)

never imagine the US Carrying out limited strikes on Iran.

James King (39:22)

Right.

Claire Miller (39:22)

If you go back to the 12 Day War, he dropped those bunker busters, Right. And you had presidents through multiple administrations who never would have gone to full scale war with Iran. And here they are.

Ike Freeman (39:30)

I'm Preet Bharara. And this week CNN's Chief National Security analyst Jim Sciutto joins me to discuss the Iran war, our fraying alliances and

James King (39:39)

the rise of Russia and China.

Ike Freeman (39:41)

The episode is out now. Search and follow Stay tuned with Preet wherever you get your podcasts. When you think of a phone, not a smartphone, but like a telephone, you almost certainly think of one particular device. This boxy thing that sat on your desk. It has a bunch of buttons on it. It has a handset that you pick up. It has a braided cable. You're thinking of a phone called the Western Electric 500. And for decades, it was absolutely everywhere in American homes. It was essentially illegal not to have it in your house if you had a phone. This week on Version History, our chat show about the best and worst and most interesting products in tech history. We're telling the story of the Western Electric 500, which is actually the story about the AT&T monopoly and how it fell apart. All that on version history, on YouTube and wherever you get podcasts.

Alice Han (40:35)

Welcome back. All right, James, you know what time it is? It is prediction time. As you peer into the future this week, what do you see?

James King (40:42)

I'm back to Chinese manufacturing for my prediction analysts. I think the starkest comments in the economic realm from last week came from the CEO of Honda, the Japanese automaker, who said that the Japanese auto industry is, quote, on the brink of survival. And he made this comment because of the impact of Chinese competition. The CEO, whose name is Toshihiro Mibe, had visited an automated Chinese car parts supplier in Shanghai. And on emerging from that, he said bluntly, we have no Chinese chance against this. He was talking about the cost, speed and quality advantages of Chinese EV manufacturers. So my first reaction here is what took you so long? We've been saying this really since we started here on China Decode that the strength of Chinese manufacturing, not just in EVs but across the board is pretty much unassailable right now. But my second reaction is that Mr. Mebei is telling the truth. And my prediction is that this year we will see a major disruptive shock to a Japanese automaker. I don't quite know exactly what that means. Perhaps it means a collapse in the share price of companies that are household names across the world. Or it could mean merger or acquisition at fire sale prices of one of these famous Japanese companies. Just to end. And a couple of data points. Honda has experienced a severe collapse in its China sales this year as competition from local Chinese companies has risen. So its sales have dropped from 1.62 million units in 2020 to just about 640,000 units last year. So that gives a sense of how badly Honda has been hit in the China market and is now being hit in several other markets around the world.

Alice Han (42:51)

Okay, so James, my prediction is actually a two part prediction. It's about industrial firms and the economic state of affairs in China. So we saw just last week the announcement that producer price inflation rose 0.5% year on year in March. That's the highest, and not just the highest, but the first time it's been rising in the last three years. CPI actually did so, so it rose only about 1% year on year in March. The reason I cite this part of the inflation story is that I think if things get more prolonged in terms of energy blockades because of the Strait of Hormuz, we'll end up seeing cost push inflation that is net bad for firms. It eats into the firm profitability because in some instances they may not be able to pass on the cost to the consumers and meanwhile their input costs will rise, especially when it comes to energy or petrochemicals, some of these inputs that they use for the manufactured goods, and by the same token, certain goods we're starting to see in the white goods, appliances, space are experiencing increases in prices. This is bad for Beijing's drive to increase consumption in the economy, especially this year and in the five year plan, because ultimately this is cost push inflation, not demand driven inflation. And some of the cost if it is passed on, is passed on to the consumers. Which really goes against the subsidies program to boost consumption, really trying to reduce prices to stoke consumption. So I think we end up in a very difficult situation with the inflation print. PPI probably continues to rise. CPI really doesn't because of certain types of government policies to again cap the energy impact on the CPI basket. But it means that we end up with lower firm profitability for a period of time and consumption remaining stagnant if not suffering as a result of these energy supply shocks. And the second part of my prediction is really on the energy and petrochemicals side of things. Very early on, after February 28th when the crisis started, Beijing banned effectively the exports of diesel, jet fuel and some fertilizer goods. I think that that list probably gets expanded if this conflict gets more prolonged and if the blockade remains sustained, this could be expanded to plastics, other types of petrochemicals, other fertilizers, sulfuric acid, helium, other goods. Because if there is no end in sight, China will double down on controlling the supply chain and preferencing and privileging domestic producers and consumers. So those are my two part predictions and they really hinge on the conflict I think persisting in the coming month

James King (45:54)

or so, if not more pivotal moments I think for China, definitely.

Alice Han (45:58)

All right, before we go, just a reminder, China Decode is now available on Substack. Subscribers get ad free episodes, our exclusive newsletter, and a place to engage with James and me and other listeners. Find us@chinadecode.profgmedia.com that's all for this episode. Thank you for listening to China Decode. Make sure to follow us wherever you get your podcasts so you don't miss an episode. Talk to you again next week.