Latest / UK Column Radio / Carl Zha - The Unraveling of Trump's Trade War with Dr. Warwick Powell

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Carl Zha - The Unraveling of Trump's Trade War with Dr. Warwick Powell · UK Column Radio

0:02
Welcome to another episode of the Silk and Steel podcast.
0:05
I'm Carl Zai, your host. Today we have a very special
0:08
guest, Doctor Warwick Pao. Dr. Warwick, for people who may
0:13
not be familiar with you, could you give a very quick, brief
0:18
introduction of yourself? What do you do, Etcetera.
0:22
Sure. Thanks very much for the
0:24
invitation, Carl, to come onto the show.
0:26
I've been a fan for a long time. It's, I wear 2 hats basically,
0:31
but the hats overlap and one hat is as an adjunct professor at
0:35
Queensland University of Technology where I get involved
0:40
in research mainly at the intersection of supply chains,
0:45
digital systems, payments and political economy.
0:49
So a lot of the work that I've done in that area relates to how
0:54
new technologies in IoT, block chains, distributed ledgers
0:58
affect the way that supply chains work in a systemic sense.
1:02
The other hat that I wear is that I'm the founding chair of a
1:06
research and development company called Smartrade Networks, which
1:10
seeks to take some of the ideas that we developed through
1:13
research and develop them as first generation technical
1:17
applications that can then be introduced to the wide world.
1:20
And through that we try to work with enterprises, entrepreneurs
1:24
and supply chains, particularly in developing countries, so that
1:29
they have pathways to digitalisation and getting more
1:33
engaged in the opportunities of global trade.
1:36
So they're the two hats that I wear, they usually overlap and
1:40
and that gives me both a passion for and also a need to keep an
1:46
eye on what's going on in the world.
1:48
Well, I have known you for a long time, Doctor Warwick, and
1:51
you are expert on China and particularly China US relations.
1:59
So the reason I brought you here today is because Donald Trump
2:03
recently had a summit with President Xi Jinping in South
2:08
Korea and this concludes the second round of US China trade
2:16
war. I want to get your take on the
2:19
result of the meeting. I mean, Trump, of course, he
2:21
claimed victory. He claimed he was 12 out of 10.
2:25
And but it looks like China is getting whatever they wanted.
2:33
Look, I think. That there's a few ways of
2:34
looking at this particular summit.
2:36
Firstly, it comes on the back of what is in essence a nine
2:39
months, A7 month roller coaster. Seven months, because this
2:44
roller coaster really started with the Liberation Day tariffs
2:49
that President Trump announced unilaterally on the 2nd of
2:52
April. And ever since then, there's
2:55
been an up and down process where China responded in kind,
3:01
the Americans escalated, China responded, etcetera, etcetera.
3:05
And then there've been a number of meetings that tried to at
3:07
least take things back to the 2nd of April and enable the
3:13
parties to engage each other in a de escalated environment.
3:18
Which is what happened. We then had the meeting of the
3:23
trade teams. When was that?
3:26
That was in Kuala Lumpur a few days before the Trump and XI
3:32
summit, which in effect did the heavy lifting as far as working
3:38
through the issues, agreeing the issues, working through the
3:40
frameworks on what the agreements are going to be.
3:42
And by that, clearly what they meant was what the reciprocal
3:46
measures that the parties would take as a way of normalizing the
3:51
relationships. Again, the agreement that
3:56
ultimately was announced on the back of the the summit really
4:01
involved a winding back of the clock to the pre liberation Day
4:07
environment as well as the removal of a couple of things
4:12
that were announced subsequent to that.
4:15
Particularly the 301 measures that the United States
4:18
introduced concerning the application of additional fees
4:23
for ships that would dock in American ports, provided that
4:27
the ships were made in China and they would be levied.
4:30
And the aim of that ostensibly was to enable or or incentivize
4:35
the rejuvenation of an American shipbuilding industry.
4:39
Whether any of this has merits or not is probably something we
4:42
can go into, but, but certainly that was the objective.
4:46
China's sort of coup de grace as far as bringing the issues
4:50
actually to a head was the 9th of October announcements
4:53
concerning rare earth and other materials export licensing
4:58
regimes. Now bear in mind that back in
5:00
May, China had already introduced some licensing around
5:03
things like dysprosium. So this wasn't actually the
5:06
first set of rare earths that had been brought to the table,
5:09
so to speak, during the course of the last seven months.
5:12
But it really did get the Americans attentions.
5:15
Their reactions were clearly apoplectic.
5:19
The proposed licensing regimes went to the very heart of the
5:24
American military industrial complex supply chain system, and
5:28
you could see that the United States was incredibly disrupted
5:35
and anxious as a result of all this.
5:37
The end result, I guess is a 12 month cessation of hostilities,
5:42
if it holds. The second thing is, in my view,
5:48
the the result is really an indication that Trump economics
5:54
is being one tariff at a time, sliced and diced away.
5:59
So obviously there are still tariffs in place.
6:02
But when you put it into the context of the fact that tariffs
6:06
was the centerpiece of Trump's national economic rejuvenation.
6:11
Strategy. It was a response to a
6:13
particular view about American malaise, which is that
6:16
deindustrialization occurred because foreign countries took
6:20
advantage of America and the tariffs was the means by which
6:24
the United States would turn the tables and and engender a large
6:30
scale process of reindustrialization through
6:32
reassuring. If that was the case, and if
6:36
there was a genuine belief that tariffs was the centrepiece
6:39
policy instrument for those objectives, well, I think you
6:42
can kiss that all goodbye. The levels of tariffs that we
6:45
now have, both in absolute terms and in relative terms between
6:49
the tariffs being applied on goods from different countries
6:52
means that Americans will end up with a higher cost situation,
6:57
but there will not be sufficient mechanisms to incentivize the
7:00
reassuring that was anticipated. So Donald Trump has ensured that
7:06
there are tariffs now as part of the trading landscape, but the
7:09
tariff levels really only hurt American households and American
7:13
enterprises without even going anywhere towards the incentives
7:18
that they were supposed to create for reassuring.
7:22
He could be happy with that. I guess one last thing I should
7:25
mention, and that goes to the agreements from China to begin
7:30
purchasing American soybeans again.
7:32
The levels that have been agreed to are a little bit more or
7:36
roughly half of what was the case a few years ago.
7:41
I guess this is the case of the arsonist now coming in as the as
7:44
the fire brigade, you know, having destroyed America's
7:48
soybeans trade with China and having recovered half of it,
7:51
they're now claiming victory. And from the point of view of
7:55
Scott Besant, Besant the peasant, if you will, this is a
7:59
good outcome. Prior to the second rung of
8:02
escalation and now backing down from Trump administration, there
8:06
was already a ceasefire or choose in place, you know, that
8:11
was implemented with best in Chase, the Chinese Vice Premier
8:15
all the way to Europe and 1st to Geneva and then to London.
8:21
Why then did the second, you know, why then the second the
8:26
escalation that broke the juice fire, I mean the, the ceasefire,
8:29
the, the, the, the trigger as far as I could tell was US
8:35
implementing the BIS 50% rule, which greatly expanded the
8:40
number of Chinese companies that could be placed on American
8:44
Entity List. I think it the IT went from some
8:48
1400 Chinese companies on the blacklist to over 20,000 Chinese
8:53
companies on the blacklist. And that actually also prompted
8:58
the Dutch government to seize Nesperia a a Chinese
9:01
semiconductor firm from right under from this Chinese parent
9:05
company and causing huge disruption in the semiconductor
9:10
supply chain. And and that in part led to
9:14
China to retaliate with expanded real earth export control.
9:20
Now what? Why did you think that Trump
9:23
administration did that? I mean why did they roll out
9:26
that BIS 50% rule? Did they just not think that
9:30
China would would retaliate? I mean.
9:34
Look, it's hard to get inside the head of the Trump
9:37
administration, and perhaps it's also worth bearing in mind that
9:41
perhaps it doesn't always think with one mind.
9:44
The BIS 50% rule question came out of Lucknik's ministry and,
9:52
and, and I think we've seen over the course of the last seven or
9:55
eight months the, the, the conduct of Lutnick in terms of
10:01
his demeanour, his ability to engage in diplomacy and, and an
10:07
ability to in a sense conduct himself in a tone that would be
10:11
conducive to constructive outcomes.
10:14
All of that was absent. He tended to be somebody who
10:19
went on to the global stage persistently gloating about
10:22
America, having the cards, threatening the Chinese side
10:26
and, and, and I guess ultimately coming out of his ministry or
10:30
his department. We had these measures perhaps.
10:33
And to give the White House the benefit of the doubt, the White
10:36
House was taken a little bit by surprise by all of this as well.
10:41
And I suggest that that may have been the case.
10:43
And it's only a hypothesis on my part because it seems that often
10:47
things happen in the United States government that don't
10:52
seem to be particularly well coordinated.
10:55
The initiatives coming out of 11 agency don't seem to mesh with
11:00
those coming out of another. The different secretaries often
11:05
seem to be speaking at cross purposes and the level of
11:10
cohesion, policy cohesion and strategic cohesion seems to be
11:14
missing. You know, we have, for example,
11:16
at the same time as attempts are to temp up the tensions around
11:22
trade, we have the secretary of War literally trying to pour oil
11:30
onto the OR fuel onto the fire, metaphorically speaking, in
11:34
terms of tensions in in in the South China Sea and in the East
11:39
China Sea and in the West Pacific generally.
11:42
So I often get the sense that the current US administration
11:48
does not actually have a core strategic focus.
11:52
The agencies themselves tend to operate a little bit on
11:56
autopilot, where the instruments and mentalities and muscle
12:01
memory of the permanent state apparatuses tend to drive the
12:06
show. And, and, and, and, and so we
12:10
end up with what is in effect, a very incoherent government
12:15
administration. It's very unhelpful for
12:17
everybody trying to deal with them because you you literally
12:20
don't know what you're going to get.
12:21
Given that has happened, do you, you know, what is a, do you
12:27
think this ceasefire would help? You know, because we saw we had
12:32
a ceasefire agreement previously, it was broken.
12:35
It led to the second round escalation.
12:38
Now, what is a possibility that, you know, the Trump
12:42
administration would not do anything to aggravate the
12:46
current trade issue again in the next 12 months, 1212 months?
12:51
Well, 12 months is a long time. I mean, look what the last nine
12:54
months has given us, right. So the, the idea that over the
12:58
course of the next 365 days we're not going to have
13:03
indiscretions, even if I'm unintentional, you know, that's,
13:07
that's a very low probability proposition.
13:10
You know, I think that there is every chance that along the way
13:13
we're going to see flare ups. And I saw reports earlier today
13:17
from Bloomberg that that there are some investigations
13:22
continuing, which in a sense lays the groundwork for the
13:25
imposition of other kinds of restrictive trade measures.
13:28
So there's always something that drives the permanent state in
13:34
America, which is very much focused around preserving its
13:39
economic and political primacy globally and maintaining, in
13:44
effect, it's it's hegemony. Now, none of those aspirations,
13:49
I think, are deliverable today. The world's changed in ways that
13:53
make all of those aspirations fantasies, but that doesn't stop
13:58
the machinery of state continuing to grind away,
14:01
particularly when. If you take a good look at the
14:04
dynamics on Capitol Hill, there are very, very.
14:07
Few members of Congress or in the Senate who you would
14:11
describe as particularly pragmatic or reasonable when it
14:15
comes to questions to do with China.
14:17
On the contrary, there's a lot of Hawks across both sides of
14:21
the corridor. And I think Trump in the
14:25
administration itself or the executive will face incredible
14:29
political pressures domestically to seek to reassert their
14:33
ability to shape the agenda. Because clearly the agenda on
14:38
the questions of trade at the moment are not being shaped
14:41
autonomously by the White House. It looks like it's almost a full
14:45
rolling back of the trade Trump administration trade agenda
14:50
since April. You know, first you have the
14:53
rolling back of like the DIS 50% rule that they they promised to
14:59
suspend it for for 12 months in exchange for China to to roll to
15:05
suspend their additional export control on rare earth for 12
15:09
months. And but in addition, Trump also
15:13
cut the so-called fentanyl tariff by half by saying, oh,
15:20
because China had promised to work with us on fentanyl, but
15:23
China has always promised to cooperate with United States on
15:27
fentanyl. So this is this is this sounds
15:31
like a definitely a cave in to me.
15:36
And All in all now the, the additional amount of tariffs
15:41
that was placed in China compared to before April 2nd is
15:46
about somewhere about 16%, which is comparable to say the, the,
15:52
the new tariff that was placed on countries like UK or even
15:56
Japan who are ostensibly US allies.
16:03
How is Trump going to like, I, I, I'm assuming that there are
16:10
people who are driven the Trump policy in the 1st place.
16:14
How, how is Trump going to justify this this walk back?
16:19
Well, I think he'll basically say that there are tariffs in
16:22
place and that was what he was after.
16:23
And you'll get people who will focus on this sort of
16:26
transactional nature of describing what happened, which
16:29
is that, you know, tariffs are now in place when they weren't
16:32
beforehand. And that will be considered the
16:34
win. You know, overreaching on the
16:36
claim was to provide negotiating room to get to where you really
16:40
want to. Let's take that at face value.
16:43
It's actually still not particularly relevant from an
16:45
economic policy point of view. Because let's face it, if the
16:48
economic policy objective was to firstly reduce the trade deficit
16:54
with China, secondly shift production from China to other
16:59
parts of the world, and from America's point of view,
17:01
preferably to America, then the current levels of tariffs being
17:05
applied will not do any of that. So you've got a question of the
17:08
relative tariffs between the tariffs supplied on Chinese
17:11
goods and the tariffs supplied on goods from other parts of the
17:13
world. And if the differential isn't
17:16
high enough, Chinese goods will remain incredibly competitive.
17:19
And ultimately, there will be no incentive mechanism for
17:23
enterprises to make those long term capital allocation
17:27
decisions to shift production from China to other parts of the
17:30
world. Firstly.
17:31
Secondly, we're not going to see a dramatic shift in productive
17:35
capacity from around the world generally to investing in
17:39
America because at the end of the day, the costs of doing so,
17:43
the risks involved and the time delays simply don't warrant the
17:48
move. Given that they're, you know,
17:51
that, that in, in essence, no single country has been
17:55
disadvantaged against others. You know, they, they have all
17:58
been relatively impacted together as far as, you know,
18:03
countries of origin is concerned.
18:05
So relative and absolute tariff levels really don't help the the
18:09
actual policy agenda, if that policy agenda was a serious one.
18:13
The the last thing is, is that despite the headline tariff
18:17
rates that have been applied, the much of the the the devil is
18:23
in the detail, Carl, because there have been a whole raft of
18:26
exemptions over the period of the last seven months.
18:29
Category by category as things get taken off, you know, things
18:34
that aren't actually made in the United.
18:35
States. They're just being taken off the
18:38
United States now, speaking about needing to bring in more
18:42
beef from Argentina because they've got supply side
18:46
constraints, which are leading to inflationary pressures on
18:49
beef in the North American market.
18:51
All of these point to a recognition that tariffs applied
18:56
the way that they work actually lead to higher costs.
18:59
And so the exemptions are starting to deal with that.
19:01
The other interesting thing, I think, is if we go back to the
19:04
2nd of April, when the Liberation Day tariffs were
19:08
first. Announced.
19:09
They were announced. With the rationale that these
19:12
were reciprocal, right? Now we know that they weren't
19:15
reciprocal. That's the first thing.
19:17
And within a day it was demonstrated that they were
19:21
generated by virtue of a very simplistic and largely
19:25
meaningless formula, right? So we've just had this arbitrary
19:28
way of calculating the first bunch of tariffs and then after
19:32
that, it's literally been an arbitrary modification ever
19:37
since. These tariffs were never serious
19:40
really. They were a political move that
19:43
of course, demonstrated to the domestic base a, a willingness
19:49
of the administration to, you know, do the the, the work and
19:53
take the tough action, you know, on all of those countries that
19:56
have been taking advantage of America.
19:59
But because they hadn't been actually thought through, we've
20:03
witnessed the unraveling of this.
20:07
You know, actually a very counterproductive policy
20:11
apparatus. Americans have not been made
20:15
better off as a result of all of these moves, and that's the
20:19
bottom line. American enterprises are paying
20:22
more today than they were seven months ago.
20:26
Importers are absorbing 2/3 of the price increase and as time
20:30
goes by, they will be compelled to.
20:33
Pass those on. So none of this has been helpful
20:36
to the enterprise of rejuvenating and restructuring
20:40
the American economy. And so how does Trump, in the
20:43
end, explain all of that? Well, I think he simply
20:46
explains. That by the.
20:47
Fact that he you know got the Chinese to buy some soybeans he
20:51
got a 12 month stay on the rare earth question and and there's a
20:57
bunch of tariffs that are still there and therefore.
20:59
You know he's achieved something.
21:02
Now we still have one unresolved issue from this the last trade
21:08
spam which is the the whole Dutch government sees in
21:13
Nesperia. Now that was necessitated by the
21:17
DIS 50% rule roll out by the Trump administration.
21:20
They basically told the Dutch government, but because Nesperia
21:24
is is owned by the Chinese company parent company, so it
21:29
falls under the BIS 50% rule. So if you're going to not going
21:33
to do anything we're going to place it on the entity list and
21:36
you can end up losing all these jobs in this area employed.
21:41
So Dutch government went to the whole length of actually seizing
21:45
the company from the Chinese fairing company Wintec.
21:49
And that cost a cascade events, including Chinese government is
21:55
now telling the the manufacturing side of Nesperia
22:00
that's still inside China saying, OK, you have now have to
22:03
prioritize to supply domestic suppliers in domestic
22:09
manufacturers in China and, and, and you know, everyone else will
22:13
just have to wait. And that led to a huge supply
22:17
chain shortage in smart sectors, particularly in auto industry.
22:21
That led to the German automaker, Japanese automakers
22:24
and American automaker to announce that they're only weeks
22:28
away from running out of semiconductors and and including
22:31
Honda just shut down the Mexican plant because of that.
22:35
So now that whole under initial reason that kicked off this
22:42
chain of event, the DIS 50% rule just got rolled back by Trump
22:47
administration. What what do you think?
22:50
What do you think the Dutch would do?
22:52
Well, if I was the Dutch, I'd feel terribly used and terribly
22:57
naive and and incredibly embarrassed.
23:00
I doubt that they'll feel any of that, of course.
23:02
But but, you know, the behaviour of the Dutch government and its
23:09
ascension to American pressure really showed a lack of
23:13
foresight and the lack of strategic agility in dealing
23:17
with what potentially was going to be actually a very complex
23:20
issue. Bearing in mind that everybody
23:23
knew that there were discussions happening between the Chinese
23:26
side and the Americans anyway, right?
23:28
So with that happening in the backdrop and with all the talk
23:31
about a possible summit between the US and, and, and Chinese
23:36
presidents, you would have thought that anybody with an
23:40
ounce of strategic experience in foresight would have anticipated
23:45
that this issue may actually become part and parcel of these
23:48
deliberations. And perhaps holding fire a
23:51
little bit would have been the prudent thing to do.
23:54
But the Dutch, of course, wanted to prove their immediate loyalty
23:58
and leapt to action. You know, we've had other Dutch
24:03
political figures who I think have demonstrated some
24:06
interesting characteristics which maybe aren't
24:10
representative of Dutch politicians generally, but
24:14
certainly have I think, shone a certain light on at least some
24:18
Dutch political figures. We've had, you know, former
24:22
national leader Ruta now talking about Trump as daddy.
24:27
You know, that that frankly is is belittling for the Dutch
24:31
people and highly embarrassing for a grown man.
24:35
We've had the Dutch government respond to this Nexperia
24:38
question really in ways that showed 0 prudence and 0
24:42
foresight. So what do they do now?
24:44
Well, there are talks happening between the Europeans and the
24:50
Chinese on this question of the rare earths.
24:52
And if I was the Dutch, I would be hoping that this issue is
24:56
going to get resolved sooner rather than later.
24:59
But China, I think, demonstrated a couple of things in this
25:02
process. One was that it wasn't going to
25:04
brook any nonsense, right? And it's done this consistently
25:09
throughout, you know, the course of 2025.
25:12
It's just not going to back down in the face of all of these
25:16
provocations that are being thrown at it.
25:19
The second thing too, is it actually shines a light on how
25:23
global supply chains in 2025 are complex things, right?
25:29
The things that, you know, human societies and economic systems
25:33
manufacture are complicated. They involve parts and inputs
25:39
from all over the world that often we just take for granted
25:43
and don't think about. There is something quite
25:46
miraculous about how these global supply chains actually
25:49
work. And we end up with a phone or a
25:52
computer or a car, you know, made.
25:55
But the complexity of these systems is actually well known.
26:00
And China, through its ability to impose export controls in
26:06
China on the local production plant, actually just reminded
26:11
the world that, you know, you, you, you've got to be careful
26:15
when you sort of leap to these politically driven decisions.
26:19
And this is the madness of, of all of this, is that the
26:23
disruptions to production affects business incomes and it
26:29
affects the livelihoods of working people.
26:32
You know, those workers in those factories, whether it's V Dub or
26:36
Nissan or Honda or Ford that could be affected by this, by
26:41
disruptions to the next Furious supply chain.
26:45
You know, I mean, these are real people.
26:47
And if a political leadership can't actually have at the
26:51
forefront of their mind the potential downstream
26:54
implications on the livelihoods, the job stability of their
26:59
citizens, then, you know, you've got to wonder, you know, why it
27:03
is that they continue to hold these positions that they do.
27:08
Well, this led me to my next question.
27:11
Because the Trump trade policy has caused a lot of disruption
27:15
in normal business flows. And for example, all these
27:19
companies have tried to move their supply chain out of China
27:22
in response to the Liberation Day announcement back in April.
27:27
Now they find themselves wasted whole bunch of time, money and
27:31
effort because now, now the, the, the at the current tariff
27:35
level, as you mentioned, it didn't doesn't didn't make sense
27:38
to move production out of China that now I I was under the
27:43
impression United States is a society where you know, money
27:49
runs the politics money, you know, it ultimately it's a it's
27:54
a capital that dictate to the politicians.
27:57
How is it we're now in a situation where the Trump
28:03
administration is allowed to basically wreak havoc to the
28:08
whole business ecosystem? I mean, I know that they're
28:14
responding to certain political pressure about, you know,
28:19
decline of United States vis vis a vis rise of China.
28:23
But at the same time, you know, a lot of multinationals from the
28:28
US are still making tons of money head over heel in China.
28:32
Why? How was it that Donald Trump
28:36
administration was allowed to take a sledgehammer to this
28:40
whole enterprise? Hubris.
28:43
Well, at the end of the day, it's an incapacity to understand
28:46
the complex interconnectivity of these economic systems today and
28:51
this unbridled belief in the righteousness of 1's actions.
28:55
You know, it's literally hubris leads you to make these kinds of
28:59
very self-destructive and bad decisions.
29:02
I get the fact that, you know, today's administration in the
29:06
United States looks out there at, at, at the country and sees
29:11
significant and growing pockets of social and economic malaise
29:15
and discontent. I understand that there is a
29:18
belief that the United States has hollowed out its industrial
29:22
foundations and that many people feel a loss of sort of
29:26
connectivity and groundedness in the things around them.
29:29
You know, that's entirely understandable as a sort of set
29:32
of symptoms of what's gone on for 40 to 50 years.
29:36
But the kinds of answers that were offered actually made
29:39
things worse. This is the folly of of sort of
29:43
a politics of nostalgia. So you've got hubris, you've got
29:47
nostalgia, and you've just got this unbridled sense of sort of
29:51
right. And, and when you've got that,
29:55
you know, almost as if you're, you know, it's a politics of,
29:58
of, of a sovereign as opposed to the politics of a, of an
30:02
executive constrained by checks and balances, then invariably
30:07
these kinds of offbeat decisions get made.
30:10
The other thing to remember is that the dominant forces of
30:13
capital that drive American politics is not industrial
30:18
capital anyway, right? So the disruptions to it is seen
30:23
to be relatively minor. The dominant forms of capital is
30:26
finance capital and technology capital.
30:30
And it's those that actually ultimately dictate the
30:32
priorities and the terms of the American body politic.
30:36
So, you know, it's, you know, misguided, nostalgic, hubristic.
30:44
OK. I'm going to drill in deeper a
30:46
little bit on that topic. Why is it then why would the
30:50
finance capital or tech capital in US have a hostile view toward
30:57
China? I mean like, because can they
31:01
just what's wrong with just sit, settle down and do business?
31:07
Well, finance capital actually doesn't, right?
31:10
You know, one of the interesting things about finance capital is
31:13
that it actually makes most of its money through the
31:16
circulation of fictitious capital.
31:18
It just trades paper. And so it largely dictates
31:22
terms. And one of the problems for the
31:24
United States administration is that it's actually the dominance
31:27
of finance capital that has undermined industrial capital.
31:30
Over the last 50. Years efforts to try to do
31:34
something about this doesn't directly affect finance capital
31:37
so it shrugs its shoulders because no well, nobody's
31:41
actually pulling finance capital, you know back to earth
31:45
and and bringing it to heel so so long as they don't get
31:48
affected directly in many regards, they don't care that
31:52
much they continue to do what they do the other interesting
31:55
feature of course is you've got to look at the rest of the
31:57
policy framework that has been rolled out in the last six
32:00
months and I speak particularly to the the the the big beautiful
32:05
bill. So the big beautiful bill in
32:08
effect created another round of system liquidity expansion as as
32:14
the American government, you know, expanded its own deficits.
32:17
And what happens with system liquidity expansions in the
32:21
United States is that most of that fund holds through the
32:24
circuits of fictitious capital in the US stock market in
32:28
particular, but also into real estate.
32:30
So we've seen the S&P 500 continue to expand off the back
32:35
of liquidity, flowing into actually only a handful of
32:39
companies. And we know what those handful
32:41
of companies are. They are those companies related
32:43
to AI, whether they're in the hardware side or in the software
32:47
side. So you've got this Nexus between
32:50
finance capital and technology capital, together with a
32:53
burgeoning government deficit that actually feeds liquidity
32:57
into the things that matter to them.
32:59
They don't care really about what happens elsewhere, provided
33:03
that those circuits and those dynamics aren't affected.
33:06
So that's the way I would tend to look at all of this, is that
33:09
Trump was able to go and do all of these things not because the
33:12
others wanted him to, but because the others didn't care
33:16
whether he. Did or didn't?
33:18
Oh. That that's a great point.
33:22
You brought up AI now Powell just recently came out and say,
33:28
oh, the, the the recent current investment into AI is no way
33:33
equivalent to the.com bubble of the 2000s, Which I thought was
33:38
funny because I look at the two and I, you know, there's glaring
33:42
similarities when, you know, when the.com bubble back then
33:46
clearly ran ahead of what the technology back then could
33:50
deliver. And that sees very similar thing
33:54
with AII today, that promise in the world with AGI yet whatever,
34:00
with even hundreds of billions of dollars investment into data
34:03
centers and and AAI revolution, we're seeing actually very
34:08
little that kind of justified the low of investment is going
34:11
in right now. How long how?
34:16
I mean, it's, it's how do you think this, this will will
34:21
eventually be rationalized? Well, there's likely to be a
34:27
significant market correction, as they say, or, or, or the
34:31
bursting of the bubble. The the problem is, is that the
34:35
promises are overrunning the capacity of the real world to
34:39
deliver. And the evidence of that is the
34:44
absence of viable scaling business models for a whole
34:48
bunch of this activity. Industrial applications in the
34:52
United States are relatively modest.
34:54
And that in any case isn't really the focus of a lot of
34:58
these publicly listed AI companies.
35:00
They're more interested in things like either pursuing God
35:03
like or God inspired fantasies of AGI or they're into.
35:09
Trying to monetize. AI via AI enabled video sharing
35:14
apps, you know the AI version of Tiktok, if you will or recently
35:20
as Sam Altman announced, they're going to release an age
35:24
unrestricted or an age restricted version of chat,
35:28
right, which basically is trying to, you know, grab into the
35:31
business model and revenue flows of things like only fans.
35:35
If this is the business model for American AI, then, you know
35:40
it's going to be limited as far as, you know, it's ability to
35:45
deliver on the promises that have been made.
35:47
And when that starts to materialize, we are going to
35:51
see, you know, investors vacate, you know, they will take profit.
35:56
You know, one of the things about these sorts of booms is
35:58
that at some point large amounts of stockholders will exit the
36:04
stock and take their profit, monetize it and move on.
36:07
And you know, it happened, as you say, in 2000, you know, with
36:11
the.com boom. But let's not forget this was
36:14
the problem in 2008 as well with with the property boom.
36:20
At some point it came to an end when the real world was not able
36:25
to substantiate the promises that were being made by the
36:27
world of finance. You know, that's that's where
36:30
it's going to end up. The other issue that's going to
36:33
become a real constraint on AI is going to come from the United
36:37
States inability to resolve its energy problems.
36:41
AI is of course an energy hungry sector.
36:44
Arguably, AI is really just a manifestation of energetic
36:49
capabilities within your economy and the United States energy
36:54
system is both old and fragmented.
36:57
It's attempt to augment so that it can meet the demands of the
37:03
artificial intelligence industry is actually putting strains on
37:07
the system at large, either by pulling energy or electricity
37:11
away from other users, driving up prices in the market, which
37:14
has short term effects on consumers and other industrial
37:17
users. But it also has what we call
37:20
Dutch disease consequences, which is they create structural
37:24
shifts in the demand for resources in the economy at
37:27
large, and it will draw a whole bunch of resources away from
37:31
other industrial activities, towards AI and towards solving a
37:36
problem for AI. What that means is that those
37:39
other sectors end up becoming relatively undeveloped, and
37:42
certainly undeveloped compared to what they otherwise would
37:44
have been. So we have a contradiction
37:47
between the expansion of AI and ambitions around rejuvenating
37:51
American manufacturing because manufacturing, modern
37:55
manufacturing that is, is intensely energy intensive.
37:59
Without energy, without electricity, without artificial
38:02
intelligence, ironically, and without automation, you don't
38:06
actually get the kind of manufacturing that can only take
38:11
place in a place like the United States.
38:13
We're not going to see more manual labor intensive
38:16
sweatshops emerge in the United States.
38:18
They already exist, right? But we're not going to get more
38:21
of them. You know the the only prospects
38:24
for modern industry in the United States is high tech
38:28
energy intensive AI driven automated.
38:31
So we've got contradictions now the energy secretary what some
38:36
weeks ago talked about America facing 100 GW energy deficit
38:42
over the next five years that need to be plugged.
38:44
Well good luck there's probably a good chance that the that the
38:49
system as a whole can achieve half of that.
38:53
But and it's not that there lacks ambition and it's not that
38:56
there lacks money capital. The problem is, is the the the
39:01
physical and human skills required to pull that off are
39:05
simply not available in the quantities necessary in the time
39:09
available. It's as simple as that.
39:12
You can't manufacture enough skills that are needed for the
39:17
kind of work that must be done if the American electricity
39:20
system is going to expand in the order that's being talked about.
39:24
There's simply not enough of the equipment, whether they're
39:27
they're they're they're the equipment that goes into
39:30
Transformers, that they're just not there, you know?
39:35
So, you know, these are the constraints, you know, welcome
39:37
to reality. In a sense, the real economy,
39:39
the world of physics, the world of materials, and the world of
39:43
human capabilities ultimately is going to dictate how fast and
39:47
how successful the United States is going to to be able to
39:50
resolve these these bottleneck problems.
39:53
And I'm I think it's going to really struggle.
39:56
Well, you, you do. You did mention energy, but
39:59
isn't US incredibly rich in hydrocarbon resources?
40:04
And in fact, Trump is going 100% in on a big oil right now.
40:09
He's, you know, he's, he's ditching all these federal
40:13
subsidies on, on sustainable energy and saying, let's just
40:17
drill oil drill. Couldn't expanded production of
40:22
maybe shale gas or, or, or shale oil make up for the, the
40:28
shortfall in energy and, and, and, and you know, ultimately,
40:32
you know, does it matter what where the energy come from,
40:35
where they're from the sun or from the, from the fossil fuels?
40:38
Well, there's a few, few issues in all of that.
40:40
One is that it's likely that the shale oil reserves in terms of
40:47
the, the, the energy return on energy invested curve, if you
40:53
will, we've already gone over the top, meaning that future
40:57
resources are going to take more and more effort to extract,
41:01
which means you need a higher and higher price as well for
41:04
activity to be undertaken. So there's a, there's a
41:07
challenge at the moment because current pricing for oil is
41:11
nowhere near high enough to justify folk in the oil business
41:15
to commit the resources that you need to extract the next or to
41:20
open up the next set of wells. So that's the problem, right?
41:24
We need prices in the order of $80 a barrel.
41:28
They're nowhere near that. And again, there's trade-offs
41:31
involved because you've you've got the economics that justify
41:35
expansion of some of the more difficult and increasingly
41:39
expensive shale oil projects. You've also got an impact on
41:44
downstream impact on on consumers with gasoline costs,
41:48
but also for other industries. So we've got trade-offs that
41:52
take place in that sector alone, but converting hydrocarbons,
41:56
particularly in terms of oil into electricity useful for for
42:00
the AI industry still requires a significant investment in
42:04
infrastructure and those bottlenecks remain.
42:07
So just because you have rich sources, original sources of
42:11
materials doesn't necessarily mean you can build out the
42:14
supply chain infrastructure that you need to to extract, convert
42:18
and deliver. So I think that there are some
42:21
real constraints. The broader issue, Karl, and
42:25
this is one that I tend to think is the sort of really big
42:28
picture strategic challenge facing the United States is that
42:32
the United States has for the past 150 years developed on the
42:36
back of the ability to access incredibly high energy return on
42:41
energy invested energy sources and systems, right.
42:45
You know, when you could get oil cheap and 1 barrel of oil equals
42:50
so many, you know, years of man effort.
42:54
I mean that that that was an incredible transformative
42:58
resource for a national economy. But those easy days are actually
43:02
behind us and the United States is now in a position where it's
43:08
hydrocarbon resources are on the, on the downward side of the
43:13
EROEI curve. And that's going to become very,
43:17
very problematic over the next 10 to 20 years.
43:22
It's it's one of these things where I think the politics of
43:24
energy, which sees a commitment to maintaining known approaches
43:31
to energy and an ideological reaction to, you know, the
43:34
renewables and other things actually is hampering the United
43:39
States ability to make rational choices based on all available
43:43
options. But let's be devil's advocate
43:48
for a second. You mentioned there will be
43:51
industrial bottleneck for US to build out it's power grid.
43:56
Well, couldn't just import from China?
44:00
Couldn't just import the equipments from China?
44:04
Well, this assumes that they will import equipment from China
44:08
that they will still be bottlenecks because China is
44:12
obviously supplying a lot of this equipment to many systems
44:15
around the world that are developing their own energy
44:18
distribution networks. And IT it isn't that easy to
44:25
just flip the switch and, and, and increase production outputs
44:28
by 2030% to cater for America's needs.
44:31
So there will be production bottlenecks regardless.
44:36
And the extent to which they exist, I guess in part is going
44:41
to be reflected in whether or not Americans pay more to, you
44:45
know, jump, jump the queue, so to speak.
44:48
And whether or not Chinese manufacturers will respond to
44:51
that, which they probably will unless there are strategic
44:56
directives to in a sense, commit to some of the larger scale
45:00
energy distribution projects that China might get more
45:04
involved in in places like Africa and Southeast Asia.
45:07
So, you know, that's the sort of trade off questions again, you
45:11
know what I mean? There are no easy answers in all
45:13
of this stuff. So I mean, mainstream economics
45:15
often forgets that in the practical world, everything
45:18
always takes time. And I mean, they sort of think,
45:21
oh, well, you know, supply demand will adjust and there'll
45:23
be some, you know, magic process of market clearing at a new
45:28
price. It does assume, of course, that
45:31
things are just sitting around waiting for you to just flip a
45:34
switch and and, you know, miraculously make it all
45:37
available. That's not how the real world
45:40
works. OK, but so why, how did United
45:44
States get into this position? Because there was Once Upon a
45:47
time, United States did invent, reinvent itself.
45:52
You know, You know, we saw that in the second industrial
45:54
revolution. We saw that in the aftermath of
45:58
the Great Depression. And United States Once Upon a
46:02
time was very capable of investing.
46:05
It's only infrastructure and put together the pool of human
46:09
capital that's that's that's able to execute.
46:13
So what changed? Well, we've had growing
46:15
financialization for 50 years. So the so if you look at the
46:21
energy outputs in the United States, they've largely flat,
46:23
flat lined for 20 odd years. United States doesn't actually
46:26
produce any more electricity than it did today really than it
46:30
did 20 odd years ago. Its systems to some extent have
46:34
become a little bit more efficient, but the change in the
46:36
structure of its economy in terms of its demand for
46:39
electricity has changed too. So as it evolved into an
46:45
economic system which was more services oriented, it actually
46:49
required far less electricity outputs to support that kind of
46:54
industrial structure. And there are legacy
46:57
consequences to this, you know, and they accumulate over time.
47:00
You know, old systems get get well, systems get old.
47:03
They're not maintained as they once were.
47:06
Accountants, particularly in publicly listed companies, will
47:09
often find ways to sweat assets, in other words, defer
47:12
maintenance because that looks much better financially.
47:16
But these actions eventually catch up with breakdowns and and
47:21
in due course obsolescence. So these aren't things that you
47:26
can say, you know, at some point an error got made and therefore,
47:29
you know, we can we can just blame something.
47:33
These are sort of systemic transformations that took place
47:37
in the American economic politically or the political
47:40
economy of North America. So about 50 years ago, the
47:45
economic system in the United States began to explore
47:49
offshoring opportunities. And we saw a lot of that take
47:53
place in Japan, on the island of Taiwan, the Philippines, and
47:59
places like that where American capital established operations
48:03
in these places and and began exporting back to the United
48:07
States. That was already happening, you
48:10
know, by the the sort of late 1950s, early 1960s, by the
48:14
1970s, if you go back and read some of the policy literature
48:18
and the academic research at the time, there were already
48:21
concerns about American manufacturing being hollowed
48:24
out. So this has been an ongoing
48:26
problem. And as you hollow out industry,
48:29
or as industry structures change, the nature of an economy
48:33
changes. So the skills that used to be
48:36
needed for to work in shop floors and things, they
48:39
disappear over time. People go and do other things.
48:41
They're not renewed. The education system adapts
48:44
because those kind of requirements are no longer
48:47
there. And we see the emergence of
48:50
whole new classes of employment, you know, Wall Street, financial
48:54
engineers, etcetera, etcetera. And they become incredibly
48:57
attractive. And as people, you know, go
49:01
through an education system and get more skilled, where do they
49:04
Orient their activities? Well, they, even the engineers
49:08
that graduated from some of America's best engineering
49:11
schools have found themselves working in Wall Street.
49:14
They don't work as engineers. They don't work in research and
49:17
development, whether they're chemical engineers or structural
49:20
engineers or hydraulic engineers or what have you.
49:23
They actually all end up in in Wall Street.
49:26
So these are systemic changes that happened over the course of
49:30
the last 50 years. They've been accelerated by some
49:33
government policies, particularly policies around the
49:38
deregulation of financial markets and decoupling or or
49:42
enabling actually the banks to be both savings and loans
49:47
institutions as well as investment banks.
49:49
And and so we now have an American political economy that
49:54
in many regards just over time through processes of
49:58
transformation and evolution is a services dominated system with
50:05
with a heavy financialized overhead.
50:09
Now the question from that, obviously, can that process be
50:13
reversed? You know, I, I know if I ask
50:16
Donald Trump, he will say yes, but whatever he has done so far,
50:20
it's not really healthy. But suppose we have a more
50:23
rational leader in place. Is it possible for that process
50:28
to be replaced? Because the the process of
50:30
deindustrialization you are describing doesn't just affect
50:33
the United States. This effects countries UK as
50:38
well. You know, many, many former
50:41
leaders in in in industrial revolution.
50:44
Now is going through the same process of decaying and
50:48
deindustrialization. Now is there is there can can?
50:53
Is it possible for that process to be reversed?
50:56
Well, it's interesting you mentioned these other places,
50:57
Carl, because when I was cutting my teeth as as a postgraduate
51:02
researcher, some of the first work I was doing in the early
51:06
1990s was on this problem of deindustrialization in Italy,
51:11
you know, UK and all of those things.
51:13
So these aren't problems, right? I think that the other way of
51:18
framing this is rather than reindustrialization, which often
51:21
implies somehow reclaiming what's been lost, the only way
51:26
to think about this is what future industrialization looks
51:29
like. There is no winding back the
51:31
clock unless you want to dramatically transform the
51:34
structure of an economy in ways that will reduce living
51:36
standards. We know this because the process
51:40
of evolution to date has actually led to progressively
51:42
higher living standards for a lot of people.
51:46
And I say that recognizing that the United States social
51:49
settlement now actually has a lot of people for whom life
51:52
hasn't improved for many decades, partly associated with
51:55
all of those dynamics I was describing earlier, and for whom
52:00
in fact, it's gotten a lot worse.
52:02
You know, with 60 plus percent of people living paycheck to
52:05
paycheck, with food security being a problem for 1314% of
52:10
American households. For 20 plus percent of
52:12
households now skipping meals to be able to pay rent or
52:16
mortgages, motor vehicle loans, delinquency rates are rising
52:22
back to levels that we haven't seen for 20 years.
52:25
Ditto credit card loans, et cetera, et cetera.
52:27
So clearly American households, particularly working households,
52:31
are under incredible pressure. So the American body politic, if
52:35
you will, I think has reached a point where the anxieties and
52:39
anger that have been percolating and accumulating for 40 or 50
52:43
years have spilled over, which is why we have the political
52:46
phenomena that we do. Promising those people that you
52:49
can turn the clock back and go back to how the world was in
52:52
1955 with Fordism. You know, single, single income
52:57
earner households, 2 kids, front yard and all those things.
53:00
Well, you know, that's fantasyland stuff.
53:02
And as much as that kind of nostalgia mobilizes voters to
53:06
get out and vote in the end, it also sets them up for massive
53:10
disappointment. The only way, the only way in my
53:14
view, for the United States to transform its economic structure
53:18
is to focus on what technology can actually do and harness
53:22
technology in ways that deliver new kinds of jobs that are high
53:27
value adding and which enable people to have high quality work
53:31
and life relationships, right? So, you know, how does the North
53:35
America train a workforce that's capable of doing these things?
53:41
What are the investments that need to be made?
53:43
You know, let's take shipbuilding.
53:44
Shipbuilding's a complicated business these days. the United
53:47
States hasn't really been in the business of making ships for 70
53:50
years. It began undermining its
53:53
shipbuilding industry, ironically, in the 1920s when it
53:55
introduced legislation to protect shipbuilding.
53:58
And by protecting shipbuilding, it created massive disincentives
54:02
for innovation and productivity improvements.
54:04
So if America wants to rebuild a shipbuilding industry, rather
54:10
than simply approving Korean shipbuilders to build nuclear
54:14
submarines in North America, which is what's happened in the
54:17
last, you know, week or so, we now have a situation where
54:21
you've got to commit to rebuilding an entire maritime
54:23
workforce. Building ships need skills of
54:27
certain types. None of them really exists in
54:29
America by any stretch of the imagination.
54:33
Is, is, is the, the, the US political and education system
54:40
set up to enable those things to happen.
54:42
And if that was the pathway that was necessary, that's a 20 to 30
54:47
year commitment, right, Carl? The other thing you got to
54:49
remember is over the last 30-40 years, American literacy and
54:53
numeracy standards have fallen. Now, how do you have a modern
54:58
industrial workforce that suffers from low literacy and
55:02
low numeracy standards? Well, you can't.
55:05
China's ability to eventually become the industrial power that
55:09
it is today is premised on the fact that from 1949 to today,
55:15
literacy has gone from 20% to 9596%.
55:19
That's what's happened, right? So unless you're willing to to
55:23
do the things needed to turn around literacy and numeracy and
55:26
then create the skills necessary for these industries, the
55:29
industries aren't going to come back unless you're willing to
55:33
import the workers from other parts of the world.
55:37
And I'm not sure at the moment that the politics of importing
55:42
workers in America plays in a way that makes this easy to do.
55:48
Very well said. This has been a fascinating
55:52
conversation. Doctor Warrick.
55:54
We we have covered a whole range of subjects.
55:59
If people wants to follow your work, where would they go?
56:04
Probably 2 little places. 1 is my Substack, which is
56:07
warwickpowell.substack.com where I try to publish something about
56:13
once a week. Every now and then I
56:16
accidentally publish 2 things, but certainly I don't want
56:20
people to have high expectations that they'll be that on a
56:22
regular basis, but roughly once a week.
56:25
And the other place is I have my own little channel for very
56:29
different kinds of discussions, mainly far more technical around
56:33
global S economic development. And that is TIO talks with
56:38
Warwick Powell. So they're the two places that
56:40
you can have a have a little Bo peep at, at the things that I do
56:47
and the things that I guess concern myself and the people
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that I work with. Well, there you have it.
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Doctor Powell. Warwick Powell, Thank you for
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making your time to join us today and thanks everyone listed
57:03
in Tuning In. Please follow Doctor Warwick,
57:07
follow his work and leave your comments below on what you would
57:12
like to see next. Thanks guys.