The technology world is really in the grips of a two-front geopolitical technology war. Our models need to be superior than all the other models on Earth. We need to have the world's best AI innovation on a qualitative basis. So, we need to have the most market share. If we have exquisite models that no one uses, we're kind of irrelevant. The AI revolution has really heightened the stakes of this whole technology race. It's really put on steroids the capabilities that governments can have.
Jacob, welcome to the podcast.
Thanks for having me. It's good to be here.
So, we're going to get into a lot of exciting conversation about the future of the economy, AI, manufacturing, supply chain, but I want to start at some of your intellectual origin. You wrote a book, The Wires of War. It came out in 2021. Why don't you briefly explain the high-level thesis of the book and then I'm curious if you wrote an addendum today about how the last five years have played out, what you might have written.
Yeah. So first of all, it's great to be here and it's great to see you. I'm excited for this conversation and to have the opportunity to lay out some of the things that the administration's been working on. In 2021, I came out with a book called The Wires of War that was basically proposing a thesis that at the time was somewhat controversial but has become common wisdom since then, which is that the technology world is really in the grips of a two-front geopolitical technology war. There's the software end and the hardware end. On the software side at the time we were seeing the emergence of things like foreign information operations, and on the hardware side, which the whole premise of the book was really to actually say that the hardware end was the decisive battlefield. There was obviously the battle against Huawei and really the infrastructure of the internet, and the basic reason why the book argued that the hardware end was the most important one is because if a country controls the internet at the hardware level, they can compromise and control everything that runs on top of it.
In our system, we have private companies that live very independently from the US government and that operate in a private capacity, as we know, and that system is not the case in other places, including in China, where the companies are obviously much more subordinate to the centralized government. And so ultimately, when you have a foreign government that can whip up its companies as instruments of political power, that's very concerning for what it means for national sovereignty.
And it's funny because you started your career on the software side at Google, right? And then you realized that hardware was sort of the more important one, and now you're spending more time there in your new role. Why don't you flesh out exactly what were the key risks you identified on the hardware side and how have they played out? How have they changed or stayed the same?
Yeah. So, I mean, really what we're talking about is if you have a foreign government that can instrumentalize its tech companies that operate the hardware of the internet, it fundamentally challenges our traditional conception of sovereignty because it raises the question of what does it mean to be sovereign when you have a foreign power that knows all the deepest darkest secrets of all the judges, journalists, and jurists in your country and politicians in your country, and the definition of sovereignty starts to look very, very different in a world like that. And so the first Trump administration carried out and prosecuted a very comprehensive campaign that basically argued that Huawei and ZTE are national security threats. That campaign has been sustained across administrations since then, including this one. And so today, obviously, to your earlier question, we live in a world that's the same in some ways, but that has evolved and mutated in really interesting ways with the AI revolution that was arguably prompted by the release of ChatGPT a year after my book.
And the AI revolution has really heightened the stakes of this whole technology race in pretty fundamental ways because it's really put on steroids the capabilities that governments can have to actually carry out these types of operations.
And so let's now get to your work in the administration. Why don't you talk about your main priorities and goals and achievements to date?
Yeah. So cognizant of and recognizing the fact that the AI revolution is going to totally transform economic power and military power, and I'd love to talk a little bit more about that, the administration has laid out a policy to win the AI race. The president proclaimed a very, very historic speech last July at a summit that David Sacks and I co-hosted called Winning the AI Race, where he rolled out the AI Action Plan. And in that speech, he basically laid out that America, he acknowledged that America was in a race. And he proclaimed that America was going to win that race. And it was very aspirational. And David likes to reference that it was almost reminiscent of JFK's speech to the moon, which I actually happen to totally agree with him on that. I think it very much echoed that. And so then that raises the question for agencies like ours: How do we actually help him achieve that goal? From our vantage point, we see three conditions that need to be met to win the AI race. We need to have the world's best technology and AI innovation on a qualitative basis. So our models need to be superior than all the other models on Earth. That's number one. Number two, we need to have the most market share because if we have exquisite models that no one uses, as we know from the world of consumer technology, we're kind of irrelevant. So we need to have the most users. We want to have the app store that has the most apps. We want to be the platform for the rest of the world. And number three, we need secure supply chains because if we have technologies that are firing on all cylinders, technology companies that are firing on all cylinders, but if one tiny cog gets loose and trips up the whole machine, we are in a very brittle, precarious position. And so we need to make sure that our companies who rely on many different types of inputs and components that come from very different corners of the globe actually have supply chains that are reliable, that are cost effective, and that are secure. And so we're working very hard to do that. We launched an initiative called PAX Silica that aims at securing the supply chain and partnering with some of the world's most technologically advanced economies to develop partnerships to secure offtake agreements, joint ventures and the like. And so we're very excited about having this three-front strategy to win the AI race.
Let's go through the three fronts that you just mentioned. You've mentioned a little bit about what we've achieved. Let's talk more about that, but then also what needs to happen in order for those conditions to be met.
Yeah. So having the best AI innovation on a qualitative basis is really an effort. First of all, let me just say that we already have the best AI innovation on a qualitative basis. So the question is, how do we maintain our lead? One of the big thorny challenges that is still new and very apparent to everyone is the challenge of model distillation, which fundamentally undermines intellectual property and it fundamentally undermines the unit economics of the industry because when companies invest hundreds of billions of dollars in capex investments and then to develop fancy model weights, but then other companies can just take them, that's a major problem. So that is an issue that we obviously are tracking and our administration as a whole is engaged in conversations with companies to try to find solutions to this. But the companies and the AI labs are the ones in the driver's seat when it comes to ensuring our lead on a qualitative basis, as they should be. With respect to market share, we believe in the power of our products being superior and therefore more people like them. With that being said, we also recognize that they're competing on a playing field that's not always fair and leveled. And so we are actively engaged with governments to basically ensure that we have a preferential preference for technologies that are secure. And this is really an extension of the work that we've done on Huawei. A lot of our focus has been on hardware infrastructure, but I think there's a lot of intellectual work being done for what does that mean in the AI age? What does that mean in a world where you have open model weights that are fundamentally harder to contain? So market share is very much a part of the thinking. That is the premise for the AI Export Program. We want to grow our market share worldwide. David Sacks and Secretary Lutnick have done a lot of really great work, and Katzios has done a lot of really great work to help launch the AI Export Program, and the State Department is very involved in helping evangelize that and actually onboard more users. We launched the Chip Concierge Service that provides white-glove support for the AI Export Program for a subset of countries, which are the PAX Silica countries. So we're certainly trying to contribute in ways that are constructive and in ways that help be an accelerant to get more users.
And then for securing our supply chains, that's where I think the government probably can play the most important role because we can catalyze partnerships, we can catalyze joint ventures. Our supply chains are very frail. What we have realized since COVID is obviously China has very vertically integrated supply chains because they have a lot of state-owned companies. Our supply chains are not vertically integrated at all. They are totally geographically dispersed. Thousands of different vendors, many of them are mom-and-pop shops in different parts of the globe, full of information asymmetries. A company in Santa Clara or San Jose has no idea where some of these parts come from, who makes them, because there's so many different layers of vendor partnerships. And so as a result, you end up with a system where companies have very low visibility. There's a lot of inefficiencies by virtue of the sheer number of people involved and the lack of coordination. And so one of the things that we're looking at doing is actually using tools that the government can be a catalyst for to actually bring a little bit more efficiency and coordination to how the supply chains for our large, arguably systemically important companies work. And those include offtake agreements, they include joint ventures, they include co-investment opportunities. And the last one is market incentives. So this sort of gets at one of the concepts around creating some sort of preferential trade zone. Obviously our administration has pursued an incentives-based agenda very heavily with respect to the imposition of tariffs to encourage investment in the US. But the government has tools to actually create and incentivize behavior and create the environment that will actually lead the private sector to deploy capital in ways that are strategic.
And by the way, on that note, what is the right way of making sense of tariffs, of the effect since Liberation Day? Is it that they were largely a negotiating tool that was effective in achieving its goals? Is it that it's also an economic policy that had certain goals? What's the right way of making sense of it while also realizing that it's still early?
Yeah. So the fundamental thesis and view is, over the last generation or so, we've lost 66,000 manufacturing plants. We've lost over two million manufacturing jobs. Our industrial base has been completely hollowed out, and not by an act of divine destiny, manifest destiny, but really by choices, policy choices that have been instituted over the last 25 years that have been terrible. And so the tariffs are actually a recalibration based on the recognition that we need to have an economic policy that is tethered to our national security imperatives. In pure and perfect markets, when you have a trade deficit, typically you have changes in the value of a currency that allows a trade deficit to go back to an equilibrium level of zero. But it is not a natural phenomenon to have consistent trade deficits for a 25-year period on a quarter-by-quarter basis. That is the result of markets that are not functioning correctly. And so the tariffs actually help correct those long-term secular trade deficits. And if I could just add, if I could digress and just really hammer this one point, when the president took office, we had a trade deficit with our top 12 trading partners of over a trillion dollars a year. I mean, it was astronomical. And so we took the view that that level of trade deficit on a year-by-year basis is completely unsustainable. After Liberation Day and when the president instituted tariffs, we've actually seen a complete change in the trajectory in a lot of these numbers. Our trade deficit with China, which has long been our largest trade deficit country, has been plummeting in a way that's really historic. Our trade deficit overall has been receding, and we have actually seen record capex investment in the US, which doesn't even show up in trade data yet because the capex investment hasn't yet converted into production capacity because a lot of these plants are being built as we speak. But as someone in the tech industry, you understand the difference between a lagging indicator and an early indicator, and so it's really encouraging and actually quite exciting to see a lot of these investments being made. And so the basic thesis is we used to have a policy worldview that said, you know, potato chips, computer chips, doesn't matter, and you could have a national security untethered from economic policy. We believe that it's important to bring our economic policy in line with our national security, and that includes having an economic policy that does not run trillion-dollar trade deficits on a year-by-year basis.
And say more about the positive benefit of having a much reduced trade deficit. Is it that on the employment side that we'll now employ more Americans because we're building more here? Is it that we'll also just take care of some of the industries that are most important for national security? Is it more benefits?
Well, first of all, the Treasury will have more resources to actually fund a lot of the things Americans care about. So it has a very big impact on the resources at our disposal to actually fund the government as well as important programs. Second of all, it has a very big impact on fundamentally one of the things that we realized during COVID is it is incredibly—you can't defend a country with Facebook ads. You need to be able to make things. And the national security strategy that we released actually has a line that's very apt, which says the future will belong to builders, and that's our belief. What the tariffs do is they change the economics of building. They provide American builders with a re-leveled playing field that makes it economical for them to compete if they build in America. And fundamentally that's why we've seen historic capex investments because of the tariffs. The ingredients of the Trump industrial revolution are tariffs, deregulation, energy abundance, and tax incentives, which include capex investing through the one big beautiful bill. Those building blocks totally change the game when it comes to the unit economics of building things in America. And so it's actually in total contrast to what Europe is doing, sadly, where you have super high energy prices, insane regulation, insanely high taxes, and you see the result, which is a continued sustainment of de-industrialization of Europe, which is very regrettable. And so we think these things are choices and you can actually reverse them, and we're seeing that play out in real time.
Just on the note of Europe, there's some people that point to, hey, there's maybe some countries that are increasing their defense spending. Do you think that's for real? Do you think that's good for us? How should we make sense of what's happening right now?
So I think the political will is real, but one of the things that I'm sure you and your viewers will appreciate for folks in the technology industry is the political will can be there, but translating that political will into capabilities will require companies. It will require builders building technologies and weapon systems that are at least comparable or superior to what is already on the market. And in order to do that, you need founders who are exceptional because building companies are very hard, especially hardware companies that are very advanced and capital intensive. And you need an environment that actually makes it somewhat conducive to actually build a company. And it's really hard for Europe to put those pieces together because the culture in Europe has been really not favorable to encouraging risk-taking, which is the lifeblood of starting a business. You need to have a risk-taking culture, and then they have the unit economics problem where it's just really expensive to build stuff in Europe because your energy bills are really high. You have to spend a ton of money on legal fees before you even start. And so those parts are very challenging. So it's not that starting things in Europe will be impossible, but they have major headwinds. They will start on day one with significant disadvantages compared to American companies, where fortunately because we have a federal system, the states are the laboratories of democracy. And so if some companies, many of whom we know, have a hard time building things in one state, they can always move to a different state that has a favorable tax environment and regulatory environment. And so we actually have a system that still makes it quite easy to build things. And so our policy is we want a strong Europe. And so we have really invested a lot of efforts into having truthful, candid conversations with our friends in Europe to actually share our concerns. And the media, some elements of the legacy media, has inaccurately portrayed our stance as being antagonistic towards Europe. But it'll be no surprise that that's a total misrepresentation. The truth is that when you actually care about someone, you can actually be candid with them.
Clear is kind. And so it is because you care. If you have a relative who's unwell, is the empathetic view to pretend like they're perfectly fine and tell them everything's going to be okay when you know that they have cancer, or is the empathetic view to actually let them know that there's a problem that they need to take care of? I think the latter is clearly the more empathetic position. We care about Europe. We want them to be strong, and so we are trying to draw their attention towards policy issues that we think are serious headwinds for them.
Yeah. Similarly, some people critique and say, hey, it's better to have these countries dependent on us. Whereas similar to your example, if you really care about someone, you want them to be sovereign. You want them to be independent. You want them to be strong. And that doesn't mean that we're drifting apart and no longer going to support each other. It means that perhaps we can support each other better because you bring more to the table.
I was just going to say, and Americans are positive-sum thinkers. I mean, unlike—and this is fundamentally something that people underappreciate overseas—is it's not like there is a centrally planned, maniacal plan in Washington to get the rest of the world dependent on America because we are positive-sum thinkers. And what that means in practice is Americans also do a lot of joint ventures, you know, because we don't see the world as a finite pie that needs to be subdivided into smaller slices. We see a world where the pie expands and where there's an opportunity, and a lot of American companies are very comfortable doing co-investments and joint ventures, and so it's just a very different lens.
How should we make sense of the sovereign AI investments that are happening in the Middle East? Is that also strategic for us, or say more about that?
Yeah. So fundamentally, the Middle East has a lot of capital. They're going to invest it in artificial intelligence one way or the other. Some of the investors in the region are incredibly sophisticated, and a lot of them have rightly recognized that they want an economy that is diversified away from hydrocarbons, and AI is fundamentally a path that allows them to shift from a paradigm where they export hydrocarbons to a world where they export intelligence and tokens. As a fundamental building block of training large computing capacity is cheap access to cheap energy. An integral function of the cost of compute is the cost of energy, and in the Middle East you have a lot of very cheap energy, and so that is a comparative advantage that they have identified accurately and that they want to capitalize on. So our view is let's work together to have a mutually beneficial approach. We want to enable—because we have a positive-sum view of the world—we believe in a world where we help them achieve their aspirations that they've set for themselves in a way that actually grows the pie and offers our companies opportunities to collaborate on something greater. And so we see our approach to the Middle East as an opportunity to allow our companies to expand their lead because it's actually a market that gives our companies access to a lot of cheap energy. The UAE, the Qataris, the Saudis, the Israelis—all of them are interested in AI. If they want to make available large compute capacity to our companies, we think that's a great thing. And so we've been having a lot of conversations with them. The UAE and Saudi Arabia, we signed two large AI deals with them. I was in Israel where we signed a bilateral joint statement on technology cooperation, which we're very excited about, which included artificial intelligence. And so we're very supportive. It's a fascinating region because I think for a long time the stereotype was that the Middle East was an unstable place and East Asia was an engine of growth. And part of what we've seen over the last 20 or so years is really that region emerge economically in a way that has caught a lot of people by surprise. So it's exciting to see a lot of the developments.
