Why China's manufacturing economy is dominating — Arthur Kroeber

**Dwarkesh Patel** (0:00)
Today, I'm interviewing Arthur Kroeber, who is the founder of Gavekal Dragonomics, which is a research consultancy focused on China and author of China's Economy, What Everybody Needs to Know. A friend while I was in China recommended it to me, and it's been the most valuable and useful resource that you can get today on how China works. So Arthur, thanks for coming on the podcast and taking the time to chat with me.

**Arthur Kroeber** (0:24)
It's great to be here, thanks.

**Dwarkesh Patel** (0:25)
First question, what really is the problem if China becomes as wealthy, or if its economy grows as big as America's, or grows even bigger? I know maybe it's not your perspective to be a China hawk, but I've never really understood why this is a problem in the first place.

**Arthur Kroeber** (0:39)
Yeah, it's a very good question. It's a very good question. There's a lot of criticism of China from the standpoint of, okay, you're trying to get rich, that's fine, okay. But you're basically trying to get rich on the backs of everyone else in the world by running this gigantic manufacturing export machine, where it seems like the Chinese ambition is to produce all the manufactured goods in the world for everyone, run an enormous trade surplus, which means that they are depending on other people's buying power to support them, and that this is basically not fair, not sustainable, not a stable way to participate in the global economy. So that's more of a question not of if China does get rich, but how does it get rich? Does it get rich by essentially operating on the same rules as everyone else and having a market that other people can participate in, or does it grow rich by essentially making it impossible for anyone else in the world to have the kind of production structure that they want to have and relying entirely on these ever-growing trade surpluses? In general, in principle, from a welfare standpoint, it would be great if China got to be as rich as everywhere else in the world, even as rich as America. But that is likely to have some pretty difficult and destabilizing political consequences because of the vast differences between the Chinese political system and the US political system and the political systems of all the other major industrialized countries.

**Dwarkesh Patel** (2:15)
I mean, the trade surplus point, to the extent that it is made possible by the government involvement in industry, which is actually not even clear to me that that's the case. I mean, just like if you have high savings and not enough investment domestically, just like the counting identities are just that you will have a trade surplus. Right. But suppose that's even the case. On paper, it just seems like what is happening, the Chinese taxpayer, the Chinese saver is like subsidizing foreign importers. So on paper, it just seems like we're getting a good deal. I'm sure some people are upset about this, specifically people who manufacture outside of China. But it's certainly not like something obviously insidious. Right. So it seems like if it wasn't for this, there'd be some other reason that China can't grow as wealthy as us. I am playing a little bit devil's advocate here, but I don't really understand why this is such a big issue, that there needs to be a great power competition about it.

**Arthur Kroeber** (3:12)
I think there are a couple of things beneath that. One is the systemic difference politically is really important, right? So the US self-identity is of the leader of democracies around the world, and we are very invested, at least for now, in our democratic system. We'll see how that evolves over the next two or three years. There's some question marks around that. But historically, that's been a really huge part of the US identity. And basically, the morality play of World War II and the Cold War, which has really been the crucible in which US foreign policy has been formed, is that you had an alliance of democracies that fought back, first against fascism, then against communism. They won. And the result was that you created a world where, you know, most major countries were democratic. They operated on market economic systems, and we were heading towards sort of a world of convergence of systems, where everyone is essentially playing by the same rules. And China really gets in the way of that narrative, because it is an incredibly successful authoritarian system, where the ruling party still calls itself communist. US elites have never, to this day, really gotten comfortable with the idea that the Chinese political system is legitimate, right? And as long as you have that kind of underlying problem, I think it's going to be very difficult to erase these difficulties. And then, on the economic side, I think it is a problem, the way that China has chosen to organize its economy. Yeah, in a strictly financial sense, if you will, the rest of the world comes out ahead, in the sense that China is willing to subsidize a lot of low-cost production, so the rest of the world gets a lot of cheap goods, and the overall welfare of the world improves a lot. I think that's clearly true. But I think if you look at what has happened to the US politically over the last 20 years, there are a lot of flies in that ointment, and the fly is that it is important for large countries to be able to maintain a diversified production structure and maintain social cohesion.