Adam Tooze on the Big Misconceptions of the Chinese Economy

26:08But the direct link was that American aggregate demand excess provided a market for both German and Chinese exports with Chinese industrialization providing a market for German manufactured goods. And that still is a link. And you see it in the commitment of capital goods industries in Germany and industrial companies in Germany to ongoing direct investment in China, which is still live. I saw this when I was visiting because I speak German and I'm known there. I bump into German business people when I'm in China. And they will tell you flat out that they have to be there for two reasons fundamentally, because it's a big market and it's rapidly growing if you're saying heavy chemicals of your BASF.

26:51You can't not be there. But the other reason why a VW, for instance, can't not be there is that if you're actually going to compete in the global market in the next generation of vehicles, motor vehicles, you can't do what the US firms are doing, which is basically retreating behind national protectionism. You have to at least try and stay with the Chinese manufacturers in the Chinese market. And so VW is doubling down on its investments in China, because they just see it as the market. It's already the biggest, but it's also now at the qualitative, at the technological frontier. And unless you can compete there, and they've been having a brutal period for the last 18 months, you're basically done.

27:29You're basically going to be a legacy manufacturer of sophisticated internal combustion engines, not of the new cutting edge. Siemens, I think the electrical engineering firm is kind of a little bit in between the two. I think it also sees, especially in like process manufacturing. So the sort of highly sophisticated, fully integrated, electronically controlled manufacturing lines, which the German firms specialize in, they feel they have to still be there. So there is this substantial investment driven market orientated technologically, you know, inspired link between Germany and China. And you see it in the way the German government maintains its relationships with China through thick and thin.

28:08And when Schultz goes, he takes these large delegations of German business leaders with him. And they're quite outspoken. They're sort of anti-China consensus that you quite rightly pointed out is prevailing in the US, and which I really think weighs on American business leaders now, doesn't prevent German business leaders openly saying, if we're in the business of car making, we need to be in China. I mean, they'll just simply say that flat out. And BASF, who's played real hardball with the German government over the Ukraine war and the energy costs issue has openly said, basically, you either give us the support we need or we're leaving for China.

28:44And in the end, they've left for China where they will get the power plant they need. This isn't dirty stuff. The BASF has this commitment to being carbon neutral in the foreseeable future. And so what they said to their Chinese, the region where they're investing is, hey, we need a gigawatt of clean power. And guess what? The wind farm, the offshore wind farm is already in the process of construction. So yes, the German relationship different. And it's based on this division of labor industrial integration.

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30:35pages of market research into five insights with a click? Do that with Acrobat. Need templates for a sales proposal that'll close that deal? Do that with Acrobat. Need an AI specialist to tailor the tone of your market report to sound real smart in real time? Do that with the all-new Adobe Acrobat Studio. Learn more at adobe.com slash do that with Acrobat. So since we've pivoted to Germany, You know, there's just a ton of stories these days about frailties within the German model and the poor growth. And it feels like a very flip the script from the 2010s when Germany was booming and the periphery was so weak.

31:16And then, of course, early September, we had the AFD party, which is a right wing party, won big in regional elections. So there's a lot of angst right now about what's going on in Germany. What is going on in Germany? How much of the concern is like, okay, German legacy manufacturers are having trouble competing with Chinese manufacturers. There's obviously the politics of immigration and so forth. How much of a direct line can you draw between what's going on with the economy and then sort of what's going on in the political scene? I think there's three issues in play. The extraordinary election results that we saw in Turingia and Saxony, two states.

31:57Germany is a federal system, Turingian and Saxony are two states from the newly joined East German provinces. One element of this is the legacy impact of German unification, which, I mean, if you've ever had the chance to travel through East Germany, was accomplished. It's really a gold-plated regional policy program. Cities like Dresden are absolutely gorgeous, hugely invested, wonderful places to live. But nevertheless, there is this reasonably well-founded understanding on the part of East Germans, that they are at some level new to the party. They were basically bolted onto the West German experiment and had to largely accept its terms.

32:36And for a traumatic period in the 90s and the early 2000s, this is largely the parents or the middle-aged generation of East Germans, there was huge unemployment and massive disruption and de-industrialization of a really shocking variety. And that lingers in the political system. And if you ask the voters for the two extreme formations. One is the AFD, the Alternative for Deutschland, originally an anti-Dragi, Eurosceptic party. And the other one is Sarah Wagenknecht, so truly a Marxist philosopher who is also keen to make a compromise with Putin over Ukraine. So there's a left and a right-wing extreme.

33:13And if you ask their voters how they feel about their standing in German society, 80 % plus will say we feel like second-class citizens. So that's one key element. The second key element is the migration issue. And the AFD didn't start as an anti-migrant, xenophobic, racist party. It started as the alternative was to QE, to Draghi. But after the refugee shock in Syria in 1516, it became an openly racist, openly neo-Nazi formation. Where I think the deindustrialization element of the story comes in is that that removes the last best hope, if you like, of the mainstream, which says, you know, the way we're going to address these problems and, as it were, integrate these more successfully is by Germany's economic success story.

34:02That's ultimately going to take care of this problem and achieve successful integration. And they plowed money into Intel and the Taiwanese manufacturing chips around Dresden that hasn't bought off the East German voters. And the real nightmare of the shift in the motor vehicle industry, which is a huge piece of the German industrial infrastructure still, is that if that goes, then you're antidote, if you like, to what is essentially a politics of racism and Islamophobia, that is no longer plausible. And it isn't, I don't think that folks in Dresden or in Turingia are voting AFD because they're worried about jobs being lost in VW.

34:42It's more that in Berlin, there's total panic because if you haven't got the VW model, it's not obvious that Germany really has a growth model. And in part, it's the same blind spot as we were talking about with the US. In other words, they aren't actually focused on what even in Germany is the main source of employment and GDP, which is services and not the manufacturing base, but they have been, they've trapped themselves. They are trapped by powerful interest groups, the very strong voice of organized labor in Germany, but also the industrial lobby and a kind of lack of imagination. They're kind of clinging to industrialism as really the last straw.

35:18And yeah, that's why then the threat of China is really ominous. You alluded earlier to the idea that maybe both China and Germany seem to be hoping for, I guess, the immaculate emergence of supply side solutions to their problems rather than having to do some sort of large scale stimulus. How realistic is that? Like where could relief actually come from? I mean, in the Chinese case, it's pretty easy to see. I mean, there's a whole series of moves that they could make that would be, it's hard to see that they're just not straightforwardly win-win-win, really. And they would be an expansion of household demand and expansion of high-quality human services.

36:01there's a lot of remedial stuff that actually needs doing to backfill the China dream. The extraordinary sophistication of a city like Shanghai is not matched in the Chinese hinterland, which is, of course, vast and it contains hundreds of millions of people. And even elementary stuff like schooling is really miserable in provincial China. We, of course, think of the huge success of elite education in China, but that isn't the majority experience. And so, you know, you could very easily imagine a kind of comprehensive upskilling, upgrading strategy, implementing it will be a different thing. But that would be the way you would go.

36:36For an economy as large as China's, it's a domestic policy story in the end that will make the difference. For Germany, I think it has to be Europe-wide. That's the way to go. I mean, they could break the impasse domestically over the debt break and invest. And that would be one option. And that's certainly a big priority. And there's some promising noises now, mercifully, finally, out of the SPD, out of the Social Democratic Party, Chancellor Scholz's party, about a frontal attack on this debt break. So the debt break is the German version of the European debt rules or vice versa. The European rules are a version of the German debt break, which limits the deficit and constraints borrowing, even when Germany pays hardly any real interest and is in need of several hundred billion euros worth of investment in every area of public infrastructure, of digitization.

37:26So that would be one route. The other one, I think, has got to be Europe. And it may be shocks which, you know, deliver the opportunity to do this. a Trump victory followed by disaster for the Ukrainians would, I think, unleash a new Europe level borrowing package, maybe another half trillion euros worth of borrowing. And that would be the kind of structural stimulus that would benefit the German economy quite considerably. You know, I mentioned this in the intro, but one of the arguments that you hear in the US about why ramping up the trade restrictions with China is this idea that they're cheating in some way, right?

38:04Maybe overt, whether it's like pure sort of industrial espionage. But then there's this question like, well, there's all this state support and these aren't the rules of global trade. Just from like the historian perspective, is this a novel argument or has there always been this idea that like, no, you're doing it the wrong way or you've built up this industrial capacity in a different way than we built up. And again, it strikes me that every country has different domestic rules and so forth. In the US, we subsidize education to quite a degree. And so that is a form of subsidizing worker training that then corporations can take advantage.

38:43How novel is this claim that we get to do these things because we don't like the way you've developed? Has that always been part of these global trade debates? The first thing to say is that as far as we're able to estimate, there have been a couple of fairly serious minded efforts to estimate the scale of Chinese industrial policy spending. And it's significant. I think the most widely cited estimate puts it at about 1.7 % of GDP, which when you compare it to a similarly defined measure, though I agree with you, Joe, there's like lots of different ways of defining it. But if you apply the same classification to Europe and the US, that's about three times the share that they spend.

39:20So that's one element of this. That's clearly for real. Another, I think, horizon against which to measure this is like the regime that we had before. And I think the ferocity of this argument has to be judged against the assumption that somehow we had outgrown that kind of era of state-led and state-subsidized support. And in the European case, you'd have to say that since the 90s, they've taken that really quite seriously. In other words, the Europeans do have rules that bite to prevent national governments and regional governments from doing the kind of subsidy that the Chinese take for granted.

39:59Why? Because the Europeans are balancing this really complicated multinational European Union. And so to avoid just these crazy subsidy races and Germany winning all of them, there have to be these very tight rules. And the Europeans take this seriously to an extent that is at times quite farcical. The argument coming from the American side is a little less plausible because that kind of subsidy never really went away. And American states and cities have always competed in a fairly brutal way for investment. But I think that's another horizon against which sort of the point, the finger is pointed at China, which was, OK, in the 90s, we expected you to do this because you were still poor then.

40:37And then you did WTO. And then we were expecting you to get rich and grow out of this. and goddammit, you haven't. No, in fact, you've somehow doubled down since the 2010s. You've been doing it more and more intensely. And there's a new study of China which suggests that, in fact, this was a policy learning on the part of Beijing out of 2008. So the Chinese imagine that after the great financial crisis in the West, the Europeans and the Americans would realize that finance-centered growth was not a great thing and they would double down on industry. and to get ahead of the game, the Chinese thought they should.

41:11And of course, it turned out that no one else really ever did quite make that move. And the Chinese really did. And by 2015, they had the Made in China 2025 policy. So there was an asynchronicity in which, as it were, European and American policy theory thought we would grow out of this. So the Chinese suddenly, in fact, doubled down. That's so funny, because I always think like all these things, CHIPS Act, Inflation Reduction Act, I always have this idea. It's like, you know, 2009 might have been a good time to have done this when there was a lot of spare capacity and cheap labor and all this stuff.

41:40Anyway, I just have one last question for you. And, you know, you've been fairly critical of the Biden administration. You know, we have had this turn, right? So the administration, and maybe starting with Trump, but certainly the administration is like pivoted away from the sort of, I guess people call it neoliberal consensus of the decades that preceded it, the worker-centered approach to thinking about our trade relationships, et cetera, domestic investment, maybe belatedly getting to do some of the policies that maybe we should have implemented 15 years ago after the financial crisis. What do you see as your role as, I guess, a public intellectual, someone on the left?

42:23You're someone who people in the Democratic Party might read and listen to. What do you see as sort of what you're trying to accomplish with your writing and your public work? Yeah, it's been quite a shock, actually. I mean, on the one hand, we were listened to, and I'll say we advisedly, but it's the bit of Biden economics which is now buried and they prefer to forget, which is my team, I was one of the leading spokespeople of the team that basically said Obama didn't go big enough with the stimulus in 2009. And we needed to go really big, you know, this time. And we were listened to. Like, you know, I know from Schumer's people that absolutely that argument, that they missed a trick in 2009, it really, that actually got through.

43:09And after all, they did the huge stimulus early in the Biden administration. And I would argue that it delivered a miraculous macroeconomic record, right? But the funny thing is that that's the bit of Biden economics that everyone wants to forget because of the Larry Summers inflation argument, right? Because that was anathematized almost as it was happening. And instead, the entire team has swarmed around this industrial policy element. And I think there I've discovered a new role. So I think in the first phase, I felt, okay, there was policy learning that was going on. And the kind of left critique of the Obama administration was making a very positive contribution in feeding that.

43:45Then we came to what actually emerged in the industrial policy. And I have to say that a lot of folks that I would consider allies, friends, whatever, shifted roles to essentially the role of a kind of cheerleading around the Biden administration. And I get it. They're Americans. I'm not an American, non-American citizen. For them, this is life and death, fate of the republic. We have to rally behind our team. And by Jove, they did. The Biden administration, if nothing else, was brilliant at message management and worked. the usual suspects in the finance Twitter space, incredibly hard to get everyone on side and keep pushing.

44:20And at that point, I have to say, I discovered a slightly different role, which was more that it's a less attractive role. It's a less comfortable role, which is really that of the sort of inside critic or just simply somebody who wasn't necessarily drinking the Kool-Aid and was saying, well, by what metric, by what scale is this really adequate? And so that That was on the IRA side, the Inflation Reduction Act, where this was turned into this gigantic epic of industrial policy. I just don't see it. I don't see it in the data. I don't see it in the scale. I don't see it if you run any kind of counterfactual or what we would have expected anyway to have happened.

44:55I think there's been a real soft kid-glove treatment of this. Much more seriously, however, is the question of war and peace and the way in which national security has come to form an essential part of even of a progressive economic policy in the United States. And I come from the generation of Europeans whose childhood and youth was entirely dominated by the prospect that we were all going to end our lives in a nuclear incineration. And I find that turn towards a hawkish anti-China synthesis of industrial economic and military policy profoundly troubling. And at the very least, I think the role of folks with my kind of biography, I will become an American citizen, but nevertheless, I feel like our role at this point is to push back because there's an element of flag waving, a kind of left American exceptionalism that comes very rapidly to the fore in moments like that.

45:51And there is a willingness to believe that, yes, I don't know, America can do a Green Marshall plan or that whole rhetoric they're all very familiar with. And I've discovered a different role for myself than I really imagined in, I don't know whether I've anchored anything, but just consistently asking the question, is this? And it's not a skepticism about the potentially beneficial role of US leadership. It's just actually more often than not, a kind of asking, are you actually serious at all? Because I see hundreds of millions and single digit billions when we all know that the problems we're talking about, if you're serious and if you actually want to compete with China, are hundreds of billions, if not trillions of dollars that need mobilizing.

46:31And what I definitely don't think we should buy is the kind of weak soup of a promise of giant and dramatic action, which we all kind of, you know, can get excited about when in fact, what's being delivered is something far less than that. Adam Tews, so great having you back on Odd Lots. Fantastic conversation and looking forward to the next time. Thank you. Really appreciate the way you guys do. It's such an essential listen again and again and again. I can't tell you how many like, oh, my God, I can't stand this airport moment. You know what? I mean, listen to Odd Lots. Everything will be OK.

47:04And then the time flies. Karnan, keep that in. Keep this part in. Seriously, I kid you not. Justine Heathrow three days ago. It was like a nightmare security line. I just put them on. Great stuff from Jackson Hole. Oh, thank you so much. It's really a huge service. And it warms my cynical heart to know that we make the experience of Heathrow Airport a little bit better. That's great. I mean, there are other, also better moments. I can describe much more chatty notes. But, yeah, it's really good stuff. Well, thank you so much. And take care and hope to see you around soon. Yeah, you too.

47:48I love talking to Adam. It really had been too long. But, you know, I love talking to people. You just throw out anything and they'll have something interesting to say. I know. Those are great guests. Yeah, he definitely makes it easy. That's for sure. I did like his point about the sort of etymological point about the word overcapacity and this idea that like, OK, well, you have a grievance with China that basically boils down to, well, they're not playing fair. But if you can put this sort of seemingly neutral, technocratic, almost, it sounds scientific term onto it. And maybe you can use that as the basis for like adding specific numbers or just giving it this veneer of like scientific feeling.

48:33I thought that was really interesting because it does seem to be like maybe that has happened over the past year or so. You know what I found to be a very interesting point? And actually, something else made me think about this recently, and maybe we should talk about it more, is the sort of acceptance that we have that if we want productivity growth, we can't get that in the service sector. Right. And so, like, you know, you see, you know, health care costs. I think that actually the cost curve has been bent a little bit in recent years, but like there's a growing and growing like health care costs.

49:08Housing services continue to be a major source of strain. We all know the frustrations that people have with like university costs or child care costs or elder care costs, things like that. And so when we think about like economic growth and where productivity gains are going to come from, we default to the manufacturing sector. Or meanwhile, there's this huge swath of our economy that I think many people intuitively feel like we're losing ground on, that we're getting the same thing, but it's more expensive every year. And that perhaps the sort of big challenge or a task that we should take up at some point is like, why don't we make our services cheaper?

49:49Well, I think it's true. And you see, that's a totally, that's a great point. And you see it borne out in the inflation statistics, right? I sometimes think, OK, the cost of things is going down, but the cost of living is going up. And you see that delineated very clearly in the statistics where like, OK, TVs have become more sophisticated and more advanced and they're cheaper than ever. But rents, home ownership, insurance, medical costs, college education, child care, food prices to some extent, all of those have gone up phenomenally. So, yeah, I think it's a great point. Totally. And I'm glad Adam brought that up.

50:28Another interesting thing that he said was just this idea that there is a lot of dissatisfaction in China. I mean, there's a lot of dissatisfaction in the United States. And you hear this from multiple people when you talk to them, that there really is this sort of deeply negative vibe. And maybe it's just because GDP growth has been weak. But it feels like at least, again, this is all secondhand for me, that there is like something something wrong going on there with the way the domestic population perceives how the economy is unfolding well one thing i was thinking you know we talked about um well why didn't the u.s maybe have bigger stimulus post 2008 and again i think that's a really valid point that has been brought up by a number of people at this point but conversely if you look at china China had massive stimulus post 2008, and people have even described China as saving the global economy in that time period.

51:28And I think you kind of have to wonder, like, if that stimulus had been somewhat scaled down, would that have made, I guess, the transition or the post 2000 sort of 12 years a little bit easier? Like the U.S., if we had scaled up fiscal sooner post 2008, maybe things would have been better. But conversely, if China had maybe scaled some of it down post 2008, would it have been better for the economy? It maybe enabled it to move more to, you know, market driven, consumer demand driven. That's interesting. I don't know. No, but it's so funny. I had not realized that this idea that like after the financial system in the U.S.

52:11collapsed, that the Chinese may have thought, oh, the West is going to give up on their financialized economy. And then we basically just went right back to the same approach. So much to pull from that conversation. Yeah. Always great catching up with Adam. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Traci Alloway. You can follow me at Traci Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our guest, Adam Tews. He's at Adam underscore Tews. Also, check out his podcast, Ones and Tews. And also, check out his fantastic newsletter, Chartbook.

52:46Follow our producers, Carmen Rodriguez at CarmenArmond, Dashiell Bennett at Dashbot, and Kel Brooks at Kel Brooks. And thank you to our producer, Moses Andam. For more OddLots content, go to bloomberg.com slash oddlots, where we have transcripts, a blog, and a newsletter. And you can chat about all of these topics in our Discord. In fact, there is an Adam2's channel in there because people are so interested in Adam that there's a separate place where people chat about Adam in our Discord, discord.gg slash oddlots. And if you enjoy Oddlots, if you too like to listen to episodes while waiting in airports, then please leave us a positive review on your favorite podcast platform.

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