Decoder with Nilay Patel
00:05:54 · Willy Shih
[00:05:54] S3: Well, know, I think the point about first principle economics is actually spot on. Okay. And I often tell people, it's like my father was an economist and I used to see him come home from work and I thought, I never want to do that, you know. And I'm going to go into science and technology, right? And so I go into science and technology and take all these engineering classes and I'm in product businesses only to discover, to my horror, if you don't get the economics right, then it doesn't matter about the science and technology. Okay. And the book is really, you know, the subtitle is The Powerful Economics Behind Global Supply Chains. And I talk about all these principles behind global supply chains, but they're all actually driven by economics, okay? And in fact, what you see today is, you know, market forces responding to all this stuff. Okay. So, for example, when we put tariffs on stuff coming out of China, then manufacturers say, okay, let me move that supply chain and I'll do my assembly in Vietnam or I'm going to do my assembly in Mexico or let me find some way to circumvent these tariffs. Okay. And that's really what I find is like when you look at how these supply chains are structured, why do, you know, cashew nuts say they come from Vietnam when they were actually grown in the Ivory Coast or Ghana. Right? It's like, well, there was an economic reason for all of these things. It's like, why do frozen fish, you know, that are caught off the coast of Alaska go to Qingdao, China for processing before they come back? Well, again, it's because it's cheaper to do it that way. So when we put up these trade barriers, you know, the first reaction tends to be, you know, it's like, how can I circumvent that? Okay. And we saw a lot of that, especially last year, you know, I remember Liberation Day was April 2, Right? And if you look at the quarter right before, people knew stuff was going to be happening, you know, so we had this circumvention going. And that's why, you know, first quarter twenty twenty five, all time record imports from Ireland. And then the first half of twenty twenty six kind of slow imports from Ireland. That's because we're burning off all the stuff we imported in the first half of twenty twenty five. And it's... It all gets down to economics. I'm getting all these TV set ads because the holiday season is coming up, right?
00:08:24 · Willy Shih, Nilay Patel
It's like, great. You know, and they're all coming from Mexico. It's like, how can they all be coming from Mexico? Because I know the flat panel factories that supply all these TV sets these days are all in China, right? And they're all in China because the plants have been subsidized so heavily or because of industrial policies that have encouraged those plants to be there. If you watch the trade lanes, you'll see this stuff. What happens is there've been all these new shipping routes from China to Mexico over the last two years. Direct ocean container service from China to Mexico. It's like, I wonder what that's about. I'll tell you what it's about. It's moving parts and components from China to Mexico so that I can assemble them in Mexico and then bring them in under the USMCA agreement. Right? So, what you're actually seeing is these supply chains are organized the way they are, you know, partly because some place... Sometimes it's because some places have the capabilities, okay? But more often than not, a lot of these are just responding to economic forces. If I'm going to throw on tariffs or am I gonna make it more expensive to ship something between two points, the market will find a way around that. [00:09:41] S2: That's something I wanna come back to several times in this conversation. It's cheaper was a real driving force of globalization. Americans like cheap things. They like cheap flat panel TVs. The fact that I can go to Costco right now and get a 50 inch TV for $300 is a miracle of the modern supply chain and of modern manufacturing. Manufacturing.
00:09:41 · Nilay Patel, Willy Shih
[00:09:41] S2: That's something I wanna come back to several times in this conversation. It's cheaper was a real driving force of globalization. Americans like cheap things. They like cheap flat panel TVs. The fact that I can go to Costco right now and get a 50 inch TV for $300 is a miracle of the modern supply chain and of modern manufacturing. Manufacturing. [00:10:00] S3: It is a miracle. Right? And it's cheaper and it's because there's a place that for better or for worse can make it cheaper. Okay? And by the way, American consumers benefit from that. [00:10:12] S2: One of the reasons that we pursued free trade and globalization so heavily in The United States is we thought that creating economic ties between all these various countries would reduce the potential for an armed conflict. There's a lot of lot of ways to think about that. But in general, if you tie the economies together, the price of having a war shoots up, and also then you won't have free or cheap TVs, and maybe the public won't like that. That is under pressure now. Right? I mean, we're sitting here in the middle of an AI conversation where China's routinely invoked as the great threat that will rise up if they get to AI, AGI before us. We are putting up tariffs particularly on China. In In The United States, the policy administration is to bring manufacturing back to The United States through the use of tariffs. Your point of view is that simple economics will provide enough contortions to avoid that blunt outcome.
00:11:06 · Willy Shih
[00:11:06] S3: You know, when we seal the borders for some products everywhere, right, then the price is going to go up. Okay. So for example, putting tariffs on steel, you know, initially when we just put tariffs on imported steel and aluminum, then what happened is like, well, gee, you know, I happen to make... Be making construction equipment and more than half of the cost of that construction equipment is medium carbon steel, right? So therefore it makes it easier for me to import construction equipment from somewhere else. And then we say, okay, now we're going to tariff stuff based on your steel content. Okay. Eventually, you close off all those things, you know, which means you're basically tariffing everything, then stuff gets more expensive domestically. Okay. And, you know, you could look back on the period from, you know, 2000 until really twenty twelve, twenty fourteen. We had relatively low inflation. Part of it is because we were getting cheaper stuff from China. Okay. I think there are a couple things that drove a breakdown of this model, if you will. Okay. One is people didn't really recognize that connection between moving work out of The US to China meant you're leaving behind people who now don't have any more work. Okay? And that cost was spread over people who, by the way, also shop at Walmart and benefit from the cheap goods. Right? And, but we didn't really, as a country, didn't think about it as, like, how are we gonna retrain all those people who weren't making furniture in North Carolina. Okay? Or who were making castings and forgings in, you know, Kentucky or wherever. That was one part of the problem. The other part of the problem is, like, we have this gigantic trade deficit. Now, a lot of that is fueled by government spending and borrowing and so on like that. But typically, you know, in some respects, you would have expected the exchange rate or some other adjustment mechanism to, you know, compensate for that. I remember the last time exchange rates moved was really in the 1980s, okay? And that was also the last time The US ever had a trade surplus, right, when, you know, the dollar got a lot cheaper relative to, especially then, it was the Japanese yen, okay? And that had an adjustment on trade flows as well. All right. So, now you have China running this ginormous trade surplus, okay?
00:13:46 · Willy Shih
And basically what they're doing is they are exporting their economic problems in China to The US. Okay? And they're exporting that at the expense of jobs elsewhere. The Europeans have suddenly woken up to that. And especially you go to a place like Germany where half of the economy is revolving around the auto industry and they have now figured out it's like, wait a minute, this is an existential crisis for us. Okay. But those two things, it's like kind of the controls on this that you would have expected, to rebalance things didn't... Didn't pan out. That... That's why we have so much discussion about this right now and so much, you know, view of this as a problem.
00:14:32 · Nilay Patel
[00:14:32] S2: It it feels like my entire teen experience was a conversation about NAFTA. Right? And we should open free trade in North America. Then later I got to college and all the economic discussion was about the EU and creating the single market in the EU. And we're gonna stand up these big open markets and there's gonna be free trade inside of those markets and that will lead to a kind of economic prosperity. We're fast forward to 2026, and the desire to tear a lot of that down has gone way up. Right? Particularly as you look at the USMCA and Chinese goods coming to Mexico to come to The United States, sort of nakedly circumventing the entire policy goal of imposing tariffs. The goal is to build the iPhone in The United States. The goal is to build manufacturing in The United States. I know that you have never really thought that's an achievable goal, but that is the goal. That is what the administration promised. And we've created these sort of trade groups, trade associations that allow that goal to be circumvented. Do you think the walls are gonna keep going up or do you think they're gonna come back down?