How America Lost Its Edge And China Took Over - Dan Wang

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1:05Dan Wang:Get started at akamai.com slash GPU. You could get more economic innovation from free speech. You know, we've learned psychologically, if we teach our children to speak freely, they innovate, they go on and create Facebook or they make Apple computer. If we inhibit their free speech, then these countries have a tendency to need to steal intellectual property. Why the insecurity about the openness? It's a vibrant, dynamic economy. We've learned that more innovation comes from liberalism. What am I getting wrong? If I wanted to defend some of the aspect of illiberalism, maybe I would say that maybe the Silicon Valley model of innovation is wrong.

1:43Dan Wang:You know, the Silicon Valley approach is that maybe the way to get innovation is that we take Steve Jobs, we throw him into a garage, we sent some LSD after him and somehow an Apple computer comes out of the garage. But, you know, someone actually had to make that Apple computer. And that Apple computer, that iPhone, isn't being made in the U.S. anymore. All of it is being made in China. And so they are kind of able to wait for American entrepreneurs to dream up really big ideas, something like Elon Musk or whatever. They kind of learn these big ideas. They sort of guess that American companies are no longer very good at building these ideas because over the last 25, 30 years, the American manufacturing base that's mostly rusted.

2:20Dan Wang:It's been a lot of failures in aviation, as well as the semiconductors, as well as manufacturing broadly. And then they just wait for the geniuses to kind of hand over these great ideas into the public. And then they count on Chinese manufacturing prowess to climb all of these ladders that the Americans are laying out for them. Welcome to Open Book. I am your host, Anthony Scaramucci. Joining us today is Dan Wang. The title of the book is Breakneck, China's Quest to Engineer the Future. And I was saying to Professor Wang here that I got this book from Neil Ferguson, Dan. I guess he's at the Hoover Institute with you, maybe.

3:00He said, listen, you got to read this book. I read the book, loved it. Thank you for joining the show. But before we get into the book, let's talk about you. Tell us a little bit about your background. We know that you're a research fellow at Stanford University's Hoover History Lab, and you're now a best-selling author, but tell us how you got there.

3:18Dan Wang:Yeah, well, I'm having a great time at Hoover, especially when I can be surrounded by generous colleagues like Professor Ferguson and giving you my book. So this book sort of came together from after I spent about six years living in China between 2017 to 2023 when I was a technology analyst at an investment research firm thinking about China's rise in semiconductors and clean technology and manufacturing broadly. And so this was a time of Donald Trump's first trade war in which he was launching tariffs on China. This was a time when Chinese technology firms were getting more competent. This was a time when Xi Jinping was darkening and its repression of all sorts of political practices.

4:06Dan Wang:And I really thought that, you know, we need to move beyond these 19th century political science terms like capitalist or socialist or neoliberal to describe these two big countries. After being in China, I moved to be a fellow at the Yale Law School's Paltzai China Center. And after thinking about, you know, China as a country that is pretty autocratic and also very much ruled by engineers, moved back to the U.S., which is so much more ruled by lawyers. And so that sort of set up a lot of the motivations for writing this book. It's interesting. I mean, I feel like I'm one of these uneducated Americans.

4:45I've spent some time in China, didn't fully understand it. I think the Americans looked at China as a manufacturing Oasis, but didn't realize that this serpentine government would come in and take the engineering prowess and take the technology from companies like Apple and others that started manufacturing in China. And so tell us a little bit about the speed of growth in China and the success that they've had in terms of what they would call a technology transfer, but then also the strain. You know, what made you realize that this was historically unprecedented about China?

5:27Dan Wang:Yeah, well, the economic growth of pulling 1.4 billion people out of extreme poverty, a few hundred million people into the middle class and a few million people into the global elites. I mean, that is, I think, one of two central facts about China's rise over the last few decades. The other central fact is that it is a pretty authoritarian power that is very authoritarian into the 21st century, which means it has access to all of these technologies and intrusions in which to really impede on people's liberties and privacies. And so both facts are really important. And I think it is totally central to China's rise that it has mastered manufacturing, that it's mastered a lot of aspects of technological production.

6:17Dan Wang:They're now in the global lead of things like automotives and clean technology and a hundred other fields. And that is, you know, impinging on a lot of traditional American competences. Dan, I feel like we got this so wrong. I feel like 30 years ago, our elites in this country thought they won the Cold War. And they thought that by letting China into the World Trade Organization, China would move our way in terms of Western liberalism and in terms of Western freedoms. But they actually went in a different direction. They took the technology to do exactly what you said as a more of a form of repression and social control.

6:59So how did we get it? So first of all, is that statement correct? And if it is, how did we get it so wrong in your opinion?

7:07Dan Wang:Yeah, well, I think that statement is correct. I think that there was this expectation that China would have liberal democracy after it has liberal markets. And that turned out to have been the wrong call. Now, I wasn't making these calls. Anthony, were you in the room making some of these calls? No, I wasn't making the calls. But let me tell you how bad I am at this. Yeah, tell me. I thought those were the right calls. If you had said to me the 29, 30-year-old version of me when these calls were being made, the 35-year-old version of me when China entered the World Trade Organization in 1999, and you said to me as a pundit or as a Wall Street observer, was this the right call?

7:47I would have said yes. Even though I wasn't in the room, Dan, I would have gotten it wrong. I'm just trying to understand why we got it so wrong, myself included, by the way.

7:57Dan Wang:Yeah, well, I think if I were in the room, 10-year-old me, I also would have gotten it wrong. But I think that, you know, maybe a lot of this was more motivated. You didn't have to rub that in, Wang. You didn't have to rub in how much younger you are than me. I'm sorry, man. You got more hair, so it's all good. Keep going. It was a good comeback, good recovery. I think that this was more of a strategy. This was more of a hope than a strategy, that people were reasoning from these economic fundamentals that as China grew richer, the population would necessarily want more democracy. the internet was going to break down all of China's walls, that everything really looked like it was on America's side, that this was also a moment of hubris because America did more or less vanquish the Soviet Union, or maybe it's more accurate to say that the Soviet Union mostly self-imploded.

8:52Dan Wang:But all of these things sort of turned into a moment when everybody believed that someone like Bill Clinton would lead the world into the ultimate nirvana of total globalization. That turned out to have been wrong. That was more of a hope than a strategy. And I think that main question now is how do we course correct given that China is now very much powerful and very much not liberal? I want to go to the triumphant part of this story. I want you to be a Chinese politician, a Chinese bureaucrat. You're a member of the Communist Party, the People's Liberation Army. The last 25 years have been successful, yes or no?

9:38Dan Wang:Mostly, yes, although there are greater strains because over the last couple of years, there's much more political uncertainty. There is slower economic growth and there are more social problems, but mostly a giant success. And so a result of which, though, does this make you because this is what happens to people. We make some good decisions. We get those decisions right. And then we get overconfident. And I'll give a Western example. We make 40-year decisions about containment. The wall comes down. We get very, very smug. And then we make a series of very arrogant decisions. I think that, you know, I think this goes to my fundamental view about the U.S.

10:20Dan Wang:and China over the longer term. I think that the competition between the U.S. and China will go on for a very long time. that there is no way that we can really understand this competition through these structural factors like, let's say, demography or geography. These are insufficient because I think that competition is dynamic. I think that the country that is going to be ahead is going to make mistakes out of overconfidence, and the country that's behind is really going to feel the need to catch up. And so you gave me an example of American overconfidence. Let me reply with an example of Chinese overconfidence.

10:56Dan Wang:I was living in China in 2021. I was living in Beijing when Xi Jinping decided that he had the COVID pandemic under control, that the transition from Trump to Biden looked really chaotic after January 6th. And this was a moment for him to do big things. And so what did Xi Jinping decide to do? Well, he kind of crushed the property sector. And then he also smacked around a lot of tech entrepreneurs like Jack Ma. And China's economy today is really weak precisely because of these two actions that he undertook about four or five years ago. And so, you know, I think that these are the sort of things where they're really trying to catch up now.

11:38Dan Wang:But, you know, but once they do, they're also going to make mistakes of overconfidence again. So that's why the competition will last a really long time. OK, so explain to me the vision, though, because I want to understand this. I've got one point. I want to be Chinese. I don't want to be a communist. I have 1.4 billion people that am in the country. I want to be in total control of them. And I want to censor the media. And I want to suppress their free speech. And then I also want to use technology to get them to conform to whatever the social standards are that I would like them to conform to.

12:16And if they don't do that, I'll find ways to penalize them, either using a stablecoin that's in Renembi or something like that and take it from them. And what is the theory behind that? Why is that, in my mind, ultimately going to be successful?

12:34Dan Wang:I think that you've identified about half of the program, which is this agenda of political control and coercion, really to keep the people in check. But I think that the Communist Party also has another half to its agenda, which is to deliver to people what they think that what they believe that the people ought to want. And so if you're living in a Chinese city or the Chinese countryside, you're getting a lot of new subway stations. You're getting a lot of new parks. You're getting cleaner air. You're getting high speed rail. You're getting new bridges and new sorts of infrastructure to connect you to the rest of the country and potentially the rest of the world.

13:17Dan Wang:And a lot of that is being built by the engineers who run Beijing because they think that having these really big monumentalist projects like a giant dam or a giant bridge is going to really impress the people. I think sometimes that's true. I think that the U.S. used to impress the population with something like the Brooklyn Bridge or the Golden Gate Bridge or the Hoover Dam, whatever it is. But when you combine this element of coercion with an agenda that very plausibly is improving people's lives, and then you have the propaganda authorities pointing out to various problems in the West, whether that's crime in Europe or whether that is political violence in the US or whatever else, No, they can kind of plausibly claim to the people that the Communist Party is the best possible ruler for China.

14:12Dan Wang:And ultimately, that's what they want, to stay in power. And they can't stay in power unless they're actually delivering some of the goods. Okay, so let me flip the script then, okay? Because one could argue that you could get more economic innovation from free speech. We've learned psychologically, if we teach our children to speak freely, they innovate. They go on and create Facebook or they make Apple computer. If we inhibit their free speech, then these countries have a tendency to need to steal intellectual property. Why the insecurity about the openness? It's a vibrant, dynamic economy. We've learned that more innovation comes from liberalism.

14:58what am I getting wrong? Be Chinese for a second. Be a Chinese nationalist for a second and tell me what I'm getting wrong.

15:05Dan Wang:Yeah, well, I think that, I mean, first of all, I want to agree with you that they do feel awfully insecure. And it's really strange. I mean, you take a look at some of their statements, the way that they bully like a small country like Lithuania, which they did a couple of years ago, or they bully a H &M, the fashion retailer, because they make the wrong statement. it does look awfully insecure in all sorts of ways. They really punish a lot of comedians if they use the wrong joke. And so first of all, it is an insecure place. But if I want to defend some of the aspect of illiberalism, maybe I would say that maybe the Silicon Valley model of innovation is wrong.

15:46Dan Wang:And I speak to you as a person who spends a lot of time in Silicon Valley because I'm a part of Stanford. And the Silicon Valley approach, since you bring up Apple computers, is that maybe the way to get innovation is that we take Steve Jobs, we throw him into a garage, we send some LSD after him, and somehow an Apple computer comes out of the garage. But someone actually had to make that Apple computer. And that Apple computer, that iPhone, isn't being made in the US anymore. All of it is being made in China. And so they are kind of able to wait for American entrepreneurs to dream up really big ideas, someone from something like Elon Musk or whatever.

16:28Dan Wang:And they kind of learn these big ideas. They sort of guess that American companies are no longer very good at building these ideas because over the last 25, 30 years, the American manufacturing base has mostly rusted. It's been a lot of failures in aviation as well as the semiconductors, as well as manufacturing broadly. And then they just wait for the geniuses to kind of hand over these great ideas into the public. And then they count on Chinese manufacturing prowess to climb all of these ladders that the Americans are laying out for them. Does that make sense? It does make sense. I think you also bring this up in the book, and I want you to elaborate it on here, if you don't mind, that that's stuff that the U.S.

17:09can learn from China, but there's also things that China could learn from the U.S. And so tell me about that reconciliation.

17:19Dan Wang:Yeah, well, I think that the U.S. used to be much better at building monumentalist projects. I mentioned before the Golden Gate Bridge, the Hoover Dam, New York City subway stations. Most of these projects were built about 100 years ago. And for basically, essentially since the 1970s, the United States has not built very many projects at all. You know, Penn Station in New York is a gaping pit. The subways are pretty broken. There is like their bridges are collapsing. It just doesn't look very good. And I think that this is something that the Americans really ought to learn more from China, that people want a better level of public works.

18:05Dan Wang:California, especially, is really bad at providing a lot of functional infrastructure. And I think that more Americans ought to have better infrastructure. So that's something that the Americans can learn from China. And I really hope that the Chinese, the Communist Party, can learn some degree of free speech from the U.S. I wish that there could be better protection of speech rights, better protection of property rights, that there could be more respect for individual people. Because I think that Chinese can be really wonderfully creative, really wonderful jokers, great comics. And yet a lot of that is being strangled by the Communist Party because it just really doesn't understand what young people actually want.

18:47Okay. So, so, I mean, I think, I think this is the, this is the thing, right? So we, you know, if you were, you know, since you brought up my age, Dan Wang, let me tell you about my age. No, you did it yourself, man. Let's, let's talk about your age. Let me tell you about my age. So the CIA said, and I quote, in 1979, there's a period of long-term stability for the Shah of Iran. Three months later, the whole thing exploded in revolution. The CIA said in 1985, and I quote, while the Soviet economy can't produce at the level that our economy is producing at, it is sustainable. There'll be a 25 year continued consolidation of power in the Soviet economy.

19:32And of course, seven short years later, the thing was blowing up. OK. And so the question is, because we look at things in life and we see this linear progression, Dan, and we think, OK, well, that's going to continue to happen. But is there some things going on under the surface in China that, you know, five years from now, 10 years from now, we may be surprised about politically? Is there a balkanization of the provinces? Is the young people that you're talking about that are using these VPNs and getting information outside of the control of the Communist Party? are there things under the surface that maybe an analyst isn't picking up when they say well there's a period you know they're going to make it to their 100th year 2048 or 49 anniversary

20:19Dan Wang:um or or is there something else afoot yeah well you've convinced me old man the CIA kind of blows so um you know I think that stuff like that they're probably good at other things but not really good at predicting, that's for sure. Yeah, well, let's see what their predictions are so that we know what's not going to happen. So, you know, I think that I agree that these kinds of big surprises, these black swans could always happen, but black swans are unpredictable by definition. And, you know, what I would reason from is that, you know, from my years of living there, that the regime has been highly capable, that they don't seem terribly weak, that they have been actually pretty good at responding to crises.

21:06Dan Wang:I was living in China at the start of the COVID pandemic. Now, of course, they majorly messed up at the very start when they punished whistleblowers and they didn't control the pandemic effectively in the very early days. But after Beijing got on the case. They managed to have a zero COVID policy that for two years mostly kept the country, kept transmissions minimal and kept the economy going for about two good years before they all messed up again. And so, you know, I think that the regime looks pretty strong to me, that there is still plenty of economic growth available to it. You know, their per capita income is about one sixth the level of American income.

21:49Dan Wang:And so there's plenty of convergence that ought to be possible. And that the Communist Party has been pretty good at delivering the goods. Now, one could imagine that a lot of these sort of things collapse. I think collapse is always an option. But then I think, you know, what they would be doing is to say, oh, well, you know, let's do this exercise for the rest of the world. Does the United States look terribly strong? Well, Donald Trump is messing up a lot of different things. He's very disruptive. Does Europe look very strong? Well, you know, populist ranking parties are about to overrun the continent in a couple of years, plus they have no growth.

22:23Dan Wang:And so if we wanted to do this sort of what could collapse, I would take it much more seriously to take a look at the entire world. And based on that, I'm not sure that the Chinese look like the weakest of the bunch. So it's 2049. We are in the midst of celebrating the 100th anniversary of Mao's revolution, or is there something very different happening in China? Well, maybe you'll be celebrating, Anthony, but I won't be. I think that if they are - Okay, so you think there will be a celebration? I mean, again, I'm not, me personally, I'm certainly not celebrating that. You know, and remember, I'm old enough to remember George Marshall going over there and trying to see if he could negotiate a peace before the full-on revolution started.

23:12Dan Wang:Yeah, well, I mean, you must have been alive when Herbert Hoover was trying to deal with the Great Depression. But I think that there will be a celebration in China. The Chinese Communist Party will still be running China 20 years from today. I am expecting that to be the case. And I'll bet you a cup of coffee that they're still going to be running the country. You're smarter than me. I'm assuming that will also be the case. But looking ahead, though, Dan, when you think about technology and infrastructure and state power, where do you see the greatest risk of conflict potentially between the U.S.

23:54and China over the next decade?

23:56Dan Wang:The island nation of Taiwan could be an obvious powder keg, as well as these islands around the South China Sea, because the Chinese are very clear in saying that Taiwan belongs to Beijing. They really want to seize the island. And they also claim some degree of sovereignty, as well as possession over all sorts of these smaller islands across the South Pacific, which are also contested by other countries, including the United States. And so if Xi Jinping ever decides to seize Taiwan, then the American president has to make a choice whether they defend this island, which is a democracy that is hanging off essentially pretty close off the coast of China, whether the United States really needs to send a lot of forces to defend this democracy that is pretty pro-American.