China’s Energy Problem w/ Samo Burja

Hey, Upstream listeners. Today we're releasing a conversation I had in 2024 with my friend Sam Oberia on the geopolitics of China, including military, energy, and economic issues. Though this conversation is from last year, we hope you'll find it relevant to today's world. Please enjoy the episode.

Let's talk about China and their energy strategy. You, you wrote a brief provocatively titled China Isn't Pursuing Energy Independence.

Yes. The normal perspective is that China is going out of its way to secure geopolitically an environment where it can import oil and import natural gas and other resources that they cannot produce domestically. However, it seems to be the case that if China's really concerned about an extreme scenario such as a major war where it is blockaded and the energy supplies that come in from, from the Middle East and to a lesser extent Southeast Asia through the Straits of Malacca, and those are, let's say, interdicted in that situation, You would expect that they would be pursuing about as much energy autarky as possible. There are arguments for this, especially their significant buildup of nuclear power, which can substitute on the margin for natural gas, to a lesser extent oil, together with the, you know, transition to electric vehicles. But there are some things that you just definitely need oil for, and you need natural gas, and you need coal. And everyone knows that China digs up a lot of coal, but what people don't know is that actually China, um, also produces a lot of oil. Just to give some numbers to this, in 2023, China produced roughly 4.2 million barrels per day. Now, that's more oil than Iran, Brazil, or the United Arab Emirates. It's still much lower than US production at 12.9 million barrels or Russian production at 10 million barrels. But I think it's kind of interesting that we don't think of China as one of the greatest oil-producing countries. So it's not just that they're importing foreign oil into their well-developed refineries, they're finding oil in China and pumping it and trying to Produce it there. They also have vast, though technically difficult, difficult to access shale oil deposits. So with some advancements in fracking technology, they could unlock and economically exploit a whole bunch more oil. If China was in fact orienting its geopolitical strategy around energy security, It would be pursuing energy independence. People might remember in the early 2000s, the United States, you know, much discussion was about the Middle East, about how Saudi Arabia is important for US oil imports, how UAE is important, how Kuwait is important. All of that is still true. But the massive increase in energy production in the United States driven by fracking has reduced the geopolitical significance of these imports. It's provided a cheap source of oil that, you know, honestly undercut the profit margins of both, say, Saudi Arabia and Venezuela. In the case of Venezuela, enough to cause trouble for Venezuela and to cause trouble for Iran and to cause, you know, some reduction in incomes. So energy independence in the US was almost achieved by accident. But if the US was seriously worried about some other power blockading its shores, then energy independence would've been just pursued as a matter of national policy. And in China, in theory, they are still quite friendly to mining. They're still quite friendly to industrial development. They care less about environmental regulations than we do. They seem to also care less about global warming than we do. The oil industry doesn't have a negative reputation in China. It's sort of not associated with, you know, foreign policy adventurism or anything like that as it was associated in Western discourse. So presumably it should be a state priority to build up this domestic production. You know, we're producing as much oil as Iran. Actually, we should double it. We should produce as much oil as the United States. And if we lose some money on the margin, that's okay because our economic growth is good. And the worst thing possible for economic growth would be, you know, being stuck in a major war without energy resources. That doesn't seem to be their thinking at all. They seem to still be prioritizing growth. And if there was a major war, even if you had friendly states who you could import oil from, that would just be much worse for your strategic situation and for economic growth than just having it available domestically or having it available right next door. It would mean your entire war effort would be dependent on, I don't know, dominating the Indian Ocean. Because even if you go and you occupy Singapore and you take the Straits of Malacca and all of that, You know, most of the countries in the Middle East are more favorable to the West than they are to China. Like Iran exports some oil to China, right? Since we've mentioned it in such detail. But China doesn't necessarily offer Iran very good prices. In fact, they're not trying to cultivate Iran as their own Saudi Arabia. They're just buying the cheapest oil they can and not caring much that much of the rest of the world has various sanctions in place on Iran. And the Iranians, on the other hand, are desperate to sell oil, so they sell it to China. China's their main buyer, but China has a pretty diversified portfolio. So Iran needs China for high revenue. China doesn't really need Iran economically and doesn't seem to value Iran to an extent where it would develop the country and sort of prepare it as a viable partner. for some sort of grand strategy. So I think that they are still operating on basically economic logic. They are not trying to modify their oil policy to achieve this kind of energy independence that you might think a country preparing for war is. And they're also not trying to really develop an energy bloc. So they're not trying to develop countries that are, say, as rich as Saudi Arabia, And has, let's say, strategically aligned with the U.S. with China, as Saudi Arabia is with the U.S., right? They're not trying to enrich Iran, develop Iran, have it be capable of defending its oil production. That's not on the agenda. They're just willing to buy oil from them. They, at the end of the day, are not even trying particularly hard to enrich Russia. They're just continuing to do business with Russia because they probably understand full well that there are. Deep, you know, deep conflicts of interest with Russia. The sort of Russia plus China versus the West formulation is very much an alliance of convenience at best. They are focusing on modernizing their refineries, but the refineries are mostly refining oil that's imported from the rest of the world. So the overall, the big picture is they're doing. they're trying to modernize their economy in one of the sectors where it's actually not cutting edge, right? China's petrochemical world has sort of been left behind compared to some of these other domains of development.

If you were advising them, what advice would you give? Like, do you think they're making strategic mistakes anywhere, or would you advise strategic edits to their strategy?

I honestly think that they should just prioritize achieving resource independence sooner. I honestly think that this will actually make war less likely since people will not incorrectly assume that you can prevent China from acquiring more resources. It's disputed if one looks at various sources, the total size of China, right? There are people who say that the United States after Russia and Canada is the 3rd largest country. And according to some measures it is, and according to other measures, China is actually the third largest country. Either way, the distinction almost doesn't matter. China is a continent-sized country, and it is the you know the third or fourth largest. So anytime you hear that the United States is uniquely blessed in natural resources, which it is to a great extent, consider that China is likely America's equal at the very least. It has great rivers, it has ample arable land, and it has vast deserts and mountains where no one objects to very intensive mining or resource exploitation. Like the most fundamental barrier in a small country like Japan is that almost all the land where you could mine or hunt for resources is inhabited, and there's not that much land to begin with. It makes much more sense to think about, I don't know, the Germany or Japan of the early 20th century as being fundamentally constrained by resources, right? And engaged in resource wars. They need to find places where oil is available and oil isn't available in their territories. It makes less sense of thinking a country like Russia or America or Canada being resource constrained. The more land you have, The likelier it is that you can find and exploit natural resources. So the United States can likely find anything it needs in its territory in a situation of war. But the same is also true of China. China is not a high population density, medium-sized industrial country dependent on international trade for its resources. It actually could develop most resources domestically. So what I would advise then, if I were put in that position, would be to prioritize supplying as much of the oil as the country possibly can domestically. This would be bad initially for its economic growth, but I think in the long run it would prove to be a better strategy. You can pursue a situation where you overbuild nuclear reactors, you overbuild power, you go for the electric vehicles, but you still will have massive demand for oil just because of agriculture, because of plastics production. Natural gas, of course, remains a very useful energy source. So at the end of the day, for the same reasons they might want to develop energy independence in their power grid, They should be developing their own oil supply. And I think this development would result— it would result in less perception in the Western world that you could just blockade China and starve it of resources. And the reason that's a good perception to defeat is because I think if push came to shove and a war does happen between the West and China, You know, China would just find and exploit these natural resources during the war, and then everyone's stuck in a long war where the initial Western plan of sort of starving China out just doesn't make sense. It doesn't work. So I think it's a it's a folly of a war that we would all want to avoid. We should all try to avoid getting into a situation where we do have to blockade China. Because the blockade's not going to work. Now, it might still result in a Western victory on some timescale, but this would be a really bloody, difficult war where either you accept an armistice at the end of it and the global economy is wrecked and China's lost a lot of economic growth, and the West has sort of, you know, the, the West has broken its teeth trying to bite into China, so a lot of its military invulnerability goes away at great expense. You know, a lot of the high-tech equipment would end up being destroyed, a lot of the weapon systems would be revealed to be ineffective. There would be a massive cost, et cetera. All of that just to have an armistice, or all of that to escalate all the way to a sort of a, this slow grinding total war where you try to break into the Chinese mainland. I mean, I don't think that would be any easier for the United States today than it was for Japan in the 1930s, right? When Japan spent the better part of a decade trying to, you know, conquer this vast country. You know, I think the comparison to World War II is incorrect because I think in that war, the resource constraints on Germany and Japan, who were notable industrial economies, uh, those were very severe. And those greatly aided, uh, the Allies in victory because sort of, you know, if you look at the map of the world, what are the most resource-rich countries today? Almost all of those resource-rich countries were Allied countries. during World War II. You have like Russia, you have Canada, you have the United States, you have Australia. I mean, even Brazil joined in at the last minute. And in, in this sort of situation where you have 2 sides, each with an equally sized industrial base and a perceived but not real resource vulnerability, I think this is a place where strategic miscalculations can happen. Now, the other benefits to China are the following. I think the only way they can drive progress in technologies like fracking and so on is to develop the industry domestically. They're never going to be able to invest in some way into an industry of, say, like, I don't know, like, say, fracking in the US or the Russian oil industry. They're never going to be able to invest in those in such a way as to actually bring down the price of oil. Which is of course good for their economy. You can only just direct the development in favor of the development of your domestic industry, and then your domestic industry can export this better technology around the world. Saudi Arabia was never going to develop fracking. And I think in the US there's little reason to develop something even better than fracking because fracking made the energy balance favorable for the US. And the oil development here, if you wanted to disrupt it with like even better oil extraction technology that reaches this you know difficult to develop oil, like I think that would have to come from China. So this is a kind of you know an argument that economic interest in developing this industry, this resource extraction industry specifically in China because there is an interest. in keeping energy prices low because low energy prices are good for producers, for manufacturing, and they're also good for consumers.

That's a, that's a good and helpful overview.

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Do you think they're not doing it faster, uh, because they see the situation differently, or because political will, or because incentives misaligned? Or, or why do you think they aren't following your, your advice already?

I think they just don't think war is that likely. I think that's maybe my most sort of controversial conclusion after having looked at this. It seemed like a serious country that's not averse to industrial planning would just actually pursue energy independence as a top priority. Like, if you're about to invade a small island and you're about to fight a big naval war off your coast, I don't think you should expect your oil tankers to be safe. So even if you're not going to pump this oil yourself, where are the pipelines to Russia? Why aren't you prioritizing that? Why aren't you starting 5 pipeline projects? The Russians would be very happy to do so. The Russians would be very happy to sell you oil. They're kind of, you know, desperate. to sell anything they can to China to, you know, sustain their own economy. And they certainly see no problem with China's long-term energy dependence on Russia. Now, of course, those pipelines would come at a slightly higher cost, but this isn't even the kind of large investment I was proposing they should do to develop their deeper shale oil reserves. This is a much more modest approach where you're just sort of saying, hey, okay, You know, we don't fully trust Iran. It's too far away. Afghanistan is in the way. You know, there's no way really to connect up with them. But there's a very easy way to connect with Russia, right? Siberia is right there. And the North Sea territories where Russia gets most of its oil and natural gas, well, those aren't that far away either. I'm sure the Russians would accept development of these new pipelines. So I think the reason is they don't think the war is that likely. I think they are building up a military capable of taking Taiwan, but they're not building up a military that will take Taiwan because I think they are not— they don't want— it would be already such a critical disaster economically for China for manufacturing goods to no longer flow out of China. That would already be such a big shock to their economy. that they're trying to, I think, avoid it for that reason. I think they view their mission genuinely to be a high-income country like the Western world. They're not yet a high-income country, not properly. They have lots of parts that are developed, but for now, international trade is still a big part of what's allowing them to become richer, allowing them to become more powerful. In our mind, when we see the GDP of China has sort of matched US GDP according to some measures, when we see all of this production, we think, oh, they're sort of done developing. Their perspective is, no, we have to grab every advantage we can to reach the same level of development as the West, not in the size of the total economy, but per capita. Per capita, they want to at least be a South Korea, let's say, or ideally maybe like a European country. Let alone something like the United States. And I think they consider this their overwhelming strategic priority. And as a side effect, I think they're overwhelmingly trying to avoid war, which actually leads me to the second part. I think brinksmanship with China happens from the West, and there are 2 versions of it. One version is where we are sort of incorrect and we think we can win a resource war with China. Which honestly, I'm going to critique Peter Zeihan here for promoting this view in the public. I think he should know better. Like, for example, incorrect, incorrect claims about Chinese agriculture, but more fundamentally, an incorrect claim about a fundamental rather than incidental Chinese energy dependence on imports, right? Like the point of the imports of energy is that they're cheap. China actually can develop energy in these deeper rocks, as I described, and they could much more thoroughly survey the vast desert territories that they control, which honestly are for the most part not surveyed. China's western provinces are sort of really underdeveloped. Imagine, you know, the geography of Kazakhstan with the GDP per capita of India, but without like a long history of like, you know, the Soviet Union actually invested a lot Into surveying places like Kazakhstan, China has invested much less into surveying some of these regions, right? Because this is remote; it's inland; it's away from the global shipping lanes. China is so big that if you ship something from, let's say, the Xinjiang, Xinjiang. So if you ship it from where you know the Uyghur people live, and you ship it all the way to Beijing, that's actually more expensive. Than putting it on a boat and shipping it from Australia. The ocean is great for transporting goods. And these inland territories are far away from the river system that could be seen as a secondary backbone of the Chinese economy. The Yellow River, and even more importantly, the Yangtze River is sort of the backbone of Chinese economic development on the macro scale. And it sort of remains, you know, a slow method of bringing resources from inland China, an affordable method though, for bringing resources from inland China to the coastal industrial centers. So the Western strategy I referred to previously of basically having either brinksmanship where we're sort of inching close to China and we're like, you know, you give us these economic concessions, Or you're risking war, and we're counting on the economic. If you think about it economically, economic concessions to the West are cheaper for Chinese development than war. So China will just keep choosing those to some extent. So that's I think a rational strategy, and it does result in a lot of this, you know, a lot of this relatively China hawk. a lot, many of the China hawk perspectives that you see. But then there's the irrational one, which I also referred to earlier, which has this popular Zaihan variant and the less popular sort of neoconservative version where basically the view is we can win this. And I sort of view it's, it's not that the West would lose. I do think the industrial basis of East Asia plus America plus Europe is about equal to that of China— but note, I'm already saying the base of the entire Western alliance is about equal to China— I think it's very hard to have a winner. And yes, the US is unlikely to lose control of the world's oceans, but it will be unable to assert naval dominance of the South China Sea or any of those areas. And in fact, the manufacturing base in a country like South Korea, And in a country like Taiwan, perhaps if we're very pessimistic, even a country like Japan, all of those are actually deeply dependent on resource imports. How many container ships coming into South Korea or out of South Korea could be sunk by just Chinese rockets fired from the mainland? Let alone if North Korea were to join a war, how happy would North Korea be to fight another Korean War with full Chinese backing. Now, maybe they wouldn't be glad for it, but I think it's far from certain that that's a war that's lost. Let's remember, the First Korean War was the United States at the peak of its relative global power. I think something— when, when World War II ended, something like 47% of, uh, world GDP or something absurd like that was the United States. And at that point in the 1950s, it did take Chinese and to a lesser extent Soviet aid to sort of prevent North Korea completely collapsing. But eventually it was kind of fought to a standstill, and that's where the demarcation line is today. The balance of power in China's backyard would be in favor of China plus North Korea almost no matter what you do. At the very least, South Korea gets occupied. And then already the West loses like an important crown jewel of the industrial complex that we have, right? And, you know, Taiwan maybe is ironically in a serious global war even a little bit safer because amphibious warfare is super hard. But in South Korea, there's no amphibious warfare that's needed, right? I do think Japan is, you know, all else less vulnerable than people might assume. And then there is, of course, the threat of nuclear weapons. These scenarios have been undergamed because to a great extent, until recently, I think the assumption has been that the risk of a nuclear confrontation is too big, right? But what we see in Ukraine and today in this war And this Russian invasion is that the West can go pretty close to being at war with a nuclear power, and it doesn't result in a full nuclear escalation. Now, maybe we've been lucky. I'm on record, and I still believe that it is relatively reckless, the extent to which we have been pursuing this policy. I think that we should have been trying much harder to avoid this war. I think that I think that honestly the— but the fact is that a major industrial war is being fought in Europe where once again it matters how much you produce. It doesn't matter how much you stockpiled so that you can fight an industrial war without it becoming nuclear. I think this is a new piece of information. I don't think we had any wars like this during the Cold War. Even the Korean War I mentioned wasn't really an industrial war. Properly. It was almost like a manpower war or a military material war. There was no, you know, the mass production in China for their own equipment was still very limited at the time, and the equipment wasn't very high-tech. And, you know, the Soviets only sent token forces. So I think the Ukraine war shows that you can have a war where manufacturing capacity comes to matter, and it doesn't yet go nuclear. Without that missing piece, you might just look at current weapons stockpiles, current weapons systems. My view is as soon as you enter, as soon as you exit this war where you expect it to resolve in 6 months or in 2 years, and you enter the war where who has the manufacturing capacity matters, any technological edge that is built before the war will rapidly be obsoleted. Because you will have a rapid development cycle. I don't think we've had industrial war in a very, very long time. In Ukraine, you see a rapid development of weapons. And in any sort of US versus China war, I think the amount of weapons innovation on both sides would be tremendous. I think we'd undergo like 5 or 6 revolutions in the technology of warfare over the course of, let's say, 4 or 5 years of such a war not going nuclear. And I think that just means it's impossible to prepare for that kind of war in, in a way to win it. You can prepare for more limited conflicts. The only way to sort of prepare is to build this massive industrial base and to secure a resource base. And to some extent, let's say maybe the United States understands the value of reshoring as a national security priority. But there's been nothing like the kind of serious push that would require to truly, you know, build up the US so that it radically outproduces China once more. I think, you know, Erik, that's the real, you know, that's the real, you know, bull in the china shop or the elephant in the room, right? It'll upset everyone if you make this argument. But I think the real argument is the United States should radically, if it wants to be able to fight and win a war against China, It cannot outarm China. It cannot assemble a constellation of allies to beat China. It actually needs to radically outproduce China. Like, what would that mean? That would mean the United States, in the United States, manufacturing about 3 or 2 times the amount of stuff that China manufactures. And if you imagine that world, that's like such a different world. That's such a different economy. There are, of course, reasons for wanting such an economy anyway. Right? Abundance, etc. But I don't, I don't see any serious proposals on the table to do that. And like I said, because of the rapid evolution of technology and paradigms of warfare that you see during an industrial war, we can't just buy the fanciest toys the Pentagon wants. We can't just imagine the future war. You, you have to test it. War is computation with tanks. If you already know how the war is going to play out, usually you don't have fight it. And there's a very serious way in which the paradigm shifts that happen in war are completely unpredictable. So the US should be strategically focusing on a much, much bigger industrial base. The industrial base cannot just be defense-oriented because it would be impossible to pay for that. And, you know, it should try to crush China through ruthless economic competition by just outgrowing China. So that, that sort of, that sort of is the macro strategy. And I think the Chinese bet is the US is incapable of that. I think the Chinese bet is, you know, you have to grow your economy 3x or 2x to really be able to beat us. All we need to beat you in our own backyard is to catch up to you and just copy the high-tech economy you've already built. And they're like 80 to 90% of the way there, right? We're talking about just the last mile. sort of, you know, high-end CPUs, let's say, right? Like high-end CPUs, machine tools, jet engines. These are really like just the finishing steps that they're missing.

Right.

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And so when you say that China isn't expecting a war or preparing for war, does that mean that they are not planning to invade, or does that mean that they are planning to invade but they just don't really expect much pushback in the form of war?

I think they're perhaps expecting that a military intervention or demonstration is needed, like that they might They might interdict shipping to Taiwan, or they might have a dispute over Kinmen Island, for example, or they might have a dispute over the sort of, you know, coastal waters, right? You know, the, the claims in the South China Sea are an example. They might just claim more territory around China, naval territory. And this is short of a full invasion. And I think that they are building up a capacity for that kind of intervention, and they're building up for a military that, you know, in theory could be deployed to a naval invasion of Taiwan. But I think no concrete preparations have been made to invade Taiwan in the next year, 2, or 3, because if they were, they would at the very least massively increase their reserves. Even if they didn't take the step of like, you know, You know, Eric, like we can drive electric cars, but like you know airplanes, tanks, and ships—they still need oil unless the ship is nuclear powered. So so really, the oil thing I think is like kind of like a almost a I feel like it's it's it clinches the argument. I just don't think they're preparing for full-scale invasion of Taiwan in the next three years. I think they're preparing to build a big scary military so that. Taiwan doesn't want to declare independence, and they might be preparing for smaller— you know, Kinmen Island is this small island much closer to the coast of China that belongs to Taiwan. They might be preparing for smaller operations like that. Now, just, just to say a little bit, you know, we, we could talk more about the raw resource base that China has available, since I, I think people might be skeptical of this. Look, the reason we don't think of China as a major oil-producing country is because it never makes the list of top oil exporters. It produces so much oil, it exports almost none of it. It imports also a lot of oil. And I think because of this, people don't know much about the development of their energy capacities. Like they don't know that China also has a state-owned energy enterprise. Sinopec is a great example. And you have these Gazprom-equivalent companies in China that can develop these oil fields if needed. For example, if I look up my own notes here, shale production, right? The shale production aspect. is very notable, where across 5 major shale basins, the US Energy Information Agency estimated in 2015 that China has 32 billion barrels of oil that is recoverable with current technology. Do you know which other countries have more reserve recoverable oil reserves? There are just 2, Russia and the US. It's not even Saudi Arabia, right? This is just more than Saudi Arabia. for stuff that's technically recoverable. Now, technically recoverable doesn't mean it's economic to do it, doesn't mean it's cost-effective. But if you're in a situation of a big war or if your population is starving, you're going to go out of your way to recover that oil, even without technological advancements. So accounting for the maximal potential of the oil in place, The figure increases to like really absurd numbers, speculative numbers, right? Like 643 billion barrels. And that would actually require technology we don't have. 643 billion barrels. Apologies, I misspoke there. Anyway, I think the raw intuition people should have is that for a large country that has huge underpopulated areas, If there is a reason to find a resource, usually somewhere that resource can be found. Even for stuff like oil is, I think, kind of the rarest. And even for oil, that's just there. So it's not true that Britain could find all the oil in its territory it needs. It probably is true Canada could. It probably is true that the US could, that Brazil could, that Russia could, that China could, maybe even India at their current low level of consumption. Though in India, it's complicated because there's no vast areas that are underpopulated. And, you know, no one wants to move or abandon their town or village for there to be a major— for, you know, a major mining operation. No one likes to live near mines. No one likes to live near oil fields. There's always a lot of local resistance to the development of resources.

Say more about Taiwan for a second. Is it so strategic to China that it just feels inevitable? Or I guess you're saying China doesn't expect a war soon, but does a conflict just seem absolutely inevitable? Or how do you think about this?

I think for China, Taiwan being a part of China's non-negotiable. It's non-negotiable. And I actually think that if Taiwan declares independence, they would at the very least declare it illegal, and they would immediately lay claim to the territory. But I note that there are parts of the world where such conflicts do not immediately spiral into a war, of course restrained by external circumstances. I believe Serbia still does not recognize Kosovo's independence. And that, you know, Kosovo is of course recognized as independent by about half of the countries around the world. I think if Taiwan declares independence formally, I think China would put a lot of economic pressure on many countries around the world to— if you want to trade with China, you have to not recognize Taiwan. And I think their economic weight is so much larger than Taiwan That they could, they might pursue actual economic warfare against the island long before they pursue a straightforward military intervention or a military intervention that's beyond a measured step. Like again, I think if Taiwan declares independence, I bet China invades Kinmen Island to show they're serious. They start putting this economic and political pressure on their trade partners around the world where they actually care more about keeping Taiwan than they care about. You know, Chinese economic growth. So they're willing to sacrifice some good trade deals around the world with various non-aligned countries or even with Western countries if it means the Taiwan situation's in their favor. They amp up the pressure, they issue an ultimatum of some kind to the island, but I don't think they necessarily immediately invade. I think the situation could be compared then to a rolling war where Taiwanese government declares independence, The Chinese invade Kinmen Island. There's perhaps an attempt at a naval blockade, probably not even that. There's a lot of economic pressure, politicking. A demand, an ultimatum is issued by Beijing. Taiwan rejects the ultimatum, and then there's a kind of frozen conflict waiting for a big military and industrial buildup. And then maybe a few years later, China invades, because the analogy here could be made to Ukraine. Crimea was seized by Russia in 2014. It was almost 8 years of political, economic, and other kinds of maneuvering before the, the much more serious invasion of Ukraine was carried out. So I think that it's not inevitable that there is a conflict between China and Taiwan. I think that the Chinese view of this is that every single year going forward, no matter what anyone does, but every single year going forward, Taiwan will be more economically dependent on China than it was the year before. Growth will get harder, it'll get slower, More Taiwanese businesses will have and own property and manufacturing on the mainland. Again, I think we've discussed this in some previous episodes. Most of the people, most of the wealthy in Taiwan have significant assets in mainland China. They would just get seized. So now you remember when people are talking about sanctions versus Russia? China would issue sanctions versus Taiwan. Overnight, a bunch of Taiwanese billionaires would no longer be billionaires. Overnight, a bunch of Taiwanese businesses would lose their key manufacturing facilities. This might actually be enough to trigger a government failure, right? It might trigger snap elections or something like this, right? Like the governing coalition that declared independence might just lose an election after a few years of tension and low economic you know, low economic output, and then some sort of agreement is made with China to, you know, walk it back. Like you say, oh, we were independent, but with this new treaty, we're announcing a union of equals between China and Taiwan. And that's how the Taiwanese side could save face over a declaration of independence pursued by a previous government. There are lots of political solutions to this. But I think that, you know, for Taiwan to truly want it to stay independent, it's a difficult problem to solve. Where are you going to find a trade partner that could be as important as China? And if you're not, are you really going to sacrifice being a rich country in order to be an independent country? There are few countries in the world that I think actually are willing to take this trade. You could argue and joke, that North Korea has shown extreme dedication to being politically independent from the outside, having to set up a full totalitarian government, has to accept basically a deep level of poverty, totally disintegrated from the global economy, but they can achieve it. And Iran is also, in a way, it's paying the price of being a regime hostile to the Western world. But I do think a Taiwan that really is in an economic, political, existential struggle with China short of war, I think it would look much more like— I think it would look much more like Iran or something. I think it would have very middling economic performance. I don't think the West would give it special favors. I mean, some, but not enough, right? Like, Japan and South Korea are facing their own aging populations and reduced productivity. They're not going to be able to offer something to Taiwan that could balance what China is offering just purely in terms of economic growth in peacetime. And if they did, China, because Taiwan is politically all-important to them and non-negotiable, China might in that case extend its sanctions to South Korea and Japan, which would start to hurt the Chinese economy, but it would be devastating for South Korea and Japan's economy. Like absolutely devastating. Like the last major semiconductor manufacturer in Japan is like an export-oriented one. Like it's an export-oriented company. And this isn't unique, right? A lot of the big companies in South Korea, in Japan, they rely on being a part of China's industrial supply chain as much as they rely on the United States. It's not that they're paired up with the United States politically and that economically the US can keep South Korea and Japan just as rich. It's they have to be engaged economically with both the United States, the Western world, and China to be as rich as they are under present conditions. And otherwise, it'll just be economically disastrous. You know, the Japanese company I was referring to is Tokyo Electron, which maybe we should dive— we could dive into in a future episode. But still, I think people are drawn to the aspect of war And are missing this whole area of like a hybrid war where China is big enough it can just sanction countries. And it's never done this because it's always prioritized growth. Taiwan is the one thing that could cause China to sanction a country, right? Taiwan is one of the things that's politically more important to China than an extra half a point of GDP growth, because that could undermine the political stability. of the Chinese Communist Party, its legitimacy, right? Currently, they're focusing on growth so strongly because domestically they still need growth to maintain legitimacy. But if they lost Taiwan, they're suddenly open to all of the Chinese nationalists. And, you know, there are many, there are many hundreds of millions of Chinese nationalists, not super committed, but politically, you know, at least as committed as American Democrats or Republicans or whatever, right? And it's not a voting system. But they deeply care about the popularity or unpopularity of the CCP, right? They track polls closely because they're afraid of a low popularity environment where there's an incentive by parts of the Communist Party or parts of the government to defect and basically call for elections, forming new political parties. In other words, they're worried about a fall of their own power And a change in the regime comparable to the late Soviet Union and late communist regimes in Eastern Europe. So to them, you know, I bet Taiwan's worth a point of economic growth a year. Now, maybe it's smart from the West if we were economically dynamic, and especially for the United States, if you— the US embarked on an ambitious program of reindustrialization. simultaneously force the Taiwan issue, like tell Taiwan, hey, we're going to bail you out. We don't really care if this hurts South Korea or Japan. South Korea and Japan are too big really for the US to bail them out. But let's say the US promises Taiwan to bail them out while it's building up massive domestic industry. In that situation, you kind of force China to start sanctioning everyone, but you're ready to do trade with them and do business with them. And that's kind, that's the kind of conflict that you could win, but it would be, it would be a deeply economic, deeply sort of economic conflict. It would be like a very long-term strategy. It would be 10 or 20-year strategy. And then you can maybe break the back of the Chinese economy because once the Chinese economy deindustrializes, it will never industrialize again. They are just too old. So I think they're thinking, every point of growth we can squeeze out of this, we'll be able to maintain. There are reasons to believe that they're right. It's not that their economy is going to implode because they're too old. It's that it'll stop growing because they're too old. Look at Japan. It's still a rich country, but it's not a very innovative country. And for all the innovation that it does do, growth remains sluggish. So Japan can stay rich, But if Japan, for some disastrous reason, stopped being rich, it just couldn't rebuild, Erik. This isn't the 1950s or '60s. Neither Germany nor Japan have much ability to rebuild an economy smashed in war or an economy industrially outcompeted by a foreign power. And China, it will be much the same in 20 or 30 years. So I think that there's an interesting case to be made that actually the US should let China become as rich as it is and then start brinksmanship, because the threat then isn't, oh, we're going to conquer mainland China. That would be impossible. The threat is you're old now and you don't have much capacity. So if we make the world's economy unfavorable to you, you're never going to be able to rebuild it. And I think that there's a political sort of sunk cost We call it individually, in individual decision-making, a sunk cost fallacy. But I think in politics, it's much more devastating to lose 20% of your GDP than to forego 20% of GDP growth. Right? Like in Iran, I don't think people are really going to go to the streets and overthrow the government if they learn that a policy choice means that in 10 years, their GDP is going to be 20% lower, than it could have been. But if you tell them that it's going to be 20% lower than it is right now, okay, that might actually cause that, especially if it actually happened, right?

We're a bit over time, so I want to be mindful. So maybe just last point, do you think— or last question— do you think a bipolar world is unsustainable, and thus there will have to be sort of one of the countries, US or China, either rises, you know, crumbles, or rises up, or, or there's just head-to-head But is the, is the current situation untenable?

I think that in the long run, when China builds up its strategic weapons reserves, right, when it basically builds up ICBMs and nuclear weapons to the same number that, say, Russia and the United States have today, I think that is a dangerous world where the risk of a full-on nuclear war becomes a very big deal once more. And it actually becomes more complicated because you'll probably have 3 powers that each has an arsenal sufficient to cripple and completely destroy the other, like a 3-way mad situation between one declining country and 2, let's say, rising or at least stable countries. Those would be the US and China, and Russia would be the declining one. I think that's unsustainable in that way. That has to be resolved because even if it's a low risk every single year, over 60 years or 80 years, that's, let's say, left in the 21st century, That compounds in a very scary way. I think economically and technologically, it might actually be one of the richest worlds we could live in. You know, if the US does rise to the challenge of trying to out-innovate China, I think it could, you know, carry out a full extra industrial revolution, right? It's sort of like, okay, well, you know, you got the old generation chip fabs. Fine. We will pursue and invest in novel chip fab technology that makes the stuff that TSMC, ASML, and the new Chinese corporation are using completely obsolete and makes cheap fabs, chip fabs much cheaper, et cetera. Like you might have situations like, oh, okay. You produce extremely cheap electric cars. We're going to make it a priority to build, you know, create our own special economic zones, right? The US has not even tried. the bare minimum of producing intentional areas in the US to rebuild an industrial base. You cannot disperse it over 50 states. I know this makes congressmen very unhappy, but you have to concentrate it. So whether you like it or not, like one state in the US, one big state in the US is probably going to have the bulk of the benefit of any federal policy to like unlock that production. Anyway, the world of 2 great powers competing on technology and economics is a good one. The world of 2 great powers competing militarily is a tragic one. And, you know, the, the world where they are risking an existential conflict is an unsurvivable one. So the, the big question is, how can we keep it in this box of strategic competition and not get too many points of risking nuclear extinction and have as few wars as possible that are as bloody and terrible as the Ukraine war, right? Because I think, I think industrial war, even without nuclear weapons, it's just awful. It's just absolutely awful, right? Like, people think of World War III being nuclear extinction, but hey, if we have 5 regional conflicts Where every regional conflict, as many people die as died on the Western Front in World War I. That's, that's very bad. That's worth avoiding for its own sake. Yeah. Thank you, Erik.

Upstream with Erik Torenberg is a show from Turpentine, the podcast network behind Moment of Zen and Cognitive Revolution. If you liked the episode, please leave a review in the Apple Store. Hey everyone, Erik here. At Turpentine, we're building the first media outlet for tech people by tech people. We're the network behind the show you're listening to right now. We have a slate of hit shows across a range of topics and industries, from our AI and investing cluster of podcasts to shows that drive the conversation in tech with the most interesting thinkers, founders, investors, and influencers. influencers, like Econ 102 with Noah Smith. We're launching new shows every week, and we're looking for industry-leading sponsors. If you think that might be you and your company, email me at erik@turpentine.co. That's E-R-I-K at turpentine.co, and let's partner together.