Plain English with Derek Thompson - How China's Economic Miracle Went Off the Rails

Episode Date: November 28, 2023

This month, President Joe Biden and President Xi Jinping of the People's Republic of China (PRC) met in San Francisco amid trade wars and even the prospect of a catastrophic hot war over Taiwan. Their meeting took place during a nervous period in the history of China. After decades of spectacular growth, the Chinese economic miracle has sputtered, with huge implications for its own population and the world. And yet, even as the most dire aspects of the Chinese economy make headlines, it remains the case that China is the foundry of the green energy revolution, making more solar panels and wind turbines and electric vehicles than any other country. To help us understand how China thinks about economics, technology, and America, we welcome back to the show writer Dan Wang. If you have questions, observations, or ideas for future episodes, email us at [e-mail].  Host: Derek Thompson Guest: Dan Wang Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

What would you do if everyone said they heard your trailer a hundred times? You'd probably make a new one. I'm Justin Sales, the host of The Wedding Scammer, the ringer's first ever true crime pod. We've been hunting a con man for a few weeks now, and our hunt is coming to an end. Schemes, Heartbreak, How to Put On a Wire. We've covered all this and more, but there are still a few surprises left. Binge the Wedding Scammer wherever you get your podcasts. Today's episode is about how China sees the world and how China's theory of growth and technology

came to be so different from ours. This is a very nervous moment for U.S.-Chinese relations. The sudden breakout of war between Russia and Ukraine, not to mention Israel and Palestine, have served as a stark reminder of just how sudden parts of the world can descend into hot war. And the mother of all hot wars, from a geopolitical standpoint, would be the long-predicted showdown between China and Taiwan, a showdown which would inevitably draw the U.S. into the South Pacific. So earlier this month, in an effort to alleviate concerns on both sides of the ocean, President Biden and Chinese leader Xi Jinping met in San Francisco. And while they found some room

for agreement, there was plenty they did not come to agree upon. Expert controls for advanced microchips, peace in the Middle East, AI. At one point, President Biden told the press he still considers she to be a dictator. That's a plausible accusation, but not one you quite expect at a summit designed to turn down the temperature on U.S.-Chinese relations. But anyway, as we'd like to do here, I want to situate the story with a bit of history. Because if you believe, as I very much believe, that eliminating poverty is one of the most important things that humanity can do, then the Chinese growth miracle has been one of the great stories in the history of humanity. There is no record of poverty elimination in world history that comes anywhere close to it.

According to one analysis by David Ox and Henry Williams that was published in the journal American Affairs, the share of Chinese people living in extreme poverty, that is less than $2.15 a day, decreased from 92% in the late 1970s to just 0.14% today. to bring that statistic into your visual field, imagine a very large football stadium, say Michigan's big house, holding roughly 100,000 people. In 1980, 92,000 of them are living in extreme poverty. In 2020, that number has fallen to 140. That is what it means to decrease extreme poverty from 92% to 0.14%. An extraordinary record. But the Chinese miracle has grown, from this nest of interlocked economic reforms and policies, land reform, urbanization,

targeted manufacturing subsidies, currency manipulation, and above all, in the last few decades, it has relied on building stuff, making stuff, not just electronics for export, but also houses and high-speed rail for China itself. In the last few decades, however, this growth machine has broken down. The builders are drowning in debt. Youth unemployment is surging, decades of low fertility by government fiat have brought population growth to a sudden standstill. And so the greatest economic story in history might be finally reaching its last chapter. Or is it? Because even as the most dire aspects the Chinese economy make headlines in the Wall Street Journal, Financial Times, it remains the case that China is still the foundry of the global green revolution.

China makes more solar panels than anyone else, more wind turbines in anyone else, more wind turbines, electric vehicles than anyone else. And if the Green Energy Revolution is one of the most important stories of the next generation, it is a market where China is poised to dominate. To help us disentangle this messy picture, to help us understand how China thinks about economics, technology, and America, and to help us understand how China's philosophy of growth may still come to shape the future of the world. We welcome back to the show, the writer, Dan Wong. I'm Derek Thompson, and this is plain English. Dan Wong, welcome to back to the podcast. Thanks so much, Derek. So I really wanted to have you on the show to talk about a few themes related to

China. What's gone so wrong with their economy and the purported Chinese century, but also what's gone right that the Western media might have missed. So first, let's talk about the economy. In 2007, you go back to the financial crisis, and you told the writer Ben Thompson that, quote, after the financial crisis, China decided that it doesn't have too much to learn from the West anymore, end quote. Tell me about that. Why did China 15, 16 years ago, decide it was time to chart a totally different course of economic growth than the West? I think the global financial crisis in 2007, 2008 was a pretty pivotal moment for the Communist Party in Beijing. You know, I think it would be oversimplifying a bit, but to play up this model, it would be that I think one could have told

a story of happy convergence between China and the U.S. prior to 2007, 2008, when there were some green shoots of political liberalism in China. There was a little bit more of a spirit of cooperation between these two countries when George Bush was getting together. with Hoosintal. And then after 2007, 2008, I think China, along with quite a few other countries in the world, took a look at the U.S. and said, well, maybe not. This was a pretty devastating financial crisis built off of, you know, at the popular explanation at the time was, you know, excessive, you know, housing construction, excessive, you know, speculation, people getting loans for house. And the Chinese, I think, took a look at this model and said, well, maybe we shouldn't have so much of a financialized economy that is prone to these sort of financial crises.

So I think they started to take a little bit of a pivot onto the other side, really much more to double down on much greater political authoritarianism, much greater centralization of power, as well as what I think is a little bit more of a retro view. of the economy. And if I want to fast forward to today, you know, the way I've described to Xi Jinping's view of, you know, a lot of economics would be actually a pretty boring, traditional manufacturing superpower along the lines of Germany today, or maybe you can talk about the United States back in the 1950s, in which you have, you know, a very large manufacturing sector, employing a lot of workers in these kind of traditional boring manufacturing, high capital industries because they don't create too many political problems, that they are not prone to financial crises, that they are not agitating for a lot of social change on the

internet, and that, you know, people are pretty happy earning a wage, turning wrenches, to put it simply for a lot of different manufacturing, models. And so I think the Chinese government really decided to double down, less financialization, a little bit less of the Silicon Valley disruptive model, and much more of this kind of boring traditional manufacturing-elect growth. So before the crisis, the story of happy convergence after the global financial crisis, it's the story of purposeful divergence. Give me some texture on what that looked like, what that felt like living in China. You no longer live in China. You now live in Connecticut. But what did the kind of the

kind of political centralization that you're describing feel like to residents of China? Well, to residents of China, I wasn't in China at the time in 2008, but there were two, I think, major pieces of divergence that we can think about today. The first is there was a lot more political centralization in the five years after the financial crisis that led to the elevation of Xi Jinping as the general secretary of the Communist Party. So Xi Jinping came to power with a party that felt in that self-acknowledged in a way that was pretty diffident, that it had a lot of these factions, that it had a security chief that was running his own fiefdoms, that there were a lot of other members of the Chinese elite that were simply not really listening to the leader.

And then Xi Jinping arrived with this mandate to really try to clean house, really try to make sure that there is much more centralization of power, which he did with not extreme effectiveness to the extent that, you know, I think it is pretty likely that he will be the ruler of China for life, at least for the next five to ten years. The other manifestation of the economic divergence was that, you know, I think, you know, back in 2008, I'm sure you were covering Derek then, you know, these debates about the stimulus, how much should, you know, the America should have been investing. I think there is a little bit of a, you know, economic consensus now that, you know,

the administration under President Obama didn't quite invest enough that there should have been a much more vigorous fiscal response to the financial crisis. And in China, they did not really have anything like this underinvestment response. They had this enormous infrastructure building spree. They built about 20 Japan's worth of high-speed track in the aftermath of 2008. They built about 140 million. in housing units. I just saw this estimate from a bank, you know, about the population, you know, let's say half the population of America. They built that over the course of a decade.

They built roads and highways. They built enormous bridges. And so there was an enormous infrastructure boom really to build up the country after the financial crisis. One thing that you see in the growth data after the global financial crisis is that the share of China's economy that comes from exports declines as its biggest. spying partners, you know, the U.S., Europe, go through this terrible recession, and China pivots a little bit toward this building spree. In the late 1990s, the stat is amazing. In the late 1990s, real estate accounted for less than 10% of China's GDP. By 2013, it was 30%. It more than tripled to a number that was higher than practically any other rich country in the world. And now you fast forward to

today, and one of the most important reasons why China's economy is struggling is that this building spree led to a debt crisis. And I just want to note the irony here that in an attempt to diverge from the West after the American housing crash, China appears to have sprinted toward an infrastructure spree that culminated in its own crisis. It feels almost like a Greek tragedy playing out. So tell me about how this infrastructure spree has cashed out for China. Derek, you're certainly right that China built a probably way to... too much. Let me tell you a story of a bicycle trip that I took in 2021. In 2021, when China had COVID pretty under control, I cycled in China's fourth poorest province, a place called Guizhou in

China's southwest, a heavily mountainous area. Two friends and I cycled over five days through the heavily mountainous Guizhou to the megastity of Chongqing, also in China. China Southwest. And, you know, I was cycling through this, you know, fairly poor province in China that has the GDP per capita of Libya of around $7,000 U.S. dollars. That was actually one of the prime examples of way too much buildings breed. So Guizhou now has around 11 airports throughout the province. Many of them do not have many flights a day because there simply isn't too much demand. Gwejo is, again, very mountainous. And one of the the things that the local governments did was build these enormous, extremely beautiful and

elegant bridges that span all of its different valleys. And state media has, I came across a little article boasting that Wei Jo has around 50 of the world's 100 tallest bridges, I think, built much more out of a sense of pride rather than a sense of need. So that is how I saw a lot of China's infrastructure manifest on the ground that they build these high-speed rail systems across really arduous track at the top of the mountains where China's Tibet has now enormous high-speed rail networks running through it in these really difficult tunneling systems. So it was an enormous blessing for me as a cyclist as well as my friends. You know, I could enjoy better roads in Guajjo than I think I can in places like Michigan and Connecticut, where

Connecticut, where I would also sometimes cycle. But what was a blessing for a cyclist is not necessarily a great blessing for the local government, that the local government in Guajjo had all of these infrastructure investments. And now it has a lot of trouble actually trying to pay back. A lot of these airports that were simply not necessary now can't generate the revenues necessarily to cover their interest payments to say nothing of the interest plus principle. So, you know, the local governments now are having a hard time with this major infrastructure spree. But Derek, I think, you know, one of these things is to contrast a little bit with some of

America's problems around housing. You know, I saw China engage in this enormous building spree of building, let's say, about over 100 million units of housing over the previous decade. Meanwhile, in America, you know, I previously lived in California. Now I'm on the East Coast, has suffered over the last 10 years radical underconstruction in its you know, northeast as well as, you know, places where nimbiasm have run amok. So, you know, the U.S. now has, you know, severe under construction. China has overconstruction. It doesn't seem, you know, really obvious to me that the Chinese problem is, you know, much worse than America's.

But what do you think? I think it's such an interesting point. In the U.S., you're absolutely right. We have the problem of underbuilding. We don't have enough homes. We don't have enough clean energy. China has arguably overbuilt when it comes to housing, overbuilt when it comes to infrastructure. They build more clean energy, whether it's solar panels or other electric cars in any other country in the world, and it's not even close.

So it is so interesting that this is exactly where your point about how post-crisis, China and America, become the story of purposeful divergence rather than happy convergence. It's just ironic, I think, that China has gone so far in the other direction that this overbuilding is arguably leading to a dead-overreason.

overhang rather in the U.S. where the underbuilding is leading to a cost crisis, right? You know, one of the reasons why people, young people, older people, any people who are trying to buy a house say it's so impossible to find a house that's affordable is that the U.S. went essentially in the last 50 years from having more houses per capita than practically any other rich country to fewer houses per capita than most of the OECD. So it's a really interesting, just object lesson in how the U.S. and China have become so different in their approach to building for the future. Let's shift now to talk about jobs in China. There are reports that the youth unemployment rate has been running higher than 20% for several

months. That would be deep, deep recession levels in the U.S. Is that a statistical illusion, or does that reflect reality in China? It is a real story, and now it is a censored story. So up until about, I think, about three months ago, China's National Bureau of Statistics said, we shall no longer publish this data series that, you know, is depicting our level of youth unemployment at rates, I think, higher than, you know, what the Spanish and the Italians were, you know, putting out during the height of the euro crisis. Now, I think there is a minor technical point in which, you know, I think the data that the Chinese are putting out is capturing the range of 16 to 24-year-olds, and that is actually a pretty narrow pool. A lot of people are actually supposed to be in school.

And so I think that is not quite the apples to apples comparison that one can draw with European youth unemployment. But, you know, leaving that aside, I think there is no doubt that there has been a lot of, you know, quiet gloom among Chinese youths. So, you know, over the story of the summer was that the economy was doomed, but, you know, a lot of the people were also feeling gloomy themselves. I've spoken to, you know, so many people who've just recently departed China. And what's really striking is that the mood there among the people is not simply pessimistic, which I think implies a rational expectation of the future. A lot of it is, you know, depressed and deflated about, you know, what they're up to themselves.

There are now a lot of these stories of Chinese moving themselves as well as their businesses to overseas markets. The prime beneficiaries of these have been Singapore and then also for Japan for a lot of different people. When I speak to younger Chinese, those who are in school, for example, at Yale, what I hear overwhelmingly is that a lot of younger Chinese are saying that their parents are telling them, you know, maybe don't come back to China, which is. actually a really radical thing, I think, for Chinese parents to say to their kids at any given time. And, you know, the other... And just to jump in there, as specifically as possible, why are they telling these children don't come back to China? I think a lot of it is this temporary economic uncertainty of what is exactly is going to happen to the Chinese economy now. There are a lot of people, a lot of entrepreneurs who have been...

pretty shell-shocked over the last three years of basically two major policy actions. The first is zero-COVID, where China managed to control the virus really, really well between 2020 and 2021. And I spent all three years of zero-COVID living in China, where I saw that with my own eyes. I was able to go to a movie theater and go to restaurants in the summer of 2020 when things were, you know, looking pretty terrible in the United States. And then, you know, in 2022, the China had just, you know, a way too severe response to try to contain Omicron when it shut about the size of 25 million people, the city of Shanghai, as well as a few other cities, indoors for roughly the span of 10 weeks. And that was pretty traumatizing for a lot of people.

That was pretty devastating for a lot of businesses that simply folded because you could not survive a 10-week shutdown in which many people were not. able to depart from their housing compounds for over two months. And so the really scarring effects of zero COVID is something that has dampened a lot of enthusiasm. The other part that I think is much more difficult to measure is, you know, people, younger people talking about the political environment in China. So Xi Jinping now has been in office for about 10 years. It looks pretty likely, you know, depending on his health, that he will be in office for 10 years more. And over the past 10 years. He has just, you know, tighten his grip, you know, pretty much month by month, year by year,

there is some incremental tightening on allowable speech or allowable expression that is just making it much more difficult for people to, you know, think that China will be in much more liberal, expressive place where people are able to, you know, engage in not just freedom of speech, but also freedom of conscience. So a lot of these reports are that, you know, younger people got quite depressed in 2017 when Xi Jinping removed term limits as presidency for himself. And so, you know, when you have this atmosphere of, you know, economic growth, economic weakness at the moment, plus increasing political centralization that is really manifesting and a lot of autocracy today, I think, you know, a lot of younger people would say,

well, there are greener pastures overseas. My last question about the economics, before we move a little bit into technology, is a broad one. Do you think that the economic struggles that China's faced over the last few quarters will cause Xi to unclench his fist, encourage more household spending, encourage more consumerism, westernize the economy for a lack of a better term? Or do you think it's going to cause Xi to clench even harder, centralize more power, crack down even more on the industries he doesn't like and prop up the industries he prefers even more? Derek, I think the trend has been pretty clear that nine times out of 10, when he is facing a decision to clench harder or unclench his fist, nine times out of 10, he chooses to clench harder. If he hasn't gotten to where he is by trying to loosen things. Now, I think in general, he is capable of some tactical adjustments. He is capable of directing more credit to the private sector, as he did in 2019, when people

were complaining that he wasn't quite nice enough. He has had a lot of tactical retrenchments. But by and large, the direction is for him to crack down on things even harder. And I think that is producing a dynamic in which there are more autocratic politics, more Leninist infighting among the Communist Party that is producing slower growth. And as growth slows down, as options become more limited for the governing Communist Party, they clenched down even harder. And that is a dynamic we really saw this year when they started, you know, rating several foreign businesses, when they are introducing all sorts of greater limits on, you know, what is allowable expression. When they are removing a lot of data, in general, the direction of travel has been greater clenching of the fist.

Let's talk about technology. I would love you at a high level. And I hope that your game to be like a little bit broad-stroked and philosophical here to talk about how China thinks about technology differently than America. Because I think it's very easy as an American or as a Westerner, as a European, looking at the fact that China sometimes seems to disappear some of its most famous entrepreneurs, discourages frivolous, consumption, attacks the gaming industry, even when it's booming, has its hand very firmly on the lever for certain kinds of technology that the state party just seems to like. None of this seems very Western, and none of it I think is very familiar to an American audience. And you're so good at explaining in the biggest possible philosophical term, you know,

how China thinks about this stuff. What should a Westerner understand about China's approach to technology. Yeah. Well, Derek, for so many of us, you know, China analysts, China watchers these days, it's extremely easy to be philosophical. We treat being philosophical as a defense mechanism now for thinking about China. You know, it's very easy to be philosophical, maybe even wistful, when things are not really on the right track. I think you're quite right to say that China has a different vision of the technological future, one that isn't quite recognizably, uh, what for most of us. And I think I would trace this back once more to the roots of the financial crisis where, you know, one of the lessons, perhaps, I don't know if this is quite the right

lesson, but one of the lessons of the 2008 financial crisis was Wall Street hedge funds had a little bit too much speculative power. And I think that is one of these things that the Communist Party decided that it took a look at what was really driving U.S. growth over the last 10, 20, 30 years. And a lot of that was on Silicon Valley in the one coast, which was, you know, made up of a lot of social internet platforms, a lot of, you know, these software businesses, as well as Wall Street on the other coast, which is, you know, overwhelmingly, you know, these big banks and hedge funds and asset managers. And Xi, as well as a lot of other members of the ruling elite, have thought, well, you know, maybe we don't.

like too much of this focus on the virtual economy, too much of this focus on the financial economy. What we really have to focus on is much more on the real economy. And so that is why they invested on so much in infrastructure. That is why they are really, really keen to remain a major manufacturing power. Manufacturing share of China's GDP is around 29%. And that's much higher than even a heavily manufacturing economy like Germany and Japan, they're around 20% of their GDP is manufacturing. And that's much higher today than US GDP, which is about 11% manufacturing. And so, you know, the Xi Jinping, again, has this pretty traditionalist view on what is

important. And that is much more of a German 1950s American view of what is important. Not so much these hedge funds, not so much these crypto trading firms, not so much these video games, but real hard products instead. Let's talk about some of those hard products. China is unbelievably dominant in electric vehicles. How did this happen? How did China go from basically not a player at all in EVs a decade ago to being by far

the largest manufacturer and exporter of electric vehicles? Yeah. Well, I think it started, you know, because there is this, I would situated as China's generalized capabilities in manufactured goods. If I really had to trace, you know, what is the root of China's competence in manufactured products today? I would go back to basically the late 90s and the early 2000s when a lot of foreign businesses invested enormous amounts in the Chinese workforce.

And so a lot of this is now painted today as American companies offshoring their jobs. And I think that is, you know, a major factor. of why China really learned how to manufacture a lot of great things, that companies like Foxconn through Apple, that companies like, you know, many other, you know, semiconductor firms, clean technology firms, via electric vehicle or automobile firms, decided to set up shop in China to take advantage of a much cheaper workforce, but also in that process, train that workforce to make the most sophisticated products in the world. And so you're absolutely right to situate it in terms of electric vehicles.

I think that is really going to be the big story for the next few months, probably for the next year, that China right now is on track to surpass Japan as the world's largest auto exporter. If you told me that five years ago, and it would be very significantly driven by electric vehicles, I would have been totally astonished because China then was not making very sophisticated cars that Chinese EVs, you know, as recent as five years ago, were not this sort of Tesla premium product. They were much cheaper products that didn't work all that well, but they were managed

to improve. And I think this generalized system of improvement in China's manufacturing capability is kind of a, you know, decades-long story that will still continue to play out. Previously, they were only putting together, you know, the different components for an iPhone, components that were made in Germany, Japan, South Korea, Taiwan, and Chinese workers were only involved in assembling these foreign products. Today, Chinese workers are producing a lot of these sophisticated components in what is the most sophisticated consumer product today, namely the iPhone, that China is now becoming a larger automobile exporter than any other country in the world, and that China is also really dominant in a lot of these clean technologies

we need for the green transition. China is really dominant in solar. It is really dominant in batteries and also has these strong footholds in hydrogen electrolyzers as well as wind turbines. And so that has been one of the great successes of China's economic growth for the last 10 years. I read that China is adding more renewable energy

than the U.S., the European Union, and India combined. That seems almost too unbelievable to be true. And yet it seems very much to be true that China is building more solar panels, more batteries, etc. Than America, all of Europe, India combined. It's extraordinary. And it speaks to the fact that clearly there is something special about this country as a synthesis of manufacturing skills.

There was an interview that Apple CEO Tim Cook did. I don't remember if it was a few years ago or even a decade ago, where someone was asking him about what actually, Apple found so valuable in China. And he said, China stopped being a cheap place to do business a long time ago. If you're looking for the lowest labor costs, you would look way beyond China. But there's nowhere else in the world that combines or that has this expertise in what he called tooling. And they kept using that word over and over again, that China had this extraordinary

expertise in tooling that was necessary to build expensive and complicated devices like iPhones. So in addition to iPhones and renewable energy and cars, where else is this tooling expertise proving valuable to China? Yeah, absolutely. And first, a note on Apple, I think it's really right to bring up Tim Cook's comments. I think one major trend over the next few years will be that I think it is absolutely clear that Apple is trying to diversify away from China for largely these political risks that the company has decided are, you know, keeping its executives and board members up at night with respect to what's happening in China. And it is trying to increase a lot of investments in India and Vietnam in particular.

But as you bring up, you know, there is, you know, very dense ecosystems of labor as well as tooling in China. I think the first important fact is that Apple is trying to diversify. I think the second most important fact is that this is going to take a really long time, that it took a long time to build up China. And I think it will also take up quite a long time to build up India as a fully-fledged competitor to China's manufacturing prowess. I think that China's manufacturing prowess is not limited only to electronics. It's not limited to batteries. It's not limited just to the clean technology supply chain.

But I think if you go down the list of almost all manufactured products, China is building quite a lot of these boring industrial products. If I'm thinking about something like hydraulic pumps or steel presses or something that would never really make the headlines at the Atlantic for a lot of simple, boring tooling, a lot of the Chinese companies are now going toe to toe. with the traditional stronger players in Japan, Germany, South Korea on making these, you know, a lot of these products. And I think, you know, maybe the more valuable question to think about is, you know, where is China not making so much progress? And I think for that, I think, you know, we really have to narrow it down to, you know, three fields where China is still pretty significantly behind.

I would say these three fields are first semiconductors, second. aviation. Third, perhaps, biotechnology where China is not going terribly strong. But if I take a look at most other manufactured goods, my bet is that the Chinese products will be about as good as German, Japanese quality in about a decade from now. Why is China so far behind on semiconductors? It seems like a technology that if I knew nothing else about the Xi regime, I would think that it would be an extraordinary priority for China to have the leading edge on computer chips. Instead, the leading edge, as we know, is in places like Taiwan, and clearly Biden is trying to build up a industrial base in the United States that rivals Taiwan as well. Why is China behind there? Well, the semiconductor

supply chain is really widely distributed. It is not just Taiwan. That's important, but it is also South Korea, the Netherlands, and indeed the United States. I think an underappreciated fact is that even though the U.S. has fallen somewhat behind on the manufacturer of leading edge chips, namely Intel has mostly fallen behind TSM. America is still providing a lot of these leading software tools as well as the actual manufacturing equipment to produce semiconductors. And that all of the leading semiconductor companies in the world still depend a lot on American supply. So I wouldn't really quite say that, you know, the U.S. is not doing too well in chips. You know, it is doing poorly in a lot of pretty critical areas, but it still has really dominant in a lot of other chip technologies. Now, where it comes to China is, I agree that China has had a really big priority in trying to make chips over the past decade, you know, arguably over the past two decades, and it has not gotten terribly far.

And I would say that actually this is kind of an indictment of Xi's focus on excessive manufacturing, that China has not given adequate space for free expression, that China has not done enough on a lot of the leading edges of science. You know, I think, you know, if we think about what are the most important technologies over the past couple of years, you might agree with me, Derek, that I think the two most important things to come out are first, MRNA vaccines that, you know, where's the biggest help in the pandemic. And then second, I would say, you know, all of these AI large language model products that are, you know, producing a lot of wonders as well as stupid memes on the internet. But, you know, there are a lot of these, you know, technologies.

And so far, China is not really out of the, it's barely out of the starting gates for both of these technologies. That China now has some large language models, although they are really. really heavily censored because you cannot mention certain dates, you cannot mention certain political figures, you cannot mention a lot of history. And China really did not tackle this pandemic with mRNA vaccines. And so I think a lot of these science areas that require the complex integration of a lot of different fields of science is not really amenable to basically laying a lot of high-speed rail track or pouring cement into the ground.

That is much more of a Chinese strength. China is definitely trying to catch up. But, you know, China is now really behind in, you know, I think a lot of these critical areas of science. I think they will eventually catch up. But so far, that that approach has not been amenable to seize command and control approach. As you know, I'm very interested in this distinction between invention and implementation, coming up with new ideas, marking the frontier of science technology versus actually building the thing that you've invented. I want to throw this idea at you that I think is a paraphrase of,

the writer, Vaklev-Smill's recent book on invention, he says something like this. And a part of me is absolutely positive that you're going to disagree with this characterization, but it's interesting enough to throw at you anyway. He said, if you look at Russia, especially Russia in the middle end of the 20th century, they had some of the best engineers and mathematicians and sometimes physicists in the world. They were great at inventing things, especially in the space, mathematics and physics. But they couldn't implement very well. There was no consumer economy. They were bad at building stuff. There were cities. They were often bereft of necessary infrastructure

versus China, he said, is amazing at implementation, but it's not as good at invention. And so you have this sort of binary of better at invention but not implementation. He mentions the Soviet Union, I might put the United States there. I think we're great at inventing stuff and not always great at building what we're inventing. And then there's China, he said, which is great at implementing what others invent, but not great at inventing themselves. That is an unbelievably broad and maybe not even accurate paraphrase at the Vaukla's smell point. But it's just, it came to mind as you were just talking. And so I thought I'd throw it at you. Is there anything even remotely insightful in, in that binary? Yeah. Well, I wouldn't put it in so stark of a binary.

I wouldn't say that there is, you know, I wonder, you know, can we think a little bit about, you know, this continuum of what is invention and what is implementation? You know, a lot of these things, when I take a look at, you know, histories of technology, you know, I think a lot of this is not just, you know, how do you actually define what is an invention and what is an implementation? Do you have a little bit more rigorous of a way to define that, Derek, in your work? You know what? The more I write about this subject, the less. rigorous my definitions become because you take a subject like say look we've already talked about it the solar panel right solar cells you know solar cells were technically invented by bell labs in the

1950s but the photovoltaic effect was actually discovered by french scientists about a hundred years earlier and when you look at what the solar cell is today well the solar cell today is something like a thousand to one million times more efficient than the solar cell that the bell labs guys cooked up in New Jersey in the 1950s. And in many ways, you know, that cost curve, that learning curve that we came down in the last, as opposed 70 years, is almost more important than the invention of the solar cell itself. Because if we had invented the solar cell and then achieved no efficiencies on it, well, then people trying to use solar power to light their homes and power their electricity would basically have to spend a million dollars a month. And no one's going to do that,

obviously. And instead what happened is that various countries like Japan and China and at one point, but I guess it's happening again, the United States, you know, made more solar cells, realized how to cut the silicon better year after year, realized how to make them more efficient and made it, it took it from an invention that couldn't change our lives at all to an invention that might help us solve climate change. And all along the way, you could think about that as implementation, but you could also think of it as micro-inventions, right? There was a macro-relivenants. There was a macroinvention of the solar cell, and there were microinventions to turn the solar cell from a toy into something that could actually change the world. And so I often feel like, you know, what are we

really talking about? We talk about invention versus implementation. I guess I would say this. There does seem to be something about the idea. You mentioned biotech as a field where China is a little bit behind the curve. Someone has to figure out the molecule that does the thing. Someone has to figure out Samagetide is a molecule or a compound that does, if you injected into your body, cause you to lose weight and fights type type two diabetes. That's biotech. There have to be labs that figure out molecules that do a certain thing. And then you have to figure out how to, you know, manufacture drugs.

And that's an important part of biotech. But it's interesting to note that the U.S. has always, for the last, at least, you know, since World War II, been on the cutting edge of biotech. and it was interesting to me that when you said that China was not, because that seems to me to be something that really is invention. You are discovering a molecule that does a thing, and before that discovery, no one knew that molecule could do that thing. That is a discovery.

But then implementing that, deploying a new medicine, manufacturing enough of a vaccine that can actually make a difference in the world, that clearly seems to be implementation rather than invention. So I just babbled for a long time. I guess I'm saying in biotech, it's a little bit clear, there's a distinction. In hardware, sometimes it's less clear there's a distinction because you invent a toy and then you have decades of micro-inventions that turn that toy into a product. Perhaps, perhaps. So, you know, if a tree falls in the forest but no one hears it, you know,

does it make a sound? If a French guy discovers the photovoltaic effect, but, you know, there are no factories to build these solar cells, you know, doesn't really make a difference. You know, I think, you know, these, I think a lot of these things, once we, you know, really get down to it, are, as you put it very well, a lot of these micro inventions. And the micro inventions really do matter. That you're right that, you know, I think, you know, something like, you know, the discovery of a new molecule could indeed be really important. And it's something that we can really pinpoint for something like a Nobel Prize. You know, I think that that sort of discovery is really, really important. But, you know, what's much less harrow did is this greater Chinese strength on, you know, actually

building a lot of these things and actually implementing a lot of these things and building the factories to build more of these things. And I think that is really important too. But, you know, I would just say that a lot of this is maybe I agree with the Smith's broad point that it is a little bit more difficult to identify these novel ideas coming out of China. But, you know, as anyone in Silicon Valley might tell you is that ideas are cheap. It's the actually doing the work that's hard. I think that's a really absolutely fair point. And I do think that many and of China in the U.S. underrate the degree to which their focus on the supply side is commendable. And especially when it comes to pulling us down the cost curve on things like batteries and solar panels,

in many ways the entire world is benefiting from that work. I want to end by just looking at the intersection between innovation, which you and I are both so interested in, and politics. And she's politics in particular. because on the one hand, we've talked a little bit about why one should be a little bit more bullish on China than the mood in Western media.

At the same time, innovation isn't done by systems. It's done by people. And it seems alarming that the authoritarian tendencies of Xi Jinping seem to be discouraging certain Chinese geniuses

from settling in China after they study abroad or are encouraging them to leave China in the first place. So how do you reconcile this tension between, on the one hand, China has this build-first approach that has been very successful for them, and on the other hand, that the iron fist under which this build-first approach has been operated seems to be discouraging some of the smartest people from staying in China? There's definitely an enormous tension with this approach. I think that most Chinese people are a little bit discouraged that Jack Ma resembles some sort of caged animal in which he's allowed to smile and wave at people from his political cage.

But he's not really... Yeah, just step back. Just tell the Jack Ma story in bite-sized format, just for those who don't know it. Jack Ma, the founder of what is China's biggest e-commerce company called Alibaba. Also, had a big hand in founding and financial, which is a financial technology company that he also controls with Alibaba. Has always been outspoken. He would star in these military, he would star in these kung fu movies. He would dress as an outrageous rock star and perform for company employees. And perhaps most dangerously, he gave.

a speech in 2021 slamming financial regulators for being old-fashioned, and the financial regulators retaliated in this brutal fashion as only a highly autocratic system can by subjecting the companies that he controlled to a lot of regulatory pressures. And so Jack Ma is, you know, I think still one of the richest people in China. He is just far less outspoken today, after what is a pretty severe dressing down by politics. I think that fate is discouraging a lot of people. I think that Xi Jinping is kind of making clear that, yes, you are allowed to make money,

but it is only money in sectors that I designate and that I like. A lot of these things are in hardware, it's in clean technology. It cannot be in things like financialization in terms of a lot of hedge funds and a lot of investments. It cannot be in these internet platforms, which create a lot of speech and therefore political problems for the Communist Party. It has to be involved in these sectors. And I think there is this pretty big risk to these blunt reshufflings of priorities,

that regulators in 2021 sort of slammed a couple of industries and more or less decapitated the online education industry, It hurt a lot of video game developers because the government decided that these were not terribly valuable. Now, I think there could be something to be said that maybe it was fine for them to really try to squeeze out the cryptocurrency sector. Maybe there isn't really too much innovation there, that it is just too much, too many of these fraud risks instead.

But, you know, that sort of mood has been dampening a lot of the enthusiasm for Chinese entrepreneurs. And so I think what's really involved, the key question for China, at least when it comes to technology over the next decade, is, you know, what is going to triumph? You know, innovation is made not only by people, as you put it, Derek. It's also made by systems. And, you know, Xi Jinping is betting that he has created a pretty good system for innovation, that China is actually doing quite a lot on space projects. It is doing quite a lot on exploring the deep sea. They're pretty proud. of these scientific projects that are made by the state. They're really proud of things like China becoming a larger auto exporter than Japan. You know, sticking into Japan is always a good move in China. And so, you know, they are, they have a lot of technological momentum going their way from basically a few decades of investment and a lot of political momentum, a lot of technological momentum here.

But what is getting in the way is Xi's increasingly tight-fisted authoritarianism in which he can crush a lot of these sectors at will. I think that is certainly dampening a lot of entrepreneurial dynamism today. Is it quite enough to dampen China's technological prospects over the next decade? I would bet probably not. I would bet that their technological momentum is really sufficient here. But I think that is really the major question that we should be thinking about for the next decade. Sorry, this is my very, very last question for you, Dan. The U.S. and China obviously are in the process of some kind of decoupling.

What do you think is the most important unknown as the U.S. and China seem to erect these trading walls across the Pacific? I think China's technological economic competences on building manufacturing is really obvious. it is getting better at a lot of these things all the time. You know, one thing I'm quite curious about is whether America will be able to recover its industrial manufacturing mojo. You know, President Biden has these major bills to build a lot more in America, Bipartisan Infrastructure Act, Chips Act, as well as inflation reduction act. Will America really be able to rebuild a leading chip sector and will it be able to recover a lot of the clean technology supply chain. chain from China. I think the U.S. is in this fairly novel position in which it is engaging in

technological catch-up with a lower-wage competitor on solar as well as batteries and a lot of these other clean technology products with China. Right now, we are facing a auto worker strike. There are all sorts of other types of industrial actions that these unions are threatening. I wonder if America is really going to be able to manufacture a lot of these things. Now, it might be good enough that America doesn't actually, you know, really scale up production here. I would not say that the history of America manufacturing over the past two decades has been covered in glory. You know, so I'm rooting for a lot of this to succeed. But I think there is this, you know, big question about whether America can do it.

And on the Chinese side, I think the major unknown is, you know, whether these other countries, namely Vietnam, India, Malaysia, Thailand can really try to get a lot of the supply chain that has been pretty deeply embedded in China over the last two decades. That some manufacturing has departed from China, but a lot of these are also Chinese companies importing Chinese components to produce in third countries and get around U.S. tariffs to get into the American market. But if it is the case that India especially it can become a really big manufacturing superpower than I think China's, you know, manufacturing progress, its technological edge will really suffer a lot of setbacks. Yeah, it's a story that I'm really paying a lot of attention to because in many ways,

I wonder how much of the new energy that supply side Democrats, you know, abundance progressives, whatever you want to call it, in many ways, I think this movement that you're seeing to build more stuff in America seems like a direct response to the geopolitical fear of a superpower China that no longer wants to do business with us. And I always think it's interesting the degree to which domestic economic policy is a reflection of geopolitical concerns. I do think that to a certain extent that's happening right now. And if that theory is true, then what happens in China is so, so important to what happens in America. Dan Wong, thank you so much for talking to us. Well, Derek, it is maybe a fitting to end on a perhaps fitting note of convergence that 15 years

after the financial crisis, America is studying a little bit more on how to be more like China in terms of focusing on the supply side. So that makes it a quite timely conversation. Yeah, right. Maybe the age of divergence is arguably, is ironically coming to an end, decoupling in terms of trade, but converging in terms of the understanding. of the importance of the supply side of the economy. It's time to learn from each other again. Indeed. Thanks, Dan.

Okay, appreciate it. Thank you so much for listening. Plain English is hosted by me, Derek Thompson, and produced by Devin Manzi. Some great news for you all. As you probably know, we are returning, have returned back to our normal schedule of two pods a week. So be on the lookout for new episodes every Tuesday and Friday. If you like our podcast, please rate. Give us five stars.

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