Decoder with Nilay Patel
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?
00:15:33 · Willy Shih
[00:15:33] S3: I think we're gonna see more pressure to kind of moderate our behavior a little bit, okay? Because let's face it, there are a lot of goods where we as a country need access to inexpensive labor, Okay. So, I'm actually very pro USMCA as a successor to NAFTA because I actually think, you know, there are things that we need inexpensive labor. Mexico is a good place to source things like that, right? There are things that we need from Canada, right? So if we were to look at North America as a trading block, then what you would see is you would see the benefits of specialization, right? Which is the whole rationale for trade in the first place. It's like, we're better at doing this, you're better at doing that, you know, we'll... Specialize in that, we'll specialize in this, we trade, everybody's better off. Okay? And if you can do that with a community of countries that understand the need for that type of balance, then everybody is better off. Okay. I think the problem with China is they're very happy to have this imbalance where they want the world to be dependent on them, they don't want to buy stuff from the rest of the world. When you have that, then trade doesn't really work. Right? So, I think that's the problem. I'm hoping we're going to realize that we're better off among a group of like minded countries where we can trade within that block. So, for example, if The US were to view North American partners and European partners in Japan and countries in Southeast Asia and Australia and New Zealand, and by the way, parts of Central And South America, and even Africa, and say, okay, let's trade across this block. We'd have access to most of what we need, whether it's critical minerals or, you know, low cost labor or a lot of technology specialties, right? So, you know, we could do much better with that. Much better than a kind of go it alone strategy in my view.