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America’s Asian Allies Prepare for a U.S. Retreat | Silk and Steel · UK Column Radio

0:01
Speaker 1: Hello and welcome to another episode of the Silk and
0:04
Speaker 1: Steal podcast. I'm your host Carl Zah. Today I have
0:08
Speaker 1: back on my show doctor Warwick Paull from Australia. Hello, Warwick,
0:13
Speaker 1: welcome back to my show.
0:15
Speaker 2: Great to be with you again, Kyle.
0:19
Speaker 1: We have a lot of talk, a lot to talk
0:21
Speaker 1: about as usual. The war in the Gulf is entering
0:27
Speaker 1: another phase. Uran just said that there there was They
0:32
Speaker 1: will refuse to negotiate with Donald Trump and USN administration
0:37
Speaker 1: anymore and they intend to wait out Donald Trump's remain
0:41
Speaker 1: in turn, which means the straighter home moves will be
0:44
Speaker 1: closed out until twenty twenty eight. That is that your expectation.
0:52
Speaker 1: Did you expect the war to, you know, just just
0:56
Speaker 1: to be a prolonged one?
0:58
Speaker 2: Absolutely? All right? Go back, actually, Kyle on my substack
1:02
Speaker 2: and article looking at the dynamics between escalation, the escalation trap,
1:07
Speaker 2: which is the Robert Pape thesis, together with arguments about
1:12
Speaker 2: Trump being incentivized to bring a quick end to the
1:15
Speaker 2: war and get out versus other dynamics at work, which
1:19
Speaker 2: is including the sort of much broader foreign policy posture.
1:25
Speaker 2: I guess of the American permanent state around the idea
1:29
Speaker 2: of the Greater Israel project, And of course you add
1:35
Speaker 2: into that the overriding political sensibilities leading into a midterm
1:40
Speaker 2: election and the need for what we call a decent interval,
1:45
Speaker 2: which is a gap between recognizing military defeat and actually
1:50
Speaker 2: doing something about it. And that decent interval problem is
1:54
Speaker 2: the one that manifested itself in Vietnam when the American administration,
1:59
Speaker 2: people deep inside the administration actually knew that the United
2:02
Speaker 2: States couldn't win that war, but they couldn't get out
2:04
Speaker 2: either for fear of losing reputation, et cetera, et cetera.
2:08
Speaker 2: So you bundle all of that together, and the chances
2:12
Speaker 2: of a rapid resolution to this conflict is very, very slim.
2:16
Speaker 2: The other thing to remember is that this is a
2:19
Speaker 2: conflict many decades not only in the making, but in
2:22
Speaker 2: fact has been on and off for many decades as
2:26
Speaker 2: part of a continual attempt, I guess to reshape the
2:33
Speaker 2: very nature of the Persian Gulf and the geopolitical arrangements there.
2:37
Speaker 2: And going back thirty years or so, there was a
2:40
Speaker 2: clear American strategic intent to prosecute a clearing strategy to
2:48
Speaker 2: clear out all the obstacles towards being able to lay
2:52
Speaker 2: the groundwork for a greater Israel, and the last major
2:55
Speaker 2: obstacle of that was the Iranian state, and so that
3:00
Speaker 2: project in that sense hasn't ended yet. The fact that
3:04
Speaker 2: the United States has actually suffered what I would say
3:06
Speaker 2: is a strategic defeat, and it's a strategic defeat for
3:10
Speaker 2: the United States because it was not able to achieve
3:13
Speaker 2: any of its core objectives via military means. It actually
3:18
Speaker 2: recognizes that it can't achieve those military objectives. And it's
3:23
Speaker 2: also had its position in the Persian golf severely depleted,
3:28
Speaker 2: and in fact they've been by and large pushed out
3:30
Speaker 2: of the Persian golf for the time being. So in
3:33
Speaker 2: all major respects, the United States for now has suffered
3:38
Speaker 2: a strategic defeat. It doesn't mean the end of the war,
3:41
Speaker 2: but it is forcing the Americans to recalibrate, and that's
3:46
Speaker 2: precisely what they're doing. And of course, at the same time,
3:49
Speaker 2: because it is a process that involves more than one actor,
3:53
Speaker 2: the Americans don't get to dictate all the terms. Iran
3:56
Speaker 2: and others are actually recalibrating their own posture towards the conflict.
4:03
Speaker 2: That's just been the current circumstances and their expectations about
4:06
Speaker 2: what might unfold over not only the next three months,
4:09
Speaker 2: but perhaps even as you imply, the next three years.
4:14
Speaker 1: Yeah, that will have great implication for the global economy
4:19
Speaker 1: because up to now, the person golv hold about twenty
4:24
Speaker 1: percent of the world's crude oil production and also about
4:28
Speaker 1: twenty percent of a world's natural gas production. And as
4:33
Speaker 1: we find out, the modern world runs heavily on products
4:39
Speaker 1: derived from hydro carbon products. What do you see going
4:46
Speaker 1: forward the impact on the global economy will be as
4:50
Speaker 1: a war drags are.
4:53
Speaker 2: Part of the assessment of what is likely to unfold.
4:56
Speaker 2: Depends upon how we evaluate, firstly, the aggregate market impact
5:02
Speaker 2: of what's been going on in the Persian Gulf, as
5:05
Speaker 2: well as offsetting moves made elsewhere, particularly in the United
5:08
Speaker 2: States and to some extent what's going on in Russia,
5:12
Speaker 2: and the ability of economic systems and enterprises around the
5:18
Speaker 2: world to adapt to a world in which there are
5:22
Speaker 2: supply side shocks when it comes to oil, but not
5:25
Speaker 2: just oil in general, but the derivative products that come
5:28
Speaker 2: from it, because it's the derivative products that ultimately feed
5:33
Speaker 2: their way into different kinds of economic activities. And different
5:37
Speaker 2: kinds of oils from different parts of the world are
5:40
Speaker 2: better suited for the manufacturing or the distilling of particular
5:45
Speaker 2: kinds of usable energy products. I think one of the
5:49
Speaker 2: interesting things that we need to watch very very closely
5:52
Speaker 2: is actually what's going to happen in the diesel market.
5:56
Speaker 2: Diesel is the product that is manufactured best actually from
6:02
Speaker 2: the crude oil from the Persian golf and also from
6:04
Speaker 2: the urals, the Russian crude variety. It's actually not particularly
6:11
Speaker 2: efficient to get diesel from the crude from the American
6:17
Speaker 2: shale basins. Okay, So the American system is actually perfectly
6:22
Speaker 2: fine for the manufacture of gasoline, but it's actually not
6:27
Speaker 2: well suited to the manufacture of diesel and jet fuel.
6:32
Speaker 2: But that it actually does need to import oils from
6:35
Speaker 2: other parts of the world, either from the Persian golf
6:39
Speaker 2: or some blend some oils that they can blend from
6:43
Speaker 2: places like Canada. Okay, So the thing to watch out
6:47
Speaker 2: for is actually what's going to happen to diesel first
6:51
Speaker 2: and foremost in the United States. Diesel is also going
6:55
Speaker 2: to be an issue for other parts of the world
6:57
Speaker 2: for exactly the same reason. Okay. So I think it's
7:02
Speaker 2: not just a question of aggregate oil shortages. It's actually
7:05
Speaker 2: very particular kinds of end products where we're going to
7:09
Speaker 2: experience more shortages than not. These products, by the way,
7:14
Speaker 2: go towards activities where the elasticity of demand, the price
7:18
Speaker 2: elasticity of demand is actually not particularly high, meaning that
7:25
Speaker 2: even as prices go up, these activities in a sense
7:28
Speaker 2: have to going. You can't just stop using diesel because
7:36
Speaker 2: you don't have any substitutes, and if you stop, you
7:38
Speaker 2: also impair your business. Whereas for many households that use gasoline,
7:43
Speaker 2: they do have the ability to adjust their behaviors so
7:47
Speaker 2: as to save on gasoline, whether it's by working from home,
7:52
Speaker 2: taking public transport, car pooling, et cetera, et cetera, or
7:58
Speaker 2: you know, riding a bike or whatever it is. There
8:01
Speaker 2: are substitutes that many households can actually contemplate in the
8:05
Speaker 2: event of rising gasoline prices, which will alleviate some of
8:10
Speaker 2: those pressures. But diesel is a very different story. So globally,
8:15
Speaker 2: diesel exposure will be the main one to watch out for.
8:20
Speaker 2: We also know, and this is probably the last big
8:23
Speaker 2: picture sort of observation about all of this, is that
8:28
Speaker 2: what China does is going to matter a lot. China
8:32
Speaker 2: over the last four months has demonstrated that its ability
8:36
Speaker 2: to modulate its demand for oil from the global market
8:42
Speaker 2: has played an important role in keeping a lid on
8:45
Speaker 2: price rises. It hasn't stopped price rises, but it's certainly
8:50
Speaker 2: taken a lot of the pressure out of the system.
8:53
Speaker 2: The question will be whether or not China will continue
8:56
Speaker 2: to be either willing or able to do that, and
9:00
Speaker 2: how fast China will be able to adapt its own
9:03
Speaker 2: economic systems and models over the course of the next
9:07
Speaker 2: six months to two to three years that will continue
9:10
Speaker 2: allowing China to reduce the pressure it places onto the
9:14
Speaker 2: global market. So they're the things that I think we
9:18
Speaker 2: need to watch out for. We've already seen some demand
9:21
Speaker 2: destruction come the world market on the demand site has
9:26
Speaker 2: already responded. There is less economic activity using some of
9:30
Speaker 2: this oil, much from China, but elsewhere as a result
9:34
Speaker 2: of the situation in the Persian Gulf. The other thing
9:37
Speaker 2: to remember is people have a very interesting way of
9:42
Speaker 2: thinking about prices at the moment. I think the last
9:45
Speaker 2: time I looked earlier this morning, Brent crude was eighty
9:50
Speaker 2: seven eighty eight ninety dollars or something of arrol around
9:54
Speaker 2: that number, and there's a whole lot of size of
9:57
Speaker 2: relief around the place. You know, people saying, you know,
9:59
Speaker 2: it's not that high. Well, let's not remember, let's not
10:02
Speaker 2: forget that in January it was about fifty five sixty, Okay,
10:09
Speaker 2: so it's actually gone up, you know, forty percent. This
10:14
Speaker 2: is not you know, peanuts. We have this year experienced
10:20
Speaker 2: substantial increase in crude oil prices. That's a fact, right,
10:26
Speaker 2: the fact that we now think that it's not that
10:29
Speaker 2: high because in our minds we were thinking that maybe
10:31
Speaker 2: this is going to go to one fifty or two hundred.
10:35
Speaker 2: In many ways, that's a trick we play on ourselves.
10:39
Speaker 2: The people running businesses get no relief from the fact
10:44
Speaker 2: that oil prices at ninety dollars is sixty dollars shy
10:48
Speaker 2: of what we might might have expected when it is
10:52
Speaker 2: thirty five dollars higher than it was. That's the reality.
10:57
Speaker 2: Prices have increased, and enter rises have had to adapt,
11:01
Speaker 2: and some of them have done that, of course, as
11:03
Speaker 2: we've discussed before, through contracting their activities, finding alternatives, et cetera,
11:09
Speaker 2: et cetera, and also just slowing down what they do,
11:11
Speaker 2: and others are just having to absorb it and eventually
11:13
Speaker 2: will pass on these costs. So we're going to see
11:16
Speaker 2: some cost pass ons. The diesel stuff, by the way,
11:19
Speaker 2: just so that people sort of understand how it affects
11:21
Speaker 2: an economy. Diesel and jet film is foundational to transportation,
11:29
Speaker 2: moving people and cargo. Diesel is also critical and things
11:33
Speaker 2: like farm machinery and mining machinery. So just have a
11:37
Speaker 2: little bit of a contemplation about what that means for
11:40
Speaker 2: those who are in the business of producing and harvesting
11:44
Speaker 2: agricultural products and the folk who are in the business
11:47
Speaker 2: of mining products out of the ground. At some point
11:51
Speaker 2: these costs will feed through into the system.
11:57
Speaker 1: Now, I was listening to Professor John Meerscheimer talking about
12:03
Speaker 1: the current uh uh straight straight horn mooset crisis. He
12:07
Speaker 1: mentioned that, you know, Youran is systematically dismantling the American
12:13
Speaker 1: Alliance system in the Gulf uh by the mere fact
12:17
Speaker 1: that Iran is hitting all the US bases in the
12:20
Speaker 1: region with no adequate response from from the United States.
12:26
Speaker 1: And this will cause you repairable damage to the US
12:31
Speaker 1: Empire in ust Asia because you know, all these countries
12:35
Speaker 1: had expected United States to be their shield, to provide
12:38
Speaker 1: a security umbrella, and now it turns out hosting US
12:42
Speaker 1: base actually is a liability. Now, wouldn't ask if that
12:47
Speaker 1: lesson is it's been learned by countries in other parts
12:53
Speaker 1: of the world, particularly East Asia. When in regards to China,
12:58
Speaker 1: Professor Meerscheimer said no, he said, because the Asian countries
13:04
Speaker 1: they have no choice. They want to they want the
13:08
Speaker 1: big United States to be there to get their back,
13:12
Speaker 1: and when confronto with China or gargantual countries, they have
13:16
Speaker 1: no choice but to turn to United States. So this
13:20
Speaker 1: lesson that Iran has tied to American allies in the
13:24
Speaker 1: golf would not apply to East Asia. What's your take on.
13:28
Speaker 2: That, Well, I'm sure six months ago who would have
13:31
Speaker 2: said the same about the Persian golf monarchies as well,
13:34
Speaker 2: that they've had no choice but the terms of the
13:36
Speaker 2: Americans for security. Right, So let's just go back to
13:41
Speaker 2: the situation of Persian golf, because I think that it
13:43
Speaker 2: said something quite important. I think he's basically right in
13:46
Speaker 2: that the Iranian response to the war that was unleashed
13:53
Speaker 2: upon them was obviously to defend their country, but also
13:57
Speaker 2: to seek to expel Floyd this incident, the war incident,
14:03
Speaker 2: to shift the structural parameters of the Persian Gulf itself,
14:09
Speaker 2: and it's done that in a few ways. Obviously, it
14:13
Speaker 2: has used the Hormos weapon as some leverage visa v.
14:18
Speaker 2: The United States, and that's where a lot of the
14:20
Speaker 2: focus has been. We talked a lot about the global market,
14:24
Speaker 2: you know, Trump having to jawbone the global oil market
14:27
Speaker 2: to try and suppress the price. There's been lots of
14:30
Speaker 2: talk about algorithm manipulation around oil trading, et cetera, et cetera.
14:35
Speaker 2: What we tend not to talk so much about is
14:38
Speaker 2: what the upstream effect is, which is the effects on
14:42
Speaker 2: the oil and gas and other chemical the petrochemical exporting
14:46
Speaker 2: states of the Persian Golf, and a protracted constriction of
14:52
Speaker 2: export capabilities will have a detrimental effect on those states.
14:58
Speaker 2: We know, for example, that even after a month or
15:02
Speaker 2: so of conflict, the UAE actually had to seek liquidity
15:06
Speaker 2: support from the United States because its US dollar foreign
15:12
Speaker 2: exchange reserves had been severely depleted because of the restrictions
15:17
Speaker 2: of its oil exports going through the Gulf. So there
15:20
Speaker 2: are a lot of upstream pressures that are actually being
15:23
Speaker 2: created by the exercise of the weapon of hor Moves.
15:28
Speaker 2: Iran incidentally has had to suffer and adapt to incredible
15:34
Speaker 2: amounts of restrictions and sanctions for many, many years, so
15:39
Speaker 2: in a sense, it is far more adapt at being
15:43
Speaker 2: able to deal with these strictures and restricted conditions. Much
15:48
Speaker 2: of the oil, incidentally, that has flowed through the Strait
15:51
Speaker 2: of hor Moves over the past couple of weeks, because
15:53
Speaker 2: there has been some quote leaky Jun quote has been
15:57
Speaker 2: oil destined for China. So I think Iran is actually
16:02
Speaker 2: largely enabling that to happen. It's in Iran's interest, but
16:05
Speaker 2: it's also in China's interests, and in fact, nobody's going
16:10
Speaker 2: to stop that from happening. The United States Navy is
16:12
Speaker 2: not going to stop that from happening either, So upstream
16:16
Speaker 2: pressures have been built through the strait of Hormo's weapon.
16:20
Speaker 2: On top of that, as you say, the military response,
16:25
Speaker 2: the bombing of the American bases as well as some
16:29
Speaker 2: of the oil and gas production facilities, has demonstrated a
16:33
Speaker 2: couple of things. One is that Iran actually has an
16:37
Speaker 2: offensive capability that can cause serious damage. It is a
16:43
Speaker 2: serious regional missile power and a serious regional drone power. Secondly,
16:49
Speaker 2: it's also demonstrated that the United States does not have
16:53
Speaker 2: the wherewithal to defend those bases. So, yes, the bases
16:57
Speaker 2: have become targets for Iran, but the big lesson out
17:02
Speaker 2: of this is that the United States actually doesn't have
17:05
Speaker 2: the wherewithal to defend those bases. Now, when Professor Mersheimer
17:10
Speaker 2: talks about those lessons not being learned in Asia, well,
17:14
Speaker 2: lessons are not always learned in an instant. Let time
17:19
Speaker 2: take its course and let the reality progressively sink in.
17:27
Speaker 2: The Japanese are remilitarizing, partly because of domestic pressures, but
17:34
Speaker 2: partly because they are concerned that the American umbrella is
17:40
Speaker 2: not reliable. The Republic of Korea is developing a whole
17:45
Speaker 2: bunch of its own autonomous systems, and the public in
17:48
Speaker 2: South Korea have for quite a number of years had
17:52
Speaker 2: the view that the American nuclear umbrella is not something
17:56
Speaker 2: that South Korea can depend upon, and that in fact,
17:59
Speaker 2: the pressure has been building on the Green Peninsula for
18:02
Speaker 2: South Korea to become a nuclear statement of itself. These
18:07
Speaker 2: countries are concerned. It doesn't matter what their wishes. Maybe
18:12
Speaker 2: they still wish that the Americans can come to the rescue,
18:17
Speaker 2: that the Great Night can somehow magic up and ability
18:21
Speaker 2: to defend these bases. But their behavior tells us that,
18:26
Speaker 2: in fact, they're preparing for a future in which the
18:28
Speaker 2: Americans can't. Now, they can't say that publicly because that
18:33
Speaker 2: would unleash its own self fulfilling prophecy, but their behavior
18:37
Speaker 2: tells us that the lessons are being slowly absorbed in
18:42
Speaker 2: these national capitals. So in time, my own view is
18:50
Speaker 2: that there will be greater pressure across the Western Pacific,
18:56
Speaker 2: in Southeast Asia and North Asia countries to initially just
19:03
Speaker 2: hedge and quietly hedge, not make too big a deal
19:06
Speaker 2: out of this, but ultimately recognize that their security future
19:12
Speaker 2: cannot be reliant upon the United States. Now, there's a
19:15
Speaker 2: long way to go befoot between now and when that happens.
19:20
Speaker 2: In the meantime, of course, the United States is pushing
19:24
Speaker 2: its allies across the region to take on greater burdens.
19:28
Speaker 2: Elbridge Colby was in the Philippines recently talking about essentially
19:33
Speaker 2: burden sharing. Not so long ago, he was on social
19:37
Speaker 2: media essentially telling aspirant Middle powers to pull their heads
19:41
Speaker 2: in and get behind the United States and what he
19:46
Speaker 2: meant by that was by more things or order more
19:50
Speaker 2: things from the United States in the name of defending
19:55
Speaker 2: regional de terreance, et cetera, et ce. Now, there's some
19:58
Speaker 2: very important admissions in that. Firstly, the the United States
20:00
Speaker 2: itself does not have the capacity to deter It needs
20:04
Speaker 2: others now to step in and step up. The second
20:07
Speaker 2: thing is that there have been reports now that the
20:10
Speaker 2: Pentagon's preparing a new strategic document which contemplates the use
20:17
Speaker 2: of so called tactical nuclear weapons in East Asia Western Pacific.
20:25
Speaker 2: That is also an admission that conventional deterrence is over,
20:28
Speaker 2: because if conventional deterrence was actually viable and functional, you
20:33
Speaker 2: wouldn't even be contemplating this. You don't think that serious
20:37
Speaker 2: people in the security apparatuses and national defense establishments in
20:42
Speaker 2: these countries don't actually understand what all of this means.
20:48
Speaker 2: It doesn't matter, you know, John can say that these
20:52
Speaker 2: people wish that the Americans will be able to do
20:54
Speaker 2: all these things, or maybe they do, right, it's always
20:59
Speaker 2: better than all that you know is out of speak.
21:02
Speaker 2: But you can't tell me that they're not preparing for
21:04
Speaker 2: a different future. Then.
21:09
Speaker 1: Well, speaking of Japan's militarization that you know, partly as
21:15
Speaker 1: a hedge against US which drawing from the region, but
21:20
Speaker 1: isn't you know that also part of what US agenda.
21:25
Speaker 1: I mean, the US is the one that has been
21:27
Speaker 1: pushing Japan to remilitarize in the past decades, in part
21:33
Speaker 1: as you mentioned, a kind of pushing Japan to shoulder
21:37
Speaker 1: on more responsibility of containing China. And this this has
21:42
Speaker 1: been quite consistent I think for US policy for the
21:46
Speaker 1: last decades. You know, from the starting from the I
21:50
Speaker 1: would say Trump's first term, it was carried through Biden's
21:55
Speaker 1: term and now Trump's second term as well. In fact,
21:59
Speaker 1: the former Secretary of State oh Man suddenly draw Black
22:04
Speaker 1: what's his name as the secretary of State for Joe
22:07
Speaker 1: Biden Lincoln. Uh. Yeah. B Lincoln recently gave an interview
22:12
Speaker 1: where he said, you know, in a competition of China
22:18
Speaker 1: versus United States, there's a great mismatch because China has
22:23
Speaker 1: greater industrial capacity, they have greater population. So in order
22:29
Speaker 1: so for in order to come from China, United States
22:33
Speaker 1: will need all its allies to buy band together. Uh.
22:37
Speaker 1: This is basically a mission that the United States is
22:40
Speaker 1: no match, uh against China. That's why it needs all
22:45
Speaker 1: it's uh, all its vassal states to pull pull their
22:49
Speaker 1: resource together with the United States. So this this seems
22:52
Speaker 1: to be like a consistent US agenda to to to
22:57
Speaker 1: to force its vassal states to take more response possibility
23:00
Speaker 1: when it comes down to uh uh uh, you know,
23:04
Speaker 1: to to take a more responsibility insuring up the US Empire. Now,
23:16
Speaker 1: given given that, how why why what's a domestic agenda
23:26
Speaker 1: for Japan's re military raising?
23:28
Speaker 2: Right?
23:29
Speaker 1: I mean, I understand that they're trying to trying to hedge,
23:31
Speaker 1: but how is that benefit Japan domestically when they're facing
23:37
Speaker 1: a declining e can't.
23:39
Speaker 2: It's a beautiful confluence of interest s. Actually, the Americans
23:45
Speaker 2: want their allies to step up to the plate both financially,
23:52
Speaker 2: commit more budget and also to take on more what
23:55
Speaker 2: I call frontline risk responsibility, be the human shields. Okay,
24:01
Speaker 2: Historically Allied states, of course, have been reluctant to do this.
24:06
Speaker 2: They haven't had to. They get in the end work
24:09
Speaker 2: on the assumption that the Americans will be there and
24:11
Speaker 2: they'll step in. That's been the long term gripe about
24:15
Speaker 2: NATO that NATO countries actually have never lived up to
24:19
Speaker 2: their obligations in terms of the proportion of budget committed
24:24
Speaker 2: to or proportion of GDP committed to to defense. But
24:30
Speaker 2: it also aligns today with a set of other interests
24:35
Speaker 2: in Japan. One is actually a concern that the Americans
24:40
Speaker 2: won't be there, so there is a need to figure
24:42
Speaker 2: out what to do, and of course to be able
24:46
Speaker 2: to remilitarize in the context of at the same time
24:49
Speaker 2: not annoying the Americans. Is a fantastic opportunity to remilitarize anyway,
24:54
Speaker 2: So they're killing two birds with that one stone. The
24:58
Speaker 2: next thing they're dealing with is intensifying domestic precture around remilitarizing. Generally,
25:05
Speaker 2: we know that for quite a long time now, there's
25:09
Speaker 2: been moves from certain sections of the Japanese political spectrum
25:13
Speaker 2: to water down and eventually overthrow Japanese Japan's postwar pac
25:19
Speaker 2: Fist constitution. So there is a section of the japan
25:22
Speaker 2: political society and elites that actually do want to remilitarize
25:29
Speaker 2: Japan anyway. And lastly, the benefit that is being portrayed now,
25:37
Speaker 2: particularly through the recent defense wide pay by six hundred
25:41
Speaker 2: pages or thereabouts, is an alignment between remilitarization and economic rejuvenation.
25:48
Speaker 2: So the idea here is that the commitment of additional
25:53
Speaker 2: national resources to the defense industry is going to play
25:57
Speaker 2: a pivotal role in catalyzing Japanese these economic revitalization. So
26:02
Speaker 2: these various threads are coming together very conveniently around Japanese remilitarization.
26:10
Speaker 2: It suits a lot of different interests at the moment.
26:14
Speaker 2: The fact that it is a series of distinct interests
26:18
Speaker 2: coalescing also means that it has fragility. Okay, the fact
26:23
Speaker 2: that it has been stabilized for the time being probably
26:26
Speaker 2: has a little bit to do with the fact that
26:29
Speaker 2: by and large the Japanese political elite do harbord concerns
26:33
Speaker 2: about China, and so it is an easy thing to
26:37
Speaker 2: mobilize disparate interests around. You know, it's the common interest question.
26:42
Speaker 2: But when people, you know, there's often debates about, you know,
26:47
Speaker 2: whether Japan's doing it because the Americans want them to,
26:50
Speaker 2: or what have you. The point is is that there's
26:52
Speaker 2: lots of interests that actually co inside right now, and
26:56
Speaker 2: they all have their own priorities as to what they
26:59
Speaker 2: think they're going to give out of this. How it
27:01
Speaker 2: plays out will of course depend on what the circumstances
27:05
Speaker 2: are in the future. The risk for the Americans is
27:08
Speaker 2: the Japanese actually getting a little bit big and independent.
27:12
Speaker 2: It's always the risk when you push your allies to
27:16
Speaker 2: become more muscular themselves. The risk is that they actually
27:18
Speaker 2: end up becoming far more muscular than you wanted them
27:21
Speaker 2: to be and far less dependent upon you. So there's
27:25
Speaker 2: a risk in there for the Americans. We also have
27:28
Speaker 2: different issues in Japan. You know, if it fails on
27:30
Speaker 2: the economic rejuvenation front, there will be those who saw
27:34
Speaker 2: it as a pathway to economic rejuvenation who will start
27:36
Speaker 2: to have doubts that this is the way to go.
27:39
Speaker 2: The remilitarization folk, of course, continue to confront other interests
27:44
Speaker 2: and views within the Japanese polity which opposes the watering
27:47
Speaker 2: down to the Japanese pacifist constitution, and have raised a
27:51
Speaker 2: whole bunch of concerns around the ways in which Japan's
27:54
Speaker 2: current defense and security policy directions are being formed. So
27:59
Speaker 2: there's a lot lot of fluidity at play domestically as well.
28:06
Speaker 1: As you mentioned, you know, a US push for its
28:10
Speaker 1: allies to take a workship responsibility. Paradoxically, I mean that
28:17
Speaker 1: once they do possess those capability. Wouldn't that mean a
28:22
Speaker 1: de facto withdrawal of the US found the region?
28:27
Speaker 2: Yep?
28:27
Speaker 1: Like is that? Is that what you?
28:29
Speaker 2: Yeah? And that's precisely the issue. So there's a whole
28:33
Speaker 2: lot of retric The US isn't going to announce that
28:35
Speaker 2: it's walking out of the region. And in fact, the
28:37
Speaker 2: idea of retrenchment is actually a multi dimensional question. It's
28:42
Speaker 2: not in or out. It's looking at the ways in
28:46
Speaker 2: which America is seeking to recalibrate its ability to maintain
28:49
Speaker 2: strong influence, if not determinant influence, within the region, given
28:53
Speaker 2: the fact that it also has constraints in ways that
28:57
Speaker 2: it never did, and its constraints are much real. It
29:01
Speaker 2: doesn't have the arsenal depth, it doesn't have the supply
29:04
Speaker 2: chain depth to replenish used up inventory, it doesn't have
29:10
Speaker 2: an adverstry that is as weak as it once was.
29:13
Speaker 2: So the Americans are actually having to recalibrate how they
29:18
Speaker 2: maintain a position within Asia whilst recognizing these realities. Elbridge
29:25
Speaker 2: Colby has talked about the need for America to re
29:29
Speaker 2: establish balance in its favor. The implication, of course, is
29:33
Speaker 2: that from his point of view, the balance of power
29:36
Speaker 2: in Asia is already not in America's favor. I think
29:39
Speaker 2: he's right on that, by the way, and I'm not
29:42
Speaker 2: the only one. I think people in Tokyo know. I
29:45
Speaker 2: think people in Soul, No, people in the Lone, people
29:47
Speaker 2: in Taipeia, Which of course goes to the question of
29:52
Speaker 2: Professor Mersheimer. Well, people know, right, they can wish all
29:57
Speaker 2: they want, but they're not going to build a nation
30:00
Speaker 2: defense posture based on what they wish. They're going to
30:03
Speaker 2: build a national defense posture base on what they evaluate
30:06
Speaker 2: to be the material risks and probabilities going forward. And
30:10
Speaker 2: one of the things they're building for is actually a
30:13
Speaker 2: depleted American capability materially. Now, it doesn't mean that Americans disappear.
30:19
Speaker 2: What the Americans are doing is that they're in serving
30:21
Speaker 2: themselves far higher up the command chain. So they're seeking
30:24
Speaker 2: to mobilize these resources materially and lock them in to
30:29
Speaker 2: an American command system through technology, through intelligence capabilities, and
30:35
Speaker 2: ultimately through strategic management and coordination wherewithal So, the Americans
30:41
Speaker 2: are what I would call looking to enhance their ability
30:46
Speaker 2: to lead from the rear and maintain control over the
30:51
Speaker 2: pivotal levers of war. Making. They've been doing this in
30:55
Speaker 2: other parts of the world. We know that they're belligerent
30:59
Speaker 2: in Ukraine even as some of the material means are
31:02
Speaker 2: not being delivered. But they do that by controlling guidance
31:07
Speaker 2: and GPS data. They deliver information systems by way of startlink,
31:13
Speaker 2: et cetera, et cetera. So this idea of retrenchment is
31:17
Speaker 2: actually a multi dimensional dynamic at work, and it's a
31:21
Speaker 2: problem that a previously dominant Pegamon is having to confront
31:27
Speaker 2: in the face of the changing circumstances that they find
31:30
Speaker 2: themselves in. But it means that others are having to
31:33
Speaker 2: adapt as well, and there are uncertain implications as a result.
31:39
Speaker 2: You know, you let certain things out of the bag,
31:42
Speaker 2: and you make certain things possible that weren't possible some
31:45
Speaker 2: years ago. It's almost impossible to control how those issues unfold.
31:51
Speaker 2: And that's your downside. Risk is ahead of Pegamon. You know,
31:57
Speaker 2: you give your subordinates too much leeway and one day
32:00
Speaker 2: that'll come to a view that they don't need you
32:02
Speaker 2: in the way that they once did.
32:08
Speaker 1: Yeah. Indeed, how the United States, you know, what Japan
32:16
Speaker 1: is doing is basically amongst military kinsingism, and this is
32:21
Speaker 1: what US itself have been doing for the past decades. Now.
32:27
Speaker 1: The military kinsingism my work for a while, as we've
32:31
Speaker 1: seen how you work for Hitler's Nazi Germany prior to
32:36
Speaker 1: the outbreak of World War Two. But after a certain point,
32:42
Speaker 1: you're just gonna end up with a lot of investment
32:45
Speaker 1: into lots of weapons, and but you still have all
32:49
Speaker 1: these debts that needs to be paid. Well, in Hitler's case,
32:54
Speaker 1: he felt he didn't need to pay the debt as
32:57
Speaker 1: long as he he he wrote, his military over a
33:01
Speaker 1: spill over the border and take over other countries. What
33:06
Speaker 1: United States or the United States. It can't keep this
33:09
Speaker 1: military kinsingism going for a while because US retains the
33:13
Speaker 1: ability to print dollars, you know, US still has maintained
33:18
Speaker 1: the financial hegemony.
33:20
Speaker 2: Over the world.
33:21
Speaker 1: You know, under the dollar system that can can just
33:24
Speaker 1: keep on printing money. But this is not a luxury
33:27
Speaker 1: that's afforded to other countries. You know, I don't know.
33:30
Speaker 2: If Japan will be able to pull that off. For example, well,
33:35
Speaker 2: if Japan's borrowing in the end, then it can pull
33:37
Speaker 2: it off. If it needs to borrow in US dollars
33:40
Speaker 2: to buy things from the Americans or others, then it
33:43
Speaker 2: will open up the risk of foreign exchange constraints run.
33:49
Speaker 2: The interesting thing though about the Japanese economy large is
33:53
Speaker 2: that military Knesianism is usually put on the table as
34:00
Speaker 2: a response to an economy that has high levels of
34:06
Speaker 2: underutilized resources, in other words, high unemployment. Japanese unemployment is
34:12
Speaker 2: a two point six percent, It's not like the Japanese
34:16
Speaker 2: economy has an unemployment or a resource under utilization crisis.
34:24
Speaker 2: What this canes in military canes in Ism, if you will,
34:29
Speaker 2: has the potential of actually doing is creating inflationary pressures
34:34
Speaker 2: in the Japanese economy in non military areas as well
34:39
Speaker 2: as in some of the military areas too. When you
34:42
Speaker 2: commit a lot of extra money into a particular industrial setup,
34:48
Speaker 2: industrial circuit, seeking to build more things and there are
34:54
Speaker 2: constraints in those supply chain systems, that ultimately creates uput
34:59
Speaker 2: pressure on price. You're also going to given unemployment of
35:03
Speaker 2: two point six percent, you're also going to be dragging
35:06
Speaker 2: resources away from other parts of the economy. And you're
35:12
Speaker 2: going to do that because you're going to incentivize people
35:15
Speaker 2: to leave jobs in some other industry and go and
35:18
Speaker 2: pick up jobs in the weapons munitions sector, for example,
35:24
Speaker 2: And when you do that, you leave the old industry
35:30
Speaker 2: under resource, which creates its own bottlenecks. So the risk
35:34
Speaker 2: in what is in effect the full employment system and
35:38
Speaker 2: the Japanese economy is basically at full employment two point
35:41
Speaker 2: six percent unemployment, it's really just transitional employment, unemployment, people
35:46
Speaker 2: in between jobs, those sorts of things. In this kind
35:49
Speaker 2: of full employment system. The kind of fiscal pump priming
35:55
Speaker 2: that is being contemplated now really is a recipe for
36:00
Speaker 2: for inflation large but more to the point, a whole
36:04
Speaker 2: bunch of disruptions in Japanese economic and therefore social life
36:10
Speaker 2: as a consequence that may not actually deliver much net benefit.
36:14
Speaker 2: It'll be great for weapons manufacturers because there will be
36:18
Speaker 2: a lot more money flowing through those particular pipes, but
36:21
Speaker 2: it won't be much good for anyone else, you know.
36:23
Speaker 2: So that that's the issue, right with this sort of
36:26
Speaker 2: fiscal pump priming, if it's in Japanese yen. I think
36:31
Speaker 2: people need to understand that states that can be their
36:35
Speaker 2: own currency and that in effect run up debts in
36:39
Speaker 2: their own currencies are never in a solvency problem crisis
36:43
Speaker 2: point of view. That's not a problem. But that's actually
36:47
Speaker 2: not the problem, right. The idea that states aren't you know,
36:50
Speaker 2: can confront solvency crisis, it really is a distraction from
36:54
Speaker 2: your real issues. The really Huges is confronting the reality
36:57
Speaker 2: that you're operating at two point five two point six
37:00
Speaker 2: percent unemployment. There's only so many people in Japan who
37:03
Speaker 2: can do different kinds of jobs. You're going to be
37:04
Speaker 2: pulling people from one set of industries into another set
37:07
Speaker 2: of industries. You'll create shortages in the first set, you'll
37:12
Speaker 2: potentially intensified bottlenecks in your second industry because you're going
37:17
Speaker 2: to be pulling on upstream resources. And we know that
37:22
Speaker 2: military development, for instance, involves a whole bunch of rare
37:25
Speaker 2: earth elements and a whole lot of Japanese earth elements
37:28
Speaker 2: of dependent on China. This isn't changing quickly. Japan has
37:32
Speaker 2: spent ten years plus trying to reduce its dependency on
37:40
Speaker 2: Chinese supplied refined rare earths, and it's barely made a
37:45
Speaker 2: dent in the overall scheme of things. And if the
37:49
Speaker 2: military side increases demand above and beyond what is currently demanded,
37:55
Speaker 2: it's going to face even more constraints.
38:04
Speaker 1: Right, And there's one region that will be affected by
38:10
Speaker 1: all this. This is the island of Taiwan. Recently, Taiwan
38:16
Speaker 1: just hold its Hong Kong Exerpt military exercise, but based
38:21
Speaker 1: on the reporting from the island, it seems like the
38:23
Speaker 1: main purpose of that military exercise is actually to uh
38:31
Speaker 1: to carry out a fire drawl of an emergency evacuation
38:38
Speaker 1: of the Taiwan top leader UH this case, like in
38:44
Speaker 1: the in case of a landing by the p l A.
38:50
Speaker 1: I mean they so what's why, why then, is Taiwan
38:57
Speaker 1: government continue to choose at this time to antagonize mainland Chine.
39:05
Speaker 1: I mean, there's so much to be gained for a
39:08
Speaker 1: more harmonious cross ey relationship. But why is did the
39:13
Speaker 1: Taiwan government continue to pursue this confrontational stance with them
39:18
Speaker 1: in China. It's because in today's Teo political world, well,
39:24
Speaker 1: because the DPP is existentially committed to Taiwanese independence.
39:30
Speaker 2: That's what that's what it's raised on deathra is and
39:34
Speaker 2: if it was to abandon this posture, it would abandon
39:38
Speaker 2: its own reason for existence. It has its own political
39:41
Speaker 2: constituencies on the island as well as elsewhere that it
39:45
Speaker 2: needs to satisfy. And so the DPP, in a sense,
39:52
Speaker 2: by virtue of the very nature of its existence, what
39:55
Speaker 2: it is meant to be, is going to continue. You're
40:00
Speaker 2: tating to the extent that it can for you know,
40:04
Speaker 2: what it thinks is a pathway towards independence, and of
40:07
Speaker 2: course argues that Taiwan is already de facto independent and
40:11
Speaker 2: all this sort of stuff, right, But put all of
40:13
Speaker 2: that rhetorical stuff aside. It is fundamentally a political movement,
40:19
Speaker 2: a political party that has only one purpose of existence,
40:23
Speaker 2: and that is to antagonize mainland China. And that's what
40:30
Speaker 2: Why else does it exist if it didn't antagonize mainland China.
40:35
Speaker 2: Let's not forget the DPP, in terms of his party manifesto,
40:41
Speaker 2: is committed to Taiwanese independence. It's not going to get
40:46
Speaker 2: rid of that. This is the only reason it exists.
40:51
Speaker 2: Without it. Without it, what is it? What is the
40:54
Speaker 2: What is the DPP without that? Not very much at all?
40:58
Speaker 2: Without that, arguably, everyone then realizes that it's really a
41:03
Speaker 2: political movement advocating for the interests of Americans and Japanese.
41:09
Speaker 2: So what else can it do? This is what it does.
41:15
Speaker 1: So we have already talked much about the US strategy
41:20
Speaker 1: for maintaining its diaminants and hegemonic status, particularly in East Asia.
41:26
Speaker 1: What is China's response to this.
41:31
Speaker 2: Well, Mainland Chinese once has been to in many ways
41:36
Speaker 2: take advantage of particular moments to expand its sovereignty footprint,
41:46
Speaker 2: and most of that sovereignty footprint obviously relates to maritime
41:50
Speaker 2: areas either south of the island, the Taiwan Island and
41:53
Speaker 2: also some of the features in the South China Sea.
42:01
Speaker 2: For a long time, mainland China has tended to not
42:06
Speaker 2: have that much maritime activity on the east and southeast
42:12
Speaker 2: side of the of the island for a whole bunch
42:15
Speaker 2: of historical reasons in terms of capacity and capability. You know,
42:18
Speaker 2: even that idea of the Median line down the middle
42:21
Speaker 2: of the Taiwan Straits has been this de facto or
42:26
Speaker 2: informal territorial the demarcation. But we've seen over the last
42:34
Speaker 2: few years, particularly after Nancy Pelosi's visit.
42:38
Speaker 1: That.
42:39
Speaker 2: Mainland PLA Navy and PLA Air Force activities around the
42:44
Speaker 2: entire island as well as in the South China Sea
42:50
Speaker 2: in those areas that China has maintained a long standing
42:54
Speaker 2: territorial claim to it's actually increased its activity then in
42:59
Speaker 2: a semi permanent away, and it's done that with coast Guards,
43:03
Speaker 2: not with navy. It's coast Guards. Now that's pretty important
43:06
Speaker 2: because Coast Guards is essentially saying this is ours and
43:09
Speaker 2: we're going to guard it. And so that's how the
43:14
Speaker 2: mainland's responding. You know, every day the ROC, the Republic
43:18
Speaker 2: of China Military, which is what they call themselves by
43:23
Speaker 2: the way, officially, they put out a immediate notification of
43:29
Speaker 2: the number of People's Liberation Navy and Air Force movements
43:36
Speaker 2: in and around the island. So anybody who's on social
43:39
Speaker 2: media will see these maps that get put out, and
43:43
Speaker 2: what it tells you is that the mainland forces are
43:49
Speaker 2: far more active today than they've ever been. You know,
43:52
Speaker 2: well well done. I say to you know, the folk
43:55
Speaker 2: in Manila, Tokyo, and Taiwan not to mention the agitators
44:02
Speaker 2: in Washington if they think that what they've been doing
44:07
Speaker 2: somehow contributes to their ability to contain the People's Republic
44:11
Speaker 2: of China. The evidence quite clearly is the reverse. The
44:15
Speaker 2: People's Republic of China is now able to respond in
44:20
Speaker 2: ways that actually extend what is considered normal compared to
44:26
Speaker 2: what it was four years ago, you know, and that's
44:31
Speaker 2: all they're doing now. This is all they're doing every time.
44:35
Speaker 2: Every time there's some kind of a provocation of these sides.
44:38
Speaker 2: So that is how Beijing or viewing they will literally
44:42
Speaker 2: step in and say, well, you know, we need to
44:46
Speaker 2: be here more permanently to protect national sovereignty. They'll look
44:50
Speaker 2: at Taipei and shake their heads and go, well, you know,
44:53
Speaker 2: for seventy odd years, we're kind of left that bit
44:58
Speaker 2: to you because we basically took over your own you know,
45:03
Speaker 2: the ra A c his own territorial sovereignty claims. We
45:07
Speaker 2: took over those as the people Republic of China, and
45:11
Speaker 2: as a consequence of the Civil war, you know, those
45:14
Speaker 2: parts were sort of left to you that that was
45:17
Speaker 2: actually the internal division of labor. But if Taipa is
45:20
Speaker 2: not up to it, well Beijing will step in. That's
45:25
Speaker 2: what they're doing.
45:29
Speaker 1: So I want to switch track a little bit to
45:31
Speaker 1: talk about Chinese economy because China has been making strides
45:37
Speaker 1: despite the worsening geopolitical tensions. Uh, you know, China dominades
45:44
Speaker 1: for example.
45:45
Speaker 2: The area of robotics, and.
45:49
Speaker 1: Recently US government just passed a ban on Chinese humanoid
45:53
Speaker 1: robots and quadrup pet robots. And this is the area
46:01
Speaker 1: where you know, China has like ninety percent of the
46:05
Speaker 1: world's market. Why do you think US is doing.
46:10
Speaker 2: That ninety seven percent of the market, as I understand it, look,
46:15
Speaker 2: I think the US is doing it in a preemptive
46:18
Speaker 2: attempt to create the conditions for the emergence of a
46:21
Speaker 2: domestic industry. If Chinese manufactured robots take hold and secure
46:30
Speaker 2: large market chare in the US, there would be very
46:32
Speaker 2: little room in the domestic market for indigenous robotics businesses
46:38
Speaker 2: to grow. So I think it's a preemptive move from
46:41
Speaker 2: the US's point of view. I thought it was funny,
46:43
Speaker 2: by the way, because that announcement for the US was
46:46
Speaker 2: from memory around the twenty seven to twenty eighth of July,
46:50
Speaker 2: and about ten days later China and House that it
46:53
Speaker 2: was going to slap a whole bunch of tariffs on
46:56
Speaker 2: American peacans. It tells us something about the structure of
46:59
Speaker 2: the two I means, now, doesn't you know China's China's
47:03
Speaker 2: idea of a trade trade response to the Americans is
47:05
Speaker 2: to stop the flow of peacans whereas the Americans are
47:09
Speaker 2: putting up barriers to the latest generation of humanoid robots
47:16
Speaker 2: peacans versus robots. You know, who are the peasants today,
47:22
Speaker 2: I guess is the question?
47:24
Speaker 3: So anyway, that's that that it's an odd well that
47:31
Speaker 3: that was that was due to the US deliberate US
47:34
Speaker 3: current policy rights, because US has banned export of more
47:39
Speaker 3: advanced semiconductors to China.
47:42
Speaker 1: So the only thing they allow China to purchase from
47:46
Speaker 1: US are agricultural products. So today the export to United
47:50
Speaker 1: States looks like the export of a served war country
47:54
Speaker 1: to more advanced manufacturing economies. Because US exports are soybeans.
48:00
Speaker 2: Uh.
48:00
Speaker 1: You know that that's a separate problem with China. Shift
48:05
Speaker 1: the purchasing of soybean to Brazil. But you know soybeans corn. Uh.
48:10
Speaker 1: These consists of the largest US export to China, whereas
48:15
Speaker 1: China exports everything from advanced machinery to UH to labubu
48:22
Speaker 1: and and it's yeah, and but but it's not that
48:27
Speaker 1: because US product cannot compete. It's it's the US government says, no,
48:33
Speaker 1: and video, you cannot export your most advanced AI chips
48:37
Speaker 1: to China. No, No, These US, all these so called
48:42
Speaker 1: dal use items cannot be exported to China, and so
48:48
Speaker 1: what's there to what's there to buy? And this is
48:51
Speaker 1: also the reason why China has shifted a lot of
48:53
Speaker 1: the dollar surplus to the global seales countries to to
48:58
Speaker 1: invest in infrastructure, because they can our user styllars to
49:01
Speaker 1: buy actual American products they want. Sorry, are you.
49:06
Speaker 3: Well?
49:06
Speaker 2: I was just going to mention that there's actually a
49:08
Speaker 2: report in today's South China Morning Posts which reports on
49:14
Speaker 2: the findings of a recent survey of companies conducted in
49:18
Speaker 2: July by the US China Business Council, and it found,
49:22
Speaker 2: and I'll just quote from it, that most of the
49:26
Speaker 2: pending export licenses are for items that are already availed.
49:29
Speaker 2: So these are export licenses that American companies have to
49:32
Speaker 2: apply to the American government for so that they can
49:36
Speaker 2: export the China, And most of these licenses for items
49:39
Speaker 2: that are quote already available in China from Chinese or
49:42
Speaker 2: international suppliers, effectively sidelining American companies for no strategic gain.
49:48
Speaker 2: Months long licensing delays are costing the United States billions
49:51
Speaker 2: of dollars in exports in evading American market share globally,
49:55
Speaker 2: says the survey So this is an example of where
50:00
Speaker 2: shooting yourself in the foot actually starts to become very,
50:03
Speaker 2: very material and there is quite clearly not much to
50:08
Speaker 2: be gained. And yet this is what the administration is
50:12
Speaker 2: now trying to force onto American companies. They're going to
50:16
Speaker 2: hurt American industry by doing this. So what you know,
50:20
Speaker 2: that's that's just what it is. The other thing is
50:22
Speaker 2: is that overnight there's also a report in the in
50:27
Speaker 2: the Wall Street Journal of all places, talking about the
50:31
Speaker 2: dramatic growth in Chinese exports of machinery and equipment. It's
50:36
Speaker 2: almost like it takes them six months to twelve months
50:39
Speaker 2: to catch up with what's going on, right, But at
50:41
Speaker 2: some point or another, the mainstream Western media ends up
50:44
Speaker 2: reporting on things that many of us have been watching
50:47
Speaker 2: and talking about for two years or three years. But
50:52
Speaker 2: the realization, I think is coming that China is exporting
50:56
Speaker 2: a lot more than just you know, cheap shirts and
50:58
Speaker 2: cheap jocks. They're exporting actually things like machinery, equipment, robotics,
51:04
Speaker 2: et cetera for the global South. And it totally undermines
51:07
Speaker 2: another piece of propaganda that's been floating around for the
51:10
Speaker 2: last month, that's somehow China is quote pulling up the
51:13
Speaker 2: ladder of development from global South countries. China is actually
51:18
Speaker 2: enabling global South countries to develop quicker by building more
51:22
Speaker 2: rungs on a ladder through the exportation of equipment, technologies, machinery, solar,
51:30
Speaker 2: you name it, right. So that's the changing configurations of
51:35
Speaker 2: the contours of the world. And now so the Chinese economy,
51:39
Speaker 2: that's very quickly touched on that you mentioned it. It's
51:43
Speaker 2: actually okay, broadly speaking, it's not pending collapse. We've discussed
51:49
Speaker 2: this before. A recent speech made by very prominent, well
51:54
Speaker 2: known public economists Lee Dolque receives a lot of a
52:01
Speaker 2: frissant of excitement, mainly from Western commentators, I might add,
52:05
Speaker 2: who saw in Lee's speech an affirmation of all of
52:10
Speaker 2: their own gripes and complaints about the Chinese economy. And
52:13
Speaker 2: they picked up on the idea that Lee used to
52:16
Speaker 2: describe the Chinese economy as being cold, okay, that it
52:21
Speaker 2: really needed to be warmed up. The growth drivers to
52:25
Speaker 2: replace the property sector hadn't emerged, that there was a
52:30
Speaker 2: constrictions as a result of local government debt, and so
52:35
Speaker 2: that you know, these westerners latched onto that and said
52:38
Speaker 2: ah see, you know here it is. You know, even
52:41
Speaker 2: Chinese economists know that it's all going to pot But
52:46
Speaker 2: of course that's not what Lee said at all, And
52:50
Speaker 2: in fact, I don't. I think that there are elements
52:52
Speaker 2: of his assessment which are pretty spot on, but I
52:54
Speaker 2: think that there are some that are a little bit undercooked.
52:58
Speaker 2: The local government, their issue is an issue, but it's
53:02
Speaker 2: not because of solvency problems. And again people get confused
53:05
Speaker 2: about this. They think that our local government's own money,
53:07
Speaker 2: they're going to go broke. No, local governments basically exist
53:14
Speaker 2: in what we call a vertical fiscal imbalance structural problem.
53:21
Speaker 2: They have very few revenue raising opportunities, but they also
53:24
Speaker 2: have the greatest expenditure responsibilities, and so much of what
53:29
Speaker 2: they get by way of revenue actually comes by way
53:32
Speaker 2: of federal or national government allocations. And that structural imbalance
53:38
Speaker 2: has been the case for a very very long time.
53:42
Speaker 2: No local government's going to go broke, but it means
53:47
Speaker 2: that they do have cash flow constraints, and because they've
53:50
Speaker 2: got cash flow constraints, they have been slow to pay bills,
53:55
Speaker 2: and that has rolling effects, of course locally, because it
53:59
Speaker 2: affects economic systems are fundamentally about flow. Sole's broad observations
54:06
Speaker 2: that the economy is a bit cold talks largely about
54:11
Speaker 2: whether or not there's an aggregate demand. So he argues
54:14
Speaker 2: that the national government needs to spend more money boost
54:17
Speaker 2: fiscal injections, et cetera, et cetera. My own sense is that,
54:21
Speaker 2: in fact, that's not really quite the problem. The problem
54:23
Speaker 2: is actually blockages in flow. There's plenty of monetary resources
54:27
Speaker 2: in the economic system at large, but we're not getting
54:31
Speaker 2: the cash flow that's actually necessary to make the system
54:34
Speaker 2: turn over a little bit quicker. Velocity of circulation of
54:38
Speaker 2: money is actually quite slow in China, and it needs
54:42
Speaker 2: to be increased. You don't need to inject net anymore
54:48
Speaker 2: financial resource into the economy other than what's planned to
54:51
Speaker 2: support new infrastructure development, et cetera, et cetera. What you've
54:54
Speaker 2: got to do is get dormant money capital moving a
54:58
Speaker 2: little bit more effectively. So I think that they're some
55:03
Speaker 2: of the challenges. I do, however, think that the Chinese
55:05
Speaker 2: government's also very mindful of these challenges, so they're tackling
55:10
Speaker 2: things like age receivables. Sounds pretty boring, right, but it's
55:14
Speaker 2: essentially companies in supply chains that are not paying their
55:18
Speaker 2: bills for sixty ninety and twenty days. They're clamping down
55:22
Speaker 2: on that. We're going to see the emergence of a
55:25
Speaker 2: more sophisticated and mature market for supply chain finance solutions,
55:30
Speaker 2: one of the most undeveloped areas of financial product or
55:33
Speaker 2: services currently in the Chinese economy at large. That's going
55:38
Speaker 2: to be buttressed by People's Bank of China institutional reform
55:42
Speaker 2: around product developments enabling the mobilization of household and enterprise
55:47
Speaker 2: savings into structured financial products to support precisely these sorts
55:52
Speaker 2: of things, in other words, to boost circulation, get money
55:55
Speaker 2: out of savings accounts and pump that money into supply
55:59
Speaker 2: chain fin and sing so that companies are not sitting
56:03
Speaker 2: on unpaid invoices for sixty ninety days, but are paying
56:07
Speaker 2: them after thirty days. We're also going to start to see,
56:11
Speaker 2: I think, a progressive acceleration of the folding up of
56:15
Speaker 2: so called zombie companies. Now, some of that about forty
56:18
Speaker 2: percent of zombie companies is actually a legacy of the
56:21
Speaker 2: deleveraging of the property sector. But I think we're going
56:24
Speaker 2: to see a lot more activity around that Now that's
56:27
Speaker 2: going to be an interesting transformational process because as you
56:32
Speaker 2: basically shut down zombie companies, you're going to need to
56:36
Speaker 2: also facilitate employment restructuring along the way. So we're going
56:40
Speaker 2: to see how successful different parts of the country are
56:46
Speaker 2: in making that next transition, right, that structural transformation. So
56:50
Speaker 2: I think that the main challenge in the Chinese economy
56:53
Speaker 2: isn't that there's a lack of money capital floating around
56:56
Speaker 2: the system. The challenge in the Chinese economy, if we
56:59
Speaker 2: want to keep to about headwinds, is actually about circulation flow.
57:03
Speaker 2: The exports is contributing about eighteen percent of GDP growth,
57:08
Speaker 2: so it's actually a minority. So again, you know, public
57:12
Speaker 2: perception widespread is that the Chinese economy is export dependent.
57:16
Speaker 2: Well it's not. Over eighty percent of GDP growth is
57:20
Speaker 2: actually driven by domestic demand, investment demand, and consumption demand.
57:25
Speaker 2: Eighteen percent is from net exports. So keep it in perspective.
57:34
Speaker 2: Continue upgrading is happening, and I think we're going to
57:37
Speaker 2: continue to see that as well, and that's likely to
57:42
Speaker 2: over the next six months see some growth again I
57:45
Speaker 2: would expect in fixed asset investment. So fixed asset investment
57:50
Speaker 2: fell in the last six months, even taking out real
57:53
Speaker 2: estate investments, so this is broadly speaking in factories and
57:56
Speaker 2: equipment and things. Though once again, when you drill down
57:59
Speaker 2: to the next level, you'll see that fixed investment actually
58:02
Speaker 2: grew in certain sectors, you know, whether it was in
58:05
Speaker 2: three D printing for example, and other high tech areas.
58:09
Speaker 2: So we're seeing the restructuring of the Chinese economy continue
58:12
Speaker 2: to take place. Lastly, and this is kind of just
58:16
Speaker 2: a it's a bit in house, if you will. But
58:21
Speaker 2: as you'll remember, a lot of complaints were made by
58:24
Speaker 2: sort of Western observers about over capacity and involution. The
58:31
Speaker 2: restrictions on the growth of fixed asset investment is actually
58:35
Speaker 2: one of the obvious ways in which the nationalist government
58:38
Speaker 2: and its financial apparatuses have sought to clamp down on
58:44
Speaker 2: the expansion of capacity. It was actually a direct response
58:49
Speaker 2: to concerns about involution, and so people who complained about
58:55
Speaker 2: involution six months ago are now complaining about the fact
58:58
Speaker 2: that fixed asset investment has been constrained. You can't have
59:02
Speaker 2: the both fixace that investment was constrained to deal with involution.
59:08
Speaker 2: So that's where I think the Chinese economy is going
59:10
Speaker 2: a couple of other quick things on that front. They
59:15
Speaker 2: go to the five year plan right twenty twenty six
59:17
Speaker 2: to twenty thirty five year plants. There's a whole bunch
59:19
Speaker 2: of really interesting things happening in terms of creating a
59:22
Speaker 2: new energy system. So heavy emphasis on renewable energy, green
59:28
Speaker 2: hydrogen and other green fuels, green ammonia and other green
59:36
Speaker 2: liquid fuels. That is going to be I think part
59:40
Speaker 2: of the big story of the Chinese economic system over
59:44
Speaker 2: the next five to ten years is the ongoing evolution
59:47
Speaker 2: to reduce its dependency on bottle fuels and to increase
59:55
Speaker 2: the role of renewable energies. The second one that I
59:59
Speaker 2: think people will sorry, I'm just getting over a cold,
1:00:04
Speaker 2: that people will find interesting to keep an eye on
1:00:07
Speaker 2: is the emphasis on urban renewal. Urban renewal is an
1:00:15
Speaker 2: upgrading of urban systems. So we had the property the leveraging,
1:00:26
Speaker 2: and that obviously has had a big impact. The next
1:00:31
Speaker 2: phase of urban development in China is actually going to
1:00:33
Speaker 2: be all around urban renewal, new infrastructure, cleaning up. Tea
1:00:44
Speaker 2: resorted to my Angie Bojar. So this is what they
1:00:48
Speaker 2: call a white team, but as you know, it's actually
1:00:50
Speaker 2: a green team. Anyway, the urban renewal, we'll see reinvestments
1:00:59
Speaker 2: to upgrade infrastructure like sewage systems and all of that.
1:01:05
Speaker 2: It's a whole bunch of the developments that took place
1:01:07
Speaker 2: in China between say nineteen eighty onwards. Means that today
1:01:14
Speaker 2: something about sixteen percent of the dwelling stock in China
1:01:18
Speaker 2: is now more than forty years old, and a lot
1:01:21
Speaker 2: of that dwelling stock was probably designed to have a
1:01:24
Speaker 2: life of between fifty and seventy years. So there's a
1:01:29
Speaker 2: whole bunch of dwelling stock, together with the infrastructure that
1:01:32
Speaker 2: supports it, you know, drains and electrical wires and all
1:01:35
Speaker 2: of that, that are actually coming up to a point
1:01:37
Speaker 2: where they need to be replaced and renewed. That's going
1:01:40
Speaker 2: to happen. We're going to see a whole bunch of
1:01:43
Speaker 2: these old buildings I think torn down and people move
1:01:47
Speaker 2: into some of the new ones, and some new buildings
1:01:49
Speaker 2: get built in their place. But we're not just going
1:01:52
Speaker 2: to see a like for like replacement. We're going to
1:01:54
Speaker 2: see I think a new phase of urban settlement patterns
1:02:01
Speaker 2: that will have a lot more emphasis on public space
1:02:04
Speaker 2: and public utility. And you've probably seen a bit of
1:02:07
Speaker 2: this already on your bike rides around Shanghai and stuff,
1:02:10
Speaker 2: where urban renewal is actually creating neighborhoods that are a
1:02:16
Speaker 2: lot greener, a lot more open spaces, a lot more parkland,
1:02:20
Speaker 2: as well as a whole bunch of public services, infrastructure,
1:02:24
Speaker 2: whether it's some of those amazing libraries that we see
1:02:27
Speaker 2: as part of the encouraging people to read campaigns and
1:02:31
Speaker 2: other kinds of public amenities. So we're going to see
1:02:36
Speaker 2: a lot of that over the next five to ten years.
1:02:40
Speaker 2: Transforming urban environments that were a little bit brutalist, not
1:02:48
Speaker 2: in a strict architectural sense, but a little bit brutal
1:02:52
Speaker 2: things got built very very fast. The things that are
1:02:55
Speaker 2: now a lot more sensitive to the eclogy. Cleaning up
1:03:01
Speaker 2: rivers and again you know you've ridden along the Hongkol
1:03:07
Speaker 2: River and also the Sujo Creek.
1:03:13
Speaker 1: I'm guessing right some Jabongapo. Yeah, now that a tributary.
1:03:20
Speaker 2: Of the Hong Kool River. So all of that's cleaning up, right,
1:03:24
Speaker 2: and there's going to be more that will be done.
1:03:26
Speaker 2: The cleaning up of urban waterways. You think back ten
1:03:30
Speaker 2: fifteen years ago, these waterways were basically the dumping ground
1:03:35
Speaker 2: for factories and other things. They weren't assets other than
1:03:39
Speaker 2: as places, you know, for barges to carry things and
1:03:44
Speaker 2: as dumping grounds of pollution and rubbish and things. Well
1:03:48
Speaker 2: they're all getting cleaned up, and that's going to be transformational.
1:03:51
Speaker 2: So I'm actually incredibly excited for about as you can
1:03:55
Speaker 2: probably tell, far more excited about this phase of Chinese
1:03:59
Speaker 2: abanization than I am about the sort of last twenty
1:04:04
Speaker 2: years of urbanization, which moves a whole lot of people
1:04:07
Speaker 2: in the cities, generated a massive amount of economic growth,
1:04:12
Speaker 2: but in a sense did so without necessarily delivering a
1:04:17
Speaker 2: high quality urban living environment. Now we're going to move
1:04:22
Speaker 2: down that path, and I think anybody who's interested in
1:04:26
Speaker 2: an urban settlement and urban development and ecologically sensitive urban
1:04:30
Speaker 2: development would be well advised to pay close attention to
1:04:34
Speaker 2: what China is doing and thinking about in this space.
1:04:37
Speaker 2: Because about sixty five percent of China's population is urbanized.
1:04:42
Speaker 2: The target is about eighty five percent, right, which is
1:04:46
Speaker 2: another one hundred and twenty one hundred and thirty million
1:04:48
Speaker 2: people to be urbanized over the next twenty years. And
1:04:53
Speaker 2: so this is quite an exciting period to be engaged
1:04:58
Speaker 2: in and on going transformation and development of this incredibly
1:05:02
Speaker 2: large and complicated place.
1:05:07
Speaker 1: Yeah, I right now, Shanghai. I'm in a hotel in Pung.
1:05:13
Speaker 1: I've been bicycling around all the greenways and so I
1:05:17
Speaker 1: saw firsthand the effort of the urban radio in Shanghai,
1:05:22
Speaker 1: and it's very nice. A lot of the river and
1:05:25
Speaker 1: canal has been cleaned up and now like the neighborhood
1:05:29
Speaker 1: and community are flourishing. And I suspect that Shanghai is
1:05:33
Speaker 1: a pioneer in this urban radio project because is relatively new.
1:05:40
Speaker 1: It's a lot of the infrastructure are are pretty new.
1:05:44
Speaker 1: I suspect the same kind of rollout will happen gradually
1:05:49
Speaker 1: in other Chinese city as well, because this is how
1:05:51
Speaker 1: Chinese government central government functions. They first experiment in selected cities,
1:05:56
Speaker 1: like what they did with special economic zones in the
1:05:59
Speaker 1: early ages. You know, they tried introduced market reform in Sensen,
1:06:05
Speaker 1: in Shanghai, a couple of other cities. When that became
1:06:08
Speaker 1: a success, they then propagated that model nationwide. So I
1:06:15
Speaker 1: look forward to see more of these urban renew projects
1:06:18
Speaker 1: getting rolled out throughout the country. Right now, I living
1:06:23
Speaker 1: in Shanghai, it's very nice. I mean, I highly recommend
1:06:27
Speaker 1: people to visit. You know, if it's your first time
1:06:30
Speaker 1: visiting China, I would suggest Shanghai as your entry point
1:06:34
Speaker 1: because it's it's clean, it's very tours friendly, and the
1:06:39
Speaker 1: infrastructure is just excellent. And I dootally. I also had
1:06:43
Speaker 1: been talking with people in retail because yesterday I went
1:06:47
Speaker 1: to get a tailor made suit and I was asked
1:06:51
Speaker 1: king the shop owner who has been running the shop
1:06:54
Speaker 1: for over twenty years. She said, yes, the business was
1:07:00
Speaker 1: slow after COVID compared to pre COVID time, but for
1:07:06
Speaker 1: at least for her her own business, the business has
1:07:08
Speaker 1: been picking up this year compared to the last few years.
1:07:12
Speaker 1: So it's getting better now that the economy is definitely
1:07:16
Speaker 1: a recovery path.
1:07:17
Speaker 2: Go ahead, sorry, well, and it's actually quite an interesting
1:07:20
Speaker 2: dimension of retailing, right, So we're starting to come off
1:07:25
Speaker 2: the back of COVID. I think it's taken in some
1:07:28
Speaker 2: ways a bit longer than people expected for new behaviors
1:07:31
Speaker 2: to re emerge, right because after the disruptions to two
1:07:36
Speaker 2: and a half years of disruptions as a result of
1:07:38
Speaker 2: the pandemic, a whole bunch of new behaviors got locked in,
1:07:43
Speaker 2: and new ones are emerging and some of those are
1:07:45
Speaker 2: in the way that people essentially spend. By and large,
1:07:49
Speaker 2: in most main cities in China, the material conditions of
1:07:53
Speaker 2: life are reasonably good for most people. In other words,
1:07:57
Speaker 2: people are not thought of the base fundamentals of having
1:08:01
Speaker 2: a normal, half decent life, and so they're now starting
1:08:05
Speaker 2: to explore other possibilities. And those other possibilities will be
1:08:09
Speaker 2: things like other than travel and education and those sorts
1:08:13
Speaker 2: of entertainment things. They will be things like bespoke tailoring, right,
1:08:18
Speaker 2: so I wouldn't be surprised over the next you know, again,
1:08:21
Speaker 2: five to ten years, where we'll see a little bit
1:08:23
Speaker 2: more of that. I used to get my suits made
1:08:25
Speaker 2: in Shanghai too, and also shirts, shirts and suits, and
1:08:31
Speaker 2: I used to take large groups of people actually into
1:08:33
Speaker 2: many of these places and we'd order in the end
1:08:36
Speaker 2: collectively probably two hundred shirts. Most of my Australian friends
1:08:41
Speaker 2: would order a whole bunch of interesting business shirts, you know,
1:08:45
Speaker 2: checks and stripes and all of that, and finally they
1:08:48
Speaker 2: get around to me and I'd order five white shirts
1:08:50
Speaker 2: and five blue shirts, and that was me right. But yeah, look,
1:08:56
Speaker 2: I think that these services oriented things will actually redevelop
1:09:01
Speaker 2: a h a place in the heart of people. You know,
1:09:10
Speaker 2: we will go from the mass consumers and stuff, we'll
1:09:13
Speaker 2: go from the big brand names, and people will actually
1:09:17
Speaker 2: move towards once again some of these bespoke tailoring. So
1:09:20
Speaker 2: it will be again very interesting to watch these transformations
1:09:25
Speaker 2: take place.
1:09:27
Speaker 1: Yeah, and they offer excellent quality for the price, you know,
1:09:32
Speaker 1: it can't beat it. They also ship globally. I ask
1:09:35
Speaker 1: they actually do ship over the world to Germany, Canada, Australia,
1:09:40
Speaker 1: et cetera, which is great.
1:09:43
Speaker 2: I'll help you on another occasion.
1:09:49
Speaker 1: Okay, well, thank you very much doctor orrig Pal for
1:09:55
Speaker 1: making your time to speak to us. If people want
1:09:57
Speaker 1: to follow you, where would they go?
1:10:01
Speaker 2: They can find me at my Substackworrigpile dot substact dot
1:10:04
Speaker 2: com and they can check out my book Thermoeconomics in
1:10:08
Speaker 2: a Time of Monsters, which is available on Amazon.
1:10:13
Speaker 1: Thank you very much, and for my audience, thank you
1:10:16
Speaker 1: for listening. Until next time.
1:10:18
Speaker 2: May Way