How Science Fiction Explains the U.S.-China Trade War

more science fiction, and it never seems to happen. Does that make sense? You know, most people don't like the idea of being into science fiction but secretly actually like it and really read or watch a lot of science fiction. Yeah. I didn't know that. You're the opposite that, because it's like seeing this like dorky or geeky or something like that. Or yeah no, I could see that, Yeah exactly. No, Like I I every once in a while, I try,

but then I just like forget. Okay, But you know Star Trek, right, Yeah, yeah, I used to watch it pretty regularly. Oh okay, So then do you remember what the mission or the prime directive of the Star Trek Star Fleet was no, no, no, I don't think so. All right, well, I'm going to read it off Wikipedia. I don't want people to think that I know this like by memory. Um So, the prime directive is a guiding principle of star Fleet, prohibiting its members from interfering

with the internal and natural development of alien civilizations. The Prime directive applies particularly to civilizations which are below a certain threshold of technological, scientific, and cultural development. So basically, you know, the more advanced civilization that is, star Fleet shouldn't go around bullying or influencing less developed civilizations during

their space exploration. So at first I was about to ask what on earth this had anything to do with the markets or economics or anything that we normally talk about, But that last point kind of makes me think that there might be an analogy to some developments that we're seeing today. Yeah, I think you know where we're going to go with this, and that is, of course, the technological war. I guess you could say between the US and China, right, And we've talked about this before on

the show, but the implications are so massive. These tech fights, the rays to control certain important technologies so critical that we really probably can't talk about it enough. Yeah, and the person that we're going to speak to you on this is Uh, as far as I can tell, a science fiction fan. And I have to say one of the more unusual analysts that I have met in my

entire career in financial journalism. Before I came onto the show, I actually just looked up his profile because I wanted to make sure that I got the job title right. And his job description on LinkedIn is Galactic Energy Commodities, space mining and unobtanium research at Jefferies. So uh, that's that gives you some idea. I can't wait. So who is this we're talking to? Who is such an awesome

job title? All right, it's a Leiban you. He is an analyst over at Jeffrey's actually an energy analyst, I believe, but writes a lot about broader issues in China. So Leban, it's really good to have you on the show. Yeah, thank you for having me. Thank you for that introduction. I have to say that wasn't the only job title on your LinkedIn. I also saw Galley slave at mcquarie

and Padawan learner at Lehman Brothers. Yes, I guess my LinkedIn profile was a bit of my um my little joke against LinkedIn for using our content for their profits. So I did have a little laugh at their expense. I guess. So are you a science fiction fan? I have to say I am. I don't think I am a raging science fiction fan, but I I do follow it.

And uh and and you know, it's it's important more and more because there's a lot of things in science fiction now that really pertained what we what we see happening in the world. What are the key things that you read and think about in the science fiction realm that you see happening in the world. Obviously, Tracy brought up the Star Trek Prime directive and the US inner

attempting to interfere with Chinese technological development. What are sort of the big themes in sci fi that influence you're thinking right now on what we see in the world. The one thing is we have to introduce this Chinese science fiction writer. He's probably right now the most popular science fiction writer in China. He wrote a series of books that everybody reads in China as kind of a representative of the cultural, facivilizational craft clash between the US

and China, and in his book. He has one civilization, which is a Trice Lawrence civilization, and they figured that they're gonna take over Earth, and one of the ways that they are going to accomplish this is by sabotaging all the scientific progress on Earth. So when um, the US put the export ban on Huawei, that came to mind of a lot of people who have been, you know, following the situation, have been fans of the seeing where wow, this is actually happening in real life. It's never quite

been done. I don't know if there's ever been a historical president where one nation tries to hinder the scientific progress of another. H It's just kind of new. So that therefore, I think as technology developed so quickly, this becomes kind of a new way that the conflicting nations will present itself. So you used the allegory of the Chinese science fiction writer, Um, I think the name of the first book is the Three Body Problem. Is that right?

That's correct? You use that as an allegory for the US trying to basically stymy technological progress in China. But I guess my question is do you think that is ultimately the goal of the US's trade policies and what they're doing with things like Huawei. Is it that strategic? I actually personally don't really think so. I think it's actually just a you know, panicked anxiety, let's do something. It's uh, it's a function of ignorance and anxiety and

with some truth all mixed in there. However, there is the Department of Energies Business Advisory Board. They actually came out with a policy paper that actually tried to think through all of this. And when they thought throughout this, they still advise that the US be very aggressive with export bands of China to steiny Huawei, even if it will ultimately result in the the acceleration of technologlogical catch

up of China. And they still said this is the correct policy to take the themes like, there are some parts of the American policy apparatus that has thought through this and has made this recommendation. Now, whether it's in everybody's head, it's unclear. You're reading through your notes and you sort of talked about the two prongs of Trump's

trade approach. One on the tariff side, you say, you know, that might actually be sort of brilliant and it might actually begin to cause global multinationals to move their supply chains out of China, uh, and that might have some effect, whereas on the other hand, the export band to Huawei, which as of right now when we're recording this, which is in early July, has been softened a little bit, as you put it, well, may have the perverse effect where the supply chains move out of the US so

that companies can export technology to Huawei, and also will have the effect of accelerating China's own efforts to build its homegrown technology. Yeah. So so that is where um, once I saw these policies come through, you scratch, scratching your head to think how well thought through a lot

of these policies were. Because once the export band was put in place, especially the extra territorial parts of it, immediately I thought, this is exactly the opposite of putting tariffs on Chinese exports, because now all of a sudden, anything with US origin in it becomes kind of tainted. So a lot of the tech development that needs to find a Chinese market, because China's market is now the largest semiconductor mark in the world, it will try to

move out of the US either. You know, there are the minimus rules for the products if you're below twenty five percent. So if for example, some product had US content in there, all kinds of efforts will be made to make that below. In recent weeks, we have heard that a lot of US companies are still supplying Huawei because they are manufacturing outside the US. Those kinds of efforts will continue if the export ban is remains in place.

I think one of the reasons that Donald Trump ultimately relaxed the export ban is because of very heavy lobbying from these American companies trying to explain this point to him. Right, So, Bloomberg has actually reported that there are companies like Intel who think that they found a legal I don't want to call it a loophole, but you know, the illegal thing that does allow them, to your point, to ship

to Huawei. Joe just mentioned this, But talk to us about self reliance, notion when it comes to developing China's own domestic technology capability, because again that's where the sci fi analogy sort of comes in again, and that's where people start talking about the three body problem and what happened to Earth when basically the alien civilization tried to

stop them from developing technology. Right, So we're right, right when uh right, when a civilization is under threat in this way, now, developing on technology isn't just an economic problem, it's a national security problem. China, which had already been throwing all kinds of resources into developing its in my conductor industry, um, we think right after the Huaweidan, whatever huge amount of resources they already committed, there is now very likely a multiple on that. I don't know what

multiple it is. But the US has pushed China the direction to try to stop China from doing something, it has actually you know, accelerated that process. So the long term likely ramification of the US threatening Huawei with this UH technology export limitations is China then doubles down or really increases its investment on domestic technology. What about the short term gains, Because one of the concerns among many people in the US government and industry is just who

wins the race to five G rollout. And there's a perception out there in your own research at Jefferies has talked about this that there are big gains from the first country that really rolls out five G wireless technology, all kinds of revenue advantages, the ability to set all

kinds of standards and so on. Is there an advantage just in the short term win if the US can slow down Chinese technological dominance right now in this area, I suppose there is some, But the most the US will get out of it is UM technology will catch up on the u S side itself. So whereas right now, if beings standards they are, China can't quite do five G because it needs a lot of the US parts, and the US can't quite do five G either because it needs a lot of the Huawei technology. So both

sides have kind of hobbled each other. I guess if this was the u S strategy from being well ahead of the pack, then now the race is kind of even if you will, so the short term there might be some benefit in one very specific industry. I think the problem with all this is that in the longer term, the trust that technology developed in the US will have

a global market has been damaged. So in the longer term, all kinds of R and D that was that would have been carried out in the US might now have to be either relocated from the US or replicated elsewhere. It's hugely inefficient UM, and it's damaging to everybody but mostly damages actually the US if that happens the long term. So speaking of inefficiencies and and just going back to the notion of China accelerating its own technological progress because

of what the US is doing. I mean, we've seen China try to develop its own semiconductor industry before and they haven't been that successful. So what are the chances that there are six festival in doing this now and what are the chances that they avoid, you know, ramping up technological capacity to the point of ridiculousness or mass inefficiency. China has taken multiple stabs at developing its semiconduct industry

and has never done a very good job. In the late nineties at at an effort, and in the early two thousands had an effort. There's two major reasons why it did not succeed in the past. One of the major reasons is that China just did not have the human capital at that time. At that time, China had but a third or in the in the early part of the two thousands, half the number of engineers as

the US. However, over these years, the Chinda's graduates of engineers from the year two thousand on where they graduated about as many engineers every year as the US to two. Today, China graduates eight times the number of science and engineering students every year, and the researcher the stock of talent has now surpassed the US. So now there's a lot of human capital in the market that can do this kind of work. So there is the resources to throw

at this problem. The other thing is that the thing that held everything up is that there was no real market for the chips made in China. The chips made in China was subsidized products, and they were always somewhat behind what was already available stuff made by Intel or am D, and they were probably more expensive and performed worse. So nobody bought them except for the defense industry in China that was required to buy them. But now that you have a company like Huawei and UM, you have

also the threat of you know, further export bands. I read an article a while back that now a lot of companies they described suppliers UM from the US as suppliers of the last resort. I mean, first you buy domestic, then you buy from the US if all else fails. So now because of the engineers there and now all of a sudden a market has been created, so that chips are sold, revenue is generated, and R and D in the semi conduct industry is just a function of revenue.

If the revenue is there, about your revenue spent on R and D, So that creates a virtuous circle. So there's a much higher chance of success this time around, just because you have two pieces in place. Now, which is the human capital, and then now which is a market has been created. How far behind right now would you say still the Chinese semiconductor industry is so kind of a thumb in the air is about six years now. The six years you've gotta be somewhat careful on that.

This assumes a static situation, assumes that the US stops technological advancing, and then, based on prior track record, how long it will take China to catch up in the different generations of chip manumating process. However, you can't quite assume that the US will stop advancing. But also something

else has changed now. Now what we believe is that the prior rates that China was catching up on has now been thrown out the window because of all the resources that China will throw at the semiconductor industry, and also the rate of advance for the U S semiconductor industry. There's a big question mark on that now because China

is the world's largest market for semiconductors. If that world's largest market has a big question mark where there will be export bands on, it will be R and D be done in the US to to service that market. So the advance of the US technology could slow down and the catch up speed of China's technology could accelerate. But you know, in a static environment it's about six years, but you know, we we think it could be less

than that. Let's talk about the pure tariff side of the tensions that are going on right now, and again we don't know exactly what the final trading relationship is going to look like between the US and China as of right now. The more stepped up tariffs are on the whole old a lot of analysts expect that maybe there will be some deal later in the year. You've written somewhat positively about Trump's tariff strategy, so I'm curious

what potential gain you see from it. We touched on it in the beginning, and how you see how the Chinese government is going to play its cards in response, I'm not too sure. I'm all that positive on Trump's strategy. What I think is that he he is quite innovative in using tariffs. Tariffs I've never really been used in this way before. Tariffs historically have been used to protect the domestic industry, where you know there's a domestic beneficiary.

When he used this tariff, domestic consumers are heard, but you actually have a domestic beneficiary. In Donald Trump's case, he has no domestic beneficiary really in mind. All he has is a foreign businesses that he really wants to cause some pain on. At the same time he's causing pain on domestic consumers. However, if this foreign adversary caves, then there is no harm done to domestic consumers because the terrorists will be lifted and then the US will

collect the trade concession from whichever foreign adversary cave. And this strategy works extremely well with small economies South Korea, Mexico, Canada. They all caved and the US collects its concession. However minor they are concession concession concession. However, if you have an adversary that is not small and that is not caving, then your tariffs are causing harm for your domestic consumers. You may be hurting the suppliers from the foreign country,

but your consumers are being hurt. So then I think, me personally, I think it's the the level of pain and both It's almost symmetric, So then it just becomes a game of who can withstand more pain. So as it's playing out, I think both sides right now think that they can stand more pain than the other. China, I think, believes that the US will cave because special interests will force Donald Trump to throw in the towel. Whether it's the farm lobby, the consumer lobby, or whatever.

The politician China believe that the US is controlled by special interests. Donald Trump's strategy is probably betting on their belief that China's economy is pottering because of the huge debt that China is built up in recent years. Without that being true, China will not cave, and then it will just be a long drawn out trade war before

someone realizes which side is suffering more pain. So I've always wondered this, but the Trump administration seems to simultaneously believe that China is on the brink of a massive financial meltdown. Or economic slowdown of some sort. But at the same time they seem to be very, very scared of the potential for economic progress and eventually strength in the country. How how did they square those two positions

in their minds? Do you think? Yeah, I, from from what I see a lot of UH commentary out of the US does hold like a schizophrenic view of China. At the same time, they think China is advancing at such a pace that it will dominate everything and things must be done now, otherwise nothing can be done in five ten years time when China controls everything. But also at the same time, they also believe that China's economy um so over leverage, overstretched, that it's on the brink

of collapse. And those two kind of opinions exists almost simultaneously in the minds of a lot of American policymakers. I think, and I'm not too sure that that is healthy or correct and will lead to any kind of intelligent strategy. I just want to go back to what you said about the Chinese perception that the US can't win the trade war because special interests will ultimately force the administration or force the government to relent in some way.

I mean, arguably that view was somewhat vindicated just by the recent actions with Huawei in which chip companies came and said and urged the administration to relax the export controls,

and that's exactly what happened. But more big sure, does this essentially represent a fundamentally pessimistic view on the state of US politics right now that our government sort of regardless of who is in control, is incapable of doing anything long term strategic because there will be these powerful special interests that will demand that be undermined for short term profits. I think that is the opinion of the leadership in China. Rightfully or wrongfully, I think that is opinion.

There is a man by the name of Wang hu Ning. He just recently ascended to the Standing Committee of the Politburo. You know, these are the seven people who pretty much run China. He has a very interesting background. He was never a politician. He never ran a province, he never ran an s V, he never ran any ministries. He just extended the bureaucracy from academia and as advisors for the last three presidents, from John Zaming to Hoo Jing

Tao and now Shi Jing King. He is the ideological theorist for China, and he wrote a book about I

Don't Know fifteen twenty years ago. He's spent a number of years in the US studying in universities and researching universities, and he wrote a book titled America against America, pretty much saying that the US is controlled by what he calls minority shareholders and special interests control all of US politics and therefore it leads to gridlock and nothing that can be done with um, you know, where big money controlled things. This is not at all a very unique analysis.

People like Manser Olson in the US political scientists and Francis Fukuyama, who more or less come out with the same conclusion. Where Francis Fukiyama calls it re patrimonialization with it's a long drawn out phrase that he coined, which is the late stage democracies he will develop in such a way that special interest control everything. And that's Manser Olsen's theory as well, where what he calls distributional coalitions,

which is special interests will dominate the political landscape. And both Manser Olson and Francis Fukuyama, their conclusion is that once it happens. They can't think of any way that it can be resolved. This is kind of a steady state. I have to ask, who do you think is ultimately going to be able to withstand the most pain when it comes to the trade war. Is it the U US with you know, a fractured political system, beholden to lots of interest groups, but that is coming from a

position of strength and power to some degree. Or is it China with its command economy, able to develop industries very quickly, but coming from a lower base, which one I have to say, China. You know, time is on China's side. China's government has much a lot more tools that it can use if the community really were to, you know, enter a really weak patch. They can do a lot of things that the US cannot. Can stimulate their banks, they can cut taxes like they already have.

And you know, kind of the magic thing with China is it still has reform in its back pocket. Can always do reforms and privatize it so easy. There is an effort right now to more or less pushed toward the privatization of s SO ease, which is probably going to force s o s to pay a lot more dividends, pretty much distributing the capital from the s o E to the larger economy through tax cuts. There's a lot of tools that China has. China also has the benefit

that they more or less control the media. As this trade war is being raised, they have already been preparing the population with propaganda linking this to the Korean War, linking the trade war to the Long March. Now in the US there has been very little preparation for the fallout. I guess they're hoping a deal will be cut and

there won't be any fallout. But right when prices really start rising for American consumers, right when the farmers really start, you know, losing a lot of sales, these interest groups will you know, start their lobbying efforts and start pushing back. China is a economy is probably could take you know, the damaged Chinese commune the short term could be larger on a percentage basis. It's not about who is damaged

more more about who can take more pain. So even if the US economy suffers less, it's unclear whether they will be able to withstand that amount of suffering. Laban you ahead of Hong Kong, China Research at Jeffreys. Thank you so much for joining us. Thank you. That was so great. I really enjoyed that. Oh you're welcome. Thank you for having me so, Joe. I have a secret confession, which is that I started reading The Three Body Problem after reading one of Laban's notes a few weeks ago. See.

Remember I actually started reading that like two years ago. Now, I gotta star you beat me, no, but I didn't finish it. You'll probably be to beat me to it, but I'll reach. I do want to restart reading it now.

It's good, although I mean Laban has kind of ruined the plot a little bit because now we know that the alien civilization tries to suppress technology on Earth, and in doing so, they encourage Earth to basically ramp up their technological prowess, and years and years of intergalactic warfare kind of ensue. So I wonder if that's going to be what happens to the U. S And China. Wait, aliens are going to come and no, oh no, no, the US are the aliens in this one, right? No?

I think if aliens actually came to Earth, I think there's a chance that the U. S. And China might unite right against a common enemy. Oh yeah, so let's say we should root for that outcome and avoid avoid domestic earthbound strife. Yeah, exactly. All right. On a serious note, though, I really enjoy um having Laban come on and talk about this, and I think he does point out some very interesting things, especially when it comes to the differences

in the respective political systems of the U. S And China. Yeah, that's what that was really one of the things that struck me. And now I want to read that guy's book,

America Versus America. But you know, it's funny thinking about it from that lens, because in a way, it suggests that the election of Donald Trump, while we sort of think of it as this major event that sort of changes everything, if you think about it through sort of like stages of democracy and we're at this captured stage in which long term strategic planning isn't even really something that we don't we don't really even have the muscle

for it anymore. Then it makes you sort of wonder whether Trump is just sort of a an artifact or just a something along the road of a path that we've already long gone down on. Right. It also puts me in mind of one of the earliest Odd Lots episodes that we ever did, which was with the archaeologist Arthur Demorrist, where he talked about how or why civilizations are prone to collapse, and he basically argued that it's when they become too complex that things start to go

pear shaped. And you can see that a little bit when we start talking about trade and interest groups and the notion that you're going to have to hire dozens and dozens of lawyers to figure out whether or not you can you sell into China. You can see that complexity really clearly. Yeah. Absolutely, we should have him back on soon. It was I love that. That was one of my favorite episodes. Alright, this has been another episode

of the Odd Loots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe Wisenthal. You can follow me on Twitter at the Stalwart, and you should follow our producer on Twitter, Laura Carlson. She's at Laura and Carlson, and you should follow the head of podcasts at Bloomberg, Francesca Levy at Francesca Today, and follow Bloomberg's podcasts overall on Twitter. At podcast, Thanks for listening,