At the start of the year, a trade war with China seemed more likely than a shooting war with North Korea. Beyond rhetoric, what's really changed between the United States and North Korea? Doesn't this follow a time worn pattern of nuclear tests, harsh rhetoric, and then a deal that leads to everything subsiding, albeit only for a year or two. Welcome to Benchmark, a podcast about the global economy. I'm Daniel moss, I cover global economics for Bloomberg View in
New York. My co host Scott Lammon is on vacation this week, and I'm pretty sure he's not spending time on a beach in North Korea. But stepping back, isn't this just a distraction from the main game, which is US China relations. Here to help us address this question is Professor Graham Allison, a Harvard University's Kennedy School. He's just published an acclaimed book handicapping the odds of a conflict between the US and China. It's called Destined for War?
Can America and China Escape through Cydities Trap? Graham, It's good to have you. Thanks so much for having me. There's a lot more to your book than North Korea, though it is one of the scenarios you sketch that might result in a clash will dive into North Korea
in a moment. But first, what is the through cydities trap? Well, this is an insight that was captured for us by the founder of history, Lucidities, who was reviewing the circumstances that created war between Athens and Sparta in classical Greece. And through cydities trap is the dangerous dynamic that occurs when a rising power like Athens or Germany before World War One, or China today threatens displace a ruling power
like Sparta or Britain or the US. So trucidity strap is the dangerous dynamic that occurs when a rising power threatens to displace a ruling power, and unfortunately, in most of those cases the results is war. And you're talking economically, not just militarily rising. Well, the rise is a multidimensional phenomena,
but in which economics is essentially the substructure. So in the case of Athens, Athens had come from nowhere to be economically stronger, particularly because it got the wealth from its allies or colonies. In the German case after your reunification of Germany in eighteen seventy, country that was about half the size of Britain's had become equal to Britain in GDP by nineteen hundred and order larger by nineteen fourteen.
And I feel at the China story, which you're you've covered many times, basically a country that wasn't even on any of the international League tables in the economic world in nineteen eighty or nineteen ninety has now come to rival and indeed to eclipse the US in many many arenas, including as the largest single national economy measured by purchasing power parity, which is the yardstick that both CIA and i MF believes is a single best yardstick for comparing
national economies. More on that in a second, but quickly to North Korea. It does sound, professorlike we've heard some of this stuff before, have we. Well, yes we have, and actually it's a sad story. So there there are many, many layers of it. As you suggested, the underlying driver is the throucidity and dynamic between a rising China and a ruling US, where a rising China thinks that the anomaly in this situation is Americans being on the Korean peninsula.
I was in Beijing three weeks ago, where everybody wants to talk about thucinities, trapping, how to escape it, and in one conversation with somebody in the government, they said, you know, really, there would be no problem on the Korean peninsula except for the fact that you're there with your troops. If you were to leave and not to have a defense relationship, there would be a government that would be unified. It would be a tributary of China.
We wouldn't allow it to have nuclear weapons, and there would be no problem. Now, from the ruling powers perspective, which I certainly subscribe to, we look and say, wait a minute. South Korea is one of the great success stories of the post World War two period. Uh An economy that was nothing has become the thirteen or twelfth largest economy in the world. They have a successful democracy. We're very proud of South Korea. We're not going anywhere.
That's an underlying dynamic. Now, on top of that, you've got a nutty regime in pon Yang which has been marching down the track to build a nuclear capability first and then the ability to deliver nuclear weapons again. South Korea and against Japan, and it was now on the cusp of developing a capability to deliver nuclear weapons against
San Francisco or Los Angeles. So yes, we have seen this story before, and unfortunately in the Clinton administration when we thought of acting rather than talking to prevent it, we thought the risks of acting were too great. When the Bush administration faced that same crossroads, they came in the same conclusion. When the Obama administration looked at that, they came to the same conclusion. So I think we're all on our little bit the edge of our seats now,
as the thucidity and dynamic is the underlying driver. But above this and the expression of it in the current setting is this movement towards a showdown in North Korea and which either North Korea is going to acquire the ability to strike the West coast with nuclear weapons. Most people are betting that's how that's how it'll turn out, or alternatively, Trump is going to act to prevent them doing that and including attacking North Korea. I'm glad you
mentioned that you described a natty regime in Pyongyang. What about the new regime in Washington? Does that add an extra dynamic to this that we didn't see in the past three administrations when they deliberated on this issue. Well, I think it certainly does. And there's the there's a kind of you can tell the two sides of the
coin story. On the one hand, if you were to go back a year or five years or ten years, and you were to say there was a regime that was led by somebody who was erratic, impulsive, uh, maybe even a little crazy or nutty, there would be only one candidate for that. Now we've solved that problem. So Washington is in the competition. That's on the one side
of the coin. On the other side of the coin, if you're going to make credible to North Korea, or more importantly to China, who's the lifeline to North Korea that you're simply not going to tolerate a North Korea that can attack the Americans with nuclear weapons. You need
somebody who can appear a little nutty. How much leverage does China actually have one raids and he is varied opinions on this, Well, I think the it's complicated, but it's a fact that of all the oil that North Korea gets comes from China, so that pipeline is a lifeline, and if China were to squeeze that lifeline, the oil on which the North Korean military is dependent in order to operate, and in which both Korean factories are dependent
in order to operate, would be at risk. So the one occasion when China declared that there was a temporary problem with the oil for three days, the North Korean snapped attention. So that's a card China not being prepared
to play yet. And I think, if I understand, if I try to read the method in what appears to be madness in the in the Trump administration's messaging about North Korea, it is to try to persuade she shamping that he needs to squeeze that lifeline, to say to Kim Jong un, now stop at this point, now, not later, because if you continue, I really believe this fellow Trump
might attack you. And if you attack you, then, as we've all gone through that scenario many times, were likely to have the Second Korean War, and g she remembers that the in the First Korean War, the Chinese and
Americans were fighting each other. One of the scenarios you discuss in your book involves the death of a North Korean leader and US and Chinese troops rushing in with special forces to kind of control the situation and inadvertently bumping into each other, and things progress will progress, maybe the wrong word things developed from there? Are there any other scenarios where the U, S and China could be
drawn into conflict as a result of North Korea? And I think unfortunately, I mean yes, there are multiple ones. I just described a couple in the in the book, and uh, folks at the Pentegon have worked through. Oh, I don't know a dozen scenarios, but the one that I think is most troublesome right now, to go back to your earlier question, is it's only five easy steps from where we are right now today to Americans and Chinese fighting each other on the Korean peninsula. So Kim
Jong un conducts some more tests. Trump attacks the missile launch sites in order to prevent the tests being completed. North Korea responds by shelling Soul with the artillery that it is a thousand pieces able to kill ten thousand or a hundred thousand people very quickly in Soul. The US and South Korea then attack that a tailor as well as other rockets and launchers that can kill hundreds of thousands, even millions of people in South Korea if
they launch against them. At that point, we're into the Second Korean War, and China in the First Korean War, as we marched up the peninsula to unify the country, entered the war and beat us back down to the thirty parallel that was. That was when China was only a fiftie our size. And as Chinese say, now, we think we established that proposition then, so don't test that
once more. But if the events unfolded in this manner, given the underlying dynamic of this slucidity and competition, I can really imagine Americans and Chinese fighting each other in Korea, which is something neither president and neither government wants at all. Will Professor stepping back from North Korea for a second and looking more broadly at US China relations, If I read the book correctly, you're not actually predicting war between the US and China. You do seem to be saying
the two countries are on a track. That makes it more likely than many people realize is that the gist of it exactly right, and you read it just right. So basically this is a book motivated by trying not to predict war but to prevent it, and it says to prevent war, we need first to recognize that in athucidity and dynamic there's inherent risk that doesn't make sense,
but it's there. So it's a risk that I see everything you're doing as the rising power as part of this effort to displace me, and you see everything I'm doing as an effort to try to contain and prevent
you from from emerging. So under those conditions, events that would otherwise be inconsequential, like the assassin a nation of an archduke that served as the trigger for what became World War One, or easily managed, can end up triggering this set of actions and reactions by the primary protagonists that take them to a place where they don't want to go. You discuss the considerable gains that China has made economically, Where has it pulled ahead of the US
economically and where is it still falling short? Well, I've been surprised, actually, I mean how little Americans have appreciated how far and how fast China has come. As I say in the chapter on this uh I quote Facliffeveld for President Czech Republic. He says, all this has happened so fast, we haven't yet had time to be astonished. So in the book, I give a short version of a quiz. I give it to my students and my class at Harvard, and says, when could China become number one?
And it has in the long version twenty six indicators number one, manufacturer number one, trading number one, supercomputers number one, artificial intelligence number one, g D p uh and students guest not in my lifetime. Then I show him table to the label of which is already already all these things have happened. So China already has the largest middle class. China already has the fastest supercomputers. China already has the
most billionaires. And in every arena, as we watched the paper, almost every day, you see another space in which China is emerging, took rival and as I say, often eclipsus. I saw a pieces last week. Uh Starbucks, the chief executive office says he believes they're gonna soon have more Starbucks in China than they have in the US. And when he started there fifteen years ago, and everybody said
Chinese only doing tea, they don't drink coffee. So basically, if you start with one point four billion people, that is four times as many people as we have. If there are only one quarter as productive as Americans, they're going to have an economy as big as ours. And why should there only be one quarter as productive? Now? What about the financial system? I was surprised on a recent trip to Asia which coincided with the Federal Reserves
Open Market Committee meeting. In the days leading up and the day of that f o m C meeting, there was saturation coverage of every sentence, every nuance, And that was even when it was widely predicted interest rates would be unchanged and in fact they were. I was surprised that there was very little or no reference anywhere to the People's Bank of China. And yet, if China is on the ascendency economically, surely there would have been at
least as much discussion. Can you break that down for us, professor? What are we missing here? Well? I think that's a very a student observation. I've noticed the same thing. In part, it's because the chainee still keep control of their UH financial system in ways that the US doesn't. They don't have free flows of capital, they have many more instruments to operate, and they make their choices in terms of
their overall picture. So I've had a good fortune to interact on a regular basis with the fellow who's the number one economic assistants to Jimping lou Hu, who was a student here at Harvard at the Kennedy School twenty years ago. He's extremely able person. But when he talks about how China is thinking about their own financial system, he says, Look, we imagined that finance was magical and that Americans do all about finance and had that under
under control. So we were just taking lessons until two thousand seven eight in the financial crisis, when we discovered they don't understand how this works any better than we do, and actually they allowed a degree of risk to develop that we would never allow. So when people come back and say to us, you know, relax controls of your financial system, we say, forget about it. Look and see
what risks that entail. So I think, in part because the FED is obviously an independent actor and is now at a particularly important pointed as it looks at the at the issue of unwinding, it's gathered more attention but I think in part it's because on the Chinese side, the actions of the People's Bank are really subordinate to what the national government decides to do. Maybe in fifteen years time it will be the p BOCS dot plot and forecasts will be talking about before we go Professor
Devil's advocate. Why isn't China just like Japan? If you go back thirty years ago, everyone was saying that Japan was the rising power. H Japan is number one. It permeated popular culture. You probably saw the Wesley Snipes Harvey Kitel movie Rising Sun. Could we be missing something here? That's a good it's a good point. And as Herbstein, a famous chairman of the fenset, if a trend can't
continue forever, it won't. And I propose the Allison footnote to Stein's law, which says it's much easier to predict that something will happen than when. So can this trend continue forever? No, of course not. But ten years ago could it continue for another ten years? Most people bet not. I bet that it would. If I look at it, I don't see why China can't continue, at least for
the foreseeable future. Growing at three times the rate of the U S, which is what it's been doing, and since in this to sit it in story, it's the relative growth of the two alreadies. I would say that's the way about it, Professor. Thank you. Benchmark will be back next week and until then, you can find us on the Bloomberg terminal, Bloomberg dot com, our Bloomberg app, as well as on Apple Podcasts, pocket casts and stitch it.
Why you're there, take a minute, rate and review the show so more listeners can find us and do let us know what you thought. If you can follow me on Twitter at Moss Underscore. Echo Graham your Twitter handle please, it's just Graham Allison. Benchmark is produced by Sarah Patterson. The head of podcast is Alec McCabe. Thanks for listening, see you next time, and once again, Graham Allison, thank you, thank you so much