Invest Like the Best with Patrick O'Shaughnessy
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.
00:25:17 · Walter Russell Mead
So we said, okay, fine, Germany, you can have really high tariffs on American goods, but we won't reciprocate because it's in our interest for you to grow. A lot of that stuff got institutionalized, there are many many cases now where you have non reciprocal tariffs and our barriers have been lower, I think the Trump people were not wrong to say, okay, this needed to change. We're also seeing with the need for supply chain security and so on, you can't simply take your economic policy out of a free trade textbook.
00:25:52 · Patrick O'Shaughnessy
[00:25:52] S0: On the other hand, you do still need trade. Trade needs to be beneficial on both ends. I wanna talk about the changing orientation of us versus the world, sort of our foreign policy. But first ask about technology because when I started my career, I'm 41, so twenty years ago, call it. I remember seeing, I've always been an investor. If you looked at the top 10 or 20 market cap companies, it was a total global mix of companies from many different industries. It looked like this kind of potpourri list. Now that same list is literally just American technology companies. Basically one through 20. There's a couple exceptions. It's more or less total dominance by American technology companies. And that was true before OpenAI and Anthropic and SpaceX. Now those are resurging even on top of our great technology companies. And I'd love to just hear you reflect on how tech, of course AI, and you have to ask about that as well, are changing the nature of global order in such a digitally dominant set of technologies that we're once again the leader in. How do you process it?
00:26:51 · Walter Russell Mead
[00:26:51] S2: I do try to look to historical analogies. There's nothing exactly the same as this. The closest you really can see is to the actual industrial revolution. Interestingly, the country that led the first industrial revolution, Britain then dominated for one hundred and fifty years became a dominant power. History is moving a lot faster now, but I think we absolutely have been in this position of the first to really see and use this potential source of power. I think since the seventeenth century, the key to power in the modern world is which countries can be most effective at developing, harnessing, exploiting the power of new technology without blowing up internally because of the social stress and upheavals that new technology causes. And for a lot of reasons, think first the British and then we were just better at riding that wild horse than other people were. I think that is still true, but you can look at American society today and see the reaction against tech, this sort of anti data center thing, and you've got Trotskyites in the DSA thinking that the most retrograde forms of Marxism are our only salvation in this terrible situation. It's not a given that we will be able to pull it off again. Enormous progress and yet total chaos and dissension. The relationship between achievement and order right now has broken down because we need a different kind of order than we've had because our technology has created a new kind of world. It is changing the way power works, it is changing the nature of power. So far, America is doing what we've been doing for a very long time, which is dominating the cutting edge.