Hello, this is Scott Galloway from Prop G Media. We try to bring you podcasts that both educate and entertain, that are data-driven. We've found a space in the market and we want to test a pilot here. Simply put, every second-order effect or near the center of every major geopolitical occurrence or economic occurrence is one entity: China. And if, like me, one day you're convinced China is doomed due to a demographic collapse and over-leverage in the real estate market, and then the next day you think they're an unstoppable power because of their manufacturing prowess and scooping up alliances that the United States has decided to forego, we have a difficult time finding really good information on China. And that's what we see as the wide space. So we found two very talented people: Alice Han, who you likely recognize from our Property Markets podcast — she's one of our most celebrated guests — and also James King, who was the European and Asia correspondent for the Financial Times. So with that, please give us your feedback on this pilot podcast of China Watch and let us know what you think at heypodg.com. Again, we'd really appreciate your feedback. So with that, here is China Watch.
The real winner, I think, of that Alaska summit wasn't Washington or Moscow. It was actually Beijing.
Welcome to China Watch. I'm Alice Han.
Today's episode of China Watch, we're discussing three items in the news. Number one, China's reaction to the US-Russia summit in Alaska. Number two, Trump taking a page potentially from Xi Jinping's state-run capitalism. And number three, China's first-ever robot Olympics. I wanted to start off with the Alaska summit between Trump and Putin because I think Beijing has an important perspective on that relationship given its outsized influence both on Russia and America. So last week's Alaska summit between Donald Trump and Vladimir Putin didn't quite deliver the ceasefire in Ukraine that some countries and some leaders wanted, and certainly that the White House itself was hoping for. Trump himself called it a big, great progress, quote-unquote. But when he was pressed, he admitted that there is no deal until there is a deal. So in other words, we've effectively reached an outcome in which we still don't have a deal. And to my mind, the real winner, I think, of that Alaska summit wasn't Washington or Moscow. It was actually Beijing. I think what's worth mentioning, and I remember seeing this in the Chinese state-run media in advance of the summit, was that China was welcoming this bilateral meeting and saying that it would be good for global peace. And while China didn't actually call for a ceasefire, it has been in the camp of supporting both sides negotiating. And certainly, to my mind, and this is something that I want to get your opinion on, James, Beijing doesn't, in effect, want Russia to lose and actually stands to gain from the Ukraine conflict continuing. And certainly, I think that this relationship between Russia and China will continue to impact China-US and even China-Taiwan relations moving forward. So just a quick question, James: what was your sort of takeaway from the Alaska summit, and how do you think it will impact China?
Well, I mean, I think that one of the revealing things that Trump said was that President Biden did something unthinkable: he drove China and Russia together. And then Trump added that if you're just a minor student of history, that is the one thing you don't want to do. So I think that, you know, there is an interesting angle on this, and that is that the US is clearly thinking that the closeness of Russia and China — those two great powers, huge in terms of territory and population, that stride Asia — having those two countries so closely aligned is not in the interests of the United States. I thought that was a very interesting aspect to what happened in Alaska. And so I think a lot of people are wondering whether or not the US can drive a wedge between Russia and China, whether or not it could even perhaps break up the China-Russia axis. And from my perspective, I have to say I think this could well be US wishful thinking. And the reason for that I'd like to give is, you know, I went to the Russian border with China about 10 years ago, and while I was there, I stood at this very border city called Heihe, and you're just sort of looking north into the wide expanses of Siberia. It's almost like a place that time forgot. And it's a very evocative place. The river that you're standing by is called the Amur in Russian, but in Chinese it's called Heilongjiang, which means Black Dragon River. And indeed, the flow of that river is so strong and dark that it conjures up the idea that there could be somehow a dragon lurking there. But that was 10 years ago. Really nothing happening on the Russian border. Very little commerce, very little trade, and not a single bridge across 1,000 miles of this Amur River that flows between the countries and forms the borders between them. But if you go there today, what you find, I think, supplies the reason why it will be very difficult for the US to prize Russia and China apart. And that reason is that there's so much going on now. There's huge border trade. There are three bridges over the river now that have been recently built. China is a big customer for Russian natural gas. Trade is now about 220 billion US dollars a year. And the most important glue between Russia and China now is geopolitics. And that's really that China supports Russia in terms of its war in Ukraine. And the reason it does that primarily is because, as you mentioned, Alice, China's biggest geostrategic priority these days is to make sure that if it has to fight a war in Taiwan on its south and southeast border regions down there, then it can do so. It doesn't have to worry about its northern border with Russia becoming unstable. And so for this crucial geopolitical reason, I think that the Russia-China axis will remain pretty strong for probably some time to come. And that, I reckon, makes Trump's idea that somehow Russia and China being so closely aligned could be a problem, and perhaps that the US could drive a wedge between them — I think that's probably wishful thinking.
I completely agree with that. I think for structural reasons, let's start with those. Russia, energy-rich country, but lacks capital and technology. China, rich in capital and technology. And I've just been looking into some of the data of massive FDI flows in the last few years going into Russian infrastructure and Russian construction. On top of that, we've also got massive tech sales and automobile sales going from China to Russia as well. I think that it's worth mentioning at a personal level the relationship between Putin and Xi. Xi has met with Putin as a global leader more than any other leader in his time in office. I think he has obviously attached a great deal of personal value to this relationship. And although you hear grumblings at the ministerial level — when I go to China, for instance, and talk to people who are policy advisers to Beijing, the grumblings that, you know, Russia historically hasn't been a strategic ally, you know, there has been a history of border conflicts, even as early and more recently in the '60s — but certainly I think this relationship on personal grounds has become very, very important to Xi Jinping. I would also mention that while I thought that Trump had a narrow window of opportunity at the beginning of his administration to do a reverse Nixon, meaning get closer to Russia at the expense of China, I think he's blown that with his foreign policy, both on Ukraine, but also his trade policy. And I think by basically giving this trade truce to China, which we've seen since the Stockholm meeting, it's effectively, I think, prioritized improved relations with China over really trying to decouple from China and get closer to Russia. So I think even although Trump had an opportunity at the beginning of his administration, China and Russia seem to have gotten even closer. What I will have to flag, and I'm curious if you have thoughts on this too, James, is that North Korea has a degree of participation in this conflict too. We've seen North Korean troops going into the conflict in Ukraine. They seem to be profiting from the conflict as well. And this begs the question: how is the axis of ill will, these authoritarian countries from Russia to China to Iran to North Korea, faring in Trump 2.0? And how do you think that these authoritarian powers are testing American resolve and American primacy?
Yes, I mean, there does seem, as you say, to be a view out there that we are facing a kind of concerted axis of authoritarian powers against the West. To me, this really is very overblown. I think that each of the powers that are involved in Ukraine are there for their own reasons: Russia, because it covets Ukrainian territory, and because of the character of Vladimir Putin, who sees himself in terms of restoring Russia's historical pride. China's involved, as I mentioned, because it prioritizes its geopolitical relationship with Russia, because it really needs to shore up its southern and southeastern border so that it can, if it comes to it, fight over Taiwan. And I think North Korea, in a very sad way, to be honest, is there because it needs to earn the money. I've read that for each of the soldiers that North Korea sends to Ukraine, it's earning about $2,000 US a month. And there are other statistics saying that Pyongyang, the capital of North Korea, has earned more than 20 billion US from sending arms and military assistance to the Ukraine theater. So it seems to me that really North Korea's interest in this is not geostrategic. It's not trying to form some kind of an axis of authoritarian powers against the West. It's just there to make money. And we all know that North Korea is one of the poorest countries on the planet. I myself have been there. It's really a kind of grinding poverty everywhere you look. So I personally think that those are the main issues in play.
Yeah. And one other data point that I think is worth mentioning is just the increase in trade dependency between Moscow and Beijing since Russia-Ukraine. You know, there's a statistic that in the late '90s and early 2000s, about 10% of Russian exports were destined to China. Now that figure, more recently in the last few years, has reached 30%. I wouldn't be surprised if that grows as an ongoing trend. And it seems that the majority of Chinese imports from Russia are in the form of oil and gas. So about 75% of the imports from Russia going into China are basically oil and gas, energy-related. And, you know, this is maybe a separate discussion we can have later on about China's energy transition. But it brings about interesting questions about China trying to reduce its energy dependence, trying to create more homegrown varieties — some of them renewable, some of them coal, some of them nuclear. That's a separate discussion, but certainly I think still a timely and a lively one. Let's take a break and stay with us.
Welcome back. We're going to talk about the second item on the agenda, and that is how Trump may be learning from Xi Jinping and taking a leaf out of his playbook. What seems interesting to me, as somebody who studied Chinese political economy for quite a bit of time, is the way in which Trump seems to have been adopting a lot of the techniques that Xi has refined over the last decade or more — whether it's, you know, nationalization of certain companies in industrial policy when it comes to semiconductors, even to some extent crypto, and more recently, I thought this was quite amusing, James, grabbing a golden share in US Steel. And he seems to be personally directing the tech bros and a lot of these CEOs to do foreign investment pledges, both domestic CEOs and foreign CEOs. You know, there's been obviously pressure in the last few years on TSMC to grow its Arizona plant and potentially expand its presence in America. And so some people have hailed this as state capitalism with American characteristics, which is very tongue-in-cheek. But I think it's worth mentioning that in a way Biden continued what Trump 1.0 did with the IRA. He launched these subsidies for clean energy and semiconductors. And Trump has just been using the executive authority to push this agenda more aggressively. And you're starting to see an impact on the way that foreign investors are treating America. I sense from my clients that people are a little bit unsure and worried and apprehensive, especially my European clients, about where to invest in America given the state largesse and uncertainty about where Trump is actually going to direct his attention. So James, you know, as somebody who has followed America closely too, is Washington's turn towards state capitalism, you think, a smart correction, or is it a risky power grab by Trump? Can he ultimately be as successful as Xi has been?
I really like this phrase that people are using about the US adopting state capitalism with American characteristics. As anyone who studied China knows, this is a direct echo from Deng Xiaoping's phrase about what the Chinese economy would do, which was adopt socialism with Chinese characteristics. And of course that opened the door for all of the capitalist reforms that set China onto its current path. So to sort of be using that in a backhanded way about Trump's policies is really highly ironic. But I must say, I have a bit of a personal reflection on this because I went to the TSMC plant in Arizona last year and I was really blown away by it. Of course, this plant costs about $65 billion US to create, and now the full price tag for the whole series of plants that are going to be built there could be as much as $165 billion US. Now that would be the biggest foreign investment in American history. And it was to a significant extent lured to come to Arizona, to Phoenix, from Taiwan by the funding from the US Chips and Science Act. I think the TSMC plant in Phoenix got about 6.6 billion in direct funding and it's able to get about another five billion in low-cost government loans. So this was a massive achievement. However, when I was there in Arizona, looking at the clean rooms, being taken around this factory that's going to be making close to the cutting-edge computer chips that can be made anywhere in the world, there was one really big question that hangs over the longer-term viability of this plant, and that was how much will it cost TSMC to make an advanced chip in Arizona compared to how much it would cost to make the same chip back in Taipei, in Taiwan? And the answer that we heard, sort of off the record from scientists who'd worked at TSMC, was probably about double. In other words, it will be twice as expensive to make those chips in Arizona as it is back in Taiwan. And I think that raises a big question over the viability of US industrial policy going forward. We'll have to see how it all pans out. Maybe the bigger the plant gets, the more the economies of scale start to click in. But back to your opening question, you know, it really is curious to look from here in Europe — I'm based in London now — at the way US policy is turning towards industrial policy and towards this much more state-directed form of capitalism. We've just spent the last, really, post-war period doing exactly the opposite and looking at countries like China and thinking, oh well, they can never be successful doing state capitalism. And now it looks like the US is at least flirting with this idea. How do you feel about that, Alice? I mean, do you feel this is sort of a very mind-warping moment?
Well, I have a lot of thoughts about this. So let's just take a quick discussion. When you were talking about TSMC, it reminded me of what my colleague Chris Miller has been saying recently. Chris Miller, who wrote Chip War, and he was saying recently that cost is definitely an issue. It is way more cost-efficient to produce cutting-edge semiconductors in Taiwan versus Arizona. And that might be true for many years to come. But the bigger issue actually, and it oftentimes is the case when it comes to cutting-edge technology, is human capital. So the leading engineers are still mainly in Taiwan. There are not enough bodies, so to speak, to basically bring over to Arizona without compromising the fabs back in Taiwan. So I think that's going to be a key bottleneck for any kind of American domestication of semiconductor production, even although, you know, Trump and his coterie are putting pressure on TSMC to expand production in America. I also think that what is interesting to me when you look at the numbers is that even although you've got big statements about, for instance, Stargate partnership, over $500 billion for AI basically integration and infrastructure over the next four years being committed by a number of big tech companies, if you add all these red — I would call it red carpet — sums together, it's still orders of magnitude smaller than what China is committing to its infrastructure manufacturing powerhouse. The IMF estimates that about 4.4% of Chinese GDP is spent on industrial policy across subsidies, tax benefits, and land. That is about 700 to 800 billion a year. And the Chips Act, by comparison, is only about 75 billion dollars that's just dedicated to the semiconductor industry. But even if you sum up all, I think, the red carpet and I did a back-of-the-envelope pledges, it's still much smaller than China. And I think that the IMF sum probably understates the extent to which policy banks and local government banks are actually financing and subsidizing these firms to continue to grow. I think EVs are a great example of the way in which local governments competed with each other to offer subsidies, low rent, basically free land to these EV manufacturers. A great book on this is obviously Yasheng Huang's work, in which he looks at may capitalism, the way in which mayors compete for companies to come and basically domicile in particular localities. So I think it's very hard. It's going to be very hard for Trump to steer the whole behemoth that is America towards a sort of Xi-style industrial policy. But my last thought on this, James, as a historian, is that America has flirted with protectionism throughout its history. You know, you only look back to the founding fathers. Hamilton was a big proponent of America being a manufacturing, a domestic manufacturing powerhouse. He wasn't so keen about free trade. And then when you move further on into the early 20th century, you also see moves, whether it's the Smoot-Hawley tariffs that were put into place, you know, huge protectionist barriers against imports coming into America, or even FDR in the '30s, where you did actually see a great degree of fiscal stimulus and industrial policy. So I think America has had its history of trade protectionism, of industrial policy, but it's hard to see it ever compete at the level at which China has attained, and a lot of that is structural, I think.
Yes, I must say I agree. And also sitting here in the UK, it strikes me that what the US is doing, it may not be optimal. It may be somewhat wasteful, and possibly the US is creating big cost structures in manufacturing, but at least it's better than what we're doing here in Europe, which is virtually nothing. There is no industrial policy here in a country like the UK. There is no government funding of our chip companies and our tech companies. So perhaps what we have now is China leading the way in industrial policy, as you said, spending billions, hundreds and hundreds of billions on this, and then the US starting to move after it. And at least the US has a highly advanced chip factory there in Phoenix, Arizona. And then Europe really lagging far, far behind.
Yeah. Yeah, that's definitely a conversation for another podcast because I think, to my mind, it's quite baffling that Germany, for instance, that was a frontrunner in manufacturing, Industry 4.0, which China tried to copy, has really fallen behind in a lot of key manufacturing sectors, not in the least EVs and automobiles. But that's definitely a topic that we can pick up at a later date. I'll end with a thought. And I'm curious again to hear what you think about this. I've been toying with writing this op-ed about Trump's tributary system. I think that Trump's way of holding on to power and treating the rest of the world reminds me of late-stage Qing Empire China, in the way that the Qing Empire is trying to address these, quote-unquote, unequal treaties with foreign countries during the Opium Wars, and in the way in which Trump sees a kind of tributary system in which other countries should pay tribute through tariffs. But that's something that I've been toying with as a concept. I think in some respects, yes, he is learning from Xi, but I think he's learning from some of the sort of 19th-century pathologies of late-stage Qing Empire.
Well, I mean, you certainly had the right photographs to back up that thesis with, with all of the — well, many of the European heads of state standing there or sitting there in front of Trump in the White House as supplicants, really listening to whatever instructions Trump wanted to hand out. I thought that was a very, very big moment in terms of, well, certainly the visuals in our relationship. And what was it that Tim Cook gave him? A gold plate in his...
