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Hello and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway.
And I'm Joe Wisenthal.
Joe.
Up until recently, very recently, I would say there are or were two hypothetical blockades that kind of loomed large in the minds of geopolitical strategists everywhere. And the first was, of course, Iran blockading the Strait of War moves. That's clearly not a hypothetical on anymore. It's actually happened. It's reality, and we've been doing a lot of episodes about it. And so the big hypothetical blockade that we're left with to ponder is China potentially doing something with Taiwan.
Definitely, and you know, the only thing I would actually flip them in the sense that I would say the vast majority of discourse has been about the letter China potentially blockading.
Taiwan in some way.
That was the thing that everyone has been talking about for years and years with growing intensity. And then, of course, as you mentioned now, the Hormuz situation, which sort of, I don't know, hit people by their blind spot because they didn't think it could ever really happen, or whatever really happened has happened. But when this resolves, If this resolves, et cetera, I believe the question of Taiwan will very quickly return to the fore.
Oh absolutely, So, as you mentioned, it obviously hasn't happened yet, but people have been writing and thinking about it for years and years and years, and as you know, I consider myself an expert on this topic, having once written a paper in college saying that China was going to invade Taiwan before the two thousand and eight Beijing Olympics, and that obviously didn't happen.
Well, being wrong has never gotten in the way of any pundit's career, that's right, so that I wouldn't worry about that. That has never been an issue as long it was as as well articulated and actually et cetera. That you're fine.
It was written from a server closet while I was in Beijing, so it had that going for it. But anyway, my point is that this is something that's always sort of looming in the background, and you always see headlines kind of coming up that hint at China Taiwan tension. So we actually had one this morning. We're recording on April twenty. First, the headline is Taiwan's president canceled his visit to Swatini. Do you know where that is? It's a tiny, tiny place in Africa?
Did they record?
Did they like? You know?
It is interesting because there's a few countries still help wholly out there that recognize that's right, Taipei is the unified capital of China. Most of like a lot most of switch. There's a few random ones out there that are still like they don't recognize the mainland, et cetera. So I'm always, you know, all little factoids here and there.
I didn't know that, But so Taiwan's president offices citing air root issues. I'm doing air quotes for those who can't see this video, and China pressure. So yeah, you do get those kind of headlines every once in a while. And then the one other thing I would say is like, okay, the straight of horror moves the blockade. There clearly an oil story, and oil is something that powers the entire global economy. But as we've kind of learned over the past six or seven weeks, oil might not actually be
the thing that like powers markets. Right if you think about the true, true, the thing that matters for markets, it might be something much closer to AI and semiconductor evaluation is.
Cut right, Yes, totally. I mean, evidently the world could go a few weeks and not grind to a halt if the straight of horm moves is closed for a few weeks, I believe the reaction in markets would be and just all around the world, and really can everything would be orders of magnitude differently off someone's like no chips, no chips coming out. That would be such a bigger deal.
And of course you know the question of you know, Taiwan's role in the world, that would already have been a very big security question even prior to the now constant drum beat obsession with AI chips, et cetera. But it only magnifies why this is such a live issue.
Right, So apparently we can kind of survive a few weeks without oil. Can we survive a few weeks without we can survive a few months.
We can survive a few weeks without a fraction of a certain fraction the didy whereas if we you know, the chip flow were to be disrupted on that level would just be Yes, much bigger deal.
All right, Well, we do, in fact have the perfect guests to talk about all of this, someone who has just written a book on exactly this topic called Defending Taiwan, a Strategy to Prevent War with China. We're going to be speaking with Ike Freiman. He is also a Hoover Fellow at Stanford. So, Ike, thank you so much for coming on.
All thoughts, thanks for having me on.
Here's my first ques. And you've spent a lot of time in China, including researching this book. Are you going to be able to go back?
I think I could go back. The question is whether I could leave. I'm joking. I'm joking. They gave me a hard time at immigration on the way out last time.
Oh interesting.
And I can't do useful research there anymore. It's not like there's archives I can access, interviews.
I can do.
So the value of it for research is going down for me, but also the risk of my person and the risk.
Of my devices is going up.
I do try to engage as much as I can, but I think it's better to engage in the third countries.
What do you tell us the genesis of this book or the origin of it or how you got interested in this particular topic.
Well, my background is as a China scholar looking at the China's global investment campaign. My first book was about the Belton Road and I looked at a bunch of Chinese language sources that show how it works under the hood as a campaign to mobilize the party state behind Seson Ping, and then I went on the trail of it to Sri Lanka, to Tanzania, Greece, Greenland. Actually I did my PhD about China in Greenland trying to understand how China leverages.
You did our PhD about China and Greenland. Yeah, oh that is timely, and I keep going.
That'll be another book.
Yeah.
But what I learned in the process of doing this book is that China has this formidable toolkit for blending economic power with its geopolitical objectives. And Taiwan was clearly emerging during COVID as the ai story was heating up as this monumental issue in the structure of the world economy, not just for the old reasons that we care about Taiwan, which is largely about geography. So it seemed to me reading about this, China had more ships, more planes, more missiles,
more drones. What was I missing? Why is the United States not completely outmatched? So I started this project with a friend of mine named Harry Halem, who's a superstar naval historian, and I asked him, what's the book I should read to underst what a US China war over Taiwan would be, like, what it would take to win, and then what of those things the US can do or can't do? And he said, well, the book doesn't exist.
I can give you hundreds of articles, hundreds of people to follow on Twitter, but no one thing to read. And so began this collaboration between two historians, one focused on the economics, one focused on the military, to.
Put the pieces together.
And as I did so, I began to discover there's huge gaps in our knowledge of this problem. This is the most complex, multidisciplinary, multifunctional foreign policy problem that American statecraft is ever faced. Because it's a military problem, it's also an industrial problem, it's a technology policy problem, it's a diplomatic problem, a real one, complex one for how we do with China, with Taiwan and with the rest of the world. And then finally it's an economic problem.
It's a question of global economic order, because if Taiwan falls by force or coercion and China seizes the FABS, the semiconductor FABS, or the FABS are disabled or destroyed, that is a hard reset of the entire global economic system that we have had since nineteen eighty nine and arguably back to nineteen forty five. So what comes next?
And while we have a lot of good thinking about certain aspects of this scenario, like the wargaming of what an amphibious campaign would look like and how we stop it, there's other aspects, like the economic planning, that we just haven't done.
So that was the idea for the book.
Pull together the best of existing knowledge, fill in the gaps where we can, based on interviews, based on historical work, Chinese language materials, and try to be the person to put the pieces together.
I want to back way up for a second and ask a very obvious question, which is why does China actually care so much about Taiwan? And then is it even accurate to say, like why does China care about Taiwan? Should I be asking why does she himping care about Taiwan?
Those are the two right questions to ask, and it's where we start with the book. The first thing to understand is that it's not about the chips.
For China.
The chips are a co benefit. But China cared about time I won long before they made hips, and they would care about them if they didn't make chips. Taiwan
is the unfinished business of China's Civil War. In nineteen forty nine, as the gwoman Dang Chang Kai Shek's government was losing control of northern China, they began to evacuate their forces alongside all the treasures of the Imperial Palace, to Taipei, and they set up a government there, essentially took over the island by force, and became, over the course of the Korean War essentially a US ally. In nineteen fifty five, Eisenhower went to Taipei. They became a
critical node in the US Alliance architecture. Mao obviously wanted to take this island. He wanted to wipe out the remnants of his enemy, and for him, the fact that there was this other China right across the strait, which at the time enjoyed the Chinese seat in the UN Security Council, was recognized by most of the world as the one true China. This was a fundamental question of the legitimacy of the Chinese Communist Party, and so it
became this tootemic propaganda point. We will liberate Taiwan from the imperialists, and in the process we will make China whole. We will fix this historical wrong that we were separated under this century of humiliation, and therefore for us to be fully rejuvenated as a civilization, Taiwan has to be brought to heal and the world must accept it's not just about control over Taiwan. It's about political legitimacy. The
United Nations must accept. The United States must accept that Taiwan is part of China, and there's only one China in the world, and the Communist Party is the only legitimate government. So this is why it's sensitive. It's not just about the status of Taiwan. It's about what China means, and that has always been bound up in competition with the United States.
Prior to the KMT having fled the mainland of the civil war and all that, what was understood to be the status of that geography called Taiwan, and to what degree going back even prior to the Civil War, etc. What was its relationship to mainland China.
It depends how far back you want to go. Back in the seventeenth century, the Dutch had a presence there as the Ming Empire was falling apart. You had generals who came from the mainland. They're claimed by both sides now. A couple of them became gods actually, and there's temples to them in Taiwan. And essentially during the Qing Dynasty, China's final dynasty, they were a region of the province across the strait on the mainland, but the Qing dynasty's.
Writ didn't really run there.
They were settled by people from the mainland, but it was swampy and pestilential, and there were indigenous people, and it wasn't really actively administered by the center. The Qing pretty quickly lost control over the fringes of their empire, and then the Japanese took it in the Sino Japanese War in eighteen ninety five, and the Japanese developed it.
The Japanese industrialized, they left a mark on it, and unlike other places that the Japanese colonized were like Korea, where their colonization was brutal in Taiwan, they left relatively good feelings. So all through the first half of the twentieth century, when the communists and the nationalists were fighting on the mainland, Taiwan was under Japanese control. And then the question is after Japan surrendered in nineteen forty five,
who did they surrender it to? And was the status of Taiwan decided after Japan's surrender, And the US position is, legally it remains unresolved. It remains unresolved who Japan surrendered it to. So the US position is we don't actually take a view on what the true status of Taiwan is. This is something for Taipei and Beijing to work out between themselves, and we are open to any outcome, but it has to be done peacefully, so no force and
no coercion. And since Taiwan's become a democracy, it has to be democratically acceptable to the people of Taiwan. And that's a principled position which is really about the stability of the broader region because it recognizes that this region has held together through trade routes that go through international waters,
international airspace. It's been stable since nineteen forty five. And if the United States starts allowing borders to be changed by force, trade routes to be changed by force, very quickly, the whole regional order in.
This part of the world will collapse.
And this is a grave economic danger for the United States as a geopolitical danger.
So that's the view.
And unfortunately, what China is doing is they're trying to revise that situation by pushing in the gray zone, pushing through coercion, and there's obviously always the risk they could escalate to war.
I want to talk more about that, but just on the topic of I guess US policy towards China, and you already touched on the one China policy. But what exactly is strategic ambiguity? Because whenever I hear that term, I always think it's like, that's what I would do if I was trying to get out of a social commitment later that evening, or something like, oh maybe I'll come maybe you know, we'll see, we'll see what happens.
What is exactly does that mean? And isn't it weird that people recognize that as an actual policy strategic ambiguity? What does it mean?
So the whole policy is sort of strange because it was never put forward by one person. It emerged through accretion. So it's like seeing one hundred bottles of beer on the wall, like you keep adding a new lyric every time there's a new administration. So what is the components of the One China policy. Well, there's three communicates, three agreements that the United States signed with China between the seventies and the eighties, and those are the political foundation
of our relationship with the PRC. And the language is vague, and there's some key phrases that are translated differently in English and Chinese, so we get to claim that the other side said things that the other side says it doesn't say. There's a whole lot of that, But basically the United States position is we will have a relationship with the PRC.
We will treat.
Beijing as the sole legitimate government of China, but we will maintain for all practical purposes an informal relationship with Taiwan as if it were a country, just not technically not de jury. And this has been reaffirmed by Congress, which in nineteen seventy nine past the Taiwan Relations Act that makes very clear that it's the sense of Congress.
So we should treat Taiwan as a.
State in basically every respect except for some of these formal, very high end political and military interactions. And then in the Reagan administration we made some extra commitments to Taiwan called the Six Assurances, and they basically reduced to we will not force you to the negotiating table, we will not trade you away. In other words, you will never face pressure from us to take a bad deal. And what this policy adds up to has been called by
political scientists dual deterrence. We want to deter Taiwan from declaring independence or doing something provocative that might trigger a crisis, and we want to persuade Beijing that if it intervenes, it might face the devastating real but that they don't have to worry because Taiwan has also deterred, so they can take their time, and hopefully if we deter both sides from doing something extreme, we can encourage them to
resolve their differences peacefully. So that strategic ambiguity is the not saying exactly what we would do or under what circumstances. The tricky thing is that was a great policy when we had overwhelming economic, technological, and military advantages.
That is no longer the case.
We probably could defeat China in a high end conventional war, and we can go into why if we put sanctions on China, we could probably cause a greater GDP hit in China, And we can get into why. But the cost to us and the risk to us as Americans is just going up up up as the relative balance shifts, and so now it increasingly seems like it's a get out of jail free card, even if it isn't.
Quick question, I know basically nothing about taiwanis domestic politics.
Am I wrong?
Though?
I feel like I read somewhere it's like the KMT the success they and they were the revolutionaries, aren't they the more dubbish of the parties and relations with Beijing? And don't aren't they the party that seems to be a little bit softening of the stances of the future and maybe, you know, uniting the two sides a little bit?
Am I wrong about? That's? How is that possible? It's how nerdy do you want to get?
So?
Here's the thing I mentioned.
That the dispute is largely about what China means. Now that question continues. The Gwomandong, the KMT, which is the successor of Chang Kai Shek's party, they believe that there are still the legitimate representatives.
Of the true China.
The entire thing.
Well, they recognize that there is a free China and an un free China. And I think they've long since given up their aspirations of raising an army and going back across the straight and taken over the mainland. But I think they have an aspiration that one day this divided China can be unified, either in some kind of confederation structure or who knows, maybe with the KMT on top. And they identify culturally, historically, civilizationally as Chinese. They say,
we're Chinese, we just happen to live on Taiwan. But we're one civilization, one nation. And the KMT's point of view is that we one China, respective interpretations, and on that basis, Beijing is willing to talk to them because they disagree about one China means what one China means. But they both believe in principle that there is only one China and the world and Taiwan's part of it. But the current ruling party in Taiwan, the Democratic Progressive
Party of the DPP. They have a different perspective. They say, we are a country called Taiwan. We're one of the most technologically advanced places in the world. We are thriving to democracy. The world needs our chips, you know. We are at the center of this security architecture.
They themselves is a distinct nation.
We are a distinct nation and we should be recognized by the world as such. And they're not suicidal, they're not crazy. They recognize that if they declare independence that this could bring the hammer down on them.
But their points of.
View is we will never declare independence because we already are. And Americans, I think will are about to have to learn this lesson because Taiwan is going into a presidential campaign and it is far from clear where the wind is blowing, and the United States will have to work with whoever wins, because that's what it means to have a partner that's a democracy.
But these two parties have very different.
Points of view, and one of the points I make in the book is we need to learn to handle Taiwan's domestic politics. We are two democracies that respond to one another. For example, I think the KMT, if they come back to power, will be much less interested in helping America reshore chip production, and they're also probably much less interested in doing military cooperation with the United States if that's going to inflame China. I think, basically you
can think about it this way. The DPP believes that the relationship with the United States is the most important thing, that we matter to them just as they matter to us, and that if Taiwan gets in trouble, America will come. And the KMT views are diverse, but they tend to have the view the cavalry might not be coming. The Americans might be using us as upon in a bigger geopolitical game, but can we really trust them? And we don't want to become Ukraine, So maybe the best approach
is to negotiate. And these are two very different points of view. They're both plausible interpretations of the facts, and the United States has to learn to deal with both sides.
I want to ask you more about reshoring, but since we're on the topic of domestic Taiwanese politics, one thing I've always wondered, and I'm curious if you maybe got some color on this in the cour of your research. But one of the reasons, it's not the only reason, but a big one. One of the reasons Taiwan is strategically important is because of the semiconductor business and the presence of TSMC and companies like that. What role does
a TMC play in Taiwanese domestic politics? Like, are there actual instances of like semiconductor companies having a seat at the table when it comes to formulating national security policy or indirect influence or anything like that. Have you seen examples?
It's hugely, hugely important.
It's only a couple of percent the semiconductor industry depending on how you define it with related services industries, it's something like five percent of employments in Taiwan, but it's an outside share of Taiwan's exports. And right now, just if you look at the macro data, Taiwan's exports are booming because no one can get enough of their chips. There is an entire ecosystem of universities, vocational training centers,
companies that supply to TSMC. This is a national champion in so many ways, and they get tax benefits and subsidized land and Taiwan's political economy is organized around making them a success, just as South Korea's has been organized around making Samsung and others a success. TSMC is smart enough to know that it has to deal with administrations of both parties. But TSMC is also caught in a US China at tension too, and TSMC doesn't share the
United States political objectives here. TSMC is happy to sell to China. They don't have a problem with China buys lots of their chips, but they have to work with the United States because ultimately they are fabricating chips at the high end that are made with US designs, So the US does have the ability to export control where there's final products go.
This is really interesting and important and I hadn't thought about this dynamic. I mean, I guess it sort of makes sense to me that, like if I were like the leadership in Taiwan, I don't know if I would be like that thrilled about our main company opening up FABS and Arizona, et cetera. But I guess it sort of makes sense, Like, Okay, you know, the US is a pretty important partner. But what I'm wondering, you know,
like in a future scenario. So going back to Reagan, and it's like, we're this doctrine, We're never gonna put pressure on you to like accept a bad deal. What if, over time, organically a new generation of sort of more sympathetic like mainland voters, like they grow up, they look at the world, they see maybe the US sort of looks like a belligerent power sometimes, et cetera. They look at China and it seems it looks like they're doing a lot better. They're not as poor as they used
to be, they look pretty stable, et cetera. Like, could Taiwan just sort of migrate closer to the Chinese sphere or perhaps even merge back into China organically?
Yes? And that and.
Is that is that something that like US policy like feel like, do we feel.
That we have to prevent that?
If that's sort of where the democratic action in Taiwan goes, well.
Our long standing policy is that it's the right of the people of Taiwan, yeah, to decide their own future. And that's a principled position that we hold for a reason that is also self interested, which is, if Taiwan decides that they want to submit or they want to take a deal, and they want to unify with the mainland. By the way the mainland uses this term reunification, that's a weasel word. Taiwan has never been subject to the
People's Republic of China in its history. But if Taiwan becomes unified as part of China, what's the United States.
Going to go in? We're going to go in and topple the governments.
We're going to tell them no, that they should have self determination to decide. And that is one reason why it's a no brainer to start to build a semiconductor manufacturing base in the United States and Japan and other allied countries, because there's any number of reasons to doubt whether we have assured access in the long term to Taiwan's chip supply. And if this is the most essential bottleneck the develop meant of frontier ai then we cannot put all of our eggs in that basket.
Do we know like younger Taiwan is there a reason to think that? Like, I don't know. I have again, I haven't looked at polling of like how the younger what do we know about them?
So the younger Taiwanese tend to lean more towards the DPP. Historically, they tend to in polls, they tend to identify as I'm Taiwanese only. Rather very few of them will say I'm Chinese only. More of them will an increasing number will say that I'm Taiwanese only, although many will say I'm both Taiwanese and Chinese. Chinese in the sense of culturally civilization of Chinese, not Chinese in the sense of
People's Republic of China Chinese. And I think these dynamics are affected by what the mainland does.
China is.
I think perfectly happier season Ping will be perfectly happy if Taiwan would sign a piece of paper that says I accept one country, two systems Taiwan, which is to say, I accept your principle that there's only one China and we're part of it, and you're the legitimate leaders, and we will get a Hong Kong style arrangement where we get to keep our laws, our institutions, our democracy, we get some freedom of expression, freedom to organize, We get
our fancy passports that have visa free access to all these countries, all these perks, and maybe Beijing will give them free energies.
Other subsidies, other perks.
That is the offer that's on the table for Taiwan, but it's become a whole lot less attractive now that Taiwan has watched what happened to Hong Kong.
Because Hong Kong took that.
Deal and it was all right until people in Hong Kong started to object to the CCP's encroachment on their institutions and their freedom to organize and speak out.
And when it ended up happening.
Is season ping sent in masked thugs that brutalized people, rounded them up, disappeared people in the night, terrorized the population, and crushed them into submission. So I think Taiwan has understood twenty nineteen that if they take one country, two systems, it's the slow beginning of the end of their democratic institutions and their freedom. It is not a it's not
a deal that they would take, I think willingly. But if they feel that the United States and the rest of the world isn't backing them up, and they're offered, Beijing essentially says, you want to do this the easy way or the hard way. I can imagine a world in which they choose the easy way and This matters because we're not just talking at peace time. We're also talking about crisis scenarios. There's all kinds of things that
China can do to dial up the pressure. They can mobilize their forces in the Taiwan Strait for a potential invasion.
Oh, it's just an exercise. It's just an exercise until it's not.
They can start to curtail the flow of goods and planes coming to and from Taiwan. They can start to ask for manifests. Who's on the plane? Oh so sorry, Ike is on the plane? Could you make a pit stup in Shanghai? We want to ask them some questions. There's so many ways that Bijin can turn up the pressure. They probably have Special Forces United Front people on the ground in Taiwan. They can do cyber attacks against someone critical infrastructure. They can blank the country with propaganda, the
island rather with propaganda. There's so much things that China can do to put the pressure on and try to drive wedges between Taiwan, the United States and Japan. And in those moments, what is the US political strategy? Yeah, we have a military strategy if they turn to an invasion, But what is the political strategy, if the markets start to panic, if we think we may need to get our American citizens out, And these are the scenarios I argue in the book that we haven't yet fully thought through.
In your framework. What's been the big constraint on Hihinping so far historically, Like, why hasn't he done something on Taiwan yet?
Well, we don't know. We have to speculate.
One reason is that the People's Liberation Army, the PLA, I think it's fair to say, up until recently and probably still now, lacks the ability to take and hold Taiwan by force. Back in nineteen forty nine, after Mao took over the mainland, the first thing he did was he told his generals, now give me the plan to take Taiwan. And they studied it and they concluded, Sir, it can't be done. This is one of the hardest
waterways in the world. There's crazy tides, there's enormous waves, there's fifty mile an hour winds, there's typhoons, there's fog, and there's only a few landing beaches that are plausible. And Taiwan knows what those are. And now they have spent the better part of a century fortifying them. So if you want to get all of your men across the strait, you have to deliver them by sea or by air, and air is difficult, as Ukraine has shown.
It's easy to shoot down helicopters and planes, and so you need to take them in these amphibious ships, which can be sunk by mines or cheap drones or artillery. And then you have to get them into the shores, and then you potentially have to sustain them for a long period of time. You need to give them vehicles and AMMO and fuel and food and medicine. And happens if you successfully deliver fifteen thousand troops to the shores, and then.
Your logistics tail gets cut because.
A number of your amphibious ships end up on the bottom of the Tai one straight, and then your men are massacred on the beaches. So many things have to go right in a highly synchronized way for an amphibious invasion to work, such that d Day, which is the great example in history where we had all these advantages that China wouldn't have today, Very very almost it came very very close to going completely off the rails, as I discussed in the book. So season paying is systematically
building the capabilities he would need. He's building out this amphibious fleet. He's building better anti submarine warfare to force us back. He's building longer range ballistic missiles that can target ships to force our aircraft carriers to stay further back from the conflict zone. He's building out his air force and drones, cyber tools, all these things to coerce Taiwan.
But if you roll the dice on an invasion today, I think, at least if you look at the public wargames, it is possible that he would suffer a pretty catastrophic defeat. So that's one reason for patients. But as his preparations proceed, I think he's getting more confident.
So one of the things you used to hear a lot more, and I don't think you hear it nearly as much nowadays, but this idea of economic pain, Right, if China invaded Taiwan, there would be some sort of retaliation, maybe sanctions, something like that. And because the CCP had built its legitimacy on the social compact with its population, which was basically, you know, we're in power and in exchange, you all hopefully get rich. That was just untenable for
Shishimping and other policy makers. You don't hear that that much anymore. And I wonder, I wonder why that is. Is it just because like people feel that China has reached the level of economic development, where like okay, the legitimacy has been established in terms of the social compact. Or is it because we had an example of Russia invading Ukraine and very obviously being willing to trade off that military action even though it generated an enormous amount of economic pain for the country.
It's a whole bunch of factors at once. Season Ping has overseen a transformation in the social contract in China from development to ideology and national security. From the anti corruption campaign to his ideological rectification campaigns, to rewriting the history textbooks to taking Communist party cadres to historical sites
to study points of hardship and party history. Season Ping uses this term struggle to describe what the party should do, and he has told young people that can't find work that they should eat bitterness, the idea being you should tough it out. We are in nations striving for national rejuvenation, national rejuvenation means rising to the height of human achievement in every human endeavor. And to do that, we're going to work hard, and we're going to make some sacrifices.
And he has tightened surveillance, he has tightened discipline that allows him to run this regime according to a very different set of rules through coercion. And that means we have to assume that China's tolerance for economic pain has increased. Now at some point there's a limit if the financial system were just to implode under the threat under the threat of sanctions, or because there's just mass capital flight because no investor wants to be stuck in ill liquid
assets in China. If the US and China are headed to war, Yes, there's possible that China could suffer a sudden black Swan collapse, but I think that's not base case.
And I have a work that I describe in a lot of detail in the book about how over the last ten years China has been systematically building shock absorbers into its financial system to make it more likely to survive the gut punch of the imposition of sanctions and the fact that Rush's financial system, which had met it lacked many of these advantages, was able to steady itself after the imposition of sanctions. Is I think an encouraging sign,
just a couple of numbers to bring us home. At the beginning of the Russia Ukraine War, Russia was blindsided that the Europeans joined all the sanctions. They had moved a lot of their central bank assets from dollars into euros, and then the Europeans froze those assets, which meant suddenly half of their foreign exchange reserves were just inaccessible to them.
That was a huge boo boo for the Russians.
And then the sanctions regime targeted SpareBank and other major banks in ways it had not been expected. So the ruble lost something like half its value in a couple of weeks, and there was a real risk of Russian collapse. But with only three hundred billion dollars at foreign exchange available, they were able to write the ship because they they
imposed capital control regime. They limited outflows from banks, They raised interest rates to twenty percent, They demanded that state enterprises payments in rubles, all of these things to increase demand for rubles and keep the bank solvent. And then foreign hedge funds that had profited on the ruble short took a look at the situation and they said, well,
are there are more sanctions coming? Well, if the answer is no, then it's all priced in and the ruble looks pretty cheap because actually Russia's imports have just collapsed and their exports are booming because the oil price is up. And then in April of twenty twenty two, the ruble was the best performing currency in the world, and then the ship was setting, and then the economic war became an attritional contest that we have not won yet. And
I think there is a similar dynamic with China. There's some possibility that their financial system could implode, but China, if you count their shadow reserves, has between ten and twenty times.
The EFX that was available to Russia.
They have an existing capital control regime, all the banks are run by the state, and if they survived that gut punch, they have the stockpiles to live on their own supply for men many many months if they're entirely cut off from imports. So the question is, if we can't defeat them economically slowly, how do we think about the long term contest of economic pain such that it is something that we as a coalition of democracies can
possibly win. And the answer I come to in the book is we have to stop thinking about it as punishment. Stop thinking about is how we could hurt China in a way that hurt us too. We need to think about what are the things that we would want to do in our own best interests in a crisis to secure our own economic interests that would just happen to hurt China as a byproduct.
Just real quickly on cutting off imports? Are they good on oil?
For like this is?
We know they have this big oil stockpile. War would be extremely oil intensive process. You know, they d a lot of cars. I doubt they're military as nearly is.
I think they're good. I think they're good on oil.
You think so? They in peacetime they consume what is it, thirteen fourteen million barrels a day, of which around four are produced domestically. If they became cost and sensitive, which they would be in a crisis, they could probably squeeze that up a bit. They also can import overland. They import, you know, a couple of million barrels a day over land. And if they had to, they could import more by land.
It wouldn't be comfortable, it wouldn't be cheap, but if they would have willingness to pay, they have plenty of foreign exchange. They could also do as the Nazis did, which is turned coal into fuel oil fisher trobes has been done in the past. The Nazis declared were on all their oil suppliers, and they still managed to fight through nineteen forty five pretty effectively.
But there's more to this.
They've got They declare, what is it, one point three billion barrels in their spr they probably have something more like two, and then they can make the civilian economy. The PLA would use something like five hundred thousand barrels a day. So if you run the math and I just do the back of the envelope in the book, what matters is not that they would run out of oil eventually at some point they would feel the squeeze, but our allies Japan, South Korea.
Taiwan would feel the squeeze much faster.
So our coalition as currently set up doesn't have the advantage in a long term contest of extreme economic war. And it's not just about oil. It's about everything else. They have stockpiles of cotton, they have stockpiles of chips, they have stockpiles of everything plausible that they might need. Taiwan doesn't have that, Japan doesn't have that. So this is the risk that they take us up to the brink. We are forced to contemplate what the long term economic.
War looks like.
We realize that if they can last for twelve months and we can last for three, that's not a game we want to play, and we fold. And then if that is established, they can coerce us. And this is not just about Taiwan. This goes far, far, far beyond Taiwan. This is about our entire alliance architecture in the region, and frankly, this is about our hemisphere too.
One of the arguments you make in the book is this idea that a US policy response can't just be about military power, it has to be about economic power as well. And you talk about this idea of avalanche decoupling, so sort of forming a grand alliance with other democracies to try to isolate China from the global economy. And when I hear a term like avalanche decoupling, I kind
of think like, well, in some respects. The US and maybe some other parts of the world have been trying to decouple from China for a long time, with varied degrees of success. What convinces you that something like that would be possible in a crisis moment, especially when we're talking about again grand alliances with democracies that maybe under the Trump administration we don't seem to have the best of relations with at the moment.
It's a really important question, So let's take the heart facts head on. In the last couple of years, we have learned some very important things about what is and is not possible when it comes to breaking our critical dependencies on China. Everyone knows that we have these critical dependencies which strike at the very heart of our lives and livelihoods. We depend on China for the active pharmaceutical
ingredients that save lives every day in hospitals. We depend China on the supply chain to build any drone in the United States. We depend on China for legacy chips, without which we can't make cars. There is no Ford, there is no Stilantis. I think that's crazy. I think it's crazy. I think it opens up the United States to black economic blackmail, and frankly, the fact that our allies have the same dependencies opens them up to black
mil too. So it's a no brainer that we should start to break these dependencies on China in the same way that China is trying to break its dependencies on us because they don't want to be blackmailed. So what is dangerous is that China would be able to de risk their economy largely from ours. But we couldn't do
that in a symmetrical way. But if a crisis happens over Taiwan, whether that's tomorrow or eighteen months from now or five years from now, it will be an oh shoot, I guess we should have done all of that five years ago, But that will be yesterday's problem. And the question for today's problem is how do we deal with
the situation we face. And it's very possible that situation would be in the context of a crushing recession and stock market correction, because, as we mentioned at the beginning of this conversation, the whole equity market is being held up by an ai trade. We're seven tech companies that are priced for perfection make up forty percent of the S and P, and if you take away the supply of chips, they fall to earth. Six hundred billion dollars.
Is that the number the hyperscalers are spending on data centers this year.
It's close enough.
You take that.
Away, and the use economy is in recession. So imagine the context of a terrifying stock market correction and heading into recession. Let's assume that we China has taken some actions that reveal that we really need to expand this
derisking or partial decoupling thing. But we've also learned that we can't decouple from China all at once, because we tried this on Liberation Day and we got cold feet within a week because the bond market blew up and all the captains of industry called up the president and said,
you have to reverse this, mister President, or we're cooked. So, if you can't decouple from China all at once and quickly, the only way to do it is gradually looking at the critical stuff first and the non critical stuff later. If ever, so what I want to do is say what is the most critical things? If you have to stack rank our dependencies, what's ninety ninth percentile, what's ninetieth, what's seventieth, what's fiftieth, and then let's go down the list one at a time and figure out how do
we break these dependencies. So in the event of a crisis, an invasion of Taiwan or a blockade of Taiwan or some gray zone ambiguous thing, if we decide we need to reset this relationship and we need to decouple from China five percent, ten percent, thirty percent, what does that actually entail?
And I would submit that that's a much.
Harder problem than we've realized, because even if we want to decouple just a little bit, we face a transhipment problem right now. As we've discovered, you have a tariff differential on China, the tariffun China is here, the tariff on Vietnam, Mexico, everyone else is here.
So companies will export their.
Stuff from China to Vietnam or Mexico, they'll write made in Vietnam or Mexico on.
It, and though we send it to us. So if you don't develop a.
Solution to this transhipment problem, there is no way that you can decouple from China even a little bit, even in a crisis. That to me is very scary and the process of working with other countries to address this. Essentially, this is rules of origin for trade. This is a big enterprise that is going to take years and years
to do. It cannot be done right away. So what we're talking about with Avalanche de coupling is a process that it abandons the fiction that we can do this all at once and starts thinking about if we need to divorce China ten percent, thirty sixty percent, whatever it is, how do we go about building a new kind of economic order such that we can still have trading relations with the rest of the world. And that question has not been addressed until this book.
I find this conversation to be like, very alarming, and you know, obviously and it should be very alarming. I guess the good news, if there is any, is that we have spent the last year several years deepening our friendships with the rest of the world and building up our allies and establishing that open non China trading block. At least we're oh wait, no, we're literally we're literally doing the opposite.
Well, I was going to say, on the plus side, if one of the one of the elements of China deterrence is building a better custom system, where we can actually track transhipments, then maybe maybe some of that work has been done. It's better than like buildings.
But like it does seem like we're kind of not doing any of this right, I mean not only not doing any of this correct, we are like rowing. I like, if the goal is let's do this avalanchey coupling around the world, to like, we're going in the opposite direction.
Yeah, that's exactly that's exactly right.
The only way you can get this stuff done is if you work with your partners.
That's the only way.
Yeah. And that's not about being moralistic, it's about practically speaking. There's stuff that we don't know how to make in this country anymore because we outsourced it two generations ago and there literally aren't any people left who know how it's done. And Japan or South Korea in particular, but many of our European partners too have this know how in advanced manufacturing, and not to partner with them I
think is kind of crazy. Also, they face the same problems, the same risks of economic coercion by China, and they have even less leverage to put back push back against China because Chinese, relatively speaking, as much bigger than they are. So I think the Trump administration has a few correct
ideas dealing with these rules of origin through these bilateral deals. Yeah, doing bilateral economic security packs like with Japan, but we need to be bringing larger groups of allies and partners together.
To do this, just real quickly.
I think you mentioned at the beginning that you actually think currently in a conventional war that the American military would have the upper hand. I don't, but like, you know, it looks like I don't know what's going to go on with the ron and I'm very susceptible water child, the Johnese propaganda. I watched the military prayers, like it looks really impressive, the robot dogs and all this stuff
or the robot dogs. Yeah, like, give a short version of why as of April twenty first, twenty twenty six, you think the US military still is the upper hand.
This is something I learned in the process of working on this book and the previous book. There's a companion book called The Arsenal of Democracy, which is all of the military US in volts that my editor is like, no way you're putting it. That's too nerdy. But here's what I discovered in researching that book. The wars that America has fought over the last eighty years have been land wars, and land war has a certain character and
war at sea has a totally different character. And the basic reason is that war on land involves lots and lots and lots of units that are basically interchangeable, and so it's attritional. You're wearing each other down, you're fighting along a long line. You're applying pressure, and there's an equilibrium and a balance, and you're basically trying to hold up enough reserves with potential energy to punch through the enemy's line and then send in the cavalry and their
line collapses and you write to victory. So if you look at the maps of World War One, for example, the line doesn't move, it doesn't move, it doesn't move, it doesn't move, and then it breaks.
War at sea is different.
You have a very small number or much smaller number of platforms, and they're much more specialized. And so if you can take out just one or two of the enemy's vessels, specialized aircraft, specialized ships, the whole structure starts to collapse and the rest become easier to kill and that means that there's no real incentive to hold back reserves. Once the engagement starts, it's incredibly intense, and it's often
decided in the first hours todays. And one significant implication of that is your ability to see and communicate across the battle space is really really critical, And especially as the range of our missiles and our drones has increased, that means that US aircraft and ships and submarines that could potentially strike targets in or around China can be zooming around across literally millions of square miles of ocean.
So to see these things, to target them, and then to deliver mass to a target to kill them is no easy feet And if the US can use cyber counter space capabilities and so on to disrupt China's ability to see and communicate in those critical early hours, then it could potentially win a lopsided victory or vice versa.
And one of the implications of that is if you're just counting ships or counting planes or missiles, you will miss the parts of the balance that are most important, that are actually qualitative, many of which can be augmented with AI. And this is hard because it means when you're wargaming these things. If you don't have a clearance, you kind of have to make it up. With these capabilities, we don't know what the cutting edge of cyber is.
For example, only a very small compartmented group of people within the national security establishment know all of the relevant capabilities. But I just think that if China believed that they could defeat the US in a high end war, they would be behaving more assertively. They would be operating not just in the time went straight, but all around the region in a way that they're not yet.
We started this conversation talking about, you know, the famous hypothetical blockades in geopolitics and international relations classrooms around the world. What's your big take away from the Strait of Ormuz situation as it applies potentially to China and Taiwan.
It's a good wrap up for the conversation. Really, it's the United States military has these godlike capabilities with special forces, with cyber electronic warfare in some senses the way our
air defenses have performed, which is exceptionally exceptionally well. But while our military is very good at doing the operational military stuff, we are not succeeding at the strategic level, because ultimately, war is the continuation of politics by other means, and our politics is susceptible to economic pressure in a
way that our adversaries is not. And if we don't, if we don't get the message, if we don't take the wake up call and start working on our economic resilience and our credible ability to bear economic pain and supply chain disruptions and the rest, we will be unprepared on exam day because China has so many more capabilities to impose economic pain on us and to micro calibrate the character of that economic pain than Iran does, and they have more ability to do it for a long
period of time in multiple theaters.
And parts of the world.
And we can only deal with this problem if we treat it as it all of government, interdepartmental problem, not just a military problem, and if we work with allies, and if we try to make some kind of bipartisan consensus that national economic resilience matters, That to me is the lesson of performers.
All right, on that cheerful note, Ike Friman, thank you so much for coming on all thoughts. And the book is defending Taiwan a strategy to prevent war with China. Really appreciate it.
Thanks so much for having me on.
Thanks so much.
Ike.
That was great, Joe, that was a fascinating conversation. And I haven't read the entire book, but I did flip through it and I do recommend it's super interesting. There's also like some really interesting appendices with speeches from various Taiwanese.
Yeah, I'm gonna have to.
Yeah, it's definitely worth reading. One of the things that stood out there was this, I mean towards the end of the conversation, when we were talking about the possibility of like how do you build up economic resilience that requires the participation of other economies at the same time that the Trump administration seems to be pushing a lot of those other economies and strategic alliances further away.
You know. So we didn't get into this, but obviously, okay, like we don't like the stock market it falls a couple percent and suddenly we get cold fee. Okay, that's economic resilience. I think there's another issue which we didn't get into, which's political appetite for war. You know, especially after the Iraq war, it is diminished the current war and around is not popular pretty clearly, regardless of whether it's wise or regardless of how serious the economic toll is.
And so I think, like another interesting and important dimension here is look around. And I'd be curious, like how many okay, we could sit here and make the argument, Look, we really need chips, or we need to defend this principle whatever, et cetera. Is there really the domestic political appetite for massive conflict, et cetera. I don't know even beyond even beyond the economic question, does the appetite exist?
But I really enjoyed that conversation. It was certainly very interesting, you know, hearing him, for example, walk through the math of how much shell oil China has and how much you would be able to how long it would be able to go with its existing stockpiles. And it does seem right this question of whether there will ever be some sort of serious change to the China Taiwan relationship, et cetera. And it's it's a complicated one on many dimensions.
As he said in the beginning, yes, almost almost one of the most complicated questions there is.
Oh.
Absolutely, there's also a fundamental tension between you know, the US building out it's chips resilience while deterring China from doing something in Taiwan, and that if the US actually manages to be successful in building domestic capacity chip's capacity, than that, like the silicone shield that's protected, Taiwan gets weaker and weaker.
Right, we have to start paying attention to upcoming Taiwanese election and start wondering whether the government in Taiwan will continue to be enthusiastic about the idea of the US building a chip capacity. This is a new uh, this is a new dimension of international relations and so forth that we have to key in on.
You just want to go to Taiwan, Well, you know what.
The one thing I will say is I do want to go to Taiwan. But the one thing I will say is I always want to learn more about the domestic policy of other countries, because I do think it's very easy to look at the US and say, okay, here I know a fair amount about American domestic policy, and then you hear about like, and here's Taiwan's policy, here's Iron's policy, here's Israel's policy, right, and there's Corea's policy. Is if there is just one right polity or it
is just there is just this one unified thing. And I think it's important to remember that all these countries have domestic politics just like the United States.
And disagreements and nuances and all of that. Yep, absolutely, shall we leave it there.
Let's leave it there.
This has been another episode of the Authots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Joe wisanth All. You could have followed me at the Stalwart Fellow. Our guest Ike Freman, He's at Eke Freman Fellow or producers Carmen Rodriguez at Carmen armand dash Ol Bennett at dashbod Kelbrooks at Kilbrooks and Kevin Lozano at Kevin Lloyd Lozano. And from a odd Laws content, go to Bloomberg dot com slash odd Lots. We're of a daily newsletter and all of our episodes and you can chat about all these topics twenty four to seven in our discord Discord dot gg slash off Lots.
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