Chinese Free Trade, AI Managers, and Why AI Art is Art w/ Byrne Hobart

I think it's really positive. Not so much — like, free trade in general has been very beneficial on net. There are certainly some costs, certainly some trade-offs, certainly some things that the US in particular could have done differently. But overall, just from a utilitarian standpoint, specialization is helpful and it seems to be the most effective way to get countries out of poverty, etc. But the main reason to be more near-term optimistic about this is that for China in particular, participating in trade as a way of legitimizing the state is a relatively new part of their political mix, and I don't know that it's one that will last forever. So I've always been kind of paying attention to whether it seems that the CCP views political repression or making people in China richer as better avenues to stay in power. And to the extent that they do view trade as the right thing to do, that's a whole lot better than the alternative, both for people in China and for people elsewhere. But it's also just kind of funny — it is kind of funny that the chairman, you know, the ruler of the longest-lasting, I believe, communist-ruled state is this global champion of capitalism who's meeting with CEOs and telling them, please continue doing more business, especially business with other countries. They've come a long way since Mao. So I like that. It's just one of those funny things. Like, the fact that there is an institution called the Ho Chi Minh Stock Exchange — I think it's just hysterical. I think it is this total victory for the idea of capitalism that we have these communist insurgent war heroes and we memorialize them by naming a stock exchange after them. Eventually, and I guess, you know, it is a testament to just the fact that trade works — it does not necessarily have to be completely free trade, but just a system where countries can import some of the things they need, they manufacture things the rest of the world wants, everyone is able to specialize a bit. And ideally a system where countries do choose to retain some control over their futures, they do choose to keep some critical industries onshore even if there's a temporary economic case for moving them offshore. I think that's a better world than a world where what your country produces is what your country gets, and where trade is rare and is mostly high-value goods consumed by elites. So that system does exist in some parts of the world. There are some poorer countries — for a lot of developing countries, when they're growing and they have export-led growth, one of the complaints they get from their trading partners is that these countries are intervening to keep their currency cheap because that keeps their goods competitively priced. Sometimes they do that very directly, sometimes historically they've had fixed exchange rates. Sometimes you have places like Taiwan where they nominally don't, but there's been some interesting forensic accounting on the financial statements of Taiwan, the Taiwanese central bank, and the financial statements of their big life insurers that indicates that implicitly they are buying dollar-denominated assets in order to keep the Taiwan dollar cheap so that their exports remain competitive. So that's the usual thing that you see. But there's this other pattern in countries that don't develop where they actually keep their currency artificially expensive — they keep it artificially highly valued. So it means they can't export very much, but it does mean that when they're purchasing luxury goods as imports, they actually have a lot of purchasing power. So it's the case for a lot of countries that are natural resource exporters where that's their main business and where the state is controlled by natural resource interests, or the state exists in part to extract some of the benefits of that. In a case like that, it's very hard to have an exchange rate that makes oil a bad product to sell if you're a country with a lot of oil. So your economic policy at that point can be: okay, conditional on us having a lot of oil revenue, conditional on some of that oil revenue making its way towards people who are connected to the government, how much expensive property in London can they buy, and how many nice cars could they get, things like that. So yeah, you do see both of those kinds of patterns show up in terms of how countries set up their exchange rate system.

I think it's best to bet on it being temporary. I think that tariffs as they're being rolled out now are just not going to be all that effective for achieving America's economic goals, but the costs are probably going to show up sooner than the benefits. And I don't know if that just means that we will just have tariffs for a while and prices will be a bit higher. The US, I think, would be less affected than a lot of other places, but especially because in the event that you have a global economic slowdown that's partly caused by slowing trade, US consumption actually becomes a more important stabilizing force for the rest of the world, and so other countries may just have to produce things and sell them to Americans, and we may just end up buying them. It's a kind of messy solution there, but it is a worse scenario than what you get without just blanket fairly high tariffs, but maybe a better scenario than some of the counterfactuals that you can dream up. But yeah, I do think that probably there's still some element of bluffing or some element of what will retroactively be seen as bluffing in the tariffs. But it is, as we've discussed before, it's really hard to talk about bluffing and the level of bluffing as this stable quantity because literally every time you speculate that the tariffs are a bluff, you are making it slightly less effective strategy to actually do the bluff — to actually threaten tariffs as a pure bluffing mechanism. And by the same token, if people do think that okay, Donald Trump absolutely does not want to just put a 20% tariff on every single product coming into the United States, that would be crazy, and therefore we should assume that this goes away — well, if you do that and Trump knows he's gonna be in power for a while and he also has this vision, and maybe the vision is not 20% tariffs specifically, but it is a bit more of a protectionist vision and a bit more of a vision where other countries are doing things, they're forming more of their economic policy in light of things the US tells them to do — maybe in that scenario he says, okay, we are doing tariffs because people have to not think that this is a bluff. They have to not think that they can make some tiny concession and the tariffs won't be a problem.

There are probably configurations where that's true. I think the case where that has to be true is a case where the US has a lot of investment in manufacturing capacity that we could make, we don't make it because there's too much competition from foreign producers, and therefore we just import the goods instead. So you could combine those two and suddenly a US-based manufacturer does actually have a viable business selling to Americans and maybe exporting globally as well — although that's going to be harder if there are retaliatory tariffs. So let's stick with: okay, a US manufacturer does decide that they're going to build a factory because now they don't have to worry about competition from China or Germany or wherever else, so they do it, and then that soaks up some surplus workers who would otherwise not be working, and they do end up producing things and so on. Yeah, there are scenarios where that does work well. I think in a scenario like that you're probably also betting on the spillover effects of if we do have more of the supply chain in the US, then US companies can iterate a little bit faster, and maybe it does make sense to assemble some — like, there are some products where it makes sense to assemble them because more of the components are being built in the US and you can source them more quickly and you're operating under consistent legal structure, etc. But I think in a case where that's the pitch, it's probably an even better pitch to actually choose which industries we want, because there's some industries — like, it just doesn't make sense to pay American wages to make T-shirts. There's just not really a plausible world where we do that, except a world where there's some very capital-intensive way to automate almost all of it and we just, for whatever reason, want the T-shirt machinery all to be in the US, and you know, the one technician who's just looking at the machine and seeing that all the display lights are green and so the machine is working fine — like, yeah, that is a job that we would get, but that doesn't really move the needle on bringing manufacturing jobs back. It does move the needle on bringing some manufacturing capital back. But I think if you look at the space of industries where the US either could be competing more and isn't — so things like chips and a lot of the equipment that goes into chip fabs — I think that is a case where yeah, the US actually is plausibly globally competitive in that space. We have been within living memory a major producer of those products. But if you have non-targeted tariffs, then that doesn't really work very well. Chips are a weird case though, because they do have very high incremental margins and so tariffs are just less of a consideration. It's the cases where the tariff actually exceeds the end profit margin that the supply chain expects to get, which could be the case for some low-margin products. In a case like that, tariffs do have a really big impact. Everyone has to respond to them, and they'll often respond to them just by raising prices because a lot of the imports, especially from China — and this gets less the case every year — but China does still have this huge manufacturing base in very low-value-added products that are just incredibly cheap, and those are products where they're still just absurdly cheap even if there's a higher tariff. Like, there's that famous chart of the century that AI likes to put out, which is just tracking cumulative inflation since 1990 in various categories, and the way they usually cast it, which is true, is that you see very high inflation in very regulated products — so anything that touches real estate, education, healthcare, things like that — prices had been rising for a long time. Actually, a lot of those prices have leveled off since then, so it's not as extreme as it used to be. And then if you look at things like toys and furnishings and electronics, then you see this rapid decline in prices. And that — you know, these are less regulated sectors, but these are also sectors where they're tradeable. And that's the other thing the chart is showing: is that if you have a very rich country, you should expect prices to go up disproportionately for non-tradable goods, because if you're buying a haircut in America, you can't outsource that haircut to a cheaper labor market. You can outsource the labor to someone whose labor is worth less than yours, and most of us do that, but you can't do the full outsourcing thing. Whereas if it's, I don't know, a new action figure, like, that's just going to get built in wherever the cheapest labor is. There isn't a lot of complexity to building things like that, and so they just tend to go wherever they're cheapest. So I think in categories like that, there's just — there isn't really a lot for anyone to do except raise their prices and accept that maybe on the margin there is a little bit less consumption in these categories. I did think about the chart of the century a while ago, and I was considering what kind of allowance to give my kids. And the allowance situation is just in constant flux. It is a lot like Trump's trade policy in a way and has a lot of the same political dynamics. We're always unsure about the extent to which we're making a really hasty decision or doing something as negotiating ploy, or making a deliberately bad choice entirely to preserve our ability to bluff in the future. But regardless, one of the things I thought about was the child consumption basket is very heavily weighted towards toys and electronics, and these are the things that have actually had the most deflation. So if anything, parents should actually be giving their kids — like modern parents, parents my age, their kids actually have more purchasing power for a dollar than I did when I was a kid. So the allowance should actually be much lower in nominal terms for modern kids than it was when I was a kid. But my kids really don't appreciate the nuances of this kind of macroeconomic argument — especially for that or for here's why the Tooth Fairy is not as generous as you may have heard from other sources. You know, the sources could say what they want, but the quarter under your pillow doesn't lie.

Like part of what you want when you're arguing with kids — you just want the ability to deploy overwhelming argumentative force. I first read about this in the context of a book about Enron that was talking about Enron's CEO, Jeff Skilling, who was kind of the architect of a lot of what Enron did, including a lot of the good stuff but also a lot of the bad stuff. And he came from McKinsey, and someone was describing him as this prototypical McKinsey consultant where if he doesn't know the answer, he's just going to recite in perfect complete paragraphs endless statistics about every little data point that implicitly supports his argument, and he's hoping that if he talks fast enough, you won't be able to trace this back and say, wait, those numbers, those are accurate and it's really impressive that you knew them to that many significant figures, but they don't actually have any connection to what you're telling me we should do. Anyway, I thought of that as actually a decent strategy for arguing with kids: is just if it sounds like you just know a whole lot more about this process and that you will just bore them to death if they want to argue about it, then sometimes they give up. That might work with adults too. I feel like I've seen it happen.