Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, it's a very good question.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's a very good question.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's a lot of criticism of China from the standpoint of, okay, you're trying to get rich.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That's fine.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Okay.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But you're basically trying to get rich on the backs of everyone else in the world by running this gigantic manufacturing export machine where it seems like the Chinese ambition is to produce –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
all the manufactured goods in the world for everyone, run an enormous trade surplus, which means that they are depending on other people's buying power to support them, and that this is basically not fair, not sustainable, not a stable way to participate in the global economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So that's more of a question not of if China does get rich, but how does it get rich?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Does it get rich by essentially operating on the same rules as everyone else and having a market that other people can participate in?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Or does it grow rich by essentially making it impossible for anyone else in the world to have the kind of production structure that they want to have and relying entirely on these ever-growing trade surpluses?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
In general, in principle, from a welfare standpoint, it would be great if China got to be as rich as everywhere else in the world, even as rich as America.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But that is likely to have some pretty difficult and destabilizing political consequences because of the vast differences between the Chinese political system and the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
political system and the political systems of all the other major industrialized countries.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think there are a couple of things beneath that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
One is the systemic difference politically is really important, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
self-identity is of the leader of democracies around the world, and we are very invested, at least for now, in our democratic system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We'll see how that evolves over the next two or three years.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's some question marks around that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But historically, that's been a really huge part of the US identity.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And basically, the morality play of World War II and the Cold War, which has really been the crucible in which US foreign policy has been formed, is that you had an alliance of democracies that fought back first against fascism, then against communism.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They won.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the result was that you created a world where
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Most major countries were democratic.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They operated on market economic systems, and we were heading towards sort of a world of convergence of systems where everyone's essentially playing by the same rules.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And China really gets in the way of that narrative because it is an incredibly successful authoritarian system where the ruling party still calls itself communist.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
elites have never to this day really gotten comfortable with the idea that the Chinese political system is legitimate, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And as long as you have that kind of underlying problem, I think it's going to be very difficult to erase these difficulties.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then on the economic side, I think it is a problem the way that China has chosen to organize its economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, in a strictly financial sense, if you will, the rest of the world comes out ahead in the sense that China is willing to subsidize a lot of low-cost production.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the rest of the world gets a lot of cheap goods and the overall welfare of the world improves a lot.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think that's clearly true.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But I think if you look at what has happened to the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
politically over the last 20 years –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There are a lot of flies in that ointment.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the fly is that it is important for large countries to be able to maintain a diversified production structure and maintain kind of social cohesion.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And if you lose the capacity to run a manufacturing economy that employs large numbers of people, there's a lot of disruptions that come as a result of that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the purely financialized economy that we had grow up in the United States in the early 2000s as a result of this bargain with China wound up being pretty bad for the social compact.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I think there is a legitimate question about how do you integrate China's growing power, wealth, industrial might into a world in a way that societies around the world can tolerate.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it's a legitimately difficult problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think a lot of the problems have to do not with China, but with U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
domestic policy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I think a lot of what's going on right now is scapegoating of China and
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
as a way of diverting attention from decisions that need to be made domestically about income redistribution and macroeconomic policy and so forth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But there is also I think a legitimate question to be made about China now accounts for 20% of the global economy, probably will be larger in future, a third of the global manufacturing economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There has to be an agreed set of rules about how it interacts with the rest of the world so that everyone feels that they are benefiting, not just in financial terms.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we don't really have that agreement now.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, well, there's a few different questions in there.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So let me break that down.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So first, I think the first thing that you alluded to there is
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Essentially, is a Cold War the right framing for whatever this conflict is that we have with China?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And my answer to that is absolutely not.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And you can address that question both empirically and conceptually.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So empirically...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you just look at patterns of trade and investment during the Cold War, the actual Cold War with Russia, the Soviet Union, the Soviet Union never accounted for more than about 1% of U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
trade and investment flows were basically non-existent.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China at its peak about 10 years ago accounted for 17% of U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
trade, which is about the same amount as Japan did in the late 80s and early 90s.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that number has come down a little bit on the surface.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But when you take account of stuff from China coming in through third countries and so forth, basically that remains the same.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then if you talk about investment flows, there's $600 billion or more of U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
corporate investment in China, which generates huge amounts of sales, much larger than U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
exports to China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the integration of the two economies is just extraordinary.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's basically no precedent for it at any point in economic history, and it is just a completely different order of magnitude to what was going on during the Cold War.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So one question would be is like, okay, if you really want a Cold War, does that mean that what you want to do is you want to reduce those trade and investment flows back down to essentially zero?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And if so, how do you do that, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So that's a very difficult problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But I think you got at sort of the more core conceptual issue, which is how does this end?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This does not end by China going away or turning into something completely different.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's too big.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It is too successful.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The economic model is successful on its own terms, has a lot of problems, but it's fundamentally successful.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it is deeply integrated with the entire global economy in ways that are beneficial for China and beneficial for most of the other countries in the world.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So everyone has some sort of a stake in China continuing to succeed.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so this is just not going to go away.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the other sense in which it's not going to go away is let's say you could wave a magic wand and make the Communist Party of China disappear tomorrow and replace it with something else.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
What would that something else look like?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, if that something else were to be successful at governing China –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
it would almost certainly share many of the characteristics of the Chinese Communist Party.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It would have a strong determination for China to be an independent geopolitical actor, taking care of its own security with very strong military so that it could defend itself against all of its real and perceived security threats.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It would be committed, as every Chinese government since the mid-19th century has been,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
to maximizing the rate of technological progress and making sure that as much as possible of China's core technology needs were met by domestic production rather than imports, it would be very, very similar to what we have today.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So it's a fantasy to think that what we have a problem here is just this particular regime and you can just like get them to change their minds.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
No, the sort of Chinese approach on this is very deeply rooted
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
in both the institutional cultural history of China itself
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And its position – its geographical and geopolitical position in the world.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so it's going to have interests that create a lot of friction and conflict with the perceived interests of the United States under any government.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it's probably going to be quite successful at managing its economy because they've been very successful for many, many decades.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, we don't know for sure because there really isn't reliable public polling.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But a lot of people say that, and my perception is that that could well be true, that there is a lot.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And all you have to do is look at the Chinese internet, the blogosphere.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They don't have Twitter, but they have local equivalents.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There is a lot of unfettered nationalist, highly militaristic thinking there that the government spends most of its time keeping in check.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Every so often, they sort of unleash it because they're in a spat with Japan or whoever, and they –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They need to gin a popular opinion.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But mostly they try and tamp that down.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So a fully – a Chinese system that was fully representative of actual popular views, we don't know exactly what that might be.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But it could be very, very difficult to deal with.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think the question is you can say what you want,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
and your sort of ideal state of things, but then how do you get there?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Because there are a lot of people in China who would say, well, no, we want it all and we can, so why should we make that deal with you?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if I take this down basically to the level on which the United States and China are now starting to negotiate, my personal view on this would be that it would make a lot of sense
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
for the US to be much, much more open to a direct investment by Chinese companies in manufacturing in the United States.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I'm thinking particularly things like electric vehicles, that whole supply chain, green energy, industrial automation, all of those things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Why do I think that?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, first of all, I think if the US is serious about revitalizing its industrial base, and I think there's a good case for trying to do that selectively, it is not going to happen unless you invite in the world's leading players and have them compete.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That is how China industrialized.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
45 years ago, they were an industrial basket case, basically.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They said, we want to get industrially strong.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
How do we do that?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We get all the leading companies in the world to invest here, and we will learn from them.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that's how you do it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if we're serious about that, we should be serious about figuring out ways –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
that we can bring Chinese industrial investment into the United States.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that, to me, would be a win-win because Chinese companies at an individual level would love that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They see the US as a huge market.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They can't get into it right now.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They would love the opportunity to tap into it more.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We could learn from them.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And if you did that, basically you would be saying whatever we're in with China, it's not a cold war because we are willing to have high levels of direct investment by both sides.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And you might want to put protections around that, all kinds of rules of the road.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But in an ideal world, I think we would have a lot more of that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Now –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
First question is like, why is that so difficult?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Why do you essentially have a consensus in Washington that not only do we have to prevent the export of US technology goods to China, but we also have to prevent Chinese companies from investing in the US?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This is basically agreed on in Washington.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the reason is data.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Fundamentally, there is a view that any manufacturing process today is also a data creation machine.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And where does that data go and who benefits from that data?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the other thing is that it used to be back 30 or 40 years ago, you could divide the world into most technologies, which were essentially for civilian use, a few technologies that were military.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then a very, very small proportion of technologies, dual-use technologies that could go either way.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it was those dual-use technologies that had to be controlled very carefully.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Now, basically, everything is dual-use.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Any technology that you can imagine...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
can be put to some kind of military use.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So it becomes much more risky to have these patterns of investment, particularly when you don't know where the data is flowing and how that will feed into someone else's defense production base.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think that is a legitimate concern.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so in my ideal world, you would have a lot more Chinese investment in the United States, but it would be very carefully regulated.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
In the same way that China very carefully regulates the direct investments by foreign companies in its economy, they have very strict rules about data localization, et cetera, et cetera.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I think that could be achieved.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think it will be very, very difficult in the current political environment.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then just in terms of sort of the grand bargain that you suggest is China is very interested in not being pigeonholed.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They didn't want to be pigeonholed in low-value-added manufacturing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They wanted to do the high-tech stuff.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Now they're doing that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They don't want to be pigeonholed in manufacturing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They want all of technology, including AI.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I don't think that any strategy –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
which is premised on the idea that China should accept arbitrary limits on what it can do, is viable.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Because would we accept that?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Absolutely not.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so why should we expect them to accept something that we would consider an absurd and completely unreasonable infringement on our sovereignty?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It just doesn't work that way.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if you go back to the early 1990s,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China recognized that pretty much every other country that had gotten rich had done so in large part by building up an automotive industry that then served as a mechanism for creating innovations in other sectors.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You look at the U.S.,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You look at Germany, you look at Japan, you look even at Korea, which is very successful.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they said, okay, we have to have a big auto industry.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This is one of the key industries that we have to support.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So starting in the early 1990s, they had this strategy of bringing in foreign companies, making them do joint ventures on a 50-50 basis with Chinese auto companies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the theory was that eventually the Chinese companies would learn and then you would be able to, you know, develop your own national champion auto companies and, you know, kick the foreigners out, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And basically this failed.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It failed massively.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Over the next 25 years, foreign companies came in, General Motors, VW, Toyota, Honda, and so forth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they did very, very well.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the joint venture partners in China basically just sat around and clipped coupons from the dividends that these companies – that these joint ventures were producing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
All of the technological inputs continuously came from the foreign partners.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
All of the design ideas that the local partners were never able to succeed.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And in volume terms, you had a lot of smaller scale locally sponsored companies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
vehicle companies in China, building kind of low-end vehicles.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So a lot of the cars that wound up getting made in China were made by local firms.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But if you look at the share of profits and total value in the system, it was dominated by these joint ventures, which were in turn dominated by the foreign partners.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China, circa 2010, 2015, had been doing this for 25 years, and they were basically no closer to having globally competitive conventional car makers than they had been 25 years before.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
In the late 2000s, 2005, 2010, they started thinking, well, this and other related kind of industrial policies are not working very well.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We are not generating the national champions that we thought we were going to do.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So what do we do about this?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And their answer was leapfrog.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Let's try and figure out what is the next –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
stage of technological development that people really aren't working on yet.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Let's work on that and then maybe we can get in on the ground floor.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so what they came up with in large measure was a renewable energy, specifically electric vehicles.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They started having a pretty comprehensive set of subsidies and other kinds of industrial support for companies like BYD to produce electric vehicles.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
BYD is basically a private company.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This worked okay for 10 or 12 years.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And BYD got pretty good.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And particularly what they started to figure out was the supply chain.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they got very good at making the batteries work.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But still, when you got to 2018, 2019, BYD was still not that exciting a company.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Most people in China really didn't want to buy electric vehicles.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They seemed really inconvenient.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The sexy cars were like the big SUVs that the joint ventures were putting out and so forth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then in 2018, the Chinese government made the decision that they would allow Tesla to come in and build a wholly owned gigafactory in Shanghai.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They had never approved a wholly owned automotive company before.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They started cranking out cars in 2019, which became immensely popular.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it seems like one of the things that happened was that the Chinese companies by 2019 had gotten pretty good at the underlying technology of electric cars, specifically the batteries and then the software systems that govern the cars.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But they were terrible at consumer design.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They had not figured out how to make these cars.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And Tesla did have appealing products that people wanted to buy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They were big status symbols.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So BYD and its competitors said, okay, this is the part we have to figure out.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
How do we –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
How do we achieve this?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And basically, they recognized that they had to up their design game.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They, among other things, went to Germany and –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
loaded up on a lot of German car designers that were able to transform their kind of technology base into much more appealing packages.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then by 2022 or so, they were able to compete with Tesla both on price and on quality.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I think what that shows you is that, number one, the Chinese government made a pretty good bet
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
on this kind of leapfrogging idea that there are technologies of the future, we need to get in early, subsidize the heck out of them.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Some of the estimates that have been made about the level of subsidies given to the EV industry and related supply chains, it's two or $300 billion, huge, huge amounts of money that did not generate that much of a return, financial return for a really long time, but they stuck at it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The thing that finally flipped the switch was this catalytic foreign investment that showed the Chinese companies what they needed to do to actually compete in the consumer market.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then they got very good at that very quickly.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You know, I think the thing is, it's like the old slogan about advertising, half of it works, but you don't know which half.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, did China need to spend that much in subsidies?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Probably not, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But had they spent less, would they have had the same effect?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Maybe, maybe not.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They, you know –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They tried various different types of subsidies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So initially they were producer subsidies to just like get companies to produce more.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Then they had a lot of buyer subsidies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So at the individual level, but also the city government level to promote, you know, things like electric buses.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so I think all of that played a role.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think what was important was that the government set a very clear direction and they said, we want this to happen.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we really want it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we don't know how long it's going to take.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we're just going to keep trying different things until it works.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Because the goal of creating this electric vehicle sector and the whole supply chain for it, that's what we want at the end.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
No, it's definitely perilous.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if you look at China has a list of key industries.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's called the strategic emerging industries.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They came up with it basically in 2010.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It built on previous iterations of industrial policy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Most of it is not really an effort to predict with high degree of specificity what comes next.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They're mostly pretty obvious things like semiconductors, industrial automation, new materials, all this kind of stuff that I think would be on anyone's list if you were just sort of running a VC fund and saying, what are the sectors that we think are- But most VC funds are like losing money.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
No, no, no.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think basically the analogy with the VC fund is a pretty good one.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I've made it many times.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Think of China as like a giant VC fund that is just willing to lose huge amounts of money for a really long time on the assumption that a few of the bets will pan out.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Right.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so China as a as a state, as a government is uniquely able to throw a lot of money at things for a really long time, not care about what the returns are and say, we're going to identify this universe of potential winners.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We're going to promote all of them, basically.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And some of them may work and some of them may not.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the successes will pay for the failures.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So, a couple things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So, first of all, I would say that even if you go back to, like, 2005, 2006, when they started thinking about this...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Saying that green energy was going to be an important industry in the future, everyone was saying that, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You had the Kleiner Perkins guy, John Doerr, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
John Doerr was the big VC who said, circa 2007, I'm going to put all of my bets on green energy because this is the future, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
He turned out to be wrong from the standpoint of his investment returns.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But he turned out to be, I think, totally correct in terms of saying this is a really big thing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So it was just not that wild a bet to say that green energy was going to be really important.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so we should place a lot of bets on that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But why does this work and why is this different from a central planning thing, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think that's a really important point.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So a couple of things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So first of all, the Chinese system like –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
the systems that preceded it in East Asia, Japan, Korea, Taiwan, so forth, has always put a lot of emphasis on being good at exporting.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So there are a lot of pressures within the system to create industries that can export, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The reason this is important is if you have a totally closed system,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
which frankly is what I think Donald Trump is trying to create in the United States, and people are just producing essentially for domestic consumption, there's no incentive to keep up with global technology developments.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if you have this constant export focus, essentially what everyone is trying to do
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you're a closed domestic market, you can rig the domestic market and buy off your connections in government to make sure that you as a company have your market share.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So there are a lot of ways to win that do not involve technological upgrading.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that is what dooms all import substitution regimes.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you have an export-driven economy, you can't rig the global economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Ultimately, you have to compete, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And you can't compete just on price.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You have to compete on raising your game.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And Japan did this successfully.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Taiwan did this successfully.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Korea did this successfully.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China's done that successfully.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So that's answer one, is that you had this underlying system, which was heavily incentivized in technological upgrading across the board.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So that's what you were sitting on top of.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it was completely different than the old central planning regime, which was autarkic and inward-looking.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Second, you had this domestic competition environment, which was really cutthroat and which involved a lot of international companies, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And this is a little bit of a difference to Japan, which always kept the foreign companies out of its domestic market.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Their companies operated globally, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
very, very well, but the domestic market was very protected.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China's domestic market was not that protected.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so they were always willing to bring in companies that they thought would be able to spark some technological change.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And again,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You can say – so what this did is it created a field in which maybe the government has the right ideas, maybe they don't.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But you have a crucible in which their ideas can be tested.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You know, very competitive domestic market where you have a lot of the big international players doing their own thing as well.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so that the things that work get some validation and you can keep building on those successes.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I think that's a really important – and then just the sheer –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
scale at which they were able and willing to support what appeared to be losing bets for a long time does matter, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And you could contrast their view, for example, in solar energy, where they said, look,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We want to be big in solar energy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And again, they started thinking about this in 2005.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
What do we need to do?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they identified the whole supply chain from the raw silicon inputs through all of the modules into the finished panels.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they said, we want to be in every stage of that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they had a pretty deliberate strategy of trying to create people at every point in the supply chain.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they were willing to go through cycles of people not making any money.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Comparison, obviously, in the United States is the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
government gives one loan to one company, Solyndra.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It goes bad and everyone says, this is proof that industrial policy does not work, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think China actually has the right answer to that question and we had the wrong answer to that question.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You have to be willing to accept some failures and some loss of government money along the way if you want to get to the end.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But I really stress the ecosystem because a lot of this would not have worked just by the government saying, oh, we want to do solar.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It would not have worked unless you had this broader ecosystem of export-driven manufacturing
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
high competition and international participation across many, many, many, many, many sectors of the economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They all converged to create a successful result.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
No, it's a good question.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I guess I would start by emphasizing the ways in which China is very, very different than Japan.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The sort of central thing that is really different that lies at the root of a lot of this is that China is an independent geopolitical actor and Japan was not.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Japan, at the end of the day, they could rely on the US for security.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They were demilitarized.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China basically is on its own.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They're in a very dangerous neighborhood.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have 14 land neighbors that they share borders with.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have names like North Korea, Russia, Pakistan, Afghanistan, a lot of dangerous actors.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Several of them have nuclear weapons, North Korea, Russia, Pakistan, and India.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So China, just in a very narrow sense, lives in a very dangerous neighborhood.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so they quite legitimately have, I think, some pretty significant national security needs.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they also have aspirations to be great power, and they want to do it on their own.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So, the incentive to get things right is much more existential in China than it was in Japan.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Japan essentially could take the choice to sort of say, oh, well, we're going to have a stagnant economy and that's bad and whatever, but actually we'll be fine, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And for China, it's not fine, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So, there is underlying it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think there's a spur there.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
that increases the chances that the Chinese leaders will do the things that they need to do to keep the system more dynamic.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's not a guarantee, but it's a pretty strong incentive.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But then if you look at some of the specifics, so the big difference
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
between the way that China and Japan are economically organized is essentially the relationship between the financial and the corporate sector.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So Japan had the system where banks owned equity in these giant industrial companies and in the trading companies and vice versa.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There were these cross shareholdings, which meant that it was essentially the entire economy of Japan, the entire corporate and financial sector had one big balance sheet.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And all of that balance sheet rested by the late 1980s on land values that had just gotten completely detached from any form of reality.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There was an investment thesis among investors who were playing the Japanese stock market in the late 80s that you did not look at the earnings –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
of the Japanese companies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Those were irrelevant.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
What you looked at was the value of the land that they controlled.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So it was essentially a capital ratio where you assumed that the value of their underlying land capital was a permanent contribution
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
to their wealth and prosperity.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so the valuations of these stocks, which got, again, crazy, you couldn't justify them by earnings.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They say, well, it doesn't matter because the land that they're sitting on is so valuable.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Then the land values collapsed by 80%.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The stock values had to collapse by a similar amount, 80%.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And everyone was holding shares in one another.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the banks, their capital got eroded because a lot of their capital was tied up in the land and in the stocks, which were collateralized by land.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so they were unable to lend.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They just had to deleverage as fast as possible.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The companies had to deleverage as possible, fast as possible.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so the entire economy got engulfed
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
by this phenomenon of debt deflation, which basically means that in the act of paying down the debt, because you're doing fire sales of assets, you're reducing the prices of those assets, introducing deflation.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the real value of your debt continues to grow even as you are supposedly reducing it because of the deflationary effect.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's very, very difficult to get out.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China does not have this problem at all because they looked at the problems that Japan got into.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They looked at similar problems that Korea had in the late 1990s and they said, we will never allow this kind of cross-shareholding between financial companies and corporations.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's way too dangerous.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they have kept the two quarantined.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It is illegal for industrial companies to own a bank.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The bigger ones are allowed to have internal financing subsidiaries, but they can only sort of manage financing flows within the group.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it is also illegal for banks to load up on shares of industrial companies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you have a distinct financial system and industrial system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
which means that the particular type of macro problem that Japan got into is very, very unlikely to occur in China today.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you have huge debt problems, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the property developer is very overleveraged, huge problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You've had a massive property crash in China over the last five years.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That is a big, big problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You have local governments that borrowed a lot of money, invested in infrastructure, which is now delivering very low returns.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have a big debt problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you have very substantial debt problems in China that have significant negative macro consequences, but they're all isolated and they can be dealt with in China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
sort of one by one.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you look at the industrial sector, it's not very highly leveraged.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Debt levels, in fact, are not high.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Most private companies in China have learned for many years they couldn't get access to bank credit because the banks only wanted to lend to state-owned enterprises, which were a secure –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They had physical collateral and they had a state guarantee.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Private companies for years have learned to make do basically financing their investment out of retained earnings and their leverage ratios are not that high.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They're creeping up now over the last few years because of the big industrial policy push.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But fundamentally, they're in a very different position than the Japanese companies were.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I guess my view on this is that this local government land-based financing model was actually a pretty smart thing to do initially.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And for a decade or so, it worked quite well.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Local governments were sitting on a lot of these land assets.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was perfectly – the land assets originally were undervalued quite substantially.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so it made sense for the local governments essentially to try and capitalize some of the future value of land.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
of these things and use them to finance infrastructure development.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This was not sort of a rogue policy that local governments came up with on their own.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was actually sponsored by the central government and the China Development Bank back in the early 2000s, which was
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Grappling with the problem that China at that point had a severe shortage of housing and infrastructure of all kinds including urban infrastructure and the question is like we need a lot more of this stuff.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
How do we build it?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
How do we finance it?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they realized, oh, actually as we build this stuff out, the values of this land are going to skyrocket.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So let's, you know, essentially take some financing against that future land price appreciation and use that to build the infrastructure that makes everything possible.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And if you look at the first few cases of where this was done in the early 2000s, they had these estimates of what the land would ultimately be worth that seemed ridiculous and astronomical at the time.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
they were in fact way too low.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They were way, way conservative on what the actual land price appreciation would be.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you had a period of about eight or nine years where essentially the development banks, the state-run development banks, were doing this in a fairly controlled way, very, very successfully.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then what happened was that after the 2008 financial crisis, the government said, oh, we just have to spend a lot of money
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
to gin up growth because there's been this global economic catastrophe.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so they did a massive cash infusion into the banks and to the state-owned enterprises that said, spend, spend, spend, and basically all infrastructure is good infrastructure.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Just like build whatever you want.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so what happened at that point was that all of the commercial banks got into this business of lending money to local governments for these infrastructure projects.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And their underwriting standards were much less robust than the China development banks had been.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the local governments just, you know, it was free money to them.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they just like took all the money and they ran with it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then that created this kind of Frankenstein's monster.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Even so, I think you had quite a lot of that money in the first two years went into...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
probably generated a pretty good return because China was still underbuilt relative to what it needed to be.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But after that had run for three or four years, it became clear that a lot of this was going into wasteful projects and it didn't deliver a good return.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And now they've been struggling for the last decade for how to unwind that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But I think it's important to understand that the underlying model was actually an okay model.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It just...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
wound up being done in a way that was completely uncoordinated and excessive and led to a lot of, and you didn't have incentive structures that enable local governments to reign it in when they needed to.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I still think that that is fundamentally, that is a local government fiscal problem, which ultimately is a central government fiscal problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you look at the consolidated balance sheet of the central and local governments, put them all together,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China's government debt is still probably less as a share of GDP than U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
federal government debt, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
is over 100%.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China is probably under 100%.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I would respectfully disagree with Victor on that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I mean, it's impossible to know for sure.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the problem is that
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You have the problem of formal debt, which is debt issued by government entities.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then you have contingent debt, which is debt issued by corporations that may or may not essentially be fronts or windows for local governments, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There is also a very significant problem of
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
double counting, which is hard to resolve, where debt gets counted at different levels in the system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's one piece of debt, but depending on how long the chain is, it gets counted in various different places.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I've long had the view that many of these much larger estimates of debt don't fully account for the double counting problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So, I think it's quite possible that the true debt level is higher than what we think it is.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's unlikely, in my opinion, to be as high as Victor says it is.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it also matters what the debt goes to and who is actually formally responsible for paying it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And are there like project flows or income flows that can be used to pay for it?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the servicing, just what the structure of the servicing of the debt matters, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
At the end of the day, we do have a pretty good sense from the macro data of how much total debt there is in the economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's on the order of 300% of GDP.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if you want to say that government debt is 200% of GDP,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Interesting.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Unless you're double counting, you're basically saying that everything else is a lot less than we think it is.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, I don't have it off the top of my head.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The federal government debt, I think, is around 110% of GDP, something like that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Total gross debt of all sectors, government, corporations, households, I think would be on the order of around 300% of GDP.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
In Japan, it's substantially higher.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You can get into an endless debate on these things where it becomes kind of a numbers game.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But I have a pretty high conviction that China has a – they have a significant macro leverage issue.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if you look – if you take my numbers and say, well, gross debt to GDP, which by the way are the official numbers of the Chinese government and largely accepted with some structural modifications by the IMF and so forth, 300 percent of GDP –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That is in the ballpark for highly developed economies, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It is extremely high for middle income economies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if you look at China as a economy that has average per capita income that's kind of like Brazil, one of these countries, China is way more leveraged than any other country of its level of income.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that is potentially a problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I don't want to make light of the problem because I think it is quite serious and it's an important constraint on policy and it is an important constraint on growth at the moment.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I don't think that it leads to a financial collapse situation because the system is contained and all the debt is denominated in local currencies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But it imposes attacks on growth, and it is one of the things that makes China's growth more sluggish now than it probably could be.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think one of the things that you could say about debt historically in China was...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
that it tended in general to finance productive assets.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So whether it was industrial production or infrastructure, for many, many years, China was a very infrastructure short country relative to its needs.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so you could justify quite substantial debt-financed infrastructure investments on the basis that these would deliver good economic returns for many decades into the future.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The case for that is a lot weaker now.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
than it was before.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The problem is how do you essentially retire this enormous stock of very low productivity infrastructure investments, debt financed, and how do you sort of move on and have a more productive return on capital in future?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And there are ways from solving that problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
To me, the fundamental issue is
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have too much of a supply-side strategy, not enough of a demand-side strategy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's really a macroeconomic issue that if they had stronger domestic demand, that would generate more profits for companies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They would be able to – more pricing power for companies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You would get a little bit of inflation.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you would have more cash flows within the economies that would enable people to – and local governments to pay down debt.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
you know, a little bit of inflation would erode the real value of the debt.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that's essentially how they got out of their last debt problem in the late 1990s.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They had gigantic bad debts in the banking system, essentially representing legacy loans to state-owned enterprises.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They had no way of paying them back.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they had a very growth-friendly program that generated a lot of growth, a lot of inflation, and that basically strengthened the debt problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And what they need now is a kind of a revamped, updated version of that strategy where they do a lot more to promote domestic demand to get more profits, more cash flows, and a little bit more inflation into the system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that would probably solve the debt problem over a decade or two.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They're not successful enough.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I thought one of the problems in the world that we're facing today is that they're too successful at too many things and that this is creating difficulties for other people.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So, yeah, that has come up, you know, from time to time.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And during the period in the 90s and 2000s where they're growing at 10% a year, which is the fastest growth rate recorded by any economy in the history of mankind –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
and they were doing it just not for one or two years, but for 20 years in a row, people will often say, well, there's all this waste and there's too much data on enterprises and they could grow much faster if they were just more efficient.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it's like, really, could they?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They're already growing faster than anyone has grown before.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Is it really the case that,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
that they could have grown a lot faster than they have.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And maybe, but I doubt it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I doubt it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the reason is I think there's what I would call kind of an efficiency fallacy, which is that economists who, remember, have all been basically, all global economists, macroeconomists, have been trained in the United States.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You know, since the end of World War II and particularly since, you know, the 1990s.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Right.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so they view sort of the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
in its developed state as the norm.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Right.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
rather than as the result of other processes.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So it's like the way we operate now is the way we got here.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And actually, that's not quite the case, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The reason China was able to grow so fast for so long was that they were able to mobilize these huge
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
swaths of resources, domestic savings, and throw them in a kind of uncoordinated way at a lot of problems.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And there was a lot of waste along the way.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That was part of the equation.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if they had tried to be maximally efficient and said, no, no, no, we're not going to allow banks to lend unless they can prove that this project is definitely going to have an ROI of X, they would have lended a lot less.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they would probably have had a lot less growth because they were not willing simply to create that wall of money that would create broad-based growth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they might, in fact, have had substantially more inequality than they did because this wasteful method allowed them to spread out investment in a lot of areas more.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
which were geographically disadvantaged, which might not have done so well in a purely efficiency-driven system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I think we need to be careful about assuming that inefficiency is bad.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think inefficiency sometimes can be, as long as it is basically the result of a desire to be effective,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
that can be sort of a byproduct of a successful growth story.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think that's basically my account of China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Basically, that's my basic thesis.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think they've shown that this works quite well.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think that's also part of the answer to why, well, why aren't they richer on a per capita basis?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There are 1.4 billion people.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It is just gigantic.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you just think about the scale problem, Taiwan, Korea, South Korea, they got to whatever they are relative to U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
per capita GDP, 60%, 70%, something like that, within a generation or two.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Because Taiwan, they had 20 million people.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
South Korea, they had 40, 45 million people.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
To move that number of people and get them all working in high-wage industrial or service jobs in urban areas, you can do that in the course of a generation, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
20, 25 years.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I just think it's physically impossible to achieve that on the scale that China's been operating on of 1.4 billion people.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You look at the urban migration
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It is completely unprecedented in the history of humanity, the speed at which they have converted people from rural residents into urban residents.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
For many, many years, they were urbanizing the rate of 20 million people a year added to the urban population.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I forget the precise calculation that I made, but they were effectively, in terms of housing and urban infrastructure, they were building the equivalent of, I think, I calculated New York plus Philadelphia plus San Francisco every single year for 20 years.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
No one has ever done anything like this before.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so I think what this tells you, the lesson of this, is that there's an arithmetic problem there.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That even if you do this on this unprecedented scale and do it faster and bigger than anyone has done it before, if you're trying to move 1.4 billion people into an income of United States level, it just takes a really, really long time.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And now, of course, what's happened is because they have, I think –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
gone too far off the deep end of industrial policy and the supply side will solve all of our problems.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Growth has slowed down quite a bit in the last few years.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's probably well below potential.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I don't think that there's a lot of evidence that China's growth was below potential from 2000 until 2020 on average.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think there's a lot of evidence that it's below potential now.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so they are sacrificing the ability of the average Chinese person to do more rapid catch-up with the living standards of the West in order to achieve these industrial policy technology goals.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, well, and here you get to, I would say, a conceptual sort of fork in the road.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I would say that in many respects, the communist leaders in China have a lot in common conceptually with the techno-optimists of Silicon Valley in their, what I would call, sort of technological fetishism.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So let me see if I can break that down.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The Chinese leadership throughout the last 40 years, but even going back further, has
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
has had this notion that technological upgrading is the key to wealth and power.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the fundamental idea here goes back to the 1840s when you had this great Chinese empire that had been sitting around for a thousand years doing great.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They thought they were the best in the world.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then these upstarts from England come and crush them repeatedly militarily and impose this very humiliating political settlement on them through the Opium Wars.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the basic analysis among the Chinese elites was, oh, okay, we fell behind technologically, and so therefore we must catch up technologically.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This is the central thing that we need to do.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And this was kind of recognized among some elites, but it ran into a lot of encrusted political pressure in the late imperial Chinese regime.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They didn't get very far.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
After the empire fell in 1911 –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You had a Republican government that basically, if you look back at the things that they were saying and doing, they're pretty similar to what the Chinese Communist Party has been saying and doing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They just did them somewhat less effectively.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They were dealing with civil wars and various other problems.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But the basic insight remained the same, that we need to catch up with the West technologically.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This is the fundamental thing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's just a question of how do we do this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so what the current regime in China has been able to do is to take that basic idea and actualize it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have been successful at this task of technological upgrading and catch-up and so forth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So this is really central to the conception of Chinese elite thinking, that the number one job of the government is to figure out how to mobilize the resources of Chinese society so as to maximize technology acquisition, creation, and upgrading, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
starting in the 1980s, that was a big part of the philosophy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But the other part of the philosophy is we just have to grow as fast as possible.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we are fairly agnostic as to where the growth comes from.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we realize that there are many different sources of growth, foreign investment, exports, construction, infrastructure.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We're going to do all of these things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Basically, the incentive structure that we will set up is just to tell local officials, your job is to maximize GDP growth, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that will make all of these other things happen.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If we tell local government officials, your job is to maximize technology development, they'll do a lot of dumb stuff and waste a lot of money.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That's not the right way to do it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Let's just GDP as the KPI, the end, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that turned out to be incredibly successful.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Then Xi Jinping comes along in 2012, 2013 and says, well, okay,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The problem with this is that it's now gone too far.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's led to a lot of corruption.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's led to a lot of inequality.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's led to a lot of local governments doing wasteful and duplicative things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And now we need to hunker down and focus a little bit more on the really central task, which is this technology task.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So less of growth at all costs.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Basically, the implicit idea there is we've got this figured out.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Growth will take care of itself.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We have a growth machine in China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The resources of government now need to be focused on specifically the technology question.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So everything that he has done, particularly since about 2015, 2016, when he really started to see this come into focus, has been let's worry less about the growth target and more about the technology targets.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And particularly after Trump launched his trade war,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the Biden administration followed that up with a lot of controls on exports of technology to China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think the focus got intense because they were saying, oh, the US really wants to prohibit, constrain our technological rise.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They kind of have the ability to do so.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so, therefore, we have to double down on efforts to replicate all of these core technologies so that we're not reliant on the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
or its allies anymore.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we just have to go full tilt on technology at all costs, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So that was kind of an accelerant approach.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
of this tendency.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But then there is also, there is kind of a macroeconomic theory.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if you go back and read some of the statements that they put out in the late 20-teens about their vision of the future, basically they said all of these technological developments by which they meant investments in, they didn't mean Alibaba and Tencent and all of these great
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Internet companies, they meant physical technology, semiconductors, new material, green energy, industrial robots, all this kind of stuff.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Essentially, their view is this is going to be the productivity engine of the future.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so growth and growth in the overall economy and incomes, it's all going to be driven by these technological investments.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think that is essentially what they sincerely believe.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think there are some problems with that, which is that the vast majority of people in economy do not work in those sectors.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You can get very, very good at making semiconductors and industrial robots and whatnot, and the people who work in those industries do extremely well.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But that is a tiny, tiny fraction of the totality of the population.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And how do you have spillovers that enable everyone in the economy, regardless of how remote they are from this engine room of the high-tech sector, to enjoy gains to income, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the answer in the United States historically has been we're just going to have this great consumer economy, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We're essentially going to be demand-driven.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so consumers will tell us what they want and companies will arise to make what they want, which is increasingly not stuff, but services, experiences, and so forth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we will create a financial system that produces very good financial rewards.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
for the companies, for the people that produce these kinds of services.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then you generate huge amounts of actually very high paid employment in the services economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think the Achilles heel of any sort of industrial policy driven growth model like China, but you can see variants of this basically throughout East Asia.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
is they're very materialist.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They're convinced that it's only really the physical stuff that matters.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you get really good at making the physical stuff, that will somehow magically spill over into the rest of the economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think the evidence that we have is that that actually doesn't work that much, that most of the demand in a modern industrial economy, the really high wage
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
high income economies comes from intangible services.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so there's a more complicated interaction between this high tech core and wider economic growth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I don't see in China how they set up the linkage between all these great high tech industries that they have and the 90 or so percent of the economy, which is doing something else.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, it doesn't have to.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But the way that they have, in fact, executed this tends to lead in that direction.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so here's why.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So at the same time that they have been doubling down on industrial policy –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have also been much more tightly regulating their service sectors.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So a few examples.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The famous one is that they woke up in November of 2020, realized that Alibaba's financial subsidiary was about to do this gigantic IPO.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The premise of which was that China should build a financial system that resembled that of the United States in 2005 and that this was a really smart idea.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they said, oh, actually, that's a really dumb idea because look what that led to the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We don't want securitization.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We do not want this like financial risk generation that Ant Financial is trying to talk about.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We really need to crack down on these guys.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they did.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But then they were also simultaneously concerned with a lot of other things that the internet platforms were up to.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so there was this broad-based regulation of the internet sector, which weirdly for about 20 years had operated in a complete –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
free-for-all land of almost no regulation whatsoever except for political censorship.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But pretty much anything else you wanted to do, you could do it with very little government interference.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was a strange exception to the sort of regulatory norm in China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They finally caught up and said, no, no, no, we have to regulate all these guys.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so they went around to all of the internet companies and
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And basically told them there are things that you can do that are fine and there are things that you cannot do.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And there are a lot of business models that you might be interested in doing, such as fintech, such as telehealth, such as kind of wider social media applications.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That you may not do because we think it creates too much financial risk.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We think it creates too much social stability risk.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We think it creates too much political risk for us, the Communist Party.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so a lot of the avenues of growth for the internet companies were shut down.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So that was – they still did okay.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They're still very big companies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think their share prices fell way more than was justified by the actual loss in revenue.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That's starting to correct.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Alibaba, Tencent, they're still great companies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They're figuring it out.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But they were severely constrained.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They were much, much more tightly regulated.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You look at the financial sector generally, it was significantly deregulated from about 2008 to about 2017 with some bad consequences, increased financial risk, shadow banking, lots of bad stuff, but also lots of good stuff.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Private companies, which were essentially shut out of
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
loan finance got the ability to finance themselves through debt in the way that they had not been able to previously.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You had a lot of new financial services going to households.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Basically, the government said, no, this is a little bit too dangerous, so we're going to re-regulate it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Now, most financial activity in China has been constricted back into a small number of basically state-owned banks.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was severe re-regulation of the financial sector.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There was a lot of talk about healthcare sector, opening that up to much more to private entrepreneurship.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That, again, has been reined in.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you can go down the list, and there has been a massive re-regulation of the service sector, which limits the opportunities for profitable expansion by companies, limits the opportunities for entrepreneurship, and limits the opportunities for employment.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's a political choice.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That's right.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think, you know, just, you know, so this is what happens if you say...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
technological development, particularly in hardware, will solve all of our problems.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It will generate all this growth, and so therefore we don't need this service sector, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So we have a real-life experiment, and what happens if you do that?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And what happens if you do that is you get a lot of progress in the technological sectors, and you get basically a persistent shortage of aggregate demand, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
which means that even the people who are making all this great technology stuff don't have any pricing powers.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have to keep lowering their prices.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you get deflation.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
When you get deflation and less employment growth, people say at the household level, oh, people aren't hiring.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I guess I need to save more and spend less because my income is not going to go up.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And you create the risk of
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
of this deflationary spiral, which they're sort of on the edge of right now.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so I think this is something, again, this gets back to the sort of like the techno-optimist view of things, is that if you
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you have this very narrow view of the economy as purely the expression of the emanation from this technological core, you're missing a lot of stuff.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And you will basically take yourself into a blind alley if you think that that is going to solve all your problems.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the Chinese government in the last few months I think has begun to recognize this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
and say, oh, actually, we need to have some kind of a demand strategy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This is very evident in their top-level statements.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the problem is they've been working for 45 years to build this magnificent machine of investment and industry and manufacturing, and they're very, very good at it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they have basically devoted no time in the last 45 years to figuring out how to create a demand machine.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Mm-hmm.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they're just at the very early stages of figuring out that part of the problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Right.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, I mean, I think you can scale that analogy up to China, just its total economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I mean, a lot of the stuff that I've been talking about, about how they got here, I mean, the thing you want to be careful about is this is not the result of some carefully crafted master plan that they knew all along.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was a lot of groping and a lot of random stuff.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They did one thing for one reason and another thing for another reason.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then through this kind of random process –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It all sort of coalesced in the end, but that was not, you know, the amount of intelligent design behind that was, I think, actually quite low.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They got a few sort of big directional things, I think, correct.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they stuck with them.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That's where I would give policy credit.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they were willing to adapt when things were obviously not working and cut things off and adjust with pretty high frequency.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But a lot of it was essentially a random walk where a lot of things that were enabled were
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
then sort of started to interact with each other in the way that you've talked about AI.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then they create these other results, which, you know, could not have been pre-planned.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, actually, can I just stop you there because there are a couple of things that you touched on there that I think are really interesting that I'd just like to put on a little bit more.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So, you know, past results are no guarantee of future returns, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So just because you did it before doesn't mean you can keep doing it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You know, we're seeing that now in the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
A few years ago, I would have said I had very high confidence that the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
will be able to retain the basic political system and structure it has had for a really long time.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that's one of its, you know, enduring strengths, that that infrastructure remains.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I'm much less confident about that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You know, similarly in China, I think you have this problem that they've had a succession of top leaders since Deng Xiaoping, several, and with very different styles and sort of power bases and so forth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they've managed to succeed through, you know, a range of these things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So that gives you more confidence that they're probably more likely to do it right in future than not.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You know, a lot of concerns about that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And Xi Jinping has basically declared himself president for life.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We haven't been in that situation in China for a long time.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The last time we had that, it did not end well.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And there's always been a trade-off between growth and control in China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This is kind of the central dilemma that the Communist Party has had.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We want as much growth as possible, but we also want to maintain a pretty high level of control.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that pendulum has swung much more towards the control side of the equation the last few years, and growth is slowing, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So a lot of problems.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
However, I would make a couple of points.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
One is China has been successful in its industrial policy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Less because they picked the right industries and more because they were very adept at building the right enabling infrastructure.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I would point to two things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
in particular.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
One was a program that they had starting in the 1990s, which in English has the very ungainly name of informatization.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So it translates a Chinese term, which just means informatization, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Taking information technology is the embedded term here and putting it everywhere in society.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they were early adopters of the IT revolution.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
including the internet.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And if you think back to the discourse around the internet in the late – in the 1990s, everyone was saying the internet is the death knell of authoritarian regimes because this empowers everyone to have information.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Information control is no longer possible.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Social control is no longer possible.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Would that that were true, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The Chinese government very, very early said, no, that is wrong.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We think –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
that the internet can be an instrument that we can use to, number one, promote technological development at a high speed in China, and number two, enhance our control of society.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think they have been proved absolutely correct in that bet on both counts.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Clearly, their drive to network the entire society, which they started to invest in very, very early, initially just through ordinary fixed line telecoms networks, but then they were very early in mobile and then getting government network systems that communicated across the whole country.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They invested huge amounts in that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it's been, I think, very beneficial to the rise of
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
All kinds of things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it's why basically they were able to create an entire internet of their own with its own companies that doesn't have the participation of the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
global companies and is on its own terms basically just as successful.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But it was also what they recognized is if everyone's on the internet and we have people watching the internet, then we know what everyone is thinking all the time.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We can see that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And this is the holy grail of Chinese leadership since the second century B.C.,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We sit on top of this vast empire.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's great.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We have all this territory.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
All of this wealth is flowing in.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we have no idea what people are thinking or doing far away.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This has bedeviled every Chinese administration for thousands of years.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And even into the 1990s, it was an authoritarian system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was very fragmented.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it was very, very hard for the central government to really have any idea what was going on.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And now we have a panopticon because everyone is online.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And if we control the online universe, then we see everything.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then we're pretty confident that we can keep the discourse under control.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they won that bet, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the comparable move that they are making today, which I think is severely underappreciated, is that they believe in the power of electrification.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So electricity has been around for a long time.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But still, in most countries, it only accounts for about 15% to 20% of the total final consumption of energy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So it is still actually a minor player in the global energy equation, despite having been around for 150 years and being very critical in a lot of applications.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China very early on recognized –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
that they needed a lot more electric power.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The original reason was very prosaic.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They had a lot of power shortages in the early 2000s that were making it hard for their factories to run.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they said, oh, we've got to build a lot more generating capacity, most of it fueled by coal, just so we can keep our factories running.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That was the first thing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then they started to think about it a little bit more, and they started to say, hmm, actually, what do we want?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, we know we're failing, as we talked about earlier, we know we're failing in this drive to make cars with internal combustion engines.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it looks like we're never going to be able to crack that nut and have our own Toyota or General Motors.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But no one's making electric cars.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Maybe we can be the first to do electric cars, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they said, got to do that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Then they said, oh, we need to enhance our domestic transport infrastructure.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Wouldn't it be great if we had a giant high-speed rail network just like Japan, except we're 20 times larger than Japan, so it has to be 20 times as big.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So let's do that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And by the way, this is all going to be electrified.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they created a couple of core hub industries, the premise for which was you need gigantic quantities of electricity to get these things working, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If everyone has an electric car and everyone's charging their battery, huge draw, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If everyone is riding on electric trains instead of on planes, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Huge draw on electricity.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So we need to have a much more comprehensive idea about what our electricity grid is going to look like to support these industries that we want for other reasons.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then, well, where do we want this electricity to come from?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, coal.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, we have a lot of coal, but it's really dirty.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's a climate problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's a very severe domestic air pollution problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This is really dirty.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So from an energy security and pollution standpoint, we're probably better off –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
doing renewables because any other source of fuel for thermal power plants, we're going to have to import.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We don't have enough natural gas, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We can build nuclear, but that's hard to scale, and we don't have enough uranium.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If we build...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
a renewable powered domestic electricity grid, we are self-sufficient forever because you don't have to import the sun or the wind, it's just there.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so you can see how these things begin to build on one another.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was not, again, it was not that they had the intelligent design plan in the year 2000, it was just sort of all these things came together.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the result is today, China has generating capacity that is double, more than double that of the United States.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Their renewables generation capacity alone is as big as the entire generation capacity of the United States.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Electricity as a whole is now about 30% of China's total energy consumption.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's going up like this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's rising very rapidly.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Everyone else is increasing their electricity consumption very, very marginally.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And now you see in things like AI, what is one of the big constraints on AI development at scale?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It is essentially the power that you need to power these data centers.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Who is best placed in the world to do this at home?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they have also concluded that, you know, AI aside, that having cheap, abundant electricity is really central to...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
all of the major growth industries of the 21st century.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they are now determined, I think on a strategic basis, to have an electricity system that just produces as much power as humanly possible from whatever fuel source you can find, to interconnect this via grid as efficiently as you can so they're leaders in ultra-high voltage distribution technology.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we will be able to keep our electricity prices so low that that will make it very difficult for anyone anywhere else in the world to compete with our manufacturing, with our AI, with our whatever.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Anything that electricity goes into, we will have this competitive advantage.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so they've been very – and I think they're basically right about that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the point here is that if you're able to get a few of these sort of enabling –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
all-purpose technology decisions right earlier and then scale them up, then a lot of good things can happen as a result of that, regardless of how effective you are at picking winners sector by sector in industrial policy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, they add basically a France or UK on average every year.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's a good question, and we're verging a little bit beyond my realm of competence here because I don't pretend to understand AI very well.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I'm still very unclear as to economically where all the benefit accrues, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so I
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I guess my theory, if I abstract away from AI and just think about this, okay, this is a situation where you've got a new technology.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's entering society.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
What is the innovation cycle that's going to drive it?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I'm pretty partial.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
to theories of innovation like the one that was propounded by a guy called Amar Bhude, I think he's at Michigan State, who wrote a book a number of years ago called The Venturesome Economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And what he stresses there is sort of like the feedback loop
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
between consumer demand and what producers are doing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And his view is that we focus a lot too much – we focus too much on what the producers are doing and not enough on what the consumers are driving, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think that's a pretty good insight generally.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think it helps explain a lot of why the US has maintained its position such a dynamic economy even though a lot of – we've sort of abandoned a lot of the physical processes that underlie it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so my question is, okay, economically, when we say AI, what is – what's the most important part of it?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Is it the large language models?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think the consensus is no.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That's just like the substrate.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And what really matters is the application, specific applications that get built on top of that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that's where most of the economic benefit is going to accrue, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If that idea is correct, then the question you want to ask yourself is –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
what economic system offers the most fertile ground for people figuring out how to use AI in specific zones.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And there I would give the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
a fairly strong edge over China because China has become more self-enclosed.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have become more obsessed with self-sufficiency.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They've made it very, very difficult to
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
for other people to operate in China, and it's creating some difficulties in people operating outside of China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they have this walled garden of Chinese people and whatever they do that creates applications.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But whoever the big US or Western AI operators have, they have the entire rest of the world to play with.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that's a much bigger universe where I would sort of rate the likelihood that you get interesting applications.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
higher outside the Chinese walled garden.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you want the case for why does China not dominate,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think something like that would be the reason why.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I have a lot of respect for Victor, and he, I think, has a very good grasp of the Chinese sort of bureaucratic mindset and how political calculations get made, and that's his territory more than mine.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I'm very respectful of that view.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I would, however, tend to think that actually the Chinese are going to be pretty in favor of high-speed AI development.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the reason is essentially the same reason that I was talking about earlier about informatization and electrification.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This is essentially a basic enabling technology that is useful for all of the things that can flow from it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I guess my hunch would be that they would make the same bet with AI that they made with the internet back in the 90s.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the internet, they said...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
yeah, this technology could be dangerous, it could be out of our control, but we think actually it's going to be really beneficial and that we can control it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that bet paid off for them very, very well.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think my hunch is that they will look at AI as a similar sort of thing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yes, it's possible that this could sort of get out of our control.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But we think on balance, this is really important technology.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's going to enable a lot of other things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we'll probably be able to figure out how to control it because our control systems are so good.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It is interesting, because if you look at the big development in Chinese AI recently was DeepSeq.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
DeepSeq was not the result of some state program.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was the result of basically a quant hedge fund guy in Hangzhou sitting around and saying, oh, I could actually build a pretty good LLM model flowing out of my quant activities.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Let's give it a go.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
See how it happens.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it worked great for him.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the reports that I have seen suggest that this created a certain amount of disquiet in Beijing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They said, well, where did this guy come from and why is he not coming out of the official plan?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So there is some risk, I think, that they would –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
be a little bit nervous about freelancing on this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But on the whole, I think they'll see this as another basic enabling technology that they should promote and figure out how to control over time.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think we can say with high confidence that that's not going to happen.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
As powerful as the Chinese government is, they do not have the ability to
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
force everyone into one room for this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Huawei's got its own thing going.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
ByteDance is going to have its own thing going.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Xiaomi is going to have its own thing going.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Alibaba is going to have its own thing going.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
All of these have sufficiently large revenue streams and access to capital that they can move independently and will be able to leverage their
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
their connections within the system, both at the central level and the local government level where they get a lot of their support to do their own thing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So, yeah, it will be – yeah, you will not have a national monopoly solution to this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That almost never occurs in China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think one of their key advantages would have been- Because you think the fragmentation becomes an obstacle.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Right.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the ability to concentrate your limited compute resources in one thing instead of scattered around.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, no, I think that's a fair point, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then, so that then comes back to how fast can they solve the chip problem domestically?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Because if they can solve that really fast, then that constraint goes away.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think that really gets to the heart of a lot of stuff.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I don't have a great answer to that, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Because fundamentally, what you're saying is that there needs to be a communication system, a network of interactions between two highly competitive zones, the US and China, basically, where they have to...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
you know, be able to operate with some degree of trust, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think the problem that we face in trying to analyze this is a lot of the analogies that you might reach for, you know, break down at some point.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you brought up the red telephone, which basically is a reference to the line of communication that the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
and Soviet Union had during the Cold War, where the threat that you were trying to avert was nuclear holocaust, basically.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You know, and
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
In some ways, I think that's an apt analogy, and we kind of need to think broadly along those terms.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But the specific problem that we were dealing with there were these very self-contained systems that were clearly under highly centralized control by a couple of people.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so having that one-to-one line of communication was an effective response to that particular problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
With AI...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's much more diffuse, much more decentralized, much more unpredictable what the problems could be.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And, you know, it's kind of easy, I think, to create – easy, we say in retrospect.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was hard at the time, but it was a –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
sort of, if you will, maybe a two or three-dimensional process to come up with game theory to enable us to manage the nuclear balance of terror, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I don't want to minimize Thomas Schelling's achievement.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was great.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But it was like a two or three-dimensional problem, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think with AI you have more like a – more than three-dimensional problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So it is consequently more difficult to figure out how do you create a game theory solution to this that is kind of stable, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think what you can say at a minimum right now is there are ways in which the US-China relationship today –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
resembles that of the United States and the Soviet Union in the 1950s, i.e.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
before the Cuban Missile Crisis, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I don't want to exaggerate this too much, but the sort of diminution in exchange in communication over the last six or seven years is really alarming.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So give a simple example on this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
When Trump came into office the first time in 2017, he inherited structure where there were approximately 100 –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
working level dialogues between US government and Chinese government officials, plus all of this investment in private sector stuff that was going on.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But just at the formal level, there were over 100 dialogues.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
He got rid of all of them, 100%, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And he then replaced them with one, which was the trade talks that he had in his first term.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That was the only basically mechanism that we had of communication.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Did this create a specific problem?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It did.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if you look at the early stages of COVID, right, back when SARS came out in 2003, there were staff members of the United States Centers for Disease Control embedded in the Chinese Centers for Disease Control or their equivalent organization, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that relationship, in fact, grew significantly in part because of SARS over subsequent years.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that was a very, very useful channel of getting information out.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It was not perfect.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It had plenty of problems.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But the absence of that channel I think was really catastrophic in the early days of COVID where we literally had no way of understanding what was going on within the Chinese system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There was no back channel that enabled us to get even a little bit of a head start on what was going on.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think that had very, very dire consequences.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You can probably –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
trace many, many, many deaths and a lot of social chaos to the inability of the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
and China to communicate at that critical moment, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So we have essentially dismantled the whole structure of communication.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
took the same view.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They introduced a few more things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So there were a few more communication channels that they handed off to Trump that I think have not been made use of.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So we're back to essentially zero except for the trade.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that is a very, very dangerous situation to be in with regard to global public health, any kind of sort of global coordination, whether it be on macroeconomics or climate effort or whatever, and on these issues like AI, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think that's a really bad place to be.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So we're starting at a, I think, a rather dangerous position.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think it should be a priority to figure out how we can get there.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it's very hard to see how we get there given the political environment, frankly, in both countries.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So in the United States, you have this narrative that
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China is this bad actor.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have an illegitimate government.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They are a systemic rival.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We basically have to contain, constrain, control them.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And any kind of interaction with them is in and of itself dangerous.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you have people in Congress saying, I don't want to go to China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's no point in going to China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
A, because I'll pay a political price for it if I go there.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I will be tarred as someone who went to China and therefore is tainted.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And what can I possibly learn?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I already know what I need to know, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you have...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
a deliberate effort, I think, with the United States to reduce the channels of information that we have with China and direct experience, which is very bad.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think one of the bad outcomes of COVID in China was that they kind of locked themselves off from the rest of the world for almost three years.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They got really obsessed by this self-sufficiency industrial policy complex.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The Chinese system has always had a lot of difficulty communicating with the rest of the world.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This has been persistent for many decades and centuries.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so this gave them a great excuse to just like not do the thing that made them feel very uncomfortable, which is like engage in communication with the rest of the world.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they concluded it's kind of okay.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so they also retreated into a very –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
sort of paranoid narrative about what the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
is up to, which is to a significant degree justified, but not entirely.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think lost sight of the value of really robust communications aligns with the rest of the world.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So both sides are entrenched in very suspicious and
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
self-reinforcing narratives about the other, which makes it incredibly difficult to forge a better communication system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I have to say, you know, I'm fairly critical of both of the Biden administration and the Trump administration, different ways how they handle this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think the Biden administration could have done a lot more a lot faster.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think they were – sort of had the idea that it was good to have more communication but they waited for two years before they did anything.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then they were very parsimonious about how they did it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think they could have been much more aggressive.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They weren't and that's a problem.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then I think the Trump administration unfortunately just doesn't have –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It doesn't place strong value on having respectful communications with anyone in the world, frankly.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then when you compound this with the paranoia about China, then it just creates more – I don't want to say paranoia.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That's too loaded a term.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But the suspicion, the fear, the distrust of China that exists –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
it's very hard to see how you get it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I agree with you that we need something like that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I'm kind of pessimistic that we'll get there anytime soon, unfortunately.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, exactly.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Exactly.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
How do you do that?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Right.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You can't.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It is really big.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It seems like a very banal observation, and yet I keep coming back to it as one of the fundamental facts that continues to be underestimated about China is just how big it is geographically and in terms of population.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But yeah, so I mean the question there is like, okay, so what is the value of these things?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, okay, so it's a fabulous book.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I'm very proud of it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And a few thousand people read it, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And at any given moment over the last 15, 20 years, there have been north of 300,000 Chinese students in the United States, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so I don't know what the total number is over time, but it is quite a large number, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the cumulative effect of personal experiences can be gigantic, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Particularly if it is like extended over time.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's really, really important.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then the impact of these more structured engagements, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you go as a tourist, you talk to some taxi drivers, you see this and that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
What do you learn?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, I'll give you a concrete example.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So one of my side gigs is for a number of years, I taught a executive MBA course at NYU on China's economic rise.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You know, what that meant for companies and so forth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And usually I have about 20, 25 people in the class.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I taught it for three or four years before COVID.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Four years, I guess.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then two or three years after COVID started.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
In the years that I taught it before COVID, there were always reliably four or five people in the class that had spent some time in China, and many of them had done so just as part of this executive program, because part of what you got by signing up for this EMBA is that they took you on these global study tour trips, and you would go to this country or that country, and you would be there for a couple weeks, and you would talk to a few companies and this and that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's pretty superficial, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But what I found was that when I had a class that had a few of these people sprinkled in that had that experience or a little bit of work experience or they'd gone as a tourist, had some kind of like a student experience or something.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The class discussions were always much more nuanced, and people did not retreat into these sort of cartoon stereotypes of what China was like, because everyone who had been there could say, well, actually, it was a little bit different because here's my personal experience, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Then the classes that I did after COVID had set in, they weren't doing these study tours, so no one in the class had been to China as part of the program.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And kind of luck of the draw, I didn't find any people who had been there as part of work or whatever.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I had zero direct experience of China in the class for a couple of years.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And the baseline view of what China was was, A, way more negative.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And be much more stylized and, dare I say, cartoonish.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That they were essentially getting their view formed entirely by whatever they were picking up in the media and from their preconceptions.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And there was no check on that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so I saw in just a very, very, very small but very concrete way that if you don't have people going back and forth and there aren't some people in the mix who say, wait a second, what you're saying doesn't make any sense because I was there and I saw this and it's totally different, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That, I'm convinced, has gigantic impact.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think it's really, really damaging if people in positions of authority –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
in our government and our political system refuse to expose themselves to the actual reality of what China is, which is essentially what they're doing now by making it politically impossible for anyone to go to China and see what's going on there.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That is a very, very dangerous place to be.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's ignorance.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And one of the things that drove me and many sort of China, Western China types crazy about being in China for many, many years is you would go
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And frequently, you would have this experience.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You'd be sitting in like in a seminar room or think tank or whatever.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And some Chinese expert would say, we Chinese, we understand America much better than you Americans understand China, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And for years and years, I basically thought this was BS, that most people in China don't travel.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have no idea, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And even the expert class
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They had fairly superficial kind of understandings.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so I always felt pretty confident that I and people in my cohort, we understood China just as well as they understood the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And their blind spots towards the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
system were very, very clear, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So for years and years, that drove me nuts when people would say that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Now, I think it's completely true.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
All you have to do is look at the student numbers.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
300,000 Chinese students in the US until their visas get revoked.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We're struggling to get to 1,000 US students in China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
In the U.S., we closed down the Chinese consulate in Houston as part of a trade spat back in 2020, I think.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Chinese responded by closing down our consulate in Chengdu.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Complete disaster.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Whole sort of area of Western China really important that we have no eyes on officially anymore.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Decided that their Xinhua journalists are not really journalists, which is sort of true.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So we forced them to register as government agents.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The Chinese responded by kicking out a lot of our journalists.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Massive own goal for us.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the types of interactions that U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
people have...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
with China, directly on the ground in China, have been massively restricted compared to what they were a decade ago, partly as a result of Chinese government action, partly as a result of really misguided actions on our part, partly because of just like fallout from COVID and various other things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But where we are is bad, and there is an information asymmetry, which I think operates the disadvantage of the United States right now.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, I basically agree with that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I mean, I think there's, you know, we should be spending a lot more time trying to figure out how to make this a workable relationship.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's going to be competition.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's going to be conflict.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There are some real conflicts of what we define as core interests on either side, which are tough to resolve.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This is not easy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But we basically both have to recognize, and this is more of a problem on the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
side.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think the Chinese recognizes the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
is not going anywhere, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There is a little bit of a meme in Chinese foreign affairs circles.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Oh, the decline of the U.S., the rise of the East, which is very sort of officially popular.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think most people don't really believe that because they just have too much confidence in the long run resilience of the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think they're basically right about that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think we on the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
side have to get a little bit more attuned to the idea that this is just like there is no end point to this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This is a relationship which will go on forever.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's no winning.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's no losing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's just managing.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we need to do a much, much better job of figuring out how to manage it and keep the conflicts and the friction in as contained a zone as we can.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Not easy to do.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Things are complicated.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, no, that is a really important point.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I want to just dwell on that a little bit.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The attraction that people have towards extreme narratives about China, total domination or total collapse or so forth, very, very strong.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
In my view, again, it's a product of ignorance.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The less you know about the realities of place, the more you can construct these fictional stories which take some truth and then –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
absolutize it.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The more you know about the reality, it's like, yeah, it's more messy than that, so neither that nor this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That, I think, is just another argument for why you have to have much more deep engagement so people are engaging with realities rather than fantasies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You can see this, again, in very mundane ways.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you just look at the way that the Trump administration has conducted its trade negotiations with China,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
it was premised on the notion that Chinese economy was so weak that you hit them with tariffs and they will immediately capitulate.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that was a ridiculous idea.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it's taken them a couple of rounds to figure out, oh, maybe that wasn't quite so right and we have to take this more seriously.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So getting away from the extreme narratives is important in general.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then I think also in the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
side,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Also, to some extent in China as well, a lot of the things in the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
political context that are blamed on the rise of China, we have this problem or that problem because of China, they are predominantly exercises in scapegoating, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So we're talking at the beginning of the conversation about the change in the industrial sector, hollowing out of U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
manufacturing employment and so forth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you look at the trend of U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
manufacturing employment as a share of total employment is a straight line from 1946 to today that looks like this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You cannot find the Cold War.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You cannot find the rise of Japan.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You cannot find NAFTA.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You cannot find China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You cannot find anything.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
What you find basically, I think, is the march of technological progress.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That's basically what that – and so all of these stories about China did this or China did that, yeah, there was some impact.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But mainly what the United States failed to do as the world was transforming in the late 90s, early 2000s, we failed to take seriously our responsibility to –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
change our systems of redistribution, of helping people out, of social... We failed in the social contract domestically.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So there were failures of domestic policy, which got then blamed on China, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think similarly, if you look at scare stories about how China's going to take over the world...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Okay, BYD, very good company.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Huawei, very good company.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
CATL, very good company.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
You look at the totality of the corporate universe in the world, it's still pretty big.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
US companies are incredibly powerful and adept across many, many, many technological sectors.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They are very good at what they do.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
In many cases, they still have very strong positions in China because they're so much better at what they do than the Chinese competitors.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We're dealing with the rise of a new entrant on the global stage and that's uncomfortable and there's some jostling there.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But we should also not overstate the degree to which even on a sort of a commercial industrial side that we are sort of existentially threatened by this.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's some real challenges there.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But a lot of this notion that we will –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
that we will not have an auto industry in five years because of BYD.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Let's get a grip, folks.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We could end up there, but if we end up there, it's because we will have made a bunch of really bad policy decisions that got us there, not because this competitive threat exists.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So mostly it's on us to figure out how to get things right on our own terms within our own system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then I think basically we'll be fine.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But right now, that isn't kind of where the conversation is particularly.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, I think one of the things I often describe China as a very turbulent and very deep ocean.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you skim along the top and you see the huge waves, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So all the stuff that's been built, all of the, you know, cities, the high rises, the industrial parks, the high speed rail and so forth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then you go below that and there's a very deep, still ocean of ideas, concepts, bureaucratic tendencies and so forth that have built up over centuries that in a lot of ways does not change that much.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So a simple example on this is how to make that more concrete.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If I think about
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
What the United States was like socially in 1985 compared to what it is today in terms of the space for gay and lesbian people, trans people, social acceptance of different lifestyles, awareness and attention paid to racial issues, all these kinds of things.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We were the...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Changes that have occurred in the United States over the last 40 years, I think, are substantially greater than the changes that have occurred in China over that same time period in terms of people's fundamental understandings of how do we interact together in a society.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And partly that just reflects that the US is intrinsically a somewhat more complex society
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
than China with all of these layers of races, the whole immigrant experience that was – just in terms of the number of foreign-born people was much lower in 85 than it was today.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But socially, we are much more –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's just been a lot more change and a lot more, I would say, evolution of people's basic attitudes towards what they think about society and how we should interact.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China, in that sense, I think has been more stable.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's more cohesive.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's more attached to rather deep-rooted notions of...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
gender relations, patriarchy, sort of how the society should hang together.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So that, you know, as we think about all of the change that's occurred in China, which is real, and some of it, you know, the changes in social relations that has come with the essentially abolition of the planned economy system and the replacement with this
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
basically capitalist system with a Leninist political carapace.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Those are very significant, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I don't want to underestimate how much transformation has gone on in China over that period.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think it's been substantial.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But in the US, it's been, I think, in many ways, even more.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's a kind of intrinsic churning dynamism to the American system that is just always there, is often very uncomfortable to live through, and we're living through, I think, a very particularly uncomfortable moment now.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And in China, there is some of that, but there's a lot of containment and there's more stasis in a lot of the kind of fundamental sort of social relationships.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I lived in China more or less full time until 2015.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then I started doing half and half after that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Now I principally live in New York.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
One of the things that always struck me when I would come back from China is – to the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
is just how much grassroots cultural activity you have all over the United States, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We have a very distributed sort of system of sort of cultural activity here.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And in China you have –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
a few sort of big cultural hotspots where things happen, and then it's all kind of placid, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So the sort of the variety of experience that you have in the U.S., I think, is still unrivaled.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And, you know, I think you were talking earlier about there's still this huge discrepancy of
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
between, you know, the average income in China and the average income in the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
is partly a reflection of that, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's still, on average, a much poorer society in the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
than the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And so the surplus that's available for people to do stuff that's interesting but not sort of economically productive in a narrow sense, that space is much – still a lot smaller.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it's not just political –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Repression that's doing that, it's kind of like – it's a combination of the level of income and just like the ingrained social structures.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Yeah, let's not take those lessons.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Those are very bad lessons.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Right.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I think there's also a very strong pattern.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's been a few good books written about this, about how American attitudes towards China in particular have tended to swing from one extreme to the other.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They are this great – Americans and Chinese are kind of the same because they're both pragmatic.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They like money.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They like business.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
If you go to China, it's very easy in my experience to sort of like chat with people and get along.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So that level –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
connection is fairly easy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And then the other swing of the pendulum is that they're this enormous amorphous force that is committed to a devilish system that we don't like.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And finding the middle ground in that historically has been very, very difficult for the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
to do.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Well, my expectations for this are very low.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Because I think the basic problem here is that we have on the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
side, we have a sort of a collection of grievances and complaints that have not coalesced into a very coherent agenda of what we want from ourselves and what we want from China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And if you don't know what you yourself want and you don't know what you want from the other party, it's very hard to engage in a constructive negotiation.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I think that's my fundamental take on where we are right now.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
To me, what we should be – so this is a normative statement.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
What we should be aiming for is –
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
trying to figure out what are the terms of coexistence between the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
and China in the coming years and decades.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The most desirable outcome would be some kind of an agreement under which we create a broader permission structure for Chinese companies to invest in the United States in a lot of these key industries that we're talking about.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think that's good for the United States because I think it is reasonable for us to try and rebuild certain aspects of our industrial manufacturing system.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think we let those atrophy too much.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So selectively, I think it does make sense for us to try and rebuild that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And rebuilding that should incorporate the best anywhere in the world.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And some of that is now coming from China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And I also think just in terms of
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
enhancing mutual understanding and getting better communication channels.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Investment is even more than trade, is a very good communication channel because it forces you to go to the other guy's place and put down roots there and figure out how things work and figure out ways to communicate with one another.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Now, the obstacles to that are enormous, both because the US narrative that this is intrinsically unsafe and because I think the Chinese will be very reluctant to allow a lot of their technology high flyers to go and set up in the US and risk having their technology leak away there too.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I'm not saying that that is easy or achievable, and certainly not in a few months.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This would be over the course of a year or two or three, you might be able to negotiate some terms of engagement there.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I mean, the big problem I think that China creates for the world as a whole right now is this fact that they just are unwilling or unable to generate enough domestic demand to keep their own economy running at full steam.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That's bad for their own economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it creates a lot of friction in the rest of the world because what it then means is that companies that can't sell in China are forced to export their surplus production.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And this creates rising trade frictions, not just with the United States, but with lots and lots of countries.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And it does sort of contribute to the narrative that...
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
that China is not really all that interested in creating a situation where everyone benefits from their growth.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's much more of a, we're in this for ourselves.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I think it would be helpful for the world economy, helpful for the Chinese people and helpful for general stability if the Chinese could recognize that they need to do a lot more to promote the demand side of their economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It can't just all be about endless investments in new technologies.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Most metrics that I and my team follow of return on investment in China, they're going down.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
The number of zombie companies that still exist but don't even generate enough revenue to pay the interest cost in their debt, that's going up.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
There's a lot of pressure that's building within the Chinese system because of this obsessive concern with the supply side of the economy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they'll continue to do, I think, quite well overall in technology production, but the financial constraints are rising.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So they, I think, have some self-interest here in coming up with a more balanced economic model and having some pressure from the outside to get them in that direction.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I think that would be good.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
But I guess the final point I would make on this, though, is on the US side, which is, of course, where I generally sit, it really is critical to have a realistic understanding of what's happening in China and how they're interacting with the rest of the world.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So I think one of the
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
big dangers that we have in the current Trump administration strategy in this, which was also to some degree apparent in the Biden administration strategy, was there is this belief that China can be contained and that you can essentially construct an alliance of countries
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
that will stand up to China and try to constrain it with you.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It's kind of a replay or dusting off of the Cold War playbook where you had Soviet Union and the Warsaw Pact, you had United States and NATO and all of the informal allies everywhere else, and you had the blocs against each other.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
and the bigger and more economically productive block won, right?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And that is just not going to work because the Chinese have seen this coming for a long time.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They have long had the view that the US was going to try and constrain them.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And they said, well, how do we get around this?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And their answer is not, you build a block, I'll build a block against that.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Their answer is, I will operate so that it is impossible for you to build the block that you want.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So you look at China's international engagements,
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
More countries have China as their number one trade partner than any other country in the world.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
140 countries trade more with China than they do with the United States, which is not true during the Cold War.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So if you go to Southeast Asia, you go to Latin America, and you say, how would you like to join our anti-China alliance?
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
They will say, no way.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
This makes no sense for me.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I import a lot of my industrial inputs from China.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
A lot of my consumer goods, this is really a critical relationship.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I might have some concerns about the trade balance and blah, blah, blah, but I am not going to go up against this country that is now either my number one or my number two economic partner, certainly on the trade side and increasingly on the investment side.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
That is a non-viable strategy.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
It will never work.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
China has integrated itself into the global economy very successfully.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And this is just like a fact that we need to live with.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So we need to have a strategy that recognizes this is a reality, that there are a lot of strengths that the U.S.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
has to bear if it's willing to play them, and that we have the advantages of a dynamic system and, frankly, a lot more
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
sort of creativity and flexibility in our financial system than the Chinese do.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
So it's perfectly possible to come up with a coexistence scenario in which we do really well.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
We have domestic policies that sort out our own imbalances, both economic and social.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
And we have a significant degree of engagement with China that is competitive but hopefully can be bounded so that we don't wind up in a hot conflict situation, which would be the worst of all possible worlds.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Great.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
Thanks so much.
Dwarkesh Podcast
China’s Manufacturing Dominance: State Directives & Ruthless Competition — Arthur Kroeber
I really enjoyed it.