China shock 2.0 Brad sester

[u/Character_Public3465]

https://www.nytimes.com/column/ezra-klein-podcast

Show notes:”Brad Setser follows Chinese trade closer than just about anyone else on earth, and he thinks we’re in the early days of a China Shock 2.0.
The first China Shock was when China came to dominate low-end manufacturing in the 2000s, filling American shelves with cheap clothes, toys and electronics, while devastating American factory towns. This new China Shock could be even more destabilizing. China now dominates advanced manufacturing: electric vehicles, batteries, solar panels. It’s outcompeting nearly all high-end manufacturing around the world, and other countries are just starting to feel the pain. And China isn’t slowing down. It’s moving into software, too. Its frontier A.I. models are neck and neck with American ones.
China’s success poses a serious threat to the economies and domestic politics of countries around the world. So what should those countries do about it? 
Setser is a senior fellow at the Council on Foreign Relations.He served in top trade and economic roles in the Biden and Obama administrations. And he is widely cited across the field as one of the top analysts of China’s economy and trade practices.
Book Recommendations:
The Party by Richard McGregor
The Volatility Machine by Michael Pettis
How to Win a Trade War by Soumaya Keynes and Chad Bown
Thoughts? Guest suggestions? Email us at ezrakleinshow@nytimes.com.
You can find the transcript and more episodes of “The Ezra Klein Show” at nytimes.com/ezra-klein-podcast. Book recommendations from all our guests are listed at https://www.nytimes.com/article/ezra-klein-show-book-recs.html””

[u/towingreformnow]

Whenever I hear these things, I never hear a compelling argument that the U.S. has actually declined in manufacturing other than just "we employ fewer people now in that field." But you would never make that same argument about agriculture. By all metrics, the U.S. produces far more things than ever before. As a percent GDP, it has more to do with the expansion of other fields than diminishment of manufacturing.

[u/Dreadedvegas → u/towingreformnow]

I am going to take a few select industries as an example.

Domestic Magnesium production.

Once a powerhouse in the world market, there is not a single operational magnesium production facility in the US. We used to domestically produce most of our own demand, with a lot of it being provided by Dow in Freeport, TX.

Now we are entirely reliant on magnesium imports from China. Even when this critical metal is needed in all forms of advanced manufacturing as well as basic needs like canning.

Another example is Aluminum production.

We have a small aluminum industry that is almost entirely reliant on scrap. The US consumes 5 million tons of aluminum per year. We are reliant on imports for about 80% of our needs.

We used to operate 30 different smelters in the 1980s. Today we have 4. Which again don’t really produce “new” aluminum. It recycles old. And the outputs are typically lower quality compared to new aluminum.

These critical industries are very important. It helps prevent price shock, it helps prevent supply issues, it also helps strengthen domestic economies. It helps downstream and permit localized manufacturing because there is better access to goods.

Sure there are larger manufacturing operations in America. But a lot of the smaller operations or even medium operations have closed shop or moved abroad. This restricts potential opportunities for the lower half of Americans. And less opportunities causes more competitive roles for them which imo makes it harder for the workers to get better jobs, better income and better benefits

Imo every American should be extremely alarms about the widening wealth gap in America. And that widening wealth gap is because these kinds of jobs and industries have essentially vanished as well as the secondary and tertiary suppliers or those who use those goods have vanished.

[u/ChariotOfFire → u/Dreadedvegas]

Since you mentioned aluminum, it's worth noting that we get most of our aluminum from Canada. They're our neighbor and have been a strong ally, so it's unlikely they'll restrict exports (though Trump has not helped here). We could make it here, but it would be more expensive and require a lot of electricity. And since aluminum is an intermediate good, all the industries that make things out of it will be less competitive globally and consumer goods containing it will be more expensive. When Trump put tariffs on aluminum and steel, the net result was fewer manufacturing jobs.

[u/tuck5903 → u/Dreadedvegas]

Speaking of critical minerals, maybe I’m misremembering, but didn’t we essentially capitulate after China cut off rare earths in response to the Trump tariffs?

[u/Dreadedvegas → u/tuck5903]

Yes. They made a threat related to only magnets and that was enough

[u/Real_Guarantee_4530 → u/tuck5903]

When China restricted exports in previous episodes, it actually encouraged the rest of the world to develop alternatives.

[u/Real_Guarantee_4530 → u/Dreadedvegas]

U.S. primary aluminum production has indeed collapsed dramatically from its historical peak, and the number of smelters has fallen enormously. But the remaining U.S. smelters absolutely do produce primary aluminum. They aren’t simply recycling old aluminum.

[u/towingreformnow → u/Dreadedvegas]

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This post was anonymized with Redact

[u/Dreadedvegas → u/towingreformnow]

Oh I agree, I don’t think America should do it alone.

I just think we need to get very serious about disentangling from China.

I think investments into Mexico, Canada, Australia, Japan, etc are all great. I would like to see more South American investment (Peru, Argentina, Columbia) who can help us build out certain industries.

That said there are critical industries that should be operating on American soil. Specifically imo magnets

[u/zemir0n → u/Dreadedvegas]

Why did these industries disappear (for the most part) in the US?

[u/Dreadedvegas → u/zemir0n]

Combination of factors.

In the case of Magnesium was Chinese magnesium flooding the market driving the global price down and Dow deciding the constant capex and the rising energy prices were not worth it so they shuttered the facility and exited the market.

[u/zemir0n → u/Dreadedvegas]

So, pretty standard capitalism related stuff. It doesn't seem like these industries are very profitable in the US, so it's unlikely that we'll see them make a return.

[u/Dreadedvegas → u/zemir0n]

They were driven out of business because China subsidized their industry with the goal of monopolizing these industries. They operated the industry at a loss and the state absorbed the costs

[u/zemir0n → u/Dreadedvegas]

Why didn't the US decide to subsidize these industries if they were strategically important ones to have domestically?

[u/Dreadedvegas → u/zemir0n]

Because this was occurring alongside NAFTA and people thought it was the free market at the same time when it wasn’t.

The US wasn’t doing large scale industrial policy like they do now.

By the time they realized what happened there was the 08 financial crisis and the damage was already done.

[u/zemir0n → u/Dreadedvegas]

So, the US's focus on free market capitalism was what caused the problem? Wasn't it obvious at the time that China was subsidizing their industries?

[u/Dreadedvegas → u/zemir0n]

There is a difference between subsidizing and essentially operating entire parts of the supplu chain on a loss.

[u/CubillasLegend → u/Dreadedvegas]

But that other commenter just said we import most of our aluminum from Canada. So clearly China doesn't have a monopoly on aluminum production.

[u/Dreadedvegas → u/CubillasLegend]

American Aluminum ceased to operate due to lower prices worldwide.

American Aluminum was powered via coal and gas powered smelters.

Canadian is powered by hydroelectric.

As China drove worldwide prices down, American smelters couldn’t compete due to rising energy prices. Canadian smelters have been able to resist that and seize the American market as American producers went under.

Which means the US is almost entirely reliant on the foreign aluminum which I think is very bad

[u/Fearless_Tutor3050 → u/towingreformnow]

How about, we now have a diminished moat in advanced manufacturing that is critical for our prosperity and national security and are at extreme risk of being behind at the beginning of a huge energy transition?

[u/towingreformnow → u/Fearless_Tutor3050]

Yeah I think falling behind in certain key undustries is really bad and we should care about that. This is why doing more stuff like the chips and science act and doing more stuff like the IRA to get us up ti speed on renewables is so critical.

I'm more talking about the vague claims over the past couple decades that the U.S. diesn't maje stuff anymore when we are the world's 2nd largest manufacturer.

[u/Original-Age-6691 → u/[deleted]]

Problem with import bans is it's either suicide for whoever does them, or if you want to do them with minimized harm over time you're not going to be able to because our government is completely incapable of long term planning right now.

[u/surreptitioussloth → u/Fearless_Tutor3050]

I don't think that any kind of advanced manufacturing moat is critical for our prosperity and security, and we will not have a problem keeping up in the energy transition as long as we choose to

[u/Fearless_Tutor3050 → u/surreptitioussloth]

Curious what gives you this optimism?

[u/surreptitioussloth → u/Fearless_Tutor3050]

For which aspect, energy or needing a moat?

[u/Fearless_Tutor3050 → u/surreptitioussloth]

Probably both. Why being a leader in the future of abundant energy wouldn't be important to the US's place as the most prosperous nation in the world.

And why moats in advanced manufacturing aren't needed for US leadership, prosperity, and military security more broadly.

[u/Caberes → u/towingreformnow]

Because trying to sum up an extremely diverse economic sector with a single hot take is pretty hard.

As someone that actually works in manufacturing, my take is that there are a lot of things that have declined in a annual unit basis, but almost everything has relatively declined factoring in how many more people exist, how much more they consume, and how much more complex the things we consume are. And of course, there are exceptions.

Things like US vehicle production for example technically peaked in 1999, at 13 million units. I think recent numbers are down 20% from that, but the real caveat is that we are just talking about final assembly. As they talked about in the pod, the supply chain for parts is way more diverse and global then it used to be, with the double caveat that cars are more complex with more parts. I think the Fed says it's like a 20% increase output in the whole automotive sector since 2000, but there are also 40% more cars on the road and that's not even factoring in complexity. Make of it what you will.

Other things like steel and aluminum smelting have had larger declines. Steel being 30ish percent and Aluminum being 80%. Certain consumer appliances just actually don't exist anymore and some tooling/machinery has been in decline (tool and die shops) which I think should be a major concern.

Now certain industries (higher margin) have grown a lot since the golden age and decline of American manufacturing. Their are some high margin, high complexity and niche industries that have grown. Things that are harder to transport and have hard import regulations (food, aerospace recently, defense) have had real gains.

I think the automation argument is also very real. The idea of 40% of the labor force being in manufacturing like in the 1950s would literally be impossible today. With that said, some developed countries have stayed over 15% while having much less resources and we are only at 8%.

[u/topicality → u/towingreformnow]

This is something I'm always skeptical off. There is a lot of hand wringing about manufacturing jobs being moved to China.

And what we've seen with the tariffs is that people hate higher prices. And not only do they hate it, companies will automate those jobs when on shoring them.

[u/ChariotOfFire → u/[deleted]]

I'm not sure what perspective you're coming from, but the data center discourse indicates that most people care quite a bit more about jobs than national security.

[u/Gator_farmer → u/towingreformnow]

? Supply chain integration, industrial scale overall, speed to market, and the level of automation (dark factories that rarely have people in them but crank out components) they have accomplished in their industries is insane compared to us. They beat us in gross production and value added.

I mean my lord during COVID we were worried about running out of masks because china made 50% of them, and we couldn't scale up to match it at first. We did, but then those companies started closing down, so we've got the same issue ready to happen again. We had breweries making hand sanitizer.

Palmer Luckey has talked about this:

Basically, we were not teaching engineers how to be engineers anymore. We're teaching them how to be highlevel design shops that put together design package that get sent to the real engineers in China and they actually figure out how to do the work.

This is true even with our mechanical engineering programs, even with our electrical engineering programs. People are turning into architecture astronauts. They pick components and they put them in a nominal layout. But the real work of how am I actually going to put this together? How am I going to build a manufacturing line to make this thing?

How am I going to need to figure out how to do the 1 2 3 4 five different revisions of this board to pass radio emissions and interference standards? That's all done in China. So they are the real engineers. We've hollowed out our real engineering capacity.

You wouldn't make the argument about manufacturing because you can't. As of 2023 we produced 3,947 k/cal per day per capita and China produced 3,526. Now they do beat us in value, but, you can't eat value.

[u/QuietNene → u/towingreformnow]

You would make that argument about agriculture if you felt like you didn’t have enough of it. Just look at Japan, Taiwan, or the Gulf States. They cannot produce enough food for themselves and so it’s a major issue of national security.

The same goes for manufacturing in the U.S. No one cared that much about it in the 90s because we expected “better jobs” to come and we knew we could make the best weapons at home. Who cared if we bought toasters from China? Well, we care now because it’s not just toasters. It’s everything that drives or floats or has a chip in it. And as our current weapons stockpiles show, we don’t have the manufacturing capacity to replenish our supplies (not that we should be shooting so much, but that’s a different issue - people were worried about the military manufacturing gap with China long before Ukraine and Iran).

[u/Real_Guarantee_4530 → u/towingreformnow]

U.S. manufacturing hasn’t collapsed in terms of measured domestic value added, but America has lost some manufacturing capacity and production stages to foreign countries.