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So you're the richest man of the world, you get on your jet, you come to Washington to save the day.
You're gonna cut two trillion dollars. That's part of the DOGE. Elon Musk. If you're Elon Musk, do you bring your son to the party.
He brought his son to the meeting. He walked in the meeting with Senator John Thunne with his young boy sitting on his shoulders. And what a story he's going to have to tell someday.
Huh, this is not really a department. Has anyone mentioned that?
Yet?
DOGE stands for not only the coin but the Department of Government Efficiency, and there is no department.
It's kind of a well, it's a panel, I guess.
So connecting the dots between the DOGE and actual legislation might be a longer walk than some are thinking. Then again, this is Trump's town Trump's Congress and a lot of lawmakers looking to make him happy. So what Elon Muskin Vivek Ramaswami have to say must carry some weight, right,
let's find out from our panel. I mentioned Jeanie Shanzay No, yeah, she's here today, Bloomberg Politics contributor, Democratic analyst, senior democracy fellow with the Center for the Study of the Presidency in Congress, and Shape and Fay is back, Republican strategist, founder of Lighthouse Public Affairs. Great to see you both here. I'm just gonna bet both of you would bring your young child to Washington if you were the richest person in the world.
Shape in Fay.
Does anyone listen to what comes out of this not department but panel?
I think so.
Listen. Donald Trump is about to do what conservatives have been trying and talking about doing for decades. Right, He's going to disrupt the government, and I think a lot of the ideas and a lot of the ways to implement these policies are going to come out of the Department of Government Efficiency. Like you said, However that looks right, whether it has teeth or not, is really going to
be up to the legislature. But again Republicans won. I think Donald Trump is heading into the White House in January what they mandate to do the thing that he said he was going to do and disrupt some of these government institutions that are no longer serving Americans. And I think that's exactly what they're going to do. And Elon and Vivic are going to be sort of tip of the spear of that.
Well, it's a tall order, Genie, when you start getting down of the math here, I mean two trillion dollars. My god, it would be impossible to do that without starting to eat into entitlements, and so far there's been no appetite to do that, not just on Capitol Hill, but in Washington through the presidential campaigns would go near Social Security and Medicare. In fact, the president was going to lift taxes on some of these benefits. Right, So how does this come together in the form of law.
Yeah, First of all, Joe I would take that. Very cute kid, and it's going to soften the blow when they have to make these tough decisions. I think Alon Musk is onto something as usual. Very cute kid, but you know the reality is I said before I will repeat again. They need somebody like Maya McGuinness to hold their feet to the fire. You know. The fact is is that when you look at the federal budget, sixty
two percent of it is mandatory spending. And you're absolutely right, both, you know, the Democrats and then President the Trump they ran through this campaign saying things like they won't touch social Security, won't touch Medicare, won't touch all of these things. And so substantial cups, particularly in the two trillion dollar range, would be in possible if you don't start to have a serious conversation about that. That said, I think Democrats
have to be very very careful here. The idea is right, and the notion that you need to cut, the notion that you need to streamline the federal government is exactly right. And so Democrats can't get caught in this trap of you know, looking the other way and saying all of these ideas are wrong. They have to be reformers as well, and they have to hold these people's feet to the fire when they talk about these cuts.
But they should.
Support smart streamlining and cuts as well. They just obviously are not going to talk about, you know, destroying the Department of Education overall.
You know, bringing the kid.
We call that pulling a shirley around here at balance of power. You both know it's a long story. Would you show them the picture of the cute child before you deliver the bad news?
Shape and faith. Senator Marsha Blackburn.
Thinks that she's got this worked out. I will be introducing legislations you just put this on Twitter that coincides with Doge's plan. My Doge Act will freeze federal hiring, begin the process to relocate agencies out of the DC swamp, she says, and establish a merit based salary system for the federal workforce.
Did something like that pass?
Listen? I think those are all great ideas, and I think it will bring this federal government closer to the people that it's supposedly serving. And you know, those of us on the right believe that it has stopped serving Americans for a long time. Are they achievable? They are very ambitious goals, and Democrats have in the past, you know, been really entrenched on behalf of government employees and benefits and sort of the DC culture in our nation's capital.
So I do think there's going to be a fight right in the Senate. Democrats can certainly hold up legislation and work to get compromises and shape the bills and the House. Of course, it's majority rules pretty much, so there shouldn't be too much of an issue there as long as the Republicans hold on to their slim majority. But I do think those are ambitious gold like you said,
and I do think there will be some fights. There will be definitely some public affairs battles over I think probably a lot of these ideas and a lot of other things, particularly coming out of DOGE, just because you know, change is scary for a lot of people, and changes certainly scary for the establishment and incumbents, so it's gonna I do think there are gonna be some battles. I do think some of that stuff does have a chance
and a shot. I mean, moving moving an agency out of d C. Right, that's probably a lot easier than you know, a hiring freeze or changing civil service rules and regulations. But I think they're all the right ideas, and I think I think there's gonna be a fight, and I think it's a worthy discussion to have regardless.
How about bringing people back to work in the office five days a week, Genie, This is actually one of the few specific suggestions that we've heard from Musk and Ramaswami, not only out of fairness, they say, in the spirit of productivity.
But also might thin the herd a little bit.
A lot of people don't want to come back to work five days a week, and that might result in a lower head count.
What do you think it can Absolutely and we've seen that, you know, throughout the country and in other organizations. We've also seen and they've talked about enticing people to retire early, so retirement packages that also can work. The problem is they have to curb their enthusiasm when they talk two trillion dollars in cuts. You know, you could cut out
the entire workforce almost and it wouldn't approach that. And so it is the you know, scope of what they're talking about that they may not be able to reach.
I wouldn't count against them.
These are two guys who have been insanely successful in their other aspects of their professional lives. But the reality is this process is still very unclear. They are not, as you said, part of the government. You know, I loved when Donald Trump said this was like the Manhattan Project. Okay, you know, that's that is a lofty goal. But you know what is the process? These cuts, for the most part,
would have to go through Congress. You're talking about a House with maybe even just a one seat majority at some points, you're talking about a Senate and a House that already the GOP is disagreeing. Do we start with tax cuts? Do we start with Donald Trump's non tax cuts? So the priorities, So, how do you do this? And do this in a two year period, because of course Donald Trump said they will shut down DOGE by July. I think it's twenty twenty six, So a lot to
do in a short period of time. Worthy goal, but you know, the devil is in the details here, and we haven't heard any of these details yet.
Yeah, as always, Okay, So the other specific idea that we had, beyond the broadcut two trillion, we had bring people back in the office five days a week, the federal workforce, and then do away with daylight savings. Now, this is something that's come up before. Ask ed Marky about it his pet issue. I think Marco Rubio signed on to that bill as well. Look, I don't know if we're going to favor Sun in the Morning or
sun later in the day here Chhape and Faye. But would that actually make a difference.
I do think it would make a difference. What that difference is, I think is anybody's guess. If if it stays sunnier or a lighter out during the day for us, I think that's I would I would support it. And of course time zones, you know, can cause difficulty. But you know, I don't know that this is the fight
that they really want to get into. Considering some of the earlier things that we talked about that are going to be fights that I think are real will have an immediate and real substantial impact on making the government more efficient. I don't know if this one will do that, but again I think people could support it if it will help that personally.
Yeah, I look, this has come up before.
As I mentioned, Genie ed Markey made a cause around this whole idea.
You're an educator.
This actually was a big part of the reason why we do this, so kids weren't going to school in the dark in the morning. I feel like I'm setting up some kind of online poll here.
If you like it.
Late in the morning or in the afternoon, we can all weigh in on that later.
But is this something we should be spending time talking about.
Uh, probably not.
You know, I do recall like in high school, Joe Matthew, I'd have to you and I growing up in Connecticut, I had to get.
On that bus. It was pitch black.
It was very pitch black.
Yeah, yeah, so you know there is you know, but I think am I correct Joe that some of our colleagues in the more vacation spots, they're not keen.
On this idea.
So there's a plus minds here. But to Japin's point, the reality is this probably isn't going to get you near where you need to be to addrust the serious problems in our budget deficits. So yes, you know, for the kids, we can think about it, but you know, I think we need to look elsewhere.
Entitlements and titlements and titlements.
In a series of posts on X, both entrepreneurs Musk and Ramaswami went there must declaring Americans want the United States to quote abolish the annoying time changes unquote. Ramaswami described the practice as inefficient and easy to change.
Unquote.
Here's my question for you, Chapin, and you guys can you imagine being Chapin and Genie and have to answer the questions that Joe has every day about.
This wacky stuff. Does Elon Musk get bored?
I mean, really, where's Elon Musk six months down the road here when he's got a rocket company, He's got X, He's got a lot of stuff going on.
Japin, listen, maybe his son can carry this argument and that could be his pet issue, the daylight issue. Well, that that might be the way to get it done. I do not think he gets bored. I think these are very talented, smart, thoughtful men, and they care right now about government efficiency and I think that they're going to do their best at trying to do, you know, U execute Trump's vision of this, and I think they
are the two people that can do it. I mean Elon Musk is literally a rocket scientist, right, and it is doing things that we, you know, didn't think possible a year ago. So I think he had I think these are the exact right people to be looking at government right. One of the problems in government is that is not innovative most of it. Right, There's there's no innovation. The Department of Education, it's one of the one. You know, agencies where there's just an innovation is frowned upon, right,
So continuity of government is good. Innovation and change every now and then is better.
Doad's Day with gd Shanzano and Chape and Fay. Our great panel will have a lot more to talk about coming up.
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It's Doge Day.
The Big Buzz today inside the Beltway Elon Musk the viik Ramaswami meeting with lawmakers today to walk through their plan that is bringing more questions than answers at the moment. Where the cuts will come from, how it will become law. It's something that Speaker Mike Johnson was asked about earlier today.
Here he is, we do have to scale back the size and scope, but government it serves the people. It unleashes the free market again. Our policy changes will be a part of that. But I think that if we can make some dramatic changes in downsizing the scale and scope of these things will go a long way.
And two specific examples, planned parenthood and PBS are in congressional control.
Are you planning to act both of those?
I would like to, that's for sure for both of those. Yeah, we got to build consensus to have the votes to do that.
And just like that, we're right back to cutting big bird.
Let's get into it with Jack Fitzpatrick, our appropriations expert at Bloomberg Government. He's on Capitol Hill today as well for an important series of meetings with these two individuals.
Jacket's great to have you back.
I see Senator Marshall Blackburn has raised her hand to begin potentially drafting some legislation that would include the findings or recommendations of this panel. But that's the point here, right, It's not a department, it is a panel, and there's no clear path for any of these ideas to become law.
Yeah, there's a lot of interest you mentioned, Senator Blackburn. Senator Joni Ernst started the Senate caucus, the Doge Caucus, Aaron Bean, Republican from Florida, and the House started a House caucus. A lot of people want to be involved.
There's a lot of enthusiasm and there were big promises made regarding two trillion dollars in cuts, but this is basically a think tank or an advisory board, and Republicans are happy to hear their ideas, but there are a lot of limitations on how you put those ideas into law. If you want to cut huge dollars from the federal budget, you're probably looking at Social Security or Medicaid. Medicare or Medicaid not easy things to legislate. You can't just pull it from the annual budget.
So there have been some.
Warnings from key members. Susan Collins, who's the incoming Appropriations chair, said she wants to hear their ideas. She respects them, but this is not business. This is government and it works differently than private enterprise.
Well, Jack, this is your wheelhouse. You specialize in appropriations. If one were to cut two trillion dollars out of government spending, what would it mean for our budget?
What would it mean for the economy?
It would be huge, you know. The two trillion dollar number comes from Elon Musk. At that Madison Square Garden event, he was asked, how much can you cut from the annual budget, which was six point seventy five trillion dollars last year, So cutting almost a third of federal spending would be wild. It would require massive overhauls of popular entitlement programs.
You know this.
They've talked about finding efficiencies in Department of Defense contracting. That doesn't do it. So we should acknowledge upfront some of the campaign promises and rhetoric were not realistic. But if we do take them at their word that they're being very ambitious. The things you'd have to look at are popular entitlement programs like Social Security, Medicare. Social Security has to be bipartisan. You can't do that through reconciliation.
So there are some huge stumbling blocks, and the reality check is probably going to be difficult when they actually start talking about legislating any of.
This, which brings us to your column earlier today, the headlines schoolhouse doge mus get Ramaswami talk cuts on Capitol Hill. Your point here not only is talk cheap jack, but maybe everybody needs to go back to school here on how a bill is written.
Yeah, well, look, they can rewrite some of the things on how a bill is written. The expanding use of budget reconciliation to get around the Senate filibuster is as significant as it has ever been. Republicans are talking about how many spending cuts can we find to offset the impact of extending tax cuts. So there's some reality to Republicans saying we're going to do something significant. We're going
to cut a lout of spending. They're not going to do it with Democrats, but two trillion dollars and the idea of waiting into major entitlement reform does not seem realistic because they've talked so much about it already and no one has taken action lately.
Well, so what of the old timers say here?
And I say that with all due respect, you talk to the appropriations experts, including the chairman, Tom Cole. Does you want to see everybody go back to schoolhouse Rock?
What does he think of these ideas?
They've offered some reminders that Congress controls the power of the purse. You don't set up a think tank or an advisory board and then just put Elon Musk and vivik Ramaswami in charge of the federal budget. So there's a warning there. Cole also said earmarks don't add up to that much money anyway, So we're not touching those,
We're not getting rid of that. Susan Collins said she is very interested in looking at telework and getting federal employees back in person or saving money on federal leases. So there are some ideas, there's some enthusiasm, but a lot of warnings that ideas are one thing, but it's still Congress that makes the decisions regarding federal spending.
Well, the two most specific ideas that we've heard would include one you just mentioned, bringing workers back into the office five days a week, knowing that a lot of federal workers are still doing the work from home. Bit also eliminating daylight savings time. That seemed to be a cause that both Elon Musk and Vivek Ramaswami wanted to endorse. In terms of the first one, though, you seem to think that's something that actually has enough support in Washington.
Would it result in a lower head count because many federal workers do not want to return to the office.
You know, that's something that Republicans have brought up, but they've gone back and forth because on one hand, it may result in people leaving and not being replaced and you have a smaller workforce through attrition, but also Republicans themselves,
including relevant appropriators. Steve Walmack has brought this up, has said, you know, we could save a lot of money by embracing some telework not paying as much through the General Services Administration on federal leases, telework can be used as an efficiency, and Republicans, though they're interested in cracking down on inappropriate telework and excessive locality pay for people who don't actually live in DC.
They have to choose a direction.
Are you bringing back everybody full time or are you looking for savings through efficient telework Sometimes so that's another area where they have to make some more specific decisions rather than just identifying this issue.
Got it, Jack, It's great to have you back. Good to see Jack Fitzpatrick. With a busy day on Capitol Hill. We didn't even get to the fun deadline that is looming. By the way, December twentieth, we're fifteen days out and there is still no deal on top lines on how to avoid a shutdown. So the logic at this point is we kick the can into early next year, so
we could kick the can again presumably until March. That is the buzz at the moment here on Capitol Hill, as Elon Musk continues his stride across the Capital with the vik Ramaswami, I'm drawn to a quote in this morning's punch Bowl tip sheet, a senior Republican talking with punch Bowl about this idea. Two people, they say, who know nothing about how the government works, pretending they can cut a trillion dollars, both with decent pulpits to preach
from and the ear of an unpredictable president disaster. The only good thing is at some point the'll over promise and get bounced by Trump. But until then, disaster, said this senior Republican aid gives you a sense of what we're heading for in the new year. As we had the voice of Rosemary Becky, a conversation we've been looking forward to as we try to bring you voices of experts, people with experience that might have seen these movies before.
Tax Attorney with Brownstein, former Tax Council to the Senate Finance Committee.
Rosemary is great to have you.
Welcome to Bloomberg TV and Radio. Will doge results in a smaller government.
So it quite possibly could there could be some great recommendations that come out of it to make our government a little bit smaller.
Well, two trillion dollars, of course is a lot smaller. And I wonder if this falls into the category of a lot of things involving Donald Trump, that the opening salvo is just that, and that at some point there will be maybe some spending cuts that they can take credit for.
Is that how this goes?
Yeah?
And so how this process is all going to play out is initially the DOGE is going to be set up as an advisory committee, and I think your prior guest talked a little bit about this and show it will be set up as an advisory committee to OMB and it will provide recommendations as the President puts forward his budget for twenty twenty six.
So how does it play out then when it comes time to actually crafting a budget. I mentioned the stopgap. We're going to go through this kicking the can. But at some point, likely by March, I think is the conventional wisdom on Capitol Hill, there will.
Be a budget crafted.
Dare I say using regular order? But I don't want to get too crazy here, but we'll actually have Donald Trump's fingerprints on them. Is that how he implements what we hear from Musk and Ramaswami.
Yeah, no, absolutely, and show this advisory committee will make recommendations to OMB and ultimately it'll be up to the President and OMB to put together a budget proposal that they'll send up to Capital Hill.
And then it's up to wallmakers right to.
Craft a budget and to go through the appropriations process and show, you know, hard to say at this point you know which recommendations will be taken into account, and it may be some recommendations are held back or further developed as they look at other budgets spending proposals like a tax bill. Maybe you saved some of the proposals for that exercise.
Sure, that was really the genesis of this.
Right.
When the idea of extending or making permanent the Trump tax cuts came about, everyone cried deficit spending, bigger deficits, maybe higher inflation. And then we heard this idea about the doge. Is it the answer to higher deficiles.
It's it's certainly part of a process to pay for the tax bill, right is looking for ways to cut spending as an offset to cutting those taxes. It will cost in order to extend all of the twenty seventeen expiring provisions. It's going to cost a net number of four point six trillion dollars, and so hopefully you can use some government savings to pay for that process and the extension of those tax cuts.
You believe Donald Trump actually wants to cut spending. Did his first administration show us a pattern there?
Oh?
Absolutely.
I look, I think that people are looking for real change, They're looking to see our economy expand to create jobs, and so I do think that they are going to be looking at cutting government spending. And as I said before, I think that you know, it'll be part of just the general budget process, and we could see some of those additional cuts appear as part of a tax bill or other budget processes.
Rosemary, you started your government career at the IRS, which gives you unique perspective on everything we're talking about here, including, by the way, Donald Trump's new pick to run the IRS, which I want to ask you about. But this agency is at the center of so much strife in Washington. Many Republicans wanted to pull back the funding that the Biden administration had given, saying that you'd have armed agents knocking on your doors. Are you concerned about the image
the way that IRS has been framed by people. What is, in fact an agency that's willfully underfunded.
I'm not concerned about it because I think that it's a perfect example of where there's inefficiencies and an agency that hasn't run well and hasn't served the taxpayers well. And so I think what President Trump is looking to do is to bring in a fresh set of eyes and to take another look at ways to make that agency more efficient.
And again, you.
Know, just automating that agency isn't the answer. We really, you know, need taxpayer services and people to help taxpayers. I think that's where the real frustration is at with Americans.
Well, we do have a name, Billy Long, former congressman from Missouri, named yesterday by Donald Trump to lead the Internal Revenue Service. I'm a little bit confused to here, Rosemary. You might think this is a great pick or not, But don't we have an IRS commissioner already?
We do, and he has a five year term and he is confirmed by the Senate. I suspect there will be a lot of pressure for him to lead his position, and which case, then you know, this nomination could move forward.
What can mister Long, assuming he gets this job, do then to make the IRSM or efficient agency, one that works better, one that Republicans will not be allergic to.
I think it's about making sure that agents are trained properly, that automation isn't actually running the agency.
I think that there is so much that can be done in.
Terms of again providing real service to taxpayers and helping people get their questions answered. I feel like at time and time again you're hearing about people getting notices and being frustrated with the process because there's no one that can answer their questions and help them with notices that they receive it in the mail. So I do think there's a real opportunity to take a hard look at this agency and make some change.
What do you expect in terms of the tax debate here? And it's you know, it's funny. We've been talking about tax reform and reforming the tax code, Rosemary for a lot of years. Remember when it was going to fit on a postcard. What will this debate look like when it comes to extending the Trump tax cuts and will it include all of the exemptions that he rolled out on the campaign trail? No taxes on tips, no taxes on overtime. I could keep going. I haven't even mentioned
salt yet. What will the final product look like?
You know, the final product is probably going to be a combination of extending the twenty seventeen tax cuts as well as making good on a lot of the campaign promises. And I think what we're also going to see is maybe looking again at different ways to pay for that again, whether it's through tariffs or through cutting further cutting government spending. But there's going to be some trade offs and it's
going to be a really hard process. I mean, you're talking about members who are definitely concerned about deficits and debt, and so that's all got to be taken into account during this process.
Just quickly, one more as we get ready for the confirmation process or whatever we're going to call this for Billy Long, assuming there is a change here at the top of the irs, because it can't result in a firing. As you've pointed out, this former congressman spent a long time dealing with the pandemic era tax credit. I want to be exact about this, the employee retention tax credit, which has been very controversial. A lot of lawmakers tried
to shut down. Will that make it problematic for him to get this job.
I don't think it'll make them problematic.
I think it's certainly he'll have to answer questions about it. You know, it is certainly a program that needs to be taken looked at and reevaluate it and frankly probably they need to learn from from that experience. So so that'll all be his affirmation process.
I'm glad you could join us. Rosemary Becky, tax attorney with Brownstein. We thank you for the insights. As always here on Balance of Power. We'll follow the beat on Billy Long for you in the future of the irs.
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Thanks for joining us on the Fastest Show in Politics. Thursday edition of Balance of Power. We're live in Washington, where it's been a pretty busy day around Here is Doge Day on the Fastest Show in Politics. That means the Departments of Government efficiency. Yes, we're following the coin
as well. It's actually doing pretty well. As Elon Musk and the vek Ramaswami meet with lawmakers today, we're told they're going to be holding a news conference or at least making a statement a bit later on following their meetings, and we'll hear what they have to say, knowing that Elon Musk has promised to find a way to cut some two trillion dollars out of the federal budget while we're at it. By the way, fifteen days from now, we will not have a federal budget. The government will
run out of money. So there's also an effort underway to try to craft the stopgap to get us through
the new year here without a government shut down. One of the big stories that we've been talking about with regard to geopolitics are eyes on China and the intersection with politics, policy and technology is the tip for tat that we have been seeing when it comes to access to some of the most advanced technology and in this case many cases at least chips from companies like in Nvidia that are helping to create this new age of
artificial intelligence. China ratcheting up trade tensions with the ban on rare earths this tip for tat that not a
lot of people saw bringing equity to the situation. But Gregory Allen, who runs the wadwani Ai Center at the Center for Strategic and International Studies, embarked on a great project because we talk a lot here on Bloomberg about the impact of these export controls and what they will mean for our relationships and our economies, but nowhere do we really get answers on what that impact will be. And that's what Gregory Allen set out to find. It's
great to see you, welcome back. Nice to see you at the table here at Bloomberg.
It's wonderful to be back.
This is a big, squishy story, so we can go on a lot of different directions here, and you're a real expert. So I want to start with the most recent turn in this Tit for tat With China, we're trying to keep technology out of their hands and they're trying to keep rare earth's out of ours.
But we don't buy all of that from China.
To me, no, So China is a really strong supplier in the world's rare earth market. Most of their strength is actually as a refiner, not as a miner So while they have really strong market share in most of the mining in terms of owning the mines around the world that produce rare earths, where they really dominate is in refining capacity. And what we've seen with the most recent round of export controls coming out of China, so this is their restricting sales to America is on gallium
and germanium. But I would say it's actually not nearly as strong as what the United States has done to China. And there's two reasons for that. The first of which is gallium and germanium are natural byproducts of aluminum and zinc mining, which means just about anybody who right now today is mining aluminum or zinc could get into the business of alium or germanium if they wanted to. Fascinating now once they have all that or they're going to have to find a refinery to ship it to. And
right now, China dominates the world of refining. So the question is, are these export controls that China has put in place scary enough that somebody in the West is actually going to start putting the money into building local refining capacity for these metals, and that could take a year or two to set up, and then China might flood the market later to sort of destroy that investment.
Is that a nimby story, is it?
I mean, we're actually hearing Democrats warm up to the idea of opening new nuclear power plants to help to provide power for AI data centers, for instance. It sounds like everything is being considered.
Again, well, I think in the United States' this case, we don't necessarily need it to happen in the United States. Of course, there's folks who would love for that to be the case for the jobs or for the strategic positioning, et cetera. But what we really need more than we need American sources are just non Chinese? Are those or Africa? In terms of where the medals are, that's actually almost
everywhere here. I'm talking specifically about gallium and germanium again anywhere processing facilities.
Right, we're paying for this trans continental railroad. Maybe that's the next source for these.
So that's the point is you could put these refining sources anywhere, and some developing countries such as Indonesia, which are strong in mining certain metals, have expressed an interest in getting into the refining market. The problem is on the investor side, because they're asking themselves, if we put up the money for a refinery, is China just going to flood the market to press prices so that our
refinery goes out of business. So they're going to be looking for long term purchase agreements with US customers that are going to ensure that they're still going to have access.
Fascinating.
There's one other thing here that I think is really worth pointing out, and this is a research done by your colleague in Bloomberg, Gerard de Pippo, who has pointed out that there's really a lot of circumvention of Chinese export controls going on right now because US purchases from China have obviously plummeted in the wake of these export controls, but Chinese exports to Europe have surged, and Chinese exports
from Europe to the United States have also served. And so China is getting a little bit of a taste of its own medicine when it comes to working to evade export control.
Nice had tip to Gerard his team is doing amazing work over there. China wants to have its own industry. It wants to get the chip making equipment that we don't want it to have. What's so, when you put the walls around China's chip manufacturing capacity, how far behind the US is it and how could it catch up?
So there's multiple ways you can think about this. The first is in the types of equipment. What do you need to actually put in the chip fabrication facility to operate that facility. The one that's best known is the lithography equipment. This is sort of using light to print the design on the chip. But there's also advanced deposition equipment, advanced etching equipment, and China's positioning differs in these different
categories of equipment. They're dramatically behind in lithography equipment. In some sub niches of deposition and etching equipment, they're still good, although they're quite a bit behind the global state of the art, as represented by what the United States companies can do, what the Japanese companies can do, what the Dutch companies can do.
How can China get that equipment American made equipment potentially through other countries. There's a lot of ways to backdoor this stuff, as we have seen.
Yes exactly, and of course the American equipment companies. The point that they're making is Hey, if other countries are going to sell this, we want to be able to sell it too. So that's why they're really concerned about the export controls occurring in a unilateral basis, because then there's no strategic impact on China and there's a loss
of sale by US companies. And so in earlier tranches of export controls, what you've seen is US firms actually increasing their shipments of semiconductor manufacturing equipment coming out of the countries to which they have outsourced some of their manufacturing. So it's no longer a US export. It is now a Malaysian export, even though it's coming from a US company.
The most recent tranch of export controls, designed by the Bide Administration expands the usage of the foreign Direct Product rule, which is a little bit esoteric category of export control law, but it should put a real stop to all of that category of stuff there now, wherever it's made in the world, if it includes US content, export controls are going to apply, or Dutch or Japanese local export controls are going to apply.
You're so good at this that when you consider some of the impacts more broadly speaking, here, you're actually trying to find the impact this has economically financially. How about for the companies themselves, whether you're an Nvidia or an Applied Materials.
Every time there's a quarterly.
Conference call, we hear that demand is off the scale and we can't even can't keep up with the backlog.
So what does it matter to them if China's not buying?
So it's worth saying here, you know that it's a little bit different for different markets. Now. In the case of semiconductor manufacturing equipment, it's often described in the press as a ban, but what it really is is a ban on advanced semiconductor manufacturing equipment. You can still sell the old stuff, and it's also a ban of selling all types of equipment to those chip fabs in China that are producing advanced chips, the types of chips that
would compete with an Nvidia, for example. So what we've seen is not a reduction in demand from China. In fact, demand from China is exploding right now. But what you have seen is a major change in the composition of demand, buying more of the older types of machines that they're still allowed exactly.
So does that help the intels or the AMDs, or those who are not quite at the point of an Nvidia with prohibitively advanced technology.
Yes, indeed, So what it really does is it changes what China is setting its sights on in terms of chip manufacturing. You know, if you think about a most advanced in Nvidia chip, that's you know, being manufactured at five nanometers, soon at three nanometers, those really really small, really precise components at the bleeding edge. Now what China can't buy is the equipment you use to manufacture five
nanime or three and animeters. So what you've seen is a surge of increasing chip production capacity at what we call legacy nodes nineteen animeters, forty eight animeters, twenty four and animeters or twenty eight animeters. These are the types of chips that go into your washing machine, into your hair dryer, to a certain extent, into your car, and
China is looking to become the new juggernaut of legacy chips. Now, for the US equipment suppliers, it's been a bonanza because they're continuing to get all the dollars, but what they're selling is the older equipment. That's at least what we've seen so far but the expert controls that came out this Monday really are designed to sort of change the story.
Those old fashioned chips go into weapons too, don't they.
Oh yes, absolutely, which has.
Been quite a bit of demand for Russia.
Gregory Allen, It's a great conversation and great to see you again. I appreciate the work so much, Director of the juadwani Ai Center at the Center for Strategic and International Studies CSIS.
You're always welcome here. I appreciate your research and sharing your work with a scriptory.
It's good to see you.
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