Hi and welcome to Ones and Twos, FP's Economics podcast. Every week we take a couple data points, we use them to try to explain the world. I'm Cameron Abadi, FP's deputy editor, with you in Dalian, China. Joining me here in Dalian, China is FP's Economics columnist and Columbia University Professor Adam Tooze. Hi, Adam.
So, this is a new variation on our live events that we sometimes do. As I mentioned, we are in China. We are being hosted by the World Economic Forum. And to give people some image of how we are recording this podcast, it's something of a fish bowl. We are in a podcast studio being observed by conference attendees who are surrounding us, listening in. Of course, we have our listeners at home, but I just wanted to give them some indication of what it's like. And to cite the data point, that is 17, which is the number of times that the World Economic Forum has held what it calls its Summer Davos event here in China. And it's been 20 years in total that they've been hosting here, but 3 years were taken off because of the pandemic, etc., making 17 conferences in total. It is an enormous conference, not in the snowy peaks of the Alps, but the humid climate of northeastern China in this case. And Adam, to start off with, I thought maybe you could give some description of what the conference feels like, just the atmosphere compared to previous years that you've been here.
Yeah, just to complete Cam's image of earlier, in this image, we are the fish. So, we feel like two rather special non-Chinese fish in a fish bowl in a Chinese restaurant. It's a—you know, Dalian is—we'll talk about it. It's an industrial city carved out of—one part of the town is a hotel/conference center complex. The building itself is a kind of modernist miracle of swoops and curves and sheet metal. And Davos basically imports most of its interior design from venue to venue. So, wherever you go on the WEF circuit, it's similar. It's a mix of business people, innovators, technologists, and stray folks like myself with many journalists for company. And we're in the so-called village part, which is very much part of the kind of Swiss Davos vibe, where there's coffee all day long and exceptionally good catering and, yeah, chances for meeting up. We've all just come from the big speech by Premier Li Qiang, which is the highlight of the three-day event. It's generally on a Wednesday morning. And he packs whatever auditorium they have available. This one was—I don't know, maybe 1,500, 2,000 people, and it fills up in half an hour, three-quarters of an hour. Cam couldn't even get in. It was already full. I had a chair for you, but they wouldn't let you in because it was overcrowded. And the audience, yeah, really listens with some degree of intent to what the Chinese leadership has to say.
Yeah, he did give, I think, a pretty remarkable speech. I mean, what were your big takeaways from what he had to say?
Well, this is the third of his speeches that I've heard live and this was definitely a themed speech around the central issue of innovation at scale, which is the slogan of the conference this year. And innovation was part of it. So, a relentless emphasis on what he and the Chinese leadership call Sci-Tech, which is a kind of interesting coinage of science and technology merged together. But the emphasis is also in the Chinese case always on scale. So, scale both in the sense of the scale of the market, which of course Western economists bewail it's not even bigger, but by any measure 1.4 billion people make a big market, but also scale in terms of the completeness of the Chinese innovation chain and their ability. The premier speaks a lot about what he calls the 1-hour circle. So, how much of an industrial complex you can visit within one hour's drive of any particular location. And so, in Shenzhen or in Dalian, they have 1-hour innovation circles around particular groups of technology which create dense innovation clusters.
It was also the first speech by him that I've heard that actually raised a laugh. Several in fact. And those were provoked by his pointed remarks about the success of Chinese innovation not being explicable in terms of subsidies because China simply couldn't afford them. China's not rich enough, he said, to pay for this level of innovation success. So, the stress on the hard work, the effort of Chinese innovators, a lot of emphasis on forging the steel of Chinese energy innovation and tempering—very Soviet kind of language—on the one hand, and market size, all pointed at cheap Western shots that say, you know, Chinese success is down to subsidy. Each of the speeches I've heard has been very carefully calibrated to answer a question or a challenge coming at China from the outside. This is one of the speeches that he'll give—he'll give hundreds over the course of the year—that is closely watched by the global media. And so I think there's a clear messaging and in this case the aim was to answer the subsidy allegation.
Yeah, that did seem to be the case. I was in the overflow room as Adam mentioned, and so some of the comedic aspects of the speech escaped me. You know, I didn't catch the irony. I was a bit taken aback that he was claiming that China couldn't afford its subsidies, etc. But clearly, yeah, that was meant somewhat in jest, but this emphasis on China as an innovator was clearly his intent to underscore. In other words, China's not just growing, it's not just playing an important role in the economy, but it's in a position to be a leader. And
You can't—he said you can't copy your way to the frontier.
So it was also, you know, a pushback against any suggestion that, you know, China—I mean, which is an old—I mean, people have kind of given up on that idea, but five or 10 years ago that was absolutely the kind of standard line, right? That China had essentially stolen IP to approach the productivity frontier. He wasn't having any of that at all.
And so he was also at pains to contradict the suggestion that we are facing, or the West is facing, something that has been referred to as a China Shock 2.0. He specifically referenced this and offered a response, but of course that raised the question of what is China Shock 2.0 that he's at pains to argue against. And this is in fact essentially the title of a new report that was issued by a couple of analysts, Brad Setser and Sander Tordoir. They published this report. It was specifically directed at the German government several weeks ago. And it was one of these think tank reports, many of which end up in sort of waste paper baskets without actually ever getting a hearing. This was specifically cited by the German government as motivating a change in German policy. The idea that there is a China Shock 2.0 that Germany is facing that threatens German industries and that requires a dramatic policy response. So, what do you make of that report? I mean, have you read it and what is the argument being made there and then how cogent is that?
Yeah, and it's destructive because I just saw Matt Klein, the co-author with Michael Pettis of Trade Wars Are Class Wars, go by and I think he may be listening at the moment I'm speaking. So, Matt, here's a wave. The irony is that this is a long-standing accusation, right? Against the great export surplus countries of the world that they distort their local distributional politics. They distort their macro politics with the effect that there are large global imbalances. And this has been, you know, very large scale since the early 2000s and in the Klein and Pettis analysis—hi Matt—Germany and China were aligned as basically both following essentially the same model. So, the early 2000s German wage control policy created both huge inequality in Germany, increasing inequality anyway, and a huge export surplus. And what's happened in the 2010s is that the Chinese have essentially out-Germaned the Germans. Quite specifically, they went to the Hanover trade fair in 2011, bought this German idea which WEF heavily backed of Industry 4.0, translated that into Made in China 2025 and delivered industrial policy at scale, which, dear Prime Minister, did involve very substantial subsidies. There's no question about this. The difference I think is the payoff the Chinese have received for the subsidies that they put in. The remarkable thing about Chinese industrial policy is not that they do it or that they do it at scale, but that the payoff is as dramatic as it is.
And the consequence now is a dramatic inversion of the fronts where we have Germany actually now committing to rather large-scale fiscal policy. And China at that very moment emerging as a dominant player in precisely the industries which once used to give Germany, unusually amongst large rich countries, a trade surplus with China because Germany's industrial expertise fitted perfectly with the Chinese industrial miracle of the 2000s and early 2010s. The Germans made the machines and they made the high-end industrial goods. They made the cars that the Chinese middle class graduated into buying. And that has been put in question by the Chinese industrial policy shock of the last 10 years. And the Sander Tordoir and Brattberg's paper is really like bull's-eyed onto the forehead of the current German government to say, 'Look, don't you get it? Just as you are making the shift in fiscal policy terms, you are in the crosshairs of a Chinese policy push which is taking the old familiar model of export surplus countries, compounding it with a high-tech industrial policy, and guess who is going to be the principal victim of this? You, Germany.' And it's going to be the car sector that is going to be the obvious target here which employs over 12 million Europeans in the extended supply chain. And matters, of course, crucially to a democratic stability because these are the archetypal high-end working class jobs that will be at risk and may open the door to a bad right-wing populism. So, that's the argument that's being made and the premier was trying to push back on this. I mean, he didn't really address the macro that would have been necessary to address. In previous speeches, I've heard him say much more about this. This was a much more kind of moralism versus moralism kind of argument, which is we're successful technologically because we make the effort and because our innovation systems are so sophisticated and what are you complaining about when in fact this offers opportunities. So, his big comeback line was not China Shock 2.0 but China Opportunity.
Mhm. Yeah, exactly. That is the rhetoric that the premier offered—that China Shock should be seen as a China Opportunity. Of course, the paper that Tordoir et cetera wrote is quite dire in its description of the kind of laying to waste of German industry that Germany may be facing. This was all in preparation of a G7 meeting and various EU meetings that were happening at which there was some expectation that there would be some new policy shift that would be pushing back against this shock from China. And yet in practice it seemed like the G7 and EU seemed to back away from doing anything significant. I mean, why backing away at that point after all this kind of serious analysis?
