Trade Wars

in the game again. To discuss this crucial and all important topic, I decided to turn to the person whom I learned everything that I know about trade from my trade guru, as it were, and that's my colleague at Harvard Law School, Mark wu. Mark had an important job in the Office of the United States Trade Representative. Then

he decided that wasn't enough. He went to law school, He became a law professor, he got tenure at Harvard Law School, and all along the drumbeat of Mark's path breaking scholarship has been the growing challenges in the US China trade relationship and the way that those challenges would ultimately transform the nature of the international trade regime of all of the scholars that I know, I can't think of anyone else who started by saying something that left

him way out on the dissenting cold side of the field, kept on saying it, kept on saying it, and then turned out to be painfully accurately and sadly right. Mark, Thank you for being here, Thanks for having me. No, I wish it were under a happier circumstances than the fact they were actually in a trade war. Now, so let's start with the question of how much of where

we are is Donald Trump. All those years when you were talking about rising trade tensions between in the United States, you were not predicting there would be someone named Donald Trump who would become president, but you were predicting structural differences that you always said would lead to greater and greater conflict. Would all this have happened eventually in one way or another even if Donald Trump had not been elected president. There is an underlying structural tension in the

US China relationship. So to that extent, would the economic relationship have deteriorated? I think the answer certainly yes. Would it have deteriorated in this particular way with this type of confrontation. I think that part is very much specifically Donald Trump. I don't think we'd be seeing policy conducted via tweets and sort of this whiplash left, whiplash right

type of approach. That's very much a Trumpian style of approach towards taking on China, and it's something I think has really thrown the Chinese for a loop as well. We'll talk about that. How do people sitting in Beijing, sophisticated, educated people with years of experience in watching the United States and understanding international trade and a long term strategy that they were pursuing quite successfully, how do they think about the wild card or the curveball that is Donald Trump?

And you talk to all of these people on a regular basis or don't violate any confidences, but give us an overview picture. Well, I think over the last decade or so, the Chinese increasingly became more sophisticated in their what they call American studies. So they thought they had the US more or less figured out, and they had, to the extent that we're talking about conventional what goes on within the Beltway, right, they thought there are these

structural issues, but they can be managed. Was an example of the structurature they thought they could. So, for example, they know that there are job losses happening in the US. They know that some of that is due to the fact that jobs are moving to China because of offshoring and so forth. They know that there's going to be a political backlash against that. But they thought they could control that because you can certainly align the US business community in a way that they have gains from the

growing Chinese market. You have farm purchases from certain states they're politically important. You have ways of trying to win over our hearts and minds by making certain types of investments and states that are the industrializing. So they thought, you know, people can sense that there's a China threat, but that threat doesn't have to seem as ominous. And they were making friends and creating a certain type of alliances.

But they hadn't anticipated, much like most Americans hadn't anticipated the scale of the populist backlash and that it would take the form of Donald Trump. So I think it's really thrown them for a loop. Is that because they overplayed their hand. I mean, as you said, they had a strategy and during the Clinton Bush and Obama administrations. It worked pretty well. There were people who were mad

at China, but they were peripheral. China wasn't identified publicly as the great threat to the United States, and then, as you say, we got Donald Trump. I mean, there was one sort of cosmic way of looking at it. It says they couldn't have gotten away without forever, and they didn't. I think it'll be interesting to see how history judges this. You could look to say that that's the case, and maybe they tried to push too far,

too fast. But I think this is a bit like asking the questions the Democratic Party not do enough after the two thousand and eight financial crisis. It's hard to say with hindsight. Right, on the one hand, the economy got better, I mean, one hand, the economy got better. On one hand, right, China created a lot of win win situations, especially for US business. It helped keep the global economy afloat after the financial crisis. It became the

largest market for many goods. Lots of people did well, either directly through their businesses in China or more indirectly through through their pension funds investing in certain firms that made quite a bit in China, and there are displaced pockets of people who suffered tremendously as or resolved this. But they thought they had that under control. Right. So now you're sitting there in Chinese government circles, You've got this Trump phenomenon to deal with. We're struggling here to

make sense of it. How do they make sense of it? Do they think of it as on the whole, as a temporary phenomenon of temporary deviation, or do they think, no, this is the way of the future, at least with respect to US China relations. So, on the one hand, I think they're struggling to figure out the same question that we're struggling figure out here in the United States. They're trying to figure out is this just another couple of more months until sanity returns or are we going

to have another four years of Donald Trump? And so that's the same question that we're sitting here in United States trying to figure out. So you don't think they have a better or a clearer or more thoughtful of you than we do. No, But I think what the recent trade war has made much clearer to them is that this is surfaced earlier than they thought it would but sooner in that's what has surfaced earlier, the fact that the US would see arising China as a threat.

I see. I think many of them thought, evankfully, sooner or later the Americans war going to come to some sense. They would feel uncomfortable with the fact that the US is being pushed out of parts of the Western Pacific or being displaced as the most important. But they thought they had five or ten more years before before it happened. So let's talk about the content of the trade war now. And I want to start by asking you a question

that troubles me very much. So if you move in mainstream democratic circles, then for many years, the background assumption, certainly through let's say the Bill Clinton years and into the Obama years too, the background assumption of thoughtful making liberal democrats was international trade is good. They basically thought that on the whole, more open trade rules served the United States made our economy more competitive, that the rising

tide lifted all boats. If you ask them about countries that were raising people out of poverty by virtue of trade, like China, they would say, well, that's great. It's nice that people are being brought out of poverty. Now, in the last cycle of election, certainly going back to twenty sixteen, Democrats and especially the more left wing of the Democratic Party started rethinking that question quite seriously. They began to question NAFTA in various ways. They began to question the

expansion of US liberal trade treaties with Asia. And that didn't bring in the Hillary Clinton wing of the party initially, but it did bring in the Bernie Sanders bring of the party. Donald Trump got elected, and now the Democratic Party is moving even more in the direction of greater protectionism. So the question that troubles me is is Trump a little bit right? Is there something to be said despite all of our I think justifiable horror at Trump on

moral grounds, did Trump get something right? Or is he getting something right something which is overlapping with some parts of the Democratic Party with respect to the significant downsides of the US China trade relationship as it is currently configured. I think the answer to that is yes, I think there is something to be said about the diagnosis of structural tensions in this relationship is accurate. The question is whether or not the prescription that the doctor is offering

is the right prescription. Well, let's start with the sickness, before we get before we get to the cure, let's dive into the sickness. I mean, it's it can't just be Donald Trump's formulation, which is, oh my goodness, there's a trade deficit. I'm not even totally clear that Trump gets what a trade deficit actually is. So what is the thing that's the problem for you? So I think we should be clear about this, right. I think most

people think the deficit is not the right barometer. So to the extent the Trump white House is talking about that, I think that's not correct, right. I think also to the extent that what Trump is just to be clear for listeners, that the Trump white House is basically saying we buy more Chinese stuff than China buys our stuff. And that's, after all, what a trade deficit amounts to.

And most mainstream observers of trade, economists, scholars and others think that who buys more stuff is not the only or the most relevant measure, right, And that's because supply chains are complicated, the accounting isn't quite correct. All this stuff we can nerd out about, but more importantly, this is deepackground you're allowed to hern out for a bit, but more importantly, right, the deficits and reflections of different

types of saving traits. And so the fact that you know, we are the reserve currency and the fact that we have instance savings rates means that inevitably, right, this is going to show up in this type of account. So we save less money on the average than many Asian Increasian countries save. And yet many people all over the world put their earnings into dollars because dollars a reserve currency, and so that's always going to turn up looking like

a trade deficit. Yeah, and just a question of whether that deficit is with which country, and it could be artificially larger with one country than another, because say, for example, with an iPod, right with the last place it gets assembled is in China and it gets shipped over the US. Think they made the iPod anymore? Mark? Sorry, iPhone, let's retape that part. I thought it was funny. Go ahead, So let's take the iPhone right, the last place that they assemble all that is in China. When it gets

shipped over the US. All that is going to count against the trade deficit there, even though many of the component parts come from Korea. Taime one, Japan, parts of Europe, even parts of the United States, rights, and even though Apple is an American company exactly right, which is presumably gaining a huge percentage of the profits relative to anybody

else in the supply chain. So I think the way the administration is talking about how to measure this trade wars are easy to win and all that, that's not quite right. But let's talk a little bit about some of the things they did. I think get right. Please. So I think there's two parts that we should disagreeate here. One is it's a widely recognized truism amongst economists right that free trade does expand the pie makes everybody better off. And the basic theory is, if we're trading, it's to

make us each better off. Otherwise, if I didn't think it would make me better off, I wouldn't trade with you. If you didn't think it was making you better off, you wouldn't trade with me. And presumably you do some things better than I do. I do certain things that better than you do. So we each take advantage of our comparative advantages and then we trade this with each other. So thank you, Adam Smith. That widely recognizes as truism. Then there's a question of amongst that pie that's grown,

are we sharing this fairly with our fellow countrymen. So I think this is a part that both Donald Trump, as well as the progressive wing of the Democratic Party and increasingly much of the Democrat Party is now saying no, or it's certain greedy bastards took too big a slice of that that they may and they aren't distributing it.

But the solutions that Donald Trump has for how to deal with this, right, we need to have more tax cuts to stimulate growth to sort of filter all this down, compared to the solutions that Bernie Sanders has and all that are very very different. But so I think there's but I mean, just to be clear, Mark, are you saying that the income inequality piece is one of the things that Trump is getting right? I mean, I don't dispute that income in equality is a hugely important issue,

but I also don't really hear that from Trump. No. I think the part that I'm talking about is I think both the left and the right are saying the free trade right expanded the overall national GDP, but it made only some richer than other, A small fraction of Americans much wealthier than others, and it made a very small portion much wealthier, right, And did it make some people much worse off as well? It made it certainly

made some people worse off. Some people it's just marginal, right, because it made you a little bit worse off in terms of putting downward wage. Pretty sure. By the other hand, you got cheaper consumer goods so that you could buy,

So it's a bit of a wash. But for some people, they lost their jobs, and they were in communities that lost a large portion of their jobs, and then that then turned into different types of spillover effects onto the service economy that then had certain effects into an OPII crisis. And so far then these are quite concentrated communities and

made those communities much worse off. So then one point on which you're giving Trump credit is identifying the idea that there are some parts of the United States, you know, we can imagine them as being in the rust belt or other de industrialized places where the spiral of destruction really was generated by relatively free trade between the US

and China. Yes, but I think we should be clear to say the effect of technology on that is actually as large if not much larger than trade, right, But there is this phenomenon that's happening, and it's this double whammy of technological change as well as globalization that's expanding the pie for everyone. Just like technology right increases all

of our productivity, but it's having a concentrated cost. And so I think that part is correct, and we haven't quite figured out how we're going to deal with those types of concentrated costs, as well as the fact that for some people it's really been just a wash or a slight negative cost. And so I think that's one part that's great. There's another part, which is to say, even though we're trading with one another and it's expanding both of our pie, are we each getting our own

fair share? And I think here's another part where both the Trump folks in the White House today as well as many mainstream Democrats or Republicans would also agree to say that even though it's lifted both sides, overall, the Chinese are getting unjust desserts. So this is the China is not playing fair version of the story. I'm fascinated by this and I want to go deeply into it. So, first of all, you're saying you think you do buy that. In part, I think there is definitely a mere cantilist,

beggar thy neighbor type of policy. Those are fancy words. Part of it goes a little bit like this. Right, So there's too much steel all around the world in the free market system, some of those would go bankrupt. Some of the companies that make that steal would go bankrupt yep. Over the course of time, some of that production was shut down. People would lose your jobs overall this, but eventually you get to a stable level steel production yep.

Basic theory of capitalists. So overproduce, lose your shirt. So this all works a certain way, but some and the thing this is what the Chinese government has done is to say, well, we want to manage the flow of unemployment. And part of this is for domestic stability purposes. Right If you have all of a sudden, a couple hundred thousand steelworkers of work right away, they're going to be disgruntled. This is going to be constrained certain parts of the country.

So we want to manage this flow. So we can because we also control the banks, we can direct the banks to continue lending to some of these firms even though they aren't all that profitable and so forth, they don't have to fire their employers. They're engaging in certain types of subsidies. So if that's the case, well, eventually this is a hydro system. It has to equalize itself out. So these steel companies aren't going out of business, then more steel companies in the rest of the world are

going out of business. And so this is where the market. If everyone behaved according to market principles, it would spread this pain equally. But if one party is not behaving in quarities market principles and other sides are absorbing much more of this. So we're seeing this type of effect, right, This is a begger than neighbor type of effect than the Chinese will say, well, it's begger than neighbor, just to be clear, because if there's too much steal, someone's

got to lose jobs in a steel mill. The question is in which country will that happen? And if it doesn't happen in China, then you're they're beggaring their neighbors in other countries exactly. So let me let me push back a little bit here. Maybe push back is the wrong word, but just to ask Mark, isn't this what countries,

including the United States, have often done in crises. I mean, if you think of the Great Depression, you know, the United States tried to engage in interventions to try to keep people in work because people were losing jobs at a rate that was devastating to the overall economy. Or even to think much more recently, think of the bailout of the big banks after the two thousand and eight financial crisis. I mean, isn't that really isn't bailing out a big bank the same thing as bailing out the

steel mill. So knowing there, you're sounding exactly like what the Chinese response to this is, right, They're sort of saying, well, we did this, but if you thought this was a good policy, you could do it yourself too. And but if everyone I'm not just saying you could do yourself, I'm saying we have done it. I mean, why wasn't the bailout of the banks in this sense of those

REUS based banks. The first the w Bush administration and then the Obama administration thought that if those banks went down there would be huge knock on effects for the economy. They were worried about the consequences of that, and so the government engaged in a bailout to prop up those those banks. I mean, from an economist perspective, is there a meaningful difference between that and the propping up of

steel mills. So the difference is this, if you look at just amb right, they might look very similar, but the difference is they're at least amongst the Western liberal economies. There's a sense of we only do this in times of dire financial crises, and when we do, we only do it on a very small, temporary basis, and when we've consulted with everyone else around the world to sort of say we all need to engage in this type of thing to sort of keep the global economy afloat, right.

I think we asked the Chinese. I don't think we asked the Chinese. Well, we certainly did have a G

seven and G twenty coordination process financial crisis. We're trying we actually we're trying to So we were trying to sort of say, like, what the difference here is what, or at least what Americans and Europeans and Japanese would say, is we're not trying to do this on a day and day out basis in the interest of getting ahead faster and catching up with you and getting our share, getting more of our share, And there is no we only do it when we look like we're going to

fall desperately. I mean, if I were the you know, the Chinese responding here, my reaction would be, that doesn't make it better, that makes it worse. You're saying, you guys only do it on a large scale, in a coword needed way when you really have to do it. Well, we're going to do it on a much softer, smaller scale and a consistent basis so that we don't have a crisis like you had. I mean, that sounds a

lot more prudent, doesn't it. Well, they even say this, right, they'll say, well, look, we spend the same amount of money. It's just better we spend it keeping people going to work every day and they feel meaningfully productive. Right. You spend it on the back end, you lay them all off, and then you have to deal with it through higher healthcare costs when they're yeh. And we gave it to rich people because we gave it to on the whole,

because we gave it to investors and large financials. So I think the Chinese feel as though, in some ways for the West is pointing its fingers and saying, right, will you have one model of dealing with it, we have a different model of dealing but they're both equally

Just why are you pointing fingers at us? But I think there is a sense here in the US and elsewhere that what they're engaging in is a wholesale attempt to take more than they deserve based on the competition principles, and this ties in not just the subsidies, is one part of it, right, But there's another type of begger than neighbor, which is, just if we give you access to our markets, but you don't give us access to your markets that we can sell more in and you

can't sell as much out, and you have as protected domestic market that you have outsize profits from and so forth. So that's a different right. So this argument seems more powerful to me. So say another word about this. I mean, in the context of the bailouts, you know, they bail out one way, we bail out one way. I guess we'd have to compare the total amounts of those bailouts to try to make a comparison. But I'm not super sympathetic to the argument that there's a big difference between

our bailouts and theirs. On the other hand, access to this thing you're talking about now, access to markets, There should be symmetry, right, If we give access, we should get access that seems symmetrical and fair in some deep way. Is there in fact truly different ential access at this point? I mean, is it true, as one would think just from thinking about it casually, that there's plenty of access to our markets, but we really can't access a lot

of Chinese markets. Absolutely, our average tariff rights are much lower than theirs, even before, even after the trade war started. Well, I think certainly before the trade war. Now it depends on whether we go up to twenty five percent tariffs and how large a vass were. That difference is quickly narrowing, right, And part of the Trump message has been look, it should be reciprocal. And if you're the same as your text, if you're not going to lower, then we're going to

raise ours. Right, It's not just this, it's that's good in your opinion, that's not so unreasonable. Well, there's a different way of looking at it, which is the Chinese way of looking at it, which is to say, look, we all negotiated to a certain level, and you agreed to this level in exchange for letting us in sore. You negotiate it to this deal, and now you're reneging on it. So is that the way it is an

Internet negotiations? I mean, nothing is forever, right, Well, you and I negotiate a contract and then the contract doesn't work for one of us, we renegotiate the contract. Yeah, but the Chinese view is right. The Chinese view here is there's a way to renegotiate that that doesn't involve once I sort of tearing it all up. But I think regardless of whether you agree with the Chinese view on this, which is to say you have legal obligations,

we had legal obligations. You're negotiators, just didn't negotiate this right level. And the US view of is saying we expected, over the course of time, as you became more powerful that you would right unilaterally lower some of these as other countries have done, and you have it right. So there's differently different, two different points of view on this.

But I do think here right there is an asymmetry in terms of the market access and then, particularly when you think about investment restrictions, there are many more industries that are open right to China in the US. In the US, China can come and buy a business or invest in a business, and we can't do the same in China. And I think when you come part with other countries Brazil, India and so forth, right, the Chinese

market is much more close than even those countries. So it's not even one of those they desire to say it's one of the most closed markets in the world. Yes, I think certainly the OECD investment restrictions would suggest this is, but it's very asymmetrical. It's not to say all industries are closed, right, And this is one difference between China and Japan. You go to China, you see foreign brands all over the place. You see right people driving foreign cars,

buying foreign luxury goods and so forth. But there is this difference when it comes to the strategic industry that they're interested in capturing. Right, there are formal and informal

restrictions in place. And what are examples of that high tech so cloud computing for example, Right, this is an industry that Amazon is which is a dominant player in the US is not able to get in your or if you are able to getting you've got a partner with a joint venture with a Chinese company, right, And this is part of the concern on the technology front, is if you have to engage in the joint venture, then eventually some of that technology is going to leak

over to your joint venture partner. Sometimes they're going to then eventually dissolve the joint venture they get what they want, and so on and so forth. So that leads me to the next the next big Trump point that it also sounds like you're the generally sympathetic too, or that we ought to be generally sympathetic too, which is the claim that when it comes to intellectual property the technological secrets that give you an advantage and get you ahead,

that China is also not playing fair. Well. Again, here it depends on what your view affair is, right. But if your view is that, you know, if you've got big size and you can play one player off of another in order to get more of their technology and so forth, that's a view affair, right, then yeah, the rules. But let's take a more intuit let's take a more intuitive vie affair, I mean the more intuitive view affair. So, well, actually,

what about theft properly? I mean, I assume that China doesn't say publicly we deny that there is such a thing as intellectual property rights. They don't say that they in principle acknowledge that there is such a thing as intellectual property rights. Of course, so if we take that as our starting place, I mean, you know, we could have all property as theft argument and say that there shouldn't be rights in intellectual property. But let's just assume

that there are such rights. Since the United States says so, China says so, most countries say so. Is China systematically enabling, either to the government or through private actors, there the theft of intellectual property rights from foreign and especially American businesses.

I think there is definitely theft occurring from China. The question is how much of that is simply the government actively encouraging this versus turning up line I when it knows that the phenomena exists versus this is what Chinese would skillfully do. Regardless that division, I think is more difficult to discern, but certainly there is or if you look at right, where are most of the counterfeit goods

made in the world today. Where are many of the cyber intrusions happening that commercial firms and so forth that we know about, right, Where is their greater pressure made on foreign companies to actually transfer technology? Now you can argue whether that a business choice that certain companies are making or not, but certainly with regards to the first two, right, that is active theft, and that's a thing that is

a phenomena that is happening. So let me ask you about that, because it's been a lot in the news because at the moment when it looked as though, at least to many outside observers, a deal to end the trade war was imminent, the Trump administration insisted on the Chinese government enacting into law stronger intellectual property protections than currently existed, and that appeared to be I mean, we're obviously only going from the outside, but that appeared to

be the leading reason the Chinese government balked and said, no, we're not ready to sign a deal. So I guess I have several have a sequence of questions about that. The first is, do you buy I mean, I'm just giving you the standard New York Times version of what's supposed to have happened. First question is do you buy that story that that was actually the leading stumbling block. I do, But I think there's a solid nuance behind

all of this. We're all about subtle Near is an issue, But the issue is less a matter of are they willing to make these changes in law or not? But more are we willing to accept to have a foreign power, especially given China's historical legacy? Are we willing to have a foreign power? Comment and tell us exactly what needs to get changed where in our own domestic laws. So there's a sovereignty question. So there's a sovereignty question. Don't

tell us what laws to make. It's a question of pride, it's a question of national strengths, question of being a true sovereign We will. It's this question of saying, right, we will make these changes. Right, but we're not going to make it when you hold a gun to our head and tell us you need to change this and

this and editing right. So it looks bad because it looks bad, and especially it looks bad in the history of having this century of shame and the message of Chiji Pin's era being right China's rejuvenation and rebirth and

claiming it and the center. Shame refers to a long period of Western attempts to dominate through imperial power on all over the Chinese mainland, using navies, as the British did, often trying to force changes in domestic law, most famously trying to force China, which was banning opium because they had their own opioid crisis in the nineteenth century. And Britain's response to their attempt to ban opium was to say,

you must accept our opium. And in fact, we're gonna invade you and force you to accept the opium, which is deepening your crisis because it makes money for us. So against the backdrop of that shame China saying no more. Okay, that's super helpful, Mark. But now here's my question that I've been dying to ask you. Imagine you're the Trump administration. You understand that in China the rule of law is a hit or miss game. Right. Sometimes when laws are

passed there listened to, but sometimes they aren't. More or less, the Chinese Communist Party makes sure that when it comes to the fundamental policy decisions, they will come out in court magically the way the party would like them to come out. And in fact, this is even enshrined in the Chinese constitution, which puts the party above the law. They're not hiding this fact. Okay, So that's the way

things work in China. Now you're the Trump administration and you say, China, what we need you to do is change your laws, and then the Chinese say, well, that goes against our sovereignty. Why on earth, this is my question to Mark, Why on earth would the Trump administration insist on the change in laws when a the Chinese don't want to do it, but be if they change their laws, there's no reason to think that would work. They could change their laws and just get around them.

So is this keeps me up at night? So tell me to explain, explain what's happening. So this gets at the second bit of the nuance, and I think this is actually where the impast lies. And this is why I was hitting at the issue with changing the laws is not a matter of the Chinese saying we're not willing to have these laws on the books, right, It's

a sovereignty issue. The issue for the American side is I think they're not thinking of this as a magic bullet that's going to solve the IP theft isssue, or the market access issue and so forth. What they want to do is to force this so that the Chinese are publicly acknowledging this, because some of these problems are

not the central government right pushing this down. But it's a huge country and so it's local governments right saying, well, we're getting instructions that we need to develop a high tech industry here. How do we do this? Right? And so having this on the books is helpful for committing to the local government. No, look, the central government explicitly prohibits you from holding up a certain license in exchange for right certain technology being transferred. So I think that's

where it's useful. But they're not thinking this is going to be a magic bullet. Well, they think is a magic bullet or the Democli sword hangover it is the fact that there are still tariffs in place, and so unless we see effects from this, the tariffs aren't coming off.

And the Chinese are saying, well, for giving you all this, but you're not going to take off the tariffs until we give you even more and even more, aren't we just giving you something for nothing, and so the hang up in the negotiations, right, it's not just it's not just. It's about whether the signal will be sent and whether the deal would involve the Trump administration keeping the tariffs

hanging over the heads of China until change camp. And I think the fact is the Americans will have to give something, so they'll take some portion of some tariffs off, but they want to keep a significant portion, and the Chinese want them all to come off, and then saying, well, if we violate determine, then you could put it on, but it needs to be a fair process that can

go both ways. So you're killing me, Mark, because what you're leading me to is to wonder, you know, maybe the Trump administration's approach of playing super hardball then is not so unreasonable. You know. The Chinese government is saying that it's a sovereignty issue, but really they don't want to send a message to their provinces that they really want to put an end to holding up of deals or intellectual property theft or other problems. This is very

important to the US economy. It's a question of fairness and without a hardball. Now, I'm going to sound as trumpy as I can sound without hardball. China is not going to blink. They play hardball, We play hardball. That's exactly where we're at. The question is right now, both sides are kind of saying like, well, who can be

more patient? Who's got more to lose here? And I think the Trump administration is saying, well, you can play hardball with you for a while, China, because we all know that you're more dependent on us than we are on you, and the Chinese ors for us saying well, we know, you know, Americans, it just takes one dip in the stock market before right you're gonna sort of say, okay, we cry uncle now and we'll take off a greater

portion of these tariffs. And so, you know, I think this is where we're at right now in terms of the negotiations. There's a famous article by a political scientist about why wars ever happened? And if I'm not mistakenly, it's by a guy called James Furon, and the article basically says this, why do we ever go to war? I mean, we look at each other. I've got my army, you've got your army. We should both know who's going to win, and the fighting is going to be super bloody.

So once we figured out who's gonna win, why don't if you've got a better army, why don't I just give up? And if I've got a better army, why don't you just give up? And what he says is the reason people actually fight the wars is there's actually information asymmetry. I don't know exactly how strong you are. You don't know exactly how strong I am. And the only way here's the brutal part, the only way we can find it out is by actually fighting the war

and seeing who wins. And that's why wars are fought according to this theory. I mean, it's a little simplified, but it's if it's true, it's deep and profound. Is that what's going on here? I mean, are we in a situation where each side credibly thinks the US and China each credibly think that they can win the trade war, And the only way we can know who's got a better negotiating position is by actually fighting the war and paying the huge price that each side might pay along

the way. I think what's actually going on is both sides realize we're engaged in a if not decade long, then at least a generational strategic rivalry between the two sides. But both sides are not quite sure about the others ability to sort of persevere. Right, the Chinese look at the Americans to say, the Americans aren't making the necessary investments, they're overstretching their own resources. Clearly, re recognize their dominant

military power. Clearly they're technologically advanced over us, right, but there we just have to be patient and over a course of time we will catch up to them. So they're looking at the we're the turtle or the tortoise, they're the hair, and trying to say we'll wait them out, and so histories on our side. So their goal here is not necessarily to win a trade war, right, It's to get back to a piece that will allow them

to continue to wait out the Americans. I think on the American side, you're looking at the Chinese system, and for many years people just believe there's no way an authoritarian regime can have a growing middle class with greater access to technology and still continue to this type of

system in place. Sooner or later, especially with the demographic challenges that China has especially with some of the resource challenges, right, not enough oil, not enough water, and so on, so worth right, sooner or later this thing is gonna go belly up, the same way we saw with Japan and others and so forth. So we just need to sort of constructively, impatiently engage and sooner or later China is

going to change. So profit is not part of your job description, mark, but I'm going to ask you to profit sign anyway. Who's right? Who's going to win this one? So this is the this is the big question, and it's not clear right now because it depends upon choices that each side makes. Right. So if we can look at the Chinese diagnosis of America's weaknesses, and we can say,

to some extent they're correct. Right, America isn't investing enough in itself, it's overstructing into resources, and it's engaged in all this domestic political turmoil between the two sides rather than actually fixing its own problems. So it's question of whether or not America can get back to work to

tackle its own economic and social challenges. Right. And on the Chinese side, you know, you can look at the American diagnosis of what's happening in China and say, you know, these trends are all true, but can the party state dynamically evolve over the course of time to deal with these types of challenges. No one knows. So no one really knows. That's why I say it's not really about this immediate trade war. And once I trying to one up itself over the other, I think this immediate trade

war is just a skirmish in a decade. And then what we're doing is setting the terms of this competition, because once I want to say, well, we should still continue to dance with each other, but see who makes the right calls in the long term investments, and other side saying well, if we're going to be rivals to

begin with, maybe we shouldn't be as closely integrated. And that's a debate that's happening I think inside the US, not just within the Trump administration, but within the US palty overall, right, And on the Chinese side, they're looking at this and saying, well, if this is going to be a rival that's going to keep us down, why

are we so closely locked in with them? Yeah, So, in that sense, this is a battle in what I called a few years ago in a book that I wrote on this very much with your guidance and help cool war, a long term struggle between the US and China, which is deeply about competing national interests, but at least so far has been done more or less without firing any shots, and which traditionally involved close cooperation on trade.

What's going on now in this latest phase is that there's a lessening of that degree of cooperation and a use of trade as a more active tool of a more active tool of conflict between the countries. Let me ask a question in another hypothetical form. Imagine that the trade war continues to the rest of the Trump administration, and the US does raise tariffs very significantly on China, and we're up to a twenty five percent level, and

that continues, let's say, up through the twenty twenty election. Now, imagine a Democrat is elected. Let's imagine that that Democrat takes office in January of twenty twenty one. Is there any way politically that a Democrat under those circumstances, who wanted to end the trade war by making some sort of concessions to China could do that even if she wanted to or even if he wanted to, would that even be an option? I mean, of course you might

also elect someone who wants to stay the course. But you know, you run for office against Donald Trump, you want to say what he's doing wrong. One thing you might say by running is he's getting the trade war all wrong. Could a Democrat credibly do that? Or would that just look like, Okay, we're ending the war by losing. I can't see it happening unless the Chinese really developed such a deep grudge with Donald Trump that they say, we've got more cards, more games, we're willing to put

on a table. We just don't want to give it to this guy because we don't like them, but we'll give it. They might want to give coverage to the next person. Yes, they might say a new person is elected, now we're going to be nicer to you, and then offered some but nowhere near all of what you know the U s should want. So we might see something like that. But then you've got to ask your question, if you're the new Democratic president, how big does that pot need to be in order for you to take

the political risk to accept that. And so here's where I think the structural issues really do come into play. I just see that we are edited in past where a lot of what the Democrats would want would be the structural, transformational changes that I just can't see the

Chinese anteing up. But what I do predict will be different in the Democratic administration is that Europe, Japan, others will be more willing to cooperate with the Democratic administration to greater extent than they have so far because those processes are happening today. What about before the election? Can Trump blink or can Trump not blink at all? He can certainly blink and say that you know what he's gotten more than anyone else ever gotten. It's incredible, It's

better than what anyone else has ever gotten. I mean, I think it could be the case. Right he'll say, you know, look, the Chinese now gave back what they took away. We you and I don't know what he's purporting was taken away at the table. So you know that at some point he might just decide, oh yeah, now, I'm back to remember a couple months ago he was talking about this is the greatest deal ever. So I think it's definitely possible that we could see a deal

going into the election. And then he'll say, look, my hardball tactics got me more than anyone was ever able to do with the Chinese, so I think it's possible as well. Mark, Thank you, you, as usual made me feel more scared about the potential for a longer range conflict than I otherwise would have. But you've at least given me the gift to the end of saying there's some prospect of the resolution of the conflict. And above all, thank you for educating me and for making me think.

I really appreciate your being here. Thank you, Thank you, Noah, and the feeling is very much mutual. Deep Background is brought to you by Pushkin Industries. Our producer is Lydia Gencott, with engineering by Jason Gambrell and Jason Rostkowski. Our showrunner is Sophie mckibbon. Our theme music is composed by Luis GERA special thanks to the Pushkin Brass, Malcolm Gladwell, Jacob Weisberg and Mia Lobel. I'm Noah Feldman. You can follow me on Twitter at Noah R. Feldman. This is Deep Background