316. Why the world’s economic glue is becoming unstuck

22:14Robert Peston:I mean, it's absolutely clear to me that this choice is something that is very much weighing on this administration, the new Andy Burnham administration, this whole issue of security of, well, two things. One, you know, trying to get better quality jobs in the UK, but also security of supply versus, you know, the benefits of trade that drive down costs. This is a really active debate. And I would just throw into it. I mean, you know, I'm hoping that a few MPs and ministers are watching this because, Actually, I am slightly staggered, actually, that we are the last country in the world to still have this zero tax for cheap goods from China.

23:04Robert Peston:You know, we're the one place where they can do what is effectively, you know, economists and traders would call a tax arbitrage. This is definitely something the government should be looking at.

23:16Ed Conway:We have said that we're going to get rid of it, but not until 2029. So there's this weird kind of window where actually all of the planes are coming to the UK because this is the place where you can just sell as much as you want to. But there's no reason why they couldn't kind of clamp down on this sooner. But I think it comes back to this massive culture shift. And I think it's like you say, Andy Burnham wants to re-industrialise. OK, but he also wants to be the cost of living prime minister. And that actually is quite hard to do both things at the same time, because, you know, if you want to re-industrialise, if you want to make more stuff domestically, then stuff is going to be more expensive because it just it costs more to process your fish fingers in this country than it does in China.

24:00Ed Conway:As with many kind of things, he's made lots of big assertions. But in the end, he will have to choose. And it's all about choosing, you know, whether you're going to kind of skew towards security or skew towards cheap stuff? And like I say, we've made a decision in recent decades to be all about cheap stuff and less about making stuff domestically. Are we going to go in a different direction? And I genuinely, I don't know.

24:24Robert Peston:Ed, so much more I need to ask you, but let's go to a quick break first.

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26:51Robert Peston:So let's look at another aspect of this, which is the importance, if you are going to have, you know, proper globalisation, proper free trade of keeping trade routes as open as possible. I mean, there were definitely people in the administration who knew and were warning him that if he bombed Tehran, if he went to war with Iran, that there would be an oil shock because the Strait of Hormuz would be closed. Do you think it was a bit like, you know, Michael Gove, during the Brexit referendum, don't believe the experts? What on earth was going on? I have no idea.

27:33Ed Conway:I mean, none of us know, do we? I don't know if anyone in the White House really knows exactly. The Strait of Hormuz has been one of these choke points, pinch points, whatever you want to call it. That body of water through which you have to go in order to get in and out of the Persian Gulf has been something that the Iranians have talked about as being their number one weapon in the event of something kind of going amiss for decades. And people within shipping world have talked about it for decades. In the same way, by the way, that a lot of people have said, okay, if you're going to impose tariffs on China, it's a slightly different topic, but not unrelated.

28:06Ed Conway:If you're going to impose tariffs on China, then you need to be sure that you're doing it in a clever way, because otherwise, they're just going to reroute all of the goods via Vietnam. Both of those things, you know, shouldn't have come as a surprise to the White House. But they're now seeing, you know, A, and there are obviously kind of geopolitical reasons why going into the Gulf and attacking Iran and expecting it to end in three months is kind of crazy. But there are economic kind of, there's economic logic to the fact that this is the most important area, the single biggest concentration of oil and gas anywhere in the world.

28:41Ed Conway:We still need oil and gas, like it or not. And all of a sudden, if you're going to kind of make it hard or near impossible to get that oil and gas out, then you are going to have an energy shock. and that's where we are and we're in an energy we're in two energy shocks right now because we have Russia that is facing kind of big attacks on its refineries from Ukraine something that we you know obviously we're mostly celebrating that in Europe but the quid pro quo of it is there's less diesel going around the world and so our diesel prices are going up and there's less diesel coming from refineries in Saudi Arabia and elsewhere as well because they can't get the ships out.

29:16Ed Conway:And so you put all of that together and it is an energy shock. And it's particularly tough for Europe because we're right in the middle of things and we're not energy independent. We depend on imports of diesel. We used to depend on them from Russia. In the wake of obviously what's happened in the last six months, or the last two years rather, we then started to get most of it from the Middle East. Then obviously the Strait of Hormuz closed. And now we're getting most of our diesel and most of our kerosene from America. And actually, there's an interesting, slightly terrifying question about what if Donald Trump listens to what some of his allies are saying, some people in Congress, and puts an embargo on the exports of refined American goods, products, which is totally not impossible, given that America has done that before.

30:04Ed Conway:Europe would be in extraordinary trouble if that happens. Again, all of which is just underlining the fact that geography still matters. Where stuff comes from still matters. The processes you do to make this stuff, to refine it, they still matter. Because every single pound of GDP in our country or dollar in America depends on physical things. It depends on the flow of energy. It depends on the flow of semiconductors out around the world. There's no AI without energy. so I think we underplay this when we're thinking you know when you're looking at economic models and understandably because a lot of it is quite hard to integrate into models but the more you can take a step back and think about the world from a different perspective which is kind of what I tried to do in this book and the last book I wrote Material World that hopefully the slightly more enlightened you are when things go wrong and like I say there's nothing within the events of the last few years about tariffs, about what China has done, about transshipments, about what's happened in the Strait of the War.

31:09Ed Conway:None of that stuff should have been a surprise either to Donald Trump or to the rest of us if only everyone had taken a step back and said, OK, we should really think about this a little bit more intelligently.

31:18Robert Peston:Because one of the things that I do find striking about the world in which we're in is the way that China has just thought about these things way more strategically than I'm afraid most Western governments have done. I mean, of course, there were people in the White House and Washington who would have known the extent to which, you know, an apple or a defence manufacturer was dependent on Chinese supplies of critical minerals and rare earths and all of that. But again, it obviously hadn't, you know, essentially percolated into the president's brain when he decided to put these enormously high tariffs on China.

32:07Robert Peston:Why do you think China is able to think more strategically about its economic interests than we are?

32:12Ed Conway:I think there's a different culture. I mean, the interesting notion that someone called Dan Wang wrote about in a book called Breakneck, which is worth reading, is this idea that America is a very loyally culture. And yeah, it's great. And China is an engineering culture. And if you're an engineer, you're thinking constantly about what you can build. And you're thinking about supply chains, and you're thinking about what you need in order to actually make stuff. And so I think that does play into it. I think, obviously, China has been planning a bigger emphasis on manufacturing for a long time.

32:49Ed Conway:They've been thinking about where they procure minerals. And interestingly, actually, Robert, when you think about it, America has far more in the way of mineral plenty than China does. It's got loads of oil and gas. It's got loads of copper. It's got pretty much every critical mineral you could care to think of is there in the American continent. It's just one of the, you know, the happenstances of geology and geography. America has everything. China has always been, you know, it's got lots of coal, doesn't have much in the way of oil and gas. It doesn't have much in the way of critical minerals, doesn't have much copper, doesn't have much iron.

33:26Ed Conway:It's been trying for literally for decades to build an iron ore sector and basically has failed to the extent that it's still very dependent on Australia for basically all of the iron that then becomes the steel going into the Chinese kind of system. And there is nothing more important when it comes to metals than steel. So I think there's this consciousness within China of, OK, we know that we don't have certain things, so we need to be a bit more conscious about where they come from. And we need to think in terms of supply chains. Whereas I think the attitude in the US and Europe has often been, well, we're trading nations.

33:58Ed Conway:And we know that if we need something, we can buy it from the other side of the world and we can assume it will turn up. But the upshot of that is that gradually over time, we have, well, not so gradually in the UK's case, we've de-industrialized. And we've de-industrialized rapidly to the extent that these days manufacturing is a smaller and smaller part of our economy, you know, as a percentage. The number of jobs we're doing in manufacturing is smaller and smaller. The number of plants we have making stuff is going down and down. all of which is fine if you always assume that you can buy the thing from the other side of the world that you can always buy it from China that you can always get rare earths if you need them from China you can always get drones you can always get batteries from China and let's hope that continues to be the case but if it's not the case then we're in big big trouble in a way I don't think we've ever been in our entire industrial history which I know people within certain parts of Whitehall are very concerned about.

34:58Ed Conway:You know, you talk to people in defence and security, they are very, very worried about this. But if you take the mindset that all that matters is getting cheap stuff, then it doesn't really trouble you. And to be honest with you, the economic policy in this country has for a long time been run on that basis. Talk to people in the Treasury and they think about comparative advantage and the importance of free trade all the time, which is kind of fair enough from an economic model perspective. But it's not fair enough in a world at war. And we are in a world that is more bellicose now than it has been for a long time, which is why I think all these things, as anathema as they sometimes are to conventional economists, I think it all matters now.

35:38Ed Conway:And I think it'll matter more in the coming years.

35:40Robert Peston:Well, look, we have talked about our vulnerabilities. But I think the counter argument is that China has one absolutely huge vulnerability, which is its entire economic model the way that it has basically increased the living standards of its enormous population has been to sell stuff to us. So if the system that you describe in your book were to totally break down, if we were to go to absolute total both trade and potentially military hostility between Washington and Beijing or Europe and Beijing, And actually, you know, China would be a massive loser because it's because, as I say, its economy is wholly dependent on selling stuff to us.

36:34Robert Peston:So it's not as though we haven't got leverage here. The last thing China needs is it is is, you know, a genuinely effective trade war in which you can't go around the back via Vietnam, for example.

36:49Ed Conway:Yeah, completely. I mean, that's one hopes. that both sides are conscious of that there's a form of mutually assured economic destruction here. You know, China is incredibly dependent on being able to ship its stuff around the world, including through all the choke points that, you know, we talk about so much these days. If you have those choke points being closed, it is just as if not more damaging to China than it is to anyone else. The fact that, you know, China can't get as much oil as it used to get out of Iran and out of Saudi Arabia is a massive issue for China as well. I mean, it partly explains, by the way, why China has been so determined to increase the proportion of EVs in China.

37:31Ed Conway:It reduces their reliance on Middle Eastern oil. But I would hope that both sides within this trade war, obviously Xi and Trump talking about this, there's something that is genuinely new. I mean, I'm always kind of nervous about saying this time is different. But when it comes to trade, because often it's not, but when it comes to trade, the nature of global supply chains is something that is a genuinely new thing. You know, we've always had trade, you've always had stuff flying around the world, you've always got minerals and fertilizers and the rest of it, going in ships around the world. What is genuinely new is the extent to which almost every single product you care to touch on a daily basis has components that come from other places around the world.

38:20Ed Conway:And that means that everything is completely dependent on trade in a way that it's not just stuff that seems like it's exotic. And like I say, we've never lived in a world where that has been the case like it is today. And as a result of vulnerability to it, and like you say, both sides vulnerability, China's vulnerability, but America and Europe's vulnerability as well, is greater than ever before, but also hopefully our consciousness of the need not to break the system in two is greater than it was before. I hope so, at least. That's the point of this book, is to say, let's just think about this stuff before we start meddling with it.

38:58Robert Peston:That's totally right. I mean, I was very struck, I think it was a report on Bloomberg today, that container shipping charges, wherever you are, have gone up five times, ten times in just the last few months because, you know, so many of these routes, you know, even in the Red Sea now, so much more, you know, dangerous because of the way the hooties are behaving. And, you know, so everything, you know, so, I mean, I mean, it's not the worst case that one can think of, but the cost of stuff is going up because of these wars and these choke points. You know, inflation is a genuine problem again. And if you think, if you think about the last few decades,

39:39Ed Conway:What have we seen? We've seen, obviously, there have been moments of inflation. But actually, it's hard to think of another period where you've had as much disinflation. Disinflation because we've been able to get cheap stuff from China. Disinflation because, and there are some perversities to it, because you're shutting down factories where you're processing fish in Grimsby and you're sending it to China instead because it's cheaper. But disinflation, because you've got bigger and bigger ships going across the high seas, able to take even more and more containers. So you can look back over the course of the last 30, 40, 50 years and make the case that things are so much cheaper now than they would have otherwise been because of all of these advances, which have all been pushing down the cost of stuff, physical stuff.

40:25Ed Conway:If we're now living in a world where maybe it's those container costs are going up, maybe it's insurance costs because everyone's so nervous about going through these choke points. Maybe it's the amount of fuel that you're having to burn because you're having to go around Africa rather than going through the Suez Canal because you can't go up there because of the Houthi rebels controlling the Babel-Mandeb Strait. All of that stuff together, even before you get to the question of, okay, are you going to have tariffs? Our country is going to try and build factories domestically, which is going to be more expensive than otherwise it would have been the case.

40:56Ed Conway:I think everything points towards a lot of slow burn, but nonetheless, very significant inflation in the coming years. And this is not the kind of inflation that's just like, okay, an energy price shock and it's over. This is grinding inflation as this world readjusts in the coming years. I mean, I hope not. But you look at all of the bits and pieces, and it's hard not to come to that conclusion. And that has consequences for all of us. And I'm conscious I'm saying this ahead of a winter where we're seeing energy costs going up. No one wants a repeat of the cost of living crisis. But if you look at what is likely to happen to our energy bills.

41:35Ed Conway:They're going to go up a lot in January. And that's just, you know, assuming nothing else goes worse in the Gulf. So it is a scary time at the moment. But I think the best we can do is ponder how we have come to this and think about how things could improve, but also kind of reflect on the fact that, you know, a lot of the living, the improvements that we've seen in our living standards in recent years, they've partly been thanks to the fact that we are able to buy stuff more cheaply. And they've been thanks to the fact that an iPhone that you order from Apple or a smartphone is comprised of tiny little parts that come from all over the world with lots of people specializing in those little parts.

42:21Ed Conway:That's kind of amazing. And it has delivered us the world that we live in today, which is, for the most part, much better, much cleaner, and much more advanced than anything our parents or grandparents could have enjoyed. So there is something, there is a positive prison through which one can look at this.

42:38Robert Peston:There's one final question I wanted to put to you. We are now sort of slightly frighteningly close to the year when intelligence services in America and Britain thought that we were at maximum risk of China invading Taiwan. 2027 was when everybody thought they were going to do that. Now, Taiwan is still the world center for manufacturing the chips that power smartphones, our fridges, it's everything, right? I mean, Taiwanese chips basically keep, you know, vehicles going, our consumer durables working, our phones, everything, right? They're in everything. Unbelievable economic shock that there would be if we lost access to those Taiwanese chip manufacturers.

43:28Robert Peston:Do you think in the end that's enough? Because that would also be incredibly damaging for China economically. Do you think that's enough to deter the Chinese from aggressively invading?

43:39Ed Conway:It's the same question about the extent to which the tolerance for pain outweighs the consciousness of just how intense this could be. I mean, you're right. There is no other country in the world which has mastered the production of semiconductors. So those little chips that go inside all of our devices. And like you say, it is far more prevalent than just your phone or your computer. There's no other country that does it as well as Taiwan. I mean, South Korea is pretty good at making kind of memory chips. But when it comes to the ones that do the thinking, and you think about AI, think about all of that, that is totally dependent on Taiwan.

44:18Ed Conway:Think about your phone. Think about pretty much every device around you. It is dependent on Taiwan. And it's basically because Taiwan, like I say, it is really, really hard to make transistors in semiconductors that are so small. And by the way, the mind totally boggles what they're able to achieve there. The size of some of these transistors these days, it's about eight times smaller than a coronavirus. It is so small, the transistors that they produce, each of which there's billions of these little switches within the devices you're listening to this on. They are so small that they are smaller than the wavelength of visible light, which means they are invisible.

44:57Ed Conway:And we humans produce them. We mass produce this stuff. It's not even just producing a few of them in a laboratory. They mass-produced them in Taiwan. So it is an achievement that humankind has made that actually is beyond science fiction. And yet they do that on a day-to-day basis. And so you can see why China, who has struggled, China's struggled. They put so many billions of dollars into trying to build their own fabs, these fabrication plants where you can make semiconductors, but have so far failed to get close to Taiwan. You can see why they are looking longingly across the strait and wondering whether at some point they might be able to take control of it.

45:33Ed Conway:I suspect that they are much more conscious, frankly, than people in the White House about the economic damage it could cause. And, you know, like there's stories that some people, I don't know if it's ever actually been kind of proven, but certainly it's been talked about that the Taiwanese would potentially mine some of those fabrication plants where semiconductors are made to basically destroy them in a scorched earth policy if China ever were to invade, which would be of extraordinary kind of destructive impact for the global economy, but just underlines the fact that we're talking here about stuff that goes well beyond economics.

46:11Ed Conway:This is the crux of geopolitics, because being able to make these chips as Taiwan does, that's everything. That's AI. That is all of the computing power in the world, at least the advanced computing power. Other people can make decent ships, but not to the degree of the power of those in Taiwan. So it is as powerful an economic kind of deterrent, but also a temptation as you can possibly imagine. And so again, I have no idea what the decision would end up being from China. But I do know that if there's any country which is conscious of the economic impact of this, you know, it is China and it is Beijing.

46:56Ed Conway:But that out of the way, the temptation is another question. And there's another reason why this is a scary point in history. But also, like I say, it's amazing. It's amazing that humankind is able to make these chips, to make things that are invisible. So we're living in this extraordinary age. Most of the consciousness of how extraordinary it is is invisible because it's underneath the surface of the devices we use, because the journeys that things take are not obvious from the labels that we read on the packaging. But it is kind of amazing. And all you need to do is take the economy and turn it on its head.

47:30Ed Conway:And then you see this other more magnificent, but also to some extent, more scary world in all its kind of wonder and weirdness.

47:38Robert Peston:We've just all got to be conscious of the risks out there, because we're not going to be able to cope with them unless we're aware of them. Ed, it's been an absolutely superb conversation. I love your book, Trade World, and good luck with it.

47:47Ed Conway:Thanks, Robert. Real pleasure to be here.

47:49Robert Peston:And that's it for us. Goodbye.

48:11Robert Peston:Hello.

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