Transcription
In the last few years, China has been challenging the US in a way we've never seen before. China has been plotting this moment for over a decade.
[music] China has become the world's largest car exporter. [music] Embodied AI is all the rage in China. For the first time ever, America's global economic dominance is under serious threat. So, China is doing a lot better than I'm sure Mr. Trump would like them to be doing right now. I do not think US policy is uh fully come to grips with the nature of the challenge and how far along China is in uh in playing that game.
This is David Otter, an MIT professor who co-authored an analysis of China's [music] rise to becoming the world's low-cost manufacturer in the early 2000s. The China they think they're competing with is the China that overran US and furniture manufacturing and toys [music] and assembly of electronics 20 years ago. But that's really not the battle that we're facing now. Its shock to American industries had far-reaching consequences. [music] But as impactful as this has been, the US is on the brink of something much worse. China has moved way up the value chain. It's not just artificial intelligence. It's solar cells. It's batteries. It's robotics. It's quantum computing.
This rather simple, unassuming chart is actually a stark illustration of an unprecedented shift in the global economy. It's from one of the many academic papers I tortured myself with for this video titled The China Syndrome. It's an analysis of how the rise of an economic power ruthlessly gutted American industries in the '90s and early 2000s. And it's particularly relevant because of who authored it. David Dawn, Gordon Hansen, and David Otter. The same David Otter who is warning of another much worse shock that's on the horizon.
In the late '80s, the US was barely importing anything from China. [music] That's the blue line here. American companies were largely manufacturing their products domestically. And so naturally, a large number of workers were employed in manufacturing. That's the dotted line. But in the 1990s, China's economy underwent a complete transformation. They pivoted from a centrally planned economy to a market-oriented one. One big change was allowing more foreign investment, which opened the door for multinational corporations to produce and sell within China. In 2001, the barriers for trading with China were all but eliminated when they joined the World Trade Organization. China's exports exploded. Clothes, furniture, toys, appliances. They suddenly were manufacturing all of it. By 2007, more than 150 million Chinese workers had migrated out of rural areas and into urban cities. American companies were China's biggest customers. In 1991, just 6% of spending was on Chinese products. That rocketed to 4.6% by 2007. In just 16 years, the US was importing 11 times more goods from China. Manufacturing goods in China was simply far cheaper and the impact on American workers was devastating. The share of people employed in manufacturing fell from more than 13% to just over 8% and China is responsible for about a quarter of that decline. But the damage also spread into all kinds of adjacent local industries. Many workers didn't just lose employment in manufacturing, they actually left the workforce [music] entirely. In some regions of America, the decline in incomes caused a decline in household spending. And so, retailers, restaurants, and construction businesses also suffered and were forced to do layoffs. It's certainly true that for most Americans, the shipping of jobs overseas was a net positive. [music] Goods were cheaper to buy and the stock market benefited from increased efficiency. But the negative side effects on non-college-educated workers in some of these manufacturing towns were shocking. About 1 in 10 workers who were laid off due to the China shock ended up on federal disability insurance [music] programs. The silver lining was that the US overall remained a leading economic power. As companies moved manufacturing overseas, they invested more into innovation and technological advancement. Effectively, American companies moved up the value chain. While China was still dominating in low-cost manufacturing, America was far ahead in the advanced manufacturing required in aerospace and pharmaceutical industries [music] for example and so the US survived China's first major challenge in the battle for global economic power. But this was just the beginning.
The US [music] economy at the turn of this century was defined in large part by a single phenomenon according to the economist David Ort. I asked him to help us understand the second China shock which he says will be worse than the first. Today the US is facing another radical economic shift. It actually started about 10 years ago and just like the first China shock, most of the consequences for American workers are going to be seen in the second decade. Funnily enough, this second wave is a direct result of China's handling of its very own manufacturing problems. But that's where the similarities end because this time the US is at serious risk of losing its position as the world's dominant economic power. China's new economic strategy is unlike any competition the US has faced in its history. It's hyperaggressive and it may end up backfiring on them, but the mistakes America is making play right into their hands.
So after two decades of incredibly fast development, China becomes America's biggest import trading partner in 2007. And for the next few years, they continued expanding this relationship. In 2017, the US bought $526 billion worth of goods from China, which was about 22% of all US imports. But then things began to shift. In 2022, the US imported $576 billion from China. That is slightly more in dollar value than 2017, but China's share declined from 22% to just 17%. They lost 5 percentage points in 5 years. That's a meaningful change, and it was caused primarily by tariffs that America put on Chinese imports in 2018. If there's a 10% tax to have something manufactured in China, it makes countries like Vietnam relatively more attractive. But that first tariff really just acted as a catalyst for businesses to consider importing from other low-cost countries. Tariff or not, China was now the second largest economy in the world. And as the standard of living rises, so too does the cost to manufacture. China had seen this coming for some time and was already building a plan to adapt their economy. In 2015, China announced Made in China 2025. It was a strategic plan targeted at making huge developments to their all-important manufacturing sector. China does this thing where they create these 5-year plans with their goals and targets for what they want to achieve economically and socially. This 2015 announcement included the 13th and 14th 5-year plan since the country's foundation. The goal was to shift focus away from cheap low-tech goods and towards technology-intensive manufacturing to move higher up the value chain in industries currently dominated by the US. And how exactly were they going to do that? By throwing money at it, a lot of money. The government began establishing state-owned investment funds to inject capital into specific sectors. In May of last year, for example, the third fund was set up with nearly $50 billion US to be invested. In this particular fund, they were targeting semiconductor firms, a critical industry in which China lags behind. [music] They want to be self-sufficient so that the US or any other trading partner can't cut off their access to a critical resource. This funding is provided to all the key firms in the industry. So rather than a bet on one company or setting up a 100% state-owned enterprise, the firms compete intensely to be the first to make a breakthrough. Each industry has market share targets for Chinese-owned firms, most of which are pushing for 80 or 90% of domestic sales to be made by their own Chinese companies. And we're talking complete vertically integrated companies. Even Nvidia, America's world-leading graphics chip firm, isn't vertically integrated. They design their GPUs, but they're manufactured in Taiwan by TSMC. And then there's the subsidies and tax incentives, which form the biggest capital injection. For example, since 2014, anyone who purchased a new energy vehicle has been exempt from purchase tax and received additional tax exemptions. There's about a million other policies that they're using, but the bottom line is that they're spending big and it's working.
The Australian Strategic Policy Institute tracks the leading scientific and research innovation across 64 critical technologies. So we can look across different time periods and see which countries have been leading the way. From 2003 to 2007, the US led in 60 of the 64 technologies. China led in only three of them. But fast forward to the most recent measurement and guess how many categories the US is leading in. Seven. 7 out of 64 and China who led in just three categories 20 years ago is leading in 57. Quantum computing, vaccines, and nuclear medicine are among the few remaining categories that the US leads in. But China's recent dominance puts them at the top of high-performance [music] computing, semiconductor design and fabrication, and a number of technologies that have a clear military application. Radar, satellite positioning, drones, and swarming robots. Now, a big reason why China is publishing so much more research than other countries [music] is that they've been so far behind. But they're not behind anymore. In advanced aircraft engines, for example, they're registering more than 70% of the world's patents each year and have even surpassed the US in cumulative patents. Looking beyond the research, in just four years, China shot up to become the world's largest exporter of cars. Yep, in 2024, they sold 5.7 million cars to the world, far exceeding even Japan and Germany. What's happening in the auto industry is a really good case study for the impacts that come from a market that has huge subsidies and other kinds of government incentives. The economy is not in great shape for Chinese consumers. And in a pure free market, this would lead automakers to slow their spending and investment until demand for discretionary spending lifted again. But in China, money has still been pouring in. There's well over 100 different Chinese automakers, all competing to sell an excess of cars to people in a struggling economy. And it's caused some of the most violent discounting of prices. So violent that almost none of these brands will survive. Alex Partners looked at 129 electric vehicle brands in China and estimates that only 15 of them will be viable in 5 years' time. This incredibly warped domestic market is also why Chinese companies like BYD have been exporting a heap of vehicles. On the positive side, they're selling cars for so ridiculously cheap that the only way they can survive is by figuring out how to build cars faster and cheaper. BYD's production costs are cheaper than Germany's in every category. And maybe the piece of information that's most relevant to this video, all of this has been done without the US. It was only 25 years ago when China was exporting 42% of its goods to the US. In 2023, that number was 13%. This visualization from the Lowy Institute is just great. Blue means the country's biggest trading partner was the US. Red means China.
There are so many different factors that play a role in these shifts, but I want to highlight one very obvious mistake the US is making. When America faced its first China shock, there was inevitable pain for sectors of the economy who were being rapidly displaced. But the US ultimately maintained its economic strength by shifting focus to higher-level manufacturing. Low-cost manufacturing jobs were permanently lost, but they've been replaced by jobs in other industries. [music] China is doing the same, pursuing development higher up the value chain. The US today, however, is doing the complete opposite. Throwing around tariffs and hoping for a return to manufacturing in the US is futile. I think this New York Times quote sums it up pretty well. America was never going to be selling tennis sneakers on Temu or assembling AirPods. China's manufacturing workforce is thought to be well in excess of a 100 million compared to America's 13 million. It's bordering on delusional to think that the United States can or should even want to compete with China in semiconductors and tennis sneakers alike.
The authors of China Syndrome suggested that the misguided trade policy America is implementing may have been influenced by the first China shock. The US broadly bounced back while certain pockets of America suffered leading to much of middle America feeling disenfranchised. So, does that mean that America should do exactly what China is doing, load up on government debt and inject obscene amounts of money into cherrypicked industries? Well, the research says probably not. China has been able to develop some of their markets incredibly [music] quickly, but that doesn't mean that it's being done efficiently. There's a 2019 policy review that analyzed nearly 100 academic studies to rank the effectiveness of government policies on driving innovation. It ranked mission-oriented policies, which is China's approach, the lowest on quality of evidence, conclusiveness of evidence, and the expected net benefit of the approach. To oversimplify it, China is essentially betting that they know better than the free [music] markets. That their allocation of capital to certain industries will produce better economic growth than just leaving it to businesses to compete purely for profit. Maybe. But there's also so many examples of inefficient spending. You might have heard that China has a bunch of these ghost [music] cities. Well, property development has been one of the sectors targeted with huge cash injections because China wants to bring more people out of rural areas and [music] into urban cities. That's obviously a good thing, but if you build properties like this rather than in response to demand like a normal market, well, you get 65 million empty homes according to Business Insider. The best policy approaches according to that study are research and development tax credits for companies to incentivize spending on innovation rather than distributing to shareholders and also skilled immigration and trade and competition. Who knew that if a corporation controlled a market that they might be less inclined to make a better product?
If you need something to watch next, then check out one of these videos here and thanks for watching. Heat. Heat. [music]