Sir Niall Ferguson decodes Trump, China, and the new world order

How would you characterize this new Trump doctrine? If you just follow the more bombastic things that the administration does, laying claim to Canada, Greenland, the Panama Canal, you think it's American Empire, but inside the Oval Office, their real preoccupation is with the weakness of the American position. We've heard it again and again from members of the administration that there's going to be pain to go full tariff man, to close the southern border. Those things will have meaningful costs for American households. And so by the end of the year, even more people than currently will be

saying, "What do we vote for?" How does that reduce the room for maneuver to execute on the strategy? Right? Does it constrain them at all? He can course correct. He likes to open really strongly. That's all in the arts of the deal. See what the other side does. And if it doesn't really go anywhere, he's perfectly capable of declaring victory or claiming a whip and retreating. How do you read China at this moment? Anybody who bets against Chinese stem is likely to lose their bet over a 10-year time horizon. The problem is that you're also

making a bet on the CCP's ability to manage Chinese economic policy and national security. I think that the harsh reality is that despite the mood music coming out of Beijing, they still have a problem that is deflationary, that the property sector is very hard for them to fix. And they may say they're going to have a 5% growth target. I just don't think they're going to do it. The degree to which the Chinese have been misbehaving around Taiwan has increased dramatically. I mean, it could be a real issue. President Trump could at some point be

faced with the dilemma. Do you accept a quiet Chinese takeover of Taiwan or do you risk World War II? Now, the discussion today is the $120 trillion question. US, China, and the new world order. And I'm really happy to be speaking to the renowned historian and author Sil Ferguson. He is the Milbank family senior fellow at the Hoover Institution and one of the world's foremost geopolitical analysts. Neil, it's great to have you here. Very good to be with you. Let's start with perhaps the most fundamental question. How would you characterize this new Trump doctrine? Is

it a coherent strategy or is it more a guiding direction which is going to be delivered by a series of reactive measures? Well, I quite deliberately teed myself up with an illusion back to the Nixon administration because I do think that there's something going on there which is being missed by most analysts. If you just follow the more bombastic things that the administration does, laying claim to Canada, laying claim to Greenland, laying claim to the Panama Canal, you think to yourself, it's American Empire. Uh this is as shocking as it's been since William McKinley was

president. And the administration wants you to think that. And that's part of the reason for trolling everybody on issues like Canada and Greenland and the Panama Canal. inside the Oval Office. And I think we begin to see this. Their real preoccupation is with the weakness of the American position. And there's a belief, I don't think it's right across the administration, but it's certainly in the president's inner circle that they have to reduce commitments in Europe. stop sending money and weapons to Ukraine, reduce commitments in the Middle East, uh reduce your presence in Syria, in Iraq

in order to focus on China because China's the other superpower and China is a formidable antagonist. So that does remind me of Nixon. And part of what we see here is what Nixon did in 71, which is shock the allies. You sort of shock the Europeans and you also shock your Asian allies by saying things like we're going to put tariffs on you and we might do something with the dollar and you guys have to pay for your own defense. That was all part of Nixon's playbook. And I I do think Trump has a debt

to Nixon that doesn't get nearly enough recognition. They had a relationship back in the 80s and it was Nixon who encouraged Trump to think of politics. So this is not just something I'm picking up. You have an advantage on me in having obviously written books on this subject and you spent the whole day reading old telephone transcripts from Henry Kissinger after he had first gone to China in the 70s. So, so you know advantage Neil at this point. There's another part though of the vernacular that comes out and I agree we should look below the

bluster uh which is the sense of that America and American lives in the middle and the working classes have been deeply hollowed out by what most of us call the Washington consensus. Is that part of the driving force or is this really more of a question of the strategic competition with with China? Well, I don't think there's any doubt that the the president has thought since the 1980s that you need to do a couple of things to reduce the impact of foreign competition on American livelihoods and particularly middle class and working-class livelihoods. One of them

is to put up tariffs. He's been out of consensus on this issue for close to half a century. And the other is that you force everybody else to take care of their own security and you stop subsidizing it by providing umbrellas to other powers. So I think that's right. And I think when we're trying to understand what comes up next week when a whole bunch of new tariffs are going to be imposed on American trading partners, you have to understand that Trump believes that tariffs aren't just a source of revenue. though he doesn't think that

they will help to re-industrialize America and to reduce the trade deficit which he regards as a sign of weakness and Trump has this very unorthodox economic theory an enormous trade deficit or somehow subsidizing the rest of the world uh and if you're paying a significantly bigger share of the NATO budget than say the Germans then you're subsidizing them too and actually on the second point he's right so that's part of it but azim I think the really important important idea that's at work here is the reverse Nixon theory that people close to the president occasionally

talk about and that's the idea that by being very nice to President Putin over Ukraine you are going to peel him away from Xiinping and try and drive a wedge between the Russians and the Chinese and the reason people say reverse Nixon is that they're thinking of that moment in 7172 where Nixon and Kissinger got into touch with the join lizong Nixon went to China in 72. That was the big moment when suddenly the Soviets woke up and realized that the US was closer to China than they were. And I think the idea here, it

helps explain why they appear to be so inexplicably nice to Putin. Why they seem to be ready to throw Vladimir Zilinski and Ukraine under the bus is they're trying to get into a closer relationship with Russia and peel Putin away from Xin. That's the most Nixonian thing about this administration strategy. And I want to just, you know, spoiler alert. I don't think it's going to work. Yeah. I don't think that would work as well. Partly because Russia is quite a weak player in some sense. It's weak economically. It's in a way whatever's happening on the

ground in Ukraine. It's rather on the back foot. I mean, it has to go back and, you know, rebuild itself and and think again about how it should leverage power and exert that power. And it's a quite a long journey. But there is the obvious point about Europe. I mean, I found myself agreeing with uh JD France, the vice president in that signal chat through a very very simple analogy. You know, I live in a in North London. I have lovely neighbors. We we talk a lot, but ultimately my wife and I are responsible for

the security of our home. We don't expect our neighbors to run the CCTV and the burglar alarms and maintain the fences. There is something quite odd about how for 30 years the Europeans have ignored every warning that's come out of successive American administrations about looking after their own security. What What's the psychology behind that? Well, first of all, I'd be really careful about saying you agree with JD Vance in Hamstead because your neighbors will be far less friendly towards you if you go around saying that. this administration is making itself very unpopular very fast in

Western Europe, in the UK, in liberal America. So when you're agreeing with JD Vance, you need to take I just agree with that one little point which is, you know, Europe has just not risen to the challenge over 20 years. And when I was in Davos in January, the mood around Europe was absolutely funeral. You'd run into people in the street and they'd say the mood around Europe is terrible. It's like being at a at a wake. And we're just six weeks later and I see European leaders stepping up, giving each other support, taking really

proactive steps to to rearm, rebuild, re-energize the continent. And there's a different feeling courtesy, I think, of the shock that the shock doctrine that has emerged out of Washington DC. But the question is whether that sense can be maintained and we can start to address 30 years of underinvestment. But I think the thing that I've struggled with a little bit is what was the internal political motivation for decades not to do that? Didn't it just seem unfair to expect your major ally to to shoulder the burden? Well, it actually went back much further than that.

Even in the 1960s, Americans, including Kissinger, were complaining about the unevenness of the burden sharing. And this was a recurrent theme right the way through into the Obama administration. And it was a theme in Trump 1, the first series, just as it is now. And to answer your first question, why did this go on for so long? The answer is because every president from Nixon down to Obama did nothing really beyond say please do more. They didn't actually apply any pressure to the Europeans. And the Europeans realized that they had a peace dividend that was

being paid annually from the minute the Soviet Union collapsed. So the defense budgets went down well below 2% of GDP in the majority of NATO countries. Now Trump discovered that if you actually get serious and apply pressure and make it seem like you might withdraw from NATO, you got the Europeans attention. And I I think it's important for us to give Trump and Vance credit where it's due in the space of two weeks. uh with the most obvious example being uh Vance's speech at the Munich Security Cong but the the encounter with Zilinsky in the

Oval Office was equally important. In just two weeks they completely woke the Europeans up in a way that no president has been able to do since the 1960s and in that sense he's making Europe great again. There's no question about that. And he's addressing this long-standing American grievance. The European defense budgets were already going up, majority above 2%. But but what's really interesting here, Azim, is that the Germans are now seriously going to invest hundreds of billions of euros in defense and infrastructure. And at the same time, at the European Union level, the commission is

going to launch some multi-billion dollar fund for Europeanwide rearmament. So that's a win for Trump and it's a meaningful win, but it's also a win for Europe. I did a an interview for Dai last week and I said, you know, you all hate him, but this is actually really good for you and you're going to one day have to acknowledge that Trump did you a solid because the German economy is going to benefit hugely from rearmament. But it took Trump to convince the Germans they had to do it because Trump credibly seems to question the

future of NATO and therefore the future of article 5, the all for one, one for all clause. So this is very transformative of the European scene and it also illustrates last point. Always bet against the Davos consensus. I was there too and my perception was the same as yours. European business leaders wandering around saying everything is terrible. If only we could have Trump. If only we could have mus. And I said in that case I'm short US long Europe because the Davos consensus is always wrong. And if you had simply taken my advice back there

coming out of Davos and gone long Europe uh long European stocks short US equities you'd have done very well and uh you'd have been right. Always trust Neil. I would say that from my perspective uh seeing the startup uh community it's become electrified. It's become electrified in areas of hard technology, defense tech, AI that can be used in that way. there is a deep deep motivation and a lot of this was building over the last 2 or 3 years anyway just a sense that Europe can do much more technologically than it than it has. I

think the interesting thing is that it's also provided a lifeline in a sense for industrial Germany. All of those VW factories that were soon to be empty because all the cars were coming from BYYD uh will turn into rhin metal factories at some point and they will produce useful material for that eastern flank. Then I got a little bit confused though in the last couple of weeks. Um I got confused when these big carrier strike groups which have been the pride of the US military for decades and I speak as an avid fan of of

Top Gun and Top Gun Maverick, both of which I have rewatched in the last month. I'm just curious about why keeping the Red Sea open matters to the United States under the new Trump doctrine. Oh, it's not hard to figure that out because thanks to the generosity of Mike Waltz, the national security adviser in inviting my friend Jeffrey Goldberg into his chat group, we know and we know exactly why he and Pete Hexer, the defense secretary, wanted to do those strikes against the Houthies, not particularly because of trade in the Red Sea, because of the

need to reestablish deterrence, number one, and to send the Iranians a signal, number two. And so I think this is perfectly reasonable in the sense that the Biden administration was very bad at deterrence. It was really a group of law school educated people advising the president that if anything bad happened, you should deescalate. Above all else, deescalate. And deescalation turns out to be the functional opposite of deterrence. If you deescalate in Afghanistan by handing it to the Taliban, Putin will decide, hey, I can take Ukraine at low costs. And if you try to deescalate there,

then the Iranians will say, "hm, we can do whatever we like in the Middle East, these people aren't serious." So, I think the Trump administration, at least some of the more hawkish elements within it, want to reestablish deterrence and there's nothing like precision missile strikes. This has been true since the 1980s, to remind everybody that when the sheriff is around, you are actually quite vulnerable. The the Iranian point though is the more important one. Mhm. What is coming, I think, this half of the year is that the Iranians are going to say at some point,

"No, we won't just give up our nuclear weapons program as you, President Trump, want us to." And at that point, the Trump administration will say to the Israelis, "Okay, go ahead and do what you can do to the Iranian nuclear facilities, and we'll kind of not participate, but kind of will participate to make sure that you get the job done." And I And is that sorry, is that why we've got all these B2 Spirits sitting in Diego Garcia right now? Because those aren't the cheapest planes to to move around and keep ready. Yes. So I

think we should assume that the the reckoning is is impending for Iran. Uh my friend Ron Derma as the minister closest to Prime Minister Netanyahu who's just been in Washington. I think his main message will be we can't wait indefinitely. We got to do this while the Iranians don't really have much in the way of an air defense. So I think there's going to be some quite meaningful action there and then the US is simply going to leave and the troops will leave Syria and Iraq and the Middle East will be far less a preoccupation

of this administration than has been true of any administration in the last 50 years. Right? So there's a there's a sort of a push and then we see this sort of I guess it's a kind of a a neo Monroe style pull back to the most relevant borders which will be certainly in the Asia Pacific and to some extent yet to be seen. Well I think there are three groups within the Trump administration at least three different theories of this as is often the case that US administrations are complex things and there at least two

if not three foreign policy theories in any given administration. There's the maximalist position which is quite well represented in the National Security Council which is we're up against an axis of authoritarians. China, Russia, Iran, North Korea, and we can't give them an inch anywhere. Not in Ukraine, not the Middle East, not in the Far East. The middle position is, yeah, that's right, but we can't possibly do all of this at once, but we'd better focus on China. And that would be, I guess, Bridge KBY and and others. Mhm. And and and then the people who

think it's Monroe doctrine, let's go back to the 19th century and just do our hemisphere and just leave everything else to others that Steven Miller in the White House, I think it's JD Vance, the vice president, they are the people who really want to focus on the Western Hemisphere. That's why in the now famous chat group on Signal, it's Vance who says, "Why the hell are we doing this? I don't even think we should be bothered to do this cuz who cares about the Houthies anyway? He loses the argument of course interestingly. Uh so I

want to ask one more question about the US before we turn to the other superpower which is you know we've got April the 2nd tariffs day uh liberation day whatever it's going to be called by the the journalists and the noise is maybe it's going to be 20% broad tariffs on the EU. I mean, this is obviously going to create a lot of pain for a lot of people, but I'm curious about whether the US economy can weather it. You know, you're going to see prices rise. You've already got consumer and business uncertainty, so reducing

spending and investment. You may have another half a million federal employees joining the unemployment lines spending less as well. I mean, that's quite significant even for a powerful economy. So, can the economy weather that? Does that start to temper the ability to execute on the plan? Well, in the last few months, we've gone from the euphoric vibe shift that followed the election to everybody throwing up on Wall Street and this 180 degree shift seems worthy of some scrutiny. Net negative for sure. If you do tariffs to the extent that Trump may next week, you could

take the average American tariff rate back to where it was in 1937. And I don't know about the 670 people listening to us right now, but I don't think of the 1930s as a particularly great time for the global economy. So, I think that's clearly going to be negative. It's it's certainly going to impose meaningful costs on American businesses and consumers. because it's highly disruptive particularly if one thinks of the automobile tariffs as they impact the North American supply chains very very seriously costly and if it's costly for Americans it's even more costly for their

trading partners because the trading partners are by and large more exposed to trade so this is bad hard to see any real upside to this at the same time you've mentioned it the cuts that are happening in the federal government are going to have at least some impact on the economy unemployed people uh tend not to spend more money. Um and then you missed something out which is really important and that is the closing of the southern border. Why did we not have a recession in 2023? What happened to that? All the economists predicted it.

It didn't happen. Well, one reason it didn't happen was 6% of GDP deficit all the way. And the other reason is that 8 million people were added to the labor supply through illegal immigrants. And that that's over. I mean the southern bord is essentially closed. And so the the the positive labor supply shock is gone. That will be a headwind to growth for sure. On the other side, deregulation coming for sure. No taxes going back up. The tax cuts from 2017 are going to be extended. So it's not all negative, but I think I'm in

agreement with the economists at Goldman and Morgan Stanley. If you do the arithmetic, it's clearly going to be a significant decline in growth this year, possibly recession, though I think that's not the base case. And so by the end of the year, even more people than currently are will be saying, what do we vote for? This is more painful than we had been led to expect. Because of course, if you think back to the first Trump administration, it was actually economically pretty beneficial for the average American household. That's because Trump didn't go full tariff man,

Trump was very much constrained in his first term on every major policy domain. But this time after four years in the wilderness, the MAGA gang have a plan. And that plan is to go full tariff man and also to close the southern border. And those things will have meaningful costs for American households that they weren't expecting to have to pay when they voted for Trump. Well, we we've heard it again and again from members of the administration. Scott Bessent has has said it and and others have said it that there's going to be pain. And

I I guess the just as a brief thought, how does that reduce the room for maneuver to execute on the on the strategy, right? To what extent does displeasure turn into the administration feeling they can't do all the things they want to do? Obviously, the midterms are, you know, still a while away. And does it constrain them at all or is this something that you think knowing them that they'll just push through? Well, I I think we've already seen the way in which even a 10% stock market draw down sends Scott and and Kevin Hasset

into the TV studios to reassure markets that actually the tariffs are going to be just a transactional temporary thing. I'm not sure Trump is bothered by 10% stock market decline. I think 20% might get his attention. and it did in late 2018, but then he just piled the pressure on the Fed and said it was on J. Pal to cut rates. So, I think this second Trump administration is is going to be much harder to blow off course, not least cuz there are fewer elements inside the administration that are actively hostile to this agenda. But

at the moment, the obvious sources of opposition, say Senate Republicans with more mainstream views on trade and national security, they're very quiet. Very quiet indeed. They'll get louder if things look like they're going badly wrong economically and at some point the dread word midterm will be heard and people will start pointing out that if this thing doesn't turn around in time, then Republicans will lose at least one of chambers of Congress. So, American politics is still running in a normal way despite what you might think if you follow it in the Guardian newspaper or pretty

shocking out here, but yes, as you say, the the wheels are still turning. The Supreme Court has already fired the first shot across Trump's bows. They're going to get some wins, I suspect, in the courts, but they will also be handed some defeats. So, the other thing I'd add is that the administration is still taking shape. The whole process of confirming nominees is so extraordinarily protracted that there are plenty of key jobs that haven't yet been filled. There'll be some turnover. He's Trump. He's going to fire somebody at some point this year. And that too

will have its consequences. So the one thing you know about Trump from his first presidency is that he can course correct. He likes to open really strongly. That's all in the arts of the deal. See what the other side does. And if it doesn't really go anywhere, he's perfectly capable of declaring victory or claiming a win and retreating. I mean, think how the trade talks went with China last time around. Was that a great big beautiful deal? No, it wasn't. It was a really bad second rate phase one trade deal, which the Chinese didn't even

honor. So, I think we should be prepared for trade negotiations after April 2nd, after liberation day, i.e. tariff mageddon. And in those negotiations, I don't think the major counterparties will give that much ground and then at some point uh the administration will have to declare victory to avoid really severely adverse economic consequences. Wonderful. Right. So that's America. That's the first half of Chime America. I'll summarize what we we just talked about here, which is there is going to be sort of forward momentum to use tariffs as a mechanism to strengthen America's trading pos or bargaining

position rather than trading position. We should expect there to be at some point a winding back of some of these global commitments and that the administration probably feels it's willing to take the pain and can take the pain to get to the other side but that other side might involve some sort of consensus consil reconciliation but we don't quite know when now we also start our discussion you were recounting reading about sort of Kissinger's trip to show and lie uh about 50 years ago you back then the world was completely different the US was 45

50% of the global economy. China was a couple of percentage points and here we are America at about 25%, China approaching uh 19 or 20%. So we are in a very very different world. So let's talk a little bit about China. From where I'd sit, I think China is a little bit underststudied and under represented in the dialogue. And one of the things I thought would happen a few years ago was that the export controls and the diffusion controls that were going to as they became around uh chips and advanced technology probably wouldn't work. They

would probably trigger innovation and invention in China. I think we've started to see that happen. You've just come back from Asia. How do you read China at this moment in all of this? And what are we not seeing about it? Well, I think the big takeaways from my trip last week were that the Chinese are feeling their strength in not only artificial intelligence. Deep Seek was a big win, but it's just part of a success story. And also in electric vehicles where the only question that I heard asked was, well, who will the other two

Chinese companies be that share total global dominance of automobiles with BYD? Let me just say something about about BYD. Actually, just for the audience, I mean, it's just passed hundred billion dollars in in revenue. Obviously, the cars are cheaper than Teslas, but they are selling a lot of vehicles. Uh I've just seen the first BYDs in North London in the last 6 months. Uh and BYD has got a strong and growing market in the global south. I mean in Ethiopia for example uh it's growing very very strongly. So this is a company that is not

really present at all in the US but is really substantial both in terms of its scale number of cars sold but also how good those vehicles actually are. And I think we can't overstate the speed with which this has happened. I can remember being in China not long before the pandemic when Chinese automobile companies seemed like the wild west of the Chinese economy and people didn't take it seriously in the west. Well, they're taking it seriously now because unless you erect your tariff barriers double quick, your domestic market is going to be overrun by Chinese

competitively priced and pretty impressive technologically vehicles. So that's part of the mood of this is going our way. I we really was struck by the change in in mood over 12 months because 12 months ago, you know, Chinese investors, Chinese tech companies were still pretty down in the mouth and there was a general feeling that the big guy doesn't love us and the big guy doesn't get the economy and we're all going to move to Singapore or we're all going to get out. So this was the kind of conversation 12 months ago. Now the conversation

is well he seems to get the message now so we're actually getting some sensible policy advice out of the two sessions out of the kind of policy discussion in Beijing and he loves Jack Mah again and the rehabilitation of Jack Mah as well as the fating of Chinese entrepreneurs including the deepseek founders to send a signal to the Chinese private sector the big guy i.e eiinping gets the message. We're course correcting at the macro level and we are also recognizing that you guys are indeed the rock stars of the Chinese economy. So this is important

because it means that the mood in China has has changed. Now let me make two distinct points. Number one, the technology story is unquestionably very impressive. I can remember meeting Kyu Lee last year in Beijing and he said despite the constraints imposed by the US commerce department that restricts China's access to GPUs to the most sophisticated semiconductors China's going to just do so well at least at inference so well at adoption that it will be able to hold its own in AI that turns out to be pretty much right yeah and so I think there's

a big deal here which is the success of China in not circumventing but simply overcoming the obstacles put in its way by the Biden administration mostly. But the second point which I don't think is getting enough attention is that it is really hard to turn the macro around in China because consumption took such a hit between co zero co going on and on and on and the crisis in the property sector households which predominantly middle-ass households save by acquiring apartments have been rinsed. Their balance sheets are a disaster and it is really hard for the

Chinese government to turn that around. Two really striking things. The population is falling and it is falling faster than people expected. So that it base case halves between now and the end of the century. Second startling statistic, the public sector deficit is larger in China than in the United States today by the IMF measure. Because if you look at local government, which of course a proper public sector measure does, there's just a huge amount of public sector borrowing still going on. So you have actually got a public sector deficit north of 7% in China. That

means there are limits to just how much fiscal stimulus they can do. And I think that the harsh reality is that despite the mood music coming out of Beijing, they still have a problem that is deflationary. that the property sector is very hard for them to fix. And where they they may say they're going to have a 5% growth target, I just don't think they're going to do it. I think they'll have to cook the books to get to Well, they can report it as 5%. Neil, we know there's a technique for that. Okay, two

important points there. Let's take the economic one in a second. Let's come back up to the technology one. And I do agree with you that some of the language around how these Chinese firms have developed AI tends to focus around circumvent rather than overcome. And you know we we have seen in our conversations with with Kyu Lee at the end of last year his firm was already achieving the mythical GPT4 quality capability on much smaller models and then out shows arrives deepseek the things I have seen in the last few weeks and I'm I'm sure

you've come across them as well and this is quite a mix a broad picture but it all points in the same type of direction of a scientific technological and industrial confidence uh that is built as a flywheel in in China. So the number of breakthrough drugs that are in in development and coming through the the funnel from China is now I believe about 20 20% or so or 25% of the global total. That's pretty remarkable. There are small milestones happening in fusion. But the thing that is most interesting is what's happening with semiconductors and that

supply chain because the story has been that look you need Nvidia and Nvidia needs TSMC and it's not quite turtles all the way down because below TSMC is ASML the Dutch company that makes those very very specialist extreme ultraviolet lasers. The new machines cost $350 million and you China hasn't been able to get its hands on them for a few years. It's stuck on the DUV technology which doesn't allow cutting edge chips. And what has changed that calculus I think this is this is quite important I suppose is that on the one hand your deepseek

has demonstrated you can do this on much lighter processing inference which is where the economic benefits come from doesn't necessarily require all of the best chips all the time. And in the last couple of weeks, we've seen a few things happening around this photo lithography. Some noise that maybe Huahei has an EUV machine that might be ready uh that's homegrown, might be ready at the end of this year. We've seen ASML agree to set up a repair facility for the older machines in China. And and so I I see in that aspect of that the

hard technology against which in a way a lot of American economic power had been bet was being bet. was bet on the NASDAQ essentially that the big tech companies would win in AI globally and that's I think one reason we saw those extreme valuations and there's a new story that might be emerging in China. Is that something that you recognize? Yeah, I think it's a new story. I'm not sure whether it's true but it's certainly plausible enough at this point for the old story to be regarded with more skepticism by investors. Now, that's not to

say that the hyperscalers aren't still ahead, and that's not to say that OpenAI is not making a lot of money. I gather they're making money right now by allowing people to generate an infinite number of cartoons of themselves. My general feeling is that if this is the net result of all of this innovation, we have a problem as a species. But let's just assume that there are more important things going on in say drug discovery. I think anybody who bets against Chinese engineering, anybody who bets against Chinese STEM is likely to lose their bet over

a 10-year time horizon. The problem is that you're also making a bet on the CCP's ability to manage Chinese economic policy and national security. And here are the two uncertainties. Number one, there is a way of getting the Chinese economy to grow in a more balanced way that doesn't require it to flood the world with cheap manufacturing exports. Michael Pettis has been writing about it for as long as I can remember. And it's about helping Chinese households to consume like they're in a normal society rather than to have their incomes effectively repressed. And and I

just don't see it happening. I just don't think Cining will ever fully believe that it's healthy to have a Chinese economy led by consumption. The other problem, which is I think where you're probably going, is that potentially there's a collision coming between China and the United States because the CCP under Xiinping's leadership has made it really clear that the capstone achievement of his career is bringing Taiwan under the control of Beijing. And if you watch what's going on in the waters of Taiwan, looking back over the last couple of years, with every passing month, the

PLA and the Navy do more and more aggressive things that worry the people running the Indepacific Command for the United States. So the the most precarious issue, the most contentious flash point in the world is not Ukraine, nor is it Israel, it's Taiwan. Because a Taiwan crisis would simultaneously be enormously destabilizing to the security system of the Indepacific, but it would also be destabilizing to the world economy because this would be a Cuban missile crisis except that the island in question this time is off the coast of China, not the United States, and they export

GPUs, not cigars. Right. I mean, it could be a real issue. And you're right. I mean, I think that for the audience, the degree to which the PLN, which is Chinese Navy and the Air Force, have been misbehaving around Taiwan, has increased dramatically. I sometimes watch these these betting markets, prediction markets, uh, because they are, well, they're fun to watch. I think they're quite good rearview mirrors at times, but I have noticed that the odds on a Chinese attack on Taiwan haven't really increased over the last few weeks. I wonder whether you think that's just

a blind spot of uh the people playing in that market or whether you think that the the odds are increasing. Well, I think the problem is the way the question's framed because I don't think that there's going to be an invasion kind of D-Day Taiwan Strait edition. I'm not even expecting a blockade. But I think what happens is that at some point on Trump's watch, the Chinese say, uh, just to let you know, anything going in and out of Taiwanese ports has to clear PRC customs and our Coast Guard will be going to, uh, to

collect those, that's a big problem for the United States because it's not clear that the world would perceive that as aggression by China, but the only way the United States could counter it would be in fact by taking naval action. So the worry in Washington and in Honolulu is what if we're confronted by something that's ambiguous and hard for us to react to. So the the betting market isn't really asking the right question there. The question is does China assert its notional rights since after all we accept that there is only one China? And if

it does, can the Trump administration stop a gradual Hong Kongization of Taiwan? I was just in Hong Kong. One of the interesting conversations I had was with somebody who said, you know, the way that the Chinese the way that Beijing is treating Hong Kong right now, which is uh relatively gently economically though very firmly politically is to signal that one country, two systems is okay for business and it's okay for most people in Hong Kong. That's that's an ad to Taiwan uh ahead of what will be a pretty subtle but meaningful pressure from Beijing. And

I think that's the scenario to watch out for because if you ask the hawks in the Trump administration, well, what will you do then? They'll say, well, we can't possibly do nothing. We have to act. Uh because this this would be a fundamental challenge that would lead implicitly to the end of American primacy in the Pacific. The Japanese would see that immediately and it would put TSMC in the hands of Cinping, we can't let that happen. And then you'll go to the president and the president will say, as he said to John Bolton in a

famous chapter in John Bolton's memoir, he picks up the Sharpie and he says, "You see this Sharpie, John? This this is Taiwan." And then he points to the desk and he says, "You see the desk?" They're in the Oval Office. It's the Resolute desk. He said, "The desk is China." And Trump effectively says to Bolton, "Why would I send a US Navy across the ocean to fight a war over a Sharpie?" So the Chinese know that Trump is not really that into Taiwan. The Chinese know that he Trump wants to do a big beautiful deal.

And remember, Trump is Nixon. He wants to go to Beijing. He wants 1972 to happen. And for him to be the one who goes there and does the great big beautiful deal. If that's the case and I'm Cin Ping's advisor, I'm like, "Boss, this is your moment. Only now is there a president who could actually hand you this without a fight, but you got to push the envelope. You got to make your move." I mean I'm just digesting the scenario you you presented and it's a very difficult one for the US to work its way

out of you know the sort of gradual restriction and then this declaration that is logically consistent with the notion of one China and how do you find a reasonable response through that especially as you say given who's in the white house right now I mean it's a really tricky scenario but it must be one that they've wared they must have played this This is why Elon wanted to see the war plan because it's really quite important to know what the US move would be. Now, I don't know. Um although I could get added to a

signal chat group later today that might tell me, but assuming that doesn't happen, I can only draw inferences from what's not classified. And it's clear that the United States is developing a deterrent strategy for the Taiwan Strait called Hellscape. We know this because San Po talked about it to the Washington Post last summer with the very obvious intention of communicating to Beijing, "We've got a plan for you." And that plan is to use air, sea, and undersea drones to sink Chinese vessels, which is quite a big move when you come to think about it. So,

Hellscape implies war. And all the war games I'm aware of, even the ones that the US comes out of ahead, are really largecale conflicts in which a lot of ships get sunk, uh, planes get shot down, missiles get fired, and people die. So, President Trump could at some point be faced with the dilemma, do you accept a quiet Chinese takeover of Taiwan like what they did in Hong Kong, or do you risk World War II by actually letting Hellscape happen and having US uh naval assets sink Chinese ships? That's going to be the decisive moment

of Donald Trump's presidency if it happens because they're in the situation room. and they will have to decide is America going to stay number one in the Indo-Pacific but have to fight a war to do it or is it going to accept Chinese primacy in which case the whole world reconfigures particularly in the Indepacific region and Beijing becomes the central hub. I'd also say there's another a second ramification which is essentially around the control of this enormously important economic asset which is the Taiwanese uh semiconductor industry right and of losing control of that or or

rather handing control of that to China. There's an issue with Hellscape of course which is that it it relies on the availability of many thousands of drones uh which right now I believe probably exist in a procurement spreadsheet rather than in uh you know the US US naval material stores on their ships. So there's there's also that additional challenge right which is that that that notion of a remote control defense by robot of Taiwan remains fictional and will remain fictional for a few years. We don't really know how advanced it is. I think that if

one talks to the people who do know that there's still quite a bit of confidence in the US military about what they could do right now. But the Chinese are adding to their own naval, submarine, air, missile, and space capabilities at a much faster rate than we are modernizing ours. And so I've just been reading an excellent forthcoming book about this by my Hoover colleague Ike Fryman and uh his co-author Harry Halm. And the balance of military power in the Indo Pacific is inexraably tipping China's way. So that's the kind of military naval dimension. It

it's going to get worse. And remember Ferguson's law. Ferguson's law states that if a great power is spending more on interest payments than on defense, it won't be great for much longer. The US crossed the threshold last year. And it's very hard for me to see anything that the Trump administration can do, including DOE, that is going to fix that because the debt dynamics are really quite unhealthy for the US over the next, not just the next three or four years, but over the next 40 years. Neil, that you wrote a great opinion piece in

the Wall Street Journal about that. We will put that in the show notes. I want to turn in the last 8 or nine minutes to bringing these two big pieces together. So we have lived in a world of the last 30 years since the collapse of the Soviet Union with a particular security architecture uh and a particular set of economic rules. They were freedom of navigation, reduce tariffs, trade everywhere, move things to the lowest cost uh production play production is moving from China to Vietnam which is doing very well. Thank you very much. It's clear

that that is now over. So what is the shape of that new economic and security order? You know, I I see certain things are easier to pick out in a way. The notion that we might have more regionalized trading blocks. there might be a resurgence of the belt and road which didn't do particularly uh what it set out to achieve a decade ago but it may now do so with sort of software exports through through deepseek amongst other things and the fact that you can sell cheap BYD and other cars but there also seems to

be a pressure for dual or maybe even threetrack technology ecosystems which would be you know core technology but maybe it's even in some of the financial rails that might exist and a reshuffleling of the global south and where it sits and who it looks to to buddy up with that feels to me like a the most 101 answer to where this ends up. How do you imagine this settling down and equilibriating over time? Well, I'm not sure you necessarily do get an equilibrium under these circumstances. After all, what happened in the 20th century was that

rival power blocks or empires uh ended up in two massive conflrations, right? Was not a self-equiliberating system, was it? And the danger of of unraveling the what we call the liberal international order, a phrase that I don't like any more than the Holy Roman Empire was like the Holy Roman Empire and which Voltater said was neither Holy nor Roman nor an empire. The liberal international order wasn't really very liberal, wasn't very international, and wasn't very orderly. But anyway, there was a system that essentially relied on US predominance. The best way of writing about it, I

did a book called Colossus on this was it's just an American empire, an all but name. And the United States performs these unusual functions, but it essentially projects military power. It has complete military ascendancy. It has the reserve currency and it runs an international system where it buys it's the consumer of first and last resort and it sells claims on the US Treasury to finance it. This was the international order that emerged during the cold war triumphed in the 1990s and has persisted really down until the great Trump backlash. And this raises the question that

you've posed what comes next. Well, I think read George Orwell. Don't overthink this. We end up in a world where there are three, not two, but three nuclear superpowers. Remember that's Orwell's vision. He saw this very early on. But it's taken until now for China to be a nuclear superpower. And that's different from being a nuclear power. Nuclear power is you got a couple of nuclear weapons. Big deal. Nuclear superpower is you got an absolute ton. You've got tons and tons of nuclear weapons. And China's getting there and it soon will be there. So that's

the world in which three nuclear superpowers are in a dominant position. Nobody can argue with them. And if they choose to have spheres of influence, then that's the world. It's the world of 1984. The danger of this is as in the 20th century that it's not stable and you end up with a conflict. And that's the thing that I I regard as the biggest risk in all of this. the miscalculation, whether it's like the miscalculation the Germans made over Belgium in 1914 or the miscalculation that Hitler made about Britain and Poland in 1939, somebody miscalculates

and then you end up with a conflict. And now, as we've seen already in Russia Ukraine, it's easy to start a war, hard to stop one. So I think there's a risk that this system that is evolving here which Gideon Rashman called the sort of age of empire that this system is unstable as the last of Age of Empires was. Now key point history is not a deterministic system and we can't sit here and project with nice straight lines how we get from liberal international order to 1984 or World War II. There's a scenario in

which Trump turns out to be a very stable genius and it all works out much better than you or I expect. Yeah. For example, the counterparties fold in the trade war. They just all fold and we end up with Bob Lighheiser's fairer trade. There's a scenario in which we underestimated Elani actually does fix the federal government and it gets more efficient and it costs less money. There's a scenario where the interest rates come down and that actually ultimately delivers something meaningful to households and the stock market only corrects a little and then it's all the

way back up because deregulation is real etc. It's always a mistake to be too negative about the United States. One always has to remember its innate advantages over everybody else. Like absolutely you get to attract all the talent, give it money, it does amazing things. Elon is only one of many. And then the other side is like not that strong. What if the Russians just overdo it? What if the whole system that Putin's built is actually very fragile and can't withstand a ceasefire? That's often the way about wars. And then finally, China. China has these

profound structural problems that aren't really fixable. Demographics, the debt dynamic. So although we can see it all going to hell and public intellectuals get paid more when they say things are going to hell, there's a scenario in which it turns out better than most people expect because Trump gets lucky and the other side is actually quite weak and that's the future that not many people are betting on at the moment. Uh well, I mean Neil, that's a wonderful way to summarize where we might end up. I'm glad that you're speaking with such doom and that

you are a public intellectual. I hope business is exceptional for you. It it is going to be an increasingly complex world. I think one of the things that needs to happen and people are waking up to it is dusting out their histories because if you've been in the diplomatic service, if you've been in trade and negotiations over the last 40 years, you've played with such a different playbook to the one that you currently have. And so with that, I think your own Substack is a great place for people to to start. Why don't you give

a nod to where people can find you on it? Well, I have a Substack which is called Time Machine where I post everything that I write. Uh my core competence is writing books. There are still bookshops as well as Amazon. And I think there are 16 books by me to choose from of which maybe the most relevant to this conversation is War of the World, though the most recent book is Doom. And as I think I mentioned Azim, I'm I'm in the midst of volume two of the Magnum opus on on Henry Kissinger, who had

quite a good handle on all the issues that we've been discussing and and though he's not around to to comment anymore, he left quite a lot of commentary for me to plow through as I write this second volume. Well, absolutely. I you you've inspired me to go back and dig into Kissinger a little bit. Thanks again for being with us today. Neil, you are Neil Ferguson on Substack as well. I am at Exponential View and and if you enjoyed today's conversation, we've got many more every Friday. The intersection of technology, economics, and geopolitics. So until

next time, thank you so much and thank you for being part of this community. Thanks Ze and thanks everybody for joining. Have an amazing weekend everybody and to you. Bye-bye new.