Odd Lots - Adam Tooze on the Big Misconceptions of the Chinese Economy

Episode Date: September 12, 2024

One of the big buzzwords over the last year or so has been "overcapacity." There's a constant line of argument that China is unfairly flooding the world with unprofitable goods and creating huge, unsustainable imbalances. Western countries, particularly the US (but also Europe), have responded by raising tariffs and engaging in domestic industrial policy in order to compete. But is the strategy sound? Are the basic premises of the problem correct? On this episode of the podcast, we speak with Columbia Professor Adam Tooze, the author of several books, as well as the popular Chartbook newsletter. He argues that the overcapacity framing is misguided, and that the US may be making a mistake putting its chips down on an industrial revival. He talks us through some of the actual weaknesses of the Chinese model, as well as its global political reverberations. Read more: Two Veteran Chip Builders Have a Plan to Take On Nvidia The US and China Are in an All Out Race for AI DominationSee omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Bloomberg Audio Studios. Podcasts, Radio, News. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, we recently interviewed U.S. Trade Representative Catherine Tai about, obviously,

the changing nature of our relationship with China on trade. I feel like, though, this entire podcast could just be about. that, right? There's an infinite number of angles to explore. Okay, we're a China trade podcast now. It's done. Yeah, it's done. No, you're absolutely right. So one thing, this has been hovering in the background all year, basically, but you've been hearing this mention of China over capacity. And I think even President Joe Biden was talking about this idea of China flooding global markets with artificially low-priced exports. And then beyond that, a big narrative this year has been China's economy slowing. And so I guess one question I have, or one thing that seems very noteworthy to me

that I would love to dive into a little bit more is Chinese growth has been slowing. Yeah. The Redmond Bee has been appreciating. And there have been all these new trade restrictions since the Trump administration and continuing into the Biden administration as well. And yet China's current account surplus, and I know there's some discussion about how accurate the official numbers might be, et cetera, et cetera. But the surplus is going up again, which seems kind of remarkable. Totally.

It's a really weird moment because I'll look at like images of some sort of like battery plant or factory or some transportation. I'm like, oh, this is the future. There's extraordinary what's being built and the efficiency and all that. And then you read these headlines that basically talk about an economy in crisis. We're facing their worst challenges since Deng Xiaoping or, whatever, sort of slow down. And it's hard to like, they fit together in some way, but on some level, like, I still have a hard time reconciling the dual China narratives right now. Absolutely.

And then the other tension that I observe all the time and I have a lot of questions about is this idea that, okay, China seems committed to the export-driven economic model. Yeah. Even though, again, as far as I can tell, all the headwinds right now seem to be coming on the export side. And yet, like, there's still not that much effort as far as I can tell to increase consumption or to maybe, I don't know, do like consumer stimulus or something like that. So, yeah, you're right. It does feel like a strange moment. And then I guess two other sort of dimensions of this is like one of the points and Ambassador Tai mentioned this is like this view that like China isn't playing by the rules or at least the rules that, you know, maybe the

members of the WTO for many of the last decades had accepted. And it always sort of questions like, why, you know, every country has a different arrangement, right? You know, in the U.S., companies pay the health care of their workers. In Europe, the government pays for health care. Like, every country has different rules. So, like, part of me wonders, like, what is it about China and this sort of state-directed capitalism that they have there that's, like, particularly, like, oh, no, this crosses a line and the rules of trade don't really work with them. And then, two, you know, this idea of like overcapacity and dumping. Like I get that perhaps intuitively in a pure commodity such as, say, steel.

But when it comes to some other things like solar or petrochemicals or things that really, you know, are very like cars, like I have, I struggle with this notion that like it's a useful concept. But maybe it is. But anyway. Rather than us wondering about all these questions and thinking aloud, let's ask our guests. Well, I am thrilled to say that we are welcoming back on the show, multi-time Oddlots guests, but it's been a while since we've talked to him, but someone who could help us understand all of these things. We're going to be speaking with Adam Tew's, Professor at Columbia. He's the director of the European Institute and the chair of the Committee for Global Thought.

He travels all around the world, and he was actually in mainland China this summer. So, Adam, thank you so much for coming back on AdLOTS. It's been too long. Yeah, it has. It's pleasure to be here, I guess. Thank you so much. You know, I just start, Chinese overcapacity. We just hear so much about it.

Do you think that's a useful frame? Like, do you find that to be a useful sort of analytical concept over capacity for understanding either China or a relationship with China right now? I'm a little bit skeptical. I like the tone of doubt in your own voice, Joe, as you were introducing this. I don't get it. I mean, I think maybe it's easier to define in sectors where, the technology is relatively static and where we have relatively straightforward industrial

economics models of predatory strategy that would involve building massive amounts of capacity, maybe sliding down a cost curve or maybe just establishing some sort of credible threat where folks will believe that you're going to fight for market share because you've just got so much sunk cost. So you could look at industries like steel and aluminium in those terms. And I think the Chinese themselves would admit that, you know, they went hard. on urbanisation, and so they built enormous capacities in steel, cement, and so on. That's one sort of sector. I think where it gets, I just find kind of vaguely puzzling is in new sectors,

where thanks to the kind of new world that we're in with climate planning, where I use that word advisedly, we have an idea of what we need to do to get to net zero. And that's apparently taken seriously by Western governments. And we know that the demands in terms of the build out of good. electricity, capacity, transmission, and then end use in the form of electric vehicles are just huge. And for them, we're pretty uncertain about the technologies that are ultimately going to come and dominate those sectors, even over the medium term. And it's hard for me to really kind of, to say that the world has got too many photovoltaic panels

just seems, you know, not for my daughter and granddaughter's children's future. I think the more photovoltaics, the better, to be honest, than the fact that the price is crashed, you know, enables, there's this extraordinary story about Pakistan importing 13 gigawatts of photovoltaic capacity in the first six months of this year, Pakistan, which is in real serious financial trouble. And that's because they're so damn cheap, and that's because the Chinese have built out this huge capacity. So those are the areas where I find the story just a little hard to really wrap my head around. And I think it's got, you know, as an obvious tactical motivation, you can see how the argument is being used by Western

politicians. But even when you look at the steel sector, like, you know, if you actually look at the share of Chinese capacity that's being sold onto global markets, generally speaking, it's a relatively small share of these absolutely immense industries the Chinese have built, which are overwhelmingly directed towards their own home markets. So just to ask Joe's question in a different way, why do you think it seems like policymakers, at least in the US, have landed on China overcapacity as this issue in trade, they seem to be concerned about, to the extent that it is one of the very few areas of bipartisan consensus. Well, I think China generally is an area of bipartisan consensus in the U.S.

anyway, right? So I think this is another instance of something that folks can agree on in U.S. politics. And it sounds good, and it offers a rationale for protectionism, which is very much on vogue in an election year. And with this consensus, what's really interesting, isn't it, is there's been this shift away. I mean, the big thing in the background, here is that there's been such a powerful shift in American economic policy discourse away from thinking in terms of consumer interest or holistically in terms of the balancing of consumer and producer interest towards a really rather monolithic focus on producer interest. And you don't, of course, generally talk about corporate profits in that context. You talk about American workers,

especially as what the Americans call middle class, in other words, for the rest of the world, working class blue-collar jobs. And that becomes the center of policy discourse. And in that context, then, you can kind of see how overcapacity begins to sound like a looming threat, as opposed to a free gift to American consumers and all of a sudden get to benefit from whatever subsidies, ultimately Chinese taxpayers are going to end up footing the bill for. So I think this shift towards a worker-centered vision.

And this operates, you know, in a purely nationalist mode, a rather masculinist mode on the Donald Trump side, and it is a huge part of the Biden folks' interpretation of why they lost in 2016 and why the Democrats had to fashion this new vision of economic policy, which was essentially around restoring the prospects of the American working class. And I think that's where the sort of the work is being done and the segways are being established. Do you think that was a good pivot? Like, I mean, setting aside the actual implementation of the tactics and, it's a good, you

It is striking. People aren't talking about, oh, it's great that we can get all these cheap goods by global trade. We are not talking about the sort of consumer-centric frame. Where we overdue, was this warranted the sort of worker-centric frame on the effect of trade? I mean, I'm a skeptic also when it comes to the China shock. I mean, not at the detailed level. Obviously, there are industrial producer communities in the U.S. that were hit really hard, and that's true all the way around the world. and in many cases it's preempted industrialization. Large parts of Africa, you know, there's just no prospect of that industrialization any longer happening. So that's real.

But as a diagnosis of the malaise of American society, I don't think it does work in general. There are a whole bunch of things wrong with the conditions of life for working class of Americans that aren't reducible to the availability of so-called, you know, good-paying blue-collar jobs. And I think it's a mistake on the part of Democratic Party in progressive politics to focus excessively on this because it distracts from what should have been a much broader agenda of improving the conditions for the service sector, which makes up the vast majority of the US economy, and thinking hard about how to improve the quality of life, conditions of work. And also to think, you know, because the standard argument is it's always a manufacturing that you get the productivity

increases. Well, maybe it's time to think harder about how we could think about the service sector also as a driver of productivity and improve quality of provision, quality of workplace, upskill the workforce in those sectors. And there was a moment in the early Biden administration with a build back better agenda, which was more promising. And I think a lot of people may be hope that Kamala Harris might also be more amenable to this. But once Manchin got to work on the agenda, and Biden's, I think, just habits of mine, he is after all the very old man. And so he comes out of an era in which American industrialism was really the Trump card. And so we kind of regressed into that mode of thinking about industrial policy. And then in political terms,

It's incredibly easy to sort of form a segue where you have a strategic industrial sector that China has sort of gobbled up. You have a crisis of the American working class and deaths of despair and Angus Deaton and case and so on. Then you have the working class voters for Trump and then you have the fentanyl epidemic and you pile all of these things together and you've got yourself a real stack there. And the common problem in each case is in a sense, China. And, you know, that's an overcapacity fits quite nicely into that because overcapacity is the result of the unbalanced Chinese growth model. I mean, overcapacity is, you could more charitably say,

it's a relatively neutral and technocratic way of describing an accusation against China that could be put in more forceful and aggressive terms along the lines of you stole our IP and screwed us. And instead, you say, no, no, let us explain to you. We think you have an overcapacity problem. Let us help you think this through and figure out how we deal with it. You can get the news whenever you want it. With Bloomberg News Now, I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio

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You mentioned, Adam, the importance of the services sector to the U.S. economy. And China, of course, has a very different economic model. And I alluded to this in the intro, but it is still one that seems very much committed to export-driven growth. So I'm curious why you think that is. Why, despite all the ostensible headwinds to manufacturing and exports, China remains. committed to growth coming from that. And then I know there have been some rumblings about maybe increasing. I think she called it domestic circulation or something like that. But it doesn't seem like there's been a real push to boost the services sector or boost consumption.

Yeah. So this is a really interesting point. And as I was listening to you, Chases, you opened up. I was thinking, hmm, I'm not sure I'm not sure I quite agree. If you don't agree, that's fine. I'm not sure that I would agree that the Chinese strategy is export-led. I mean, we shouldn't confuse Germany in China, because I think the Germans really, you'd have a hard time actually putting a pin in German strategy, but they celebrate exports per se as a kind of national achievement. Whereas I don't think that is the center of Chinese policy discourse. I mean, rather the opposite.

They actually now have this dual circulation model where they recognize there is an external sector, but that's very vulnerable to external shocks. and the centre is really domestic production, you know, if you were to look at steel, for instance, you know, in a good year in China, either too, and before they did the whole gear shift with urbanisation and construction and real estate, I mean, 95%, certainly 92 to 93% of Chinese immense steel production was consumed domestically, right? They produced a billion tonnes of steel and would export 60 to 70 million tonnes. The vast majority of it is being consumed at home. If you look at Adam Wolf's amazing breakdowns of the Chinese motor vehicle industry,

you see exactly the same thing, right? The vast majority of Chinese motor vehicle production is domestic. The vast majority of their EV, their electric vehicles, the ones that everyone's up in arms about, are also being consumed in China. And that's one of the really impressive things you see on the streets and the highways around Shanghai. It's just one fancy EV after another stuff you've never seen before. Gold wings. It's so futuristic.

It's over. It's extraordinary. knowing. But so far, it's really largely internal. The big surge in Chinese motor vehicle exports, which has made them all of a sudden this huge force in the industry, which is hugely disruptive to the Europeans, notably, is actually in internal combustion engines. So as it were, lower tech Chinese manufacturing. And a lot of it is joint ventures, in other words, Western firms who can no longer find markets in China for their now defunct and stigmatized. You know, folks in China really don't want to be driving, especially American-badged cars now. And so when what we see is the export

surge, but to attribute that to policy, I think, is a non-secatur. There is an industrial policy in China which is driving towards modernization. And then what mediates between the two things, what hooks these two things up is the Michael Pettis argument about macroeconomic imbalance. The real issue is they have this very, very heavy driven industrial policy and they don't have the macro demand to sustain it. And so it spills over as a result of corporate strategies of desperation, basically gambling for salvation, through looking in foreign markets. That, I think, is a convincing overall picture. When you look at, there's one sector where I think you could tell a slightly different stories and always have been able to, which is photovoltaics, because they're about

half of output is exported. They've so overbuilt in photovoltaics that that really is. They basically decided we're going to be the monopoly supplier to the entire energy. transition worldwide. That was already the case 10 years ago when they built out to meet European demand for photovoltaics. But across the board in the Chinese economy, I think it's more convincing to tell a story of industrial policy, which is primarily domestically orientated, this huge Chinese, innovative, scrambling response to that strategy, which then generates such fierce competition within China, especially in light of the Michael Pectis' demand-constrained situation, that then the firms go looking for foreign markets to find the demand. A story like

that, I think, is more convincing than to say Beijing is aiming at export-led growth. You know, it raises a question, and one of the things, again, Tracy mentioned it, but why isn't China doing more to boost its consumer? And they have it, you know, we have seen very sluggish growth, objectively, consumption has been very mediocre, particularly ever since the COVID lockdowns. And Matt Klein had a really great piece in his substack. Recently, basically, no matter how you slice it, it looks like the consumer has been very weak. And so if you just look at like train miles traveled or restaurant bookings or things like

that, it still looks very mediocre. On the other hand, despite the lack of sort of direct in the pockets of consumer stimulus, I see convincing things from time to time that, like, the real goal of economic policy improve everyone's standard of living is still going on, that there's still growth and improvement in the standard of living in Chinese society. I've never been to the mainland. You were there this summer, and I assume it was not your first time. When you're there and when you talk to people, does it seem like overall that whether

it's clearly measurable in retail sales or whatever, that, the current model is continuing to lift people up. I mean, the overwhelming impression one has if you visit a city like Shanghai is just, it's absolutely awesome. I mean, it's in the sort of technical sense. You're just overawed. It's so vast. I mean, it's 20 million plus people.

It's so well organized. It's so modern. It's so rich. The infrastructure, I mean, you know, there's an upside to over capacity, which is just like, there's no limits on it. There's space. There's ample room. it is incredibly impressive and clearly still highly dynamic.

It doesn't feel like a society which hasn't been invested in the last five years or ten years like some bits of Europe feel at this point. So the technological innovation continues. And after all, I mean, even if we think the numbers are fudge, their growth rates are higher or at least on a par with the US and way above those of Europe and Japan. So it's definitely still growing and still generating affluence and innovation and technological change. Yeah, there's really no question about that. But what you also hear really quite vocally, and I was surprised, this isn't North Korea

or Stalinism or something where everyone's worried about bugs in the walls or something. People will tell you quite openly how miserable they're feeling. And there is definitely a sense that something's broken. The real estate market's headed in the wrong direction. The regime is not friendly to go getting just simple wealth accumulation anymore. The pressures of the intensely exam-driven education system on young people, and the parents of young people are relentless and brutal. And there is that sense of like a system that is straining.

It's not obvious where the next 7, 8% per annum growth machine is going to come from. And it's always an adjustment to go from 7,8% per annum to 3 or 4, even if 3 and 4 is still very respectable. And loads of economists, I don't know whether you folks read the amazing blog Pekinology by Zicheng Wang, who's now actually a student at Princeton. at Princeton. I don't know whether he'd agree to be on the show. We should have him on. Yeah. I've talked to him and I've been meaning to, yeah. He's like the top and does such a service to the Anglosphere and just translating document

after document. And he's like, you'll have seen it. He has this roundup of 11 prominent. And we're talking like vice ministerial level voices from within the Chinese economic scene who are all saying exactly what you're saying, Joe. Like, go where? This is, why aren't we doing this? It's so obvious. Like, here's another way we could do this. We could provide better. housing for rural to urban migrants. We could do various types of discount scheme for parents. We could change the tax system in a way it should be more beneficial. We could build out a welfare system that will be more supportive. What's really fascinating is that at the top level, there seems to be, and this is what this drum role of expert opinion from within the Chinese hierarchy, none of these

people are remotely dissident. There does seem to be almost a German-style level of resistance around a series of ideological ideas, crucially around welfare dependence, which basically say, no, we should create this really tough environment in which Chinese families and households have to prove themselves. And no, we're not going to just easily provide support. And it does seem to be something of a hang-up almost

about a society, I guess the regime fears that China will lose that incredible, restless, you know, hungry edge that drove it through the last 20 to 30 years. It's, I guess, I don't have a good answer. What I'm saying is that within the system itself, people are registering this perplexity and the answer you get back runs along the lines of, well, the higher-ups just don't think that would be a good idea.

Since you mentioned Germany, my framework for the China-German-Economic relationship, at least, has always been sort of frenemies, where they both benefit in some way. and they're quite closely linked, but there are obviously tensions and points of issue there. I'm wondering, how do you see the evolution of the China-German relationship right now? Like, how much has it changed from, say, pre-COVID to where we are today? Yeah, I mean, you could start with the structural similarity. I mean, they both are chronic trade surplus countries and have kind of competed with each other to have the largest, It's not just trade imbalance, the current account surplus.

So they have that structural similarity. They were once complementary in that China would produce with German equipment the cheap manufactured goods that American consumers would buy. Of course, American consumers also bought high-end German exports directly, as did the Chinese upper middle class. But the direct link was the American aggregate demand excess provided a market for both German and Chinese exports with Chinese industrialization providing a market for German manufactured goods.

And that still is a link, and you see it in the commitment of capital goods industries in Germany and industrial companies in Germany, two ongoing direct investment in China, which is still live. I saw this when I was visiting because I speak German and I'm known there. I bump into German business people when I'm in China, and they will tell you flat out that they have to be there for two reasons fundamentally because it's a big market and it's rapidly growing if you're saying heavy chemicals of your BASA, if you can't not be there. But the other reason why a BW, for instance, can't not be there is that if you're actually going to compete in the global market in the next generation of vehicles, motor vehicles, you can't do what the US firms

are doing, which is basically retreating behind national protectionism. You have to at least try and stay with the Chinese manufacturers in the Chinese market. And so VW is doubling down on its investments in China because they just see it as the market. It's already the biggest, but it's also now at the qualitative at the technological frontier. And unless you can compete there and they've been having a brutal period the last 18 months, you're basically done. You know, you're basically going to be a legacy manufacturer of sophisticated internal combustion engines, not of the new cutting edge. Siemens, I think the electrical engineering firm is kind of a little bit in between the two. I think it also sees, especially in like process manufacturing.

So the sort of highly sophisticated, fully integrated, electronically controlled manufacturing lines, which the German firm specialize in, they feel they have to still be there. So there is this substantial investment-driven market-orientated technologically, you know, inspired link between Germany and China. And you see it in the way the German government maintains its relationships with China through thick and thin. And when Schultz goes, he takes these large delegations of German business leaders with him. And they're quite outspoken. There's sort of anti-China consensus that you quite rightly pointed out is prevailing in the US, and which I really think weighs on American business leaders now doesn't prevent German business leaders openly saying, if we're in the business of car making, we need to be in China.

I mean, they'll just simply say that flat out. And BASF, who's played real hardball with the German government over the Ukraine war and the energy costs issue, has openly said, you know, basically it's, you know, you either give us the support we need, or we're leaving for China. And in the end, they've left for China, where they will get, you know, the power plant they need. This isn't Dursy stuff that BASF has this commitment to being carbon neutral in the foreseeable future. And so what they said to their Chinese, the region where they're investing is, hey, we need a gigawatt of clean power. And guess what?

The wind farm, the offshore wind farm is already in process of construction. So, yes, the German relationship's different. And it's based on this division of labour, industrial integration. I'm Francine Lacqua, an award-winning journalist, and I've got a new podcast, Leaders with Francine Laquois from Bloomberg Podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacqua wherever you get your. podcasts. So since we've pivoted to Germany, you know, there's just a ton of stories these days about frailties within the German model and the poor growth. And it feels like a very flip the script from the 2010s when Germany was booming and the periphery was so weak. And then, of course, early September, we had the AFD party, which is a right-wing party, one big in regional

election. So there's a lot of angst right now about what's going on in Germany. What is going on in Germany? Even how much of the concern is like, okay, German legacy manufacturers are having trouble competing with Chinese manufacturers? There's obviously the politics of immigration and so forth. Like how much of a direct line can you draw between what's going on with the economy and then sort of what's going on in the political scene? I think there's three issues in play that the extraordinary election results that we saw in Turingia and Saxony, two states. Germany is a federal system. Turingia and Saxony are two states from the newly joined East German provinces.

One element of this is the legacy impact of German unification, which, I mean, if you've ever had the chance to travel through East Germany, was accomplished. You know, it's really a gold-plated regional policy program. And cities like Dresden are absolutely gorgeous, hugely invested, wonderful places to live. Nevertheless, there is this reasonably well-founded understanding on the part of East Germans that they are at some level new to the party. They were basically bolted onto the West German experiment and had to largely accept its terms. And for a traumatic period in the 90s and the early 2000s, this is largely the parents or

the middle-aged generation of East Germans. There was huge unemployment and massive disruption and deindustrialization of a really shocking variety. And that lingers in the political system. And if you ask the voters for the two extreme formations, one is the AFD, the Alternative for Deutschland, originally an anti-Dragis, Euro-Skeptic party, and the other one is Sarovagen-Knecht, so truly a Marxist philosopher who is also keen to make a compromise with Putin over Ukraine. So there's a left and a right-wing extreme.

And if you ask their voters how they feel about their standing in German society, 80% plus, we'll say we feel like second-class citizens. So that's one key element. The second key element is the migration issue. And the AFD didn't start as an anti-migrant, xenophobic, racist party. It started as the alternative was to QE, to Draghi. But after the refugee shock in Syria in 1516, it became openly racist, openly neo-Nazi formation.

Where I think the de-industrialization element of the story comes in is that that removes the last best hope, if you'd like, of the mainstream, which says, you know, the way we're going to address these problems, and, as it were, integrates the East more successfully is by Germany's economic success story. That's ultimately going to take care of this problem and achieve successful integration. And they plowed money into Intel and the Taiwanese manufacturing chips around Dresden. That hasn't bought off the East German voters. And the real nightmare of the shift in the motor vehicle industry,

which is a huge piece of the German industrial infrastructure still, is that if that goes, then your antidote, if you like, to what is essentially a politics of racism and Islamophobic, that is no longer plausible. And it isn't, I don't think, that, you know, folks in Dresden or in Turingia are voting AFD because they're worried about jobs being lost in VW. It's more that in Berlin there's total panic,

because if you haven't got the VW model, it's not obvious that Germany really has a growth model. And in part, it's the same blind spot as we were talking about with the US. In other words, they aren't actually focused on what even in Germany is the main source of employment and GDP, which is services. And not the manufacturing base, but they have been, they've trapped themselves. They are trapped by powerful interest groups, the very strong voice of organized labor in Germany, but also the industrial lobby. And a kind of lack of imagination. They're kind of clinging to industrialism as really the last straw.

And yeah, that's why then the threat of China is really ominous. You alluded earlier to the idea that maybe both China and Germany seem to be hoping for, I guess, the immaculate emergence of supply-side solutions to their problems, rather than having to do some sort of large-scale stimulus. How realistic is that? Like, where could relief actually come from? I mean, in the Chinese case, it's pretty easy to see. I mean, they could do, there's a whole series of moves that they could make that would be, it's hard to see that they're just not straightforwardly win, win, win, really. And they would be a expansion of household demand and expansion of high quality human services.

There's a lot of remedial stuff that actually needs doing to backfill the China dream. The extraordinary sophistication of a city like Shanghai is not matched in the Chinese hinterland, which is, of course, vast, and it contains hundreds of millions of people. And even elementary stuff like schooling is really miserable in provincial China. We, of course, think of the huge success of elite education in China, but that isn't the majority experience. And so, you know, you could very easily imagine a kind of comprehensive upskilling, upgrading strategy.

Implementing it will be a different thing. But that would be the way you would go. For economy as large as China's, it's a domestic policy story in the end that will make the difference. For Germany, I think it has to be Europe wide. that's the way to go. I mean, they could break the impasse domestically over the debt break and invest, and that would be one option, and that's certainly a big priority. And there's some promising noises now, mercifully, finally out of the SPD, out of the Social Democratic Party, Chancellor Schultz's party, about a frontal attack on this debt break. So the debt break is the German

version of the European debt rules or vice versa. The European rules are a version of the the German debt break, which limits the deficit and constraints borrowing, even when Germany pays hardly any real interest and is in need of several hundred billion euros worth of investment in every area of public infrastructure, of digitisation. So that would be one way out. The other one, I think, has got to be Europe. And it may be shocks, which, you know, deliver the opportunity to do this. So Trump victory, followed by disaster for the Ukrainians, would I think unleash a new

Europe-level borrowing package, maybe another half trillion euros worth of borrowing. And that would be the kind of structural stimulus that would benefit the German economy quite considerably. You know, I mentioned this in the intro, but one of the arguments that you hear in the U.S. about why ramping up the trade restrictions with China is this idea that they're cheating in some way, right? Maybe overt, whether it's like pure sort of industrial espionage, but then there's this question like, well, there's all this state support and these aren't the rules of global trade. Just from like the historian perspective, is this a novel argument or has there always been this idea that like, no, you're doing it the wrong way or you've built up this industrial capacity

in a different way than we built up? And, you know, again, it strikes me that like every country has different domestic rules and so forth. You know, in the U.S., we subsidize education to quite a degree. And so that is a form of subsidizing worker training that then corporations can take advantage. How novel is this claim that like we get to do these things because we don't like the way you've developed? Has that always been part of these global trade debates? The first thing to say is that as far as we're able to estimate, there'd been a couple of fairly serious-minded efforts to estimate the scale of Chinese industrial policy spending. And it's significant. I think the most widely cited estimate puts it about 1.7% of GDP.

which when you compare it to a similarly defined measure, though I agree with Joe, there's like lots of different ways of defining. But if you apply the same classification to Europe and the US, that's about three times the share that they spend. So that's one element of this. That's clearly for real. Another, I think, horizon against which to measure this is like the regime that we had before. And I think the ferocity of this argument has to be judged against the assumption that somehow we had outgrown that kind of era of state-led and state subsidized support. And in the European case, you'd have to say that since the 90s, they've taken that really quite seriously.

In other words, the Europeans do have rules that bite to prevent national governments and regional governments from doing the kind of subsidy that the Chinese take for granted. Why? Because the Europeans are balancing this really complicated multinational European Union. And so to avoid just these crazy subsidy races and Germany winning all of them, there have to be these very tight rules. And the Europeans take this seriously to an extent that is at times quite farcical. The argument coming from the American side is a little less plausible because that kind of subsidy never really went away. And American states and cities have always competed in a fairly brutal way for investment.

But I think that's another horizon against which sort of the point the finger is pointed at China, which was OK in the 90s we expect to. you to do this because you were still poor then. And then you did WTO and then we were expecting you to get rich and grow out of this. And God damn it, you haven't. No, in fact, you've somehow doubled down since the 2010s you've been doing it more and more intensely. And there's a new study of China which suggests that, in fact, this was a policy learning on the part of Beijing out of 2008. So the Chinese imagine that after the great financial crisis in the West, the Europeans and the Americans would realize that finance-centered growth was not a great thing

and they would double down on industry and to get ahead of the game, the Chinese thought they should. And of course it turned out that no one else really ever did quite make that move and the Chinese really did. And by 2015 they had the Made in China 2020-25 policy. So there was an asynchronicity in which,

as it were, European and American policy theory thought we would grow out of this. So the Chinese suddenly, in fact, doubled down. That's so funny because I always think like all these things, Chips Act, inflation reduction act. I always have this idea. It's like, you know, 2009 might have been a good time to have done this when there was a lot of spare capacity and cheap labor and all this stuff.

Anyway, I just have one last question for you. And, you know, you've been fairly critical of the Biden administration. You know, we have had this term, right? So the administration and maybe starting with Trump, but certainly the administration is like pivoted away from the sort of, I guess people call it neoliberal. consensus of the decades that preceded it, the worker-centered approach to thinking about our trade relationships, etc. Domestic investment, maybe belatedly getting to do some of the

policies that maybe we should have implemented 15 years ago after the financial crisis. What do you see as your role, as I guess a public intellectual, someone on the left? You know, you're someone who people in the Democratic Party might read and listen to. What do you see as sort of what you trying to accomplish with your writing and your public work? Yeah, it's been quite a shock, actually. I mean, on the one hand, we were listened to, and I'll say weird, visibly. But it's the bit of Biden economics, which is now buried and they prefer to forget, which is my team, I was one of the leading spokespeople, of the team that basically said,

Obama didn't go big enough with the stimulus in 2009. And we needed to go really big, you know, this time. And we were listened to. I know from Schumer's people that absolutely that argument that they missed a trick in 2009. It really, that actually got through. After all, they did the huge stimulus early in the Biden administration. And I would argue that it delivered a miraculous macroeconomic record, right? But the funny thing is that that's the bit of Biden economics that everyone wants to forget because of the Larry Summers inflation argument, right? Because that was anathematized almost as it was happening.

And instead, the entire team has swarmed around this industrial policy element. And I think there I've discovered a new role. So I think in the first phase, I felt, okay, there was policy learning that was going on and the kind of left critique of the Obama administration was making a very positive contribution in feeding that. Then we came to what actually emerged in the industrial policy. And I have to say that a lot of folks that I would, you know, consider allies, friends, whatever, shifted roles to essentially the role of a kind of cheerleading around the

Biden administration. And I get it. They're Americans. I'm not an American, non-American citizen. For them, this is life and death, fate of the republic. We have to rally behind our team. And by joke, they did. Like the Biden administration, if nothing else, was brilliant at message management and worked, you know, the usual suspects in the finance Twitter space, incredibly hard to get everyone on side and keep pushing. And at that point, I have to say, I discovered a slightly different role, which was more that it's a less attractive role. It's a less comfortable role, which is really that of the sort of inside critic. Or rather just simply somebody who wasn't necessarily drinking the Kool-Aid and was saying, well, by what metric, by what

scale is this really adequate? And so that was on the IRA side, the Inflation Reduction Act, where this was turned into this gigantic epic of industrial policy. And I just don't see it. I don't see it in the data. I don't see it in the scale. I don't see it if you run any kind of counterfactual or what we would have expected anyway to have happened. I think there's been a real sort of soft kid glove treatment of this. And much more seriously, however, is the question of war, is the question of war and peace and the way in which national security has come to form an essential part of, even of a progressive economic policy in the United States. And I come from the generation of Europeans, whose childhood and youth was entirely dominated by the prospect that

we were all going to end our lives in a nuclear incineration. And I find that turn towards hawkish anti-China synthesis of industrial, economic and military policy, profoundly troubling. And at the very least, I think, the role of folks with my kind of biography, I will become an American citizen. But nevertheless, I feel like our role at this point is to push back because there's an element of flag-waving a kind of left-American exceptionalism that comes very rapidly to the fore in moments like that. And there is a willingness to believe that, yes, you know, I don't know, America can do a green marshal play. or that whole rhetoric they're all very familiar with. And I've discovered a different role for myself than I really imagined in, I don't know whether I've anchored anything, but I just consistently asking the question is this.

And it's not a skepticism about the potentially beneficial role of US leadership. It's just actually more often than not, are kind of asking, are you actually serious at all? Because I see hundreds of millions and single digit billions when we all know that the problems we're talking about if you're serious. and if you actually want to compete with China, are hundreds of billions, if not trillions of dollars, that need mobilizing.

And what I definitely don't think we should buy as the kind of weak soup of a promise of giant and dramatic action, which we all kind of, you know, can get excited about when in fact what's being delivered is something far less than that. Adam Tews, so great having you back on Adelot. It's fantastic conversation and looking forward to the next time. Thank you. Really appreciate the way you guys do.

such an essential listen again and again and again. I can't tell you how many like, oh my God, I can't stand this airport moment. You know what? I mean, listen to odd lots. Everything would be okay and then the time flies. Yeah, keep that in. Keep this part in. Yeah. Seriously, I kid you not.

Justin, Heathrow three days ago, it was like a nightmare security line. I just put them on great stuff from Jackson Hole. Oh, thank you so much. Like, you know, it's really, it's really a huge service. And it warms my cynical heart to know that we make the experience of Heathrow Airport a little bit better. That's great.

I mean, there are also better moments. I can describe much more chatty moments. But yeah, it's really good stuff. Well, thank you so much. And take care and hope to see you around soon. Yeah. You too. I love talking to Adam.

It really had been too long, but you know, I love talking to people you just throw out anything and they'll have something interesting to say. I know. Those are great guests. Yeah, he definitely makes it easy. That's for sure. I did like his point about the sort of etymological point about the word over capacity. and this idea that like, okay, well, you have a grievance with China that basically boils down to, well, they're not playing fair.

But if you can put this sort of seemingly neutral, technocratic, almost, it sounds scientific term onto it. And maybe you can use that as the basis for, like, adding specific numbers or just giving it this veneer of, like, scientific feeling. I thought that was really interesting because it does seem to be like maybe that has happened over the past year or so. You know what I found to be a very interesting point. And actually something else made me think about this recently and maybe we should talk about it more is the sort of acceptance that we have that if we want productivity growth, we can't get that in the service sector. Right. And so like, you know, you see, you know, healthcare costs. I think that actually the cost curve has been bent a little bit in recent years, but like this is a growing, growing like health care costs, housing services continue to be a major source of strain.

We all know the frustrations that people have with like university costs or child care costs or elder care costs, things like that. And so when we think about like economic growth and where productivity gains are going to come from, we default to the manufacturing sector. Meanwhile, there's this huge swath of our economy that I think many people intuitively feel like we're losing ground on, that we're getting the same thing, but it's more expensive every year, and that perhaps the sort of big challenge or a task that we should take up at some point is, like, what do we make our services cheaper? Well, I think it's true. And you see, that's a totally, that's a great point.

And you see it borne out in the inflation statistics, right? I sometimes think, okay, the cost of things is going down, but the cost of living is going up. And you see that delineated very clearly in the statistics where like, okay, TVs have become more sophisticated and more advanced and they're cheaper than ever. But rents, home ownership, insurance, medical costs, college education, child care, food prices to some extent. All of those have gone up phenomenally. So yeah, I think it's a great point. Totally. And I'm glad Adam brought that up.

Another interesting thing that he said was just this idea that, like, there is a lot of dissatisfaction in China. I mean, there's a lot of dissatisfaction in the United States. And you hear this from multiple people when you talk to them that, like, there really is this sort of, like, deeply negative vibe. And maybe it's just because, you know, GDP growth has been weak. But it feels like at least, again, there's all secondhand for me. that there is like something wrong going on there with the way the domestic population perceives how the economy is unfolding. Well, one thing I was thinking, you know, we talked about, well, why didn't the U.S. maybe have bigger stimulus post 2008? And again, I think that's a really valid point that has been brought up by a number of people at this point.

But conversely, if you look at China, China had massive stimulus post 2008. and people have even described China as saving the global economy in that time period. And I think you kind of have to wonder, like, if that stimulus had been somewhat scaled down, would that have made, I guess, the transition or the post-2000 sort of 12 years a little bit easier? Like the U.S., if we had scaled up fiscal sooner post-2008, maybe things would have been better. But conversely, if China had maybe scaled some of it down post 2008, would it have been better for the economy? It maybe enabled it to move more to, you know, market-driven, consumer demand-driven. Yeah, that's interesting.

I don't know. No, but it's so funny. I had not realized that this idea that, like, after the financial system in the U.S. collapsed that the Chinese may have thought, oh, the West is going to give up on their financialized economy. They can't just. And then we basically just went right back to the same approach. So much to pull from that conversation. Yeah, always great catching up with Adam. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Allo. And I'm Jill Wisenthall. You can follow me at the stalwart. Follow our guest Adam 2's. He's at Adam underscore 2's.

Also check out his podcast, Ons and 2s. And also check out his fantastic newsletter chart book. Follow our producers, Carmen Rodriguez, at Carmen Armin, Dashel Bennett at Dashbot, and Kel Brooks at Kail Brooks. And thank you to our producer, Moses, Ondom. For more Oddlots content, go to Bloomberg.com slash oddlots, where we have transcripts, a blog, and a newsletter, and you can chat about all of these topics in our Discord. In fact, there is an Adam 2's channel in there, because people are so interested in Adam that there's a separate place where people chat about Adam in our Discord, discord.g. slash oddlots. And if you enjoy oddlots, if you too like to listen to episodes while waiting in airports, then please leave us a positive review on your favorite podcast platform. And remember,

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