August 15, 2024 • 55 mins
The past few years have thrown up a number of potential weaknesses in the American economy. There've been disruptions to supply chains stemming from the global pandemic. There are concerns about the availability of strategically important items like semiconductors and vaccines. Meanwhile, Russia's invasion of Ukraine roiled global commodity markets and the ongoing conflict in the Middle East has created even more complications for shipping. So how is the US thinking about economic security and what have we learned? In this episode, we speak with Daleep Singh, Deputy National Security Advisor for International Economics and Deputy Director of the National Economic Council in the Biden Administration. We talk about how the government identifies areas of potential shortages and chokepoints, and what it does to try to get ahead of them.
Mentioned in this Episode:
Introducing the Chokepoint Economy, When Shortages Start to Matter
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Episode Transcript
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:20):
Hello and welcome to another episode of the Old Blots podcast.
I'm Tracy Allaway.
Speaker 3 (00:24):
And I'm Joe. Why isn't thal Joe?
Speaker 2 (00:26):
We are recording this in August twenty twenty four, which
means there's only six years to go. Six years to
what six years until? According to John Maynard Keynes, we
will have an era of abundance.
Speaker 4 (00:42):
Right.
Speaker 2 (00:42):
He wrote in nineteen thirty that he thought technological development
would mean in one hundred years, which would be twenty thirty,
that we would have a plethora of goods and elevated
living standards and reduced working times and everything will be great.
So I'm excited.
Speaker 5 (01:00):
Yeah, I think I can hang on with the sort
of charge and toil scarcity mindset for another six years.
Speaker 3 (01:06):
Then we were reached nirvana here on earth.
Speaker 2 (01:09):
I mean, to be fair, he did sort of caveat.
Speaker 3 (01:11):
It, and I say, I have no idea where you're
going with this.
Speaker 2 (01:14):
Yeah, okay, I promise I have a point and you're
actually going to remember it in a second. But first
I'm going to say that Caines did caveat his forecast,
and he basically said, as long as there are no
big wars or population booms. And that was in nineteen
thirty so, you know, bad timing for both wars and
population boos.
Speaker 3 (01:32):
So yeah, a few things happened. Maybe we've got to
kick it back another fifty.
Speaker 2 (01:35):
Years, okay, But my point is, you know, in twenty
twenty four, it feels like instead of abundance, there is
very much And you touched on it just then this
focus on scarcity. So maybe we have like, yeah.
Speaker 3 (01:50):
We love done here, Tracy, thank you.
Speaker 1 (01:51):
So maybe we.
Speaker 2 (01:52):
Have a lot of different types of goods that are
available to us now, you know, I can go buy
a pretty cool TV for not that much money. But
in the past four years or so, we have seen
shortages of very important items that have emerged.
Speaker 5 (02:10):
Yeah, and I would classify this into sort of two
categories in my head, which is that there was sort
of the acute scarcity of specific things that we saw
during the COVID shock, and so you know, there were
things like oh, suddenly we have a scarcity of protective
equipment for doctors, or a certain type of lagging edge
(02:32):
chip that went into automobiles, certain things like that that
really became like scarce in that moment. But then I
would say that maybe awakened a consciousness that we have
these long term scarcities that are strategic in nature. So
suddenly people worried about, well, do we have the minerals
that we need in order to build out a domestic
(02:55):
electric vehicle supply chain, do we have the industrial to
build out things like semiconductors, concerns about the medical supply chain.
And these are like long term strategic questions that aren't
just related to sort of that exogenous shock that we
got in March twenty twenty.
Speaker 2 (03:13):
Absolutely, and you just mentioned industrial capacity there. It does
feel like governments around the world, and certainly the US,
have become more active in how they manage some of
these concerns. And I don't know if you remember, but
back in twenty twenty, I think I frame this as
like the choke point economy, where people become more concerned
(03:35):
about the relative flow of goods and the idea of
choke points in specific supply chains that sort of cascade
through the rest of the economy. That was before we
all started talking about the resurgence of industrial policy, but like,
this is kind of what we're talking about.
Speaker 5 (03:51):
And then I think the other really important dimension here,
and it fits right into what you're saying, is that
we're seeing when it comes to things like industrial policy
or reindustrialization, or this effort to build up semiconductor capacity.
Part of it is sort of like pure economics, but
is where you get this real intersection of economics and
international security geopolitical anxiety, because a lot of this stuff
(04:13):
is like building up capacity domestically in areas in which
possible strategic rivals are independence of our.
Speaker 2 (04:22):
Right, and then of course how do you balance strategic
independence with the risk of autarchy?
Speaker 3 (04:28):
Right, that's right.
Speaker 2 (04:29):
So I'm very pleased to say that we're getting back
to our CIRCU twenty twenty roots. We're going to be
talking about supply chains and a lot of other interesting things.
But we really do have the perfect guest. We are
going to be speaking with Deleep Seeingh. He is, of
course the Deputy National Security Advisor for International Economics in
the Biden administration. He's also the Deputy Director of the
(04:52):
National Economic Council. He previously worked at Treasury and the
New York Fed and Goldman and p Jim. So truly
the perfect lots guest. Delip, thanks so much for coming
on the show.
Speaker 4 (05:05):
Nice to be with you, Tracy and Joe.
Speaker 2 (05:07):
I think you are also the first all lots guests
that might be coming to us from a secured, confidential
room in the White House. So that's why the audio
sounds a little bit different.
Speaker 4 (05:19):
Glad to be a pioneer. Yeah, you can, you can
rest assured the line of secure.
Speaker 2 (05:24):
Okay, So I mentioned your career summary and it is
very long. I just want to make sure did I
hit all the important talking points? What have you been
doing up until this particular moment.
Speaker 4 (05:36):
Yeah, I mean it's kind of a nonlinear career path.
Some might say an incoherent one. But yes, I've spent
roughly half of my career in the private sector, first
in the tech boom during the nineties, then in financial
markets at Goldman as the world hyper globalized during the
two thousands, and then after the Financial Crisis of eight
I've mostly been in government service at the Treasury, FED
(05:58):
and now at the White House, excluding a year and
a half at PGM as the Global Chief Economist and
a similar type of role during the early Trump years.
But really, the way I make sense of it is
I've just my careers lived at the intersection of economics, geopolitics,
and markets. It's essentially what I studied as an undergrad.
Also in grad school. I actually thought, coming out of
(06:20):
grad school, I might start a company in a developing
country that could do well and maybe do some good.
But my timing was pretty terrible. I was coming out
of grad school in two thousand and three just after
the dot com bubble had burst, and the moment wasn't
exactly right for someone like me to get funded. And
I also had hundreds of the hundreds of thousands of
dollars in debt, so I grambled and took the only
(06:41):
offer that was made to me, which was at Goldman Sachs.
But you know, it gave me a particular lens through
which to view the world, and over time I realized
that sometimes you can see the world most clearly through
the lens of markets, but I wanted to have I mean,
I recognize that sometimes that lens can get distorted, and
at other time it's better to look at the world
(07:01):
through the lens of geopolitics or economics or technology. And
my aspiration was to acquire as many lenses as possible.
You know, if you want to make a push on
the world, towards what it should be. You first have
to see it for what it is.
Speaker 2 (07:14):
Joe, this is how I ended up at Bloomberg for
my first job. They were the only news organization in
London that was actually paying their interns, and so there
you go, I realized I needed money.
Speaker 5 (07:27):
No, but the way you describe your career, you know,
if you want to change the world, you first have
to understand it. I think is like a like Tracy said,
the perfect odd lots guests, especially given your private sector roles,
public sector roles, economics, politics and markets, economics, geopolitics and markets,
all the things that were interested. What does a Deputy
(07:48):
National Security Advisor for international economics do?
Speaker 3 (07:51):
What is that role?
Speaker 4 (07:53):
Yeah, So basically it's to take on challenges that are
at the intersection of economics and national security, whether they're
domestic or or international. And the premise is that economic
security is national security and vice versa. So if we're
going to have strength at home, then we need to
heal our divisions and revitalize our economy. That's what allows
us to lead abroad. And if we can lead abroad
(08:15):
from a position of strength, we'll create a safer, more
prosperous world that reinforces all of our efforts at home.
So I mean to bring it to life. Yeah, let
me just give you an example of a few examples
of what I do and no particular order. How can
we launch a positive democratic alternative to the belt Road initiative?
Can we design sanctions that change the calculus of Putin
(08:37):
on prosecuting his war in Ukraine? Can we unlock the
value of the Russian Central Bank reserves that we froze
for the benefit of Ukraine as it fights for freedom.
Can we design export controls in a way that don't
dull the incentive for innovation You were talking about this
in your opening, without seeding our crown technological jewels to
a strategic adversary. Can we help to break the dead
(08:59):
impact in the developing world to showcase our value proposition
to countries that might be skeptical about our intentions? And
then the passion project for me really is, can we reimagine,
invent or revitalize the tools and institutions of American financial firepower?
Because I mean, my view is we're living in the
most intense period of geopolitical competition, at least since the
(09:23):
Cold War ended. Maybe going much further back, and since
the great powers of today are also nuclear powers, you know,
barring catastrophic miscalculation, the logic of mutually assured destruction probably
suggests that when confrontation occurs, it's less likely to play
out on the military battlefield than it will in the
(09:44):
theater of economics and technology. So we'd better go into
this competition well armed, and we need to actually think
really hard about how to.
Speaker 3 (09:52):
Do that cracy. We might get to this later, but
one area that it might play out as in the
Arctic circle.
Speaker 2 (09:58):
Oh yes, well, we should definitely talk about that. I'm
trying to think of an elegant seg from mutually assured
destruction back to supply chains, but I'll just do it, okay.
So in twenty twenty, during the pandemic, we kind of
woke up to the risk of supply chain disruptions and
we saw a variety of things both big and small
(10:20):
in terms of importance. So everything from I guess gatorade
to the needles needed for vaccines and things like that.
Suddenly there was a shortage. How do you in your
position even begin to identify potential risks in the supply chain,
and how do you go about evaluating their relative strategic importance.
Speaker 4 (10:45):
Yeah, so I mean this term, this phrase that gets
thrown around supply chain resilience. I really think our task
is to go beyond the abstractions and try to get
into what it means in practice. And the context really matters,
because the effort to revitalize our supply chain resilience, it's
happening in the context of a multiplayer, multi stage geopolitical
(11:08):
competition that's playing out across the world. So let me
try to explain what I mean. So when people use
this term supply chain resilience, the first question that we
ask is resilience against what kind of shocks? Because they
could be economic shocks, they could be geopolitical, climate health,
all of the above. And each of these shocks, if
(11:29):
they occur individually or collectively, they impose different kinds of
stress on supply chains. So first, resilience against what? And
then the second question is how do you define resilience.
It comes in many different forms. It could be production capacity,
It could be diversification of suppliers and buyers, you know,
it could be having sufficient stockpiles that could plausibly absorb
(11:52):
an exogenant shock, or it could be supply chain agreements
with trusted partners that can surge capacity when the good
or technology is scarce at home. And so, you know,
what we have to evaluate now is should we think
of these forms of resilience as economically equivalent or politically equivalent?
And then is it really resilience that we're after? You know,
(12:12):
maybe resilience is appropriate for certain supply chains, like you
mentioned masks. In that category of good, you could argue
we have no comparative advantage and margins are quite low,
and so maybe resilience is the right word. But maybe
resilience isn't really enough for a supply chain in which
we have a clear national security nexus, like leading edge semiconductors,
(12:33):
where the barriers to entry are very high, the economies
of scale are very large, and you really want dominance.
So I think there's a continuum between resilience and dominance,
and you have to decide where do you want to
be on that continuum. And then the fourth step is
once once we define what we mean by resilience and
we clarify with ourselves and our partners, is it really
resilience we're after in this supply chain? What are the
(12:56):
tools that we have and that we can deploy. Some
of them are regulatory, that could be procurement, could be
multilateral agreements, could be stockpiles. You know, it could be
changed to our immigration policy. And then the last question,
this is the hardest one, and this is where we
really have to build our analytical muscles within the US government,
is can we stress test and simulate if we use
(13:16):
our tools in the way that's optimal for the United States,
and we make assumptions about what our adversaries do, and
then also non aligned countries and allies and partners, if
we make assumptions about how that plays out over the
course of five or ten years, are we net better
off in equilibrium? That's the framework that I think we're
trying to apply in every supply chain, and every supply
(13:37):
chains a different story. I mean, there's some kind of
Tolstoy logic behind it. And so pick a supply chain
and we can get into the details.
Speaker 5 (14:00):
I'm really looking forward to getting into details and specific
mechanisms and.
Speaker 3 (14:04):
Tools you have.
Speaker 5 (14:05):
I just want to you know, when you think about
these like long term, we don't make five year plans
in the US, in part because we don't know who's
going to be in power in a year from now,
and there's always changing. How do you think about at
the abstract level or the big picture level, how do
you think about the challenge of long term planning for
(14:25):
some of these areas in a political system that is
inherently by design, very volatile.
Speaker 4 (14:31):
It's very hard. About four decades have passed since we
really practiced industrial policy in the United States, and some
of those muscles that we used to have they've atrophied.
And so that's what I was referencing when I said,
we really do need to build an analytical infrastructure that's
fit for purpose. Now it may be that the political
judgments that are made, even with the best analysis, are
(14:54):
going to take us in a very different place than
the analysis would suggest we should. But we first have
to do our homework. If we have tools that can
boost our supply chain resilience, really you can apply the
use of tools to any kind of geopolitical objective, not
just supply chain resilience. Can we take inventory of all
of those tools, When have they worked well when they're
(15:16):
used alone or in tandem, when they're used unilaterally versus
multilaterally with allies and partners. What are the limitations of
using those tools, What are the trade offs? What are
the spillovers? And then I don't think we have good
models yet for thinking about how we're left in a
if you want to think about it in a general
equilibrium sense, if we deploy the tools that we have
(15:40):
and they play out in the manner that we expect,
how do we think about whether we're not better off
when we consider how our adversaries might respond, or allies
or partners or not aligned countries. Those models don't exist.
I mean, I don't think you can use the fed's
large scale general equilibrium models to find an answer. We
have to invent those. So that's just the analysis part.
(16:02):
And I think we have to build, my mind, a
multidisciplinary swat team of sorts, with different kinds of expertise
and a variety of disciplines I mean microeconomics, macro financial forensics,
trade finance, diplomacy, international law, domestic law. And that's going
to take time to build. Ultimately, though, I mean, you're
(16:22):
asking the question of what happens if you have an
abrupt political shift and we no longer stick to the
plan that might have been imagined by a previous administration.
That is a feature of democracy. You can look at
it as a bug because we can't make long term
plans in the way that an autocracy can. But it
also prevents us from making big mistakes. You could argue,
(16:45):
we have these checks and balances and we have to convince.
I mean, a lot of the work that I think
I do our team performs it should have bipartisan appeal.
We think all the time about how do we sustain
our technological pre eminence, how do we ensure that we
have energy security, how can we shore up our resilience
and critical supply chains. I don't think of those as
(17:05):
being inherently partisan issues. Of course, they become part of
the theater, but in their essence, we're just trying to
think about what are the long term strategic objectives of
this country, putting aside the politics of the day.
Speaker 2 (17:17):
Okay, So, in the spirit of moving away from abstraction
about you know, catchphrases like supply chain, resilience and things
like that, can you maybe give us a specific example
of what you've done to shore up a specific thing
or even service, walk us through the process of identifying
(17:39):
it as something that is worth the government's time and
effort to coming up with particular solutions and evaluating those
different solutions versus the problem.
Speaker 4 (17:51):
Yeah. Sure, I mean, I'll give you a recent example
from actually from last month. It's the polar Icebreaker deal.
So on the sidelines of the NATO summit, the deal
was President Biden and his counterparts in Finland and Canada.
They announced the deal called the ice Pack, the ice
Breaker Collaboration Effort. And here's the backdrop. I mean, the
North Pole is warming rapidly. It's warming four times faster
(18:16):
than the rest of the world. That means the Arctic
ice is melting, and the melting accelerates the warming because
the sea absorbs the heat from sunlight, whereas ice reflects it.
And less ice means more Arctic shipping lanes that have
shorter transits that bypass choke points in the Suez or
Panama Canal. And less ice also means more commercial opportunity
(18:40):
if you want to extract critical minerals or lay undersea
data cables in the Arctic. And then it also creates
and this is where my role at the intersection of
economics and national security comes in. It creates geopolitical space
to project military power, and Russia and China both have
high ambitions in the Arctic. With a larger surface fleet
(19:02):
that will be able to navigate the Arctic in ways
that it couldn't when there was more ice. But for
any of those opportunities to be realized, you need ice breakers.
We only have two of them. Both of those ice
breakers were built in the nineteen seventies. They're both past
their service life, and it's taking a long time and
a lot of money to replace these ice breakers and
(19:23):
build a full US fleet to take advantage of the
opportunities I mentioned. So that means we have to rebuild
our productive capacity in building this highly specialized, highly complex
niche of ships called polar ice breakers. And if you
want to do that, you first have to have no
how and expertise. You probably need to have economies of
scale to make it financially viable, and then you need
(19:46):
a steady demand signal to justify the upfront costs and
capex and also investments in the workforce. Well, this is
where your allies matter. Friends matter. So enter Finland. It's
a newly minted NATO ally right. It joined after Russian
invaded Ukraine. It's widely recognized as the world's best designer
and leading producer of polar ice breakers. You may have
(20:09):
heard at some point about the Helsinki Shipyard. It's actually
produced more than half of the world's total fleet. Canada
is also a leading player, and actually one of its
firms bought the Helsinki shipyard after its previous owners, a
couple of Russian oligarchs were caught up in sanctions after
Putin invaded Ukraine. So this gets really interesting. And the
(20:29):
deal we announced at NATO is for Finland and Canada
to share their expertise with US and make investments in
US shipyards to grow our collective production capacity to build
ice breakers. And what do they get. Well, in exchange,
we agree to integrate our ice breaking supply chains so
that they are interoperable at every stage of production. And
(20:52):
then ultimately our vision collectively all three countries, it's to
create a suppliers club that can capture a greater share
of the global order book. And it's a big global
order book. There's a long list of allies and partners
that understand what's happening in the Arctic and they want
to build ice breakers for the same reasons that we do,
but they don't have a shipyard. And our best estimate
(21:12):
is that the global total global demand for ice breakers
over the next decade from allies and partners is between
seventy and ninety vessels. That's a lot. And so if
we can pull this off, we get three benefits at once.
We revitalize our capacity to innovate and produce at scale
in a key industrial segment number one. Number two, we
(21:33):
safeguard our national security and project power in a key
geostrategic region number two. And then number three, it's not
zero sum. You know, we strengthen our allies and partnerships
as we execute this deal. That's not a bad trifecta.
Speaker 5 (21:49):
What happened to you as shipbuilding capacity in general, that
it's become so constrained or atrophied. And when you talk
about this agreement with Canada and Finland, what kind of
numbers and concrete mechanisms are there other than just obviously
the handshake or the agreement to do something.
Speaker 4 (22:10):
Our shipbuilding industry is atropheed. Over the course of decades,
we began to outsource, just like in many other industries
in which there's a large upfront capex investment required and
low margins. We outsourced that type of business overseas. So
China became the dominant player in large part because of
(22:31):
the degree of subsidies that they deploy to their shipbuilding industry,
and Japan and Korea were left as the only other
major global players, and that created a major economic and
geopolitical vulnerability that has been exposed in recent years. Now
we could decide should we compete writ large in shipbuilding.
(22:51):
I think we should, but we have to start somewhere.
And so what we're doing is picking a niche that
plays to our competitive strengths, because, as I mentioned, this
is a this is a highly specialized niche, the one
that I'm describing with polar ice breakers requires a lot
of technology. Finland and Canada are best in class, and
if they're willing to partner with us and share with
(23:12):
us and rebuilding our productive capacity, that's why this deal
makes sense. In terms of the numbers we're actually working
on an MoU, I can't give you the exact numbers,
but I mean I would go back to the Global
order book that I mentioned. There are seventy to ninety
ice breakers that the likes of India and Brazil and
Argentina and Chile and Sweden many countries one ice breakers.
(23:35):
We want to be their supplier of choice. All three
of our countries do. And so instead of building two
ice breakers in the past fifty years, we want to capture,
you know, let's say ten twenty thirty ice breakers of
demand over the next decade. And you can only have
the kind of investments and workforce development that I'm describing
if you have that sort of demand signal.
Speaker 2 (24:12):
So you mentioned strengthening cooperation with our allies through some
of these initiatives, and you know, I take the point
when it comes to things like icebreakers, but certainly in
some areas where we've identified strategic importance or a particular
industry that we do want to build up. I'm thinking
specifically about domestic electric vehicle manufacturing, there is sometimes a
(24:38):
tension between building up our own domestic capacity and our
own independence supply versus the interests of some of our
allies and specifically Europe in that case, Can you talk
a little bit about how you balance those competing interests.
Speaker 4 (24:55):
Yeah, I mean so, I'm glad. I mean EV's that's
a great example because you could generalize the challenge we're
facing an EVS to the entire tradable good sector. And
I mean the problem confronting the world, not just the US,
is that China's production trajectory it's set to flood the
world well beyond what global demand can plausibly absorb. And
it's not a new problem. We've seen China run this
(25:17):
play for the better part of the last two decades.
It's how China has gained dominance and steel and solar
and wind and medical devices, machine tools. But now the
trend is broadening, it's intensifying, it's moving up the value chain.
So evs are a good example of how they're doing so,
but semiconductors or batteries would be other good examples. And
(25:37):
the starting point is one of the worrisome aspects because
China already accounts for thirty percent of the world's manufacturing
sector and value added terms, and that's more than the
US and Germany, Japan, India, and Mexico combined. And look
China's dominance, if it's growing dominance of these sectors was
merely the result of indigenous innovation and market forces, you know,
(25:59):
we should apply, we should applaud the positive spillovers that
would accrue to the rest of the world. But The
reality is that the China is competing with massive state support.
It's beyond anything we've seen in any other industrialized economy,
and you can see it. I mean, we could talk
through the metrics. There are volume based metrics, nominal metrics,
financial results from its exporters. You could measure the scale
(26:22):
of policy support directly. You could look at market structure
and how much it's concentrated. You arrive at the same conclusion.
And so your question is the right one. How do
we confront that challenge without alienating allies? And we've tried
to articulate three levers that we deploy and which lever
you deployed and to what extent. It's more empirical than ideological.
(26:44):
But the first lever is, yes, we are going to
make investments at home to strengthen and scale up our
productive capacity. I mean much in the way that I
described for the Icebreaker deal. And that's an R and
D and infrastructure and technology and manufacturing. It's also the
size and skills of the labor force that's required to
build out the capacity that you were trying to generate.
(27:06):
But the second is partnerships, So partnerships with countries that
are playing by the same rules to give each other
access to our productive capacity and our purchasing power. And
then the third part of it is, and it's regrettable,
but it's the use of restrictive tools like tariffs with
on trading partners that are not playing by the same rules.
And that really is to prevent our investments from getting undercut.
(27:30):
And I really do wish we didn't have to use tariffs,
but the reality is that we're not competing by the
same rules, and the harm from standing aside and doing
nothing is not acceptable to our economic strategy, or our
national security, or to our political economy. Now, I mean
the challenge in terms of keeping our allies and partners
(27:51):
with us, it's how exactly do you calibrate the use
of all three of these levers and the optimal scale
and scope of tariffs. It really depends on the pace
at which we in our allies are deploying productive capacity
and the extent to which our investments are getting multiplied
by the private sector, and how China responds with affirmative
(28:13):
measures or restrictive measures of its own. So this gets
back to the point I was making earlier. I mean,
we want to partner with our allies in terms of
this analysis of multi stage multiplayer game theory. You know,
we have choices to make, so does China. So do
our allies, and so do non aligned countries. So we
want to we actually want to roll up our sleeves
with allies, think several steps ahead, anticipate their response from
(28:36):
other players, and then make x anti judgments about whether
our interventions, whether they're affirmative inducements in our productive capacity,
or whether they're tariffs to remedy harm. Are they going
to make us net better off in equilibrium for decades
to come collectively, And that's the kind of conversation they welcome.
And you know, I know we've had endless inkspilled about
(28:57):
whether allies are alienated by our actions. But I have
to say the technocratic dialogue that's taking place and really
it's I mean, I was at the G seven earlier
this summer as well. The dialogue at the highest levels
of government it has become. I would say it's remarkably constructive.
You know, I was away for a year and a half.
I came back and the tone has really changed.
Speaker 5 (29:18):
You know, another area that we've seen this administration really
used the idea of economic strains and geopolitical security is
in the novel use of the Strategic Petroleum Reserve, which
by its name, you know, people thought of it as like, oh,
it's just a mechanism in case we were suddenly the
US is like shut off from being able to import oil,
(29:40):
which is no longer a big deal anymore because we're
such a big oil producer, and now it has this
sort of economic balancing effect. In fact, you wrote a
piece that got published in the FT in February with
previous odd Lad's guests are the data about this, But
then there's talk about, well, can spr like mechanisms be
used for other strategic commodities such as the various minerals
(30:02):
that are necessary for say, EV batteries. Except for where
are we on this? Is this still just in the
sort of tweets and blogs and white papers world? Or
is there a trajectory for more spr like infrastructure to
stabilize a market induce demand for these other critical commodities.
Speaker 4 (30:26):
Well, I mean I no longer live in the world
of tweets and blogs. Yeah, it can be, but there
is real work taking place. I mean, for the reasons
that I wrote about with ARNAB when we created the
spr we were a major net importer of petroleum and
we were going through the oil shocks of the nineteen seventies,
and it made sense, of course to have a very
(30:47):
large stockpile as a buffer against shocks. Now everyone knows
we're a net exporter, but we have quite a bit
of vulnerability on many of the inputs that are needed
to make clean energy transition, and also for many of
the refined products that come from petroleum that sometimes become scarce,
particularly during the winter months. So can we broad in
(31:09):
the concept of the strategic petroleum reserve to think about
resilience more generally? And if you want to think about
critical minerals, the reality is if you look at each
of the markets and they're really embryonic markets for many
of the critical minerals that are needed like lithium or nickel,
or manganese, graphite, et cetera. We are facing serious shortfalls
(31:31):
and under investments in you supply, and much of the
investment problem relates to price spikes and just outright volatility
in these markets. And I don't think the market is
going to solve this problem by itself, and because the
risks for producers, they're asymmetric to the downside, it's they
undersupply a critical mineral. Okay, they may lose a little
(31:53):
bit of profit. If they oversupply, they are potentially facing insolvency.
They always of course, there's a sort of damicles hanging
over all of these markets, which is China flooding the market.
So there's an opportunity for the public sector to step in,
and we really with some novel financial tools, can we
think about an authority that gives us a demand backstop,
(32:16):
the the ability to create a demand's backstop with price
floors or guarantees or insurance mechanisms or a buyer of
last resort function. Could we have the ability to intervene
in markets to buy when the spot market is depressed
and then sell the equivalent amount in futures markets, or
create a synthetic reserve by selling put options without actually
(32:37):
having to physically stockpile the mineral. If it's feasible, you know,
if the good allows for it, can we stockpile. Can
we provide non recourse bridge financing to a liquid but
solvent producer. Can we create a marketplace for high standard
critical minerals, the kind of minerals that have high standards
for labor and environmental impact, or just transparency. These are
(33:00):
all the kind of authorities that when I talked about
reinventing or reimagining our tools, these are examples of the
kind of tools I think we're going to need as
we undergo this transition over the next few decades.
Speaker 2 (33:11):
So I know you were talking about minerals just then,
but I have sometimes joked on this podcast that I'm
going to campaign for a strategic pork reserve. So I
feel it's incumbent upon me to ask how does food
security fit into your thinking? And also is there potentially
an overlap between the Biden administration's stated goal of bringing
(33:33):
down prices and inflation and also building up independent supply
and resiliency and things like that.
Speaker 4 (33:42):
Yeah. I mean, look, I no one should laught food
security as national security. There's no question. We have to
take it seriously, and sometimes markets for food fail. I
think there is something to what you're asking. I mean,
there's another idea that is worth thinking about more, which is,
you know, should we create a pool of patient capital
(34:02):
that could be invested with flexibility and at scale to
advance strategic objectives that the private sector left to itself
may not prioritize, especially during moments of exigency, and food
security could be one of those objectives. So, for example,
and you can call this what you want, but if
you had a pool of flexible capital, perhaps we could
(34:24):
give discretion for the US government, with all the appropriate guardrails,
to make investments at home or abroad to advance strategic
objectives that Congress or some other form of democratically legitimate
deliberation decides are worth advancing. It could be energy security,
could be food security, could be addressing supply chain vulnerabilities.
(34:45):
It could be sustaining technological pre eminence. That could be
one purpose of it. A second would be and this
maybe gets to the more likely use case for food security.
Could this pool of capital help US respond to or
deter a disruptive shock, particularly a disruptive shock from economic coercion.
And this happens all over the world, It's happening right
(35:08):
now to some extent in the Philippines. And then three,
could this pool of capital just help address what I
think goes back to one of your questions from before, Joe,
a strategic US disadvantage compared to some of our adversaries.
Who can make very long term strategic investments over the
course of decades. We don't have anything like that, but
they have sovereign well funds, many of them do. It
(35:28):
helps them gain a first mover advantage or just a
competitive edge in many in many critical supply chains or
foundational technologies, and it can confer a lot of soft power.
So should we have something comparable to that. That's another
you know, if you ask me what's in the R
and D lab, this is something we're thinking about.
Speaker 5 (35:46):
One of the things we've talked a little bit about
strategic planning in the area of relationships with our friends
and allies. But one of the things that people talk
about is that some of our actions to impair our
adversary or constrain our adversaries can backfire or not be
as powerful as we thought. And there's a lot of
a lot of articles about how the Russian economy, for example,
(36:09):
is doing much better than people would have expected in
the spring twenty twenty two after the sanctions were first hit.
Maybe it's not booming, but it does not seem like
it's totally crippled. And then in the context of China,
for example, you talk about tariffs, we've had technology export controls,
things like that, constraints on what Nvidia can send to
(36:30):
them and so forth. You hear, well, this is just
going to prove to be an accelerant for their own
domestic initiatives, and that it's going to cause they're going
to do even more and they're going to do better
et CETA than the otherwise would have been because they're
gonna have to double down on homegrown technology. Taking that
latter one, do you buy that premise? Do you think
that China is making progress faster than it otherwise would
(36:52):
have because of certain constraints that have been imposed by
this administration in.
Speaker 3 (36:57):
The last one.
Speaker 4 (36:58):
I mean, Joe, we could spend multiple podcasts on the
Russia sanctions regime and export controls on China. Let me
try to, let me try to answer your questions on China.
So look, no, I do think I do think these
controls are absolutely necessary. But let me back up a
little bit just to give you a sense of why
I believe that. I mean, the first rule is do
no harm, right, because our capacity to innovate, we know
(37:19):
it's one of our superpowers, maybe it is the most
important superpower we have as a country, and we do
not want to dull the incentives for renovation, neither here
or anywhere abroad. And we don't want to reduce our
companies access to foreign markets unless we're confident that there
is some national security objective that's implicated without controls. But
(37:40):
here is the reality, and this is why the China
export controls are absolutely necessary. There are a set of
technologies that are they're foundational to economic growth, potential and
national security, AI, quantum semiconductors, biotech, hypersonics. I mean that
list is going to change over time, and those of
us in government need to be humble. We're always going
(38:01):
to be behind the frontiers of the private sector. But
let's just stipulate there is a list of so called
foundational technologies that really really matter. Number two military civil fusion.
In China, it means the CCP doesn't make a distinction
between its commercial and military sectors. And then three is
our private sector. The private sector everywhere in the world,
it does have this overwhelmingly strong incentive to sell cutting
(38:23):
edge technology to an enormous Chinese market. And so that's
the problem is that if we had unfettered diffusion of
our most foundational technological advances that would be tantamount eventually
to giving up the crown jewels of the American economy.
And that's why we're pretty emphatic about not letting that happen.
And export controls are just an acknowledgment of that geopolitical reality.
(38:46):
They're not an attempt to hold China back. But that's
why that you've heard my boss Jake Sullivan, one of
my bosses, talk about the need to be careful and precise,
the metaphor of a high fence around a small yard.
And so what does that mean? I mean here again,
like I can share with you a bit of the thinking,
the framework. I mean. Number one, it's what are the
technologies that are likely to be foundational to US national
(39:09):
security and economic growth potential? So come up with that
list number two of that of those technologies on the list,
where do we have the largest lead and therefore, where
will we most likely see maximal effort by our adversaries
to close the gap if the diffusion of US technology
was uncontrolled, And then conversely, where are we behind and
therefore most vulnerable to foreign controls that might slow or
(39:31):
impede our own technological development? And then three, we do
think really hard about whether and to what extent the
targets of export controls have substitutes for US foundational technology,
either through indigenous development and there's been a lot of
pressive course about what China's doing and lagging edge semiconductors
in this regard, or from third countries. Can they get
the supply from somewhere else? And then four is can
(39:54):
you build a coalition how broad and how deep and
could we plausibly sustain it around any control for foundational technology?
And the fifth part of having a small yard high
fence or a strategic anchor is again stress testing and
simulating if we get into an escalatory tip for tat
of technology controls with our adversaries, how does it play
(40:15):
out in a multiplayer, multi stage contest over time? And
then put a guardwill on ourselves that any imposition of
control it has to surpass some threshold of efficacy compared
to the next best alternative. Is it going to make
us net better off? So this is not like arbitrary
and reflexive placing of controls on really important technologies for
(40:36):
really important markets. We are taking this process very seriously.
I'm trying to give you a bit of a flavor
for that.
Speaker 2 (40:42):
So Joe brought up the sanctions against Russia, and you
were a key architect of those, so I feel we
would be very remiss if we didn't talk about them
a little bit more. But one of the criticisms that
you sometimes see of those is a the efficacy, which
Joe already alluded to, but be this idea of weaponizing
(41:03):
the dollar's special status in the global financial system, the
reserve status. So a lot of what we've been able
to do is because the US dollar is central in
the financial system and there are a lot of flows
that go into dollar assets and things like that. So
as a result, we have seen more concern about potentially
(41:24):
countries like Russia and China maybe moving away from the dollar,
maybe moving into gold or the un or whatever. Is
that something that you are actively concerned about, And then
how do you balance the I guess the power that
the dollar's special status gives the US with maintaining that
(41:46):
special status and not I guess overreaching in terms of weaponization.
Speaker 4 (41:51):
So I'm going to be a little careful about speaking
on the dollar. That's uh, there's some kind of lightning
bolt that will strike me down, because that's really the
preserve of the Treasury secretary to talk about. But I'll
just what I'll do is I'll talk to you about
it in the context of my job. And you're right,
I mean dollar primacy. It's a privilege. Perhaps it's exorbitant
that and it allows us to fund our government, our households,
(42:12):
are businesses much more cheaply than would otherwise be the case.
It allows us to absorb a shock like no other country.
And yeah, with sanctions and other forms of economic statecraft,
that does give us a unique capacity to deliver a shock.
And every time you use sanctions, especially when you do
so forcefully, you do create an incentive for some countries
(42:33):
to hedge against the dollar based financial system. And we've
got to take that very seriously. But look, you also
have to, I think step back and look at the
numbers right now. If you think about the measure of primacy,
is the currency used, how is it used to save
to borrow in the transact? Right now, the dollars global
shares on the order of sixty, sixty and forty percent
(42:54):
on those measures. The rem and be share is somewhere
between zero and two percent, and euro is in a
distant second place. Somewhere around twenty twenty and maybe thirty
five percent on those measures, And so the dollar still
is the operating system of global finance. It has incredibly
powerful network effects. And my view is that displacing the
dollar would essentially require us to commit a series of
(43:17):
unforced errors that you would think of as a failure
from within. And I think that kind of failure would
also have to be coupled with a more credible alternative
to have sustained impact. And that is somewhat hard for
me to see with Europe still challenged by internal divisions,
Japan trying to break out of multi decade stagnation, and
China just obviously moving in the wrong direction in terms
(43:38):
of institutional reforms. But look, I mean, as I mentioned
dollar primacy, it's a network. All networks have tipping points.
Those tipping points are often psychological ones that are really
hard to identify in advance, and we know from the
study of networks. Anybody knows doesn't matter whether you're talking
about biology or technology or finance, or like my daughter's
(44:01):
lunch table at school, they lose value slowly, then very suddenly.
So we're always going to be paranoid about dollar privacy,
will never take it for granted. We'll always try to
build a better product. And so it really depends on
our policy choices what kind of country you want to be.
We need to put to rest questions about whether the
dollar's institutional strengths are going to be sustained across political cycles,
(44:22):
rule of law, transparent regulation, independent judiciary, deep in liquid
capital markets. And the most important from my perspective, is
our story. Our ability to generate trust and to attract
ideas and talent and investment. That's really ours to lose.
Speaker 5 (44:38):
You know, when I look at the big picture and
I get excited about reindustrialization efforts and the new factories
and all seem very cool. But the other thing that
worries me, or one of the things that really worries me,
is that the legacy industrial powerhouses of the United States
seem to really be struggling. And I'm thinking of Going
in particular, and I'm thinking of tell in particular, which
(45:01):
is like, Okay, it's great if we have new things,
but these are like our powerhouses, and they're not doing
well on a raft of measures.
Speaker 3 (45:08):
What's going on there?
Speaker 5 (45:09):
Like people have different Oh is the financial people they
got too focused on financials. They're different stories that people
tell about what happens to legacy domestic industrial capacity. But
I'm curious what you how you sort of think about
identifying the problems that we've seen at some of these companies.
Speaker 4 (45:28):
Well, Joe, I'm not going to speak about a particular company,
but let me try to answer your question more generally,
because I think it's a really good one. Let me
pick like a legacy, legacy sector that really matters for
our national security. And so I don't know if you've
heard about ship to shore cranes or if you know
much about them, but it is what it sounds like.
These are cranes that take a good from a ship
(45:51):
they bring it to shore. It may not sound like it,
but this is a critical piece of legacy, you may
call it legacy legacy, relatively lower tech infrastructure that really matters.
And it has a real vulnerability because the vast majority
of the goods that enter or exit our economy they're
shipped to ports and they're pulled off of ships with cranes.
(46:13):
Here's the digital aspect of it. These cranes have onboard
electronics that allow for remote software updates, and they can
allow a foreign actor to interfere with port operations during
a crisis, maybe even shut it down. Well, China makes
eighty percent of these cranes that are used in the US.
It's priced out the competition with massive subsidies to a
(46:33):
state owned crane producer called ZPMC. So that gives China
tremendous opportunity to collect information on what's coming in or
out of the country, including for goods that supply our military.
So the risk of another Huawei situation, it's non trivial.
And so I'm mentioning this because what to do about it.
(46:54):
It's similar for many other industries that you could reference,
many companies that you could reference. It has to start
with public investment to catalyze, ideally through the private sector,
the rebuilding of our production capacity so on ship to
shore cranes. Last month, this administration announced it was going
to take twenty billion dollars from the bipartisan Infrastructure bill
(47:15):
and start building cranes again because of the national security
threat that it poses. But then the second piece of it,
and it relates to a lot of the questions you've asked,
you need friends to do this the right way. Friends
with expertise in building cranes in this case, and here
Japan is one such friend. I mean the twenty billion
dollars that I referenced, a good part of it is
(47:37):
going to go to a US subsidiary of Mitsui, a
Japanese company, and they're now going to build the first
domestic option for ports on ship to shore cranes in
thirty years. And hopefully we'll give this firm a chance
to scale up and compete with a heavily subsidized Chinese rival.
But to give that a better chance, the President did
propose twenty five percent tariffs on Chinese ship to shore cranes.
(48:00):
And the last bit is the Coastguard is going to
in the meantime it has been given authority to inspect
all cranes for any signs of hackers that are burrowing
into the software violating security protocols. So in any of
these industries, Joe, I mean, this is going to be
a painstaking process. It's going to require years of effort
to do the basically the economic forensics of where do
(48:20):
we have vulnerabilities to what extent is it critical for
our industrial base, does it have a nexus with national security,
and what combination of investments and diplomatic agreements and in
some cases restrictive measures can give us a chance to
compete in a much more contested environment. I mean, this
is not las a fair free market economics. You know,
I came of age in the nineteen nineties and we're
(48:43):
just not in that world anymore. So this is what
industrial policy is going to look like.
Speaker 2 (48:48):
Tilly, I'm going to squeeze in one more question, which
is just going back to that idea of patient capital.
So number one, how serious are those discussions or how
serious is that idea being taken? And then secondly, in
the realms of it building out industrial policy or capacity,
one of the discussion points that you sometimes hear is
(49:09):
whether or not it's more valuable to throw money at
the initial investment, so building the first factory or whatever,
versus the government committing itself in one way or another
to longer term forward purchasing agreements so that there's always
a flow on demand and companies can kind of plan
accordingly and maybe avoid big cycles where demand is like
(49:33):
vacillating up and down very dramatically. How are you thinking
about that?
Speaker 4 (49:38):
Yeah, I don't want to put odds on whether the
kind of work I was describing is going to end
up with a particular final form. Just I'm always wrong,
but let me just try to try to answer your question.
I mean, I think what we're going to do if
we have time and political spaces to continue to identify
sectors that we think are going to be foundational to
(50:01):
economic growth and essential for national security, and where the
private sector on its own likely doesn't have the incentives
to make the investments we need at tas and with
scale to compete. And that really is all about identifying
where they're clear market failures. It could be an infrastructure,
it could be in particular sectors, it could be in
the size and skills of our labor force. But we
(50:23):
do know if we don't, if we don't prioritize growth
in these strategic sectors and make sure that we have
enough investment and we have enough diplomatic partnerships to help
them scale, then we're probably going to have a continued
hollowing out of our industrial base, and we're going to
be vulnerable to shocks all manner of shocks, and we're
probably going to have a political economy that becomes more
(50:44):
and more disillusioned and we'll have a feeling that they've
been left behind, and that leads us to a very
bad place.
Speaker 2 (50:50):
De leep saying Deputy National Security Advisor for International Economics
at the Biden administration, thank you so much for coming
on all thoughts, really appreciating it's fantastic.
Speaker 3 (51:00):
Thank you so much, So great to get to chat
with you.
Speaker 4 (51:03):
But really my pleasure, Joe.
Speaker 2 (51:17):
I thought that was very interesting. It also felt nice
just to talk about supply chains rather than market volatility
for a little bit. I thought you raise a crucial
point in the industrial capacity build out, which is in
some respects the US government is at a disadvantage because
every four years we have the possibility of major political change,
(51:40):
and if we're thinking on longer term time scales, you know,
things like semiconductors take years, if not decades to actually
build out that capacity, it can be difficult to maintain continuity. Obviously,
we're in an election year. We don't know who's going
to be president just yet, but it will be really
(52:00):
interesting to see in twenty twenty five, like how much
of this has continued.
Speaker 5 (52:05):
Yeah, you know, I think to Delete's point, look, we
don't want to be an authoritarian system now, democracy is good,
and as you put it, that's a feature in a bug.
It's annoying because it does make long term planning in
theory more difficult, but it's good because it also provides
a very important check on long term strategic mistakes in theory,
(52:25):
and so that's all good. I think where it's worriesome
specifically is that if you have priorities that shouldn't necessarily
be particularly controversial, such as say I have icebreakers, right,
but if you have a political system that's sort of
like so like polarized and perverted, that everything automatically becomes
(52:50):
in this hyperpartisan lens. You can see then how any
sort of priority becomes very difficult to execute on because
as he said, people will see Zono politically one way
or another, even if in theory it shouldn't be well.
Speaker 2 (53:06):
And also, the thing I was thinking about was something
like Icebreakers was done in coordination with Finland and other countries,
as Deleepe was talking about. But that's an interesting aspect
where supply chains are becoming more of a coordinated thing.
I think that's relatively new, at least in the West.
But how does that continuity risk play out with allies?
(53:32):
Is there a concern that if they commit to a
specific thing, then maybe in four years or in a
year or whatever, the political circumstances will change and US
interest won't be there in the way it was previously.
Speaker 3 (53:45):
I think we just got to build more ships.
Speaker 5 (53:46):
I mean just I'm gonna say an opinion, like, it
does not seem great that we've let our sort of
shipbuilding capacity because it's obviously not just icebreakers. It's been
a long time since we built like aircraft carriers and
dredging and all that stuff.
Speaker 3 (53:59):
You gota bid ships in this country.
Speaker 2 (54:01):
We came so close to making this a nineteen oh
six foreign dredging episode, but we didn't quite get there.
Speaker 3 (54:07):
At one time, the jones didn't come up easier.
Speaker 2 (54:10):
Oh yeah, that's right. Okay, shall we leave it there.
Speaker 3 (54:12):
Let's leave it there.
Speaker 2 (54:13):
This has been another episode of the Authlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 5 (54:19):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carman armand Deesh, I'll
Bennett at Dashbot and kill Brooks at Kilbrooks. Thank you
to our producer Moses on them. For more Oddlogs content,
go to Bloomberg dot com slash odd Lots, where we
have transcripts, a blog, and a newsletter and you can
chat about all of these topics with fellow supply Chain
(54:41):
nerds in our discord Discord dot gg slash odlogs And.
Speaker 2 (54:45):
If you enjoy Oddlots, if you like these supply Chain episodes,
then please leave us a positive review on your favorite
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(55:08):
Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:20):
Hello and welcome to another episode of the Old Blots podcast.
I'm Tracy Allaway.
Speaker 3 (00:24):
And I'm Joe. Why isn't thal Joe?
Speaker 2 (00:26):
We are recording this in August twenty twenty four, which
means there's only six years to go. Six years to
what six years until? According to John Maynard Keynes, we
will have an era of abundance.
Speaker 4 (00:42):
Right.
Speaker 2 (00:42):
He wrote in nineteen thirty that he thought technological development
would mean in one hundred years, which would be twenty thirty,
that we would have a plethora of goods and elevated
living standards and reduced working times and everything will be great.
So I'm excited.
Speaker 5 (01:00):
Yeah, I think I can hang on with the sort
of charge and toil scarcity mindset for another six years.
Speaker 3 (01:06):
Then we were reached nirvana here on earth.
Speaker 2 (01:09):
I mean, to be fair, he did sort of caveat.
Speaker 3 (01:11):
It, and I say, I have no idea where you're
going with this.
Speaker 2 (01:14):
Yeah, okay, I promise I have a point and you're
actually going to remember it in a second. But first
I'm going to say that Caines did caveat his forecast,
and he basically said, as long as there are no
big wars or population booms. And that was in nineteen
thirty so, you know, bad timing for both wars and
population boos.
Speaker 3 (01:32):
So yeah, a few things happened. Maybe we've got to
kick it back another fifty.
Speaker 2 (01:35):
Years, okay, But my point is, you know, in twenty
twenty four, it feels like instead of abundance, there is
very much And you touched on it just then this
focus on scarcity. So maybe we have like, yeah.
Speaker 3 (01:50):
We love done here, Tracy, thank you.
Speaker 1 (01:51):
So maybe we.
Speaker 2 (01:52):
Have a lot of different types of goods that are
available to us now, you know, I can go buy
a pretty cool TV for not that much money. But
in the past four years or so, we have seen
shortages of very important items that have emerged.
Speaker 5 (02:10):
Yeah, and I would classify this into sort of two
categories in my head, which is that there was sort
of the acute scarcity of specific things that we saw
during the COVID shock, and so you know, there were
things like oh, suddenly we have a scarcity of protective
equipment for doctors, or a certain type of lagging edge
(02:32):
chip that went into automobiles, certain things like that that
really became like scarce in that moment. But then I
would say that maybe awakened a consciousness that we have
these long term scarcities that are strategic in nature. So
suddenly people worried about, well, do we have the minerals
that we need in order to build out a domestic
(02:55):
electric vehicle supply chain, do we have the industrial to
build out things like semiconductors, concerns about the medical supply chain.
And these are like long term strategic questions that aren't
just related to sort of that exogenous shock that we
got in March twenty twenty.
Speaker 2 (03:13):
Absolutely, and you just mentioned industrial capacity there. It does
feel like governments around the world, and certainly the US,
have become more active in how they manage some of
these concerns. And I don't know if you remember, but
back in twenty twenty, I think I frame this as
like the choke point economy, where people become more concerned
(03:35):
about the relative flow of goods and the idea of
choke points in specific supply chains that sort of cascade
through the rest of the economy. That was before we
all started talking about the resurgence of industrial policy, but like,
this is kind of what we're talking about.
Speaker 5 (03:51):
And then I think the other really important dimension here,
and it fits right into what you're saying, is that
we're seeing when it comes to things like industrial policy
or reindustrialization, or this effort to build up semiconductor capacity.
Part of it is sort of like pure economics, but
is where you get this real intersection of economics and
international security geopolitical anxiety, because a lot of this stuff
(04:13):
is like building up capacity domestically in areas in which
possible strategic rivals are independence of our.
Speaker 2 (04:22):
Right, and then of course how do you balance strategic
independence with the risk of autarchy?
Speaker 3 (04:28):
Right, that's right.
Speaker 2 (04:29):
So I'm very pleased to say that we're getting back
to our CIRCU twenty twenty roots. We're going to be
talking about supply chains and a lot of other interesting things.
But we really do have the perfect guest. We are
going to be speaking with Deleep Seeingh. He is, of
course the Deputy National Security Advisor for International Economics in
the Biden administration. He's also the Deputy Director of the
(04:52):
National Economic Council. He previously worked at Treasury and the
New York Fed and Goldman and p Jim. So truly
the perfect lots guest. Delip, thanks so much for coming
on the show.
Speaker 4 (05:05):
Nice to be with you, Tracy and Joe.
Speaker 2 (05:07):
I think you are also the first all lots guests
that might be coming to us from a secured, confidential
room in the White House. So that's why the audio
sounds a little bit different.
Speaker 4 (05:19):
Glad to be a pioneer. Yeah, you can, you can
rest assured the line of secure.
Speaker 2 (05:24):
Okay, So I mentioned your career summary and it is
very long. I just want to make sure did I
hit all the important talking points? What have you been
doing up until this particular moment.
Speaker 4 (05:36):
Yeah, I mean it's kind of a nonlinear career path.
Some might say an incoherent one. But yes, I've spent
roughly half of my career in the private sector, first
in the tech boom during the nineties, then in financial
markets at Goldman as the world hyper globalized during the
two thousands, and then after the Financial Crisis of eight
I've mostly been in government service at the Treasury, FED
(05:58):
and now at the White House, excluding a year and
a half at PGM as the Global Chief Economist and
a similar type of role during the early Trump years.
But really, the way I make sense of it is
I've just my careers lived at the intersection of economics, geopolitics,
and markets. It's essentially what I studied as an undergrad.
Also in grad school. I actually thought, coming out of
(06:20):
grad school, I might start a company in a developing
country that could do well and maybe do some good.
But my timing was pretty terrible. I was coming out
of grad school in two thousand and three just after
the dot com bubble had burst, and the moment wasn't
exactly right for someone like me to get funded. And
I also had hundreds of the hundreds of thousands of
dollars in debt, so I grambled and took the only
(06:41):
offer that was made to me, which was at Goldman Sachs.
But you know, it gave me a particular lens through
which to view the world, and over time I realized
that sometimes you can see the world most clearly through
the lens of markets, but I wanted to have I mean,
I recognize that sometimes that lens can get distorted, and
at other time it's better to look at the world
(07:01):
through the lens of geopolitics or economics or technology. And
my aspiration was to acquire as many lenses as possible.
You know, if you want to make a push on
the world, towards what it should be. You first have
to see it for what it is.
Speaker 2 (07:14):
Joe, this is how I ended up at Bloomberg for
my first job. They were the only news organization in
London that was actually paying their interns, and so there
you go, I realized I needed money.
Speaker 5 (07:27):
No, but the way you describe your career, you know,
if you want to change the world, you first have
to understand it. I think is like a like Tracy said,
the perfect odd lots guests, especially given your private sector roles,
public sector roles, economics, politics and markets, economics, geopolitics and markets,
all the things that were interested. What does a Deputy
(07:48):
National Security Advisor for international economics do?
Speaker 3 (07:51):
What is that role?
Speaker 4 (07:53):
Yeah, So basically it's to take on challenges that are
at the intersection of economics and national security, whether they're
domestic or or international. And the premise is that economic
security is national security and vice versa. So if we're
going to have strength at home, then we need to
heal our divisions and revitalize our economy. That's what allows
us to lead abroad. And if we can lead abroad
(08:15):
from a position of strength, we'll create a safer, more
prosperous world that reinforces all of our efforts at home.
So I mean to bring it to life. Yeah, let
me just give you an example of a few examples
of what I do and no particular order. How can
we launch a positive democratic alternative to the belt Road initiative?
Can we design sanctions that change the calculus of Putin
(08:37):
on prosecuting his war in Ukraine? Can we unlock the
value of the Russian Central Bank reserves that we froze
for the benefit of Ukraine as it fights for freedom.
Can we design export controls in a way that don't
dull the incentive for innovation You were talking about this
in your opening, without seeding our crown technological jewels to
a strategic adversary. Can we help to break the dead
(08:59):
impact in the developing world to showcase our value proposition
to countries that might be skeptical about our intentions? And
then the passion project for me really is, can we reimagine,
invent or revitalize the tools and institutions of American financial firepower?
Because I mean, my view is we're living in the
most intense period of geopolitical competition, at least since the
(09:23):
Cold War ended. Maybe going much further back, and since
the great powers of today are also nuclear powers, you know,
barring catastrophic miscalculation, the logic of mutually assured destruction probably
suggests that when confrontation occurs, it's less likely to play
out on the military battlefield than it will in the
(09:44):
theater of economics and technology. So we'd better go into
this competition well armed, and we need to actually think
really hard about how to.
Speaker 3 (09:52):
Do that cracy. We might get to this later, but
one area that it might play out as in the
Arctic circle.
Speaker 2 (09:58):
Oh yes, well, we should definitely talk about that. I'm
trying to think of an elegant seg from mutually assured
destruction back to supply chains, but I'll just do it, okay.
So in twenty twenty, during the pandemic, we kind of
woke up to the risk of supply chain disruptions and
we saw a variety of things both big and small
(10:20):
in terms of importance. So everything from I guess gatorade
to the needles needed for vaccines and things like that.
Suddenly there was a shortage. How do you in your
position even begin to identify potential risks in the supply chain,
and how do you go about evaluating their relative strategic importance.
Speaker 4 (10:45):
Yeah, so I mean this term, this phrase that gets
thrown around supply chain resilience. I really think our task
is to go beyond the abstractions and try to get
into what it means in practice. And the context really matters,
because the effort to revitalize our supply chain resilience, it's
happening in the context of a multiplayer, multi stage geopolitical
(11:08):
competition that's playing out across the world. So let me
try to explain what I mean. So when people use
this term supply chain resilience, the first question that we
ask is resilience against what kind of shocks? Because they
could be economic shocks, they could be geopolitical, climate health,
all of the above. And each of these shocks, if
(11:29):
they occur individually or collectively, they impose different kinds of
stress on supply chains. So first, resilience against what? And
then the second question is how do you define resilience.
It comes in many different forms. It could be production capacity,
It could be diversification of suppliers and buyers, you know,
it could be having sufficient stockpiles that could plausibly absorb
(11:52):
an exogenant shock, or it could be supply chain agreements
with trusted partners that can surge capacity when the good
or technology is scarce at home. And so, you know,
what we have to evaluate now is should we think
of these forms of resilience as economically equivalent or politically equivalent?
And then is it really resilience that we're after? You know,
(12:12):
maybe resilience is appropriate for certain supply chains, like you
mentioned masks. In that category of good, you could argue
we have no comparative advantage and margins are quite low,
and so maybe resilience is the right word. But maybe
resilience isn't really enough for a supply chain in which
we have a clear national security nexus, like leading edge semiconductors,
(12:33):
where the barriers to entry are very high, the economies
of scale are very large, and you really want dominance.
So I think there's a continuum between resilience and dominance,
and you have to decide where do you want to
be on that continuum. And then the fourth step is
once once we define what we mean by resilience and
we clarify with ourselves and our partners, is it really
resilience we're after in this supply chain? What are the
(12:56):
tools that we have and that we can deploy. Some
of them are regulatory, that could be procurement, could be
multilateral agreements, could be stockpiles. You know, it could be
changed to our immigration policy. And then the last question,
this is the hardest one, and this is where we
really have to build our analytical muscles within the US government,
is can we stress test and simulate if we use
(13:16):
our tools in the way that's optimal for the United States,
and we make assumptions about what our adversaries do, and
then also non aligned countries and allies and partners, if
we make assumptions about how that plays out over the
course of five or ten years, are we net better
off in equilibrium? That's the framework that I think we're
trying to apply in every supply chain, and every supply
(13:37):
chains a different story. I mean, there's some kind of
Tolstoy logic behind it. And so pick a supply chain
and we can get into the details.
Speaker 5 (14:00):
I'm really looking forward to getting into details and specific
mechanisms and.
Speaker 3 (14:04):
Tools you have.
Speaker 5 (14:05):
I just want to you know, when you think about
these like long term, we don't make five year plans
in the US, in part because we don't know who's
going to be in power in a year from now,
and there's always changing. How do you think about at
the abstract level or the big picture level, how do
you think about the challenge of long term planning for
(14:25):
some of these areas in a political system that is
inherently by design, very volatile.
Speaker 4 (14:31):
It's very hard. About four decades have passed since we
really practiced industrial policy in the United States, and some
of those muscles that we used to have they've atrophied.
And so that's what I was referencing when I said,
we really do need to build an analytical infrastructure that's
fit for purpose. Now it may be that the political
judgments that are made, even with the best analysis, are
(14:54):
going to take us in a very different place than
the analysis would suggest we should. But we first have
to do our homework. If we have tools that can
boost our supply chain resilience, really you can apply the
use of tools to any kind of geopolitical objective, not
just supply chain resilience. Can we take inventory of all
of those tools, When have they worked well when they're
(15:16):
used alone or in tandem, when they're used unilaterally versus
multilaterally with allies and partners. What are the limitations of
using those tools, What are the trade offs? What are
the spillovers? And then I don't think we have good
models yet for thinking about how we're left in a
if you want to think about it in a general
equilibrium sense, if we deploy the tools that we have
(15:40):
and they play out in the manner that we expect,
how do we think about whether we're not better off
when we consider how our adversaries might respond, or allies
or partners or not aligned countries. Those models don't exist.
I mean, I don't think you can use the fed's
large scale general equilibrium models to find an answer. We
have to invent those. So that's just the analysis part.
(16:02):
And I think we have to build, my mind, a
multidisciplinary swat team of sorts, with different kinds of expertise
and a variety of disciplines I mean microeconomics, macro financial forensics,
trade finance, diplomacy, international law, domestic law. And that's going
to take time to build. Ultimately, though, I mean, you're
(16:22):
asking the question of what happens if you have an
abrupt political shift and we no longer stick to the
plan that might have been imagined by a previous administration.
That is a feature of democracy. You can look at
it as a bug because we can't make long term
plans in the way that an autocracy can. But it
also prevents us from making big mistakes. You could argue,
(16:45):
we have these checks and balances and we have to convince.
I mean, a lot of the work that I think
I do our team performs it should have bipartisan appeal.
We think all the time about how do we sustain
our technological pre eminence, how do we ensure that we
have energy security, how can we shore up our resilience
and critical supply chains. I don't think of those as
(17:05):
being inherently partisan issues. Of course, they become part of
the theater, but in their essence, we're just trying to
think about what are the long term strategic objectives of
this country, putting aside the politics of the day.
Speaker 2 (17:17):
Okay, So, in the spirit of moving away from abstraction
about you know, catchphrases like supply chain, resilience and things
like that, can you maybe give us a specific example
of what you've done to shore up a specific thing
or even service, walk us through the process of identifying
(17:39):
it as something that is worth the government's time and
effort to coming up with particular solutions and evaluating those
different solutions versus the problem.
Speaker 4 (17:51):
Yeah. Sure, I mean, I'll give you a recent example
from actually from last month. It's the polar Icebreaker deal.
So on the sidelines of the NATO summit, the deal
was President Biden and his counterparts in Finland and Canada.
They announced the deal called the ice Pack, the ice
Breaker Collaboration Effort. And here's the backdrop. I mean, the
North Pole is warming rapidly. It's warming four times faster
(18:16):
than the rest of the world. That means the Arctic
ice is melting, and the melting accelerates the warming because
the sea absorbs the heat from sunlight, whereas ice reflects it.
And less ice means more Arctic shipping lanes that have
shorter transits that bypass choke points in the Suez or
Panama Canal. And less ice also means more commercial opportunity
(18:40):
if you want to extract critical minerals or lay undersea
data cables in the Arctic. And then it also creates
and this is where my role at the intersection of
economics and national security comes in. It creates geopolitical space
to project military power, and Russia and China both have
high ambitions in the Arctic. With a larger surface fleet
(19:02):
that will be able to navigate the Arctic in ways
that it couldn't when there was more ice. But for
any of those opportunities to be realized, you need ice breakers.
We only have two of them. Both of those ice
breakers were built in the nineteen seventies. They're both past
their service life, and it's taking a long time and
a lot of money to replace these ice breakers and
(19:23):
build a full US fleet to take advantage of the
opportunities I mentioned. So that means we have to rebuild
our productive capacity in building this highly specialized, highly complex
niche of ships called polar ice breakers. And if you
want to do that, you first have to have no
how and expertise. You probably need to have economies of
scale to make it financially viable, and then you need
(19:46):
a steady demand signal to justify the upfront costs and
capex and also investments in the workforce. Well, this is
where your allies matter. Friends matter. So enter Finland. It's
a newly minted NATO ally right. It joined after Russian
invaded Ukraine. It's widely recognized as the world's best designer
and leading producer of polar ice breakers. You may have
(20:09):
heard at some point about the Helsinki Shipyard. It's actually
produced more than half of the world's total fleet. Canada
is also a leading player, and actually one of its
firms bought the Helsinki shipyard after its previous owners, a
couple of Russian oligarchs were caught up in sanctions after
Putin invaded Ukraine. So this gets really interesting. And the
(20:29):
deal we announced at NATO is for Finland and Canada
to share their expertise with US and make investments in
US shipyards to grow our collective production capacity to build
ice breakers. And what do they get. Well, in exchange,
we agree to integrate our ice breaking supply chains so
that they are interoperable at every stage of production. And
(20:52):
then ultimately our vision collectively all three countries, it's to
create a suppliers club that can capture a greater share
of the global order book. And it's a big global
order book. There's a long list of allies and partners
that understand what's happening in the Arctic and they want
to build ice breakers for the same reasons that we do,
but they don't have a shipyard. And our best estimate
(21:12):
is that the global total global demand for ice breakers
over the next decade from allies and partners is between
seventy and ninety vessels. That's a lot. And so if
we can pull this off, we get three benefits at once.
We revitalize our capacity to innovate and produce at scale
in a key industrial segment number one. Number two, we
(21:33):
safeguard our national security and project power in a key
geostrategic region number two. And then number three, it's not
zero sum. You know, we strengthen our allies and partnerships
as we execute this deal. That's not a bad trifecta.
Speaker 5 (21:49):
What happened to you as shipbuilding capacity in general, that
it's become so constrained or atrophied. And when you talk
about this agreement with Canada and Finland, what kind of
numbers and concrete mechanisms are there other than just obviously
the handshake or the agreement to do something.
Speaker 4 (22:10):
Our shipbuilding industry is atropheed. Over the course of decades,
we began to outsource, just like in many other industries
in which there's a large upfront capex investment required and
low margins. We outsourced that type of business overseas. So
China became the dominant player in large part because of
(22:31):
the degree of subsidies that they deploy to their shipbuilding industry,
and Japan and Korea were left as the only other
major global players, and that created a major economic and
geopolitical vulnerability that has been exposed in recent years. Now
we could decide should we compete writ large in shipbuilding.
(22:51):
I think we should, but we have to start somewhere.
And so what we're doing is picking a niche that
plays to our competitive strengths, because, as I mentioned, this
is a this is a highly specialized niche, the one
that I'm describing with polar ice breakers requires a lot
of technology. Finland and Canada are best in class, and
if they're willing to partner with us and share with
(23:12):
us and rebuilding our productive capacity, that's why this deal
makes sense. In terms of the numbers we're actually working
on an MoU, I can't give you the exact numbers,
but I mean I would go back to the Global
order book that I mentioned. There are seventy to ninety
ice breakers that the likes of India and Brazil and
Argentina and Chile and Sweden many countries one ice breakers.
(23:35):
We want to be their supplier of choice. All three
of our countries do. And so instead of building two
ice breakers in the past fifty years, we want to capture,
you know, let's say ten twenty thirty ice breakers of
demand over the next decade. And you can only have
the kind of investments and workforce development that I'm describing
if you have that sort of demand signal.
Speaker 2 (24:12):
So you mentioned strengthening cooperation with our allies through some
of these initiatives, and you know, I take the point
when it comes to things like icebreakers, but certainly in
some areas where we've identified strategic importance or a particular
industry that we do want to build up. I'm thinking
specifically about domestic electric vehicle manufacturing, there is sometimes a
(24:38):
tension between building up our own domestic capacity and our
own independence supply versus the interests of some of our
allies and specifically Europe in that case, Can you talk
a little bit about how you balance those competing interests.
Speaker 4 (24:55):
Yeah, I mean so, I'm glad. I mean EV's that's
a great example because you could generalize the challenge we're
facing an EVS to the entire tradable good sector. And
I mean the problem confronting the world, not just the US,
is that China's production trajectory it's set to flood the
world well beyond what global demand can plausibly absorb. And
it's not a new problem. We've seen China run this
(25:17):
play for the better part of the last two decades.
It's how China has gained dominance and steel and solar
and wind and medical devices, machine tools. But now the
trend is broadening, it's intensifying, it's moving up the value chain.
So evs are a good example of how they're doing so,
but semiconductors or batteries would be other good examples. And
(25:37):
the starting point is one of the worrisome aspects because
China already accounts for thirty percent of the world's manufacturing
sector and value added terms, and that's more than the
US and Germany, Japan, India, and Mexico combined. And look
China's dominance, if it's growing dominance of these sectors was
merely the result of indigenous innovation and market forces, you know,
(25:59):
we should apply, we should applaud the positive spillovers that
would accrue to the rest of the world. But The
reality is that the China is competing with massive state support.
It's beyond anything we've seen in any other industrialized economy,
and you can see it. I mean, we could talk
through the metrics. There are volume based metrics, nominal metrics,
financial results from its exporters. You could measure the scale
(26:22):
of policy support directly. You could look at market structure
and how much it's concentrated. You arrive at the same conclusion.
And so your question is the right one. How do
we confront that challenge without alienating allies? And we've tried
to articulate three levers that we deploy and which lever
you deployed and to what extent. It's more empirical than ideological.
(26:44):
But the first lever is, yes, we are going to
make investments at home to strengthen and scale up our
productive capacity. I mean much in the way that I
described for the Icebreaker deal. And that's an R and
D and infrastructure and technology and manufacturing. It's also the
size and skills of the labor force that's required to
build out the capacity that you were trying to generate.
(27:06):
But the second is partnerships, So partnerships with countries that
are playing by the same rules to give each other
access to our productive capacity and our purchasing power. And
then the third part of it is, and it's regrettable,
but it's the use of restrictive tools like tariffs with
on trading partners that are not playing by the same rules.
And that really is to prevent our investments from getting undercut.
(27:30):
And I really do wish we didn't have to use tariffs,
but the reality is that we're not competing by the
same rules, and the harm from standing aside and doing
nothing is not acceptable to our economic strategy, or our
national security, or to our political economy. Now, I mean
the challenge in terms of keeping our allies and partners
(27:51):
with us, it's how exactly do you calibrate the use
of all three of these levers and the optimal scale
and scope of tariffs. It really depends on the pace
at which we in our allies are deploying productive capacity
and the extent to which our investments are getting multiplied
by the private sector, and how China responds with affirmative
(28:13):
measures or restrictive measures of its own. So this gets
back to the point I was making earlier. I mean,
we want to partner with our allies in terms of
this analysis of multi stage multiplayer game theory. You know,
we have choices to make, so does China. So do
our allies, and so do non aligned countries. So we
want to we actually want to roll up our sleeves
with allies, think several steps ahead, anticipate their response from
(28:36):
other players, and then make x anti judgments about whether
our interventions, whether they're affirmative inducements in our productive capacity,
or whether they're tariffs to remedy harm. Are they going
to make us net better off in equilibrium for decades
to come collectively, And that's the kind of conversation they welcome.
And you know, I know we've had endless inkspilled about
(28:57):
whether allies are alienated by our actions. But I have
to say the technocratic dialogue that's taking place and really
it's I mean, I was at the G seven earlier
this summer as well. The dialogue at the highest levels
of government it has become. I would say it's remarkably constructive.
You know, I was away for a year and a half.
I came back and the tone has really changed.
Speaker 5 (29:18):
You know, another area that we've seen this administration really
used the idea of economic strains and geopolitical security is
in the novel use of the Strategic Petroleum Reserve, which
by its name, you know, people thought of it as like, oh,
it's just a mechanism in case we were suddenly the
US is like shut off from being able to import oil,
(29:40):
which is no longer a big deal anymore because we're
such a big oil producer, and now it has this
sort of economic balancing effect. In fact, you wrote a
piece that got published in the FT in February with
previous odd Lad's guests are the data about this, But
then there's talk about, well, can spr like mechanisms be
used for other strategic commodities such as the various minerals
(30:02):
that are necessary for say, EV batteries. Except for where
are we on this? Is this still just in the
sort of tweets and blogs and white papers world? Or
is there a trajectory for more spr like infrastructure to
stabilize a market induce demand for these other critical commodities.
Speaker 4 (30:26):
Well, I mean I no longer live in the world
of tweets and blogs. Yeah, it can be, but there
is real work taking place. I mean, for the reasons
that I wrote about with ARNAB when we created the
spr we were a major net importer of petroleum and
we were going through the oil shocks of the nineteen seventies,
and it made sense, of course to have a very
(30:47):
large stockpile as a buffer against shocks. Now everyone knows
we're a net exporter, but we have quite a bit
of vulnerability on many of the inputs that are needed
to make clean energy transition, and also for many of
the refined products that come from petroleum that sometimes become scarce,
particularly during the winter months. So can we broad in
(31:09):
the concept of the strategic petroleum reserve to think about
resilience more generally? And if you want to think about
critical minerals, the reality is if you look at each
of the markets and they're really embryonic markets for many
of the critical minerals that are needed like lithium or nickel,
or manganese, graphite, et cetera. We are facing serious shortfalls
(31:31):
and under investments in you supply, and much of the
investment problem relates to price spikes and just outright volatility
in these markets. And I don't think the market is
going to solve this problem by itself, and because the
risks for producers, they're asymmetric to the downside, it's they
undersupply a critical mineral. Okay, they may lose a little
(31:53):
bit of profit. If they oversupply, they are potentially facing insolvency.
They always of course, there's a sort of damicles hanging
over all of these markets, which is China flooding the market.
So there's an opportunity for the public sector to step in,
and we really with some novel financial tools, can we
think about an authority that gives us a demand backstop,
(32:16):
the the ability to create a demand's backstop with price
floors or guarantees or insurance mechanisms or a buyer of
last resort function. Could we have the ability to intervene
in markets to buy when the spot market is depressed
and then sell the equivalent amount in futures markets, or
create a synthetic reserve by selling put options without actually
(32:37):
having to physically stockpile the mineral. If it's feasible, you know,
if the good allows for it, can we stockpile. Can
we provide non recourse bridge financing to a liquid but
solvent producer. Can we create a marketplace for high standard
critical minerals, the kind of minerals that have high standards
for labor and environmental impact, or just transparency. These are
(33:00):
all the kind of authorities that when I talked about
reinventing or reimagining our tools, these are examples of the
kind of tools I think we're going to need as
we undergo this transition over the next few decades.
Speaker 2 (33:11):
So I know you were talking about minerals just then,
but I have sometimes joked on this podcast that I'm
going to campaign for a strategic pork reserve. So I
feel it's incumbent upon me to ask how does food
security fit into your thinking? And also is there potentially
an overlap between the Biden administration's stated goal of bringing
(33:33):
down prices and inflation and also building up independent supply
and resiliency and things like that.
Speaker 4 (33:42):
Yeah. I mean, look, I no one should laught food
security as national security. There's no question. We have to
take it seriously, and sometimes markets for food fail. I
think there is something to what you're asking. I mean,
there's another idea that is worth thinking about more, which is,
you know, should we create a pool of patient capital
(34:02):
that could be invested with flexibility and at scale to
advance strategic objectives that the private sector left to itself
may not prioritize, especially during moments of exigency, and food
security could be one of those objectives. So, for example,
and you can call this what you want, but if
you had a pool of flexible capital, perhaps we could
(34:24):
give discretion for the US government, with all the appropriate guardrails,
to make investments at home or abroad to advance strategic
objectives that Congress or some other form of democratically legitimate
deliberation decides are worth advancing. It could be energy security,
could be food security, could be addressing supply chain vulnerabilities.
(34:45):
It could be sustaining technological pre eminence. That could be
one purpose of it. A second would be and this
maybe gets to the more likely use case for food security.
Could this pool of capital help US respond to or
deter a disruptive shock, particularly a disruptive shock from economic coercion.
And this happens all over the world, It's happening right
(35:08):
now to some extent in the Philippines. And then three,
could this pool of capital just help address what I
think goes back to one of your questions from before, Joe,
a strategic US disadvantage compared to some of our adversaries.
Who can make very long term strategic investments over the
course of decades. We don't have anything like that, but
they have sovereign well funds, many of them do. It
(35:28):
helps them gain a first mover advantage or just a
competitive edge in many in many critical supply chains or
foundational technologies, and it can confer a lot of soft power.
So should we have something comparable to that. That's another
you know, if you ask me what's in the R
and D lab, this is something we're thinking about.
Speaker 5 (35:46):
One of the things we've talked a little bit about
strategic planning in the area of relationships with our friends
and allies. But one of the things that people talk
about is that some of our actions to impair our
adversary or constrain our adversaries can backfire or not be
as powerful as we thought. And there's a lot of
a lot of articles about how the Russian economy, for example,
(36:09):
is doing much better than people would have expected in
the spring twenty twenty two after the sanctions were first hit.
Maybe it's not booming, but it does not seem like
it's totally crippled. And then in the context of China,
for example, you talk about tariffs, we've had technology export controls,
things like that, constraints on what Nvidia can send to
(36:30):
them and so forth. You hear, well, this is just
going to prove to be an accelerant for their own
domestic initiatives, and that it's going to cause they're going
to do even more and they're going to do better
et CETA than the otherwise would have been because they're
gonna have to double down on homegrown technology. Taking that
latter one, do you buy that premise? Do you think
that China is making progress faster than it otherwise would
(36:52):
have because of certain constraints that have been imposed by
this administration in.
Speaker 3 (36:57):
The last one.
Speaker 4 (36:58):
I mean, Joe, we could spend multiple podcasts on the
Russia sanctions regime and export controls on China. Let me
try to, let me try to answer your questions on China.
So look, no, I do think I do think these
controls are absolutely necessary. But let me back up a
little bit just to give you a sense of why
I believe that. I mean, the first rule is do
no harm, right, because our capacity to innovate, we know
(37:19):
it's one of our superpowers, maybe it is the most
important superpower we have as a country, and we do
not want to dull the incentives for renovation, neither here
or anywhere abroad. And we don't want to reduce our
companies access to foreign markets unless we're confident that there
is some national security objective that's implicated without controls. But
(37:40):
here is the reality, and this is why the China
export controls are absolutely necessary. There are a set of
technologies that are they're foundational to economic growth, potential and
national security, AI, quantum semiconductors, biotech, hypersonics. I mean that
list is going to change over time, and those of
us in government need to be humble. We're always going
(38:01):
to be behind the frontiers of the private sector. But
let's just stipulate there is a list of so called
foundational technologies that really really matter. Number two military civil fusion.
In China, it means the CCP doesn't make a distinction
between its commercial and military sectors. And then three is
our private sector. The private sector everywhere in the world,
it does have this overwhelmingly strong incentive to sell cutting
(38:23):
edge technology to an enormous Chinese market. And so that's
the problem is that if we had unfettered diffusion of
our most foundational technological advances that would be tantamount eventually
to giving up the crown jewels of the American economy.
And that's why we're pretty emphatic about not letting that happen.
And export controls are just an acknowledgment of that geopolitical reality.
(38:46):
They're not an attempt to hold China back. But that's
why that you've heard my boss Jake Sullivan, one of
my bosses, talk about the need to be careful and precise,
the metaphor of a high fence around a small yard.
And so what does that mean? I mean here again,
like I can share with you a bit of the thinking,
the framework. I mean. Number one, it's what are the
technologies that are likely to be foundational to US national
(39:09):
security and economic growth potential? So come up with that
list number two of that of those technologies on the list,
where do we have the largest lead and therefore, where
will we most likely see maximal effort by our adversaries
to close the gap if the diffusion of US technology
was uncontrolled, And then conversely, where are we behind and
therefore most vulnerable to foreign controls that might slow or
(39:31):
impede our own technological development? And then three, we do
think really hard about whether and to what extent the
targets of export controls have substitutes for US foundational technology,
either through indigenous development and there's been a lot of
pressive course about what China's doing and lagging edge semiconductors
in this regard, or from third countries. Can they get
the supply from somewhere else? And then four is can
(39:54):
you build a coalition how broad and how deep and
could we plausibly sustain it around any control for foundational technology?
And the fifth part of having a small yard high
fence or a strategic anchor is again stress testing and
simulating if we get into an escalatory tip for tat
of technology controls with our adversaries, how does it play
(40:15):
out in a multiplayer, multi stage contest over time? And
then put a guardwill on ourselves that any imposition of
control it has to surpass some threshold of efficacy compared
to the next best alternative. Is it going to make
us net better off? So this is not like arbitrary
and reflexive placing of controls on really important technologies for
(40:36):
really important markets. We are taking this process very seriously.
I'm trying to give you a bit of a flavor
for that.
Speaker 2 (40:42):
So Joe brought up the sanctions against Russia, and you
were a key architect of those, so I feel we
would be very remiss if we didn't talk about them
a little bit more. But one of the criticisms that
you sometimes see of those is a the efficacy, which
Joe already alluded to, but be this idea of weaponizing
(41:03):
the dollar's special status in the global financial system, the
reserve status. So a lot of what we've been able
to do is because the US dollar is central in
the financial system and there are a lot of flows
that go into dollar assets and things like that. So
as a result, we have seen more concern about potentially
(41:24):
countries like Russia and China maybe moving away from the dollar,
maybe moving into gold or the un or whatever. Is
that something that you are actively concerned about, And then
how do you balance the I guess the power that
the dollar's special status gives the US with maintaining that
(41:46):
special status and not I guess overreaching in terms of weaponization.
Speaker 4 (41:51):
So I'm going to be a little careful about speaking
on the dollar. That's uh, there's some kind of lightning
bolt that will strike me down, because that's really the
preserve of the Treasury secretary to talk about. But I'll
just what I'll do is I'll talk to you about
it in the context of my job. And you're right,
I mean dollar primacy. It's a privilege. Perhaps it's exorbitant
that and it allows us to fund our government, our households,
(42:12):
are businesses much more cheaply than would otherwise be the case.
It allows us to absorb a shock like no other country.
And yeah, with sanctions and other forms of economic statecraft,
that does give us a unique capacity to deliver a shock.
And every time you use sanctions, especially when you do
so forcefully, you do create an incentive for some countries
(42:33):
to hedge against the dollar based financial system. And we've
got to take that very seriously. But look, you also
have to, I think step back and look at the
numbers right now. If you think about the measure of primacy,
is the currency used, how is it used to save
to borrow in the transact? Right now, the dollars global
shares on the order of sixty, sixty and forty percent
(42:54):
on those measures. The rem and be share is somewhere
between zero and two percent, and euro is in a
distant second place. Somewhere around twenty twenty and maybe thirty
five percent on those measures, And so the dollar still
is the operating system of global finance. It has incredibly
powerful network effects. And my view is that displacing the
dollar would essentially require us to commit a series of
(43:17):
unforced errors that you would think of as a failure
from within. And I think that kind of failure would
also have to be coupled with a more credible alternative
to have sustained impact. And that is somewhat hard for
me to see with Europe still challenged by internal divisions,
Japan trying to break out of multi decade stagnation, and
China just obviously moving in the wrong direction in terms
(43:38):
of institutional reforms. But look, I mean, as I mentioned
dollar primacy, it's a network. All networks have tipping points.
Those tipping points are often psychological ones that are really
hard to identify in advance, and we know from the
study of networks. Anybody knows doesn't matter whether you're talking
about biology or technology or finance, or like my daughter's
(44:01):
lunch table at school, they lose value slowly, then very suddenly.
So we're always going to be paranoid about dollar privacy,
will never take it for granted. We'll always try to
build a better product. And so it really depends on
our policy choices what kind of country you want to be.
We need to put to rest questions about whether the
dollar's institutional strengths are going to be sustained across political cycles,
(44:22):
rule of law, transparent regulation, independent judiciary, deep in liquid
capital markets. And the most important from my perspective, is
our story. Our ability to generate trust and to attract
ideas and talent and investment. That's really ours to lose.
Speaker 5 (44:38):
You know, when I look at the big picture and
I get excited about reindustrialization efforts and the new factories
and all seem very cool. But the other thing that
worries me, or one of the things that really worries me,
is that the legacy industrial powerhouses of the United States
seem to really be struggling. And I'm thinking of Going
in particular, and I'm thinking of tell in particular, which
(45:01):
is like, Okay, it's great if we have new things,
but these are like our powerhouses, and they're not doing
well on a raft of measures.
Speaker 3 (45:08):
What's going on there?
Speaker 5 (45:09):
Like people have different Oh is the financial people they
got too focused on financials. They're different stories that people
tell about what happens to legacy domestic industrial capacity. But
I'm curious what you how you sort of think about
identifying the problems that we've seen at some of these companies.
Speaker 4 (45:28):
Well, Joe, I'm not going to speak about a particular company,
but let me try to answer your question more generally,
because I think it's a really good one. Let me
pick like a legacy, legacy sector that really matters for
our national security. And so I don't know if you've
heard about ship to shore cranes or if you know
much about them, but it is what it sounds like.
These are cranes that take a good from a ship
(45:51):
they bring it to shore. It may not sound like it,
but this is a critical piece of legacy, you may
call it legacy legacy, relatively lower tech infrastructure that really matters.
And it has a real vulnerability because the vast majority
of the goods that enter or exit our economy they're
shipped to ports and they're pulled off of ships with cranes.
(46:13):
Here's the digital aspect of it. These cranes have onboard
electronics that allow for remote software updates, and they can
allow a foreign actor to interfere with port operations during
a crisis, maybe even shut it down. Well, China makes
eighty percent of these cranes that are used in the US.
It's priced out the competition with massive subsidies to a
(46:33):
state owned crane producer called ZPMC. So that gives China
tremendous opportunity to collect information on what's coming in or
out of the country, including for goods that supply our military.
So the risk of another Huawei situation, it's non trivial.
And so I'm mentioning this because what to do about it.
(46:54):
It's similar for many other industries that you could reference,
many companies that you could reference. It has to start
with public investment to catalyze, ideally through the private sector,
the rebuilding of our production capacity so on ship to
shore cranes. Last month, this administration announced it was going
to take twenty billion dollars from the bipartisan Infrastructure bill
(47:15):
and start building cranes again because of the national security
threat that it poses. But then the second piece of it,
and it relates to a lot of the questions you've asked,
you need friends to do this the right way. Friends
with expertise in building cranes in this case, and here
Japan is one such friend. I mean the twenty billion
dollars that I referenced, a good part of it is
(47:37):
going to go to a US subsidiary of Mitsui, a
Japanese company, and they're now going to build the first
domestic option for ports on ship to shore cranes in
thirty years. And hopefully we'll give this firm a chance
to scale up and compete with a heavily subsidized Chinese rival.
But to give that a better chance, the President did
propose twenty five percent tariffs on Chinese ship to shore cranes.
(48:00):
And the last bit is the Coastguard is going to
in the meantime it has been given authority to inspect
all cranes for any signs of hackers that are burrowing
into the software violating security protocols. So in any of
these industries, Joe, I mean, this is going to be
a painstaking process. It's going to require years of effort
to do the basically the economic forensics of where do
(48:20):
we have vulnerabilities to what extent is it critical for
our industrial base, does it have a nexus with national security,
and what combination of investments and diplomatic agreements and in
some cases restrictive measures can give us a chance to
compete in a much more contested environment. I mean, this
is not las a fair free market economics. You know,
I came of age in the nineteen nineties and we're
(48:43):
just not in that world anymore. So this is what
industrial policy is going to look like.
Speaker 2 (48:48):
Tilly, I'm going to squeeze in one more question, which
is just going back to that idea of patient capital.
So number one, how serious are those discussions or how
serious is that idea being taken? And then secondly, in
the realms of it building out industrial policy or capacity,
one of the discussion points that you sometimes hear is
(49:09):
whether or not it's more valuable to throw money at
the initial investment, so building the first factory or whatever,
versus the government committing itself in one way or another
to longer term forward purchasing agreements so that there's always
a flow on demand and companies can kind of plan
accordingly and maybe avoid big cycles where demand is like
(49:33):
vacillating up and down very dramatically. How are you thinking
about that?
Speaker 4 (49:38):
Yeah, I don't want to put odds on whether the
kind of work I was describing is going to end
up with a particular final form. Just I'm always wrong,
but let me just try to try to answer your question.
I mean, I think what we're going to do if
we have time and political spaces to continue to identify
sectors that we think are going to be foundational to
(50:01):
economic growth and essential for national security, and where the
private sector on its own likely doesn't have the incentives
to make the investments we need at tas and with
scale to compete. And that really is all about identifying
where they're clear market failures. It could be an infrastructure,
it could be in particular sectors, it could be in
the size and skills of our labor force. But we
(50:23):
do know if we don't, if we don't prioritize growth
in these strategic sectors and make sure that we have
enough investment and we have enough diplomatic partnerships to help
them scale, then we're probably going to have a continued
hollowing out of our industrial base, and we're going to
be vulnerable to shocks all manner of shocks, and we're
probably going to have a political economy that becomes more
(50:44):
and more disillusioned and we'll have a feeling that they've
been left behind, and that leads us to a very
bad place.
Speaker 2 (50:50):
De leep saying Deputy National Security Advisor for International Economics
at the Biden administration, thank you so much for coming
on all thoughts, really appreciating it's fantastic.
Speaker 3 (51:00):
Thank you so much, So great to get to chat
with you.
Speaker 4 (51:03):
But really my pleasure, Joe.
Speaker 2 (51:17):
I thought that was very interesting. It also felt nice
just to talk about supply chains rather than market volatility
for a little bit. I thought you raise a crucial
point in the industrial capacity build out, which is in
some respects the US government is at a disadvantage because
every four years we have the possibility of major political change,
(51:40):
and if we're thinking on longer term time scales, you know,
things like semiconductors take years, if not decades to actually
build out that capacity, it can be difficult to maintain continuity. Obviously,
we're in an election year. We don't know who's going
to be president just yet, but it will be really
(52:00):
interesting to see in twenty twenty five, like how much
of this has continued.
Speaker 5 (52:05):
Yeah, you know, I think to Delete's point, look, we
don't want to be an authoritarian system now, democracy is good,
and as you put it, that's a feature in a bug.
It's annoying because it does make long term planning in
theory more difficult, but it's good because it also provides
a very important check on long term strategic mistakes in theory,
(52:25):
and so that's all good. I think where it's worriesome
specifically is that if you have priorities that shouldn't necessarily
be particularly controversial, such as say I have icebreakers, right,
but if you have a political system that's sort of
like so like polarized and perverted, that everything automatically becomes
(52:50):
in this hyperpartisan lens. You can see then how any
sort of priority becomes very difficult to execute on because
as he said, people will see Zono politically one way
or another, even if in theory it shouldn't be well.
Speaker 2 (53:06):
And also, the thing I was thinking about was something
like Icebreakers was done in coordination with Finland and other countries,
as Deleepe was talking about. But that's an interesting aspect
where supply chains are becoming more of a coordinated thing.
I think that's relatively new, at least in the West.
But how does that continuity risk play out with allies?
(53:32):
Is there a concern that if they commit to a
specific thing, then maybe in four years or in a
year or whatever, the political circumstances will change and US
interest won't be there in the way it was previously.
Speaker 3 (53:45):
I think we just got to build more ships.
Speaker 5 (53:46):
I mean just I'm gonna say an opinion, like, it
does not seem great that we've let our sort of
shipbuilding capacity because it's obviously not just icebreakers. It's been
a long time since we built like aircraft carriers and
dredging and all that stuff.
Speaker 3 (53:59):
You gota bid ships in this country.
Speaker 2 (54:01):
We came so close to making this a nineteen oh
six foreign dredging episode, but we didn't quite get there.
Speaker 3 (54:07):
At one time, the jones didn't come up easier.
Speaker 2 (54:10):
Oh yeah, that's right. Okay, shall we leave it there.
Speaker 3 (54:12):
Let's leave it there.
Speaker 2 (54:13):
This has been another episode of the Authlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 5 (54:19):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carman armand Deesh, I'll
Bennett at Dashbot and kill Brooks at Kilbrooks. Thank you
to our producer Moses on them. For more Oddlogs content,
go to Bloomberg dot com slash odd Lots, where we
have transcripts, a blog, and a newsletter and you can
chat about all of these topics with fellow supply Chain
(54:41):
nerds in our discord Discord dot gg slash odlogs And.
Speaker 2 (54:45):
If you enjoy Oddlots, if you like these supply Chain episodes,
then please leave us a positive review on your favorite
podcast platform. And remember, if you are a Bloomberg subscriber,
you can listen to all of our episodes absolutely ad free.
All you need to do is connect your Bloomberg account
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the Bloomberg channel on Apple Podcasts and follow the instructions there.
(55:08):
Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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