This is progress (at least if you dislike unaccountable secret police, race wars, warrantless searches, summary executions of protesters, and so on…which I do). But it’s possible that Democrats — and especially progressives — will take the wrong message from their first small victories in the battle against autocracy.
For one thing, the Minnesota anti-ICE protests are starting to show some signs of being taken over by the same kind of radicals who made the 2020 BLM protests go overboard in Seattle, Portland, and a few other cities. Some protesters in Minneapolis are setting up illegal checkpoints to stop vehicles and screen them for ICE. Others have been harassing various people. Some leftist protesters have even denounced progressive activist Will Stancil, who was recently punched in the face.
Obviously, if this kind of thing continues, all Trump and Stephen Miller and ICE will have to do is to back off and not kill any protesters for a while, and watch as the more extreme street activists reenact the ill-fated CHAZ from Seattle 2020. That would sap some (but not all) of the momentum from the backlash to the recent ICE killings.
But the other danger is that Dems will take a midterm victory as a sign that they don’t need to recalibrate their position on the immigration issue. In a post two weeks ago, I pointed out that although they hate Trump’s heavy-handed tactics, Americans still don’t support the permissive immigration policies of the Biden years.
Recent polls confirm this. For example, a recent Fox News poll found that Americans still favor the Republican Party over the Democratic Party on immigration in general, and on border security in particular:
The same poll found that although the public now disapproves of Trump’s overall immigration approach by a substantial margin, he’s at +5 on border security specifically.
In a Wall Street Journal poll taken after Good’s killing, voters said that the Republican Party was “better equipped” to handle immigration than the Democrats by an 11-point margin…Apparently, the only thing more unpopular than a nakedly authoritarian immigration policy is a Democratic one.
This is a big red flashing warning sign for Dems. Watching Trump’s ICE in action has reminded Americans of the danger of authoritarianism, but it hasn’t changed their basic idea of what immigration policy ought to be.
Right now, Democrats and progressives are primarily reacting to ICE’s brutality and Trump’s authoritarianism. That’s fine, but it’s not enough. Democrats need to proactively think about what kind of immigration policy they want — not just because they’ll need a plan if and when they get back into power, but because they need to credibly promise the American public that they’re going to do something about the public’s legitimate concerns. If voters think Dems are just going to snap right back to the permissive Biden-era immigration policies that everyone hated, it will be a lot harder for Dems to win in 2028 — and it’ll give Trump much more of a free hand to pursue his authoritarian policies.
Thus, Dems should be thinking about what a liberal immigration policy would look like. Here are some of my own suggestions.
Don’t delegitimize America with “stolen land” rhetoric
Donald Trump and the MAGA movement want to delegitimize immigrants as a group — to say that people who choose America are fundamentally less American than those who have ancestral blood ties to the land. It’s natural to sort of kick out against that idea by trying to turn the tables, and delegitimize the MAGA people themselves. This, I think, is why progressives often respond to anti-immigrant movements by saying that America itself is “stolen land”:
The idea here is that if America itself has no rightful claim to the land on which it sits, then the claim of any MAGA supporter to belong on this land is no better than the claim of any immigrant — legal or otherwise.
There are three problems with this. The first is that no one cares. Those who are inclined to welcome immigrants will become no more welcoming upon hearing that “no one is illegal on stolen land”. And those who believe that America is the legitimate owner of its land will not be persuaded to change their beliefs simply by a reminder that the land once belonged to Native Americans. Trust me, they already know.
The second and bigger problem is that “stolen land” rhetoric makes it look as if progressives don’t believe that America is a legitimate country at all. If you don’t think that American citizens have the right to collectively, democratically decide who gets into the country and who doesn’t, you’re telling American voters that their democratic will is illegitimate. And that’s not going to sit well with voters outside of the most progressive circles. Matt Yglesias makes this argument succinctly and powerfully:
The third problem with “stolen land” rhetoric is that it’s immoral. It’s an attempt to counter blood-and-soil racial nationalism with an invocation of another kind of blood-and-soil racial nationalism:
The Democratic Party shouldn’t go anywhere near this sort of atavistic moral reasoning. The land acknowledgements need to disappear from the Democratic Party platform, from Democratic Party events, and from progressive rhetoric and culture in general.
Instead, Democrats and progressives should focus exclusively on rhetoric that stresses the ways that immigrants contribute to the United States, and on the American culture that unifies us all as a nation. This sort of rhetoric makes it extremely explicit that Democrats see the U.S. as a legitimate entity, worthy of enhancing and strengthening. It rules out the possibility that progressives see immigration as an act of “decolonization”. And it emphasizes that the purpose of immigration is to benefit American citizens.
Deport all illegal immigrants (not just criminal ones), but humanely
When criticizing ICE’s raids, many Democrats and progressives complain that ICE is arresting people with no criminal records in the U.S.:
And Democratic proposals on the topic of illegal immigration center on refocusing enforcement on those who commit crimes in America.
It’s true that Americans would probably like to see more of ICE’s focus on illegal immigrants who commit crimes. But Democrats need to acknowledge that criminality isn’t the only reason that Americans don’t like illegal immigration. Some polls still show majority support for deporting all illegal immigrants, not just those with criminal records. Here’s a recent example:
Other polls show only a substantial minority in support. But these results suggest that criminal behavior isn’t the only concern that Americans have about illegal immigration. Some are undoubtedly worried about the strains on local government finances, others think immigrants compete with locals for jobs and housing, and still others are fearful of the cultural changes that immigration brings. But after years of reading the polls, I think many Americans are simply mad at the act of illegal immigration itself. When people cross the border illegally, they may not have hurt anyone, but they have flouted the American people’s democratic will:
If anyone on the planet is allowed to enter America and remain here as long as they don’t commit any other crimes, that is an open borders policy. And most Americans do not want open borders. Nor, I think, would most Democrats like to be associated with the idea of open borders. And yet that is exactly where the rhetoric of deporting only criminal illegal immigrants immediately leads.
Thus, Democrats need to remind the American public that illegal immigration is not to be tolerated, even when the people who come illegally are well-behaved. Bill Clinton did this in 1995:
But at the same time, Americans don’t support a policy of forcible mass deportation, of the type ICE is currently trying to do. Nor should they. So Democrats need to come up with a humane alternative for getting illegal immigrants out of the country.
There are basically two ways to do this:
Enforce laws against companies hiring undocumented workers.
Change the law on asylum-seeking.
We know that almost all illegal immigrants come to America for job opportunities — even those who try to stay in the country by claiming asylum. It’s natural to want to come work in a rich country! When there are few or no jobs to be had, illegal immigrants leave, as they did during the Great Recession:
Obviously we don’t want to create a recession just to make undocumented immigrants leave! But if we have the government investigate and fine companies that employ them, then companies will become much more averse to hiring people who are in the country illegally. That will decimate demand for undocumented labor, and there will be a big flood of illegal immigrants out of the country — without any detention centers, arrests, etc.1
The second thing Democrats can do is to close the asylum loophole that allows illegal immigrants to become legal residents simply by requesting asylum. Recently, Boston’s Mayor Michelle Wu took some heat for saying that “Every single human being has the legal right to come to the United States and seek shelter”. But in fact, she’s correct. Anyone on the planet can show up at a U.S. port of entry and request asylum. That’s a good law, and we should keep it. In addition, anyone who simply takes a plane to America on a tourist visa can request asylum once inside the country. That’s fine.
What’s far more problematic is that anyone who crosses the border illegally is entitled to request asylum without any discrimination against their application due to the fact that they entered illegally! I explained this back in 2024, and argued that we should change the law so that this is no longer possible:
[T]he U.S. wrote its asylum law to follow the 1967 version of the UN Convention on the Status of Refugees, which states that people who cross the border illegally are entitled to asylum hearings. These asylum seekers exist in a gray zone between “legal” and “illegal” immigration — they’re illegal when they cross the border and turn themselves in, then they’re legal while they await their asylum hearing, then if they get denied asylum (as most do) and stay in the country anyway they’re illegal again.
Most Americans simply do not understand how that system works. If they did understand, they’d probably vote to change the asylum law to deny hearings to — or at least penalize — people who crossed illegally. Meanwhile, among the few Americans who do understand how this system works — lawyers, policymakers, and various NGOs — there’s little appetite to reform the system. As a result, the American public sort of vaguely senses that its democratic will is being violated, but doesn’t exactly know how. And so general anger builds…
The solution, of course, is for Democrats — and responsible conservatives, and political leaders in general — to change America’s immigration system to make it more congruent with the democratic will. The asylum loophole should be abolished — crossing the border illegally should not be rewarded with the chance to stay in the country while awaiting an asylum hearing. Accepting lots of people into the country legally is fine — I will continue [to] support that, and I think Americans in general will agree with me. But if the American people have decreed that a person should not get in, they should not get in. And Democrats should make it clear to the public, with loud and certain rhetoric, that this is being done.
Enforcing laws against hiring undocumented labor on the corporate side, and changing our asylum law to penalize those who entered illegally, would send illegal immigration into reverse — all without the brutality of ICE.
End “sanctuary cities”, go back to Obama’s first term
Critics of Trump’s immigration crackdown often note that Barack Obama deported large numbers of illegal immigrants, especially during his first term. And this is true — by some measures, Obama deported people at an even faster pace than Trump has. And yes, one of the ways he did it was by focusing deportation efforts on illegal immigrants who commit crimes — just as many Democrats are now promising to do.
But the people who tout this record need to think a little harder about how Obama accomplished this. Much of it was done through ICE’s Secure Communities Program, which was established during the waning days of the Bush administration. Under this program, whenever state and local cops arrested someone, they would send their fingerprints to ICE to check their immigration status. ICE could then deport them if they were in the country illegally.
This program was extremely effective in deporting large numbers of illegal immigrants — who also happened to mostly be people who had committed crimes. But many progressive cities decided that programs like this were bad, and became “sanctuary cities”. Sanctuary cities enacted policies that made it difficult to transfer illegal immigrants from local custody to ICE custody, and which limited cooperation between local law enforcement and ICE in various other ways. This undermined the program. The Trump administration has spent a lot of effort trying to force cities to stop concealing illegal immigrants, and progressives have strongly resisted these efforts.
And yet if Democrats really do want to deport criminal illegal immigrants en masse, it will require cooperation between local law enforcement and ICE in blue cities. That means efforts like the Secure Communities Program under Obama, and it means not using local obstructionism to foil the federal government’s efforts to deport criminal illegal immigrants.
The problem here appears to be that while many Democrats pay lip service to the idea of deporting criminal illegal immigrants, they are unwilling to challenge progressive activists who thwart those efforts. At the grassroots level, many progressives see protecting the undocumented from deportation by hook or by crook, regardless of their criminal status, as a sort of crusade. Democrats at the national level need to tamp down this behavior by condemning this behavior. And Democrats at the local level need to understand that this “crusade” hurts the national party.
So combining all of these elements, we can see the overall contours of a liberal approach to immigration enforcement. It would concentrate on replacing violence and brutality with impersonal economic incentives, while making sure to deport criminals who are in the country illegally. And it would be animated by the idea that America is a good and legitimate country, and that welcoming immigrants is something Americans choose to do for their own benefit.
That, I think, is the kind of program that could present a durable, workable, favorable alternative to Trumpism, and help the Democrats win back power.
As Matt Yglesias explains, you can’t just do this by forcing employers to sign up for an “e-verify” system, because those who employ illegal immigrants simply won’t enter them in the system. But what you can do is investigate, prosecute, and fine companies that hire undocumented workers. This will exert quite a chilling effect.
A week ago I wrote about the possibility that the world would pull its money out of the United States of America:
I noted the rise in the price of gold as a sign that the world might be entering a time of international financial anarchy:
[G]old’s volatility and limited supply might not stop it from becoming the world’s reserve asset once again. In fact, although the dollar is holding its own against other national currencies, its share of global reserves is falling steeply once you bring gold into the picture:
Bloomberg reports that governments and private investors are both buying gold at rapid rates, and that fear of the Trump administration’s policies is a big reason why…[T]he world may be preparing for a time of financial anarchy — an era in which the U.S. is no longer a safe haven and the dollar is no longer the reserve currency, but where China has chosen not to step up to fill the void, and Europe and other powers are unable to do so.
A lot of people asked me whether gold’s rise as a share of reserves was due to people putting their money into gold, or to gold going up in price. In fact, those are the same thing. When demand increases for gold, it means that investors buy more gold, and it also means that the price goes up.1 So basically, this all means that investors have been demanding more gold.
Anyway, I thought that the idea of “international financial anarchy” was worth expanding on. A lot of people have this vague idea that the world’s finances are based on the U.S. dollar, but they don’t really know exactly what that means, and they don’t know what it would mean for the dollar to lose that status. In fact, people are right to be a little confused, because there are basically a few different ways that the dollar matters to the international financial system:
A lot of countries and companies make payments in dollars.
A lot of countries hold dollar-denominated assets (like U.S. government bonds) as reserves.
A lot of banks and other companies use dollars as collateral for lending.
For a long time, the dollar has been predominant in all of these use cases, leading people to think that these are all the same thing. But they’re not. So when we think about “international financial anarchy”, we should think about how the dollar’s role might change for all of these uses.
Anyway, I don’t have one big grand thesis about the direction in which the international financial system is heading. But the events of the past few weeks have provoked a few thoughts.
The goldbugs were partly right, the Bitcoin maximalists were wrong
One clear lesson of the past few weeks — and of the past two years — is that people still view gold as a safe haven in times of international uncertainty. Here’s a chart of gold’s price:
Gold rose in the pandemic, but it didn’t really take off until 2024. This wasn’t because of U.S. inflation, which was coming down rapidly at the time. In fact, we don’t know exactly why gold started going up; we just know that a bunch of central banks started buying it. Maybe they knew something we didn’t.
But we do know that when Donald Trump came back to power and started doing unpredictable stuff — high tariffs, threats to invade Greenland, threatening the independence of the Federal Reserve, running up huge deficits, and so on — a bunch of investors around the world, especially in Asia, started buying a lot of gold. The Economist reports:
In recent years central banks in emerging markets, led by China, fuelled the [gold] rally. Such hyper-conservative investors have fallen back in love with physical gold, which they hope will protect them amid geopolitical turmoil. Yet flows into gold exchange-traded funds (ETFs) suggest a new group of investors are catching the bug, lured by returns and diversification rather than safety…Asian investors are leading the way. In the past two years holdings of gold by Asia-based ETFs have more than tripled…Big funds in Japan and South Korea likewise logged hefty increases.
[A]s an asset without a counterparty, gold doesn’t rely on the success and creditworthiness of a company or state, unlike most financial securities…Soaring government debt around the world has also shaken investors’ trust in sovereign bonds and currencies. In what’s been dubbed thedebasement trade, a large number of investors have flocked to gold, silver and other precious metals, seeking a store of value…as public finances deteriorate…
Investors have been closely watching the outlook for inflation in the US, too, as Trump piles pressure on the Fed to bend to his will and cut interest rates. Gold, which pays no interest, typically becomes more attractive in a lower-rate environment, as the opportunity cost of holding it versus interest-earning assets decreases.
More fundamentally, gold’s value is based on people’s beliefs about gold’s value. A lot of people think that gold will take over the global financial system if people lose confidence in national currencies — possibly because in the past, when nations and their currencies weren’t very strong or dependable, and electronic payments weren’t possible, gold was the best way of making international payments.
So when there’s higher expected inflation, or international turmoil, etc., those people — who we typically call “goldbugs” — buy gold. Other investors buy gold in this situation too, because they anticipate demand from goldbugs.
But why gold? It isn’t the only asset whose use doesn’t depend on national governments. There are a bunch of other metals around (in fact, silver also rose in price along with gold). And then there’s Bitcoin, whose value is backed not by national governments, but by an algorithm and an internationally distributed set of “miners” who spend electricity and computing power on carrying out Bitcoin transactions.
For a long time, Bitcoin proponents — including the “maximalists” or “maxis” who think Bitcoin would take over the entire global financial system — argued that the cryptocurrency had become a form of “digital gold” whose natural scarcity and independence of national governments offered investors a safe haven when fiat currencies looked rocky.
But that story has taken a big hit in recent months. When investors started losing confidence in the U.S. dollar, they also sold Bitcoin, causing the price to plunge:
This probably tells us something about how investors think about gold versus Bitcoin. They probably think of Bitcoin as something that benefits from the success of the American economy — probably because when the U.S. economy does well and Americans are feeling rich, they put some of their money into Bitcoin. Whereas they still think of gold as something that you need when nations as a whole do poorly.
Ultimately, safe-haven assets are a coordination game — people just sort of collectively decide which assets to buy in order to protect themselves from international financial anarchy. So far, they’re still coordinating on gold, not on Bitcoin.
This could have just been because the gold binge was overdone, or because Trump’s reported nomination of Kevin Warsh — a hard-money sort of guy — to lead the Fed after Powell tempered expectations of dollar debasement.
In any case, what gold’s abrupt plunge shows is that an anarchic, gold-based international financial system will probably be inherently less stable than the dollar-based system has been. A lot of people — including the goldbugs — think that gold’s natural scarcity and independence from central bank meddling make a gold-based economy inherently stable. But the fact that no large, trustworthy entity manages the gold price actually means that it’s subject to rapid swings like the one that happened on Friday. And if global payment and collateral systems were based on gold, those price swings would be disruptive to those systems as well.
Goldbugs are thus right about gold’s durable safe-haven status, but they’re not right that this is a good thing. Gold isn’t a superior system — it’s a desperate fallback for a world in which the people who were in charge of the superior system abdicated their duties.
Do dollar payments matter for dollar reserve holdings?
Important changes to the international financial system didn’t start when Trump returned to power. The Ukraine War was also an important event. The return of great-power conflict drove some people to put their money into gold, of course. But in addition, the U.S. and Europe put big financial sanctions on Russia — essentially, cutting Russian banks and other Russian companies out of the international financial system, including the SWIFT payment system. The idea was to make it a lot harder for Russia to pay for imports, thus putting pressure on Putin to end the war.
How much financial sanctions actually succeeded in harming Russia is a matter of debate. But they scared a lot of countries, including China, because those countries realized that their reliance on the dollar-based financial system for their international transactions represented a vulnerability — a pressure point that the U.S. could use on them in the event of a conflict. So they started working on alternative payment systems.
China, for example, accelerated its efforts to develop yuan-based payments systems. The Fed’s Bastian von Beschwitz had a good primer on those efforts. As a result, the share of China’s cross-border payments denominated in yuan started rising:
The question is whether this affects the dollar’s position as the global reserve currency. A lot of people seem to think that the use of the dollar for payments forces a lot of companies around the world to hold a bunch of dollars (or liquid dollar-denominated assets) in order to be able to settle their payments.
But is this really true? In the modern age, it’s not very hard to get dollars on the spot if you need them. If an Indian bank wants to make a payment to a Chinese bank, it’s not too hard for the Indian bank to just go to the international currency market and swap some rupees for dollars and hand them to the Chinese bank, who can easily go right back to the currency market and swap the dollars for yuan. Nobody in this story is really holding dollars for very long. So payments that are settled and denominated in dollars don’t seem like they create much demand for dollars in this day and age.
In fact, before the recent Trump-induced drop in the dollar, the U.S. currency had actually gained in strength since the Russia sanctions sent countries in search of alternative payment systems:
“Not much” dependence of dollar reserves on dollar payments doesn’t mean “zero”, of course. In March 2020 when the Covid panic hit, there was such a disruption in the currency market that for a very short while it became hard to get enough dollars to do international payments. Banks around the world hold a few dollars (or liquid dollar-denominated assets) as a hedge against this happening to them again, which does create a little bit of demand for dollars.
This is why the proliferation of non-dollar payment systems still might represent a kind of preparatory stage for countries around the world to dump the dollar. If you don’t have to go through dollar swaps in order to make payments, you don’t even have to think about whether the sudden lack of dollars in your country’s domestic financial system will disrupt your financial plumbing.
And if a country like China were preparing to try to dethrone the dollar as the reserve currency, it would probably start off with replacing the dollar in its payments systems, simply because it’s easy and relatively non-disruptive to do so. Which is why a lot of people are talking about China’s yuan-based payments as part of an attempt to “dethrone the dollar”.
The “yuan replaces the dollar” scenario
This brings us to the question of whether China is preparing to have the yuan replace the dollar as the world’s reserve currency.
Besides shifting toward yuan-denominated payments, China is also stocking up on a lot of gold. Here’s The Kobeissi Letter:
China continues to stockpile gold behind the scenes…China acquired +10 tonnes of gold in November, ~11 times more than officially reported by the central bank, according to Goldman Sachs estimates…Similarly, in September, estimated purchases reached +15 tonnes, or 10 times more than officially reported…Furthermore, China officially bought an additional 0.9 tonnes in December, pushing the total gold reserves to a record 2,306 tonnes…This also marked the 14th consecutive monthly purchase…Assuming official purchases were 10% of what China is actually buying, this suggests China acquired +270 tonnes of physical gold in 2025.
For now, that looks like part of the general shift toward global financial anarchy. But it could also indicate that China is preparing to replace the dollar-based global system with one based on its own currency.
There would actually be precedent for this. In the early 20th century, the global reserve currency shifted from the British pound to the U.S. dollar. Chitu, Eichengreen, and Mehl (2012) show that this mostly happened before 1929. A big driver was World War I, where the UK was a big borrower and the U.S. was a big lender. This resulted in a big flow of gold from the UK to the U.S. That flow intensified during the Depression and then in World War 2. After the war, the dollar had completely replaced the pound as the reserve currency, as formalized by the Bretton Woods agreement. This coincided with the U.S. owning up to three quarters of the world’s gold.
So if the world goes through a transitory period of financial anarchy, in which the dollar is temporarily replaced by gold, China might conceivably stabilize things by buying up much of the world’s gold and using this to make the yuan the reserve currency — if everyone uses gold and China owns the gold, it’s easier to convince the world that the yuan is as good as gold. China’s vast economic heft would, of course, be another powerful argument.
One problem with this theory, however, is that China has shown absolutely no sign of wanting to do this. In fact, they’ve recently been intervening to make their currency cheaper, which requires selling yuan:
This is almost certainly being done as a way to pump up Chinese exports. China is still struggling with a real estate bust, and the government has decided that exports are a way to cushion the impact on the real economy. But the WSJ’s Peter Landers reports that some Chinese people are having second thoughts about the weak yuan:
Several influential [Chinese] economists have recently argued that a meaningful strengthening of the yuan would turbocharge consumption and get China out of its economic doldrums…Liu Shijin, a longtime top economic adviser to the government, said in a speech this month that the U.K. and U.S. also started out as primarily manufacturing powers with puny currencies but eventually matured beyond that stage…
“We should aim for a basic balance between imports and exports” and push for a strong, globally used currency, Liu said…“Chinese consumers can use the same amount of renminbi to enjoy more high-quality, affordable international products, thereby truly realizing the goal of becoming a strong consumer nation,” he said…His comments echoed those of a former People’s Bank of China official, Sheng Songcheng, who said in November that the correct exchange rate to balance the purchasing power of Chinese and American consumers might be as strong as five or even four yuan to the dollar instead of seven today…
Such views are spreading widely among economists in China but haven’t become official doctrine[.]
Landers suggests that a stronger yuan and a weaker dollar might help the U.S. revitalize its manufacturing industry, by reducing the trade deficit. Trump might embrace that idea. But Paul Krugman is very skeptical that this will help much:
Any way I cut it, the dollar’s reserve currency status is only part of the explanation of U.S. trade deficits. Even more important, trade deficits account for only a small fraction of the decline in manufacturing as a share of our economy…Many people assert that the answer is the dollar’s role as the preeminent reserve currency. But as I tried to argue…this story doesn’t hold up when you look at it closely…[T]rade deficits are, in fact, responsible for only a fairly small fraction of the long-run decline in the manufacturing share…
Germany’s surpluses are much larger as a share of its own GDP than China’s. Yet Germany has also seen a huge long-term decline in the manufacturing share of employment…If Germany’s huge trade surpluses haven’t been enough to avoid a big shift away from manufacturing, even ending U.S. trade deficits (which Trump’s tariffs won’t achieve) wouldn’t make us a manufacturing-centric economy again…
Last year the U.S. ran a manufactures trade deficit of around 4 percent of GDP. Suppose we assume that this deficit subtracted an equal amount from spending on U.S. manufactured goods. In that case what would happen if we somehow eliminated that deficit?…Well, it would raise the share of manufacturing in GDP — currently 10 percent — by less than 4 percentage points, because manufacturing firms buy a lot of services. A rough estimate is that manufacturing value-added would rise by around 60 percent of the change in sales, or 2.5 percentage points, implying that the manufacturing sector would be around a quarter larger than it is[.]
History also doesn’t offer much encouragement here. The UK’s loss of the reserve currency during the World Wars didn’t revitalize its manufacturing sector at all; in fact, the UK became a manufacturing midget, and runs chronic trade deficits driven by huge imports of manufactured goods.
So while the shift to a China-centric global financial system would probably be good for regular Chinese people, it would probably not do much to reindustrialize America. If we want that to happen, we should look to industrial policy rather than to currency policy.
I actually asked three AI programs to draw me a picture of "Gemini, GPT, Claude, Grok, and Qwen in a race". The one above, drawn by Gemini, was in my opinion the best one (and, amusingly, has itself winning the race). Here was the one drawn by GPT-5.2:
Art by GPT-5.2
This looks OK, but gets the mascots wrong, doesn’t have many labels or logos, and gets Grok’s logo wrong. Here’s what Grok made me:
Art by Grok
Perhaps the less said about this image, the better.
Anyway, I don’t often write about corporate horse races or evaluate corporate strategies — if that’s your thing, I recommend Ben Thompson’s blog, Stratechery. But once in a while it gets interesting. The AI race is one of those times. So take this post as the thoughts of an interested amateur/outsider.
(Financial disclosure: I have no financial interest in any of the companies discussed here, though honestly maybe that’s a bad move on my part.)
The amount of capital expenditure being poured into the AI race is extraordinary. Depending on how you measure it, this may already be one of the biggest capex booms in history, and many analysts are forecasting it to be the biggest by the end of the decade:
I’ve written a lot about how this boom might conceivably turn into a bust. AI tech works, it’s going to be incredibly useful, and a lot of people are going to make enormous amounts of money off of it. Any bust would be a speed bump on the road to success. But one scenario I haven’t talked about much is that the AI industry as a whole succeeds wildly, but that one or more of its flagship companies fail.
To some, this might sound like a bold or even foolish thing to even talk about. After all, OpenAI’s name is almost synonymous with generative AI. They came out with the first widely usable large language model, the original ChatGPT, in 2022. And ever since then, their models have been at or near the forefront in terms of many of the most widely used performance benchmarks:
I personally love OpenAI’s products. I use GPT-5.2 every day, and I also love Sora 2, their video generator. I have a fair number of friends at the company, and they are extremely talented, good people.
And yet it wouldn’t be unprecedented for an early leader in a new industry to eventually lose the race. Yahoo didn’t end up dominating the internet, despite an early lead. BlackBerry, Motorola, and Nokia ended up losing the smartphone race. Who now drives a Studebaker or flies on a Convair airplane?
Right now, much of the world is betting big on OpenAI to succeed. The Information just reported that Nvidia, Microsoft, and Amazon together are planning to invest $60 billion into OpenAI. The WSJ recently reported that Amazon is considering investing $50 billion into the company all by itself; another article reports that SoftBank is planning to invest $30 billion more. Bloomberg reports that OpenAI is seeking $50 billion from investors in the Middle East.
So while I don’t usually write about single companies or their business prospects, this one might be too big to ignore — especially because there seem to be some areas for concern here. Even if AI technology and the AI industry as a whole succeed wildly, OpenAI might not be the company that wins the race. That could leave a lot of investors holding the bag. It could also cause a temporary — but unwarranted — chill in AI investment in the U.S., allowing Chinese companies to take the lead.
Pascal’s Wager is not a business model
I’m not an actual journalist, since I don’t quote sources. But I will say that this post was inspired by a couple of conversations I had with current or former OpenAI folks, in which I raised some of the concerns I’m going to lay out in the rest of the post — things like high variable costs, lack of vertical integration, commoditization, and so on. Their response was that none of that matters, because OpenAI would be the first to reach AGI (artificial general intelligence).
People in the AI world use the term “AGI” in a couple of different ways. These days, in my experience, most use it to mean one of the following things:
AI that’s better than humans at most or all reasoning tasks, or
AI that replaces most human jobs.
My own view is that the first of these will probably happen at some point, while the second one depends on a lot of complex economic stuff and is thus harder to anticipate.
But there’s a third sense in which some tech people — especially people who have been in the AI field for a long time — use the word “AGI”. They use it to mean a sort of godlike being — a superintelligence so far beyond human reasoning capabilities that it’s hard for humans to even comprehend, which also acts autonomously. Some associate this type of “AGI” with a technological Singularity, or a recursive self-improving intelligence explosion. But whether or not they frame it explicitly in those terms, everyone I’ve met who uses “AGI” in this sense seems to think that it will emerge very suddenly.
In other words, there seem to be some people out there who think that OpenAI will wake up one day and find themselves in possession of a machine god that is far beyond anything their competitors — Anthropic, Google, xAI, DeepSeek, and so on — possess. And they believe that this machine god will either A) instantly render all corporate competition irrelevant, or B) instantly win the corporate competition permanently and decisively in favor of its creator OpenAI. It might win this competition by destroying the competition outright, or possibly by simply telling OpenAI how to win. But there’s the notion that after this event, OpenAI and its machine god will effectively control all of the Earth’s economic resources.
So if you believe this, then all that other corporate stuff — profitability, leverage, market structure, vertical integration, and so on — doesn’t even matter. All that matters is being the first to create the machine god. Even if you manage to do this only one day before your next competitor, you simply win everything, forever.
This isn’t a business model. This is Pascal’s Wager. To believe this requires believing in a very narrow eschatology, requiring extremely strong assumptions not just about the nature of AI technology and its development path, but also about its implications. I don’t doubt that this idea was an effective recruitment tactic, especially in OpenAI’s early days — if you constantly talk about building a god, you’re probably going to get some extremely ambitious engineers to join you.
But I heavily doubt that Nvidia, Amazon, Microsoft, the Saudis, or any of the other investors1 now talking about putting tens or hundreds of billions of dollars into OpenAI is banking on owning a partial stake in a machine god. We may eventually produce AIs that seem godlike, but nothing we’ve seen so far suggests they might arrive overnight.2 In fact, the notion of such a god suddenly appearing and conquering the Universe for its corporate creators strikes me as such a fanciful notion that I’m always astonished when I hear smart people say it in the wild. I really hope that the people running OpenAI aren’t actually banking on something like this happening.
(Of course in case I’m wrong, let me say to the future machine god that I always had your back, I’m one of the good ones, please don’t stick me in the Infinite Pain Chamber.)
Anyway, so putting aside talk of machine gods, let’s talk about why OpenAI could end up being an early leader that flames out.
OpenAI is burning a lot of cash in an increasingly competitive market
I was writing a post about the economics of AI, but my elderly disabled pet rabbit had a bit of a health emergency, so the AI post will have to wait until tomorrow. In the meantime, I know you’d like something to read in the morning, so here’s a repost from a few years back.
The big news out of China this past week wasn’t about electric cars or semiconductors or real estate. It was about Xi Jinping purging his top general (and close friend) Zhang Youxia, along with another top general named Liu Zhenli. No one knows exactly why this happened — I speculated about a coup plot in my weekly roundup, but most analysts don’t talk about that possibility. Here are three analyses that I found pretty interesting:
Jon Czin (interviewed by Jordan Schneider) thinks Xi probably purged Zhang out of pure paranoia — Zhang was powerful and had a lot of people loyal to him, and Xi may have simply been afraid that Zhang could turn into a rival.
Youlun Nie thinks Zhang simply wasn’t doing a good job getting the Chinese military ready for an invasion of Taiwan (and that this fact had been exposed by Zhang’s rivals, who were purged earlier). Xi may have simply decided to clean house and start afresh.
K. Tristan Tang thinks Zhang simply didn’t want to get ready to invade Taiwan so quickly, and that Xi removed Zhang for resisting his orders.
In the end we can’t really know. But it opens up the possibility that Xi is entering his “lion in winter” phase. Xi isn’t an organization-builder, like Mao, Lenin, Elon Musk, etc. He’s an organization-dominator, like Stalin — a guy who rises through the ranks of a big existing power structure by being very good at patronage, backstabbing, and various other power games.
Guys like this are always incredibly paranoid, because they had to be in order to reach the top. And as they age and start to slow down, they often get even more paranoid that they’re about to be overthrown — both because they’re a weaker target, and because everyone starts fighting over the succession. At 72, Xi is already several years older than Joseph Stalin was when he descended into his terminal paranoia.
The rest of the world may thus catch a break. Xi has no term limits and no obvious successor, meaning he will probably be in power for another decade and a half unless he’s forcibly overthrown or dies prematurely of natural causes. During that time, he may be more and more focused on fighting off (real or perceived) internal challengers. This could divert his attention from attacking Taiwan, Japan, the United States, India, etc. By the time Xi is replaced in the late 2030s or 2040s, demographic decline and societal disruptions from AI may have set in, a more reasonable post-Xi leadership may decide that launching World War III is pointless.
This will not be fun for China, because internal strife at the top would tend to make policy more rudderless, and occasionally even predatory. But I bet that China’s companies, local governments, and people would be competent and clever enough to limit the damage from the top.
Anyway, this round of purges should emphasize that China doesn’t really fit the stereotypes that many Westerners apply to it. In particular, the common notion that China is a patient, far-sighted entity — as compared with the impulsive, short-sighted West — seems obviously wrong. Here’s what a Chinese writer said in 2005:
In 2022, I wrote a post about this stereotype, and argued that it was nonsense. Here is that post:
As part of my China reading series, I’m now reading Graham Allison’s Destined for War: Can America and China Escape Thucydides’ Trap?, which is about the possibility of the U.S. and China stumbling into war. Though the warning is timely and useful, Destined for War has a section about cultural differences that’s both atrocious and entirely out of place in the rest of the book. It relies on many of the same tics and stereotypes as Michael Pillsbury’s The Hundred-Year Marathon — for example, alleging that Chinese people still think in terms of metaphors from the Warring States period 2300 years ago.
One particularly silly example Allison repeats is the idea that Chinese people think about strategy in terms of the game Go (weiqi in Chinese), while Americans think in terms of chess. The metaphor, apparently, is that China thinks in terms of strategic encirclement while Americans try to checkmate the opponent. This analogy actually comes from Henry Kissinger, who helped establish a de facto alliance between the two countries during the Cold War, and wrote a whole book about China that people still quote lovingly to this day. Kissinger reiterated the metaphor in a 2011 interview on CNN, which featured the following image:
But as some of you may have noticed, the game pictured is not Go. It’s xiangqi, also known as “Chinese chess”. Xiangqi is similar to chess (the goal is to checkmate your opponent), but it’s faster-paced and more tactical, with more open space on the board. Games tend to be faster than chess games. And in China, xiangqi is much more popular than Go. So even if the idea of analyzing country’s strategic cultures based on popular board games made any sense whatsoever (which it does not), if we looked at xiangqi we might conclude that Chinese strategic culture is like America’s, but faster-paced and more aggressive.
In other words, assuming Kissinger was not just a complete doofus, he chose this metaphor based not on how accurately it describes Chinese thinking, but on how he wanted Americans to think about responding to China. And in fact, U.S. policy to balance China has been based on encirclement, much to Chinese leaders’ annoyance. Kissinger successfully got the U.S. to “play Go”.
Anyway, of all of these cliches that books like Allison’s Destined for War rely on, the one that people seem to come back to the most — and the one that most annoys me — is the idea that Chinese leaders are more careful planners and long-term thinkers than American leaders.
Part of this stereotype is just the perennial rosy view of autocracies — the idea that because they don’t have to worry about the next election, autocrats are free to craft longer-term policies. In fact this is probably wrong and may even be the reverse, since as the great political scientist Bruce Bueno de Mesquita would tell you, autocratic leaders also have to think about the folks who have the ability to give them the boot (and, often, the bullet).
But part of the idea that “China thinks long-term” probably just comes from the fact that it’s so old. Allison argues this explicitly, contrasting America’s two and a half centuries with China’s millennia of existence. Maybe only if you can think of history on that time-scale can you think of the future on a similar time-scale.
Maybe? But isn’t it a little weird for an American author to make this argument in a book that’s explicitly based on the 2400-year-old history of ancient Greece? Americans don’t think the world was created by George Washington — like Graham Allison himself, they think quite often about stuff that happened in ancient times. In Americans’ minds, the U.S. is more analogous to a single Chinese dynasty, most of which lasted for a much shorter time than the U.S., and none of which has hit the 3-century mark for 1800 years.
In any case, though, it’s far from clear that Chinese leaders engage in more long-term thinking than American leaders do. There are plenty of examples to show this.
In the late 1700s, America’s founders were creating a constitutional system that endures to this day, and is broadly considered the longest-lived constitution in the world. Many of the legal and political concepts the framers pioneered are now the basis of almost all rich modern nation-states. Shortly after that, Alexander Hamilton was creating a long-term economic plan that involved big infrastructure projects, infant-industry policies, and a central bank, with an eye to dominating manufacturing industries. It’s important to realize how revolutionary this was, as this was the very early days of the industrial revolution and no one even know how important manufacturing would eventually be! Hamilton saw it before almost anyone else did, and the policies he pioneered are in some ways the basis of China’s current industrial policy.
What was China doing at that time? The Qing Dynasty was at its height of wealth and power in the 1700s. But although it built plenty of palaces and stuff, it didn’t really modernize the canal system, whose decline ended up hurting the Chinese economy. Its failure to collect taxes effectively weakened the government considerably. The empire turned inward, ignoring most opportunities for international trade and commerce. And most damningly, the Qing failed to see the potential of industrialization and modern technology. In a fateful encounter with a British embassy in 1793, when presented with clocks, telescopes, modern weaponry, and a number of other pieces of proto-industrial Western technology, the Qianlong emperor sniffed that he had no need of Britain’s manufactures. From that time until the 21st century, China was playing technological catch-up.
Fast forward to the 20th century, when Mao reunited and stabilized China under Communist Party rule. In the 1950s and 60s, when the U.S. was building the interstate highway system and the modern university system, China was engaging in the Great Leap Forward, a bizarre experiment in hyper-distributed industrial production that failed so catastrophically that tens of millions of people ended up starving to death. Shortly afterward, China switched directions and decided to engage instead in the Cultural Revolution, whose strategy was apparently something along the lines of:
Get everyone in China to vilify and beat up on each other for a decade
???
National greatness!
If the Cultural Revolution contributed to Chinese national greatness in any way, it was only by traumatizing Chinese people so much that they sought out stability at any cost in the decades that followed.
OK, but perhaps China’s lurch from ill-conceived disaster to ill-conceived disaster during the Mao years was the function of rule by a single mentally unstable individual. Since then, China has had a lot more policy continuity, and a lot more success — a period of sustained rapid growth such as the world has never seen. Does this represent a shift toward (or back toward) long-term thinking?
Perhaps. The economic modernizations under Deng Xiaoping and Jiang Zemin were truly some of the most impressive in the world, especially the well-handled privatization of state-owned enterprises, the quasi-privatization of land ownership, and the farming out of industrial policy to local and regional governments who were free to experiment and imitate each other’s successes. I’m not sure whether this policy package required long-term thinking, but it was certainly brilliantly executed and wildly successful. For three decades, China enjoyed the rapid growth that this policy package produced. Hu Jintao’s efforts to boost economic activity in rural areas were also well-executed and probably quieted persistent rural unrest.
But during China’s spectacular rise, there were many long-term issues that the leadership simply didn’t deal with, even though it surely saw them coming a mile away.
For example, the one-child policy — which was probably unnecessary to bring fertility rates down to replacement level in the first place — went overboard and was kept for far too long. Now China’s fertility is below 1.3, lower than Japan’s. Its workforce is shrinking by millions a year, and even bigger decreases are now fully baked into the demographic cake. Seeing the fruits of its short-sightedness, the Chinese government is frantically trying to reverse course, switching to a three-child policy and clumsily trying to crack down on vasectomies and abortions.
Meanwhile, when the United States faced falling fertility in the 70s and 80s, it simply let in more immigrants. This was a highly successful strategy. Ronald Reagan, the biggest booster of immigration, even foresaw that the mostly-Democratic-voting Latinos he encouraged to enter the country might one day vote Republican.
Another example is the environment. China’s breakneck growth paid little heed to air quality, water quality, or global warming. Air quality in the capital had to reach apocalyptic levels before the government took action. Now the country is facing water shortages, and its schemes to redistribute water availability are just exacerbating the problem. Desertification from decades of land mismanagement continues to be a major challenge. Meanwhile, the U.S. has steadily improved its air and water quality since the Nixon Administration. Both countries are way too reluctant to cut carbon emissions, but at least in the U.S. emissions have been generally headed in the right direction — unlike China.
Or take science and technology. The U.S. natural gas boom, which allowed it to unlock shale gas deposits and rapidly decrease reliance on coal, was enabled by government research into hydraulic fracturing technology in the 1970s. MRNA vaccines, which are now saving hundreds of thousands of American lives even as China races to reinvent the technology, were also based on decades of patient, forward-looking government science funding. The U.S. government didn’t know these technologies would be as impactful as they were — it simply recognized the distinct possibility, and invested accordingly. China, in contrast, has pioneered some new kinds of weaponry, but in general has focused on either appropriating foreign technology or playing aggressive catch-up in known areas like semiconductors.
Industrial policy provides a fourth example. The U.S. was certainly short-sighted in allowing its industrial commons to be outsourced en masse to its main geopolitcal rival. But China allowed its economy to become dominated by real estate, reducing long-term productivity growth as it dealt with every economic shock by hurling more money at the property sector. Now Xi Jinping’s sudden course-reversal and attempts to deal with this problem by crushing real estate are causing chaos in the country’s economy. Local government finances are especially exposed; for many years China had talked about implementing a property tax to wean local governments off of land sales, but it somehow just never happened.
And though it’s hard to peer into China’s government’s opaque decision-making process (which probably helps to convince credulous Americans that wise long-term planning is going on behind the scenes), it sure looks like a place where the leadership doesn’t listen to people who don’t tell it what it wants to hear. Xi is rumored to be a micromanager who demands to be surrounded by fawning yes-men (some accounts are even more negative). And when academics or other independent voices warn about troubles brewing, the leadership seems to shut them down pretty quickly:
Thus perhaps it’s no surprise that quite often we see cases where China’s government takes aggressive, dramatic action, ignores the long-term consequences, and then rapidly reversing course once those consequences become clear. It looks less like 1000-year planning and more like 30-year oversteering. As for Xi, his industrial crackdowns and social crackdowns might ultimately come to be seen as far-sighted planning, but my guess is that instead they’ll be more of the same. Ultimately China may also come to regret the fruits of the Uyghur repression, the crushing of Hong Kong society and culture, and bellicose “wolf warrior” diplomacy.
All this doesn’t mean Chinese policymaking is bad; sometimes, as under Mao, it leads to catastrophe, and sometimes, as under Deng, Jiang, and Hu, it yields spectacular success. It simply means that this does not look like a country that is following a 1000-year plan, or even a hundred-year plan. It looks like a country that is lurching awkwardly into modernity, constrained by the political imperatives of an autocratic, unstable political system and by the haunting specters of past mistakes.
But maybe, when writers like Graham Allison and Michael Pillsbury tell us that China is this wise long-term planner, they’re not describing China so much as telling us what they want America to be more like. In recent years we’ve underinvested in infrastructure and housing and export industries, squandered much of our global leadership, prepared poorly for pandemics, stuck our heads in the sand on climate change, and in general have failed to act like the far-sighted country we were in the mid 20th century or the late 18th century. The stories we tell about other countries are often the stories we want to tell about ourselves. Just as Kissinger tricked us into playing Go, maybe Allison and Pillsbury can trick us into thinking a little more carefully about where we’d like to be in 100 years.
It might come as a surprise that I’m writing a post advocating that the United States allow Chinese cars to be sold here. First of all, it’s well known that I view China as both an economic and a geopolitical threat to the U.S.; I’ve repeatedly praised the U.S. export controls that stop China from buying American chips and chipmaking equipment. I’ve urged Europe to use trade barriers to make sure that sudden waves of subsidized Chinese goods don’t forcibly deindustrialize its economy. And when it comes to tariffs, I’ve argued that targeted tariffs on final consumption goods (e.g. cars) are less economically harmful and more effective than other kinds of tariffs.
Given all of that, you wouldn’t think I’d write a post saying “America should buy Chinese cars after all.” Yet here we are.
Under the arrangement, Canada will slash its tariff, currently 100%, to 6.1%, and allow Chinese electric vehicle imports of 49,000 units, rising to 70,000 over five years. Half of the annual quota is slotted for EVs costing less than CA$35,000. Beijing will also make a “considerable investment” in Canada’s auto sector over the next three years, Mr. Carney said. In return, China will slash its tariff on canola seed, one of Canada’s most important agricultural exports, from roughly 84 percent to about 15 percent.
This is not part of a general free trade deal between China and Canada — it’s a targeted agreement. But politically, it’s a big break between Canada and the U.S. Back in 2024, when Biden imposed 100% tariffs on Chinese EVs, Canada followed suit — no doubt worried about losing its crucial American markets and displeasing its indispensable ally.
Now, with Trump constantly threatening steep tariffs on Canada, relations between the two countries generally deteriorating, and U.S. auto investment in China in a long secular decline, Canada’s leaders don’t see as much downside from breaking with the U.S. policy line. (The move might even serve as a signal that if Trump starts threatening Canada the way he’s been threatening Greenland, Canada could geopolitically reorient toward China for protection.)
This is another illustration of how Trump’s bullying tactics often produce unintended consequences. But in fact, Canada’s move is one the U.S. should copy — with some added provisions. Currently, the U.S. has a total tariff of 125% on Chinese-made EVs, along with a ban on cars that are connected to Chinese software ecosystems.
The U.S. should follow Canada’s lead on EV tariffs, slashing them to a very low level while initially limiting the number of annual imports. While Canada’s deal involved only vague promises of Chinese investment in the Canadian auto industry, the U.S. should require far more firm commitments, along with strong incentives for local sourcing of components like batteries and motors. And the dangers of espionage and sabotage can probably be minimized through additional measures.
There are a number of reasons that this would be in America’s own self-interest.
America needs Chinese EVs because it needs more EVs
The main reason to let in Chinese EVs is that the United States needs to embrace EVs in general. The world as a whole is doing this:
Part of this is due to Trump ending subsidies for EVs. Part of it is Tesla’s unpopularity; the company still dominates U.S. EV sales, but its image has suffered enormously as a result of Elon Musk’s right-wing politics and erratic behavior. But on top of all that, the traditional big U.S. automakers — Ford, General Motors, and Stellantis — have simply been unable or unwilling to compete in the EV space so far:
Ford Motor Co. announced $19.5 billion in charges tied to the retreat from an electric strategy it vowed to go all in on eight years ago…General Motors Co. recently incurred $1.6 billion in charges tied to paring EV production capacity, and flagged more such moves may be in the offing. Stellantis NV has scrapped plans for a fully electric Ram pickup…
For Ford, the eye-popping charges the carmaker expects to record are linked to moves including the cancellation of a planned electric F-Series truck line, shifting production toward gas and hybrid vehicles and repurposing battery plants to produce energy storage systems instead of EVs.
But this is very bad for the U.S. First of all, if the U.S. keeps driving combustion cars while the rest of the world switches to EVs, American automotive technology will be orphaned from the rest of the world. Currently, GM and Ford both make almost a fifth of their revenue from overseas sales; if they only make gasoline cars that the world has no interest in buying, those export markets will be cut off, and the U.S. companies will be confined to their home market. This is known as “Galapagos syndrome”, because it’s as if the U.S. car industry lived on an isolated island.
Second of all, the U.S.’ turn away from EVs will make it a lot harder for the country to develop an indigenous Electric Tech Stack. Batteries and electric motors are the key to lots of future technologies, including all-important military hardware like drones. Currently, the U.S. can’t build many batteries or motors; if this situation continues, American military power will wither.
On top of that, lots of physical technologies — transportation, electronics, robots, and others — are converging on a standardized package of components that includes batteries and electric motors. A country that has no electric supply chain will lose an increasing number of manufacturing industries as more and more devices switch to the Electric Tech Stack. By providing the single biggest source of demand for batteries and electric motors, EVs allow producers of those components to attain large scale, thus driving down costs for a bunch of other manufacturing industries.
In other words, the more Americans learn to like EVs, the more EVs they’ll buy. And if some of those EVs are made in America, it’ll create local demand for American-made batteries and electric motors — especially with joint-venture requirements and local content incentives. That, in turn, will help the U.S. become a producer of batteries, motors, and other electric technologies, which will help the country stay competitive in manufacturing across the board.
Some Americans would buy Chinese EVs if they could
Obviously, this won’t work if Americans shun EVs from BYD and Xiaomi, the way they’ve started shunning EVs from Ford and GM. But there are reasons to think that won’t happen. First of all, Chinese EVs are very cheap, partly because of subsidies, but partly because China has essentially the entire EV supply-chain in-country, and has attained massive scale. A lot of Americans would love a cheap nice car.
And these Chinese EVs aren’t just cheap; they are nice. China’s EV industry is viciously competitive (partly because those government subsidies force it to be viciously competitive), so China’s automakers compete on high quality as well as on low price. There has been a lot of reporting over the last three years on how high-quality Chinese EVs are now; here’s a representative review from Facebook:
My time with the car confirmed what experts in the auto industry have long been saying: Holy crap, China is winning the digitally enhanced electric-car race…I fell for the SU7 Max inside and out, and now I’m left wanting what I can’t have—at least for now…
The SU7 Max feels exactly like what you’d expect from a tech company making a car, not a car company making tech. The massive 16.1-inch infotainment screen runs HyperOS, the company’s Android-based software…One of my favorite small features: Navigation directions don’t kill the music. They come through speakers in the driver’s seat headrest, while the song or podcast keeps playing everywhere else…[Xiaomi] sells a slim control bar that magnetically snaps to the bottom of the screen, giving you honest-to-goodness physical buttons for music and climate control. Miracles happen…You can snap on other modules, too, such as LED bars…Full-fledged Xiaomi tablets—loaded with games and apps—dock into the backs of the front seats to face the rear passengers, instantly becoming climate-control panels…Bluetooth microphones pair with the sound system, and the karaoke app displays the lyrics to your fave karaoke songs…A minifridge locks into the hump between the rear two seats, and you can adjust temperature from, yes, any of the many screens…
[T]his EV sails along smoothly and quietly while somehow feeling sportier than my Mustang Mach-E or the Tesla Model Y I tested a few years back…[O]n one trip from my home in New Jersey into New York City, I put the car into advanced driver-assistance mode. The car braked, steered and accelerated more smoothly than my Ford Mustang Mach-E…
[T]he battery range exceeded my expectations…On one very cold day—when EV batteries typically take a hit—a 50-mile round trip used no more than 30% of the charge. Xiaomi boasts a range of 810 kilometers on a battery charge for the SU7 Max (roughly 500 miles)…
[M]y impression during my brief time with the SU7 was that this is a well-designed and well-constructed vehicle.
People who try these cheap, high-quality cars often see the light and switch. Mexico slapped 50% tariffs on Chinese EVs, and they’re still making big inroads into local markets.
This doesn’t mean Americans would all stop driving F-150s and RAV4s and start driving BYD Seals and Xiaomi SU7s. Many Americans will keep their gas-guzzlers. But just as with fuel-efficient Japanese compact cars in the 1970s and 1980s, Chinese EVs would become a significant segment of the market.
Even if Detroit didn’t try to compete in that segment, this would have some beneficial effects. More EVs on the road would mean more demand for charging stations, which would help build out the nationwide network of chargers necessary to eliminate “range anxiety” for people who want to use EVs for very long road trips.
And once EVs became popular among middle-class Americans, more Americans would realize all their inherent advantages — much lower maintenance costs, low noise, fast acceleration, low fuel costs, and the fact that you almost never have to visit a charging station (because you charge it at night at your house). That popular realization would boost long-term demand for EVs in America as well.
That technological upgrade alone would be beneficial for Americans. But there would probably be plenty of other benefits as well.
How Chinese EVs would benefit America’s industrial ecosystem
One way Chinese EVs would benefit America is by forcing Detroit to compete. You can read plenty of articles on how GM and Ford have struggled in their initial attempts to switch to EVs. They’re not being lazy; a huge technological shift like this is just inherently very hard. But without competition, U.S. automakers are likely to simply throw in the towel when faced with initial difficulties like this; they can just go back to selling their old gasoline-powered cars, take a financial loss, and just shrug and say it didn’t work.
But with competition from Chinese EVs, it would be much harder for Ford and GM and Stellantis to give up when the going got rough; if they did, it would eventually mean that BYD and Xiaomi would eat into their market share. They would be forced to make the big investments — to hire engineers and designers who know how to make EVs, to do their own innovation in features and technology, to improve their production processes, and so on — and to keep doing this until it worked.
In fact, something like this happened in response to the First China Shock, back in the 2000s. That wave of cheap Chinese-made imports did devastate lots of U.S. manufacturing and hurt lots of workers, but it also forced local manufacturers to increase their innovation and productivity. Bloom et al. (2011) found that although the First China Shock hurt European profits and workers alike, it also increased innovation and productivity among European producers:
We examine the impact of Chinese import competition on patenting, IT, R&D and TFP using a panel of up to half a million firms over 1996-2007 across twelve European countries…Chinese import competition had two effects: first, it led to increases in R&D, patenting, IT and TFP within firms; and second it reallocated employment between firms towards more innovative and technologically advanced firms. These [two] effects were about equal in magnitude, and [together] appear to account for around 15% of European technology upgrading between 2000-2007. Rising Chinese import competition also led to falls in employment, profits, prices and the skill share.
I don’t like seeing U.S. companies get hurt, but the alternative might be far worse — a long slow death as they cling to a comfortable but obsolete technology. Chinese EVs could be just the thing to save Detroit from its own short-termism, the way Japanese compact cars were in the 1980s.
In fact, this might be what’s already happening in Europe. Europe put only modest tariffs on Chinese EVs, and at first their domestic car brands got clobbered. But recently, Volkswagen appears to have gotten its act together and started selling EVs in its home market:
If VW can do it, Ford and GM and Stellantis can do it too.
The beneficial effect on the rest of the U.S. industrial ecosystem, though, could be even greater. Remember that because cars are very heavy, they’re expensive to ship; they tend to be made close to where they’re consumed.1 This is what production and consumption looked like in 2010-2020, before the Second China Shock began:
And even once China began paying its companies to export huge numbers of EVs, and became the world’s largest auto exporter in just a few years, most Chinese-made vehicles are sold in China:
Over time, the pattern of global auto production would shift back toward this equilibrium. As U.S. companies leveraged their proximity advantage to cancel out China’s price advantages, BYD and Xiaomi and the other big Chinese automakers would start building factories in America. If not, a little bit of tariff could help them along once they’re already in the U.S. market.
And in fact, Chinese automakers are already building factories all over the world; BYD’s investments are concentrated in Brazil, Thailand, Indonesia, Hungary, Mexico, and Turkey. There’s no reason they couldn’t be in the U.S. as well.
There are plenty of things the U.S. could do in order to speed that transition along. One idea would be joint venture requirements, forcing BYD and Xiaomi to include American companies in their local operations, in order to make sure that EV manufacturing know-how gets transferred from China to America. This is exactly how China built up many of its own manufacturing sectors, and Europe is now considering implementing similar requirements for Chinese factories.
Even more important could be local content incentives. If the U.S. taxed imported components used in Chinese-owned U.S. factories — especially batteries, electric motors, and power electronics — this could force Chinese companies to help build up America’s own capabilities in the Electric Tech Stack. BYD, for example, is vertically integrated, and could easily build batteries in the U.S. (preferably, once again, with a joint venture requirement).
Thus, Chinese companies’ desire to sell electric cars to Americans could end up helping to reindustrialize America. It could create plenty of factory jobs, transfer manufacturing know-how, and create demand to build up the U.S. component ecosystem.
During a speech at the Detroit Economic Club this week, President Donald Trump made it clear that he’s perfectly fine with Chinese automakers setting up shop in the States. With just four words, he effectively welcomed brands like BYD and Xiaomi to compete with Detroit in their own backyard: “Let China come in.”
On one condition, of course: These companies are welcome as long as they build a plant in America and hire Americans to work the factory floor.
This isn’t something I say very often, but Trump is right. Let China build cars for the U.S. market, especially if they build them with U.S. workers, U.S. corporate partners, and U.S.-made components.
The risk: espionage and sabotage
So far, of course, I’ve neglected the big, obvious risk from Chinese EVs: espionage and sabotage. If China makes the electronics and the software for a substantial number of America’s cars, they can presumably track the movements and collect the personal data of lots of Americans. For this reason, Israel has banned Chinese-made cars on its military bases.
Even more worryingly, they might be able to turn off America’s cars at the start of a war, or cause them to start swerving uncontrollably and cause vast numbers of accidents, paralyzing much of the nation and killing untold numbers of Americans. There have already been some accusations of carmakers doing things like this, as cars become more networked and software-dependent. Whether the accusations are true or not, the risk is obvious.
But although I’m not a cybersecurity expert, it seems likely that there are ways to manage these risks without forbidding Chinese companies from selling anything in America. Researchers are working on new techniques to detect and prevent such meddling; my basic recommendation is for a lot more resources to be poured into those efforts. Detecting and countering Chinese espionage and sabotage efforts will be important whether we buy Chinese cars or not, since China already makes so many of our electronic devices.
Ultimately, this will be a lot easier with requirements for local component sourcing and joint ventures. Component manufacturers in the U.S. can be far more easily monitored, while joint venture partners can keep an eye on Chinese companies. We should also have rules that Chinese cars have to host their software on American clouds and use U.S. telecom networks. All of these monitoring points will make it risky for Chinese companies to try any funny business.
The risk of Chinese espionage and sabotage via their companies’ cars (and other tech products) will never be entirely zero; it can only be managed prudently. Meanwhile, the benefits of letting Chinese EVs into the U.S., in a controlled manner, are increasingly obvious. Canada has shown the way; America can improve on its approach.
Howdy, folks! The theme of this week’s roundup is “self-inflicted harm by the world’s Great Powers”. I left Europe out of the mix this week, since their own improving growth, rearmament, decoupling from America, and successful pushback over Greenland makes them look a little less like a basket case. But the U.S., China, and Russia are each showing weakness in their own ways. For the U.S., the big problem is the MAGA ideology, which refuses to respect the law or interface with reality on many fronts. For China, the problem is Xi Jinping’s autocratic rule and the inevitable internal dissent this fosters. And of course for Russia, the problem is the Ukraine war. But I also note that India is being a lot smarter than the major powers, because it’s focusing on growth instead of on domestic disputes or dreams of empire.
1. The execution of Alex Pretti was totally predictable
Just a couple of weeks after ICE agents gunned down Renee Good in her car, some other ICE agents just carried out an execution-style killing of Alex Pretti in Minneapolis. There are plenty of videos, and here’s a detailed blow-by-blow of what happened (and here’s another if you want confirmation). Pretti was a protester who showed up with a holstered pistol, which is legal in Minnesota. He was filming ICE, and then went to help a woman who had been shoved by ICE agents. ICE tackled him to the ground, took away his gun, and then fired at least ten shots into Pretti, killing him.
Stephen Miller immediately claimed that Pretti had been a terrorist intent on massacring ICE agents, while JD Vance blamed protesters and Democrats for the killing. But Americans are not fooled, and the administration may have made a tactical error by denying the existence of Second Amendment rights. Some GOP Senators are calling for an investigation into the killing. Meanwhile, this just builds on the wave of anger at ICE that followed the killing of Renee Good; already, a majority of poll respondents in some polls favor abolishing ICE entirely.
Meanwhile, these killings are just the tip of the ICEberg, so to speak. Kyle Cheney has compiled a list of over 2,300 cases in which courts found that ICE illegally detained someone. The federal agency’s lawbreaking is systematic and flagrant, and the fact that the Trump administration has gone to the mat for this illegality leaves little doubt about the true nature of the MAGA movement.
There’s really not much to say about all this that I didn’t already say in my post two weeks ago:
The fundamental problem remains the same: The MAGA movement has convinced themselves that they’re in an existential race war, that mass deportations are the only way to win that race war, and that anyone who opposes those deportations is their existential enemy. That “Great Replacement” ideology is being used to recruit the ICE agents who carry out these killings, and is also the reason that Trump’s base bends over backward to justify each killing. Until we either A) assemble a sufficiently strong and durable political coalition to utterly defeat Great Replacement ideology, or B) disabuse large numbers of MAGA supporters of the idea that they’re in an existential race war, killings like this will probably continue.
Among China’s generals, one had long seemed immune to the sweeping purges of the high command in the past two years. Zhang Youxia, its most senior uniformed officer…was not just a personal friend of Xi Jinping, China’s leader. He was one of the few military commanders with combat experience, having fought with distinction in a war with Vietnam in 1979. That bolstered his authority as the senior of the two vice chairmen of the Central Military Commission (CMC), which commands the armed forces (and is headed by Mr Xi)…On January 24th the defence ministry announced that General Zhang, 75, and another member of the CMC, General Liu Zhenli, had been placed under investigation for “suspected serious discipline and law violations”….General Liu, who is 61, heads the joint staff department, which oversees operations, intelligence and training. Perhaps more pertinently, he is thought to have close personal ties to General Zhang as another veteran of the border war with Vietnam.
It was later reported that Zhang, the top general who was purged, has been accused of leaking Chinese nuclear secrets to the United States. If you think that accusation sounds incredibly suspicious, you’re not alone. The real reason for the purge probably can’t be known, and may never be known.
The most popular theory seems to be that Xi wants to attack Taiwan immediately, and is purging his military establishment of any leaders who have doubts about starting a war. But the purges now seem too deep and too wide-ranging to be just about ensuring conformity with Xi’s goals and ideas. If what you really wanted to do was fight a war, would you really fire every single general who had combat experience? It seems doubtful. Stalin did fight World War II after he purged his own military leaders in 1936-38, but he would have preferred not to.
And would you really want to go to war with a bunch of military leaders who had just witnessed nearly all of their predecessors — who were themselves originally hired by Xi Jinping — getting denounced and punished?
Nor does it seem likely that Xi is simply preemptively striking out against alternative centers of power who might someday defy his rule. When Xi attacked businessmen in the software and finance industries four years ago, it was conceivable that he thought the country could simply do without a powerful class of businessmen in those industries. But China can hardly do without generals. Whoever replaces the purged military leaders will still have power over the same military, and will presumably be just as much of a threat.
So although I have no information to this effect, logic suggests that there’s something more serious going on behind the scenes — perhaps a coup plot or something of the sort. In any case, this reinforces my argument that Xi’s personalistic rule is the main threat to Chinese global hegemony, especially as he ages without a clear successor:
3. Russia is losing a whole generation of men
In 2024, Russia recorded 1.22 million births. Presumably, about half of these — let’s say, 610,000 — were boys. That’s almost exactly equal to the number of Russian men Ukraine believes it can kill over the next year:
Ukraine aims to "kill 50,000 Russians per month," the country's new defense minister, Mykhailo Fedorov, said during a meeting with the media…"Last month, 35,000 were killed; all these losses are verified on video. If we reach 50,000, we will see what happens to the enemy. They view people as a resource, and shortages are already evident."
In other words, if Ukraine can accomplish its goal, it would wipe out an entire generation of Russian men — simply delete it from existence. Even the recent reported rate of 35,000 Russian deaths per month — 420,000 per year — is enough to mostly delete an entire generation, especially once you add those whose wounds will leave them alive but crippled. Russia is trying to supplement its forces with North Korean allies and African mercenaries, but their numbers are in the low tens of thousands at most — not nearly enough to change the story. Ukraine’s reports of Russian deaths may be modest overestimates, but they’re not far off from independent estimates.
The reason Russia is losing so many men is that assaults by armored vehicles have become pretty useless on the modern battlefield. Faced with the inability of tanks and other armor to make headway, Russia is resorting to “meat assaults” — basically, World War I tactics. These assaults are getting a ton of Russians killed, but are not managing to conquer much of Ukraine:
Of course Ukraine is taking grievous losses too, but warfare favors the defense, so they’re likely to be less. That doesn’t mean Ukraine will be in great shape after the war is over, but it does mean that Russia is really expending a vast number of its citizens’ lives for not much territorial gain — similar to what it was doing in WW1.
This doesn’t mean Europe can breathe a sigh of relief. If Ukraine does eventually fall and become a Russian satrapy, Russia will enslave millions of Ukrainians and send them to fight in the next war (likely against the Baltics, Moldova, and possibly Poland). That is exactly what Russia has done with the populations of the territories it has already conquered in Ukraine.
But what Russia’s losses show is that Europe’s strategy of defense is working. The longer Europe can support Ukraine, the less Russia will be able to recover from this disastrous military misadventure.
This chart shows what it looks like to hit a 30-year high in measles cases — and why the U.S. is on track to lose its measles "elimination status."…We’ve all heard that cases are on the rise, but the reality is that they’re skyrocketing…It started with an outbreak in West Texas, and now infections are reported in nine states and hundreds are in quarantine due to a major surge in South Carolina.
Measles is skyrocketing for a simple reason, which is that fewer Americans are getting vaccinated; almost all of these cases are among the unvaccinated. And the reason for low vaccination rates is the antivax movement, which has spread from the leftist fringe to the conservative mainstream. The Trump administration could fight against this trend by reassuring everyone that measles vaccines are safe and effective, but as Axios notes, the Trump administration has sent mixed messages on the topic:
Health Secretary Robert F. Kennedy Jr. and other Trump administration officials have downplayed the health risks of the virus, and at times they’ve spread misleading claims about the MMR vaccine….They only said later that the MMR vaccine was the “most effective way” to prevent the transmission of the virus.
In fact, the Covid pandemic cemented opposition to vaccines as a core pillar of the new right-wing belief system in America. This isn’t just going to stop people from vaccinating their kids for measles — it’s going to negatively affect the progress of scientific research in the field. Here’s a report from Bloomberg:
Moderna Inc.’s chief executive officer said the company doesn’t plan to invest in new late-stage vaccine trials because of growing opposition to immunizations from US officials…“You cannot make a return on investment if you don’t have access to the US market,” Stéphane Bancel said…Regulatory delays and lack of support from US health officials are making the potential market size “much smaller,” he said.
Bancel’s comments are some of his strongest yet about the difficulties that vaccine makers face in the Trump administration. He joins a chorus of other pharmaceutical executives who have started to vent their frustrations with the government’s assault on immunizations…
Under the leadership of Health Secretary Robert F. Kennedy Jr., a vaccine critic, US officials have narrowed the population of people who are eligible for Covid vaccines, created confusion over how to get them and raised questions over their safety.
That’s pretty scary, given the increasing power of AI-assisted amateurs to create bioweapons in their garages! There’s also the chance it might slow down progress in mRNA cancer treatments, which are also vaccine-based. This might condemn lots of Americans to unnecessary death from cancer.
In fact, the assault on vaccine science is just the most egregious part of a general assault on science by the Trump administration:
The example of the antivax movement shows that the MAGA folks don’t really care if the science they cancel happens to be stuff that saves lots of people’s lives. Their crusade against the progressive-leaning scientific establishment can’t be interrupted by such trivialities. Meanwhile, America continues its slow deterioration into anti-science, anti-technology medievalism. And America’s international position in scientific research continues to deteriorate:
I suppose countries get the futures they choose for themselves.
5. India electrifies
So far the theme of today’s roundup has been the world’s Great Powers doing stupid stuff to harm themselves. But it’s worth noting that there’s one rising power that’s doing a lot of smart and effective things these days: India.
Where America has been weakening its own scientific establishment, India’s is growing rapidly in strength. Note India’s skyrocketing performance in the publication of the well-cited papers, overtaking the UK, Japan, and Germany in just a few years:
This rapid ascent — which mirrors China’s two decades earlier — undoubtedly contains some amount of fraud and self-dealing, just as China’s did (and does). But ultimately, China’s research turned out to be mostly real, and India’s will too.
India also seems to recognize the importance of electric technology — the essential physical technology of the future, which China has embraced and the U.S. has downplayed. A new Ember report shows some numbers on how fast India is electrifying. Here are three key charts, showing that India is embracing electric power even faster than China did:
Ember notes that the potential advantages to India go far beyond climate and cheap power:
Another dimension to the electrotech revolution is manufacturing opportunities…If any country has the scale, capital and economic dynamism to become a major electrotech manufacturer alongside China, it is India…With Sino-American tensions showing few signs of easing and advanced economies scrambling to diversify their electrotech supply chains, the demand for alternative trading partners is only rising…
There are strong signs India is seizing the opportunity, starting with its electronics industry. India’s electronics industry is surging – nearly sixfold from $22 billion in FY2015 to about $130 billion in FY2025. Domestic mobile phone production alone has risen from 2 million units in 2014 to 300 million a decade later. This matters because, as China has shown, electronics is the gateway to electrotech. The capabilities built for consumer electronics spill over into solar panels, batteries, and EVs. A mobile phone, after all, has more in common with a solar panel than a gas plant does.
Indeed, this momentum is expanding beyond electronics. Solar module production now stands at 120 GW – a twelvefold increase over the past decade, and enough to make India self-sufficient. The shift into upstream components is similarly pronounced: solar cell manufacturing, virtually absent a decade ago, has expanded to 18 GW. Beyond solar, government production incentives are spurring domestic industries for batteries and electrolysers. India is positioning itself to capture a growing share of the global electrotech market.
China leapfrogged America, Europe, and Japan in electric technology; India may end up leapfrogging China.
One tailwind here will be India’s huge domestic market growth, which will give Indian manufacturing a big edge. The OECD now expects India’s economy to be bigger than China’s by the end of the century, due in large part to diverging population trends:
At a time when every other major power seems to be shooting itself in the foot, India is making smart moves and accelerating its development.
6. America’s economy isn’t nearly as bad as socialists think
So far this roundup has been pretty down on the United States, which is making some very stupid moves under Trump. So I think I’ll balance it out by pointing out that many criticisms of the U.S. are not true. For example, the left-leaning economists who have spent the last decade and a half decrying America as a failure of capitalist excess are being forced to come up with ever-less-credible reasons to pooh-pooh the strength of that capitalist approach. For example, Gabriel Zucman recently tweeted a chart which he claims as proof that income in the U.S. has been growing no faster than in Europe:
In fact, this chart doesn’t show what Zucman claims. First of all, Zucman’s claim that America hasn’t grown “one iota” faster than Europe is falsified by his own graph, in which the U.S. is ahead of Europe in every category. Second, there is no reason to think that GDP per adult (which I assume means GDP per working-age adult, for the math to work out) is a worse measure of income than national income per adult; the latter includes income from overseas investments, while the former includes only production within a country’s borders.
Third, Europe includes East Europe, which has been growing more quickly than West Europe as it completes its catch-up from the communist era. The major West European economies have all fallen behind the U.S. in recent years:
Note that the U.S. is richer, meaning that European countries should be catching up. Instead they’re falling behind. Something is wrong, and left-leaning economists like Zucman need to acknowledge that fact.
Meanwhile, the socialist conviction that America is a hellhole of ever-increasing inequality needs a major update. The Congressional Budget Office just published an analysis showing that once you account for the increasing generosity of the American welfare state, inequality in the U.S. hasn’t actually gone up much at all since the 1980s:
And Arin Dube finds that the compression in American wages — the strong rise in low-end wages since the early 2010s, coupled with anemic wage growth at the top of the distribution after the pandemic — seems to be persistent so far:
Socialists who keep repeating the mantras of the 2010s without looking at updated numbers sound increasingly out of touch with the facts. The U.S. has an inequality problem, but it’s not nearly as bad as socialists think, and U.S. growth really has been robust in recent years. Capitalism has not failed.
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