Making shoes isn’t the right strategy

Danny Crichton:

Josh, thanks so much for joining us.

Josh Zoffer:

Really happy to be here. Thanks for having me, guys.

Danny Crichton:

So Josh, you had an op-ed about a week and a half ago in The Economist called The global trading system needs new rules, not tariffs. And ironically, I think this came out literally days before President Trump's announcement, or roughly coterminous with it. And all of a sudden you have the complete opposite of what your recommendation was, which is lots of tariffs, not a lot of rules. I'm curious. All of this chaos over the last couple of days, we've witnessed over the weekend the crashing of the markets, huge shifts in trade, massive complaints from China, Japan, Korea, exporting countries all over the world. What's your prognosis of the situation as we speak Monday afternoon?

Josh Zoffer:

In short, not good. I think the market reaction has born out Wally's and my take that indiscriminate tariffs is not the right answer. If you can glean anything from the stock market performance it's that this is probably not a great idea. But to take a step back, I think part of what we wanted to say is there is, in theory, this set of rules that is supposed to govern when countries use tariffs, when they impose various trade remedies and tools to alleviate some of the imbalances that I think that the Trump administration since 2016, 2017 has rightly pointed to as things that are not good.

The fact that China is not, in many ways, playing by the global trading rules. And then those rules are designed to do something. I think the issue is that those rules, as we say in the op-ed, haven't really done much to stop those imbalances from forming, to prevent the kind of large-scale subsidies and unfair behavior that we've seen not just from China but from a whole bunch of countries.

And then as the United States in various administrations, Trump's first administration, the Biden administration, and now again on an even more extreme level, Trump's second administration, have used tools like subsidies and tariffs in response. The WTO, the system that is supposed to regulate all this stuff has nothing to say about it. Is clearly not performing any role in either preventing problems from arising or in alleviating very extreme responses.

And so what we have as a result of that, the breakdown of that rules-based system is what you're seeing today, which is the Trump administration taking very extreme actions. Actions that have totally disrupted the system and I think have, in many ways, shown why a better alternative would not be to go back to what we were doing before but to say, "All right, we need something. This is clearly not the answer." And I think that something has to look like a rethink of the rules so that everybody is playing from the same rule book.

Danny Crichton:

Given that these are just rules that we set up, one thing. I'm thinking about my time at the UN. Secretary Blinken came during the invasion of Ukraine and was saying, "It's not about might makes right. It's right rules make right. Rights make right." Very similar to the opposite of the Thucydides quote that you cite in the piece, "The strong do what they can but the weak suffer what they must." That is the whole basis of the rules-based international order, is that we use these rules to bind ourselves.

The problem is that it only works as long as the countries that are the most powerful agree to do that self-binding. One thought might be that, okay, is it the WTO that's the problem or is it that the countries who have to agree to the set of rules that the WTO might enforce just don't want to agree to them anymore? And if that's the case, how would a new set of rules address that fundamental political problem?

Josh Zoffer:

Yeah. And I will say I think a place where the Biden administration and I certainly differ from the Trump administration's tactics is I think having a preference for working with allies and partners and believing that, even if it's not what would be the best thing for you in any individual moment, that a set of rules that are well thought through and that are followed is, in the long run, going to be better for everyone. And so you're right that one of the things we're seeing is, coming from the United States, a disregard for rules entirely.

And again I would say the track record so far does not appear to be very good as to whether that is the right strategy to pursue. But you're right that it is a challenge. We've got to reinvigorate the desire among various countries to follow those types of rules. I think one of the things that I feel the proudest about from my time in the Biden administration is that President Biden spent a huge amount of time trying to reinvigorate the Transatlantic Alliance and work with our allies and partners.

If you look at, for example, the sanctions regime against Russia, which I spent a lot of time on when I was in the Treasury Department, I think one of the things that gave it teeth was that it was not done just by the United States but in concert with a wide swath of allies representing, give or take, 50% of global GDP. The European Union, Japan. The whole G7 as well as Australia. And so I think my view would be there is some real work to be done to remind everyone of why rules matter and why they're helpful. But again, I kind of think we're seeing in real time why everybody doing the go it alone and the strong do what they can and the weak suffer what they must is not a great outcome.

Danny Crichton:

What's striking to me from the first Trump administration to the second one that we're seeing right now is, in the first Trump administration, it was really focused on China. There are exceptions to this. There was the coal and steel tariffs that were applied more broadly as protected industries that have a lot of political salience for Trump and I think American politics in general. But what's striking about the tariffs announced this past week is how broad they are. So to your point about the partnerships and the allies, Europe was castigated, I would say, in the first Trump administration, but they were not an active target.

And I don't know what has radicalized. I don't know if it's the Ukraine War, I don't know if there's other influences that are going on under here, but it is striking how much the focus has turned on everyone as opposed to, really the principle focus here was China. And when you look at the trade deficit, as we're literally recording this, and we're, again, recording this Monday afternoon. Trump just announced retaliatory tariffs in the last couple of minutes of an additional 50% by Wednesday if China does not pull its 34% tariff on us. So we are now in a spiraling game theoretic kind of arms race, if you will, on tariffs.

But to me, why do you think the focus has shifted off of China? Because one of the things that I think was interesting from the first Trump administration is Trump really pioneered a bipartisan strategy on trade that, in most cases the tariffs were held on in the Biden administration, in fact built upon. You saw this with FIRRMA and CFIUS formerly. All of these different mechanisms that were pioneered with Trump one held together. And so why not just continuing down a path in which there's a lot of bipartisan support? Clearly it's the largest trade deficit. $1 trillion last year, in 2024. That, to me, has been the most shocking thing.

Josh Zoffer:

I couldn't agree more. I don't really have a good justification of, why go after the Europeans? They are our stalwart, our best allies. They have worked closely with us, arm-in-arm on every issue, from trade with China to the war in Ukraine. That piece, it's really hard for me to wrap my head around. And I think in the long run I suspect, as a country, we will come to regret the amount of vituperative opposition that we've seen early in this administration to Europe. When it comes to China, look... and I hard not to give the first Trump administration a bit of credit here for catalyzing everybody to think a little bit differently about the way the global economy had been running.

And to me, the two things, if I take a step back and say... when Trump said, "We don't want to do this free trade stuff. I want to put tariffs back on the table." And we really thought about what's working, what's not. I think the two things that I take away from that: one is, to some extent, manufacturing and the ability to make things really does matter. There are a certain set of things, whether they're critical to the defense industrial base, things like semiconductors for example, that it's actually important, from a national security perspective, to be able to make domestically, or at least to rely on your partners and allies. This is the friend-shoring theory that we've got this group that we feel comfortable we can buy stuff from.

It doesn't mean we should try to make everything. I find it a little bit confusing when I hear things like, "We should want to make iPhones or make shoes." That doesn't feel like the right strategy to me. So that's one, is there is some amount of stuff that you want to be able to make. And ideally you want to be producing in manufacturing the highest technology, most advanced, most valuable stuff. That's really where you get the most from controlling the manufacturing base, as well as national security.

Second piece of this is that the trading system had not done a great job preventing unfair practices. There are cases where a trade imbalance develops because there is meaningful comparative advantage and the system is working the way it should. There are also cases where trade deficits develop because one country has cheaper labor. Fine. We can't control. We can't make everyone pay American wages. But cases where the lower cost of labor results from lower labor standards, worse conditions. That's not really fair and that's not something we should want to reward in the way that we trade with other countries.

Another is looser environmental standards, so the carbon intensity of the goods that we produce. This is true of steel, for example. That of steel made in the United States or in Europe is much lower than steel that comes from China. And that's a major externality. It matters for the climate, it matters for public health that if the trading system is rewarding lower environmental standards abroad, that's not a great outcome.

And I think saying, "We should use tools like tariffs to correct some of these imbalances and make sure that we've got laws that say, "Our labor standards need to be at this level for us to feel that workers are getting a fair deal. Our environmental standards need to be at this level so that public health is not being undermined by production."" A ton of the work of social movements in the 1960s and '70s was about reversing some of those environmental harms.

And I think what we realized is the international trading system had kind of been a get out of jail free card for a lot of that stuff. And it was productive to say, "Maybe we should do something about that." And from that perspective I think it was pretty reasonable, and this is why you've saw this reflected in the continuation of tariff policies against China in the Biden administration. I thought that reflected saying that, "There's something fair here. We should do something about it." But it's not going to be extreme. It's going to be targeted to the places that matter, to the things we want to be producing. Things like batteries, electric vehicles, et cetera. Or where there are national security risks. Things like semiconductors or rare earth permanent magnets, where we're super reliant on China. From a national security perspective, that might not be ideal.

That's a really targeted strategy. And I will say as someone who worked on the 301 tariffs that the Biden administration announced in May of 2024, we studied that stuff really closely. We spent, I think I was personally involved in it for the better part of a year. And there were people who were in the White House before me who worked on it even before that going line-by-line through the tariff code, good-by-good and saying, "Does this really need a tariff? Does this make sense? What's the right level?" Because this stuff is important. And if you get it wrong, it imposes real costs on companies that have their supply chains disrupted and on people who pay higher costs. And if you don't pursue these kinds of policies with that level of care and with that level of targeting, it's easy to overdo it and impose wide costs that impose economic pain. And that's what we're seeing right now.

Danny Crichton:

One of the challenges I think is there's a great lie with trade, which is on one hand we want high environmental standards, high labor standards. We want high quality goods, and yet the American public likes to go to Temu and get a $2 T-shirt dropshipped from China. Sometimes three, four weeks, but they want a $2 T-shirt. We know it's made in a sweatshop. There's no way to produce a $2 T-shirt. In any way is anyone getting paid a living wage in air-conditioned facilities? It's just economically not possible. You see this is the same with climate and Europe where, in many cases, Europe has very strong climate and carbon decarbonization policies, but then you're importing very carbon-intensive goods from China as a way to offshore carbon to the exporter, and therefore you can say, "I'm France. We are doing so well in our climate goals. We're buying goods that produce a ton of carbon, but they're not producing carbon here."

It off-shores it, pushes it off the books, et cetera. You look at the American consumer as the consumer of last resort in the global economy. We just want to buy things. We want to buy them as cheap as possible. No one really cares about the quality, et cetera, et cetera, et cetera. How much of this do you think is that big lie? And to what degree do you think you can undo that? Because the question I've had listening to folks all morning and on the shows, et cetera. And we're all watching this real time. It's unreal to realize that you spent a year looking at line-by-line tariffs, and I feel like there's just a person with a big number on a chalkboard, and it seems to be changing hour-to-hour.

How much do you think Americans could actually adapt and change to this? Which is to say, "Look, we could bring shoes back but shoes are going to cost $200. You're going to buy one pair every three, four years. You're going to repair them." You're going to bring back the cobbler. You're going to properly mend shoes and mend clothes and darn socks because disposable culture we've had for 30, 40 years as consumer, 1960s cultures-onward would have to go away in a world in which we increasingly manufacture things back at least in the West, if not in the United States.

Laurence Pevsner:

I'm going to interject very quickly just to mention that you mentioned the cobbler. And we're talking about the Melian Dialogue. And one of my little asides is that in Plato's Republic there's a discussion about, they're walking through the different members and jobs in the republic, and one of the jobs is the cobbler. And they're like, "Which one of these jobs do you want to talk about?" Like, "Oh, we want to talk about the guards first." And he's like, "You sure you don't want to talk about the cobbler?" And they're like, "No, Socrates. Who cares about the cobbler?"

But the point of the cobbler is that he's got very little to do because he just repairs shoes every so often. Otherwise he's just sitting there idling, and eventually he becomes the philosopher. He's the one who actually thinks about the big ideas because he's got nothing else to do. So maybe the idea here is we're all going to become philosophers. Cobbler philosophers.

Josh Zoffer:

Exactly. Exactly.

Danny Crichton:

Laurence, that was a long road.

Josh Zoffer:

But I appreciate it. This is a really high level of philosophical discourse. You don't usually get that in the context of trade policy. To answer the question, Danny, when it comes to the overall direction of globalization and consumption, the ship has set. We're not going to totally go back. I don't think we would want to go back to autarky. I don't think we would want to go back to a world of radically less globalization because I think one of the lessons of the post-war era, the era in which the rules that the United States and our allies set up after World War II has been in operation, is that on the whole this has been pretty good.

Billions of people around the world have been lifted out of poverty in places like China. From a human perspective on net, I think a good thing. And I don't think we want to reverse that whole cloth. Now, does it have costs? Of course it does. Does it have costs domestically? Yes. And I think we've learned those costs were larger than we thought they were. The effects of de-industrialization are real and we shouldn't discount them. And on the other hand, the value of being able to access cheap goods and enhance the purchasing power of Americans is also not something to be discounted.

People are better off in many ways because they can afford electronics that would be out of reach otherwise and have a higher standard of living. To give due deference to Annie Lowry here, who's a writer at The Atlantic who's done a great job of this. Have we prioritized the cheap socks and flat screen TVs a little bit too much over the affordability of things like housing, education, and healthcare? Yes, of course we have. So I don't think we've gotten everything right. But from the perspective of trade, I think overall we want trade. We want globalization.

We want the trading system to work because net-net, when it is working properly, it does lead to prosperity both in the United States and abroad. The US and China, I think our view in the Biden administration, and we said this many times, was we don't want to decouple. We're not trying to end trade. We're trying to correct imbalances when it comes to the imbalances reflected in, for example, the climate impact of different goods. Toward the final couple years, 2022 to 2024, you saw the global economy and leaders not just in the United States but I would also point to Europe, thinking really hard about this.

So Europe, for example, has coming into force a Carbon Border Adjustment Mechanism, is what they call it, which is effectively like a carbon tariff. It basically says, "If the thing we're buying has a higher carbon intensity than it would if it were produced domestically or by someone within the mechanism, you got to pay for that." Because you're right, that is a cost that's being externalized, and we shouldn't shut our eyes and ignore it.

But I think, to come back to this point again, the way that this was being dealt with was in a targeted way, a strategic way that said, "We don't want to disrupt the global economy writ large. What we want to do is fix the places where it's gone too far, where there are costs that are not being accounted for, where it's undermining our commitment to our values like labor and environmental protection." My view is that's a worthwhile endeavor, and we were on the right track. And what you saw was, as those policies were starting to come into place, we were able to use these types of tools, subsidies and tariffs, in ways that got at those core national security and value commitments without disrupting the whole system. I think there is a way to do this that does not result in the kind of market Armageddon that we're seeing, and there's a way of doing it that does.

Danny Crichton:

Let me ask you. One of the things we try to do with Riskgaming across the games, the newsletter, the podcast, et cetera, is try to complicate things. We don't try to simplify it. The world is very complicated, complex. And when you look at the trading system, the theme of the last 30, 40 years has been integration. We see deepening networks all around the world. And this whole discussion is so focused on US-China, but obviously there are companies. Those companies have multiple divisions. They sell products in different places.

A Intel chip is designed here, manufactured in Taiwan using parts from other countries. Those are now shipped to multiple endpoints. Some of those are Malaysia because it's a cloud infrastructure startup that's reselling that compute to China in order to get around export controls. And so the layers of complexity here keep adding up. And one of the things I think is interesting when you think about your targeted approach versus the sledgehammers, I think there's this challenge around, how do you handle a network? Where you want to prune different relationships, but there's always a way to rewire and way-find a way around that network, around the export controls, around the tariffs.

We saw the trade deficit with Mexico with the United States has something like doubled or tripled over the last two, three years because Chinese manufacturers started moving factories into Mexico, particularly in autos, in order to be able to ship through USMCA. It's one of those things where it's like the argument, I think, on the Trump side would be, look, you can always just get around this. Even Germany might take Chinese money in order to build factories if that's the last bastion of place that doesn't have a tariff. You have this sort of open hole in the wall, so to speak. So even though it's not necessarily autarky, there's this challenge of, how do you provide a level playing field of regime across the world? Particularly as the WTO has become irrelevant over the last six, seven, eight years to Pell Court and everything else. How do you think about that as a network?

How do you break the black box and how complicated it is? We do a lot of stuff with the defense industry and the defense industrial base. One of the questions is, how many chips come from China? How many pieces components come from China? The Pentagon doesn't know. The national security defense primes don't know. And there's nothing really surprising about this because it's thousands of parts made by thousands of companies. Those companies outsource, they subcontract. No one knows the answer to that question. Intel doesn't know the answer to that question. And it makes sense, given how complex. So to what degree is that we have to absorb that complexity and just accept that, hey, eggs come from different countries. There's a bird flu or an avian influenza that comes in. The supply chain gets knocked out every once in a while. We just absorb that. Versus saying, "Look, every country needs to have its own egg supply. It all has to be separated because eggs are super important."

Josh Zoffer:

I think this is a really important question. And I'll say two things about what the world looks like today and then maybe pivot a little bit to one of the implications of this question, which gets at the heart of, what are we trying to do with all this trade stuff? Clearly we're trying more things. What do we want the outcome to be? On? What does the world look like today? You're exactly right. Our supply chains are endlessly complex. It is almost impossible to know what is in the final goods we're buying. Where the pieces came from, what those pieces are, how much value to attribute to each of them, which matters from a trade rules perspective. We do have, in theory, tools to address this.

So there are tools around domestic content requirements or rules of origin, which are around how trading rules apply to a given good based on where the stuff in it originally came from. It's designed to deal with this. The factory just got... the final assembly or the factory just got moved somewhere else to avoid a tariff. To your point, those tools are dramatically limited by the data that we have. They are only as good as, do we actually know where the origin is? The rules can't do that much if you can't answer that question.

Part of the is, in today's world, we have to do the best we can and acknowledge that there's this thing you hear about often in government. I'm sure Laurence has heard about this, called administrability, which is, we want to do something but we need to make it, "Administrable." It has to be something that is within the boundaries of possibility given the human beings that we have, the number of people we have working on it, and the information at their fingertips, and the hours in a day. And perfect policy is always limited by administrability.

It's a balance between trying to get more out of the system and the information we have and trying to be respectful to the fact that we can't do everything. And also if you ask the government to do something really hard, that burden ultimately falls on a set of people who are going to have to work really hard if you ask them to do something new. That doesn't mean you shouldn't do it, but it means you have to be cognizant of that. To go back to this question of, if we were redesigning the rules, what do we need? I would say one thing we should pay close attention to as we move forward and try to create new rules is putting in place the systems that we need to gather data so that we can, across borders, do finer targeting. Use that information to get at the core of the problems we're trying to solve and not paint with an overly broad brush.

Now, to this question of moving factories and how supply chains change when you put these kind of policies in place. I think this is a really important and underappreciated element of how trade policy is changing the global economy, which is to say, what are we actually trying to do? One of the things that happened when we put tariffs on just China, to your point, is companies moved their factories. Because if you say, "There's a tariff if the good gets shipped from China, but not if the same company is producing it at a factory in Mexico." Well, guess what? The obvious answer is, put the factory in Mexico. And I think there's a question. Is that what we want? Is the thing we're trying to do just get the factory out of China? Or are we trying to get the factory into the United States, for example?

So the historical analog that I think about a lot lately is, in the 1980s, China was not the bogeyman of international trade. Actually it was Japan, our ally. During the Reagan administration people were really worried about this. It was when the Japanese semiconductor and auto industries were really taking off, and their market share was increasing, and it in many ways kind of looked like the situation we face today, where Reagan put together this Presidential Council on Industrial Competitiveness and convened all the leading executives to think about this. And the set of things that ultimately happened were three things.

One, Reagan, world's consummate free trader, puts tariffs on Japan. Pretty meaningful tariffs. Up to 100% in some cases. Complicates the historical narrative around the commitment to free trade at that time. It was always not pure free trade or nothing. It was, we need to be targeted and we have to use these tools where it matters. The second is the US and Japan agree to what are called voluntary export limits. So Japan basically says, "We agree not to sell you too many cars. We leave some room for you guys." And the last thing, and this speaks to the thing we're talking about now, is all the Japanese auto manufacturers set up factories in the United States. So in the early 1980s I think almost none of them had a presence in the United States, and by the mid-1990s I think pretty much every Japanese car company had a factory in the United States.

And I think it's an open question. I don't know that anybody in the trade and industrial policy debate has a clear answer to this. Is what we want to happen that the Chinese automakers who are, let's be clear, really good... one of the things that is important to note is there is this narrative, long-standing, that China just cheats. China's definitely done some unfair trade practices. Nobody is disputing that. It's pretty well-established. But let's be really clear, Chinese car companies are really good. They make great cars. I think the head of Ford was at an auto show and saw one of these and was blown away. But that tells you they've done something right here. And so one thing you could say is, "Well, maybe we should just do what we did in the 1980s and say, "The right outcome is they set up factories here and they employ Americans."" Another is to say, "No. Actually what we really want to happen is for American car companies to employ Americans and to sell more cars." And those would require really different policies. You have to think really differently about what you're trying to accomplish.

And so I think, to your point of when you squeeze the balloon the pressure goes somewhere else, we have to be really thoughtful about what we want at the end of the line. What we want the global economy and supply chains to really look like.

Laurence Pevsner:

Yeah. When we were touring our China EV Riskgame, actually at that same time was when the Ford CEO was going around talking about how impressed he was by BYD and all the others. And that game is us really understanding why the US and European companies failed in the China market. But the same can be said in reverse. It's only because we do not let them dominate our own market that they don't. But I do think that goes back to your question of, why are we doing all this? What's the actual purpose? Is it because we care a lot about factories? Are factories the core to the American DNA? Because it does seem like sometimes we lose sight of what our actual core strengths are. We had a lot of strengths. All of the major tech companies are based in the US. That's something that was the envy of the world, and now of course all those stocks are plummeting.

I also think it gets back to your other point about what are also the problems that we're trying to address. Annie Lowry, with her affordability crisis articles, and of course her husband as Ezra Klein and Eric Thompson have the Abundance book out right now, which we're talking about on every podcast. It does seem like, okay, if one solution is to try to block out other countries from putting their goods and using tariffs that way, we could also just build more. We could also have a supply solution where, okay, well, our housing is going to get cheaper because we build more houses rather than cutting the cost of everything else. Our healthcare can get cheaper in a similar... the supply side solution is this new, hot argument. And I'm wondering, do you come out in support of that? And if so, why weren't we using some of those tools in the Biden administration?

Josh Zoffer:

I will say I am fully supportive of it. When I think about one of the things that was the most exciting to me during the 2024 campaign on Vice President Harris's side was the commitment to build 3 million new homes. This stuff was getting absorbed, I think, by the Biden administration in the form of the CHIPS Act, which is, let's build factories. Let's build fabs here for the first time in a generation in the form of the Inflation Reduction Act, which really was about trying to put in place tax incentives, loan guarantees, and financial support for production in the United States. Do I think that there's a lot of room for improvement? For sure. And I just finished the book. I thought it was great. I thought it really carefully and laid out well the steps that would need to be taken from a regulatory perspective and just from a commitment perspective.

I think one of the things that I took away from the book is, even where, on the left, we've tried to do this stuff, sometimes if we run into a barrier we just say, "Ugh, there's a barrier." And I think Ezra Klein and Eric Thompson do a really great job saying, "You've kind of just got to fight through that and say, "That's not acceptable." The thing that matters is getting it done." So yes to the supply side stuff. Definitely think it matters. In some ways I think the most important part of the book, though, was the chapter on invention, because we are not going to secure America's economic place in the world purely by building houses for ourselves.

Energy is something, where do we want abundant cheap energy for Americans? Yes, but we also want it so that we can power our factories and have a comparative advantage in production because we are one of the lowest cost energy producers in the world, and so we can make things that other people might not be able to make.

If you think about things like direct air capture, which both it's a technology that helps you address climate change by literally sucking carbon out of the atmosphere. It takes a lot of energy. If we had unlimited free electrons, it would be way more feasible to do that. There's that piece of it. But then the last thing is if you think about, where does abundance really come from? Where does national wealth and prosperity come from? It comes from making things that everybody in the world wants. It comes from being on the leading edge of technology and being able to build businesses that then employ people and create economic opportunity that allows them to buy those houses and to consume that energy and to have prosperous lives.

And so to me, that is the place where I'm the most interested in saying, "What do we do going forward?" Is, how do we make sure? To your point about the tech companies we have and those being the envy of the world. How do we have more of that? How do we make sure that the next generation of inventions... and I think at Lux, you guys do a lot of this, is looking for 10, 15 years down the road. Where is the future of invention innovation? What are the technologies that most people haven't even heard of today that are going to be really important value drivers and places where economic opportunity is created?

How do we make those things, and how do we ensure that American companies, engineers, and scientists are the ones not just inventing them but also commercializing them? This is, I think, another lesson we have learned as we've looked back at the last 50 years, call it, of international trade, inside what worked and what didn't. It turns out a lot of the things that China's really good at making today were invented in the United States. The LFP Battery is a great example, where it's invented in the United States. One of the first companies trying to commercialize it, I think it's called A123, is an American company that gets funding from the Department of Energy's Loan Programs Office. Ends up not making it. Gets bought by a Chinese company, and then they take it and take that all the way to the bank.

I think, going forward, one of the things that we need to pay close attention to is not just, how do we invent things? But how do we make sure that the economic opportunity that stems from them is something that Americans are benefiting from?

Danny Crichton:

I think this is one of the largest, most difficult questions, and I don't even think we have a great policy answer. A123, founder of the company's a current founder in the Lux portfolio, as an example. We obviously invest far more in hardware than most venture capitalists. We are trying to build those factories of the future, so to speak, both literally and metaphorically. So companies like Hadrian are literally trying to rebuild the American defense industrial base and aerospace industrial base. We have a whole set of other companies doing the same thing. I think you are getting at something that's really, really tough and I think it's an open question of, when we were doing the research for the China electric vehicle riskgaming scenario, one of the things that really struck me is that the global auto market is something like 3% of GDP. And when it comes to manufacturing, it's some gargantuan percentage of global GDP is just autos.

And it's one of those things where it's like, "Look, we have a variety of companies working on autos." We have Applied Intuition working on creating autonomous vehicles and making the next generation of automobiles more effective. Zoox, one of our older companies which sold to Amazon, also an earlier generation of that. But obviously continuing to push the frontiers forward in autos. But ultimately, if you don't have the factories to build an auto, you are losing the market anyway.

So we can be on the cutting edge. We can build great new technologies. We have the smartest PhDs, et cetera, et cetera. You could use all the superlatives but if you just don't have all the workers building it here, it doesn't really much matter. And this was leading to another piece here, which was I was thinking, as we unpack some of the complexities here, again we can say, "US-China," or Japan-US back in the 1980s, but there's also internal market dynamics. So we're talking about Detroit back in the day. We're talking about Ford and Jim Farley building out a CEO here today. Well, the migration of autos to the south has been the story for the last 20 years. Ford has open plants. Hyundai has plants in South Carolina, I believe in Tennessee, elsewhere in the south.

Some of that is union dynamics. Some of that is cost of living. Some of that is regulatory. Some of that is environmental protection. Et cetera, et cetera, et cetera. But there's this internal migration as well that I think is complicating the story. Because one of the big questions, I think, that came out of the Biden administration is you look at, let's say the CHIPS Act. Trying to bring the fabs back. It's coming into Phoenix. That's our next game that's coming out in the next couple of months, modeling the water politics of Phoenix and Arizona more broadly.

But the question is, who should have these industries? One of the things I think that Korea, you see this with Ulsan and the shipbuilding industry there. You see this in China and across a whole chunk of industries, is you have the Christmas ornament town. And it's like that town's whole factory, the whole business of the town is Christmas ornaments. And it's like Santa's are everywhere. We don't do that here, for a variety of reasons. We don't do that because Congress, when it comes to government programs, wants to split it across congressional districts. And so there is not an F-35 town. Autos are now across multiple states because you want to incentivize and try to pull as many economic incentives as possible. You want leverage points.

So no one wants to commit to one place and say, "Charlottesville," or whatever the case may be, "Charlotte, North Carolina or Savannah, Georgia is going to be the hub for this. Birmingham, Alabama is a hub for aerospace. But everything is going to go there. We're going to have the network effects. We're going to make that sound exclusively driven to make that industry as competitive as possible." I just don't see how we can do that within our federal system of state, local, and federal governments working together in tandem to win those arguments when you have the block that is the CCP being able to do that at all levels.

Josh Zoffer:

Yeah. Our system is hard. Would I trade it for anybody? No. Is it easier for China to do long-term technology planning and to say, "We're just going to do this thing and we're going to do it here," than it is for us? For sure. I would not take a trade of that, but I think ultimately I do believe in our system of democracy. I think, in the long run, our economy has all of the advantages to be successful. The best innovation economy in the world, the best research institutions, the most sophisticated capital markets.

But you're right, it is hard. I think this is going back a little bit to the abundance thing. Sometimes we just have to learn how to get out of our own way. The most important thing is to have the factory. It doesn't matter where it is if you don't have it at all. Learning that muscle of, we just have to do the hard things, and not everybody's going to like it. And we just have to get it done because if it really matters, then it really matters and we need to do it, is a muscle that I think we've got to relearn a little bit.

We used to be fantastic at this. If you look at mid-century America and you look at the hard choices that were made under Presidents Roosevelt and Eisenhower, you see a lot more of this. Of just, "We're going to do the hard thing, and we're just going to do it." That has costs sometimes. I think we have rightfully gotten more attuned to the trade-offs that occur. And when we put up a factory in a community in a way that's really disruptive, we've gotten way more attuned to the downsides of that, and that's a good thing. But to the extent that we have let it... and again, this is a huge theme of the Abundance book, let it become a barrier to doing it at all. That's a problem.

Danny Crichton:

I think there's two interesting dynamics. Let's take Louisville as an example. Louisville Airport is one of the most important airports in the United States because it's the hub of UPS. There are no passengers, by the way. It's actually kind of an absurd airport. Three runways. Hundreds of thousands of plane operations a year. Almost all UPS. All the goods that basically go to the East coast will fly through a single hub, logistics, in Louisville. And so UPS becomes one of the largest employers here. And why is that? Why did agriculture work in certain places? Well, Maine is on the coast. That's where the lobster are. The weather in Iowa is conducive to corn, potatoes, et cetera. Oranges in Florida. You have these constraints, and so there's a lot more logic and it's a lot, actually, easier to build up these kind of hub industries.

Louisville is the same thing. It has the right weather, it's centrally located if you want to hit New York, Boston, DC, down south. It is an amazing place. It's just far from California on the West Coast, and they have a separate hub over there. So it has that, like, "Where else is it going to be if it's not there?" Unfortunately, when it comes to factories, outside of some logistics like shipbuilding, where you have to be littoral, you're going to have to be on the coasts somewhere, the vast majority of goods can be kind of produced anywhere.

Supplies, maybe you're close to the steel, therefore it has to be over there. There are some constraints. I'm not trying to make that up. But the reality is, in many cases, you have the choice of anywhere. And this maybe gets into the Abundance book, which is to say it's not just YIMBY-NIMBY. It's this like...

If the NIMBYs were like, "Well, if it can be anywhere," why does it have to be here? And I think that's the culture that has to break, which just says, "Well, it has to be somewhere." And how do you go from, maybe it's not YIMBY, which I think has always been a struggle for a lot of communities, but it says, "Look. Somewhere we need to have a nuclear waste disposal site if we're going to have a massive nuclear power industry." And no one wants it near them. I understand that. This is maybe the most extreme example. But it has to go somewhere. Otherwise we don't have the industry at all.

Factories these days are obviously far cleaner. It's actually kind of amazing. These are not soot-filled factories from 1920s Chicago in which we have the famous Ash attack in London or whatever the case may be. These are, in general, clean. Not perfectly clean. There's some pollution. But you can put them in a position that's away from residential. You can put them down 20 minutes on a highway. They're accessible to residential communities, they're accessible to workers, but they are not necessarily in your literal backyard. And that is still hard to do.

And to me, that is the challenge, and that is why you're seeing, in states like Texas as an example, so many factories are moving to the Texas regions not because of necessarily incentives that's there and you have rules. It's actually because no one has the ability to stop it. If you go outside Tyler, Texas or McAllen or any of these large cities, you're outside of incorporated Texas, no city actually controls the planning of that particular place. So you can just build and no one has a veto.

And I do wonder to what degree we can actually build those sorts of places further in other parts, particularly coastal, particularly liberal, particularly elite parts of the United States where you don't have all those veto points.

Josh Zoffer:

Yeah. I think part of that is cultural. I was reading yesterday an article about what happened with Boeing, and one of the things it talked about is how, the second half of the 20th century, manufacturing was a high status thing to do within Boeing. The engineers were revered. And then at some point, as the economy financialized and the executives moved further and further from the factory floor, both literally and metaphorically, manufacturing became this thing that people were like, "That's not that interesting. It's low status work." And that I think contributes to this idea that people don't want factories near them.

And so part of this, and I think this is one of the really important things, to go back to the earlier theme we were talking about, the rethink. Leading people to the conclusion that manufacturing actually does matter and you need to do some of it. It is a great thing that manufacturing and the ability to make things has become something in vogue or that we care about again. So part of this I think gets solved by that change in culture. It also gets solved by opportunity.

There are so many communities across this country would love to have a new factory. Do they employ as many people as they did in the 20th century? No, it's never going to be the case that they're going to be as much of a job creator, because we have a higher level of automation in our factories than we did before. But a factory that employs a decent number of people, is producing something that the world wants to buy is a source of wealth. Those communities, those people have purchasing power. They can go out and buy clothes and food and services and invigorate community.

That's the reverse of the hollowing out that we saw in the 1980s and '90s. The other point that I wanted to make, to go back to what you were saying earlier about forgetting how to make things when you don't have factories, is this is yet another thing that I think we've relearned, is that the reason having an industrial base, at least to some meaningful extent, matters is because, one, if you're not making any of it, all of a sudden when you need to, you're going to find that really challenging. One of the things that I think we in the Biden administration were very attuned to, because it was a real challenge, is workforce, and having people who literally know how to build the factories and then how to operate them.

We're having, people are getting trained to operate the new TSMC fab in Arizona precisely because we do not know how to make the most advanced trips. We don't have the workforce for it, and so we've got to train them. And going forward, I think we will all pay more attention to the risks that come from letting that workforce die off. That's one point. The other point is manufacturing itself. It's not just a process. It's also a place where innovation can occur. It's not just the thing you're making, but the way you make it can be something you get better at. And again, this is something China has done really well by becoming the world's manufacturing hub, is they've just gotten really good at making things.

It's why they've innovated so quickly in areas like batteries and electric vehicles. It's one of the reasons why, as we squeeze them through export controls and their ability to access semiconductors, I expect eventually they'll figure it out, because they're really good at making things. I think what we have learned is we need that too. We've got to have a set of people who are thinking about advanced manufacturing, are thinking about process innovation, because it is one of the places where you can really generate meaningful innovations that create a lot of opportunity.

Danny Crichton:

I agree, obviously, 100% on talent development, because that's what I focus on in a lot of this. And that has been one of the most embarrassing parts of the last two months, has been the throwing away of so much talent at the federal level and different people who have all these expertise. You look particularly at NIH. Scientists, technologists, et cetera. And it's sort of obvious, so we don't need to get into it. But this idea of having talent pipelines. Realizing that if you don't have people working on the line, they can't get better. That's how Japanese cars beat American autos back in the '80s, was through the Kaizen model of continuous improvement and having line workers who had autonomy on the line to improve it. To figure out, oh, there's two parts. And if I got rid of one of these parts it would both be more reliable and would save time on the line. And so you have these kind of win-wins.

And China has stretched it all the way to the end. BYD, obviously one of the most automated factories, one of the largest factories in the world, now can produce a car for below $10,000. I was just reading today that only something like 20% of cars sold in the United States are below $36,000, on US roads. And so you have a 4X cost comparison and that's not just wages, that's not just sweatshop labor. These are just factories that are highly-automated, well-produced, thoughtful from a talent development strategy that's been in place for 30, 40 years. But Laurence, I cut you off.

Laurence Pevsner:

Well, I was just going to say, this leads very naturally into another piece of yours that you had in the New York Times not too long ago where if we're talking about DOGE in the government. And the headline that you went with was, or that the paper went with, was, Elon Musk Needs to Teach Our Government How to Lose More Money. Now, I don't think you meant the way to do that was to fire all of the experts and the folks on the path that Danny was talking about. But rather you had this interesting idea that the government needs to be taking more risky investments to actually challenge ourselves in that direction. Kind of like, you've gone from government to VC now. You're seeing what VC does and saying, "Hey, maybe the government should be doing a little bit more of this." Could you say a little bit more about that and why you think that argument is still relevant right now?

Josh Zoffer:

Sure. I will say the original version of that piece that I pitched did not mention Elon but, yeah, I think the point stands that one of the ways that you look back at history that the United States and other countries, too, China's really good at this today, are able to catalyze innovation is with government support. There is this amazing book by Mariana Mazzucato called The Entrepreneurial State, where she points out that pretty much all of the most important parts of the iPhone at some point or another benefited from early stage government investment in R&D. The point that I have tried to make both, I made it when I was in government and, now that I'm out, I'm trying to make it on the outside more publicly, is I think our risk appetite should be higher when we do really early stage stuff. We have R&D and grant programs. For the most part they're not huge. ARPA-E, which is the early stage grant making part of the Department of Energy, has an annual budget of, give or take, $400, $500 million. It's like the size of a midsize venture capital firm.

DARPA, which is our flagship innovation program, has a program budget of, again, call it $4 billion, which, it's great and DARPA is an amazing program. But compared to where most of our industrial policy support and dollars go, it's pretty small. Most of that money goes towards supporting more mature, later stage enterprises. And in my view, if we really want to do the thing we were talking about earlier, which is to figure out what's going to be the thing in 10, 20 years that is the thing at the core of the global economy. That's where, in my view, the US government should spend more of its money and have a willingness to put dollars at work and to take risk. Not all of that is going to pan out. This is how to lose more money piece.

Where that comes in is, like a venture capital firm knows, if you take risk and you back early stage technologies, not all of them are going to work. The trick is that if you find the right ones, the ones that end up being important and the ones that do work, the gains are enormous. And in this case, those gains accrue not to the LPs of a fund but to a country. If the companies in that country are the ones employing the people who are getting paid higher wages because that technology is commercialized domestically, that's an incredibly important thing that creates prosperity. It's one of the reasons that our economy was so strong during the second half of the 20th century, because so many of the most important inventions in the world, from the transistor to the jet airplane, were commercialized in America and, for a long time led, by American companies. And I think we've lost sight of how important government investment is to making that happen.

And in the meanwhile, other countries around the world have taken just the opposite lesson. China's got a plethora of tools that they use, from state-backed loans to state guidance funds to just outright industrial subsidies. In France you've got institutions like Bpifrance, which is their state investment bank. Of course you've got sovereign wealth funds all over the world, but in particular I would point to places like the Middle East, where they're making investments to try to build domestic innovation ecosystems. And I think there's a lot more that we could do on that front.

Danny Crichton:

Let me close this out. We're almost out of time. You had another piece in the Wall Street Journal. So multiple opinion pieces and very different partisan environments, but you had a great piece in the Wall Street Journal that was about the multiverses and this rise you've observed across all kinds of different forms of media, different areas of human life, that this concept of the multiverse exists. That we want to have different ways of seeing the world. We want to live in our own narratives, et cetera. And apply that to economics and politics. What multiverse would you like to live in right now?

Josh Zoffer:

I'd like to live in one where United States is leading the world in innovation and where the direction of markets is up, not down.

Danny Crichton:

Well, with that, Josh, thank you so much for joining us.

Josh Zoffer:

Great to be here, guys. Thanks so much.

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