Should I stay in my lane?

Decision-making under uncertainty

In a recent conversation about industrial policy, Noah Smith chided me for offering opinions on foreign policy risks, suggesting I was not qualified to opine on that subject. He’s probably right, and he probably “won” the debate. But I think his argument proves too much—no one has the expertise required to construct the sort of industrial policies now being advocated in Washington.

Let’s think about the record of the foreign policy establishment, over the past 90 years.

1. Lots of experts thought Chamberlain was right to appease Hitler in 1938.

2. Lots of experts warned of a “missile gap” with Russia in the late 1950s

3. The “best and the brightest” thought the Vietnam War was a good idea.

4. Our foreign policy experts failed to predict the 1979 Iranian Revolution.

5. During the 1980s, our experts told us that without an “industrial policy” Japan would soon surpass the US.

6. Our experts failed to predict the breakup of the Soviet Empire.

7. In 1991, our experts told us that Iraq’s Republican Guard was a formidable fighting force.

8. Once fooled, our experts thought the second Iraq War would be a cakewalk, like the first one.

9. The recent Ukraine War offers almost an unlimited number of bad takes. John Mearsheimer is the one expert cited by Smith in our discussion, and he suggested that Putin would not be so stupid as to invade Ukraine (in an interview someone sent me with the intention of convincing me how correct Mearsheimer had been!) When war broke out, we were initially told that Russia would roll right over the weaker Ukrainian army. Later we were told that severe economic sanctions would cripple the Russian economy. Then we were told that the cutoff of gas would severely damage the European economy during the upcoming winter. Of course none of this happened.

If I wanted to be snarky I’d say, “Yes, Noah, I lack that sort of expertise”. But the truth is that my own foreign policy predictions haven’t been much better. I suspect that it’s almost impossible to forecast in this area, just as it’s not possible to reliably forecast movements in asset prices. The world is too complex. But being unable to forecast is not an argument for an activist industrial policy. You cannot justify any sort of government policy without some sort of model, some sort of assumptions about how the world works. I cannot analyze industrial policy without some sort of foreign policy assumptions. So I do my best.

Smith criticized my claim that the Chinese government was less dangerous than the Russian government, citing the danger posed by China having an extremely large manufacturing sector. At one point he seemed to suggest that I was an old guy that didn’t understand the modern world, where China dominates manufacturing.

But surely we must make some sort of assumptions in this area. For instance, no one would claim that Germany or Japan are as dangerous as Russia, just because they have at least as large a manufacturing sector. Actions matter. And while China has engaged in some troubling actions, such as territorial claims in the South China Sea, its actions are not even close to being as reckless as those of the Putin regime. So it’s a judgment call. Reasonable people can disagree.

Even if I were convinced that China is equally dangerous as Russia, I would oppose current US foreign policy, which I believe is making war with China more likely. Here are a few of the problems I see with Smith’s argument, as best I understand it:

1. China has more than 4 times the US population. It’s almost a given that their manufacturing sector will be vastly larger than ours. If that means we have no hope in defending the US, then all is lost. No plausible industrial policy proposed by Smith or anyone else will meaningfully close that gap. But I don’t believe that is necessary.

2. My own economic policy views focus on things like fiscal responsibility and pro-investment tax policy. While I don’t think of these as “industrial policies”, they are the best way of boosting the manufacturing sector, which as Smith points out has some “dual-use” features. Current policies such as tariffs are ineffective and indeed counterproductive.

3. Smith is on stronger ground in advocating policies that boost specific sectors with national security implications, such as chip making and drones. I don’t have enough expertise in those areas to say exactly what our policies should be, other than that I prefer positive approaches such as subsidies to negative policies that attempt to damage the Chinese economy, for reasons I’ll explain later.

4. Any national defense strategy needs to consider plausible scenarios—what sort of problems are we likely to face? With Russia the answer is pretty obvious; Putin has indicated that he regrets the break-up of the Soviet Union, and thus we need to make sure that we have the ability to repel any attack on former Soviet members of Nato. Given Russia’s current struggle against a small impoverished nation like Ukraine, it’s clear that Nato can defend itself if it sticks together, even with the current levels of defense spending. Nato’s biggest weakness is political—will the US abandon our allies and thus open the door to Putin making a move on the Baltic nations? By helping Ukraine, we make that risk less likely. (And the addition of Sweden and Finland is an underrated gain.)

When thinking about the risk of war with China, I like to look at past history. What can we learn from the mistakes we made in earlier decades? I’ll start by considering the prelude to Japan’s attack on Pearl Harbor. I’d like to break this down into two parts: public opinion and geopolitical realities. Obviously, public opinion alone isn’t going to lead to war, but the backdrop it provides can help us to understand the failure of diplomacy to manage disputes over more tangible issues.

Here’s Wikipedia:

Japan's fear of being colonized and the government's expansionist policies led to its own imperialism in Asia and the Pacific, as it sought to join the great powers, all of which were Western nations. The Japanese government saw it necessary to become a colonial power in order to be modern and therefore Western.^[1][2] In addition, resentment was fanned in Japan by the rejection of the Japanese Racial Equality Proposal in the 1919 Treaty of Versailles, as well as by a series of racist laws, which enforced segregation and barred Asian people (including Japanese) from citizenship, land ownership, and immigration to the U.S.

Well that’s odd; I never learned about the Racial Equality Proposal in my history class. Why did that make the Japanese people resent Americans? Aren’t we wonderful people? It turns out that America, Canada, Australia, and New Zealand objected to allowing non-white countries like Japan to have an equal position in the League of Nations. Why? Because we were racist.

Beyond public opinion, there were also economic factors at work:

In the 1930s, Japan expanded slowly into China, which led to the Second Sino-Japanese War in 1937. In 1940, Japan invaded French Indochina in an effort to embargo all imports into China, including war supplies that were purchased from the U.S. That move prompted the U.S. to embargo all oil exports, which led the Imperial Japanese Navy (IJN) to estimate it had less than two years of bunker oil remaining and to support the existing plans to seize oil resources in the Dutch East Indies.

To be clear, there is a reasonable argument for the US putting those sanctions on Japan, as it had invaded China and was expanding elsewhere. Nonetheless, it does seem to have been at least one factor that led to the attack on Pearl Harbor.

Now let’s consider current policy toward China, starting with public opinion. Over the past decade, I’ve seen an enormous increase in misleading or even dishonest anti-China rhetoric, which often borders on racism. To be clear, the following examples are not Noah Smith’s views, just things I see floating around. Many of these have been amplified by government officials:

1. Claims by the US government that Covid escaped from a Chinese lab, with zero evidence to back up the claim. Most of the US public believes these false claims.

2. False claims by the Trump administration that most Chinese students studying in America are spies. This has led some state universities to restrict enrollment of Chinese students.

3. Claims that China is to blame for the US fentanyl pandemic. Even groups making this claim admit that a Chinese chemical embargo would not solve the problem, as the same chemicals could be sourced elsewhere.

4. Wildly exaggerated claims that China’s responsible for de-industrialization of the Rust Belt. (The actual cause has been mostly automation, the movement of factories to other parts of the US, and trade with countries other than China. For instance, 95% of jobs in coal mining have now been lost—all due to automation.

5. Several states have banned the Chinese from purchasing single-family homes, in response to hysterical fears of Chinese spying. (Of course China does spy on us, just as we spy on them.)

6. Ridiculously exaggerated claims of Chinese IP theft. (Our history classes ignore our extensive IP theft from Britain, when we were a developing country.)

7. The recent welcome swing away from woke excess now risks going too far, as I see increasingly blatant anti-Asian racism. Today’s FT quotes the CEO of Cleveland Cliffs:

   “China is bad. China is evil. China is horrible. But Japan is worse,” he said, adding: “You did not learn anything since 1945. You did not learn how good we are, how gracious we are.” He added: “Stop sucking our blood.”

8. You would think that America would be proud if China emulated some of the best practices of our educational system. Look at how this is reported by the rabidly anti-China National Review:

   Youngkin’s Office Vows to ‘Get to the Bottom’ of CCP Influence after NR Exposes Effort to ‘Clone’ Premier Virginia School

Not surprisingly, Chinese public opinion has recently turned against the US. Who would have guessed that the Chinese people resent being blamed for all of America’s problems?

Some complaints about China are 100% true. There really are severe human rights abuses in places like Xinjiang. But when this fact is reported, why does the US media generally fail to report that President Trump supported the single worst human rights abuse in China, their decision to put 1 million Uyghurs into concentration camps? Can you blame the Chinese public for being cynical about the US?

Imagine how the Chinese people feel when they see how Trump tried to overturn a democratic election and use a violent mob in a failed attempt to intimidate Congress into allowing him to say in power as an unelected dictator? You can laugh that it was a pathetic attempt, doomed from the start. I agree. But what would you expect the Chinese to think when 4 years later they see us turn around and elect Trump again?

All our thought leaders on the right have conveniently forgotten their statements in the immediate aftermath of January 6th—when they insisted that Trump should never again be president. The Chinese people aren’t fools—they see what’s going on in America, our hypocrisy on democracy and human rights. I used to think the Chinese were too cynical about the US—now I’m not so sure.

Even in China, public opinion matters a lot. The rise in nationalist sentiment there is very disturbing, just as the rise in authoritarian nationalism in Russia, Europe, Mexico, India, and the US is disturbing. It bodes ill for the future of world peace. I’m not suggesting that the US is to blame for this global trend, but the last thing we should be doing is trying to make it worse.

Here’s just one example of how the American public has been brainwashed by anti-China propaganda. In the 1990s, most people I spoke with congratulated me when I told them I planned to visit China. Yet back then, China was a place with very poor health and safety levels, and a lot of crime. Today, China is vastly safer, healthier and crime rates have fallen to very low levels. You are far safer in a big Chinese city than in a big American city. But recently, when I tell people I’m going to China they say, “Aren’t you afraid?” Of what?

To take another example, lots of Americans still think China has a one-child policy. In fact, the Chinese people know far more about America than we know about China.

When you move beyond public opinion to geopolitics, we seem to be repeating the playbook that led up to the two world wars. A few of our economic sanctions on China may have a valid national defense justification. But the vast majority of our trade and investment restrictions are being implemented for crude mercantilist reasons. The more we cut China off from the global economy, the more we make it like North Korea, a country with nothing to lose from military adventurism. I’d prefer a world where China was closely integrated into the world economy, and had a lot to lose from military aggression.

World war is incredibly destructive, especially in the nuclear age. The primary foreign policy goal should be preventing war. That does not mean pacifism; a strong military can help to deter war and the US should have a strong military. Rather, the goal should be to minimize the expected value of future damage from war, which can be expressed as follows:

Expected cost of war = (probability of war) X (damage if war occurs)

I suspect that our pre-war economic sanctions on Japan increased the probability of war by a larger percentage than they reduced the damage if war broke out. (I emphasize pre-war, as we all agree you’d want sanctions if war does occur.)

I worry that our current economic war with China is increasing the risk of a military war by more than it reduces the damage if war breaks out. Clearly, I might be wrong. There’s a great deal of uncertainty when it comes to foreign policy, and Noah Smith has some strong arguments. All I can do is to give you my best estimate.

It’s true that I don’t have expertise in this area. But if you disagree with me, ask yourself who does have expertise? For most of my life, Henry Kissinger was regarded as the pre-eminent expert on geopolitics, especially US-China relations. Kissinger passed away in 2023, but he basically shared my view as to the appropriate policy with China.

Today, Yasheng Huang is perhaps America’s most knowledgeable expert on China, and he also shares my concerns:

In the past decade, however, geopolitical dynamics have shifted, leading the US government to increasingly overlook this bedrock principle. US-based researchers who have conducted normal academic activities with their Chinese counterparts have been branded as spies. Agents of US Customs and Border Protection have interrogated scientists simply because of their Chinese backgrounds and their research disciplines. In 2023, Florida enacted a bill restricting the hiring of graduate students from a “country of concern”, mainly China, in state universities’ academic laboratories. In January this year, the US Congress attempted to resurrect the ‘China Initiative’, a programme set up by the US Department of Justice to prosecute perceived Chinese spies in US research and industry, even though the initial programme that was launched in 2018 was plagued with flaws and was shut down in 2022. In June, the US House of Representatives proposed a bill that would prohibit the Department of Defense from giving funding to any US university that has research collaborations with China.

Regrettably, these policy actions — poorly thought out in my view and tainted with racial profiling — are a sign of things to come. At a practical level, the era of close and unfettered collaborations between US and Chinese scientists and technologists has come to an end.

We should be trying to improve relations with China, not trying to launch a new cold war. Freer trade and investment is a good place to start.

PS. Regarding drones, Anduril announced today that it is building a massive drone manufacturing facility in Ohio. We can do those things without launching an economic war against China.

PPS. Here’s an ancient Chinese warrior that I saw in Xian: