Almost everyone in the AI space that I see with a microphone in front of them says the US has to win the AI war. I don't know what that means. And if I guess as to what it means, I don't think it's possible. Because it's an infinite game. And no one that I talked to would argue we're going to somehow prohibit them from moving forward in AI. Let's not forget it wasn't that long ago that OpenAI, they'll say, borrowed or copied the innovation that happened at Google and DeepSeek. This is how innovation works.
Bill, great to be back in person. Good to see you, sir. That was fun last night. We have to give a little shout out to our friends Vinnie and Bill Lee and some others who we got together with in Austin last night for some poker. I think you did all right last night. You had some winnings and you had some more winnings. In fact, I brought you some flowers. This is for your Florida Gator.
Bring you your flowers. Thank you. I'm sure the listeners are tired of hearing I started the last two podcasts, one before the Sweet 16 and one before getting into the Final Four. And then of course everyone knows the Gators went all the way. I had a bunch of friends out. We spent the whole day, the Monday of the game day, on the river walk outside the team hotel. Saw a bunch of old friends. I know fandom is a weird thing because you don't actually do anything. You just go along for the ride. But it creates a very special experience and I'm super proud of what they did in that team and how they won. I had talked about it before and it was dramatic too. So, but it was a great time. Just a great time. What have you been up to?
Speaking of games, that was an exciting upset by the Warriors in game one over Houston the other night. I hope our guys make a run at it this year. Certainly looks like they're a totally different team with Jimmy Butler on the team. And no doubt I think they're 25 and four or something like that since the Jimmy Butler trade.
Completely. I tell you, man, I'm thinking a lot. In fact, this is something you really drilled into me ages ago about thinking about just complex systems. When I look at all the things this new administration is trying to change simultaneously, you and I talked three months ago. I said I was worried about the markets. Discount rates had to go up. There was more uncertainty in the world. But when I start thinking about what's going on, what this administration is trying to accomplish all at very large scale. So think about this. Whatever you think about each one of these individual things, they're trying to totally transform global trade. So that's trade negotiations with 100 countries. We effectively have an embargo between us and China. 140% tariff, export controls, and so we have to renegotiate that deal. Bessent said today it really hasn't even started. That's going to be a slog. On top of that, we have taxes. If we don't lock in the tax bill, it doubles at the end of the year. We have this reconciliation package. We have DOGE and deficit reduction. We have questions around the 10-year and whether or not deficit is going to actually be larger this year. We have the war in Ukraine, and lots of back and forth there. We have dealing with the volatile situation in the Middle East. I mean, it sounds like we were on the verge maybe of seeing an Israeli attack on Iran. And all of these things are happening simultaneously. And so one of the things that's just on my mind, if you look at the discounted rate of dealing with any of them successfully and then you multiply those discounted rates together, the probability that you're going to land this plane in just a really smooth landing, I think, is challenging to see. We're going to have some wins, we're going to have some losses. And so today, I know we want to revisit some of these conversations around tariffs and free trade and these export controls and kind of where we are in the market. But I would just say like we're attempting something very high difficulty level and if this administration is able to land the plane on all these, it will be quite an accomplishment.
Yeah. And you bring up complex systems, this is the reason I spend so much time down at the Santa Fe Institute because that's all we talk about. But a couple of features of those things that relate to exactly what you said. First, it's very hard to know which variables are dependent in a complex multivariable system. And there may be one you don't know about that flips and the whole system takes on a different shape. And this makes these things very hard to predict, which is why I don't like talking about macro for that exact very reason that there's so many variables. It's very hard to be accurate and correct. And even if you are, it might just be by happenstance because you might not know the exact variable that caused it. So it is difficult and unfortunately, and I'll state again, I don't like talking about macro, but we're kind of forced into it because the market and even the destiny of many of the high-tech companies that we would prefer to focus on seem to be caught up in this whole thing.
For sure. For sure. I mean, I just saw a random tweet before we came in here. Somebody estimating that the revenue hit to Meta this year from reduced advertising by the merchants, Chinese merchants on Meta like Temu, is like $7 billion. Wow. Now, think about that. That's pure profit, right? There's no incremental variable costs against serving those advertisers. So, if that just disappears, it's very, very high margin business. And so again, just the downstream consequences, backfill with something else that may not pay as much.
Yeah. You know, perhaps, but I think what it reminds me is, it feels like there's news every hour. It's pretty exhausting, but we got to lock in. There's a super busy calendar ahead. So, why don't we start with just maybe updating where we are on tariff negotiations and revisiting, I think, some important arguments about free trade. So last time we were together we really framed this by saying on the one hand it seemed there were two different sides in this administration. On the one side we had kind of a more tactical, narrow view of tariffs, maybe the best consensus, I called it, which was a fully loaded gun rarely discharged, and have targeted tariffs to re-onshore critical national industries. And on the other side of this, we had what I described as more the nuclear Navarro approach. This is that we generate trillions in tariff revenue that we tariff everybody. High structural tariffs. We replace the Internal Revenue Service with the External Revenue Service. And this is much more structurally different. Not tactical at all. Well, where are we now? Markets are now down 15% during this period since quote-unquote Liberation Day on April 2nd. The markets are clearly worried about a global trade war. We now have export bans. So China implemented an export ban on rare earths on April 5th. We retaliated or at least implemented an export ban of our own last week on Nvidia chips. We'll get into all of these bans and tariffs, they are quite controversial even among Republicans. Remember, the Republican party on Capitol Hill has historically been against tariffs. And so, I think there's an increasing concern on Capitol Hill about where all of this is headed and what it means for the economy. And so, many people are saying this is feeling quite chaotic. They're nervous about the 10-year. They're nervous about the impact on the dollar. Bessent's saying it's going to be a slog and this is going to take a while. But the president says on Friday he thinks it'll all, you know, we'll have it resolved in the next three to four weeks. So what is your reaction to all of this? What I want to do is take it up a level because I think there's an important conversation. Republicans have historically been a party of free trade and lower taxes, right? I think of Reagan or Milton Friedman. And yet today there seems to be this growing consensus around tariffs. So, let's just go back, make the case for us, steelman the case for why this may be a misadventure in the first place.
Bill, when we were talking at the beginning of this podcast journey about skilled immigration, we played a short clip from Ronald Reagan, which was one of his last speeches that he gave in office. And this week with all this tariff discussion, there was another Reagan clip floating around that I think does just as great a job of summarizing something in a very efficient way. So, if you don't mind, let's play that clip real quick.
And today, many economic analysts and historians argue that high tariff legislation passed back in that period called the Smoot-Hawley tariff greatly deepened the depression and prevented economic recovery. You see, at first when someone says, 'Let's impose tariffs on foreign imports,' it looks like they're doing the patriotic thing by protecting American products and jobs. And sometimes for a short while, it works, but only for a short time. What eventually occurs is first homegrown industries start relying on government protection in the form of high tariffs. They stop competing and stop making the innovative management and technological changes they need to succeed in world markets. And then while all this is going on, something even worse occurs. High tariffs inevitably lead to retaliation by foreign countries and the triggering of fierce trade wars. The result is more and more tariffs, higher and higher trade barriers, and less and less competition. So soon, because of the prices made artificially high by tariffs that subsidize inefficiency and poor management, people stop buying. Then the worst happens. Markets shrink and collapse. Businesses and industries shut down and millions of people lose their jobs. The memory of all this occurring back in the 30s made me determined when I came to Washington to spare the American people the protectionist legislation that destroys prosperity.
So, I mean, for me, everything I learned up until this point in time is congruent with what Reagan said. Tariffs lead to increased inflation. They lead to reduced innovation. Putting a protective blanket over our companies and our country leads to them being less globally competitive. And then fourth, which he mentions, it leads to retaliation. And I've just been kind of revisiting a lot of my priors. One of my favorite economists who spends time down at Santa Fe, Ricardo Hausmann, put out a great piece who said, 'We're not adding up everything the right way. We're only looking at physical goods, their services, and intellectual property and net income that comes from companies like Meta operating around the globe.' Neil Ferguson did an incredible hour with Bari Weiss that I would just tell everyone to go listen to. And every one of these things takes me back to what I learned over 20 or 30 years that these things aren't going to work out in the long run. And so I'm skeptical. I mean, I'm always open-minded to revisiting my priors, and if someone wants to put out an argument why this is all going to work, but you and I were talking earlier, I find there's a lot of conflation going on about different reasons arguing for why different actions are happening. The tactical, we need to have these specific technologies, be resilient so we're not overly dependent on one country, to this bigger thing where we're going to replace all of tax income. And I think you could do a little bit of the first. The latter just violates all my priors. So, I'd have to start fresh and I'd have to be convinced that all these great thinkers that came before us were wrong. So if our friend David Sachs were here, and I think he brought you up on the All-In Pod last week, if he were here, he would say, 'Okay, free trade is all well and good.' Very Jeffrey Sachs. But he'd bring up John Mearsheimer. And he would say, the reality is we're in a great power struggle. We have a peer rival in China today. And that national security must take priority over free trade and might make the argument I think that in particular creating resilience in these industries, rare earths, chip fabs in the United States, auto manufacturing, steel, aluminum, etc., are essential to our national security and so therefore it's not inconsistent with free trade. What would you say to that?
Well, we talked in the past, I think to the extent you're doing something very tactical, it could be proposed as such. The tone and the bravado of the description of what we're doing isn't consistent with that. There's also, if you're using the word resilient, that can include other countries that are allies. It doesn't have to be on the shores of the US. And I know people who in the first Trump administration were told to diversify away from China and they built supply chains in Vietnam. And now they're worried about tariffs there. And so there needs to be a consistency in order for people to adjust to those things. One more piece I would mention, we'll put links to all these things, is Thomas Friedman has an op-ed in the New York Times that says, 'I just saw the future and it was not in America.' He takes it further. He believes that in advanced manufacturing, we're not just not doing it here, but we're not on the cutting edge of what it would take to do here. If you recall back in a day and age when Japanese manufacturing and just-in-time was this huge thing where all of America was convinced Japan was ahead of us in auto manufacturing. And he says we need to adopt that philosophy about manufacturing in China. And he goes to the point of saying look we need to force them to do JVs here so we can learn from them. Yes. Now no one's talking that way in the administration because there's so much vilification. There's no recognition of where they might be better than us. But those problems, I guess the point I'm making, are worth solving. But I'm still not convinced that we have a, I think we have a huge labor problem trying to be competitive in manufacturing.
Right. Neil makes a great point about the argument that oh we shouldn't have done this. We regret global trade. That argument takes you, you're allowing yourself to imagine, you're taking where we are today and competing with an imaginary version of how things evolved if we didn't embrace global trade. And assuming that we would have manufacturing and be in a better place. And I think that's, he used the word fanciful, which I would agree with. I mean, I might also argue, in response to Mearsheimer, it was an incredible debate last year, the All-In Summit between Mearsheimer and Jeffrey Sachs, that he comes out of the realist school of political international relations. And I think there's a lot of truth to it. I mean, you can't stick your head in the sand and pretend that we don't operate in an international system. In the middle of the Cold War in the 1970s, we had all sorts of embargoes on Soviet Russia that were probably smart embargoes. A lot of people think that the historical telling is that what brought the wall down ultimately against Soviet Russia was that our economy was triumphant. And so I look at the situation today and I think one part of the problem is that it's not clear out of the White House what the goal and objective is. If the goal and objective is Navarro, then I think there's broad opposition within not only the Democratic party but also the Republican party to the scale of tariffs and disruption that's going to have on the economy. But I think it's fairly non-controversial that we should have tactical, narrowly tailored tariffs and tax subsidies and incentives in order to re-onshore some critical capabilities. I mentioned a few, chip fabs, some pharma, critical rare earths and production. I mean we don't want to be dependent on the Chinese for whether or not we can produce an automobile or whether or not we can produce a phone, etc. And so I think that some of that makes a lot of sense to me. What doesn't make a lot of sense to me is that we launched what was kind of this nuclear-style tariff war against every country on the planet. And so just the sequencing of events here I think is a bit confusing. It should not be this McKinley-style multi-trillion dollar tariffs if what your objective is principally, where the agreement is, is to re-onshore some of these critical industries. And what I think is missing from this, all we're talking about is tariffs. We need to be talking about what is the accelerationist agenda that we're going to put together in order to get these chip fabs. There's a lot of things we could put together, AI funds. We can put together tax incentives and other packages to get people to build here. I think that gets lost in the conversation.
If we think that this alternative path is all about this re-onshoring bill, is that consistent, do you think, with the Reagan and Milton Friedman view of free trade? Like if it was more tactical like that?
I think if it were more tactical, I'd probably push back on you and disagree. I don't think our current democracy is set up in a way that's really good for the country to deploy dollars to help industry. And I gave this speech at the original All-In Summit about regulatory capture. And I just can't imagine that if our, well first of all the AI boom in the US has attracted more capital dollars than I've ever seen accumulated in the history of mankind. So why sprinkling a little more on would be helpful but also you get into this game of picking winners and losers. Now Friedman highlights and I think this is true, the Chinese government is just much more successful at state involvement in innovation. And if you maybe go back to the space race or the Manhattan Project, we were capable of kind of mustering forces in that way, but I haven't seen it done recently like the past 40 or 50 years. In many ways, the private sector has done a more efficient job of taking on the Manhattan Project-style project. I mean, you look at what's going on in Abilene, Texas, and Denton, Texas, around building out incredible supercomputer clusters all done really without government involvement. And I think that's an efficient and preferred mechanism where a lot of, to your point, there's a lot of capital available. But there are areas where I don't think we will move forward much without government involvement. A great example would be in energy. So as we talked about many episodes ago, Korea and China are delivering fission nuclear at one-quarter the price we are. And I think that Korea example, South Korea, is very important because that is a democracy. So, here's one country that's authoritarian, one that's a democracy, and they're both achieving it. And we are 4x over that. That's going to require some type of government involvement to figure out why we can't build that better and faster. And to be fair, there's a lot of movement around the country, mostly at the state level, about removing red tape as something governors celebrate, which is helpful. And may move us in this direction. So those I tend to, if we're going to help something along, I think figuring out why our government has become friction and mud and changing that is probably going to be more impactful than the government doing the work themselves or picking winners with capital. We're quick to blame others around the world for our challenges, but I think we need to spend at least as much time accelerating ourselves. And part of that acceleration is getting rid of needless regulation and looking at our own systems and asking that question. Why does it cost 4x more to build a fission reactor today in the United States than it does in South Korea?
Hey. Yeah, totally. And by the way, one thing you just spurred in my brain. I was listening, Friedman also did a podcast with Ezra Klein and I'm just going to steal his story. I don't know that it's true, but he says that when China attacks a new industry these days, they encourage a ton of startups. I didn't know this. He said so when they went after solar power, they encouraged like a hundred startups. So rather than pick a winner, they give money to everybody. So in a thousand-flower-bloom kind of way and those hundred compete their way down to five. And he said there's a lot of fraud and grift and waste for the ones in the losers, but what you get out of the five is something that's actually honed by a market force. And I don't think anyone that thinks about authoritarian China thinks about the state using market forces to get to a higher level of efficiency and production. But if what Thomas said is correct, they're actually using this kind of competitive market force to hone the better players in these industries.
Let's talk a little bit about, I think a lot of things get conflated when we talk about tariffs and one of the most important is export controls. So an export control is effectively a license requirement that acts almost as an embargo on all trade in a particular good. So on April 5th, China implemented this rare earth ban and then we reciprocated last week with a ban on all Nvidia H20 chips going to China. So when you look at the rare earth ban and I have a list here of the materials that were banned on April 5th and you have things that go in critical elements into magnets, samarium, terbium, and so these are about 60% of these materials are mined in China. So you do have other places on the planet that are mining these rare earths, the problem is 90% of them are refined in China. When they banned those rare earths, these are the magnets that go into EVs, phones, computers, machines of all sorts. This was called by some in and around the White House as a kill shot. A kill shot against the US economy. That causes massive problems in industrial production. When I think about again the destabilization that comes from overdependency on something like if every magnet that goes into every machine in the United States is coming from China and now we've effectively banned it even though the ban was in response to the tariffs by the United States, what is the off-ramp to this? I now see just this afternoon while we started recording the pod, Trump has said that he doesn't expect the tariffs to stay anywhere close to where they are in China. He doesn't think they're going to be zero, but they won't be anywhere close to where they are. He's, and we see kind of a unilateral walking down of these tariffs, but these export bans are really dangerous, Bill. So, what are your thoughts about an export ban perhaps just compared to the tariff itself?
Well, I mean, I go back to the Reagan video, right? He says this will eventually lead to retaliation and escalation. And the fact that this video was recorded whatever, '80s, what is that, 45 years ago? Like, this isn't a new perspective. So, you could argue, 'Oh my god, I can't believe this happened.' Or you could say, 'Well, if you studied history, you should have expected this to happen.' In fact, there's this Milton Friedman video going around and he talks about retaliatory tariffs and he says, 'Okay, let's say that somebody shoots a hole in the bottom of your boat.' And so, it's taking on water. A retaliatory tariff would be like you shooting another hole in the bottom of the boat and then they shoot a hole in the bottom. It just sinks faster. Right. And he's saying, but in fact, what we did last week is the US did ban H20s going to China. And this was a pretty controversial move. And in fact, I was looking at some of the analysis that was done this week. And the newly launched Huawei cluster Matrix 384 is China's competitor to the GB200. So SemiAnalysis is out with an assessment of this and many others. And basically what they concluded is that Huawei is already on the frontier or near the frontier with respect to chips. In fact, one of the analysts on CNBC this week said, 'To be honest, we basically just handed the China AI market to Huawei anyway.' And as Bernstein analysts, because they said what it effectively does is clears the decks for Huawei to have monopoly profits in China. They no longer have to compete with CUDA and Nvidia in China, even though we were sending them. The H20 was a nerfed chip, right? It was a chip that was two or three generations behind what we have in this country. But it was, some people think in retaliation to the rare earths. Other people think it's just part of the AI strategy to try to win the AI war against China.
Well, and let's just take the argument that it was a retaliatory move. How good must it feel to be Nvidia and Jensen and the executive team there that you become a pawn in these games that you had nothing to do with creating. And in fact you designed this product specifically to meet the export control rule that was in place before this one, which is very similar to this Vietnam thing that we were just talking about. So you can't be happy with that. I reposted when this all happened a great video that Deirdre did over at CNBC about how this will be good for Huawei. And I think if you ask Jensen, he would say, 'Yeah, this is great for Huawei.' And it's not just that you get an isolated market where every participant in the AI market in China may have been working with Nvidia. Now they start working with this and they all collectively help improve it over time. And I read one article that said that China's getting some of their very first commercial planes off the ground. One of the reasons is they became reliant on Boeing and Airbus and so by denying your exports to a market you increase the incentive they have to develop their own technology.
Well particularly when they have the capability of China. I mean the fact of the matter is if they had no capability to develop it, it would be one thing. I think more like the race around nuclear arsenals, if you will. There's some countries that will never have the capacity to build said nuclear arsenal, but the fact of the matter is China is so close in this regard with respect to the H20s. From my perspective, it's a very close call. I don't think we should be sending GB200s or cutting edge chips to China. I think that there's a legitimate national interest in staying out in front on AI. I think there's a debate to be had about that. That's where I come down on that side of the issue. But the H20s, it seemed to me, was a very self-defeating way. I think that the competition with CUDA in China distracted the competition, denied them monopoly profits within China for these Chinese internet companies.
There was some insinuation last week that Jensen was intentionally skirting all of these rules around China and that there was maybe 30 or 40% of all their sales were going into China. I, as I look at this, I think we have to be really careful. I think that these tariffs all of a sudden can find us in a place where we're demonizing. And I think Nvidia and Jensen are national heroes for the work that they've done and the leadership they've given us in global AI. American success stories. Totally agree. And this idea that somehow they comply with the exact attributes of the H20 prescribed by the US government, and then they sell those in China and then after the fact we go back and somehow start demonizing them, I think is a very dangerous thing.
