Invest Like the Best with Patrick O'Shaughnessy
00:15:05 · Walter Russell Mead
You know, here's the merchant with his like silk robe from China, and he's standing on a rug from Turkey, and he's got a stuffed parrot from Brazil on his mantelpiece. There's just this astounding amount of wealth, which then allows you to start thinking globally. Eighteenth century, the Prussians fight, Frederick the Great fights with Maria Theresa over Silesia. The Seven Years' War, this is a beautiful, I've been there, I've been to Silesia, I love Silesia. It's a sausage shaped province in modern Poland. And seven years, both countries go bankrupt, and in the end, Frederick gets it, which means he's Frederick the Great, and it's just Maria Theresa who lost. But during that seven years war, the British basically kicked the French out of India and Canada and North America and established the foundations of the world order that we still live today. So you're thinking globally. Once you have built this global system, you then do something extremely treacherous, which is you invite everyone else to participate in your system. So you don't do, say, what the Spanish did in Latin America where you say, this is ours, we conquered this, nobody else can trade here, you people stay out, which obviously condemns it to a certain stagnation. The British in the nineteenth century, they have free trade in the British Empire, everybody can trade, and the British Navy keeps piracy down for everybody, not just for the Brits. And what this does is it encourages other countries to participate in your system, as we did with Britain, we didn't fight with them after 1812, we came close a couple of times, but at the end of the day, we traded in the British system, we were among the greatest beneficiaries of what the British did. And the Germans did the same thing, Prussia, the German Empire became a great trading power, they had investments in Argentina and Chile, and in many places their commerce was driving out the British. Then the Germans discovered that we have another little trick up our sleeves, they go to war in World War I and they suddenly discover that while they were integrating into the world, that made them very rich, gave them great technology, a lot of military power, but now they're dependent on it. Suddenly they're at war with The UK and they can't get all that grain from Argentina and America that fed their people.
00:17:38 · Walter Russell Mead
They can't get that imported rubber from Malaya that provides the tires that they need for war. So they've grown dependent on that international system and you're able to cut it off and this is one of the big reasons the English won so many of these wars. So, system exists, I think a lot of Americans really aren't conscious of it, but we sort of revert to these patterns, things happen and we just behave in these ways. So after the end of the Cold War, what do we say to Russia and China, Come on in, and just as we said to Germany and Japan in 1945, benefit from the system. Actually, we waited about forty seven to do that, but in any case, come on in, benefit, and now both Germany and Japan are principal pillars of the world system. We sort of hoped that Russia and China would do that too, they've taken more of the Wilhelm the second path than the Conrad Adenauer path, We are now testing what happens there. It's one of the reasons I'm worried, but it's a pattern that has been recurring and so far, whenever it finally comes to the test, our side has been winning.
00:18:49 · Patrick O'Shaughnessy
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00:20:31 · Walter Russell Mead
[00:20:31] S2: I used to have these conversations in China, some of my books have been published in Chinese, and I've gone to Chinese universities and had these conversations with scholars and officials. And what I can say is, they are very aware of this dynamic. If there are things that keep Xi Jinping awake at night, I think one of them is his awareness that in any kind of conflict with The United States, China would face being cut off from so many of the raw materials and so on, and markets that its economy needs. I mean, let's imagine China declares a blockade of Taiwan, which could very easily happen. The United States just from 100 miles further out imposes a counter blockade on China. Nothing is going in or, you know, no oil is coming in or out, no manufactured goods are being sold, what happens to the Chinese economy, all the soybean contracts they have with farmers in Brazil and Argentina not getting delivered. We've all been surprised with the Iran war to see just how big the Chinese oil stockpiles have become. A lot of Chinese energy policy can be understood as trying to avoid the trap of dependence on the global economy. They're doing the solar, they're doing as much hydro as they can, and some of our friends in the environmental movement are saying, oh, it's so wonderful, they're so green, let's cooperate with China to build a new world. They're also digging as much coal as they possibly can because what they're trying to do is make themselves less dependent on the outside world so that in a worst case scenario with The US, they can actually fight for the long term.
00:22:16 · Patrick O'Shaughnessy
[00:22:16] S0: Do you think The US runs the risk of trying to do that same thing, become more isolationist? You know, our exports are relatively low as a percent of GDP compared to lots of other countries throughout the world. We are fairly self sufficed. Like America is an amazing place, natural resource rich, two oceans on either side, like we have these amazing advantages. Maybe we could do it without this interdependent thing that's created this amazing power structure as you laid out. Does that worry you that we like trend more in the direction of being isolationist or something?
00:22:43 · Walter Russell Mead
[00:22:43] S2: Well, think, look, there is obviously in American history we have a tradition of isolationism that is stronger at some times than others and it's definitely coming up now, and it does worry me a good deal because I do think American security and the American economy do ultimately require us to be engaged globally, not necessarily as global social workers or something, but you think about our trade, roughly a third of it is in the hemisphere, a third of it across the Pacific, a third of it across the Atlantic. We couldn't really very easily do without any one of those. We saw during the pandemic that our dependence on China for all kinds of things was really quite alarming. People look at our supply chains and they can see a lot of vulnerabilities, but we can't make everything that we need right here, we can't get all the raw materials that we need right here, but also, our producers need more than the American market. Traditionally, the most free market lobby in The United States has been the agricultural lobby, because America can do a lot more than feed ourselves, our farmers can feed practically the world, and if they're reduced to only feeding the American market, they can't make money. The prices are so low. They need that market. The same is true, you know, there's so many economies of scale. If our AI companies, if our tech companies can only benefit from the internal American market, that's actually not enough to generate the revenue and growth that they need, even to stay technologically equal, say to China, much less be ahead and be super profitable. Our business needs the world, and then there's the question of, okay, well, you can't really make people buy your stuff at the point of a gun, and you don't really want to have a gun around all the time, So you have to have a trading relationship that works for both sides. Both sides have to agree to the trade. There are ways of doing that. We got very doctrinaire in this belief that a simple free trade system would work, we didn't look for systematic cheating from China, but we also, after World War II particularly, a lot of the European countries were so poor and devastated from the war that reviving their economies became necessary for American security, otherwise they would have gone communist and we didn't want that.