Why China builds while America debates, with Dan Wang

0:00So today I'm really excited to have Dan Wong on the show. Many of you will be familiar with his work on technology, in particular the angle from China. I've been reading his essays on his beautifully designed blog for a number of years. And Dan has just published a new book, Breakneck, over here, which I strongly recommend. It's just been shortlisted as one of the best books in the year for the FT Business Book of the Year. So much, much deserved, Dan. And it's great to have you here. Thank you very much, Hazi. The core idea in your book is that China is an engineering state led by engineers and the U.S.

0:41is led by lawyers. What in practice does it mean to say that China is an engineering state? In practice, what it means is that China is very intent on engineering the environment. I spent a lot of time living through some of the successes and the not-so-great successes of the engineering state. Some of the successes can be represented through the city of Shanghai, which has beautiful subway systems, very well-functioning, excellent infrastructure of all sorts. And you can debate whether this is also a success, but I've also cycled through China's fourth poorest province, far in the southwest in mountainous Guizhou, which has high-speed rail, which has 11 airports, which has 45 of the world's tallest bridges.

1:28And so this is where this province is really saddled by all sorts of debt. It is pouring a lot of cement into the ground. And I think this is giving people a sense of some degree of optimism for the future, even if it creates some problems. Engineers also are very intent to engineer the economy. So as I was living in China between 2017 to 2023, one of the centerpieces of my time there was Xi Jinping's effort to smash a lot of consumer internet companies, a lot of cryptocurrency companies to say, we need young people to work on strategic technologies instead. And one final thing to say is that the engineering state also treats society as if it were just another engineering exercise, as if people were just another building material not to be torn down and remolded as they wish.

2:18And so I spent a lot of time also thinking through another big centerpiece of my time in China, which was zero COVID. I was in China throughout all three years of zero COVID, really felt like the state was simply moving people around as if we were a series of chess pieces. So environment, economy, society, they engineer it all. I mean, it's a remarkable thread that you've drawn between those different dynamics. I think one of the really helpful things is it gives us a frame to try to make sense of things that may feel a little bit disconnected, but in a sense, there is something that pulls it all together.

2:55I suppose one of my questions around all of this is why does it work in China? I mean, people have tried technocratic engineering in the past. Of course, the Soviet Union was a good example, you know, the five-year plans, Goss plan, all these other things. What is it about the intersection between Chinese leadership, Chinese society, Chinese culture that has meant that it has this momentum that we can observe when we see you land in Beijing and the airport is pretty phenomenal. You walk around a clean city, you go on high-speed rail, you see the numbers of BYD cars that are now driving around the streets of London, you see what's happened with the exports of solar panels.

3:40Why does it work when it didn't work previously? I'm not sure if it fully works. I agree that a lot of it does work. Beijing airports, the solar, the BYDs, which is becoming more of an international success. There are also, if we wanted to poke at the dark underbelly of the engineering state, Maybe we should go to Guizhou and take a look at these really tall bridges that cannot meet their bond payments that very few people use. We can go to the northern city of Tianjin, which you have been to, Azim, which is one of China's most overbuilt cities. They try to build something like China's Manhattan and does not function super well.

4:15What I would say is that the engineering state mostly works pretty well. It has mostly worked pretty well in terms of producing manufacturing leaders, producing excellent infrastructure. And that is a real achievement. And I think what really distinguishes China from, let's say, the Soviet Union is that the Soviets were much, much more state-controlled in a lot of ways relative to the Chinese. Goss' plan really was real. The five-year plans really were real. Whereas I think the Chinese five-year plans are kind of an interesting exercise. It is taken more seriously rather than literally. And what China has is this incredibly dynamic, vast consumer economy, which the Soviets never were able to produce.

4:57There is a lot more entrepreneurial dynamism in China that I think a lot of these successes, when you say something like BYD, which is an entrepreneurial firm, this did not grow out of the plan, Now, when we think about something like solar, that is, again, predominantly entrepreneurial firms, some of them maybe state-owned. But I think there is something, call it Chinese characteristics, that inflects a lot of the engineering state that does make it much more successful. There is something that's relatively distinct, which appears to be the transition between engineered outcomes that we might have seen before 1979 or before the opening up of capitalism with Chinese characteristics, where there were engineering efforts under the leadership of Mao, and many of those didn't really work well.

5:43The attack on the four pests, for example, is a great example. But I think the thing that struck me about reading about China in my recent trip was that there's also a degree of competition in this engineering, that in a way, city mayors and regional leaders compete with each other in a way that we didn't really see in the era of the centrally planned engineering state. Can you just characterize that and just tell me whether you think that competition is relevant or important? The important thing to say about China is that there is a lot of competition. There is a lot of competition between the firms.

6:20There's a lot of competition between regional governments. Everybody has their favorite EV maker, where the Shenzhen EV makers, the Shenzhen government doesn't really buy from the Shanghai EV makers. It has to buy from itself. And so I think there is this level of competition that is pretty endemic, mostly because China is just so big. it cannot possibly be controlled, not even by a ruler as ambitious as Xi Jinping. But I think there is also a sense of which I feel like, you know, part of the problem is that the engineering state could be too successful. Did the wiping out the four pests in the Great Leap Forward, was that a success?

6:54Well, in narrow terms, destroying all the sparrows really was something that Mao did. I think the estimates are that China destroyed something like 30 % of sparrows, which triggered all sorts of ecological disasters. Part of the consequence was the destruction of the sparrows. So that was an effort in which they succeeded, but they failed. And this is where I also think about other engineering projects. Something like the one-child policy, something like zero COVID, which the number is right there in the name. There's no ambiguity about what these sort of things mean. You know, they were able to achieve one child per couple for a lot of folks, and they were able to tamp down on the growth of zero COVID for quite a long time.

7:31But this is also where success actually is a harbinger of failure. And maybe you don't want so much engineering-led state capacity here. Let's dig into zero COVID because I think for many of us who are not in China, we lived through the lockdowns that you had in the UK and certain parts of the US and parts of Europe. But it was very, very different as it played out in China. and you describe this in your book as well, but just for people who are listening, what was it really like and what did zero COVID actually mean to live through? I think the way I reflect about the three years of zero COVID are kind of a drama in three acts.

8:13The first act of zero COVID, I was in Beijing at the start of 2020. We heard about the Shanghai lockdown. We were all quite nervous about the new respiratory virus. And one of the broader reactions among myself, as well as a lot of my friends was, oh man, not again. This is the second respiratory virus to erupt from China in 20 years. The first was SARS in about 2002. And we were upset because it seemed to erupt in exactly the same way, which a lot of local political officials were uninterested in bad news because they wanted to maintain a facade of serenity. And that was one of the reasons that zero COVID spread pretty extensively.

8:53And this was a time when a lot of Western commentators were saying, well, could COVID be something like China's Chernobyl moment, which a natural disaster triggers the collapse of a political regime? And then there was a longer second act in which China was able to control the virus through pretty restrictive means, much better than other countries could. So China essentially sealed the borders. Only Chinese could enter. If you landed in China, you would be put into a two-star hotel where you couldn't really leave for two to three weeks. You'd be given hotel food for quite a while. And anyone to test a positive for the virus would be dragged away from their home to be sent to a convention center or stadium such that they don't affect the rest of the household.

9:38These sort of restrictive measures, plus a contact tracing regime that was kind of inconvenient, but we all learned to live through it. This proved that the Chinese were able to have much lower rates of transmission and get back to normal life in a way that the Americans could not. So I was pretty struck that between March and April, a lot of Beijing was coming back to life when the U.S. was really shutting down. And so more Chinese felt that the zero COVID system was working. But then there was a third act in which people had been stuck with the virus. The government seemed to have no strategy for exiting zero COVID.

10:13People wondered whether they would just have to be dealing with the virus all the time for years or perhaps decades. And when the virus evolved to be much more transmissible, namely through the Omicron variant, Shanghai lockdown. This was, I described, the most ambitious lockdown ever attempted in the history of humanity, in which 25 million people were unable to step foot outside of their apartment compounds over the course of 10 weeks in the spring of 2022. And this caused a lot of anger and a lot of distress among ordinary people because they did not want to have random shutdowns through a super transmissible virus all the time.

10:48And the new mod of this zero COVID strategy was at the end of the year in December, essentially Beijing threw up its hands and said, everyone, you're on your own now. And COVID spread throughout the country in which they removed all of these controls in one of the coldest months of the year. And so this is where I think that the engineers tend to be really fixated on delivering one policy. When it becomes untenable, they can swerve really quickly and do something completely different. Is this a feature or a bug? Hard to say, but that is just how engineers operate. You're right. I mean, engineers, it's a bit unfair.

11:24I'm going to generalize, but nuance is complicated, complex to engineer for and second and third order effects are complicated to engineer for a priori. But I have a quick question about the lockdown. Do you think the lockdown is a function of an engineering mindset or could it have been a function of a authoritarian regime that doesn't have to worry about popular consent for a little while, a bit longer than a democratic regime, but the engineering mindset allows you to execute on that intent far better than a different class of mindset. I think there is no contradiction between a role by autocrats and a role by engineers, in which I feel like it is called a role by Leninists or a role by communists.

12:08These all apply. So I think that what I want to offer is that the engineering state is not a replacement to any of these other important terms. Part of what I wrote this book is that I thought we were reasoning through this 21st century competition between the U.S. and China, mostly through these political science terms from the 19th century. It doesn't mean that these political science terms are wrong. I think that they are just incomplete. And I think that we should definitely understand China as being authoritarian, engineering-led, somewhat socialist, somewhat capitalist, kind of neoliberal as well, and also very state-driven.

12:42But once we start adding up all of these sort of things, I think it is more useful to have simple frameworks like engineers, really to try to understand them. Would they have been better off as a loyally state? You know, you describe the U.S. as a loyally state and it has very different dynamics that emerge from it. What are the characteristics of that that make it a loyally state? The loyally society moves much more slowly. It doesn't really tend to commit to big projects all at once and then go really hard and go all out towards achieving some of these projects. So the loyally society is much more deliberative And what we can tell is that the Loyalty Society, whether that's in the U.S.

13:23or arguably also the U.K. is also a Loyalty Society, they are also much worse at building. They're much worse at building HS2. They're still talking about the Heathrow runway. It's been talked about for, what, two decades now. Kind of incredible. And so I think that what I would love to see is for the U.S. to be, let's say, 20 % more engineering because the U.S. has a desperate need to build its way out of the housing shortage, build its way out of the rusting manufacturing industrial base, and then also resuscitate the defense industrial base and all of this before the infrastructure that we need to decarbonize the economy.

14:02I dare say that the UK, which is actually more substantially de-industrialized than the US, maybe let's make a 30 % more engineering. And I would love for the Chinese to be 50 % more loyally because I think it would be wonderful for the Chinese people to actually enjoy individual rights, to have a state that respects a lot of their creative impulses. And I wish that, and I think that China would be a stronger power if the state could just sometimes learn to leave it's people alone for a little bit so that they can individually flourish. Watching the numbers around China between 1995 going from very small economy, maybe one of the top 10 in the world to 2014, the size of the US on a purchasing parity basis and seeing what they are that nation and its industries is capable of doing in scaling out advanced technologies.

14:54And then hearing you say, well, you know, China could be an even more powerful state with a little bit more loyalness really tells us something about what the capacity of that nation is. Now, you know, this moment in history, it's sort of inescapable that a lot of the language that comes out of the U.S. is couched in the similar terms to the great power competition that we had seen with the Soviet Union, certainly since 1947 and until, you know, the turn of the 90s. What are the things that Americans don't understand about China? You know, you've come back here, you're talking to people, you're hearing what people say on the East Coast and on the West Coast, the rhetoric from the politicians, but also the way in which technology firms talk about this must land on your ears and you're thinking, I'm not sure they've interpreted this quite right.

15:41So what are the biggest misunderstandings? First of all, I think we're all wrong about everything all the time. I think that is a rough starting framework. I'd be the last person to put up my hand to say I know anything about China. And I frankly don't understand anything about America either. And I think both of these countries are too big and too difficult to really try to grasp. And so I think there is an East Coast flavor of getting China wrong, which is that China is successful in technology, mostly because of industrial subsidies. And so if they are cheating in all sorts of ways, and we need to raise the cost of their production through tariffs, but if weren't for all these industrial subsidies, China wouldn't be very far ahead.

16:22And I think there is also a West Coast misunderstanding of China, which is that China's ahead only because it has stolen a lot of American technologies. And I think both of these perspectives are true to some extent, but radically incomplete. You know, I do see part of my task as really pushing back against some of these views. I think there are other views that we can push back against, that China is somehow this wonderful global socialist utopia, which has solved poverty and it's just some sort of leftist paradise. I think this is a country that detains union organizers, that has a pretty threat-bare social safety net, and that is, you know, enforcing pretty traditional gender roles upon the people.

17:03And I think that, you know, a lot of what I'm trying to do is to say that China has been technologically successful. It is growing more and more technologically successful. And also, the political regime is getting more and more repressive in new and novel ways. And so I think that what we see in China is some sort of technological progress as well as some sort of institutional political regress. And I think we can keep both of these facts in mind. I think that is simply true. And, you know, try to interpret the world in a little bit of a smarter way that, you know, we don't have to say that this is some sort of an amazing political paradise.

17:40At the same time, you know, we don't have to say that they are failing all the time in technology. There's a deep sense of rivalry between when I talk to American entrepreneurs or certainly when I listen to the statements that are public, a sense that they are in a race against China, particularly around AI. And that's a lot of the language that has infused what the big AI companies have said. It's behind a lot of the language around export controls on chips. But when I talk to Chinese entrepreneurs, I've not talked to many, probably 20 to 30 in AI and advanced materials and batteries and so on.

18:16I don't get a sense from their language that they see themselves in a race against the U.S. And that could be a language barrier. It could be that I've not spent enough time with them and they're not going to be candid with me. What is your interpretation about how the people in these two different countries in those roles see each other? It is certainly striking that Washington, D.C. in particular conceptualizes the U.S. and China technological competition as a race. We saw this with the AI action plan announced by the White House a few months ago, in which they explicitly said AI is a race. Now, in which dimension is it a race?

18:48You know, it's not always very clear to me. I think that this is much more of a long-term competition. But I think what you're hearing a lot of is kind of more the East Coast perspective of Washington, D.C. saying, well, we need to get ahead of the Chinese and we need to build a lot more. And I think if you are speaking to more West Coast entrepreneurs, as you do all the time, I think people have a much better sense that, you know, it's not so much a race. Nobody gets to hit the win button. There is no referee that comes out at the end to give gold, silver, and bronze. This is kind of just a long-term competition.

19:20And I think you're picking up on something very true, which is that the Chinese kind of conceptualize themselves as being a little bit apart Every Chinese company understands that American suppliers can be pretty unreliable because you never know when the Department of Commerce is going to completely cut off your chip access. And so they understand that there is kind of this bully out there that is denying them essential technologies for reasons that are sometimes valid, which they don't always understand. And so they are trying to escape from under the thumb, but maybe they are also thinking mostly about their own products for their own sake rather than, oh, well, how do we get better than the Americans?

19:59But I think there is also a pretty clear sense among Chinese entrepreneurs that it is the U.S. that has invented a lot of great things. You know, Chachi PT was absolutely noticed in China. MRNA has been noticed. And so maybe the Chinese themselves don't conceptualize it as a race. But, you know, one point that I'll offer is that it seems like the Americans have a much poorer understanding of China relative to the Chinese who have a much better sense of America because, you know, it is kind of this global Twitter marketplace. Everybody is reading American stuff where, yes, the Americans don't spend that much time thinking about what's actually going on in China.

20:34A quick note. If you want to support us in bringing more of these conversations to the world, please consider subscribing to the show. Well, I think American information is easier to access because we've built a layer of decades of journalism and reporting and analysts who filter it and take it across. And, you know, I would guess that the level of English speaking amongst Chinese entrepreneurs is higher than the level of Mandarin speaking amongst American entrepreneurs. So there is that sense. But you raise an interesting point about the mRNA vaccine, and we could add the smartphone or GPS. These are things that have emerged from the American innovation stack running from human capital development from the education sector through to the way government has funded things early through to venture capital.

21:28As a Chinese stack produced anything that is comparable? And are the conditions perhaps getting better to do that if they haven't? Yes. And I think one quick thing to say about the American cultural stack is that it seems like all the British are much more familiar with American politicians than they are with their own politicians. And so there is something kind of really globally dominant about the American discourse that gets absolutely everywhere. I think you're right that China has not produced a lot of these really core technologies that other people want to build on. Most of the time, Chinese firms are fast followers.

22:02So it was Apple that invented the first real smartphone, Samsung followed, and then Huawei, Xiaomi, Oppo Vivo nipped at Samsung's heels. And again and again, I think it is slightly difficult to find real Chinese innovations. Perhaps you can label the consumer grown as a Chinese innovation. But I think what I would try to encourage listeners to think about is that I think that there is a little bit of an overstatement of the general view that quote-unquote innovation is the most important thing. First, it's really difficult to define what is innovation. I would say that a lot of the improvements in electric vehicles as well as their batteries, though they're not a new category of products created by the Chinese, you know, this sort of incremental bit of innovation, that is absolutely an improvement over the product that the Chinese are delivering and the rest of the world are not.

22:54And I think China's real strength here is to be a very good, fast follower. It doesn't matter that China was unable to invent the first solar cell. The first solar photovoltaic cell was invented by Bell Labs in 1954. The Americans treated this mostly as a science project, and that is all good and fine. But the Chinese were able to completely overrun this industry, such that they're making about 80 % of the solar value chain in the world. And so my view is that science is, for the most part, a public good. It does not matter whether the innovation comes from Zhuizhian University in Hangzhou or Stanford University in California.

23:32It's whoever can make the most use of it. And the American firms have not made very good use of it, and the Chinese have done a much better job. So maybe this process of innovation is less important. Maybe what matters the most is just having most of the industry and being able to iterate upon it. There's something in that. The notion that the value really accrues at the point of diffusion, right? And one's ability to diffuse it in the economy. And if it's something that has protocols or standards, you want to diffuse those protocols and standards as well as the Americans did with IP and other internet protocols back in the late 80s through the last 30 years or so.

24:10And it's the diffusion that actually impacts the prosperity and the welfare and security of your people more than the early invention. I think that's something that we can think about when it comes to AI, because when we look at what's happening in artificial intelligence, I see very, very distinct etiologies in the US compared to China. You know, in the US, if I interpret it, it's a all hands to the pump race to build better and better, bigger and bigger models that are, you know, more generally capable that might reach something that some people call AGI. And what I see in perhaps in China is a broader, more distributed approach towards, I mean, this is not about not producing the best model or better models, but it's more about saying, you know, we can diffuse this across our economy, we can find ways to use it more quickly, and it's not dependent on these bigger and bigger models.

25:08So I see this sort of this distinction. I was thinking back to just how important open source became in China. You know, it's been something that's been important for 20 years. It was certainly part of a recent five-year plan as something to anchor around. And it seems to be one of the distinctions between what's happening in the U.S., where I do think we see some genuine efforts at really hardcore innovation, and what's happening in China, where I think we're not seeing exclusively fast following. I think we are seeing very rapid iterations bouncing between these other labs, the Kimmys, DeepSeq and Alibaba and so on.

25:48And through that, seeing an accelerating cycle of innovation. And the paths seem to be quite different at this point. I think the other big difference between the U.S. and China is that maybe the U.S. has a lead in reasoning models right now. But there are other big advantages that China can bring to the table, which involve much bigger aspects of hardware, which the Chinese are significantly better. So I'm thinking about something like power production. AI requires a lot of power to both train and to actually run. And China right now is producing, by the end of this year, it will produce 500 gigawatts of new solar install.

26:25The U.S. will have about 50 gigawatts. So just one order of magnitude difference. China right now has 33 nuclear plants under construction. The U.S. has zero. And so, you know, this is where, you know, the Chinese are thinking a little bit ahead of, well, what are the constraints going to be? How many years is it going to take? And then they're actually building a little bit more towards that future. China also has a lot of talent. China has different sorts of data. The U.S. economy is mostly services and healthcare. Maybe what the Americans will get is the automation of the Baines and the McKinsey's of the world.