Lawfare Daily: Steve Brooks and Ben Vagle on U.S.-China Economic Competition

[Intro]

Stephen Brooks: Only 3.8% of the parts and components in the iPhone, roughly $16 worth of it come from China, so it's not a Chinese phone, but in terms of exports, it's being counted as Chinese, which radically skews not just our understanding of the trade deficit, but our understanding of how capable China really is.

Matt Gluck: It's the Lawfare Podcast. I'm Matt Gluck, executive editor at Executive Functions with Steve Brooks, professor of government at Dartmouth, and Ben Vagle, an incoming JD-PhD candidate at Stanford.

Ben Vagle: If it is just the United States that is trying to undertake a cutoff of China, especially in the short term, its losses are actually not going to be that disproportionate relative to those of China.

Matt Gluck: Today we're talking about a new book by Brooks and Vagle called “Command of Commerce,” which assesses U.S.-China economic competition.

[Main Podcast]

Steve, why don't you start out by telling us what you two set out to do in this book?

Stephen Brooks: Well, we sought to address two conventional wisdoms in the book, and the first is that China's economic capacity and its economic power is very, very close to America's. And our assessment is after having done this research, is that the U.S. is actually still very, very far ahead of China in terms of economic power and capacity.

And the second conventional wisdom was what would happen if there was a conflict over Taiwan or some other major conflict, could the United States engage in an economic cutoff of China that would you know, effectively hurt it and constrain it?  And the conventional wisdom is the U.S. really can't do that. That the U.S. would be heard basically as much as China, that because they're so tightly linked that you can, the U.S. is in a position to hurt China, but only by hurting itself.

And what we found is that's partially true. It's true if the U.S. tries to cut off China by itself unilaterally. But if the U.S. were to cut off China with its allies, then China would be hurt massively more than the United States, by our estimates at a minimum of five times more than the United States and up to 11 times more than the United States.

Matt Gluck: One large contribution in the book–and much of the first part of the book, or the first part of the book entirely–is devoted to descriptively explaining the U.S. economic power relative to China. And then later you get into the tools that each country can use in a potential conflict. And so I wanna start, I wanna start with that first part of the book.

So you contend that many analysts don't focus enough on the power of firms or on the importance of high technology sectors in calculating geopolitical economic power. Ben, could you explain why those parts of the analysis are so critical and why they favor the U.S. over China?

Ben Vagle: Yeah, and I think it's first helpful to just outline how we have gotten to where we are in terms of measuring economic power. A lot of the standard analysis of how to look at the economic power of one country relative to another uses a set of measures that are territorially based. The most prominent of those is gross domestic product or GDP, which is essentially a measure of all of the economic activity that occurs within the territory of a given country.

And in the 1940s and the 1950s, when GDP was first developed, this was a really useful and innovative measure. And it was useful because at that point, production was not especially globalized. When a country was trying to produce a weapon system or a civilian good, very often, all of that production was just occurring within the country.

Nowadays, however, that is not really an accurate description of how production actually works. Instead, it is the case that much of world production is being governed by a relatively small number of multinational corporations that have bases of operation in variety of countries, not just in the country in which they're headquartered.

But the really important thing to note here is that these companies are still under the control of the country in which they are headquartered. And so in this new world of production that we live in, there are all of these new ways in which countries can leverage economic power in a way that is extraterritorial.

The other thing just to emphasize to an even greater degree here is that it is these companies that are the ones that are, you know, by far the most heavily engaged in the production of high technology goods, which have really a special geopolitical significance. That's something that I'm happy to talk more about.

But with that basic insight that, you know, we had that it is important to factor in globalization when looking at economic power. We decided to basically, you know, develop a new set of estimates on how to look at the power of countries relative to one another that just simply goes beyond the standard gross domestic product, territorially based set of measures that are available.

And we looked at the distribution of corporations, the world's 2,000 largest corporations across a variety of countries. And what we were able to find there, just by aggregating data on the output of these corporations, is that the United States really does retain a lead that is quite impressive, even relative to what we see in America's own gross domestic product.

We calculated that U.S. firms are generating currently around 38% of profits globally, whereas Chinese firms are collectively only generating around 16% of profits globally. And then you can compare that to a measure like GDP, where the United States makes up around 25% of world GDP right now. And China makes up roughly 20% of world GDP.

All of this is just to say that the U.S. right now has these corporations that have really significant influence in the world economy, and a lot of standard measures aren't able to pick up on either that or the geopolitical significance that this has.

Matt Gluck: And in particular, you explained that the U.S.'s lead is even more dramatic in high tech sectors. Could you just give us a sense of, of the special lead that the U.S. has there? And then we'll talk about why that matters.

Ben Vagle: So with this data set of large corporations that we assembled, I should add by the way, that these corporations make up around 75% of total public market cap. So it really is a representative sample of corporate power.

We coded the industries in which they were specializing. One of those sets of industries was high technology in a broad sense, and just in aggregating the data there, the lead that the United States has is really rather massive. We calculated that kind of shocking 56% of profits globally are being generated by the high  technology firms of the United States. 56% of high technology profits that is.

American allies meanwhile comprise much of the rest of the share of high technology profits. Chinese firms themselves are only generating around 6% of high technology profits total. And that is a massive deal for geopolitical competition. That's something that I'm happy to talk more about, but I'll leave it there for now.

Matt Gluck: And Steve, why is it the high tech sectors that we care about most when we're assessing geopolitical economic power?

Stephen Brooks: It's a good question. And one thing I would say is that we don't only care about high tech, and it is true that low tech production can sometimes matter, but if you look across the board, if you asked what's gonna be most contributing to productivity of countries in the next 20, 30 years, and in turn, what's gonna be the most important areas to be globally competitive in, if you wanna have a military, which is first rate?

You wouldn't only wanna be good in high tech, but it would be most important to be really good in high tech. And so from that standpoint, going back to what Ben was saying before, you hear a lot about China being a country which is doing lots of high tech production and certainly there's some prominent examples where Chinese firms are doing high tech production.

But in terms of measuring overall China's high tech production, when you look at the standard measures GDP exports, you really get a skewed assessment of China's high tech capacity because a lot of what is coded as being made in China is geographically made in China, but it's not made by Chinese firms.

And going back to what Ben was saying before, the kind of older measures that were created in the forties and fifties to measure economic power, you know, they kind of get countries wrong to a greater degree when a country has a very globalized production. They get countries wrong when we're focusing on high tech production. And the point of the matter is, is that China's a very globalized country.

It's just, it's globalized in a particular way in that for the most part, its firms are not leading production chains. They're not the ones at the top who are deciding what products are being made that are engaging in research and development, and that are reaping the real benefits of being the firm, which is really driving production. Rather, they're playing a subsidiary secondary role in the production chains of these companies.

And so China's doing a lot of production, but much less than if you look at standard measures. And put another way, what I would say is if you look at what's made within China, it's very, very impressive. However, if you look at what Chinese firms make within China, it's much, much less impressive.

Matt Gluck: I wanna make this concrete for listeners. One example that you use is the iPhone, and this is a pretty standard example that analysts use to tease out some of these metrics. Steve, could you explain how the iPhone illustrates this dynamic that you've laid out? That China's value added contribution is actually much lower than, than many manufacturing metrics would suggest.

Stephen Brooks: Sure the iPhone's a good example, not just 'cause it's really prominent, but because it's actually, its production has been really, really carefully analyzed, you know, essentially over the past 15 years. So there aren't a ton of products that we can, you know, carefully identify all the parts and components for going back through time. But you can do that for the iPhone.

And basically I use the example of the iPhone 14, which is the phone that I use. When I bought that essentially, two years ago for a thousand dollars, 600 of my dollars went to Apple as profit, and the remaining $400 are the cost of the parts and components in the phone. And because the phone is assembled in China, because the last stage of production is in China, it gets counted as a Chinese export. And that's just because they need some convention to figure out where something's from and the convention they use is, where was it last?

Well, it turns out that China specializes in the, where was it last phase of production. It does a ton of assembly, but it's important to note that, to assemble each iPhone. China only gets $6. It's not very profitable. It's not profitable really at all. Really what's profitable is the designing of the phone, and Apple gets all the profits for that.

The other thing I'd note is that when each iPhone comes out of China and gets counted as a $400 export from China, even though it's not actually a Chinese product. So right now the trade deficit that the administration is very, very concerned about $10 billion or slightly more than that is being counted by the fact that the iPhone is being assembled in China. It's contributing $10 billion to a trade deficit, even though it's not Chinese.

So to really understand where it's from we have to look, as Ben said, is which firms contributed to its production? Apple contributes to its design, but also who contributed to the $400 of parts and components. And we relied upon an excellent analysis of this, and what it found is that 32% of the parts and components by value come from the United States. 25% come from South Korean firms. 12% come from Japanese firms, and 7% come from Taiwanese firms. Only 3.8% of the parts and components in the iPhone, roughly $16 worth of it come from China.

So it's not a Chinese phone, but in terms of exports, it's being counted as Chinese, which radically skews not just our understanding of the trade deficit, but our understanding of how capable China really is.

The other thing I'd note is that if you look at the parts and components that are made by Chinese firms, they're basic, simple things, which through time and some effort you could make anywhere else. In contrast, the things that are being contributed by U.S. firms and Japanese firms and Taiwanese firms and South Korean firms, those for the most part are things which can't easily be done in other places.

So that's where the value of the iPhone is. And from the standpoint of the United States making the iPhone, it needs other countries. It does not really need China to make the iPhone, but needs three allies in Asia, Japan, South Korea, and Taiwan. So if you're interested in continuing to allow Apple to be profitable, you must maintain trade commitments and trade relationships with those three countries. It is a choice as to whether you maintain a relationship with China in terms of the production, but you can't cut the whole world off.

Matt Gluck: Obviously, even though the percentage of the value add to the iPhone is relatively low from China, we still need that production to come from somewhere. So where, where could that come from? It, ir's not gonna happen in the U.S. Our labor costs are far too high. So where could we actually turn to look for that?

Ben Vagle: China has established itself as being a very strong location in which components from, you know, many other countries can come to be, you know, assembled at their final stages, processed and then exported to the rest of the world. China's also made some progress in producing parts and components on its own. Not so much in the case of the iPhone, but that role of assembly is still the one that China often primarily inhabits.

You're right that this is an important, you know, segment that they control, and that right now there are not that many other countries that are engaged in that kind of work. China has a large share here.

But just given that a lot of the highest value components that are being used in assembly in China are not actually from China, there is definitely a lot of opportunity to have other countries, such as India for example, or Vietnam or Indonesia or Malaysia, begin to assume more of that role, if the firms that are sending a lot of their production to China now for assembly begin to perceive that China is not actually a viable or stable long-term partner to be engaged in that kind of activity.

And that's already something that we're beginning to see even with respect to the iPhone. Apple, for example, has been laying the groundwork for the past several years to begin to produce more iPhones in India. They're producing significantly more AirPods in India, just as another example. And slowly but surely, I think that we're seeing a process of diversification where firms because they can are starting to move their eggs from the China basket elsewhere.

And I wouldn't be shocked if that's a trend that we see accelerating just given the state of trade tensions that are currently existing between the United States and China.

Stephen Brooks: Just to follow up as a quick example, you know it, it will take some time to transition what is being done with iPhone production and many other things from China. It won't happen overnight, but it's a completely achievable goal.

And lemme just use one example, which is that one thing that China does now is that it acts as the final stage for processing the, the aluminum case, which goes around the edge of the iPhone. And the point of the matter is that China's role is not to make the material that's made in South Korea. China's role is not to make the machines which cut that material, those machines come from Japan.

China's role is to employ people actually in a Taiwanese owned factory from Foxconn, to have people press the button on the Japanese machine to cut the South Korean steel. So could you do that in other places? Of course you could. However, right now it's a little bit difficult because a huge number of the machines from Japan that do that cutting are located in China. So you'd either have to get them out of China or you'd have to make new machines, but you could totally do that. It's just a function of kind of time and money.

Matt Gluck: The iPhone is just one product. Obviously I thought it was illustrative, but Steve, could you give us a sense of other products that share similar characteristics in terms of the value chain and where the U.S. and its allies have a large advantage in their production?

Stephen Brooks: It's very hard to do this for other products because to know what China's contribution would be, you would have to do the painstaking work of taking a given product and pulling it apart and finding out where it's thousands, if not tens of thousands of parts and components are from.

So we know what the exact contribution of China was to the iPhone. But we don't know as much about what China's exact contribution is to many other products 'cause they haven't been pulled apart over time to the same degree. But Ben, if you've got good examples then you should go for it.

Ben Vagle: Well, I do have one way of getting at your question, Matt, which is a good one. Steve is right that there are generally not other analyses that are available to have the kind of specificity that we were able to get for the iPhone.

However, at the same time, there is a broader truth here, which is that in a lot of cases it is foreign firms that are operating in China that are producing much of the output that is coming from China. And I think one of the best ways to see that in aggregate is by looking at manufacturing value added statistics simply relative to the statistics that we were able to compile on the share of profits and revenues that are being generated by global firms.

China has a very large share of value added in the export of high technology goods. But it's really important to note here that if you are to just look at the share of profits that Chinese high technology firms are actually generating, they dramatically underperform the share of value added that China is generating as a country.

And this just very strongly implies something that we can, you know, see in aggregate, which is that there are a very large number of foreign firms that are operating in China, doing their production there and exporting from there. But these firms are not inherently Chinese. They are in many ways beholden to the countries in which they're headquartered, and their investment dollars and their expertise can be taken elsewhere. Steve is right to note that the upfront cost of doing so would be high, but this is a vulnerability for China that I don't think is being recognized to a sufficient extent at the moment.

Matt Gluck: Good. I I want to get into this. So Ben, could you walk us through some of the tools that the U.S. has and that it's already exercising in some ways significantly? So if, if the U.S. wanted to compel its firms or pressure its allies’ firms to move away from China and bring their profits with them, how is the U.S doing that now in some ways, and how could the U.S. do that more significantly in a conflict scenario?

Ben Vagle: I guess it's just worth noting at a macro level, I hope that we get to talk about this later, that neither Steve nor I think that the U.S. should be engaged in a large scale effort to decouple its firms from China at the very least in peace time. However, there are ways to do this in peace time, and there are certainly ways to do it in wartime.

And so focusing on peacetime scenarios first, I think that one of the, you know, most effective ways that the U.S. could adopt, to encourage manufacturing to diversify from China is just the basic recognition that China has been able to accumulate a lot of world manufacturing now as a result of the fact that it is cheaper in many ways than many other countries. That's as a function of the fact that it has a lot of economies of scale. It's a function of the fact that its labor is relatively cheap.

But through market mechanisms, Chinese goods can be made to be more expensive. I think the most prominent example of that would be tariffs. And so if our administration were to want to reduce China's share of world manufacturing in peacetime, it could impose high levels of tariffs on China itself. And then ensure that there are relatively low trade barriers with other countries.

And at that point it would telegraph that these barriers would be kept in place for a long period of time. And that set of realities could begin to encourage firms on their own volition to begin to set up production facilities in other countries to essentially avoid the pain of tariffs that, you know, they would have to incur for a long period of time, at least in the scenario that I've set up. Now, to be very clear, neither Steve nor I think that it would be wise to do that, and we'll hopefully talk about that more.

But in wartime, the transition that would happen would frankly just be much more stark. More than likely trade between the United States and China generally in wartime would be heavily disrupted, which would make the manufacturing facilities that these foreign companies have in China kind of a moot point, right?

They would almost have to collectively begin to move their production from China elsewhere if they want to have any trade with the United States or with its allies. And it's worth noting that that kind of a collective effort is something that could be very, very powerful.

Right now in peace time, I think that firms have a hard time moving their production from China in that in doing so, they're going to be facing some upfront fixed costs. And if other firms are not moving from China and not facing those fixed costs, the ones that are moving are going to be placed at a competitive disadvantage. If in a wartime scenario, all firms are subject to these kinds of pressures, you really could see rather accelerated type of exodus.

Matt Gluck: And the U.S. also has other tools that they've already exercised, like export controls among others. And I do, I do wanna get back to the point that you just made and the key difference between decoupling now versus essentially saving that as a strategic weapon that the U.S. could use during wartime.

But I want to turn first to China's economic weapons because I think this is one of the most instructive chapters in the book. And Steve, I'll allow you to talk about this. So you lay out four potential economic weapons that China could deploy against the U.S. And they are, one is selling off the massive share of U.S. Treasury securities that China owns. The second is exploiting FDI both ways.

The third is denying the U.S. access to raw materials, which we recently saw China has essentially already deployed this in its negotiations with the Trump administration over tariffs. Perhaps not to the extent that they would during wartime, but to an extent. And then the last is seeking to pry away the U.S. allies that give the U.S. this massive strategic benefit.

So Steve, could you walk us through, and I know it's a, it's a big task, you do it very well in the book, but could you walk us through why these weapons are not as forceful as, as some analysts argue.

Stephen Brooks: Yeah. Before I go through them individually, I just say what our overall assessment is, which is that in our view, three of the four economic weapons that you just noted are, are not really effective weapons for China, you know. Or if they are effective, they'll have a tiny, tiny effect.

The only one, which is really a useful weapon is the cutoff of raw materials one. So maybe I'll just start with that one first. And there, the point is, is that there are many raw materials that China has a controlling interest in, and this does give China leverage. But from our standpoint, this leverage that China has with respect to raw materials isn't really a reflection of Chinese economic strength. Rather, in our view, it's a reflection of poor planning by the U.S. government, by governments in Europe and by governments in almost all of our allies.

In that if you don't like that, China has leverage in this area this is a completely fixable problem in that you can essentially insulate yourself from this Chinese leverage by engaging in a combination of stockpiling and increasing production.

And rare earths is a really good example of this. This is a weapon that China just used and a lot of people are talking about it as this long-term weapon that China will have. Not if the U.S. and other governments respond appropriately in that they're not unable to have enough rare earths. Rare earths are actually not that rare. The U.S. has more than enough rare earths itself.

And in fact, until the close to the end of the 20th century, the U.S. was the world's leading rare earths producer. The problem is that the U.S. got out of the rare earth business, not because we don't have rare earth, but because producing rare earth and especially processing is incredibly environmentally toxic. You know, to produce one ton of rare earth, as a byproduct you have 2000 tons of toxic waste.  So, could we do this again? Yes. But in our view, a better route would be to stockpile rare earths.

And so this is just a matter of spending time and money and planning. And there what's interesting is that the South Korean government several years ago initiated a $4.5 billion program to stockpile raw materials. They did the right thing, you know, and the U.S. and its allies, they should be following South Korea's example on this.

Notably also, during the Cold War, the U.S. had a roughly $15 billion stockpile of raw materials. Now our stockpile is one 10th of that, about 1.5 billion. So we basically need to go back to having a Cold War raw material type stockpile. Again, we knew how to do it. We did it before. We just need to do it again. So this is China's main weapon, you know, and the point is, the matter is that it's something that the U.S. and other governments can insulate themselves.

In contrast, the cutoff of materials and parts and components and technologies that the U.S. and its allies could impose on China, those are not things that you can stockpile because those are things which are dynamic. They're changing over time and therefore you can't just buy a bunch of semiconductors and use them 20 years later. But you can buy a bunch of cobalt and use it 20 years later. And so that's what the U.S. and its allies should be doing.

So that's our analysis of China's best weapon. And the point is, is that this is a weapon, which, if the U.S. and its allies, act responsibly is a weapon that China will only have for a short period of time.

Matt Gluck: I'm now gonna read a brief quote from a recent article in Foreign Affairs by Kurt Campbell and Rush Doshi and I, I want you to, if you can, to put this quote in conversation with the relatively small amount of leverage that you, that you think that China has over the U.S. in a potential conflict and also just in normal geopolitical economic competition during peace time.

So the two of them write: On critical metrics, China has already outmatched the United States. Economically, it boasts twice the manufacturing capacity. Technologically, it dominates everything from electric vehicles to fourth-generation nuclear reactors and now produces more active patents and top-cited scientific publications annually. Even if China’s growth slows and its system falters, it will remain formidable strategically.

So Ben, first of all, I know that you disagree with, and you explain in the book why you disagree with many of those descriptive assessments of China's raw power. But how do we explain the, the relatively small amount of leverage that Steve just said that China would have over the U.S. in in a, in an intense period of economic competition with what Campbell and Doshi describe as this massive economic power? They might say a larger economic power in the United States or soon to be larger economic power in the United States.

Ben Vagle: Yeah, it's a great question, and I love the quote because in a very real way, the book engages with every single contention that is made in the quote at various points, you know, along the narrative journey. So I'd recommend checking out the book for that reason, if you're interested in, you know, learning more about these issues.

But the main high-level way that I can reconcile the different view that we have from Campbell and Doshi is just that all of these statistics that they're citing are, you know, available. They are like true in some kind of an abstract sense. But for every single one there is, you know, another story that you know is important to be told about them and other ways in which they really ought to be placed into context.

Let's just start with GDP as one example of that. It's quite common nowadays for analysts to say that China's GDP has overtaken that of the United States. And the people who say this are using a form of GDP called GDP with purchasing power parity that basically looks at what people are actually able to purchase with every dollar that they have.

And it's a basic recognition of the fact that in the United States certain goods and services are more expensive than what you have in other countries. For example, what will probably cost me more to get a haircut here in Washington D.C. than it would cost someone in India to get that same kind of a haircut.

And what that means is that you have countries that are still in developing stages that have much higher GDPs with purchasing power parity than you know, a country like the United States might. And that metric shows that China is ahead of the United States. That it's purchasing power parity GDP is around 30% greater than that of the U.S.

But there's a whole other story that you can tell here. Number one, should we even be using that form of GDP in measuring geopolitical competition? Steve and I think that the answer is no, because in high technology industries that feed into military industries, you have to look at goods that are tradable.

For example, you know, a given high tech good, let's look at the iPhone again, is a good, that has a broad world price. That same thing applies for much weaponry, and so you shouldn't be looking at what your purchasing power parity is in that domain. You should instead just be looking at world prices, which are measured by market GDP in which the United States still has a lead over China of about 25%.

And then you can go even deeper into the statistics there. We think that China's GDP is subject to a number of flaws that actually mean that it is overestimated. One of the reasons is what Steve was talking about very effectively earlier, which is just that a lot of China's GDP is subject to globalization measurement issues. Much of what is in China's GDP right now is actually being generated by foreign countries.

Another issue with China's GDP itself is that its economy has this incredibly unique structure. It has a massive share of investment spending in its GDP. Its GDP is basically bolstered by things such as investment infrastructure, investment in real estate. And these unique attributes of China's economy render it very hard to compare with most Western economies. And if you filter out a lot of the non-performing investment that China has right now, it's GDP is actually, you know, significantly lower, even based off of standard market rates as compared to that of the United States.

So just in that one domain, as an example, we think that the U.S. has still actually a rather significant lead in gross domestic product as compared to China. And the broader point here, because this applies in basically every single section of the quote from Campbell and Doshi, is just that there are other ways of looking at these issues.

And even if the statistics that they're citing are true in one sense, in other very important ways they need to be placed in context because there are many respects still in which the United States has a very significant economic power advantage over China.

Stephen Brooks: You know, if you're looking at a lot of these measures that people cite to say that China is as economically or technologically capable of the U.S, you basically can't trust 'em because many measures that come out of China are manipulated. You know, they're manipulated by trying to make itself look as powerful as Doshi and Campbell think it is, and it worked on them.

But if you're careful and if you really look under the surface and really pull apart and look at things in a way which counts for this manipulation, instead, you look at measures that cannot be manipulated, you get a completely different story.

So just as an example, they say that China produces more patents in the United States. That's true, but China pays people for patents and it pays people for patents, in part 'cause it wants to look impressive. If you pay people for patent patents, they'll produce patents, but most of those patents will be useless. Which is what we can see if we use a measure which cannot be manipulated by China. Namely, how much are people willing to pay China for its patents? And right now they're willing to pay collectively $13 billion for Chinese technologies.

That's impressive, but it's one 10th of the level of the U.S., which is at about 127 billion. It's actually much lower than the level of patent technology sales of Japan. It's much level than the patent technology sales of Germany. It's much level China's current rate than the U.K. So China produces a lot of patents, which impresses some people, but they shouldn't be impressed.

You know, they're being essentially manipulated by Chinese data and you can't, you can't allow that to do that, you have to look under the surface. And if any data comes out of China that can be manipulated, you should assume that it has been manipulated.

One, one other thing, an excellent analysis of why you should look at market GDP when measuring geopolitical power instead of PPP GDP is, an article which came out in New York Times two years ago by Paul Krugman, and it's called “How Super Is Your Superpower?”

And he goes through in detail using excellent examples why PPP is designed to measure consumer welfare. But we're political scientists, we're not interested in that. We're interested in power, and if you're interested in power, as Krugman argues and shows, you must look at GDP in market terms. So anyone who kind of doesn't understand why PPP is the wrong measure, read that article. It's great.

Matt Gluck: I want to turn now to your assessment of what the U.S./China economic competition would look like in conflict scenarios. And you model several six, I believe. Ben, could you take us through these and explain first of all how the scenarios are different and second of all, how the different consequences flow from the inputs?

Ben Vagle: In the first part of the book, we were looking at the broad economic power that the United States and its allies have relative to China. But Steve and I really wanted to understand what that would actually look like in a conflict scenario if that economic power could translate into leverage, that could really affect geopolitical outcomes.

And so we undertook a fair amount of economic modeling in the second part of the book on what would happen if China were to invade Taiwan and then if the United States and its allies were to respond in turn with sanctions or even some kind of a broad economic cutoff. And we looked at that in two time horizons.

The first was the short run. So just considering what would happen in the weeks and months following a conflict. And the second was in the long run. So just imagining what kind of longer run equilibrium the U.S. and China might settle at if trade barriers between these two countries remain high.

And the short run is a scenario that I especially found to be somewhat scary for the United States because we have all of these corporations that are in China producing there and exporting from there. And in the short run we would lose access to much of that production. So it was, I think, important to, you know, the argument that we're making in the book to just understand how that kind of a broad economic cutoff would affect both the United States and China.

And what we found was genuinely surprising to me and interesting to me in the scenarios in which the United States and its allies act together to cut off China, China's losses are really massively disproportionate. As Steve said earlier, China would lose between five to 11 times more than what the United States would lose.

The U.S. itself in the short term would see something along the lines of three and a half to 4% of its GDP disrupted, which is high number, don't get me wrong, that's comparable to the Great Recession. But China on the other hand, could see anywhere from 25 to 50% of its GDP disrupted if it is deprived of a broad amount of international trade during a conflict scenario over Taiwan.

And that economic pain is a massive leverage point that the U.S. has, and it's also not something that it has under every circumstance. One of the really important things that Steve and I are showing in this work is that if it is just the United States that is trying to undertake a cutoff of China, especially in the short term, its losses are actually not going to be that disproportionate relative to those of China.

They would be roughly 70% those of China, which of course is more favorable for the U.S. relative to China, but it is not massively disproportionately favorable. It's not a significant lever that the U.S. can use to alter China's behavior in ways that favor it. To do that requires working with American allies, which is really one of the most important takeaways of our book.

Matt Gluck: When you say that the U.S.'s losses would be 70% in the unilateral scenario. You mean that the U.S.'s concrete losses would be about the same, but it's just that China's losses would be so much lower? Is that right?

Ben Vagle: Yes, that is more or less exactly right. American losses would be somewhat lower in the unilateral scenario because there would be fewer global economic disruptions. Allies wouldn't be participating in the cutoff, but really it would be China's losses that would go down by far the most dramatically, and that's because allies wouldn't be participating in this kind of a sanctions campaign.

Stephen Brooks: I want to add one thing very quickly to Ben's answer, is that when he was saying that in the short term that the, the U.S. would go down about negative 3.5% and he was comparing that to the Great Recession. You know, a lot of listeners would be like, well, you know, could the U.S. even think about engaging in that kind of economic harm? And, and that's a real question.

 But two things I wanted to say to kind of follow up on that. One is that that's one reason why you would only wanna use this tool in an extreme circumstance. You know, namely a situation where China is trying to revise the territorial status quo by taking over Taiwan. With the point being that if it takes over Taiwan, that itself is gonna have huge economic consequences for the United States.

United States is not gonna emerge unscathed if China takes over Taiwan. The U.S.'s GDP is gonna go down probably about minus two or probably more. The point of the matter is, is that you would not think about using this tool if you were rational in peace time. You would only want to impose this kind of harm on yourself in wartime.

The other thing to note about the figures is that our estimates of the negative 3.5%, that's actually not a yearly figure, and so in many respects, it's not actually comparable to the Great Recession, which lasted many years. For many years, U.S. GDP was down essentially minus 4%. Rather, the minus 3.5% is the amount of economic pain that the U.S. will essentially have on the first day, and as soon as China's cut off, then what every U.S. firm is going to do is immediately say to themselves, where can I get what I'm getting from China from some other place? In other words, how can I substitute away from China?

And if you go back to what I was saying before about the iPhone example, basically almost everything that U.S. firms are getting from China, you can get from other places. So you will be able to substitute away from China in many cases quite quickly. And so what's gonna happen to that negative 3.5% figure is that's gonna be the pain on the first day. But that level of disruption is going to go down over time, quite rapidly, and so therefore, it's not negative 3.5% for the year.

That being said, my first point still holds, which is whatever the amount of pain it is, it's substantial and it does not make sense for the United States economically or strategically to be harming itself to this degree in peace time.

Matt Gluck: So first of all, there's that level of harm, but second the point that you've both made now and that I see as so critical is that if the U.S. decouples now, it gives away this huge strategic advantage that it has in a conflict scenario. And that also, I presume, gives the U.S. significant deterrence authority to the extent that China acknowledges that the U.S. has this power, even has something close to this power.

Ben Vagle: Yes. Couldn't agree more.

Stephen Brooks: As we say in the Foreign Affairs article, in also the book, you can only cut off China once. You can only cut off China once. If you've already cut it off and then China invades Taiwan, then you have no leverage essentially to implement.

In some respects, if you cut China off in peace time, you'll turn China into something more like Russia, which is a country which did not have these high level of globalized production links. And so when you cut off Russia, it wasn't hurt very much. The fact that China's tightly integrated into these production chains is good. It's good in the sense of, it allows for production to be efficient, allows for our economy to not have inflation. But it's also good strategically in that it allows us to have this tool which we can threaten in a wartime type situation.

So the bottom line is if you care not just about short-term economic growth. But also long-term chances for peace then you don't decouple from China. That being said, there are some small areas where you would think about cutting China off, namely areas of high technology, which are so important for making weapons and/or are so important for the long-term technological and economic competitiveness to the United States.

There the best example is semiconductors. There it does make sense to cut up China in peace time. But the real question is how many other sectors, limited number of them, should we be doing this? That was the debate that we think should be happening and for a variety of reasons. We went straight from having that debate to cutting China off across the board, which again, economically does not make sense and strategically does not make sense.

Matt Gluck: I wanna get at two more issues. The first is Taiwan, and then I wanna talk a little bit about the Trump administration's economic policy and how it interacts with your argument. But first on, on Taiwan. So one illuminating insight from the book, and this is near the end of the book, Steve, as you just said, the U.S. would be harmed pretty significantly by a Chinese invasion of Taiwan if it were successful. But you also say that China wouldn't actually gain that much economically from, from a successful invasion. Could you explain why that is?

Stephen Brooks: Sure. I mean, we presented this book 20 times in D.C. this summer. And a common thing that people would mention to us is, well, if, if China took over Taiwan, then it would own the whole semiconductor industry, and that's just not correct.

That's based upon an understanding of production, you know, from 50, 75, a hundred years ago. The point of the matter is for making something like semiconductors, they are so ridiculously complex to make and require so many inputs, not just coming in once, but essentially coming in constantly that there's no way for a foreign conqueror, in this case, China, to come in and essentially take over the Taiwanese semiconductor plants and then run them.

The Nazis could do that in World War II because as Ben said earlier in the interview, at that time, almost everything that you needed to make a given product was in that country. And so when the Nazis came in and took over Czechoslovakia. They took over the Škoda munitions factories, which was one of the biggest arms producers in the world, and basically said, we're gonna keep running it the same way. It's just we are in charge.

That wouldn't work this time, because now in this case, there are tons of things that are needed to make the semiconductors, which would stop coming in. And so then at that point you wouldn't be able to make them.

Moreover, you know, those plants are very complex. They require management, not just of some generic person, but someone who has decades of experience knowing how those plants actually work. And my guess would be that if a war happened that Taiwan and/or the United States would very quickly move those engineers out of those factories, so there'd be no one left to kind of tell China how to run them.

And those factories won't just be able to be making the same thing over and over year after year. They would need to be updated with new software, new machines. That also wouldn't happen. And so in my view, you'd be taking over factories that essentially won't work and so therefore it's not a valuable asset for China.

Matt Gluck: So you, you talk about how it's critical for the U.S. to maintain its European and Asian alliances if it wants to have this economic leverage. The Trump administration has placed less emphasis on maintaining these alliances, and it's done this in part through the imposition of tariffs on allies and through other signaling steps.

Could you describe the effect of these steps so far in maintaining these alliances for the long term? And what would it look like for the U.S. to really start to lose the strategic benefits that it has from these alliances and that would empower this coordination that you say gives it this massive leverage over China in an economic competition.

Stephen Brooks: Well, the first thing I'd say is just to go back to what the empirical analysis that Ben and I had in the book shows, which is that if you cut off China by yourself, then you get hurt almost as much as China. You can only impose massive disproportionate harm on China if you do it with U.S. allies. So therefore you need U.S. allies in the first place, you need to maintain them.

And then secondly, you need to be in a position to have them be willing to cooperate with you in a cutoff. And so therefore, for this reason and others, you know, I think that the Trump administration, any administration now and in the future will have to make a choice, which is what's more important to you, you know, constraining China, or is it more important for you to derive the best possible deal in terms of all countries in the world, including your allies?

And what we're suggesting is the U.S. does have a lot of capacities in the peacetime environment and in wartime to work with its allies to constrain China. But it can't constrain China and cut off its allies economically at the same time. Those are just completely mutually incompatible goals.

The second thing I'd say is that it's really, you've seen the biggest emphasis from the Trump administration in terms of pulling back from allies in Europe. We don't seem to be pulling back very much in the Middle East. And we've argued that we want to actually be even stronger military allies in Asia. So it's in Europe where the pullback is kind of most on the table. And I think the key reason there is that people in the Trump administration argue, I think correctly, that China's the biggest threat that the U.S. has.

And then they say, what can Europe do to help us vis-a-vis China? And their answer essentially is nothing. But that's because they're looking at this completely in military terms. They're asking what do the Europeans have to offer militarily in Asia? And it's true, not much, but what our analysis is showing is that economically the Europeans are crucial.

You know, in terms of you need Europe, if you're United States if you wanna do anything, you can constrain China economically, either in peace time, or war time. So this is another thing that essentially my answer would say overall, which is you've gotta look at what's going on militarily and economically at the same time. And right now I think there's very much a segmented approach to thinking about these issues and that's not going to be effective.

Matt Gluck: Steve, could you describe for us what the consequences of this cutoff scenario or decoupling scenario would look like in the long run?

Stephen Brooks: So we modeled the multilateral cutoffs in the long run. And there, the point of the matter is, is that, as I was noting before with the iPhone example, it will take time to substitute away from China, but substitution away from China is possible.

And so the point is, once all that substitution happened. Once non-Chinese suppliers have been found or established, then at that point, U.S. firms, Japanese firms, west German firms, they can go back to making things just like they did before. Their production will not be in any way in our estimate, constrained by the fact that they no longer have access to Chinese firms. And so what that means, what our analysis shows actually is that the U.S. and its allies basically go back to growing pretty much as they did before.

The country that's hurt in the long term is China. And there the points of the matter is, is this hurt is for the long term for a variety of reasons. But an important one is that all of the production that was happening in China, that was either directly owned by multinational corporations or was organized by them, all that production will have left China.

And once it's left China, for the most part, it won't go back. And so essentially a large portion of what China's economy is, will be removed and it'll be in other countries. And so China's economy, not surprisingly will not grow nearly as fast as it would if it had maintained those foreign production links.

So in the long run, it's a positive, you know, story for the U.S. and its allies in that they will eventually go back to basically the economies and growth that they had before China will be permanently harmed to very significant degree.

Matt Gluck: Ben and Steve, thank you so much and thank you again for your book. For listeners, it's “Command of Commerce: America's Enduring Economic Power Advantage Over China.” Highly recommend reading. I learned a lot, thank you both.

Stephen Brooks: Great, thanks for having us.

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