Today’s breakdown is authored by “Lithos Graphien,” an anonymous contributor with decades of experience in the lithography industry.

Printed Electronics and the Age of AI

65 years ago, Robert Noyce of Fairchild Semiconductor envisioned a way to make complex electronics using a printing process known as semiconductor lithography. Thus, the monolithic integrated circuit — or microchip — was born.

Not long after, Noyce co-founded Intel with Gordon Moore, who famously observed in 1965 that the number of transistors (electronic switches) on Intel’s microchips doubled every four years because of improvements in this printing process.

Moore’s Law holds to this day, with smaller and smaller circuit parts printed to pack more computational power into each new chip. In the near future, chips the size of your fingernail will contain an astronomical 100 billion transistors.

For this reason, a nation’s lithography capabilities determine the power of the semiconductors they can produce. That’s why lithography tools have been a key focus of US export controls.

Semiconductor Lithography Is at the Heart of the US-China Chip War

The US Department of Commerce — along with allies in the Netherlands and Japan — has so far issued two rounds of export controls aimed at limiting China’s lithographic capabilities. We summarized the first two rounds of export controls in this article.

Chinese companies like SMIC, however, have still managed to produce advanced semiconductors despite these controls. As another October approaches, which is Commerce’s favorite time of year to issue these updates, we can once again expect some type of action on lithography.

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This week, confidential sources told Bloomberg that the Netherlands intends to let the export licenses for ASML’s scanner parts expire at the end of the year, bowing to pressure by US Commerce.

ASML is the leading provider of lithography tooling, and their most advanced scanners have already been banned from export to China. The problem, though, is that Commerce took a number of years to enact these restrictions, and a large fleet of advanced tooling is already installed in China.

The chart below summarizes the machines made by ASML that are currently allowed or banned from export to China.

The key performance metric that Commerce uses to determine the law is called overlay — the ability of the machine to overlay two circuit patterns. Overlay is a measure of alignment error, and with today’s chip parts printing features on the tens-of-nanometer scale, overlay makes the difference between printing a mature node chip (>28nm) or an advanced one (<28nm). Each new generation of ASML scanners made incremental improvements in overlay.

Another improvement metric is throughput — the number of wafers per hour that can be processed through the tool. This doesn’t enable a new chip technology, but it has a considerable impact on the value of a scanner. Commerce has thus far made restrictions only on overlap, not throughput.

So what will happen next year for a Chinese fab using these tools?

First, note that no Chinese company can run these tools in secret. Every tool is accounted for by ASML and monitored by the factory. It should be fairly straightforward for ASML to segregate the export of parts for the blocked tools and the allowed tools. Most of the spare parts will be common between the blocked and allowed tools, so knowing where the parts are going will be key for enforcing the law.

Second, ASML’s immersion scanners are known for their reliability. They can often run for months at a time without maintenance, and for a much longer period before requiring a spare part.

These banned tools will be operational well into 2025 and perhaps beyond. But on a long-enough timescale, each of these tools will eventually become an idle boat anchor without spare parts.

So Chinese companies may attempt to stockpile key parts for these tools over the next four months.

Third, there is some confusion regarding whether ASML can or will block the servicing of these tools. The Dutch issue licenses only for physical goods, not technical services, so there is technically no expiration date on equipment servicing. Even so, it’s possible that ASML will stop servicing the banned tools anyway, because it’s in the spirit of what Dutch Commerce intended.

Uncharted Territory

The Dutch government’s move — letting export licenses for ASML’s scanner parts expire — at the request of US Commerce is unprecedented, in that Chinese companies legally purchased the machines under the assumption that ASML would support them for the lifetime of the tool. ASML still supports scanners they made thirty years ago. Impacted Chinese chipmakers will definitely respond through any legal channels possible. But if that fails, what is their contingency plan? What will ASML do to preserve revenues from their lucrative business in China?

The Nvidia model

Nvidia has been the focus of US Commerce as well. To limit China’s AI capabilities, Nvidia’s GPUs are limited based on their performance specifications.

In response to each new Commerce rule, Nvidia designed a special chip for the Chinese market that met the throttle specifications. ASML can take a similar approach — ie. they can meet the requirements by throttling the overlay performance on a blocked tool inside China to the required value of 2.5nm SMO. That would be both in their interest and in the interest of Chinese chip companies.

How would scanner overlay throttling work?

Over the years, many of the overlay improvements in ASML’s scanners were driven by software. That could include a new correction algorithm or a way to take more measurements. For this reason, the most likely tool downgrade option will be a software update pushed out remotely from ASML’s factories. This accomplishes a few goals:

1. It’s a relatively cheap, fast way to keep China’s fleet of immersion scanners running and earning money. This will be important if the legal battles are drawn out over a long period of time.

2. In the event that Commerce relaxes some of the restrictions under a new administration, the performance can be updated to the new overlay targets to improve tool performance again.

3. The blocked tools have the added value of improved throughput — which is not under any restriction — to maximize tool value.

4. And the tool will retain its resale value to a customer outside of China. If SMIC wanted to sell them to TSMC, for example, a similar software update could return it to advanced performance.

What are the bigger implications for China?

These restrictions will make it harder for Chinese companies like SMIC to produce a 7nm or 5nm chip. Commerce’s intent to limit China at the 14nm node will likely be fully enforced. And without further policy intervention, China will likely accelerate production of mature chips, advancing toward becoming the world’s top producer.

Mood Music

To discuss the post-election future of US competition policy, ChinaTalk interviewed Peter Harrell and Nazak Nikakhtar.

Nazak served in the Trump administration after a long career as a civil servant, where she was instrumental in shaping the Commerce Department’s work on China, first at the International Trade Administration and later leading the Bureau of Industry and Security. Peter worked in the Biden administration on the National Economic Council and National Security Council, focusing on international economics, export controls, and investment restrictions.

We discuss…

• The role of the executive in setting the industrial policy agenda

• Leadership shortcomings in the Biden and Trump administrations

• Competition with China — bipartisan consensus, bureaucratic inertia, and strategies to stop wasting time.

• Advice for America’s next president, from export controls to pharmaceutical decoupling and alliance management

• Creative approaches to supply chain resilience

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Optimizing Presidential Powers

Jordan Schneider: Let’s start by discussing the role of presidents in policymaking. I’m curious about your perspectives on the transmission belt of policy directives, both up toward the president and down from the president. Nazak, would you like to begin?

Nazak Nikakhtar: Certainly. The transmission belt process varies depending on the class of decision, which is determined by market impact and geopolitical significance. Career officials in the U.S. government understand the rules and protocols, working with interagency partners to evaluate necessary actions.

Then, if this is something they need to elevate for additional geopolitical or economic reasons, decisions are made about whether to seek interagency consensus at the assistant secretary, undersecretary, deputy, or cabinet level. All of this is coordinated through the National Security Council. Sometimes, directives come from the president. It’s a two-way street — more frequently bottom-up, but occasionally top-down.

Peter Harrell: Building on that, in both the Trump and Biden administrations, the president ultimately set the strategic direction for the administration on issues like China policy. For example, the president decides whether to pursue de-risking across many sectors of the U.S.-China economic relationship, or whether to focus on a select subset. They determine the scope of prohibitions on U.S. investment in China. 

Do we want a wide sweep of prohibitions on US investment in China, or do we want a more targeted set of prohibitions? 

Given the diverse voices within an administration and in Congress, it is up to the president to establish the strategic direction. This includes defining focus areas in the relationship, determining the breadth of approach, and envisioning a desired endpoint state for the short and long term.

This strategic direction allows agencies to utilize their tools to advance these goals. However, some individual cases and tactical decisions must also reach the president’s desk due to their significance or statutory requirements. For instance, major decisions like sanctioning or placing one of China’s largest companies on the entity list should involve presidential approval.

In the case of CFIUS, the investment screening process, only the president has the statutory authority to block a transaction. While the CFIUS committee might be able to persuade parties to abandon a transaction, the legal authority to block it rests with the president.

Generally, I’d encourage presidents and their senior staff to focus on strategic priorities rather than weighing in on every sanction against mid-level corporate officials or government bureaucrats. However, there are significant individual decisions that require presidential involvement.

Nazak Nikakhtar: I’d like to add that recent administrations haven’t excelled at providing granular direction. They often set high-level strategies like deterrence, technological superiority, military preparedness, and working with allies, but stop there. This leaves federal agencies to their own devices to interpret and implement these strategies, which is problematic.

To effectively implement these strategies, more specific guidance is needed from the top. What does deterrence look like in practice? What are the focus areas for achieving technological superiority? Which tools should this administration leverage to reach these goals? This level of detailed direction needs to come from the White House, starting with leadership. I haven’t seen this kind of specific guidance trickle down over the past 20 years, which would empower agencies to execute their strategies confidently. Without it, everyone is left in limbo, trying to determine the right course of action.

Jordan Schneider: Peter, it sounds like you might disagree. Let’s explore this further. Why are you skeptical of senior leaders getting more operational or tactical in their prescriptions?

Peter Harrell: I’m not sure I disagree. The president should not just set overarching priorities but also provide direction one or two levels below that. For example, with inbound investment screening, the president should decide whether to focus primarily on technology investments, include supply chain investments, or aim to restructure the entire investment relationship.

This level of strategic guidance from the top is crucial, but it’s different from bringing a list of 600 Chinese companies to the president for individual decisions. It’s about setting the overall direction and scope without getting bogged down in minutiae.

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Nazak Nikakhtar: I agree. For instance, regarding technological superiority, the president should specify which legal authorities to leverage, such as export controls, outbound data restrictions, or capital flow restrictions. This level of prescriptive guidance is crucial for federal agencies.

That is done now in some limited respects, but we need a more comprehensive, implementable grand strategy that provides better direction to federal agencies. I’m tired of reading endless pages from think tanks and government sources that merely state what we already know. We need to focus on how we’re going to achieve our goals.

Are we going to use export controls aggressively? Is it the small yard, high fence? Are we going to make the yard a bit bigger, considering all the stories we’re seeing about circumvention? What do sanctions on China need to look like? 

Peter is right that we don’t need to delve into the granular details of chip performance, but we do need to decide whether we’ll use export controls aggressively, define the scope of our approach, and identify specific sectors to target.

We often react rather than proactively implementing a comprehensive strategy. Federal agencies need clear direction to avoid wasting time.

We no longer have the luxury of time when it comes to China. We’ve already spent two decades transferring our technology, supply chains, and workforce to China, weakening our industries.

How much more time do we have to experiment?

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Bipartisan Boondoggles and Institutional Imprinting

Jordan Schneider: Nazak, you’re arguing that progress stalls without clearer strategic and operational-level direction, correct? What are the opposing forces from a bureaucratic and organizational collaboration perspective that create a bias toward inaction?

Nazak Nikakhtar: That’s an excellent question, and I’d like to hear Peter’s views as well. For the better part of the last 20 years, federal agencies have been indoctrinated with the idea that globalism is inherently good. To be clear, the alternative to globalism isn’t protectionism — it’s about identifying who might distort the global trading system and adjusting our trade relationships accordingly.

The prevailing notion was that we didn’t need to worry much about CFIUS, trade restrictions, or export controls because promoting trade was supposed to be universally beneficial. Around 2015-2016, America had a wake-up call, realizing this approach to China wasn’t working in our favor. The gears started turning in the other direction, but the federal bureaucratic system had been entrenched in this philosophy for two decades.

Career-level officials had long believed their primary purpose was to promote exports, including technology exports. It’s challenging for these individuals to shift their thinking after such prolonged indoctrination. Additionally, there’s enormous industry lobbying pressure. While industry will always advocate for its own interests, it’s the role of federal regulatory bodies to understand that they need to regulate. They should listen to industry perspectives but not always accept them as gospel, instead conducting their own due diligence.

Because the bureaucratic system has been conditioned to believe that industry is always right and that promotion should take precedence over protection, it’s been difficult to shift course. This explains why we’re seeing a narrow, middle-of-the-road approach. We’re making changes, but cautiously, to avoid too much disruption.

While it’s true that our economies are now globally intertwined and detangling them will require effort, we need to be clear about our objectives. What does “de-risking” mean in practice? Are we focusing on specific sectors? Are we aiming for gradual decoupling from distorted actors over time? Federal agency workers lack this level of clarity to understand how they need to shift their mindset, which is crucial for effective implementation.

Jordan Schneider: Part of the reason you don’t get that clarity from the White House is because cabinet members might disagree on what those answers are. We’ve seen this in both the Trump and Biden administrations, and throughout American history. Is it even realistic to expect the kind of harmony you’re hoping for, given that cabinet members are often ambitious individuals with their own ideas?

Nazak Nikakhtar: This is where direction needs to come from the president. It was disappointing in the Trump administration to have cabinet members constantly fighting over issues. I suspect this happens in every administration, but that’s when you need executive leadership to step in and provide clear guidance.

For example, regarding CFIUS — if Chinese laws state that they won’t comply with U.S. laws, should we believe any Chinese company will adhere to a mitigation agreement? Perhaps a president should declare that we should lean towards banning or divestment when Chinese FDI transactions are undergoing CFIUS review.

You can’t just leave cabinet members to duke it out. A president should try to appoint like-minded cabinet members to the extent possible. While you don’t want yes-men all the time, ultimately, you want to select a group of cabinet members who understand your objective and will help you achieve it. They may have differences in approach, which is healthy, but you can’t have cabinet members who fundamentally disagree on the ultimate objective, which we see all too often.

Peter Harrell: I was actually going to take it in a slightly different direction. While it’s not inappropriate for cabinet members to have different views — you probably don’t want everyone around a president to have exactly the same perspective — I very much agree with Nazak that the president ultimately needs to make decisions. The president should hear diverse voices among their advisors on strategic directions but then decide, “This is where I want you to go,” and everyone should align with that decision.

The other crucial aspect is that cabinet members need to work together on implementing effective policy, especially in our complicated relationship with China. To compete effectively, we increasingly need to leverage different types of regulatory tools, policy instruments, financial mechanisms, and diplomatic approaches that are spread across various departments. We need to get them working together to achieve shared goals set by the president.

For example, earlier this year, the U.S. Coast Guard issued a directive making it harder for American cargo ports to buy new cranes from Chinese companies. While China dominates this market, these cranes pose significant security risks as they track incoming cargo and can send that data back to China.

Simultaneously, the administration found funding from the bipartisan infrastructure law to encourage a Japanese cargo crane construction company to set up facilities in the United States, building domestic capacity over the next couple of years.

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This demonstrates how you need to combine security measures with economic alternatives, pulling together tools from entirely different departments like the Coast Guard and the Department of Transportation. Cabinet members need to be strategically aligned and direct their officials to collaborate across these different tools to achieve the real-world outcomes we want to see.

Nazak Nikakhtar: Ideally, the president would set the stage by instructing every cabinet member to identify all tools in their arsenal to deter China’s ambitions in the Indo-Pacific. They would request reports on achieving technological superiority, augmenting military and related supply chain preparedness and capacity, and improving integration with allies while reaching out to countries where China has infiltrated. Simply increasing appropriations from Congress is not the solution, as money is limited. The president should have the National Security Council and National Economic Council evaluate these strategies to determine if they align with the overall vision or require adjustments.

Currently, we lack such clear directives from the executive branch. Our approach is disorganized and policies often seem random. There’s no clear long-term strategy, resulting in a haphazard and reactive approach. We cannot win this strategic competition or race with China if we continue in this manner. China is extremely organized, and we must step up our game, particularly in terms of organization within the executive branch.

Stepping on the Gas in 2025 总统加油⛽️

Jordan Schneider: Peter, you’ve seen some Biden administration reports, such as those on supply chains. I read them and thought they were fine, maybe the classified versions were better, but there’s still a long way to go in tackling these issues.

The citations in the supply chain reports were largely from industry sources rather than independent government research.

This demonstrates a lack of institutional memory and expertise in addressing these questions. What are your thoughts on improving the executive branch’s report-to-policy pipeline?

Peter Harrell: There are a couple of factors that make for an effective government report or policy strategy that actually gets implemented rather than shelved. 

1. Obtaining buy-in during the report’s development is crucial. While the president can set direction and instruct cabinet agencies, when it comes to granular decision-making by mid-level career officers, you need their buy-in to the overall vision. An effective report should be developed in a way that garners support from assistant secretaries and undersecretaries, who can then push their teams to execute the report’s direction.

2. Continuity among officials working on execution is important. While administrations experience turnover, some continuity is necessary. Additionally, the people who put the report together should remain focused on execution rather than moving on to unrelated areas.

The 2021 supply chain initiative launched by President Biden laid out a vision to build resilience in American supply chains across four sectors — semiconductors, large-capacity batteries for vehicles and grid storage, critical minerals, and pharmaceuticals/APIs.

Progress has been quite good in semiconductors and batteries, with significant movement through the Inflation Reduction Act, the Department of Energy’s loan program office, and international efforts to source critical minerals.

But critical minerals have seen mixed progress. This area would benefit from stronger executive leadership, because we need a huge amount of minerals going forward for green energy, for defense, and for industrial applications. But getting things permitted here in the United States is incredibly painful. There are a lot of constituencies that don’t want to see new mines permitted

It would be great if the executive would step in and say, “We hear you that the mine needs to be environmentally sustainable. But also, we actually need to build a mine.”

Pharmaceuticals and APIs have seen the least progress, partly because the administration was initially busy focusing on COVID-related issues.

Moving forward, regardless of who is in office, there seems to be bipartisan consensus on the need to make progress on pharmaceuticals, as current efforts have been insufficient.

Nazak Nikakhtar: The Biden administration correctly identified key sectors to focus on initially. However, I have concerns about the approach. If I put my economist hat on, many solutions were carrot-oriented. While I support industrial policy and investments to catalyze critical manufacturing capacity quickly, we face a significant challenge — industries are hesitant to invest due to concerns about China’s ability to underprice their products.

Unless we signal strongly to these industries that we will protect them from China’s predatory pricing once they are operational, I fear some industries won’t grow as quickly as needed, and others may not grow at all. The June 2021 supply chain report should have been more prescriptive, stating that we would not only fund industry growth and provide tax cuts but also offer necessary price protections to ensure healthy growth.

Regarding critical minerals, while international agreements are beneficial, we still lack commercial processing capacity. We’re setting up supply chains that don’t yet exist. We need to focus on building critical mineral capacity. Some permitting issues could be resolved with common-sense approaches, such as using third-party validators to assess whether projects meet or exceed environmental standards, allowing projects to proceed while awaiting full agency review.

We must think creatively about solutions to move faster in this race against China. It’s crucial to have both carrots and sticks — incentives for good actors and deterrents against predatory actors and non-market economies. This balanced approach is necessary to protect the growth of our supply chains and those of our allies.

Peter Harrell: I agree with Nazak’s macro point that the successful growth of strategic industries in the US and with our Western allies requires consideration of both production incentives and demand-side factors. If we invest in critical minerals processing plants or legacy semiconductor plants in the United States, but China heavily subsidizes their plants and floods the market, making our plants economically unviable, our industrial policy will fail.

Looking back at the 1980s and the Reagan administration’s focus on semiconductors, they employed both incentives through SEMATECH and work with semiconductor companies, and also pushed the Japanese hard to prevent dumping in our market and ensure their market was open to the US. For a successful critical minerals or legacy semiconductor industry here, we need both positive incentives and barriers such as tariffs or other restrictions to prevent Chinese production from undercutting the market for the plants we’re trying to build. Pairing incentives with market protection or demand-side measures is essential.

Alliance Management and the Costs of Decoupling

Jordan Schneider: There are economic trade-offs involved in all of this. For example, a recent report showed that BIS has given out about $350 billion in Huawei waivers over the past five years. That’s surprising given Huawei’s presence on restriction lists. How do you both think about these trade-offs?

Nazak Nikakhtar: The Huawei situation is a perfect example of a policy issue that hasn’t been handled optimally in the last two administrations. We put Huawei on the entity list, but about a year and a half later, we switched the licensing criteria to mostly case-by-case, which statistically has a 99% plus approval rate. This approach is problematic from a policy standpoint and puts us in an awkward diplomatic position.

We’re asking countries like the Netherlands and Japan to restrict their exports of critical technologies to China, while we’re approving a high percentage of Huawei licenses.

This undermines our credibility when we ask other countries to impose restrictions.

Regarding the broader economic impact, when I was at the Commerce Department, we conducted an intellectual exercise to assess the economic impact of total decoupling from China, including financial flows, goods, services, and tech transfer. Assuming substitution, which we’re currently trying to achieve, the impact on US GDP was estimated at 3-5% in the short run, with enormous gains in the long run if we integrated our supply chains with allies rather than China.

I’m surprised to see reluctance in moving our supply chains, tech transfer, and capital flows away from China and integrating them with the rest of the world, given the potential for greater economic gains. This should be part of the ongoing conversation.

Peter Harrell: Regarding macroeconomic impacts, we’ve seen a lot of “sky is falling” rhetoric around traditional free trade economics since the Trump administration, with predictions that tariffs and other measures would devastate the global economy. However, we haven’t seen that happen. What we are seeing is that when there’s an orderly process allowing companies time to adapt and diversify away from China, we can address national security and economic security risks without causing major economic disruption.

I agree with Nazak that when the US is seen enacting tough regulations but then also creating numerous loopholes, it makes it harder to get allies on board with taking steps like export controls on semiconductor tools, which can be costly to their companies in the short term.

Regarding the Chinese market, especially for the tech industry, it’s true that China represents about 16-18% of the global economy. However, much of China’s dominance in tech product sales is due to its role as the world’s assembly floor. As supply chains diversify away from China, its share of the market for semiconductors and similar products will naturally decrease. Many of these sales, when cut off from China, will likely move to other markets rather than being lost entirely or captured by Chinese competitors.

Nazak Nikakhtar: Adding to Peter’s points, the argument that companies need China sales for revenue, especially in the semiconductor and equipment space, is no longer valid. Many countries are now implementing their own versions of the CHIPS Act, creating alternative markets for equipment makers. Just as we built China’s semiconductor manufacturing ecosystem, we can do the same in the United States and with our allies.

We need to critically rethink whether China is still the only market. If the answer is no, then we should encourage companies to stop selling to China. The more they sell to China, the less they’re selling here and to our allies. We’re trying to build these ecosystems now, and that should be our focus.

Jordan Schneider: I want to push back a little — the estimate of a 5% short-term hit to GDP growth if the US and China stopped trading immediately seems low, considering potential inflationary effects.

Moreover, it’s important to remember that a president’s top priority isn’t necessarily the US-China relationship. Foreign policy might occupy about 20% of their time, with only a fraction of that dedicated to Asia-Pacific issues.

It seems unrealistic to expect an entire national vision for a presidency to revolve around supply chain resilience or similar issues. Peter, you’ve been tweeting about Trump’s vision for tariffs and its potential second-order economic impacts. Can we discuss the tariff story and, more broadly, how far we can push the issues we care about without significantly impacting other domestic priorities?

Peter Harrell: I’m deeply skeptical of Trump’s proposed 10% global tariff. While we often discuss tariffs on China, this proposal would apply to imports from everywhere else, including everyday items like avocados from Mexico and Ozempic, which is primarily manufactured in Europe. This approach would likely increase costs for consumers without providing much strategic benefit.

Tariffs are an appropriate tool to protect our market from unfair Chinese competitive practices and to safeguard strategic industries. It’s important to focus not just on China as a territory, but also on Chinese goods and companies, as products can be diverted through other countries. However, we should primarily target our tariffs on China rather than on goods from our allies and partners.

A good example of effective tariff use is the electric vehicle (EV) and battery component tariffs. These tariffs, initiated under Trump and recently increased to 100% by Biden, have protected the U.S. market from being flooded with cheap Chinese EVs, as we’ve seen happen in Europe.

As China continues to subsidize its EV sector, driving costs down further, the Biden administration took steps to increase these tariffs to maintain protection for the U.S. market against unfair Chinese production practices.

Nazak Nikakhtar: The focus on supply chain resilience is crucial because it’s fundamental to preserving both the U.S. economy and military capabilities. Currently, our military relies heavily on critical supply chains in China, which forms the basis for these arguments.

Jordan, you mentioned doubts about the credibility of the report. While economic models may yield different results, the key points are twofold. First, logically, we would benefit from integrating our economies and supply chains with allies who adhere to fair trading rules. Without intellectual property theft and other unfair practices, our economies should grow faster. Second, the report does account for substitution. Remember, over 20 years ago, before China joined the WTO, we could still obtain everything we needed. The idea that gradually moving away from China will cause economic catastrophe is overstated.

Jordan Schneider: But Nazak, what about high-tech products like the Apple Vision Pro? I don’t think India will be producing something like that anytime soon.

Nazak Nikakhtar: [Laughs] My family members would agree with you.

Peter Harrell: Working with allies and partners to diversify away from China is crucial for several reasons. It strengthens allied relationships and provides access to commodities and technologies we may lack. Additionally, a larger market is necessary to compete effectively with China.

A recent example is the partnership between the US, Finland, and Canada to build polar icebreakers.

This collaboration creates a critical mass in market share, enabling the construction of a competitive, economically viable icebreaking ship industry. This partnership partly resulted from Russia sanctions, which forced Russian owners out of a Finnish shipbuilding yard, allowing Canadian investors to step in.

Jordan Schneider: That’s fascinating. While we often focus on major industries like semiconductors, these creative initiatives in niche markets where the government plays a larger role seem like an exciting way to address supply chain resilience.

Peter Harrell: Exactly. To build resilient, non-China-dependent supply chains, we need to consider both incentives and market viability, which requires scale and protection against subsidized Chinese products that raise national security concerns.

Jordan Schneider: I understand the supply chain argument, but there are trade-offs involved in pursuing an aggressive decoupling strategy. We shouldn’t completely disregard the gains that global consumers and firms have experienced from integrating China into the global economy.

Nazak Nikakhtar: It’s a fair point. When I mentioned the situation 20 years ago, I didn’t mean reverting all our technology to that time. The key is that we had resilient supply chains then, and technology was still progressing. Technology will continue to advance with or without China.

My conclusion that we need to disentangle our supply chains from China stems from the fundamental issue that the Chinese government controls its economy, creating a distorted, non-market system. Markets function better when market economies work together. Introducing a distortive element disrupts the equilibrium and flow of the global market.

If we accept this premise, it’s logical to remove these distortions to ensure a healthier economy. This doesn’t mean abandoning the global trading system, but rather looking to eliminate distortions and trading primarily with countries that are market actors.

Jordan Schneider: Peter, here’s a question from the audience about outbound investment screening. The notice of proposed rulemaking outlines two approaches for exceptions to passive investments in foreign funds investing in restricted tech in the PRC. Option one is to allow investments unless they’re active, while option two is to capture all investments over a million dollars. What’s your take?

Peter Harrell: I believe we should capture all investments over a million dollars. It’s important to address passive investments, but we need to differentiate between investments in publicly traded securities of Chinese firms and private passive investments. The outbound executive order correctly excludes investments in publicly traded securities of Chinese firms. The U.S. government already has a tool to prohibit Americans from investing in these securities: the CMIC sanctions list. The Biden administration should actively use this list for that purpose.

Regarding passive private investments, such as putting millions of dollars into a private AI firm in China, these should absolutely be captured by the outbound investment rule. There’s no other tool to capture this type of private investment, and we don’t want American dollars funding AI technology development in China.

Jordan Schneider: Additionally, a 2023 CSET report on US investment in Chinese AI presents a strong case about the soft support provided by these investments. The capital may be fungible, but there’s also the aspect of know-how and global connections that VCs bring alongside their money. This is particularly concerning for critical dual-use technologies. [Ed.: See the “Understanding the Intangibles section of this report].

Peter, since you mentioned you’re writing a book and reading some history, do you have any interesting documents or anecdotes you’ve come across?

Peter Harrell: I’ll share two historical examples.

First, in recent years, there’s been debate about balancing antitrust measures against large American tech companies with maintaining a competitive edge against China. A similar tension arose in the early Eisenhower administration, when the FTC prepared a report on American oil companies’ involvement in global oil cartels. The State Department tried to suppress the report, believing these companies championed U.S. interests globally.

The second example relates to supply chain resilience — specifically, the balance between substitution with new innovations vs investment in established technologies. During World War II, the U.S. was facing a rubber shortage due to Japan’s invasion of British Malaya, America’s primary source of rubber.

While Henry Ford attempted to build alternative supply chains in Brazil, the solution came from the FDR administration bringing together major American tire and rubber companies to develop commercially scalable synthetic rubber. This case is relevant to our current debates about critical minerals.

Creative Lawyering

Jordan Schneider: As we have two lawyers on the podcast today, I’d like to share an anecdote. I recently proposed a new government regulation idea to a civil servant, who asked me to write the regulation myself. When I asked about using government lawyers, they responded that lawyers only tell them what they can’t do. What’s your take on this dynamic?

Peter Harrell: Creative lawyering is crucial for effective policymaking. We need lawyers who can work within existing statutory frameworks to find solutions, whether it’s for CFIUS, IEEPA, or export controls. As a lawyer in policy roles, I’ve found it helpful to engage in legal arguments with internal counsel, challenging their interpretations when necessary.

While it’s important for lawyers to say “no” when something is genuinely illegal, the ideal balance is having someone who thinks creatively to find legal solutions and has the integrity to refuse when a proposal is truly unlawful. One advantage of working on China-related policy is that Congress has been willing to enact new laws addressing emerging threats, as seen with the recent TikTok legislation.

Nazak Nikakhtar: I agree with Peter’s points. The core issue is how government attorneys perceive their role. Many view themselves as advisors who highlight litigation risks rather than as partners in finding creative solutions. While there’s always litigation risk, it shouldn’t be a deterrent. Instead, we should weigh the likelihood of success.

It’s crucial to rethink the roles of everyone in the U.S. government, including policymakers, lawyers, and economists. Given the significance of the problems we face, it should be incumbent upon everyone to think creatively about solutions, as we’re not yet where we need to be in terms of addressing these challenges.

Jordan Schneider: Peter, we discussed bureaucratic barriers to competition the last time you were on ChinaTalk.

We’ve covered anxious lawyers, presidential direction, and feuding cabinet members. Would you like to assign percentages to these factors in terms of what’s hindering progress?

Peter Harrell: I’d rather not assign percentages. However, I don’t want to leave a negative impression. Looking back at my government service since 2009 and my earlier career covering foreign policy on Capitol Hill, I see a significant change in China policy. The implementation, compared to even 2009-2012 when I was at the State Department, has undergone a total transformation. While the process hasn’t been entirely smooth, we’re in a much better place now across two administrations. Despite occasional frustrations, I’m optimistic about the future. Regardless of the November election outcome, I believe we’ll see further steps to secure our supply chains, maintain our high-tech advantage over China, and build global diplomatic coalitions.

Nazak Nikakhtar: From my perspective, what’s been missing from the U.S. government is a team at the White House level with qualifications similar to Peter’s. We need to broaden the team that can articulate how to achieve our goals, slow down technological and military growth, and deter threats. This strategy should list all the tools in our arsenal and direct federal agencies to execute, rather than taking a reactive approach. A small team of visionaries who understand how these legal tools work could develop and implement a strategic vision. This level of thought and strategy in the White House could significantly improve our effectiveness.

Chien-ming Lin is a Taiwanese computer scientist. Previously, he spent five years studying and working in Beijing.

I’ve been waiting for the release of Black Myth: Wukong 黑神话：悟空 for four years. On the day the game was released, August 20, it set a new record with 2.2 million peak concurrent users on Steam, more than any other single-player game in history.

Here’s why it was such a smash hit.

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Popular Gaming Culture in China

The CCP wants people to spend less time playing video games. State-affiliated media refers to video games as “spiritual opium.” The number of hours children are allowed to spend gaming is strictly regulated.

That rhetoric and policy direction may seem extreme — but the CCP is responding to a domestic gaming industry that’s often, frankly, exploitative.

Consider the video game Genshin Impact. Genshin is markedly Japanese in style, mimicking Nintendo’s classic Legend of Zelda with a “skin-changing” 換皮遊戲 format, designed to squeeze the player base for massive profits. It relies on built-in gambling mechanics — essentially like a capsule-toy gacha machine for mobile — and it’s very good at taking players’ money.

MiHoYo, the development company behind the game, wanted to obscure its Chinese origins. The name “Genshin” is a Japanese pronunciation of the Chinese characters yuánshén 原神, and “MiHoYo” also sounds quite Japanese. Perhaps MiHoYo wants to hide its Chineseness to appeal to the global market (only 30% of the game’s revenue comes from players in China). Or perhaps this was because MiHoYo felt it would be shameful to put a Chinese face on extractive microtransactions.

And when Genshin wasn’t busy exploiting its Chinese player base, MiHoYo was content to leave those players by the wayside and instead focus on attracting overseas players. In large part, that’s because MiHoYo knew Genshin was up against Tencent’s massively addictive Honor of Kings 王者荣耀 — a mobile rip-off of League of Legends which relies on the same gambling-for-characters model as Genshin. Honor of Kings is the most profitable mobile game of all time, raking in 10 billion RMB yearly; 95% of that comes from inside China.

In other words, Chinese game developers treated their player base like jiǔcài 韭菜, a crop of vegetables. But Black Myth: Wukong broke that mold.

Latent Demand for Chinese Culture 

Daoists believe that god status is earned and achieved, not just reserved for divine beings. Follow the path (ie. dào 道), and you can become a god yourself.

That sounds like a great setting for a video game, right? Black Myth was not the first to take notice and capitalize. Two other games came first and defined the genre: The Romance of the Three Kingdoms 三國志 (1985, Japanese), and The Legend of Sword and Fairy 仙劍奇俠傳 (1995, Taiwanese).

These games are regarded as classics, beloved by Chinese players — but neither was made in mainland China. This dilemma is a familiar one for China’s cultural exports (how could DreamWorks produce a film like Kung Fu Panda before any Chinese company?), and the challenge inspired a generation of Chinese developers who dreamed of producing games that showcase Chinese culture globally, instead of waiting for foreign companies to tell those stories.

These young gamers grew up, passed the gāokǎo, and got the credentials necessary to design such games. But they despaired when their bosses at Tencent ordered them to bury their passion for coding such games and instead get Asia hooked on online gambling.

One disaffected developer was Mao Xingyun 毛星云. He wrote foundational Mandarin-language textbooks on game programming in Windows. Microsoft awarded him the Most Valuable Professional award in 2014, while Mao was still a graduate student.

He committed suicide in 2021 by jumping off the roof of the Tencent office building where he worked. After his death, this post from Mao’s Weibo account resurfaced:

To the Revival of Our Domestic Games:

I have a dream that one day in the future, everyone will be able to play high-quality games rooted in our own culture.

I have a dream that one day, “Journey to the West” will be released as an action game, allowing foreigners to experience the thrill of battle in Chinese culture through “Fighting Buddha.” It would surely be deeper and more profound than Western action masterpieces like “God of War” or “Devil May Cry.”

I have a dream that one day, “The Bund” will be released as a sandbox game, so we don’t have to play “GTA” to feel the American dream, or play “Sleeping Dogs” to experience a foreign company’s forced interpretation of our “Chinese culture.”

I have a dream that one day, many AAA titles won’t need to be localized into Chinese, because they will be our own games, with Chinese voice acting and culture.

I have a dream that one day in the future, domestic games will stand tall like other Chinese industries, taking the lead as they face the world, face the universe, with pride and confidence.

This is a dream we will achieve together.

I am waiting for the good news.

~ Mao Xingyun, June 2013, in Ukraine

Before Black Myth, China’s gamers often played pirated versions of American or Japanese games. But most players in the Chinese audience wouldn’t dare pirate Black Myth — they know how demand signals work, and they want to vote with their dollars to fund a grassroots shift across the whole of China’s game development industry.

That’s why this game activated such a wide base of support — players pay only once, up front, and are free to play as much as they want. Players know that it cost US$40 million to develop this game. They remember when the trailer was released four years ago, along with an employment offer for young game developers who didn’t care much for money.

This game shows that Chinese culture can be cool.

Of course, you do need a pretty fancy gaming PC or a PS5 to play. The fact that Black Myth became the world’s most popular video game overnight, though, shows that the gamers of China are willing to shell out big bucks to support this new era in gaming.

Journey to the West

Black Myth: Wukong is based on “Journey to the West” 西遊記, one of the great classical Chinese novels. In China and Taiwan, every student studies this novel in primary school.

The novel tells the story of the monk Xuanzang 玄奘, who traveled from China to India to collect Buddhist scriptures to bring back to China. Xuanzang was protected during the journey by Sun Wukong 孫悟空, the Monkey King, who became a god through Daoism, rebelled against heaven, and now must atone.

In Black Myth, you play as Sun Wukong, complete with shapeshifting abilities and other powers earned through the practice of Daoism.

The Monkey King has deep cultural significance in China. During China’s Cultural Revolution, much ancient Chinese culture was purposely destroyed and replaced with worship of communist ideology. (Perhaps that’s why China has struggled to produce cultural exports like Japan has with anime and Korea has with skincare and idol groups.)

But the Monkey King was spared during the Cultural Revolution, and Journey to the West remains a beloved classic. Here’s The Economist’s reflection after an adaptation of The Monkey King was released on Netflix:

Each Monkey King retelling has served as a mirror on its times, reflecting the anxieties of its creators. Some interpretations have concentrated on the need for discipline to quell the inner voice. Others have stressed the democratizing elements of a story about a lowly being who rises to great heights.

Flexible interpretation of the novel’s message has allowed the story to thrive in Communist China, even when other aspects of traditional culture were crushed. Mao Zedong admired Monkey King, who repeatedly challenged the hierarchies of Heaven, as a “wrecking ball who battles the forces of tradition,” says Julia Lovell, who translated the novel into English in 2021. A stage adaptation of the classic in 1955 praised Monkey’s “working-class wisdom” in defeating his oppressive rulers, the court of the mythical Jade Emperor. During the Cultural Revolution some of Mao’s Red Guards likened themselves to Monkey Kings, rebelling against the Party as Monkey did against the immortals.

The game’s graphics are directly imported from 3D scans of ancient Chinese architecture. The resulting visuals are stunning, which explains why the game uses up so much hard drive space. From Southern People Weekly 南方人物周刊:

In the game, players can see Yan-style 颜体 calligraphy of the Diamond Sutra 金刚经 carved into cliffs, Western Xia 西夏 dynasty’s stone tablets standing on northern plains, and weathered Buddha statues with broken arms…

Yang Qi 杨奇 and his team … scanned buildings such as Foguang Temple 佛光寺. Then, they scanned buildings and statues from the Wei 魏, Jin 晋, and Song 宋 dynasties, and then vessels and pottery from the Ming 明 and Qing 清 dynasties.

…

These artworks, shaped by generations over centuries, had been restored dozens of times and weathered by the passage of time, resulting in colors and textures that were nearly impossible to replicate.

Yang Qi told his colleagues in the 3D team that they must preserve every detail of the items they scanned, including the current color, damaged corners, weathered details, and even the grass stems embedded in the statue and small bits of exposed wire. “It’s very cool to look at it from the current perspective and observe the time at the same time,” said Yang Qi.

From this perspective, Black Myth: Wukong can be said to be a “Chinese tourism simulator” 中国旅游模拟器. The game’s sculptures of the Twenty-Eight Constellations come from scans of the Jade Emperor Temple in Jincheng, Shanxi 山西晋城玉皇庙. The setting of the Great King Huangmei 黄眉大王 — xiǎoxītiān 小西天 — is modeled after the Shuilu A Temple in Lantian, Shaanxi 陕西蓝田水月庵. The statues of Pilu Buddha are scanned from Mingshan Temple in Anyue County, Ziyang, Sichuan 四川资阳安岳县的茗山寺. The game also recreates aspects like the transformation sequences of hell, the Western Pure Land, and the protective deities’ niches from the Dazu Rock Carvings in Chongqing 大足石刻.

Secret Boss Battles

The most difficult boss of the game is Yang Jian 楊戩 (aka Erlang Shen 二郎神), who leads the army sent by heaven to punish Sun Wukong for his disobedience. Yang Jian is a major antagonist and drives the plot throughout the entire game, but he’s actually not the final boss — defeating him is so difficult that the developers made it optional. If you defeat the final boss without first confronting Yang Jian, the game ends with Sun Wukong being imprisoned in a rock instead of being reincarnated.

There are three phases to the fight with Yang Jian, and each phase comes with new attacks, new environmental hazards, and new combinations of attacks from previous phases. He has a resilience system for blocking the player’s attacks and defeating him requires expert use of in-game items, treasures, and spells.

For China’s independent game developers, however, the boss battle has only just begun. Rumors are already circulating that Tencent and MiHoYo are trying to poach the programmers behind Black Myth.

Tencent already tried to build this game when it released Asura/God of War 斗战神, an MMORPG that was initially so well received that players burned through content faster than Tencent could produce it. After the third chapter of the game, Tencent started cutting corners on production to reduce costs, losing most of its player base in the process. Tencent disbanded the God of War production team, and the developers they fired went on to found Game Science, the company behind Black Myth.

If we really are witnessing a shift in China’s gaming industry, it remains to be seen whether giants like Tencent will be able to re-enter the market they patronized and abandoned.

Jordan Notes on the Game

It’s good for world peace for China to succeed on the global stage in cultural exports. I would much rather have nationalist pride fed with Olympic sports, video games, and movie exports than Kinmen and Spratly’s. There’s all this angst in Chinese political discourse about not being looked upon as a first-rate nation by the rest of the world. Let’s all hope that this chip on politicians’ and netizens’ shoulders can be ameliorated by video game sales and not ADIZ violations.

When I published this contemporary Chinese music roundup by Jake Newby of Concrete Avalanche, which featured everything from psychedelic rock and Beijing kawaii core to Uyghur folk and Tibetan chants, someone in the DC policy universe reached out to me and said “This deradicalized me a bit — I didn’t know people made music in China like this!” I do hope that this game can do the same and remind people that there’s more to China than the Party.

One interesting dynamic that an article in The Initium highlighted was the self-policing going on in the online discourse of fans encouraging each other not to engage at all with the critiques around Game Science’s apparent misogyny in its leadership’s past posts and recruiting marketing to preserve the good energy around the release. It’s also curious that just as the game was being praised in state media for its achievement, someone dug up a 2013 Weibo post of Black Myth lead artist Yang Qi flipping off Mao’s portrait at Tiananmen Square that has some real Ai Weiwei energy. We live in different times…

On the game itself, I find it interesting how little handholding there is in the game’s story — it gives you very little in-game context on who its characters and monsters are, expecting that the audience will broadly already get the references. Setting aside its positive reception in the West (82 on Metacritic), this is first and foremost a game made for a Chinese audience. 90% of the Steam player base, after all, is based in the PRC.

It is also hard — I’ve put an hour into this snake boss — and I don’t think I’ll go much further until there are mods to make it easier. It’s not like Elden Ring where you can explore your way around a boss or use clever game mechanics to compensate for being bad. That said, the visuals are glorious, clearly made with a ton of love and care. It’s also been my first experience of cloud gaming, with NVIDIA’s GeForce Now working surprisingly smoothly even on my non-fiber connection. This game will reset the Chinese videogame equilibrium, giving publishers confidence to invest in not just exploitative mobile games but creative products, and I could not be more excited to see what comes next.

Let’s close with a line from a Steam review: “130GB on my hard drive really isn’t that big, because in those gigs is not just a game, but countless Chinese dreams of a AAA game.” “接近130GB的硬盘空间占用并不算大，因为它装载的不仅仅是一个游戏，而是无数中国人属于自己的3A梦.”

Jeff Ding is a professor at GW and a leading US scholar on China and AI. He’s also been in the China tech newsletter trenches with me practically since Substack existed, putting out essential weekly translations and analysis on ChinAI since 2018.

In honor of the publication of his new book, Technology and the Rise of Great Powers, enjoy this interview with Jeff from we last year on its themes. I think it explores some of the most important topics to technology and power.

Staffers, students, think tankers, and entrepreneurs take note! If you want to make a difference on a multi-decade timeline in strategic competition, try to work on the topics that we get into in the conversation about how tech and government policy drive long term growth rates among great powers.

Jeff Ding argues in a 2023 paper which echoes his book that great powers must harness general-purpose technologies if they want to achieve global dominance. That is, diffusion capacity (not just innovation capacity) is critical to economic growth — and China actually fares much worse in diffusion capacity than mainstream narratives imply.

In this show, we discuss the historical underpinnings of that argument and apply it to AI today — drawing out policymaking lessons spanning centuries of technologically driven great power transitions. We also get into:

• Why long-term productivity growth is driven by the diffusion of general-purpose technology, and what makes this so crucial for great power competition;

• Historical lessons from the UK, Soviet Union, US, and Germany illustrating the cultural and policy roadblocks to tech diffusion;

• The importance of decentralized systems, and how this helped America win the Cold War

• Why China’s diffusion capacity lags behind its innovation capacity, and how America should avoid getting locked into any one technological trajectory.

Co-hosting is Teddy Collins, formerly of DeepMind and the White House Office of Science and Technology Policy.

Listen via Spotify or Apple Podcasts:

Or watch this episode on YouTube!

Money, Power, Tech Diffusion, and Glory

Jordan Schneider: Why is long-term productivity growth all that matters for great powers?

Jeffrey Ding: Technology is going to affect a range of different things we care about in great power competition. It’s going to affect the military realm. It’s going to affect how nations perceive other nations — their prestige, their soft power.

I’m most focused on economic power. It’s the most fungible aspect of power. You can transform and convert economic strength into military strength. A country that sustains its development becomes more reputable and gains soft power because of its development model.

You can see that with China and the Chinese model of development. Economic power is the most fungible and transferable currency for measuring power. Historically, we’ve seen the rise and fall of great powers occur through a pretty regular pattern: one country sustains productivity growth and economic growth at higher levels than its rivals, becomes the preeminent economic power, and then converts that into geopolitical and military strength.

Jordan Schneider: There’s a big difference between a two-year horizon and a twenty-year horizon. At that timescale, why is productivity growth really what counts?

Jeffrey Ding: In the long run, productivity growth is what sustains economic growth. Take China as an example. Its economic growth to date has been driven by a range of factors, most notably demographic advantages — a large, young workforce willing to work for low wages — and urbanization. The transition from a rural, agriculture-based economy to a more urbanized, industrial economy brings a lot of good opportunities for growth.

But those two advantages are fading as China tries to escape the middle-income trap and become an advanced, high-income economy. Economists and development scholars have found that the way to escape that middle-income trap — to sustain economic growth in the long run — is through productivity growth and adopting new technologies.

Jordan Schneider: You argue that great power status is fundamentally based on wealth. So what drives national economic growth over the long term?

Jeffrey Ding: “Great powers” is a fuzzy concept. A great power is a country that has both a large economy and an advanced economy. Those two pieces working together are important. It’s not enough to just have a very populous country with a large economy if that economy is not efficient, because that’s what sustains growth in the long run.

The rise and fall of great powers happens because new technologies create differences in economic growth. One country can sustain growth for a longer period at a higher rate on the back of new technologies, whereas another power suffers a decline.

Jordan Schneider: The timeframe of the average policymaker is about one to five years. On a five-year basis, there are a lot of different policy decisions that can have near-term impacts on economic growth. You have fiscal policy. You can juke around with monetary policy.

But if you zoom out over ten to forty years, the changes you can make on the edge with fiscal and monetary policy end up balancing out. What remains is how you absorb and adapt to new technologies.

Jeffrey Ding: We often focus on just the initial moment of innovation and assume that will make an impact within five years. If you poll the top machine learning experts today and ask them when we’ll get high-level machine intelligence, a lot of them say it will be by 2035. Some commentators say AI will change the balance of power within the next decade. That’s our horizon.

But a lot of these revolutionary advances in the past have taken decades — often four or five decades — to diffuse throughout society and actually make the impact that we think they will make.

Jordan Schneider: From a policy perspective, focusing on a twenty- or thirty-year horizon is fundamentally different from a five-year horizon. The types of things you want to bet on and the policies that are robust to different futures are different when you’re looking so far out and the future is uncertain. What’s so interesting to me about your research is just how often this has played out over time.

Atlantic Waves: Industrial Revolutions in America and Europe

Jordan Schneider: Let’s look into some case studies to illustrate just how important technology is to long-term national greatness, or to nations being able to claim their place at the top of the global food chain. What role did technology play in helping the UK supplant its rivals in the eighteenth and nineteenth centuries during the First and Second Industrial Revolutions?

Jeffrey Ding: The UK was able to sustain productivity levels higher than their rivals because they adopted iron advances, metal-working advances, and mechanization at scale more effectively than their rivals.

Often in the case of the Industrial Revolution, we gravitate toward the fast-growing new industry of cotton textiles. My argument is that it was the more gradual, protracted diffusion of iron machine-making and mechanization throughout the entire British economy. That was the real driver of Britain’s industrializing faster than their rivals like the Netherlands and France.

Jordan Schneider: What are general-purpose technologies (GPTs), and why are they so important to the rise and fall of great powers?

Jeffrey Ding: General-purpose technologies have been deemed by economic historians as “engines of growth.”

General-purpose technologies are engines because they are fundamental advances that have the potential to transform broad swaths of the economy.

There’s a whole research agenda attached to them. There’s a lot of scope for continual improvement. Crucially, they make an impact only if there are a lot of complementary technologies across many different sectors that adapt.

Electricity is held up as a prototypical example of a general-purpose technology. Electricity is able to make an impact on productivity only if you change your factory layouts from being driven by a central steam engine and a system of shafts and belts. If you change that layout to something that’s more decentralized, each machine is driven by an individual electric generator.

Electricity was only made available to all these different applications with the rise of electric utilities, like central generating stations. This was affected by other complementary technologies, like steam turbines. These general-purpose technologies take a long time to diffuse throughout the economy. They rely on different complementary advances across a wide range of economic sectors to make their ultimate impact.

Jordan Schneider: If you’re looking on a multidecadal horizon, GPTs are going to drive productivity growth. It’s not cotton textiles. It’s not the one-offs that give you significant productivity growth in one particular segment of the economy. It’s the GPTs that do it for your whole nation.

What that requires is not necessarily having Thomas Edison invent the light bulb, but it’s all the hard work necessary to hook up the entire country to electricity. Factory layouts, industrial organization, and the creation of firms are all hard, but they end up affecting the entire economy. Getting those things right — more than whatever is the hot emerging technology of the day — is what’s going to keep your country in the lead over the long term.

Jeffrey Ding: On your point about talent, we often hold up this image of the heroic inventor, like James Watt. Britain became the leading industrial power because they had the James Watts of the world to invent the steam engine.

But when economic historians have dug deeper into Britain’s source of advantage, they’ve underscored Britain’s average level of technical literacy. They had just this higher level of average technical literacy among the early versions of mechanical engineers, machinists, and those who were able to deploy the new iron-based machines in all these different industries.

Jordan Schneider: Geniuses are nice but not necessarily essential. It’s the next level down of having the implementers that live in all the different corners of the economy. They see whatever it is that’s new and exciting and then bring it into their expertise.

But let’s jump forward to industrial revolution. How did this affect the Germany versus the US?

Jeffrey Ding: The Second Industrial Revolution was unfolding in Germany, the US, and the UK from around 1870 to 1914. The version of the story that I tell here is that the US became the preeminent economic power, not just in terms of size, but through the combination of size and overtaking Britain in economic efficiency, measured by either labor productivity or GDP per capita as a measure of the development level of the economy.

The key GPT general-purpose technology trajectory was the spread of interchangeable manufacturing. It wasn’t necessarily who was exporting the most advanced chemicals at that time (which political scientists suggest is the reason Germany became a challenger to Britain). Rather, it was the spread of interchangeable manufacturing methods — what became known as the American system of manufactures — across the making of sewing machines, bicycles, and all sorts of devices in all sorts of sectors of the economy. This led to the US gaining a productivity advantage.

Other countries were ahead in terms of inventive genius, or they had the research centers of excellence — the DeepMinds of the world at that time. The US was able to diffuse this interchangeable manufacturing method because it had stronger connections between the frontier institutions, entrepreneurs, and engineers. They were able to build up a more practice-oriented mechanical engineering discipline. Part of that is due to investments in land grant universities that built up strong mechanical engineering developments all across the country, not just in the elite universities.

General-Purpose Tech and Human Capital

Teddy Collins: It seems there are at least two different categories of this diffusion potential or diffusion capability.

• One is the broad, basic literacy or “tacit knowledge” that exists throughout a population, as opposed to a handful of spiky inventors or entrepreneurs.

• The second is a willingness to experiment with and implement new approaches to infrastructure. You have to redesign workflows for physical settings. That’s a big capital expense.

Those two things seem a bit different, and it seems like they would come with different policy implications.

Jeffrey Ding: That’s a fair distinction. I tend to focus on the human capital argument: how do you build a wider base of average engineers associated with general-purpose technology?

There are a lot of other factors that drive the pace and intensity of GPT adoption, including some of the things you mentioned, such as organizational restructuring and the level of vested interest or legacy institutions that exist in some countries. This is why some people say there’s a late-comer advantage. Countries that don’t have those legacy institutions are just better equipped to implement some of these structural reforms.

It’s also hard to measure and operationalize these things in terms of how many vested interests are in a particular industry. That might change across different industries. I’m comparing advanced economies that all would probably have some level of vested interests and established structures.

My preference is to look at things that cut across industries. This might be the average level of engineering talent associated with the general-purpose technology, the degree to which universities are linked and communicating effectively with industry entrepreneurs, or the strength of dissemination mechanisms for ideas about technology.

Jordan Schneider: There’s something societally disorienting about these general-purpose technologies. Your whole system and ethos need to be ready for that.

I want to read you a quote from Elting Morison’s classic work, Men, Machines, and Modern Times, which gives you a sense of what it was like for ironworkers to transition to making steel.

Morison argues that in 1857 everything was in place to transition from iron to steel. But there were all of these cultural, societal, and economic reasons not to take that leap. To explain the hesitance and the multidecadal lag that it took to adopt this new technology, Morison writes:

Would it not, by replacement of an old reagent, iron, with the new element of steel, replace also the customs, habits, procedures, and hierarchical arrangements upon which the security of life in the iron trade depended? The converter, in this context, looks less like a tool of commerce and more like some catapult leveled against a walled town.

People, institutions, and nations are that walled town. They’re looking at that catapult, and they will respond to it in very different ways.

Jeffrey Ding: Exactly. That is an example of transforming just one industry to adopt an innovation, steelmaking. Now multiply that for a general-purpose technology to any industry that a GPT would affect.

It gets even more complicated and magnified in terms of the structural changes needed to adopt GPTs. The softer stuff you mentioned — culture, status, people wanting to protect the skills they’ve already developed — all of these things come into play.

Hot Tech, Cold War: US-Soviet Competition

Jordan Schneider The Cold War is another great case for your argument. The Soviet Union had these awesome research scientists. The USSR was able to do stuff in the lab and across many fields which equaled or even exceeded what America could pull off. But when the technological grounds began to shift beneath the Soviet Union — when it moved past steel-driven development and into electronics — it didn’t adapt and diffuse the technologies nearly as effectively as the US did.

Jeffrey Ding: When we assess countries’ scientific and technological capabilities, we overweight innovation capacity. These are our typical indicators:

• Who’s spending the most on R&D?

• Who has the top scientists publishing the most?

• Who’s getting the most cited patents out there in different fields?

These are the things that we gravitate toward — and we discount diffusion capacity once that groundbreaking paper has been published. Are those ideas being commercialized and spread across all these different industries after the advances come out of DeepMind? Are those then spreading to spreading from these frontier firms to the small and medium firms that are driving most of the productivity growth in the entire economy?

In the Soviet Union’s case, they performed so well on all these traditional measures of innovation capacity in terms of the most PhDs in STEM fields or the most spending on R&D. But in a 1969 CIA report I cite in my paper, their assessment was that the Soviet Union lacked these fast-acting, biological processes of diffusion.

The planned economy of the Soviet Union limited its ability for these new advances to permeate and spread throughout the entire economy. The Soviet Union was doing well in mission-oriented breakthroughs like Sputnik, but it was not an economy equipped to computerize at scale. That led to stagnant productivity growth and ultimately the collapse of the Soviet Union.

Jordan Schneider: A fun theme in your research is Americans freaking out about losing in the 1950s. Everyone was like, “The Soviets have more PhDs than we do! This is going to be terrible.”

No Illusions? Why Tech Diffusion Wasn’t So Big in Japan

Jordan Schneider: Then in the 1980s, the concern was that Japan would overtake the US. David Halberstam — author of The Best and Brightest and Breaks of the Game — wrote in 1983 that Japan’s industrial ascent was America’s most difficult challenge for the rest of the century and a “more intense competition than the previous political-military competition with the Soviet Union.”

There was a deep consensus within the American body politic that America was losing the technological future and long-term productivity race to Japan. What didn’t Japan get right?

Jeffrey Ding: This was a very real threat in the eyes of the US. Henry Kissinger wrote an op-ed in The Washington Post saying that Japan’s economic strength and rise in high-tech sectors would eventually convert into military power and threaten the US. A poll in the late 1980s found that more Americans were worried about Japan than the Soviet threat to US national security.

The trend that I see so clearly with all these historical examples is the US overhyping other countries’ scientific and technological capabilities. One reason we do that is because we don’t pay as much attention to diffusion capacity.

There is a case in my book manuscript about why Japan was not able to overtake the US. It got to about 90% of US productivity levels in terms of total factor productivity, but then it stalled in the 1990s. That’s due to a number of reasons, including fiscal and monetary policy. That’s all relevant here.

What I highlight is that Japan gained a lot of market share in a lot of these new, fast-growing industries like consumer electronics and key semiconductor components. But it fell behind the US in terms of adopting computers at scale and overall computerization rates.

I highlight deficiencies in Japan’s ability to train a large number of software engineers. They built a lot of centers of excellence at certain universities, but they weren’t able to build a wider pool of institutions to train software engineers and fill in those talent gaps that held back the diffusion of computers throughout the entire economy.

Jordan Schneider: Some profound humility gets inculcated in you when you sit down and think about 2023 and what everyone agrees on. Things can end up radically different from whatever the consensus is.

Jeffrey Ding: Our takes are all shaped by who we’re talking to, the institutions we belong to, the ideas that are circling the rooms that we’re in, and the narratives of our times. But I think looking at historical examples forces you to get out of that a little bit, out of your little mini echo chamber, and understand that maybe we’re very wrong about the assumptions we have in our social groups and among all the people we’re reading and listening to. It’s an important dose of humility.

Jordan Schneider: When thinking about the example of the 1980s and 1990s, what were the ingredients to national policy that allowed the diffusion of the Information Age to happen with such dramatic success in the US?

Jeffrey Ding: One important factor behind all this is just access to a wider pool of software engineering talent. The US was tapping into so many immigrants who wanted to come to the US and study and work in these areas. Japan was relatively closed off in terms of bringing in foreign talent and even sending students out to other universities.

Secondly, a lot of times in the wake of these new GPTs, you almost have to have a new engineering discipline.

• Mechanical engineering in response to mechanization,

• Electrical engineering in response to electrification, and

• Computer science in response to the computer.

The US university system was more decentralized, and they had the flexibility to adapt and build this new curriculum for training software engineers at scale. Japan’s system was more rigid and centralized.

Suggestions for AI Superpowers

Teddy Collins: If you were made the czar of all AI-related policy in the United States, are there specific things you would push? What will it take for AI to show up in the productivity statistics?

Jeffrey Ding: First, there’s investing in human capital. For me, that might look like widening the base of average AI engineers, people who are not necessarily training with cutting-edge models but can take an existing model and apply it to a particular scenario. Maybe they fine-tune models on a more specialized data set. Or maybe they take something that is already out there, open source, and apply it to their specific industry context. Training that talent might look like investing in community colleges and improving the capacity to train people in the general field of computer science.

Infrastructure is also in there — but for me, that’s just anything that would affect GPT diffusion, not necessarily driving cutting-edge innovation. How do you improve access to compute for a wide range of universities and even small and medium businesses?

That’s something that the national research cloud discussions have not considered much. They’ve focused more on getting high-end universities access to more computing resources and investments in institutions that encourage more technology transfer.

Some scholars advocate for voucher systems that incentivize small companies to learn and adopt new techniques from frontier firms. Subsidizing and encouraging that in some way is another step governments can take.

Jordan Schneider: One of the arguments you make is that when GPTs come online, you don’t see them in the productivity statistics until twenty years later because it takes a long time for people to wrap their heads around them.

But this time around, we already have a nationally integrated economy. We’ve figured out how to finance a lot of these institutions. We have a whole venture capital ecosystem, and everyone understands that there are enormous gains to be made from these technological innovations.

What I am worried about when it comes to diffusion is the potential policy roadblocks that could arise if change happens “too fast” and the body politic or some industries just reject it. You could end up with legislative roadblocks that make everyone worse off with lower productivity growth. The technological change which was going to come doesn’t happen. You have a poorer society because we’re not trying to make the best of these technologies that have so much positive potential.

Jeffrey Ding: This is relevant for AI because there are so many risks associated with AI systems, from misinformation to accidents. On a narrower technical dimension, there are things like misspecified reward functions that result in all these out-of-control behaviors.

There’s a case to be made for smart pragmatic regulation that can enable more sustainable development and diffusion of these GPTs. Another example is nuclear energy, which saw key accidents and safety issues derailing their adoption at scale.

Teddy Collins: I can imagine someone saying software is fundamentally different because it spreads much more easily. The marginal cost is basically zero. We’ve already seen that because we have a small number of platforms responsible for a huge proportion of software use.

Perhaps you only need a small number of people at a small number of companies who understand the cutting-edge tech and can implement something that quickly diffuses to almost everyone. Thus, broad tacit knowledge is less important.

Jeffrey Ding: Maybe my predictions about GPTs taking multiple decades to make their impact are a bit outdated in a software-based world.

One way to measure diffusion is by dating a GPT’s emergence — maybe it reaches 1% adoption in an early adopting sector. Let’s say all the big internet companies were the first to adopt AI for adjusting their search recommendation algorithms. That’s the starting date. When does it reach 50% adoption as the median across all possible adopting industries? That’s the timeframe for the specific diffusion capacity and timeline.

People have tried to measure that for electricity and information communications technologies. Nicholas Crafts has done some of this work. Other scholars have found there has been a slight decrease in diffusion time, but it’s still on the order of multiple decades.

We’ve had breakthroughs in AI now for almost a decade, with the advance of deep learning about a decade ago. The Census Bureau in 2018 asked companies across all these different sectors about the extent to which they had tested and trialed machine learning systems. The percent adoption rate was still below 3%.

There are different takes on this. Some people rightly adopt an inside view. They know a lot more about AI than me. They’re tracking everything that’s happening in AI daily. It’s exciting. They’re like, “This thing’s going to diffuse fast — let’s be ready for it. We should be thinking on a timescale within this decade.” There’s value in considering what the external view says from these past examples and historical lessons. I’m not saying one is dogmatically right, but we should have a mix. I think the balance is tilted too much toward the inside view right now, and we should have a better balance incorporating these historical insights.

The Long, Twilight Diffusion: US-China Tech Competition

Jordan Schneider: China will likely have some real challenges when it comes to getting AI diffusion right? Even if they develop roughly equal powerful base algorithms like GPT-4?

Jeffrey Ding: There’s a gap in how we measure diffusion capacity for different countries. I just went over that metric of the 1% to 50% median. That’s hard work. It’s much easier to just cite anecdotal stuff or pull a number about R&D and make broad claims.

What I did in the diffusion deficit paper is look at different global indexes on science and technology. There are hundreds of different science and technology indicators. I tried to sort the ones that trended more toward innovation capacity: top-three firms in R&D investment and top-three universities in scientific research — these are more closely tied to innovation capacity.

On the other hand, you have things like:

• How fast and to what extent have information communications technologies diffused throughout the economy?

• What is the adoption rate of cloud computing in the country?

• How strong are the linkages between universities and companies for spreading new ideas and collaborating?

Based on that exercise, I found China’s diffusion capacity lags far behind its innovation capacity. On all the indicators that are more tied to diffusion capacity, if you average them, China’s global ranking is almost thirty places — maybe more than thirty-five places — lower than its innovation capacity ranking.

Jordan Schneider: When thinking about systems competition, I often get frustrated by American policymaking. It is so diffuse. You need to make all the different representatives happy and throw everyone a bone. You have all these irrational policies, and this state is doing something that’s going against the grain of that state.

But there is something powerful about the way America is set up: our messy political system ends up not concentrating its bets too tightly.

It is awesome that we have an OpenAI and a DeepMind and all the best universities. But something that makes America special and weird — something baked into a lot of the American system — is that it’s not a centrally planned thing.

Jeffrey Ding: Decentralization is strongly tied to high levels of diffusion capacity. That’s been borne out by a lot of different econometric research and empirical work. There are things the US can be doing. I’ve testified twice in front of the US-China Economic and Security Review Commission. My first recommendation both times was that the status quo is a defensible option. The US is in a good position right now because of its decentralized science and technology system. I strongly believe that.

It’s important the US not lock into a specific technological trajectory with AI. If we were having this podcast two years ago, we might be talking more about computer vision. Now the hottest subfield is natural language processing. If we were having this podcast eighteen years ago — when Clinton announced the National Nanotechnology Initiative — we would be talking about that technology. No one talks about nanotechnology anymore, even though it might have some general-purpose technology characteristics. It’s just diffusing under the radar.

Jordan Schneider: I love this quote you have from 2003 with the Under Secretary of Technology at Commerce saying, “Nano’s potential rises to near biblical proportions.” I mean, maybe — but if America put all our eggs in that basket and wasn’t paying computer scientists to figure out AI models, then we might be at a very different place.

Jeffrey Ding: Pouring a lot of compute and resources into transformer models seems to be one bet. There are other fields of AI beyond deep learning, like reinforcement learning or causality-based thinking — models we should not ignore nor neglect in the long term.

We should not do what Japan did when they invested in their fifth-generation computing project, narrowly looking at computers as huge mainframes in a world where that was increasingly turning toward personal computing. We should avoid locking in one technological trajectory.

Jordan Schneider: How defensible is it to keep the brains or keep the IP within your national borders? Is that something that works for these general-purpose technologies?

Jeffrey Ding: No. How do you keep such a foundational technology locked up? It’s not like GPTs are pharmaceutical secrets. That’s not the model. We’re not talking about profits from one country monopolizing this super-secret innovation. It’s more about adopting these innovations at scale.

Paid subscribers get advanced access to the second part of our conversation. We discuss:

• The state of play in the race to attract talent;

• Why hyping China’s AI and tech prowess could lead to threat inflation;

• How translating Chinese sources helped Ding understand tech diffusion;

• Why war is a tempting choice for lagging great powers.

Tech Talent Tug of War

Jeffrey Ding: China’s efforts to attract talent back from overseas have helped them stay abreast of the AI research frontier and stay connected to different innovation networks. That helps facilitate the initial adoption.

But after those top Chinese scientists hear about the latest advances and learn the latest breakthroughs, how does that diffuse to the next level down and throughout the entire country? It’s hard to have indicators for that diffusion capacity in AI.

One approach I use in the book manuscript is by asking, “How many universities does a country have that meet some baseline level of quality for AI engineering education?” I look at the CS rankings database and try to figure out how many universities in China have at least one researcher who has published in the top three AI conferences.

That number is relatively low compared to the US. It’s about 100 for China, whereas the US has around 400. There’s a broader pool of US universities that meet that low bar for baseline quality in AI engineering education.

Jordan Schneider: What’s the case for allowing the free flow of talent between the US and China?

Jeffrey Ding: A lot of talent is flowing to the US and staying in the US. The flow of talent back to China is obviously helping China’s diffusion capacity. But relatively speaking, it’s arguably helping the US more.

There are a lot of other reasons why we’d want to keep those flows open, just because there are a lot of advantages to having an open economy — not discriminating on the basis of geographic origin, or nationality — when it comes to shaping immigration policy.

These things matter more than that specific policy’s effect on relative diffusion capacity levels.

Jordan Schneider: You just reached your fifth anniversary of writing a truly fantastic weekly translation roundup on Substack. What has reading all of this contemporary Chinese writing on AI given you as a researcher?

Jeffrey Ding: History forces us out of our echo chambers and preexisting biases and dispositions. Just reading what Chinese people are thinking about AI forces me to get out of the DC and academic bubble when it comes to thinking about AI and US-China competition. It’s reading a completely different set of ideas from people living in a completely different context, whether that’s blogs or government white papers.

The diffusion deficit paper we’ve talked about in detail here was very much inspired by ChinAI translations about companies trying to implement computer vision to improve machine quality inspection on production lines for cutting tools and knives. That’s one of my favorite translations that I’ve done. It speaks to these companies. These people are not the ones that make the news, like the company SenseTime, one of the most valuable AI startups in the world. They show how China trying to implement AI on a granular level. What I’ve talked about today has been inspired by and builds on those weekly translations.

Teddy Collins: There’s a cliche that China can copy, scale, and commercialize, but it cannot innovate. It’s interesting to see that when you dig down into the weeds, China’s diffusion capability is worse than its innovation capability and the US’s lead on diffusion is greater. A lot of people would find that result surprising.

Jeffrey Ding: It’s often informed by a few attractive examples. China is good at diffusing certain things, like high-speed rail or e-commerce (like food delivery apps). But when you look at some of these other innovations connected to general-purpose technology — information communications technologies, computers, cloud computing — those diffusion rates are pretty slow in terms of actually affecting productivity in a lot of different businesses.

Inclement Clouds on the Tech Horizon

Jordan Schneider: There are pluses and minuses that come with thinking China is going to take over the world versus a more realistic understanding of the country’s strengths and weaknesses in productivity and technology. You’ve got all this McCarthyism Cold War stuff about overshooting the gap.

There’s also the CHIPS and Science Act, the most aggressive thing that America has done in twenty years trying to pull some levers in manufacturing and science and technology investments. Maybe it’s not exactly what you would have done from a diffusion perspective, but that doesn’t happen unless you have politicians really worried about China’s rise as a technological power.

Jeffrey Ding: There are instrumental reasons to overstate and hype up China’s AI capabilities and its scientific and technological prowess. If I were someone who really believed in the CHIPS and Science Act as the most essential thing for US national security, the only way to get that across the board is to adopt a “China is going to overtake us” framing. There are reasons to do that and I see the rationale behind that.

There are also a lot of downsides, however, to overestimating someone as a threat. It could lead to more threat inflation. It could lead to more willingness to escalate conflicts.

We’ve seen that historically in the US-Soviet Union case — the illusory missile gap or the US and Soviet Union getting to the brink of world destruction many, many times. The truth matters too. Having a more accurate depiction of the scenario is a good thing.

Jordan Schneider: It’s interesting reflecting on this if you’re inside the head of Xi or some other Chinese policymaker. Everything I read about China and AI seems hyperbolic.

The self-flagellation of the Chinese internet over the past six months and watching ChatGPT explode in the West has been really interesting. All of a sudden, the discourse went from, “We’re going to be awesome and amazing” to, “We’re so pathetic as a country, and we need to get our act together for this long struggle.”

I can paint a positive upside for the dose of realism injected into Chinese discourse and what that’s doing for Chinese policymaking. But Beijing might ultimately believe China will be on the back foot technologically for years to come, which could drive a more competitive dynamic with the US. The odds of us coming out ahead on that are probably way worse than the expectations that are currently baked in.

Jeffrey Ding: We have shifted so far in the direction of US national security interests and the need to beat China in all these different forms of competition. The biggest risk is if China overtakes us on something, whether militarily, economically, or by soft power.

I’m not sure where I stand on this, but why are we not considering that the biggest national security risk for the US is a weak China and a China that can’t sustain its growth? For the longest time that was US State Department policy. A strong China is good for peace.

All this self-flagellation that’s been coming out in terms of China’s AI sector has been overhyped. China could also suffer economic stagnation. What would the national security consequences be for the US? They might not be good.

It’s not even in the Overton window. We’re not even talking about it anymore in Washington.

Jordan Schneider: That’s a tricky Goldilocks thing. The way I see this getting turned around is China slows down and America and all its allies keep growing nicely with their adoption of GPTs and whatnot.

Whoever comes after Xi might realize that, in fact, you need to be globally integrated and have happy diplomatic relations to have a place on the national stage and be respected and keep pace with other countries.

But I’ve done a lot of interviews about this idea of “temporal claustrophobia,” where the Kaiser, Imperial Japan, and Nazi Germany all convinced themselves they were at a high watermark.

One of the ways to not play a multidecadal game is to start a war. If you roll the dice now in a really aggressive way, then massive wars are one way to short-circuit that long-term productivity contest.

You can get lucky or overperform in a narrower window because you have some edge or another. Though, most of the time, the countries that win wars are the ones that are larger and more technologically advanced. But it’s not every time. War can be your “out” if you talk yourself into believing there’s a hopeless long-term trajectory for you as a national leader.

Jeffrey Ding: That squares with my understanding as well.

Jordan Schneider: I feel like I’m ending every ChinaTalk on World War Three, which is a bummer…

Even though the US was scared off the by prospect during WWII, Taiwan has been successfully invaded a bunch of times!

Based on these historical case studies, ChinaTalk presents, How to Invade Taiwan — a step-by-step tutorial. Check it out on YouTube, and do give us any feedback you have:

Jordan — A Bipartisan Consensus That It’s Good to Win on AI

Harris’s nomination speech:

Trump on Logan Paul’s podcast:

Well, [AI] is a superpower and you want to be right at the beginning of it, but it is very disconcerting…

I’ve seen it. We have to be at the forefront. It’s going to happen. And if it’s going to happen, we have to take the lead over China. China is the primary threat in terms of that. And you know what they need more than anything else is electricity. They have to have electricity, massive amounts of electricity. I don't know if you know that in order to. Essentially, it's a plant, and the electricity needs are greater than anything we've ever needed before to do AI. At the highest level. And China will produce it because they’ll do whatever you have to do. Whereas we have environmental impact people and you know, we have a lot of people trying to hold us back. Massive amounts of electricity are needed in order to do AI. And we’re going to have to generate a whole different level of energy. And we can do it. And I think we should do it.

Alexa Pan — Chinese Punk Song of the Week

Song: The Trilogy by Oh! Dirty Fingers (脏手指）

I was advised by a friend to put “Dirty Fingers concert” on my bucket list. I’m glad I listened and am spreading the word. Formed in Shanghai in 2014, Dirty Fingers is best known as a punk band. This reputation likely stems both from their early raw, heady musical style, sometimes clashing with the law and social expectations, as well as from their express commitment to individuality and an “aesthetic of ugliness.” Charming as all that, there’s more to their music.

“Trilogy,” first released as a single between their second and third studio albums, suggest — as the album covers do — their reptile-to-mammal evolution: more complex, sophisticated, selective, softer but not necessarily more domesticated. The song opens with instruments lined up for dramatic entrances: broody bass, seductive guitar licks, drum rolls, sparkling mandolin adding handfuls of glitter or broken glass as needed. Vocalist Guan Xiaotian’s raspy whisper rises and pours as smoke (as he says in “Bring in Bo,” “I’m a born champion snorting clouds”), finally erupting amid rattling percussion, resolving — via a sample of Coppola’s The Godfather — in uncertain guitar oscillations. The lyrics express old, genetic ideas: “My world is 1.2 meters by 2 / She is dirtier than the dirtiest corner / And I’m the roach in the corner.” A portrait of Dirty Fingers’ honest, uninviting to some, irresistible to many, spiritual lair.

Weibo Doomscroll — The Importance of Earnest Moments

To finish off the week, enjoy these vignettes of daily life in China, curated by Moly at Weibo Doomscroll.

First, we have some translated anecdotes about the underappreciated aspects of so-called low-status jobs.

“I used to flip burgers at a Western restaurant and felt like I was Spongebob everyday. It was a ton of fun.”

“I want to quit my job and drive for Uber instead. It feels so fun. I might be lost and I might not know where I’m going, but every single one of my passengers have a destination in mind.”

“I’ve worked my friend’s shift for two days and feel like I’ve aged by a year. I’m not even kidding, I feel my life energy being sucked out of me just by sitting in an office all day.”

“After quitting from ByteDance, I rented a couple of acres in Beijing to farm strawberries. The reason I quit was because of endless status reports.”

To close, enjoy this adorable post, entitled, “Spending 9.2 RMB [$1.30] to Celebrate a Kid’s Birthday.”

I was walking my dog in my development, and [a kid] was rollerskating in the central garden. He wasn’t scared of my dog at all! He squat down and told my dog, “You’re so cute!”

I was really happy to hear praise like that. I was like, “Thank you for not being scared of him. A lot of people are really scared of him.”

He tilted his head and asked me, “Why?”

And I was like, “Maybe because his snout is black and his body is black, so he looks like he’s going to bite?”

And he went quietly, “But that’s just what people think.”

I thought our conversation was done, so I turned to walk somewhere else, but he started walking behind me. Since he had rollerblades on, he was hobbling along while talking to me, about some game he was playing, whether or not I’d seen The Ring, or making me guess if cats were scared of cucumbers. He even asked me, “If my cat went missing, what kind of cat should I ask to help look for him?”

We chatted for maybe about an hour, and I asked him if he had to go home for dinner. And he was like, “I don’t live around here, and we don’t eat this early in my house.”

And I was like, “Oh, I just didn’t see a phone on you. It’s actually past 7 p.m.”

And he was like, “We eat dinner at 8 p.m. in my family.” Then, looking a bit sad, he said, “And nobody ever hangs out with me.”

And I was like, “We [my dog and I] are hanging out with you, aren’t we?”

And he said with disappointment, “Today’s my lunar calendar birthday, but I don’t think anyone remembers.”

And I was like, “Then can I take you out to eat something? You haven’t eaten yet, right?”

And he was like, “But I don’t want to spend your money.”

And I was like, “You’re not the only one eating. I need to get dinner, too.”

And he was like, “Then can we get ice cream?”

And I was like, “Sure, but I can’t have ice cream. I’ll just order something else.” And I asked him where his favorite ice cream place is.

And he was like, “We can go to Busy Snacks. It’s cheaper there.”

And I was like, “I asked you what your favorite ice cream was, not where has cheap ice cream. What you need to do right now is buy ice cream you like, not ice cream that’s cheap.”

And he was like, “But we have to be frugal, don’t we?”

And I was like, “You don’t have to be frugal today. It’s not like you have a birthday every day, right?”

He seemed to accept what I said, but once we went to Busy Snacks, he still picked out the cheapest ice cream. I asked him what else he wanted, and he hesitated for several minutes before he asked if he can have a bottle of Genki Forest [flavored soda water]. I was like, “Sure!”

When I was standing in line to pay for stuff, he asked, “So, big sister, are we friends now?”

And I was like, “Yup, and you can call me auntie.”

He was like, “I’m 11. How old are you?”

And I was like, “I’m almost 30.”

He thought about it and said, “I still wanna call you big sister, since it makes you sound younger.”

And I was like, “Wow, thank you.”

And he mumbled under his breath, “People like you are so rare. You’re so nice.”

It made me really happy to hear. After that, he went back to my development with me and walked my dog for a little while longer. After a while, I told him that it was time for him to go home, since it was getting dark.

He was like, “I live in the next development over. Can I invite you to come over some time?”

And I was like, “Sure, but let me walk you back for now.”

Comment from Jordan on Walz as “Sleeper Agent”

From the Washington Post:

“This is a guy that really has embraced China’s view of the world, the Chinese ideology, which is communism,” Rep. James Comer continued. His evidence for this? That Walz has government pensions instead of owning private-sector stocks. “This guy is very dependent on the government,” he said. “And I believe he thinks that China, the business model that China’s had, might be the ideal model for the United States.”

“It’s very possible that China would be grooming an up-and-coming rising star in the political process,” Comer said later in the discussion, “to try to have a foothold in our government.”

These allegations are absurd.

Here’s what Walz said to the Nebraska Star Herald in 1990 after returning from his year in China.

Now recall Trump’s comment on Tiananmen in March 1990 in a Playboy interview.

I could not agree more with Walz. Investing energy to understand China, like Walz did in his educational trips and decade of service on the human rights-focused Congressional-Executive Commission on China, is essential to crafting smart policy. What this country needs in its approach to China is a clear-eyed view of the Party alongside a genuine sympathy for Chinese people. Eliding any distinction between PRC citizens and the Party is not just incorrect and offensive — it’s bad politics that serves the Party’s interests.

Republican Select Committee Chair Rep. Mike Gallagher got it. From an excerpt from his ChinaTalk interview last year: “We asked the Speaker to change the name [of the Select Committee from China] to ‘Chinese Communist Party’ to at least make the point that this wasn’t some effort designed to go against the Chinese people, to make the distinction between the Party and the people.”

JD Vance, on the other hand, seems to think that just knowing Chinese Americans, to say nothing of PRC citizens, is suspect.

I’ll leave you with an excerpt from Walz’s 2014 statement to the Congressional-Executive Commission on China during a Tiananmen anniversary event.

I’m looking at the title of this, “Tiananmen at 25: the Enduring Influence on U.S.-China Relations on China’s Political Development.” I think that may be true to a certain level, but I’m also very cognizant there's an entire generation of Americans who don’t understand what happened there, they don’t understand what the impact of it was. I think many of them, once they knew, would stand proudly with those fighters of human rights. I think for all of us if we do not commemorate and we do not remember those who were willing to risk all, it puts all of us at risk of history forgetting the lessons that were there.

For me, it certainly had an enduring influence on me. As a young man, I was just going to teach high school in Foshan in Guangdong province and was in Hong Kong in May 1989. As the events were unfolding, several of us went in. I still remember the train station in Hong Kong. There was a large number of people — especially Europeans, I think — very angry that we would still go after what had happened. But it was my belief at that time that the diplomacy was going to happen on many levels, certainly people to people, and the opportunity to be in a Chinese high school at that critical time seemed to me to be really important…

The lesson to me, though, was when you watch these things happen, you can justify and make up in your mind any reason possible that you didn’t stand up or that something didn't happen or that no one remembered. So, as being part of this commission, I take the charge very seriously, both looking at the human rights records, looking at all those things, but clearly understanding the human rights and the friendships and the people that I know. It's critical to get this right.

If there was ever anyone in charge of grooming Walz, they got fired a long time ago.

Teacher Tim and Gossip from Guangdong

The following is reporting by ChinaTalk Editor Lily Ottinger

The DNC is underway, and we’re back with more details on Tim Walz and his relationship to China. We’ve got vintage photographs, testimony from coworkers, and an analysis of Gov. Walz’s view on cross-Strait relations. Here’s part 1 if you missed it.

You’ve probably already heard that Walz spent a year in China with the WorldTeach program and that he was nicknamed “Fields of China.” In Cantonese, “Fields of China” 田華 is pronounced Tin4 Waa4, which of course sounds like “Tim Walz.”

The Initium interviewed one of Walz’s old coworkers, “Mrs. Pang” 庞老师, for more anecdotes. Here’s a translated snippet of Mrs. Pang’s reflections:

“Everyone treated him like a star. … We all had a good impression of him. …When he came, he was very young and had a sunny smile. Decades later, when I saw his campaign photo, his smile was the same as before. When he smiled, his mouth corners were raised, and the muscles of his cheeks were smiling. His smile was very contagious.”

At Foshan No. 1 Middle School, Walz participated in many activities. Teacher Pang recalled that Walz was a key member of the school’s faculty basketball team.

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Mrs. Pang continues,

On Christmas, which the Chinese do not celebrate, some students and friends put decorations on a pine tree and brought it to Walz’s room.

Teacher Pang recalled: “[Colleagues] often laughed at him, because the moment he got his salary he would go to the store at the school gate to buy ice cream.”

She also pointed out that Walz did not speak Chinese when he first arrived, “But later he gradually learned some Mandarin and Cantonese. An old teacher who also lived in the staff building recalled that one day at noon, [Walz] bought a bag of lychees and said to him in Mandarin, ‘Eat some lychees, my treat! 请你吃荔枝’”

NPR interviewed another coworker of Walz’s, Lee Nai-Tim, who taught Chinese language and literature at Foshan.

Lee recalled Walz, with a big smile, saying in Cantonese: “Both you and I are named Tim.” … Walz was the only teacher at the school who was provided with an air conditioner, but he often left it off.

“At that time, our electricity supply was sometimes unreliable,” Lee says. “Mr. Walz would turn off his air conditioner because when he used it, the lights nearby would dim. It was very hot in the summer, but he chose to go without air conditioning.”

Upon arriving home, Walz had nothing but positive things to say about his experience teaching in China. I wonder if he still has this fan:

In subsequent years, Walz and his wife have traveled to China at least 30 times. Here’s Tim showing his wife around the Foshan campus and reconnecting with former coworkers:

From Walz’s interviews and advertisements in local newspapers, we can confirm that he traveled all over Asia in the 1990s. On one such trip in 1992, Walz traveled to Taiwan.

During his time in politics, Walz has avoided making direct comments about Taiwan’s status — but his actions as governor speak for themselves.

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Minnesota-Taiwan Relations

Walz put in serious work to expand Minnesota’s ties with Taiwan relations during his time as governor. In 2022 alone, Minnesota exported $610 million worth of goods to Taiwan.

When China slashed imports of US soybeans at the height of Trump’s trade war, Walz personally negotiated a trade agreement to sell surplus Minnesota soybeans to Taiwan.

In 2020, the commissioner of the Minnesota Department of Agriculture filmed a video in celebration of the 109th anniversary of the Republic of China. It’s unclear if Walz instructed the commissioner to make this video (it looks like he might be reading off a teleprompter), but it’s interesting that he uses “Taiwan” and “Republic of China” interchangeably:

In 2024, Walz officiated a Taiwanese company’s acquisition of Minnesota-based drug manufacturer Upsher-Smith.

Taiwan sent the state of Minnesota 100,000 masks at the height of the Covid pandemic. Minnesota’s state legislature formed the Taiwan Friendship Caucus in 2021. During the opening ceremony, Governor Walz personally thanked Johnson Chiang 姜森 for the mask donation. Chiang was the director of TECRO Chicago, Taiwan’s cultural center which *definitely* isn’t an embassy.

In 2024, the Minnesota State Senate passed a resolution “reaffirming its commitment to strengthening and deepening the sister ties between the state of Minnesota and Taiwan.”

The resolution ends with this statement, which is now a crime punishable by death in China:

BE IT FURTHER RESOLVED that the Senate continues to support Taiwan's meaningful participation in international organizations, such as the United Nations, the World Health Organization, ICAO, UNFCCC, and INTERPOL, which impact the health, safety, and well-being of the people of Taiwan, and supports Taiwan’s aspiration to make more contributions in international societies.

To be clear, not all Minnesota-Taiwan ties can be attributed to Walz. 3M, the Minnesota Mining and Manufacturing behemoth, has been investing in Taiwan since 1969.

Chinese state media has yet to report on any of this…but if and when they do, ChinaTalk subscribers will be the first to find out.

For more of Tim Walz on China, check out our Part 1.

Is AI espionage preventable? Are open-source AI models a threat to national security? To discuss divergent industry viewpoints, we have a special guest post by Pablo Chavez, former ChinaTalk guest, fellow at CNAS, and former VP of Google Cloud’s Public Policy.

In late July, Sam Altman and Mark Zuckerberg each wrote independently about how the United States should deploy and govern AI power. Read together, these two pieces represent a high-stakes dialogue on the geopolitics of AI, portraying sometimes competing, sometimes complementary visions of American AI leadership.

Altman advocates for a more controlled and regulated approach, while Zuckerberg champions the power of open-source collaboration.

Altman:

[W]e face a strategic choice about what kind of world we are going to live in: Will it be one in which the United States and allied nations advance a global AI that spreads the technology’s benefits and opens access to it, or an authoritarian one, in which nations or movements that don’t share our values use AI to cement and expand their power? There is no third option — and it’s time to decide which path to take. … That will … mean setting out rules of the road for what sorts of chips, AI training data and other code — some of which is so sensitive that it may need to remain in the United States — can be housed in the data centers that countries around the world are racing to build to localize AI information.

Zuckerberg:

The United States’ advantage is decentralized and open innovation. Some people argue that we must close our models to prevent China from gaining access to them, but my view is that this will not work and will only disadvantage the US and its allies. … I think our best strategy is to build a robust open ecosystem and have our leading companies work closely with our government and allies to ensure they can best take advantage of the latest advances and achieve a sustainable first-mover advantage over the long term.

The two visions diverge for some reasonably straightforward business reasons. Altman’s OpenAI is, at its core, a developer of AI systems that it provides to enterprises and consumers for a fee. As a consequence, protecting models — the company’s main source of revenue — is a necessary step on the path to profitability. By contrast, Meta is mainly an AI deployer that wants to leverage the technology for its products (just like other enterprises like Microsoft that integrate AI into their products). It doesn’t want to be locked into a particular supplier or live in a world where AI model suppliers become so successful that they threaten its advertising and other core businesses (as OpenAI threatens to do to Google in search, for example).

Beyond their respective business interests, the two CEOs explore the larger strategic implications of the paths they propose, revealing some nuanced common ground along with some clear distinctions.

Two Competing Visions

At a high level, Altman is calling for a disciplined US-led industrial policy effort, embracing cooperation with like-minded democracies, and emphasizing the importance of coordinated action. His focus on security, infrastructure investment, and international norms leads to a controlled but generous release of AI to allies and partners — as well as co-development with these partner nations — while making significant efforts to keep frontier AI out of the hands of China and other autocratic rivals.

Conversely, Zuckerberg champions an organic, hands-off approach to democratizing AI. His call for an open-source AI ecosystem echoes a more inclusive and collaborative ethos, potentially fostering a dynamic AI landscape that empowers a broader range of actors. Like Altman, he’s concerned about China, but he sees openness as a means to stay ahead. He argues this is the only option to ensure AI technology remains broadly distributed; the alternative he describes is where the technology becomes concentrated in the hands of a select few.

While Altman’s goal is to develop and deploy AI that aligns with and upholds democratic values, Zuckerberg’s emphasis is on democratizing the development and deployment of AI itself.

These are two very different goals with potentially divergent outcomes.

In Altman’s world, both the coalition of AI countries and the technology itself should have democratic characteristics. He argues AI ought to be deployed beyond allies in the service of growing the global democratic coalition.

By contrast, Zuckerberg writes about democratizing access to AI itself through open source. In this vision, AI is water, food, healthcare, and education. With it, all countries will do better. Without it, some countries will fall behind to the detriment of all of humanity.

Ultimately, Zuckerberg argues, an open AI ecosystem should lead to a more open, safer (and perhaps more democratic) world. He points to the history of open-source software as a model for testing and ensuring the safety and stability of code.

Zuckerberg also focuses on protecting what he believes is at the core of America’s technological advantage: decentralized and open innovation. He’s not just with staying ahead in AI, but also with protecting the ecosystem that generates American technological advancement. Altman focuses on strategies for winning the AI race, rather than preserving the economic and political operating system that got the U.S. to where it is today. The advantages of AI — such as workforce training and building infrastructure — are questions for the future.

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Gray Areas and Common Ground

A deeper reading of their essays softens some of the contrast between the two visions.

Both Altman and Zuckerberg express concerns about the concentration of AI power. Altman worries about authoritarian regimes using AI to strengthen and broaden their control, while Zuckerberg is additionally wary of closed AI models controlled by a small number of companies.

Their disagreement over open vs. closed is a bit grayer rather than a strict dichotomy.

Altman’s coalition does not exclude open-source collaboration. Instead, it seeks to create a strong, unified front, built around closed, controlled models to promote democratic values and prevent authoritarian dominance.

He views open models as an ancillary mechanism of soft power to encourage both partnerships and self-sufficiency among third-party countries.

For its part, Zuckerberg’s open-source AI future doesn’t necessarily contemplate open model development — just open release, without specifics about how open any particular model should be.

In addition, Zuckerberg emphasizes the advantage that larger, more sophisticated institutions will have in deploying AI at scale: such institutions have more compute, and therefore an incumbent advantage over smaller players. He suggests that these larger institutions will have an interest in safety and stability and argues that America’s leading AI companies should work with the US government and allies to maintain a first-mover advantage over bad actors.

None of this is incompatible with openness, but these details are evocative of a more closed ecosystem than the top line suggests.

Similarly, while differing in emphasis, their perspectives on AI safety are not mutually exclusive. Altman’s focus on establishing international norms and protocols complements Zuckerberg’s belief in the inherent safety of transparent, scrutinizable AI. Both recognize the need for a multilayered approach to AI safety, combining technical safeguards with broader ethical and governance frameworks. Indeed, Altman’s advocacy for a multistakeholder governance model is clearly inspired by ICANN, but it’s also evocative of open-source software development communities.

On Engagement with China

Altman believes the threat of authoritarianism should be addressed by withholding technology from China. At the same time, he calls for engagement with China to cooperate on reducing catastrophic risk — a pragmatic nod to a complex geopolitical reality. In a sense, his argument is that we have no choice but to work with them given their size and influence. Zuckerberg offers an alternative method for maintaining an edge over China: fostering America’s innovation ecosystem through openness.

Fundamentally, both see China as a threat, but Altman thinks the US and its allies can still protect AI infrastructure from Chinese cyber-intrusions. Conversely, Zuckerberg assumes that Chinese actors are already in the system, and thus, the goal should be to continue to move fast and stay one step ahead.

Neither essay discusses China’s AI ecosystem — including what appears to be a fairly robust and growing open-source AI community — or how China would respond to their respective visions.

Everything in Moderation?

The dialogue between Altman and Zuckerberg underscores the complex challenges and opportunities at stake in AI advancement.

Perhaps the future of AI will likely be shaped by a combination of both approaches. Ultimately, the most successful path forward will require a delicate balance of innovation, accessibility, safety, and ethical considerations that involve a diverse set of governments, corporations, and civil society actors.

The question of who will control the future of AI remains open, but one thing is certain: the decisions we make today will have profound implications for generations to come. This must remain top of mind for American political leaders as we transition to a new administration and a new Congress in 2025.

This showdown deserved its own AI-generated track…

For more Pablo Chavez on open vs. closed AI, have a listen to the show we did together last month.

Good Job Alert

The Institute for Progress is looking for an associate editor. Your boss will be , creator of the excellent Statecraft newsletter and the think tank editor I’ve worked with who has impressed me the most. Consider applying!

To discuss the domestic and international implications of patent policy, ChinaTalk interviewed Brian Pomper. Brian was the Chief International Trade Counsel to Senate Finance Committee Chairman Max Baucus and is now a partner at Akin Gump.

We discuss:

• The history of America’s innovation hegemony, from the signing of the Constitution to patent trolls and Elon Musk

• Why big tech companies spent decades systematically attacking the foundations of the US patent system

• The thermonuclear patent war of Apple vs Samsung

• The evolution of Standard Essential Patents (SEPs) as a battleground for emerging tech competition

• Why China’s approach to patent litigation is causing controversy in Europe

• The intersection of patent policy and international trade agreements.

Thanks to The Innovation Alliance for sponsoring this episode. The Innovation Alliance is a coalition of research and development-based technology companies representing innovators, patent owners, and stakeholders who believe in the critical importance of maintaining a strong patent system that supports innovative enterprises of all sizes.

A Brief History of Patents in America

Jordan Schneider: Intellectual property as a concept can be traced back to the Greeks— someone in 500BC patented a food dish! Then we get our first real patents in Renaissance Italy. But fast forwarding a bit, Brian why don’t you kick us off with the Constitution?

Brian Pomper: In the original text, aside from the Bill of Rights, the only right explicitly included is that of authors and inventors to exclusive rights to their inventions.

I’ll share my own history with patents as well. My position in Congress was Chief International Trade Counsel to the Senate Finance Committee, but my experience with intellectual property goes back further.

I have a degree in mechanical engineering, of all things, and I am a member of the US Patent Bar. I took the bar exam because I was trying to avoid work for a week at my private sector law firm job.

That was a failed strategy on my part, but it left me in the unique role of a trade lobbyist with patent bar membership and an engineering background. That’s why I approach patent policy from the standpoint of geostrategic competition with China.

Jordan Schneider: Why did the founders care about this?

Brian Pomper: In England, only those who manufactured a product could have rights over their invention. It was almost like a reward system from the government — a benefit given to favorites of the court.

In America, the idea was to democratize the process. The thinking was that there was significant inventive creativity among the American populace, not just among rich people with government connections or the means to build factories.

One of the first pieces of legislation Congress passed was the Patent Act of 1790. I strongly believe that the patent system has been a foundational component in setting the American economy on the right course and developing a culture of unique, innovative creativity that we still enjoy today.

Jordan Schneider: Can you take us through the 19th century? How were patent rights respected or not respected during this period?

Brian Pomper: I’d refer to the work of my friend, Professor Adam Mossoff from George Mason University. He’s done extensive historical research on this topic. When policymakers are told about “patent trolls” taking over the American economy, Adam points out that the 19th century actually saw a lot of patent litigation activity.

Many famous inventors like Alexander Graham Bell had to litigate to secure their exclusive rights. Thomas Edison and the Wright brothers also engaged in similar practices. However, no one at the time called them patent trolls. That term is really an invention of late 20th-century America.

This brings us to an important inflection point in how we view patents. Around 1982, a commission looking at American competitiveness suggested creating a unified patent court, which led to the establishment of the Federal Circuit. The idea was to ensure uniformity in patent law interpretation across the United States, rather than having different geographical interpretations.

This focus on strengthening patent rights and ensuring predictability contrasts sharply with the current climate.

For at least the last 20 to 30 years, there’s been a sustained attack on the patent system, driven by two main factors: high-technology goods and pharmaceutical products.

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Jordan Schneider: Let’s move into the 1990s and 2000s. What are some big legislative landmarks that changed how patents work in America?

Brian Pomper: The high point of support for the intellectual property system in the United States and globally was when the World Trade Organization came into existence in 1995. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provided common standards for how countries around the world needed to treat intellectual property.

This US government initiative aimed to set a foundational floor for intellectual property enforcement in every country. The idea was that the United States, with its highly inventive economy and companies with large patent portfolios, would benefit from instituting a rule of law approach to intellectual property globally.

However, there was a backlash to the TRIPS agreement from some developing countries who felt it was too one-sided, benefiting developed countries more than those still climbing the development ladder.

Two other elements led to the erosion of support for the intellectual property system, specifically the patent system, in the United States. 

First, concerns about rising drug costs led some politicians to point to patent rights as a reason for expensive medicines. 

But even more importantly, the late 1990s and 2000s saw the rise of gigantic technology companies. We all know who they are — they are the largest companies the world has ever produced. These companies — while highly innovative and extraordinarily successful — aren’t innovative or successful because of reliance on their patents. Some are essentially advertising companies, while others are effectively online retail companies. Many package other people’s inventions into products they sell.

What all these companies had in common was that patents were a cost for them because they were selling products, not technologies per se. These products often incorporated many other people’s technologies.

For instance, consider a desktop computer. That has numerous technologies implicating many patents. The chances are not insignificant that you’re using somebody else’s technology without permission or a license. This situation ultimately results in a request for a license and perhaps litigation if there’s no agreement.

The rise of the high-tech industry and the business models of these companies led to a circumstance where it was in their economic interest to challenge the foundations of the patent system. This system should provide stability and predictability for patent owners. If you’re a patent owner, you want to know that your right is durable. This allows you to raise money and promise investors that this technology is yours and only you can use it. You can then create a company that implements that technology.

If a patent can be easily challenged, dragged into court, or brought before an administrative tribunal — that creates uncertainty for years. It hinders the inventor’s ability to attract investment and develop the technology as they should.

Speaking as someone who cares about patent policy, I believe this is negative for the U.S. economy. The U.S. economy should welcome inventors and ensure their rights are stable and secure so they can attract investment and become the next very large companies in the United States.

Jordan Schneider: Let’s point to one counterexample. Elon Musk — famously not a big patent advocate — has said in the past that SpaceX basically patents nothing. His argument is, “patents are for the weak,” and anything they patent regarding their rockets would just be something that Chinese competitors could copy and paste.

Clearly, there is significant innovation behind a project like Starship. Writing off companies that make products as “not technologically forward” might be pushing it too far.

However, there are clearly different ways to approach the cost-benefit calculus of patent portfolios. If Elon Musk held more patents and aggressively enforced them, would that hurt small firms or firms focused on R&D instead of productization?

Brian Pomper: First, I want to emphasize that I did not say these companies were not technology-forward. They’re highly innovative and successful companies. They just don’t use their patents to monetize or secure investment in the way that many inventors do. Different companies have different approaches.

When Elon Musk says he won’t patent his inventions because then the Chinese can copy the technology, he’s referencing the fact that patents are public documents. The patent trade-off is that you get exclusive use of that innovation for 20 years from the filing date, but you have to make your idea public. The idea is that if you make it public, others can learn from that technology and build upon it.

If Musk is saying he won’t get a patent because he’s afraid others will steal the technology, he’s really relying on trade secrets. From the standpoint of what’s best for the American economy and innovation, relying more on trade secrets than patents is negative. Trade secrets don’t teach the rest of the public what your technology is, making it difficult for people to build upon it.

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Regardless, having a patent is crucial for attracting investment. Ask any venture capitalist what they inquire about when considering investing in a company. One of the first questions is whether the technology is patented. This question is common on shows like Shark Tank for a good reason. Investors need to feel assured that if they invest in Company A, Company B won’t come along and make the same exact product to compete with them.

Patents are undeniably useful for the American economy, but perhaps not for every business model — as Elon Musk has demonstrated.

Jordan Schneider: Let’s go back to the policy wars that have been fought over intellectual property in the 21st century. What have been some landmarks in the 2000s that have changed the terms of debate?

Brian Pomper: Some of the big high-tech companies have fought long and hard to change the patent system to suit their particular business model. If you’re a small company going up against a very large, well-resourced company, it’s difficult to negotiate as equals unless you have the exclusive right to a particular technology that the large company wants or needs to use. Patents level the playing field in negotiations.

This is an important aspect of our system that should encourage innovative challengers to technology incumbents. It’s how we grow and develop. Of course, big tech companies don’t want challengers; they want to preserve their markets and monopolies.

For the last 20 years, these companies have pushed hard for changes to the U.S. patent system, some of which they’ve achieved legislatively.

In 2011, Congress passed the America Invents Act, which created a process at the US Patent and Trademark Office for administrative challenges to patents. If the patent office made a mistake in issuing a patent, then they should be able to revoke it — that was the idea. At the time, the intent was to create a cheaper, quicker alternative to patent litigation for dealing with mistakes made by the Patent Office.

In practice, this has provided a tool for well-resourced accused infringers to go after patent holders.

They can file multiple challenges at the patent office on various grounds, lasting years and grinding down smaller companies that lack the resources to defend against these challenges.

This has created an imbalance, and there are now legislative efforts to bring more fairness to the process and make it more like what the original drafters intended.

While these companies succeeded in getting the America Invents Act passed in 2011, they were unsuccessful in achieving many other changes through legislation. However, they were successful in getting these changes through the courts. Their public relations campaign tarnished the patent system as a playground for abusers and patent trolls, which I believe was always overblown.

This narrative had a profound impact on judges, leading them to feel responsible for providing relief to those being challenged.

One important example is the 2006 Supreme Court decision in eBay v. MercExchange, which made it very difficult for patent owners to get injunctions against further infringement. This means that even if you prove your patent is valid and I’m infringing on it, the court may not allow you to stop me from using your technology. You’re left trying to negotiate how much I’ll pay you to use the patent, even though you can’t stop me from using it.

Thermonuclear Patent Wars

Jordan Schneider: Let’s discuss the most famous patent fight of recent vintage: Apple versus Samsung. How did the post-eBay v. MercExchange landscape affect that famous dispute?

Brian Pomper: The fight between Apple and Samsung was the patent-world equivalent of a global thermonuclear war. It played out in courts everywhere, but most prominently at the International Trade Commission (ITC), where Samsung sought to block the importation of certain iPhones into the United States, alleging they infringed Samsung’s patents.

This case is crucial because the patents Samsung accused Apple of infringing were standard-essential patents (SEPs).

SEPs are a unique type of patent. They are incorporated into industry-wide standards that all companies must use. For instance, every cell phone in the world uses the same wireless standardization.

When a company’s patented technology is incorporated into a standard, it comes with certain responsibilities.

The patent owner must agree to license their patent on fair, reasonable, and non-discriminatory (FRAND) terms to anyone who wants to use it. This responsibility exists because if every company selling a cell phone must use a standard for interoperability, they’re inevitably using the patented technology and must pay for its use. Without FRAND terms, the patent owner could charge extortionate amounts, knowing companies have no choice but to use the standard.

In the Apple-Samsung case, Samsung alleged it had offered to license Apple the patent on FRAND terms, which Apple refused. Conversely, Apple argued Samsung never offered FRAND terms. Ultimately, the U.S. Trade Representative decided there was insufficient evidence to prove Samsung had offered FRAND terms, so they didn’t allow the ITC to block Apple’s phones from being imported into the United States.

This decision called into question the enforceability of SEPs, which are prevalent in various technologies worldwide, especially cell phones. It raised concerns about whether companies would want to contribute their technology to standards if they couldn’t enforce their patents. This controversy continues to this day.

Jordan Schneider: Let’s take a step back and discuss SEPs. Long-time ChinaTalk listeners may remember a fun show from two years ago that covered the 200-year history of international standards [it’s a husband-and-wife team who wrote the book together—adorable!].

SEPs are the reason we have technologies like 5G. Companies worldwide contribute their engineering expertise to solve portions of the problem, then negotiate what percentage of work they should be credited for if their technology becomes part of the standard.

Once everyone agrees on what 5G looks like, companies are paid a percentage based on their contributions. This system allows us to have 5G phones that work anywhere on the planet. It’s a remarkable example of global cooperation. How has the SEP landscape evolved over the past few decades, aside from the Samsung story?

Brian Pomper: The primary question regarding SEPs is how they can be enforced. Specifically, can SEP owners obtain injunctions against infringers or exclusion orders at the ITC? This is the crux of the argument. Some argue that SEP owners should never be able to enforce their patents because they have significant market power due to their patents being included in mandatory standards.

Others, myself included, believe that the negotiation process we’ve established, where the SEP owner must offer to license the patent on FRAND terms to a willing licensee, has worked effectively. This system has been in place since its inception and has proven successful.

Those who argue that the SEP system is broken and that these patents shouldn’t be enforceable through injunctions or exclusionary relief due to anti-competitive impacts overlook a crucial point. There are currently 8 billion humans on Earth and approximately 10 billion cell phones, each of which will be replaced in the next two years. If there were anti-competitive effects in the SEP system, we would see restricted product availability and difficulty obtaining goods. However, that’s not the case with cell phones.

The system has worked daily to create the profusion of technology we see. While there are occasional instances of intransigent companies on either side, the litigation system exists to resolve these issues.

Jordan Schneider: What should patent owners do if they feel their SEP is being violated?

Brian Pomper: If you’re an SEP owner and someone is using the standard (and therefore your patent), you approach them and say, “I see you’re using this standard. I have an SEP incorporated into it, and you need to license it from me. I’m offering to license the patent on FRAND terms, in accordance with the rules of the standard-setting organization."

The other party might respond, “I don’t think that’s a FRAND offer. You’re asking for too much.” If negotiations fail, you can sue them. In court or at the ITC, you would argue that you offered to license your SEP on FRAND terms, but the other party is an unwilling licensee. The other party would counter-argue that they are a willing licensee, but you’re refusing to offer FRAND terms. The court or commission would then examine the evidence and make a determination.

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Jordan Schneider: Can you define FRAND? What parameters do people argue about when one side claims FRAND and the other disagrees?

Brian Pomper: FRAND (Fair, Reasonable, and Non-Discriminatory) is intentionally not a defined term. In antitrust law, competing parties can’t agree on prices, as that would be a classic antitrust violation. Therefore, entities in a standard-setting body can’t collectively agree on a specific price for FRAND terms.

FRAND is a negotiated construct that can vary depending on the counterparty. For one party, it might involve monetary payment. For another, it could be a cross-licensing agreement. For a third, it might be a combination of payment and licensing. It’s a very fact-specific inquiry.

What’s clear is that if I agree to license you a patent on certain terms but tell someone else I won’t license it except for an exorbitant amount, the second offer is clearly not FRAND.

Jordan Schneider: Does every contract involving an SEP have to be public? How do you get to the bottom of this?

Brian Pomper: It’s a determination made by the court. If I claim my offer is FRAND and you disagree, I’m not entirely sure who has the burden of proof. If it’s me, I might need to present to the court the other licenses I’ve negotiated and demonstrate that the terms I’m offering you align with those previous agreements.

There’s no central clearinghouse for this information. You only get to that point once you’re in litigation.

Jordan Schneider: So, let’s say you win, and I’m found to be violating your patent. What are your options to penalize me?

Brian Pomper: Most patent owners, especially those with SEPs, want to license their technology rather than engage in court battles. In 99% or even 99.9% of cases, the SEP owner and the standard implementer agree on license terms.

If you were to lose, and the court ruled in favor of the patent owner, or the ITC said that they were going to issue an exclusion order for your products, then the patent owner would typically say, “Okay, I’m obligated to license to you on FRAND terms. Let’s discuss what that means now.” You could choose to stop implementing the standard, but chances are you’ll want a license.

Jordan Schneider: What’s an exclusion order?

Brian Pomper: The International Trade Commission, established in 1930, protects U.S. commerce from imports that infringe on U.S. intellectual property. If you’re a U.S. company and believe an import infringes your intellectual property, you can file a petition with the ITC requesting an exclusion order. This order instructs the customs department to prevent the infringing product from entering the United States. While this is a simplified explanation, it captures the essence of an exclusion order.

China and International Patent Law

Jordan Schneider: Let’s discuss the patent drama in the EU. What’s happening there?

Brian Pomper: The European Commission proposed, and the European Parliament recently passed, a series of changes to their intellectual property system, including modifications to how the Standard Essential Patent (SEP) system would work in Europe. These changes involve creating a government bureaucracy to determine the essentiality of patents and provide recommendations for license values.

This approach raises concerns. First, it seems to undermine the value of SEPs. Europe has some very large and successful companies that own substantial portfolios of SEPs, most notably Nokia and Ericsson. The motivation behind this regime appears to be driven by the automobile industry, particularly German auto companies, as cars are becoming essentially cell phones on wheels. These companies want to access the necessary technology as cheaply as possible, making it difficult for SEP owners to negotiate significant licensing fees.

It’s worth noting that the licenses for SEPs are relatively modest in the grand scheme of things. For example, Tesla charges users like me $99 a year for Lidar and WiFi technology in their cars, while they likely pay around $20-$25 for a lifetime license to that technology per car. This arrangement seems quite profitable for Tesla.

Another example is the dispute between Apple and Qualcomm over Qualcomm’s SEPs. Public reports suggested that Qualcomm was charging about $10 per iPhone for their license. Considering the price difference between an iPod Touch (without wireless technology) and an iPhone, this $10 fee seems reasonable for the added functionality.

These examples demonstrate that SEP owners aren’t necessarily trying to squeeze excessive profits from technology companies. Many tech companies view this as a volume game, where even small reductions in licensing costs for billions of devices can significantly impact their bottom line.

Jordan Schneider: Can you elaborate on how this situation in the EU relates to China?

Brian Pomper: The EU’s approach seems to inadvertently support China’s efforts in this area. Chinese courts have been attempting to establish authority in setting global licensing rates for SEPs. This means a court in China could dictate what a US or European company can charge for their technology worldwide, not just in China.

This approach undermines the value of SEPs and benefits China in two ways. First, it gives Chinese cell phone manufacturers like Huawei or Oppo cheaper access to necessary technology. Second, it weakens American and European technological leaders, which aids China in its geostrategic competition with the United States.

Jordan Schneider: How does jurisdiction work when there’s a dispute over whether licensing terms are FRAND?

Brian Pomper: In cases involving Chinese handset makers, we’ve seen them file declaratory judgment actions in China, claiming patent invalidity. This strategy aims to bring the case under Chinese jurisdiction, allowing Chinese courts to make global licensing determinations.

We need to consider the US patent system in the context of competition with China. The “Made in China 2025” plan outlines their intentions to dominate future technologies.

China’s command-and-control economy allows for massive, directed investments in specific technologies.

In contrast, the United States relies on market-based incentives to channel private sector money into innovation. The patent system is a crucial part of this policy architecture.

Unfortunately, the evolution of the US patent system over the past 10-15 years has led to a decline in early-stage innovation investment.

Many inventions that are unpatentable in the US are patentable in countries like Germany or China. This situation encourages inventors to develop their industries elsewhere, where they can better protect their technology.

Policymakers should consider the patent system in the context of our competition with China and work to create a more predictable and stable environment for patent rights.

Jordan Schneider: How are international trade agreements addressing these issues?

Brian Pomper: Trade agreements don’t typically address SEP issues directly. We’re seeing a complex situation where a Chinese court might claim the right to set global licensing rates, while the SEP owner might seek an anti-suit injunction in another jurisdiction, such as India, to say that the Chinese court can’t issue a global licensing rate. This results in competing court orders, creating a messy legal landscape.

Ultimately, companies often settle these disputes after extensive litigation. The concern is that the EU’s actions appear to support China’s efforts to become the primary forum for setting global licensing rates for SEPs, potentially undermining the SEP architecture in Europe.

Mom and Dad are Fighting Again

Jordan Schneider: I’m curious about the background of international trade lawyers who focus on technology and patents. Who ends up getting into this field and what are they like?

Brian Pomper: Most people in this field come from an IP law background and encounter international contexts in their work. I’m somewhat unusual in that I’m primarily a trade lawyer with an intellectual property background. There is a significant overlap between international trade and intellectual property, as we’ve discussed.

International agreements, coupled with the global nature of intellectual property companies, create a need for professionals who can defend IP rights overseas. These lawyers tend to be quite technical and detail-oriented.

Jordan Schneider: Litigating these “thermonuclear war” court cases must be fascinating — these companies are fighting over billions of dollars, while still doing business together.

To me, the lawyers in this dynamic are like kids watching Mom and Dad fight. It’s uncomfortable, but no one really thinks that divorce is on the table.

At the end of the day, there’s so much money to be made that these companies end up finding terms.

Any further thoughts on this dynamic?

Brian Pomper: These disputes are ultimately about licensing fees. The litigation is an attempt to gain leverage in determining the ultimate licensing fee. For example, in the Apple-Qualcomm dispute, Apple likely didn’t question whether it was using Qualcomm’s patents but was trying to negotiate a lower licensing fee.

When dealing with billions of products, even small changes in licensing fees can make a significant difference. We’re now seeing automobile companies join this fight as cars become more technologically advanced, seeking cheaper access to patented technologies.

This approach may be short-sighted for the United States and possibly even for the auto companies themselves. It often comes down to protecting bottom lines.

Policymakers need to ensure the system moves in a direction that best serves the future of the United States, considering what’s best for the system rather than any particular company.

Contributor Bit Wise reports:

Kweichow Moutai is best known for its 酱香 (literally “soy sauce flavored”) baijiu 白酒. But these days, the company is making the headlines with a semiconductor investment. Is this a brilliant diversification strategy, or has someone at headquarters been hitting the sauce a little too hard?

Just two months ago, after a stock downswing, an investment WeChat article urged investors to pivot from baijiu to semiconductors, claiming the market needs “real tech” 真科技, not “sauce-flavored tech” 酱香科技. Fast forward to today, and we’re seeing headlines proclaiming “sauce-flavored chips are here!” 酱香芯片来了 as Moutai crosses industry lines.

Let’s have a sober look at what’s behind these headlines.

What’s Moutai?

Moutai has high social status and is traditionally served in business or government settings. In 1972, then US President Richard Nixon and Chinese Premier Zhou Enlai toasted with Moutai. Henry Kissinger allegedly quipped, “If we drink enough Moutai, we can solve anything.”

Of late, Moutai has been branching out from banquet halls with crossovers like the Moutai Latte at Luckin Coffee, or Moutai-flavored ice cream.

Chip investments? Seriously?

Moutai’s latest move isn’t a new beverage but an investment in semiconductor design start-up Shanghai SmartLogic 上海思朗科技有限公司. Its founder, Wang Donglin 王东琳, once served as director of the esteemed Institute of Automation at the Chinese Academy of Sciences. Born 1956, he was already in his sixties when he founded SmartLogic in 2016.

The investment comes from two industrial development funds, both set up by Moutai in 2023. The first, Moutai Science and Technology Innovation Investment Fund 茅台科创（北京）投资基金合伙企业, is fully owned by Moutai and made a miniscule investment of 15,000 RMB in SmartLogic.

The second, Moutai Goldstone Industry Development Fund 茅台金石（贵州）产业发展基金合伙企业, is a joint fund by Moutai and Goldstone Investment 金石投资有限公司, an investment firm under government-owned conglomerate CITIC Group 中信集团. This fund invested a more substantial amount — 221,000 RMB — in SmartLogic, even though it still accounts for only 1.6% of the start-up’s investment. Together, these funds invested about 236,000 RMB (~US$33,000) in SmartLogic — a minuscule sum by semiconductor industry standards.

The two funds combined, however, have a registered capital of 750 million RMB, and have made some more sizable investments in biotech and new energy companies — for instance, a 670,00 RMB bet in Guizhou-based battery tech start-up Jiagui Energy Technology 珈硅能源科技 and a 3.7 million RMB (~US$500k) one in synthetic biotech firm Hongmo Biotechnology 虹摹生物科技.

Four investments conducted by Moutai Science and Technology Innovation Investment Fund to date.

SmartLogic is actually not Moutai’s first venture into chips. In 2017, another Moutai fund participated in a Series B round for Daoyuan Technology 稻源科技, an edge AI chip startup.

Overall, these are tiny numbers for a firm with a $250 billion market cap. But these investments are more than just a ploy for headlines — they help illustrate broader trends for SOEs today.

What is the logic behind a liquor brand venturing into high-tech investments?

Some Chinese industry analysts link it to Moutai’s own needs. Since 2013, the company has embedded chips in its bottles for anti-counterfeiting purposes, creating a demand for high-quality security chips. But this alone doesn’t justify investing in a chip-design startup.

There is little official explanation on specific investments. When establishing the two industrial development funds in 2023, they expressed hope to “enhance scientific and technological innovation capabilities” and “provide more abundant financial support for technological achievements moving towards marketization.”

How does this make any sense?

To better understand Moutai’s business logic, it is crucial to recognize that it is an SOE (state-owned enterprise), majority-owned (60.82%) by the Guizhou provincial government.

Making investments in seemingly unrelated businesses is nothing abnormal for SOEs. Moutai has set up its own investment arm in 2014, initially focusing on consumer goods.

But as the government pays increasing attention to high-tech industries, incentives for local governments are shifting. Demonstrating commitment to innovation trumps economic development. In an age where Xi Jinping bans extravagant party banquets and instead pushes a tech self-reliance narrative at every opportunity, alcohol and consumer goods don’t look good. But semiconductor design investments do.

In turn, incentives for local SOEs are shifting in the same direction as well. SOEs undergo a plethora of evaluations by their responsible government department, with science and technology playing an increasingly crucial role. Tech-focused investment funds boost scores in these assessments. While private companies are primarily driven by profits, these evaluations play a more crucial role in SOEs. For instance, managers’ promotion may hinge on strong annual evaluations.

Guess who was ranked No. 1 in tech-innovation assessments among all Guizhou provincial SOEs in 2022 and 2023? Kweichow Moutai!

While the sub-funds of Moutai’s investment arm initially focused on consumer goods, most sub-funds established in the past few years focus on high-tech industries.

Selection of Moutai investment funds set up from 2023-24. Many of their names suggest a focus on high-tech industries and pay lip service to the latest political slogans, such as the “High-Quality Growth Fund” 茅台（贵州）高质量成长股权投资合伙企业.  

Such incentive structures can lead to herding behavior where the center shouts “chips” and everyone invests in chips. Look at the discourse around “new-quality productive forces” 新质生产力, a term encapsulating Beijing’s tech-powered economic ambitions. Soon after Xi first mentioned it in September 2023, every local government and SOE rushed to adopt the concept.

Everything became a new-quality productive force — including liquor. The local Industry and Commerce Bureau in the town where Moutai is located told state media that it would “promote the digital and smart upgrading of the ‘sauce-flavored’ baijiu industry to accelerate the cultivation of new quality productive forces” 积极推动酱酒产业数字化、智能化升级，加快培育新质生产力. At the Two Sessions in spring 2024, liquor SOE bosses proclaimed their supposed contributions to China’s tech self-reliance, and highlighted the need for “cultivating and strengthening Baijiu new-quality productive forces” 培育壮大白酒新质生产力.

The absurdity wasn’t lost on policymakers, and official discourse tried to dial down. Xi Jinping urged everyone to “guard against rushing in and creating bubbles” and to instead just “selectively promote the development of new industries, new models, and new growth drivers.” Party-state media published a flood of op-eds warning of irrational investments.

Is Moutai’s chip euphoria all misguided?

There is still a certain logic behind all this.

Beijing has recognized the reality that SOEs are not the most innovative firms. Some of them, however, have lots of cash. For around a decade, the new mantra is for SOEs to move from being “asset managers” 管资产 to “capital managers” 管资本.

In 2023, a high-level meeting by China’s state-owned capital administrators called to

promote the concentration of state-owned capital in forward-looking strategic emerging industries, and serve well as “long-term capital,” “patient capital,” and “strategic capital.”

推动国有资本向前瞻性战略性新兴产业集中，当好“长期资本”“耐心资本”“战略资本”

Hard tech investments require “patient capital,” and Moutai has barrels of that. It is the world’s most valuable spirits company. As of 2023, it had cash reserves of over 150 billion RMB (~US$21 billion), and its revenue is only growing. Further, most of Moutai’s tech investment funds are set up as “limited partnerships,” suggesting that the actual investment decisions are outsourced to professional investors.

Channeling some of this money to strategic industries is precisely how the center imagines SOEs to inject “patient capital” into its tech ecosystem. The government is surely hoping that Moutai orders far more rounds than its token investments we’ve discussed here.

The bigger debate

The size of Moutai’s chip investment is relatively small. Though not significant news for China’s semiconductor design industry, it plays to a deeper debate central to the future of China’s political economy: what role can “undesirable” industries (alcohol, social media, online gaming) play in an economy increasingly focused on national strategic priorities?

A 2018 state media op-ed argued that pitting these industries against each other is counterproductive. Instead, profits from “undesirable” sectors could fund strategic industries.

The development of shared bicycles, food delivery, and Moutai not only doesn’t conflict with the development of the chip industry, but can actually provide momentum for it. Using these industries as “scapegoats” for the lag in chip development is illogical. 

…

Maotai is a consumer good, and economic growth is inseparable from consumption. Shared bicycles and food delivery, these new business forms and models, bring more convenience to people, stimulate more consumption, boost economic development, increase tax revenue, and only then does the state have money to support the chip industry.

Don’t expect these debates to be resolved any time soon.

Alcohol is also not the only drug whose sales revenue fuels China’s tech modernization. China Tobacco 中国烟草, controlling 96% of domestic cigarette sales, is effectively part of the Ministry of Industry and Information Technology — the same ministry overseeing China’s largest chip fund.

Perhaps Deng Xiaoping’s famous saying — “it doesn’t matter whether a cat is white or black, as long as it catches mice” — needs a modern update: “It doesn’t matter if profits come from baijiu or cigarettes, as long as they fund semiconductors”?

Time will tell if Moutai’s “sauce-flavored” investments will yield a successful blend or leave a bitter aftertaste.

Here at ChinaTalk, today we are diving into a topic that is snow joke –  icebreakers! 

We interviewed William Henagan and Robert Obayda, both directors of the NSC. We discuss:

• Why icebreakers are important enough for Jake Sullivan to be “obsessed” with them

• “Industrial policy for the rest of us”—how bureaucrats can get creative to support strategic industries even when they don’t get billions to hand out like the Chips Act

• How Canada, Finland, and the United States are leveling up their cooperation in the Arctic through the Icebreaker Collaboration Effort (ICE Pact)

• Why cranes matter for national security, and the benefits of using carrots vs sticks

• What icebreakers are for, and how Finland is punching above its weight in the NATO alliance.

Listen to the podcast by clicking the link below for Spotify! The audio features one minute of puns in the opener I’m too embarrassed to publish in the newsletter. Click here to listen on Apple Podcasts.

Co-hosting today is former ChinaTalk intern Alexander Boyd, who now works at the China Digital Times. 

Cranes, trains, and global supply chains

Jordan Schneider: Robert, what’s the case for industrial policy?

Robert Obayda: Under President Biden, the NSC has been pursuing a modern industrial strategy, which is the convergence of economic and national security strategies. The basic idea is that if we invest in our economy, we will advance our national security.

There are two key assumptions underpinning this approach. First, the modern vision of public investment recognizes that markets don’t always allocate capital productively and efficiently, regardless of our competitors’ actions or the scale of our shared challenges. While no one discounts the power of markets, in the name of oversimplified market efficiency, entire supply chains of strategic goods, along with industries and jobs, moved overseas.

The second assumption was that all economic growth was good growth. Various reforms strengthened some sectors of the economy, like finance, while other essential sectors, such as semiconductors and infrastructure, atrophied. As a result, our industrial capacity, which is crucial to the country’s ability to innovate, took a significant hit.

The problem with the previous approach is that it assumed the free market was equally free in each country and that no government was interfering to advance their own interests at a scale large enough to create an imbalance. Looking at the PRC’s efforts to create market entry barriers around strategically important sectors and cultivate those sectors through various government subsidies, you’ll see it’s no longer truly free.

We’ve created a strategy to compete with that. The modern American industrial strategy identifies specific sectors that are foundational to economic growth and strategically important from a national security perspective, where the private sector alone isn’t poised to make the investments needed to secure our national ambitions.

Jordan Schneider: What led you to focus on icebreakers and cranes as the first two areas?

Robert Obayda: Honestly, it was general interest. We read the strategy, thought it was brilliant, and wanted to see if we could apply it. We started looking at sectors that fit the bill, and for various reasons, cranes were the first applicable area, followed by icebreakers.

Jordan Schneider: When you say “presented itself,” can you elaborate on how you decided to invest time and energy in one area versus another?

William Henagan: Our industrial strategy takes a 10,000-foot view. We then dial into sectors of strategic importance. Chips are an obvious example, as are our efforts to facilitate the clean energy transition and some of our infrastructure investments.

In this case, we looked at areas with intense market concentration, predominantly in the PRC, but we’d be concerned about market concentration in any country. For example, with cranes, there’s a significant position in the market for a product critically important to global supply chains. These cranes pick containers off ships and put them on docks, handling an incredible percentage - 80-90% - of all goods in the world.

The question is one of resilience versus dominance. In areas like chips, we’re looking to lead the world. But for cranes, icebreakers, and some of our shipbuilding work, this is more about resilience. We’re considering how to maintain strategic sectors and products that we need to make, and that our allies and partners need to be good at making, to ensure diversity within our supply chains and resilient economies.

Robert and I started this work in our office on the homeland side, focusing on critical infrastructure protection. We were trying to think through the implementation of the multi-trillion dollar spending package under the Investing in America agenda, looking at where we need to be resilient and protect pieces of our economy to maintain a minimum level of capability. We also wanted to prove that our national security policy can facilitate strong industrial policy, economic growth, and promote a foreign policy for the middle class.

Jordan Schneider: Let’s talk through some of the tools you’ve deployed for cranes and icebreakers. The CHIPS Act, as ChinaTalk listeners are familiar with, had grants, loans, tax credits, and a big R&D portion in the NSTC. What are some tricks up your sleeve?

William Henagan: This is a good place to talk about what we’re good at and what we’re not so good at in the American government. We have a robust set of restrictive tools of economic statecraft, like tariffs and export controls. We also now have the ability to make real investments on the domestic side.

One area we’re trying to improve is our affirmative tools of economic statecraft. We have a hard time investing abroad and lack good tools for creating patient capital that we can invest here or in other countries. These are some of the questions people are starting to raise as we get more sophisticated about strategic government investment.

We learn from the work that we’ve been doing over the last three years, which is getting a lot of bipartisan support, and is something that’s going to be carried forward as you see a convergence of economic and national security policymaking in the American system.

Jordan Schneider: Robert, you spent time in the Treasury Department on the enforcement side, dealing with sanctions and OFAC. That’s a more straightforward approach of prohibiting certain actions and then fending off lobbyists. Incentivizing positive behaviors, where the government doesn’t hold all the cards, is a more amorphous and challenging task.

Robert Obayda: The Treasury Department has a long history of private-public partnerships and relies on the private sector to mitigate global risks. Historically, we’ve used various sanctions and regulations as deterrents, acknowledging that the private sector is driven by profit rather than national security. Our industrial policy now aims to use both sticks and carrots by creating market incentives for private sector partners to act in ways that advance our national security.

Jordan Schneider: Let’s discuss our case studies, starting with cranes. What carrots were you able to offer?

Robert Obayda: The sticks we were using ultimately led to the carrots. We planned to use regulations and tariffs to mitigate risks, but this would create a market gap we needed to fill. This forced us to consider how to incentivize the private sector to step in and meet that demand.

See a podcast we did on the topic here:

William Henagan: Earlier this year, we considered issuing a maritime security directive. This order from the Coast Guard would require all ports across the country to examine their ship-to-shore cranes, identify those made in China, conduct cybersecurity hygiene work, and report back to the port captain. This increases the cyber compliance costs for cranes manufactured in China.

If you’re a port authority or terminal operator concerned about the risks of having a Chinese-built crane in your U.S. port, you’d be looking for alternatives. The largest Chinese company making ship-to-shore cranes is ZPMC. The main alternatives are in Japan, Finland, and Germany - close U.S. allies and partners.

We reached out to E&S, a Japanese company that makes ship-to-shore cranes, to discuss what it would take to encourage them to establish a facility in the United States for crane assembly or, at minimum, increase capital investment in Japan to meet U.S. demand for non-Chinese alternatives.

As we released the maritime security directive, E&S issued a statement about investing in the United States and expanding operations in Japan. We’ve had productive conversations with various allied and partner-based crane producers, encouraging people to consider them as trusted suppliers and alternatives.

We surveyed infrastructure investment programs that could potentially fund ship-to-shore crane purchases, such as the Ports Infrastructure Development Program at the Department of Transportation and the EPA Clean Ports Program. We pointed people towards these federal funding sources, which must comply with the Build America, Buy America Act. This requirement acts as a pull factor, incentivizing multinational companies to set up operations in the United States to take advantage of the generational investment in American infrastructure.

This approach allowed us to present a positive narrative alongside the restrictive tools like tariffs or security directives. We’re constantly looking for ways to carry forward this type of industrial policymaking in combination with our other tools.

Jordan Schneider: Let’s move on to our icebreaker conversation. From a macro perspective, there’s a fascinating chart showing the percentage of total ships launched over the 20th and 21st centuries. It reveals dramatic spikes in American production during World Wars I and II, followed by the rise of European, Japanese, and Korean shipbuilding. More recently, China has come to dominate, producing over 50-60% of global ship tonnage in the past 10-15 years.

Icebreakers are a particularly interesting case study due to their specialized nature. They’re incredibly powerful ships that break ice by pushing themselves onto it and then falling down. Russia even has nuclear-powered versions, while Finnish icebreakers can move sideways to clear wider paths.

These ships are crucial for opening trade routes that would otherwise be closed for many months of the year. Why should America care about icebreakers beyond occasionally freeing stuck boats around Alaska?

William Henagan: To understand the importance of icebreakers, we need to consider the global shipbuilding landscape. Historically, only one or two major powers have dominated the global order book at any given time. Currently, China accounts for about 49% of the global order book by tonnage, South Korea is in the 30% range, Japan is around 10-13%, and the United States is at a mere 0.2%.

While tonnage isn’t the perfect metric for icebreakers, as they don’t primarily carry freight, these vessels are crucial for opening shipping pathways. As climate change affects sea ice thickness, we’re seeing increased demand for icebreakers, particularly in areas like the Northwest Passage.

Our industrial strategy focuses on competing in sectors where we can excel, such as high-tech, high-specialty ships that require precision manufacturing and significant design IP. Icebreakers perfectly exemplify this category of ultra-specialized, complex vessels. Moreover, our allies and partners, like Canada and Finland, possess the best capabilities and know-how in this field.

By focusing on icebreakers, we aim to increase the U.S. share of the global order book from 0.2% to perhaps 1-2%. This growth is necessary to maintain a resilient shipbuilding economy that can be converted to support naval shipbuilding or cargo ship production during wartime.

Our icebreaker initiative, the ICE Pact, demonstrates how we can implement industrial policy alongside our allies and partners. This approach creates jobs in the United States while collaborating with our closest friends and sending important geopolitical signals to our adversaries.

Robert Obayda: Ultimately, our goal is to project power into high latitudes alongside our allies and partners. This requires a continuous surface presence in polar regions to counter Russian aggression and limit China’s influence. Without this arrangement, we risk our adversaries developing an advantage in a technology with geostrategic importance and potentially becoming the preferred supplier to other countries interested in purchasing icebreakers. It’s in our interest, both geopolitically and economically, to pursue this initiative.

Jordan Schneider: Robert, I understand all of that. But have you guys thought about also making the ice around Russia colder?

Robert Obayda: Haha yeah, we’re working with the Emiratis on that, actually.

Alexander Boyd: William, what you described sounds similar to a concept familiar to Chinatalk listeners: civil-military fusion, a controversial Chinese industrial policy. How does it differ from Chinese policy, which President Biden has specifically said he’s examining closely? What makes this approach American, as opposed to simply copying what the Chinese have done?

William Henagan: One key difference, as we’ve examined this problem, is the overlap in the civil fusion concept in the PRC. I won’t claim to be a PRC expert; we’re the economic and industrial policy team from the White House, not necessarily our China team. 

The evidence isn’t necessarily there about how building hulls in the same shipyards creates economies of scale. The type of work to build an icebreaker or a warship, including the specialty skills and materials needed, isn’t a one-to-one match. However, what’s important is having healthy shipyards capable of building all the associated vessels necessary for a country to stay competitive during both war and peace.

Our approach focuses on increasing the density of the supplier base that supports American shipyards and the demand for key inputs. We can leverage economies of scale on steel to drive down production costs. While the PRC uses non-market policies and practices to reduce input costs and keep shipyards afloat, that’s not the approach we would take in the United States.

Instead, there are interesting opportunities to be strategic about investing in shipbuilding here. This helps build a density of skilled labor and workforce proficient at building ships and sophisticated types of welding. It also attracts auxiliary businesses necessary to make component parts for ships.

Ultimately, we aim to have multiple healthy shipyards with strong order books, capable of bidding for Navy contracts and possessing the muscle memory and know-how to do so. While it’s not a perfect one-to-one comparison with what the PRC is doing, there are reasonable parallels to be drawn. We’re all thinking about how to create a strong shipbuilding sector in our respective countries.

The United States isn’t aiming for global dominance in this sector. We want to ensure we have the resilience and capability we need, with sufficient economies of scale to bend the cost curve. Our core objective is to make shipbuilding here competitive, not four times more expensive than in other countries. This differs from the PRC’s goal of true dominance in this particular sector.

Robert Obayda: Another key difference between our approach and China’s industrial policy execution is that we’re doing it alongside our partners and allies. China is hyper-focused on their own industry and going at it alone. For example, with icebreakers, we’re working alongside Finland and Canada toward our collective interests of maintaining the international order.

Similarly, our crane initiative not only supports U.S. industry but also invites our partners and allies to collaborate with us in the United States. We’re not limiting ourselves to only U.S. industry; we’re expanding our view across oceans to work alongside our partners and allies.

Jordan Schneider: Let’s talk about that a bit. Will alluded earlier to the “Buy America” policies, which limit a lot of what can be done. When you called the Finns, were they confused that someone from the White House wanted to talk about icebreakers? What was that conversation like?

William Henagan: No, the Finns were not confused. They know they have the best capabilities and one of the strongest shipyards in the world. They’ve been trying to talk to us about icebreakers for a long time. However, to build Coast Guard icebreakers, which is the government agency that builds and operates icebreakers in the United States, there’s something called Title 14. It’s similar to the Build America, Buy America Act, which mandates that these ships must be built in the United States.

The President is clear about this: American ships in American shipyards. However, that doesn’t preclude us from working with Finland or Canada to share information, exchange technical expertise, and collaborate. This cooperation sends a message to their neighbor, Russia, that democracies will work together on industrial policy and stand against autocracy and aggression by actors willing to violate international norms.

For President Stubb — Finland’s new president elected in March for a six-year term — this is a significant start to his administration.

It demonstrates that Finland will be a partner for the United States as a NATO member. This deal represents Finnish values and showcases Finland’s strong industry and business potential.

Prior to their NATO ascension, Finland was experiencing a slight economic downturn. Since joining, they’ve been experiencing what some call a “NATO bump.” ICE Pact is a natural follow-on, encouraging global partners to look to Finnish shipyards as an alternative for icebreaker construction, particularly for geopolitical swing states.

Finnish companies like Kone, Cargotec, and Wärtsilä produce many key inputs for these vessels and efficient shipyards. Our economic analysis suggests that, excluding commodities from our trade data, there could be a four or five-percentage point increase in goods and equipment manufactured by Finnish companies flowing into allies and partners to build icebreakers.

This mutual benefit is why the Finns were fully committed to this effort and why they’re such important partners.

Chinese Snow Dragons – Made in Finland? 

Alexander Boyd: William, I have a question. Despite all this, Finnish firms are also partners with Chinese firms. China’s first indigenously built icebreaker, Xuelong 2 [雪龙2], was actually designed by a Finnish company. Is part of the ICE Pact telling the Finns to stop designing Chinese ships? How does that work, given their pre-existing economic partnerships with China?

William Henagan: That’s a great question. Let’s back up and discuss the Helsinki shipyard, which will address this issue. Before 2019, the Helsinki shipyard, known for building the majority of the world’s icebreakers, worked closely with Aker Arctic, the state-owned corporation holding most of the IP for icebreakers. This is the company from which the PRC bought the design.

The Helsinki shipyard was actually owned by the United Shipbuilding Corporation, a Russian state-owned enterprise created by a presidential charter signed by President Putin in 2007. The 2019 sanctions regime hit United Shipbuilding Corporation, forcing them to sell their holdings to Algador Holdings, a Cyprus-based investment company owned by Russian businessmen.

Three years later, although Algador Holdings wasn’t directly hit with sanctions, the secondary effects of sanctions on companies trying to buy ships started to prevent this shipyard from getting business from the Russians. This forced them to sell the yard to Davie Shipbuilding, based in Canada.

Our economic tools essentially encouraged the sale of this incredibly important strategic asset from Russian ownership to Canadian ownership. One year later, Finland ascended into NATO, and a year after that, we’re inking the ICE Pact. This is essentially embracing Finland and saying that as democracies, we’ll collaborate on industrial policy and send a message to autocracies and U.S. adversaries that we don’t view industrial policies as a zero-sum game. We see our alliances as fundamental to our strength abroad.

This approach differs significantly from that of the PRC and Russia. When the PRC bought the design from Aker Arctic, they built that ship in their shipyard and then didn’t continue working with the Finns. What we’re proposing is technical exchange, exchange of IP, and a long-term relationship committed to the success of both our countries, creating jobs in the United States as well as in Finland. This is an offer that China can’t make.

Alexander Boyd: Speaking of ships, you’ve partnered with the Finns, but how are the Canadians treating this? We’re obviously close allies, but we’re also right next to each other in the Arctic. Are the Canadians as willing to invest in United States shipbuilding capabilities as the Finns are?

William Henagan: That’s an excellent question. The Russians, and to some extent the Chinese, are the pacing threat in terms of the number of icebreakers. The Russians have over 40, some of the most advanced and powerful in the world. The Chinese have three or four total icebreakers, some being research vessels.

The Canadians are a natural partner because, with the exception of Russia, no country in the world is building as many ships or icebreakers. Their fleet consists of over 20 vessels, with plans to build around 28 icebreakers across three different shipyards in Canada (Irving, Seaspan, and Davie) over the next 10-15 years.

Canada is putting their money where their mouth is in terms of building icebreakers for both domestic use and maintaining a continuous surface presence. As one of our closest geostrategic partners and a member of the Five Eyes alliance, this is a natural area for collaboration. We have much to learn from Canada, and we’re also investing in our own icebreakers.

We’re exploring what expertise, skills, and capabilities we can bring from Canadian firms to support our shipyard, Bollinger Shipyard in Louisiana, in building the first domestically built heavy icebreaker in the United States in the last 50 years, called the Polar Security Cutter. The Coast Guard says we need up to nine icebreakers, a mix of heavy Polar Security Cutters and medium Arctic Security Cutters.

This collaboration and interoperability in designing and building these ships with the Canadians will allow us to use Canadian, U.S., and Finnish resources as force multipliers. In the high latitudes, there’s a strong argument that you can’t go it alone in this field.

Jordan Schneider: Breaking news: The Canadian coach of the women’s soccer team has just been let go for flying drones over competing countries’ practices. I’m curious if this might impact your comfort in working with them on icebreakers going forward.

William Henagan: It sounds like the Canadians have got hustle.

Robert Obayda:William laid it out perfectly. Canada made sense when we began; we were going at this alone. I wound up at the Finnish embassy one night and found myself talking to cutting-edge industry people, realizing they wanted to partner up. That’s how it became a bilateral thing. Then we wanted it to be a true multinational arrangement. We started looking around and turned to the north for all the reasons William outlined. The Canadians made sense, so we gave them a call, and sure enough, they were interested.

Jordan Schneider: What’s up with Norway? Don’t they make icebreakers?

William Henagan: This is a good place to talk about the theory of economies of scale. When thinking through why it’s so hard to build an icebreaker in the United States, we realized shipyards that build one-off, two-off, or three-off vessels often experience significant financial hardship or go out of business.

We asked ourselves if we could either get together as allies and partners to collaborate and consolidate demand around shipyards with experience and capital investment to build these highly specialized vessels, or if we should all go it alone. Going alone won’t reach the economies of scale and efficiencies needed in building these vessels.

Robert and I worked on a demand study, concluding that governments worldwide will try to buy 70 to 90 vessels over the next decade. The question is, what piece of that pie can the United States, Canada, and Finland try to capture?

We’re trying to create a consortium as an alternative to building in places like the PRC for geopolitical swing states. We’ve seen reports that countries like India and Gulf states want icebreakers as research vessels.

The Norwegians, Swedes, and other Nordic countries have expertise and capability to offer. However, when you look at who’s put up money to build icebreakers and which yards are doing so, it’s the Finnish yard in Helsinki, the yards in Canada, and our own yards with our $1.8 billion appropriation for building the polar security cutters.

We plan to build in a mechanism to invite allies and partners to participate in future iterations of ICE Pact. This could be an opportunity for Norway, Sweden, or others to come on board.

Alexander Boyd: Let’s stay on this topic briefly. Bollinger Shipyards is building those polar security cutters in Louisiana. Can you tell me about it? Outside of Shanghai, China has one shipyard, Zhenglong Shipyards, with more capacity than all American shipyards combined. What’s happening at Bollinger Shipyards? How big is it? What are we making? Will this radically transform the place, or are they ready to hit the ground running?

William Henagan: Bollinger Shipyards, a Louisiana-based firm, has already secured the contract to build the polar security cutter. They have various shipyards in the Gulf, with the yard in Pascagoula, Mississippi, building the polar security cutter over the next five years or so to finish the first PSC and subsequent PSCs.

These shipyards will invest in developing specialized capabilities and expertise necessary to build these ships. Under ICE Pact, we want to ensure they have a stable, long-term order book. The United States has stated through public statements that we need eight to nine icebreakers. To justify capital investment and make this the core of their business, Bollinger needs confidence in getting more than one ship of a particular specialty class built.

After building a couple of ships for the Coast Guard, we still need to help Bollinger compete to build icebreakers from the global vessel order book of 70 to 90 ships. This will provide them with the long-term stable contracts necessary to become a world leader in the sector.

If we can prove this model with icebreakers, it could serve as an example of how to create healthy, strong shipyards in the United States capable of grabbing an increasingly larger share of the global shipbuilding market.

Alexander Boyd: Would you say that U.S. government capital is a kind of icebreaker, and private capital will follow?

William Henagan: That’s a fair point. Shipbuilding is undercapitalized. It’s a difficult business requiring significant, patient capital because the margins on building ships are small. You need to invest billions of dollars to build a successful shipyard, train the workforce, and increase the density of suppliers around the yard. The whole ecosystem is largely driven by multi-million or multi-billion dollar products with small profit margins.

As the government, we want to develop our yards to build high-quality, cost-effective ships that can be sold in the international market, not just used in a market protected by the Jones Act or for U.S. military purposes. The question is how to get that flywheel going and use government funds through Coast Guard contracts, grant programs, or other investments.

There are various bills floating around on Capitol Hill right now discussing revitalizing American shipbuilding and developing a maritime strategy. Senators like Kelly and Wicker are working hard on this difficult, intractable problem. We can try to prove this concept using icebreakers because there are multiple justifications for why this is a good first case.

Jordan Schneider: That was an impressive display of knowledge, which speaks to the broader question of whether the USA should rely on a handful of experts like William showing up in the White House to handle these matters, or if there’s a more institutionalized way to tackle questions requiring different industry specializations and understanding of potential industrial policy carrots and sticks. Robert, I’d love to hear some broader reflections about working in this field and what long-term government capability in doing these sorts of things might look like.

Robert Obayda: You’re absolutely right. Having just two, three, or four people working on this is neither efficient nor particularly effective. To truly institutionalize this approach, especially within the national security community, we need to institutionalize the idea of using incentives or “carrots.” The national security community is accustomed to using “sticks,” whether through military functions or similar measures. However, there’s less familiarity with incentivizing the private sector, partly because it doesn’t come naturally and because many don’t understand how it works or what tools are available.

To execute this properly at scale, we need to continue doing it and adopt a top-down approach. We should direct our respective offices to have real industry analysts on hand who can study markets and determine what tools and levers we have to incentivize the private sector to take actions advantageous to us. We should have an office at the NSC exclusively focused on this, along with teams at each department and agency in the national security space. This way, we’re not limiting ourselves to just punitive measures. There are plenty of incentives in our toolkit, and if we learn to understand and use them effectively, it will be more productive.

William Henagan: Robert hit the nail on the head. This is an enormous team effort that in certain instances must be driven by the White House because you have to convince different departments and agencies, all with their own core missions, to work with a corporate mindset in the government. It’s incredibly difficult to institutionalize that corporate-style thinking because the way you actually institutionalize something in the government is by placing it at an agency in some kind of entity.

Robert’s point about industry analysts is crucial. To be effective at industrial policy and encouraging capital markets to allocate capital in line with American strategic objectives, we need people who deeply understand how capital markets work, how businesses make decisions, and how government action can incentivize and drive those decisions in ways valuable to us. This is challenging in our system, where people have to consider the five-year internal rate of return on investments rather than what an investment unlocks for the American economy.

The government is building that muscle now. We’re experiencing it being built in real-time, and I’m excited to see where it goes over the next ten years.

Robert Obayda: To add to William’s point, we’ve accepted as a community that the private sector is not driven by national security but by profit. However, that’s often where the thinking stops, leading to the belief that we can only use punitive measures to force action. We can have a relationship where we make it advantageous for the private sector to take these steps, but that requires a completely separate set of tools and a different way of thinking.

William Henagan: The United States has the most innovative financial system in the world, yet our government has no ability to harness it. The question we face is how to use the most dynamic, innovation-forward economy in the world to help us compete with our adversaries in the current environment. This is particularly important because over the next century, or at least the next couple of decades, competition in the economic sphere will be the determining factor in our success as a country and the continuity of our alliances.

We need to demonstrate that democracy is better than autocracy. If we don’t, it will be extremely difficult for us to be successful going forward.

Jordan Schneider: The White House versus agency question is really interesting with these types of problems. The number of different departments we’ve referenced throughout this interview illustrates two things: first, there clearly needs to be some White House component, but also that it might make sense to redistribute some of these responsibilities within the agencies to allow for fewer people to be involved, enabling a more rational approach. I don’t know if it’s within your remit to propose a Goldwater-Nichols Act for Industrial Policy here on ChinaTalk, but it really struck me that there shouldn’t be this many cooks in the kitchen when thinking about doing stuff like this.

Robert Obayda: Ideally, yes, but I don’t know if that’s entirely possible. If you look at icebreakers, the Coast Guard, Department of Transportation, and State Department all play significant and unique roles. I don’t know if there’s any way to consolidate that. What would be easier is if there was buy-in at an earlier stage - fundamentally accepting that we can play a role in creating incentives for the private sector to take these actions. There’s just a lot of fear that prevents people from doing that or from thinking outside the box more broadly.

Jordan Schneider: How does that change? Just through good case studies?

Robert Obayda: The messaging right now is coming from the top down, but it’s so new that, frankly, most people haven’t even heard of it. We just need to continue doing it. Future administrations need to continue pushing industrial policy strategy that uses both sticks and carrots, pushing that thread down through cabinet secretaries, departments, and agencies. We need to build up these small offices that exist at every department but are largely operating in the shadows as an afterthought.

This is truly one of the first administrations where we’re doing this effectively. We’re going to need a couple more cycles for it to really build itself out. But you’re seeing it slowly. William and I are turning people into believers every day, it seems. The more we do, the more we flip, the stronger the coalition becomes. When we transitioned from cranes to shipbuilding, people who wanted nothing to do with it the first time were now on the sidelines, wanting to participate and get involved.

William Henagan: It’s worth putting that in historical context, too. From the beginning of the United States, there was an initial era where we had a national industrial strategy called the American System. We were making investments in infrastructure and creating a national bank. Then, at the beginning of the 20th century, towards the Second World War, and immediately after, we made major strategic investments that developed emerging technologies and industries like microelectronics, biotech, etc.

What we’re in right now, catalyzed by a multi-trillion dollar effort through the Investing in America agenda, is the beginning of a third era of American industrial policy. It just takes a long time for an entity like the federal government, with millions of employees who often can’t or don’t talk to each other, to let that seep in. We are three or four years deep into that. Five to ten years down the line, people who have seen this as the norm of the way the government does business are going to get better at doing their jobs.

Change in the government at an institutional level is slow. We’ve also pitched ideas that Jordan is alluding to, such as having an agency focused on industrial policy or industrial analysis. Those are ideas that have been proposed by Congress. We might propose one of those in the Build Back Better agenda. We’ll see how it sticks going forward.

Alexander Boyd: This actually relates to Robert’s point about needing future administrations to continue this work. After Henry Clay’s American System, which never really got passed in full, Andrew Jackson killed the national bank. So how bipartisan is this thinking? We don’t know what will happen in the election, but is your approach to promoting shipbuilding capacity shared by people in the Republican Party?

Robert Obayda: The structure is bipartisan. We have that foundation to build off of. The strategy we’re employing, which involves incentivizing the private sector, is new but interesting and not something people are running away from.

William Henagan: As the National Security Council, we can’t discuss politics. However, I would point you to the supportive statements made by House Homeland Security Committee Chairman Mark Green and Subcommittee for Transportation and Maritime Security Chairman Carlos Jimenez, both Republicans from Texas and Tennessee, after we released our work on shore cranes and Ice Pact. This is extremely encouraging, especially in the context of our otherwise polarized, occasionally partisan environment. It’s indicative of the kind of support we hope everyone can get behind because it’s hard to argue against wanting to create a strong domestic economy in the United States that allows us to project power into other parts of the world.

Robert Obayda: We’re also fundamentally putting American business first and looking to strategic alliances when we alone can’t accomplish something. It’s a blend of both ideologies.

Outtro music:

Frontier AI models, what does it take to train and deploy them? How difficult is it to “fast follow”? What are the medium-term prospects for Chinese labs to catch up and surpass the likes of Anthropic, Google, and OpenAI?

To discuss, I have two guests from a podcast that has taught me a ton of engineering over the past few months, Alessio Fanelli and Shawn Wang from the Latent Space podcast. Alesio runs a venture capital firm called Decibel, and Shawn runs a firm called smol.ai. Both Dylan Patel and I agree that their show might be the best AI podcast around.

In this episode we discuss:

• The secret sauce that lets frontier AI diffuses from top lab into Substacks.

• How labs are managing the cultural shift from quasi-academic outfits to firms that need to turn a profit.

• How open source raises the global AI standard, but why there’s likely to always be a gap between closed and open-source models.

• China’s status as a “GPU-poor” nation.

• Three key algorithmic innovations that could reshape the balance of power between the “GPU rich” and “GPU poor.”

What Makes Frontier AI?

Jordan Schneider: Let’s start off by talking through the ingredients that are necessary to train a frontier model. 

Shawn Wang: At the very, very basic level, you need data and you need GPUs. You also need talented people to operate them. 

Jordan Schneider: Let’s do the most basic. Let’s go from easy to complicated. Say all I want to do is take what’s open source and maybe tweak it a little bit for my particular firm, or use case, or language, or what have you. What’s involved in riding on the coattails of LLaMA and co.? 

Shawn Wang: I would say the leading open-source models are LLaMA and Mistral, and both of them are very popular bases for creating a leading open-source model. This would not make you a frontier model, as it’s typically defined, but it can make you lead in terms of the open-source benchmarks. 

Typically, what you would need is some understanding of how to fine-tune those open source-models. Those are readily available, even the mixture of experts (MoE) models are readily available. And then there are some fine-tuned data sets, whether it’s synthetic data sets or data sets that you’ve collected from some proprietary source somewhere. That’s definitely the way that you start. 

Alessio Fanelli:

The biggest thing about frontier is you have to ask, what’s the frontier you’re trying to conquer?

OpenAI, DeepMind, these are all labs that are working towards AGI, I would say. That’s the end goal.

It’s one model that does everything really well and it’s amazing and all these different things, and gets closer and closer to human intelligence. 

The open-source world, so far, has more been about the “GPU poors.” So if you don’t have a lot of GPUs, but you still want to get business value from AI, how can you do that? That’s a whole different set of problems than getting to AGI. A lot of times, it’s cheaper to solve those problems because you don’t need a lot of GPUs.

Sometimes, you need maybe data that is very unique to a specific domain. Or you might need a different product wrapper around the AI model that the larger labs are not interested in building. 

The market is bifurcating right now. The open-source world has been really great at helping companies taking some of these models that are not as capable as GPT-4, but in a very narrow domain with very specific and unique data to yourself, you can make them better. 

Data is definitely at the core of it now that LLaMA and Mistral — it’s like a GPU donation to the public. These models have been trained by Meta and by Mistral. Now you don’t have to spend the $20 million of GPU compute to do it. You can only spend a thousand dollars together or on MosaicML to do fine tuning. All of a sudden, the math really changes. 

But, the data is important. But, if you want to build a model better than GPT-4, you need a lot of money, you need a lot of compute, you need a lot of data, you need a lot of smart people. You need a lot of everything. 

That’s a much harder task. 

Open Source vs Frontier Models

Jordan Schneider: One of the ways I’ve thought about conceptualizing the Chinese predicament — maybe not today, but in perhaps 2026/2027 — is a nation of GPU poors.

If the export controls end up playing out the way that the Biden administration hopes they do, then you may channel an entire country and multiple enormous billion-dollar startups and firms into going down these development paths.

They are not necessarily the sexiest thing from a “creating God” perspective. But they end up continuing to only lag a few months or years behind what’s happening in the leading Western labs. 

A few questions follow from that. What are the mental models or frameworks you use to think about the gap between what’s available in open source plus fine-tuning as opposed to what the leading labs produce? What is driving that gap and how may you expect that to play out over time? 

Shawn Wang:

The sad thing is as time passes we know less and less about what the big labs are doing because they don’t tell us, at all. We don’t know the size of GPT-4 even today.

We have some rumors and hints as to the architecture, just because people talk. And one of our podcast’s early claims to fame was having George Hotz, where he leaked the GPT-4 mixture of expert details. 

But it’s very hard to compare Gemini versus GPT-4 versus Claude just because we don’t know the architecture of any of those things. And it’s all sort of closed-door research now, as these things become more and more valuable. 

That said, I do think that the large labs are all pursuing step-change differences in model architecture that are going to really make a difference. Whereas, the GPU poors are typically pursuing more incremental changes based on techniques that are known to work, that would improve the state-of-the-art open-source models a moderate amount. 

To date, even though GPT-4 finished training in August 2022, there is still no open-source model that even comes close to the original GPT-4, much less the November 6th GPT-4 Turbo that was released. That is even better than GPT-4. The closed models are well ahead of the open-source models and the gap is widening. 

We can talk about speculations about what the big model labs are doing. We can also talk about what some of the Chinese companies are doing as well, which are pretty interesting from my point of view. But those seem more incremental versus what the big labs are likely to do in terms of the big leaps in AI progress that we’re going to likely see this year. 

Alessio Fanelli: Yeah. And I think the other big thing about open source is retaining momentum. So a lot of open-source work is things that you can get out quickly that get interest and get more people looped into contributing to them versus a lot of the labs do work that is maybe less applicable in the short term that hopefully turns into a breakthrough later on. 

So you can have different incentives. Therefore, it’s going to be hard to get open source to build a better model than GPT-4, just because there’s so many things that go into it. You can only figure those things out if you take a long time just experimenting and trying out. 

Loose Lips, Nerd Parties, & Frontier AI

Jordan Schneider: This idea of architecture innovation in a world in which people don’t publish their findings is a really interesting one.

One of the key questions is to what extent that knowledge will end up staying secret, both at a Western firm competition level, as well as a China versus the rest of the world’s labs level. 

I’m curious, before we go into the architectures themselves. How does the knowledge of what the frontier labs are doing — even though they’re not publishing — end up leaking out into the broader ether? 

Shawn Wang:

Yeah, honestly, just San Francisco parties. People just get together and talk because they went to school together or they worked together.

OpenAI does layoffs. I don’t know if people know that. They just did a fairly big one in January, where some people left. 

Just through that natural attrition — people leave all the time, whether it’s by choice or not by choice, and then they talk.

They do take knowledge with them and, California is a non-compete state. You can’t violate IP, but you can take with you the knowledge that you gained working at a company. That does diffuse knowledge quite a bit between all the big labs — between Google, OpenAI, Anthropic, whatever. And so, I expect that is informally how things diffuse. 

More formally, people do publish some papers. OpenAI has provided some detail on DALL-E 3 and GPT-4 Vision. That was surprising because they’re not as open on the language model stuff. DeepMind continues to publish quite a lot of papers on everything they do, except they don’t publish the models, so you can’t really try them out. You can go down the list in terms of Anthropic publishing a lot of interpretability research, but nothing on Claude. 

You can go down the list and bet on the diffusion of knowledge through humans — natural attrition. There’s a fair amount of discussion.

You can see these ideas pop up in open source where they try to — if people hear about a good idea, they try to whitewash it and then brand it as their own. There’s a very prominent example with Upstage AI last December, where they took an idea that had been in the air, applied their own name on it, and then published it on paper, claiming that idea as their own. And there’s just a little bit of a hoo-ha around attribution and stuff. 

But, if an idea is valuable, it’ll find its way out just because everyone’s going to be talking about it in that really small community. Sometimes it will be in its original form, and sometimes it will be in a different new form. 

Jordan Schneider: Is that directional knowledge enough to get you most of the way there? Where does the know-how and the experience of actually having worked on these models in the past play into being able to unlock the benefits of whatever architectural innovation is coming down the pipeline or seems promising within one of the major labs? 

Alessio Fanelli: I would say, a lot. Also, when we talk about some of these innovations, you need to actually have a model running. So if you think about mixture of experts, if you look at the Mistral MoE model, which is 8x7 billion parameters, heads, you need about 80 gigabytes of VRAM to run it, which is the largest H100 out there. If you’re trying to do that on GPT-4, which is a 220 billion heads, you need 3.5 terabytes of VRAM, which is 43 H100s.

You need people that are algorithm experts, but then you also need people that are system engineering experts.

You need people that are hardware experts to actually run these clusters. 

The know-how is across a lot of things. You might even have people living at OpenAI that have unique ideas, but don’t actually have the rest of the stack to help them put it into use. Because they can’t actually get some of these clusters to run it at that scale. 

The other example that you can think of is Anthropic. The founders of Anthropic used to work at OpenAI and, if you look at Claude, Claude is definitely on GPT-3.5 level as far as performance, but they couldn’t get to GPT-4. There’s already a gap there and they hadn’t been away from OpenAI for that long before. This learning is really quick. 

Versus if you look at Mistral, the Mistral team came out of Meta and they were some of the authors on the LLaMA paper. Their model is better than LLaMA on a parameter-by-parameter basis. They had obviously some unique knowledge to themselves that they brought with them. It’s on a case-to-case basis depending on where your impact was at the previous firm. 

Seeing Open Source Like a State

Jordan Schneider: This is the big question. Say a state actor hacks the GPT-4 weights and gets to read all of OpenAI’s emails for a few months. Is that all you need? To what extent is there also tacit knowledge, and the architecture already running, and this, that, and the other thing, in order to be able to run as fast as them? 

Shawn Wang: Oh, for sure, a bunch of architecture that’s encoded in there that’s not going to be in the emails. It depends on what degree opponent you’re assuming. If talking about weights, weights you can publish right away. Just weights alone doesn’t do it. You have to have the code that matches it up and sometimes you can reconstruct it from the weights. Sometimes, you cannot. 

But let’s just assume that you can steal GPT-4 right away. Then, going to the level of communication. Then, going to the level of tacit knowledge and infrastructure that is running. And I do think that the level of infrastructure for training extremely large models, like we’re likely to be talking trillion-parameter models this year. 

Those extremely large models are going to be very proprietary and a collection of hard-won expertise to do with managing distributed GPU clusters.

Particularly that might be very specific to their setup, like what OpenAI has with Microsoft. That Microsoft effectively built an entire data center, out in Austin, for OpenAI.

I’m not sure how much of that you can steal without also stealing the infrastructure. 

Alessio Fanelli: I think, in a way, you’ve seen some of this discussion with the semiconductor boom and the USSR and Zelenograd.

You can obviously copy a lot of the end product, but it’s hard to copy the process that takes you to it. Then, once you’re done with the process, you very quickly fall behind again. 

If you got the GPT-4 weights, again like Shawn Wang said, the model was trained two years ago. So you’re already two years behind once you’ve figured out how to run it, which is not even that easy. So that’s really the hard part about it. 

And software moves so quickly that in a way it’s good because you don’t have all the machinery to construct. But, at the same time, this is the first time when software has actually been really bound by hardware probably in the last 20–30 years. 

Even getting GPT-4, you probably couldn’t serve more than 50,000 customers, I don’t know, 30,000 customers? There’s just not that many GPUs available for you to buy. That’s the other part. It’s like, academically, you could maybe run it, but you cannot compete with OpenAI because you cannot serve it at the same rate. 

Jordan Schneider: It’s really interesting, thinking about the challenges from an industrial espionage perspective comparing across different industries. Because you’ve seen a fair amount of success with Huawei and routers back in the ’90s and 2000s. 

But you had more mixed success when it comes to stuff like jet engines and aerospace where there’s a lot of tacit knowledge in there and building out everything that goes into manufacturing something that’s as fine-tuned as a jet engine. 

It’s a really interesting contrast between on the one hand, it’s software, you can just download it, but also you can’t just download it because you’re training these new models and you have to deploy them to be able to end up having the models have any economic utility at the end of the day. 

Alessio Fanelli: I was going to say, Jordan, another way to think about it, just in terms of open source and not as similar yet to the AI world where some countries, and even China in a way, were maybe our place is not to be at the cutting edge of this. It’s to actually have very massive manufacturing in NAND or not as cutting edge production. 

I think open source is going to go in a similar way, where open source is going to be great at doing models in the 7, 15, 70-billion-parameters-range; and they’re going to be great models. They’re going to be very good for a lot of applications, but is AGI going to come from a few open-source people working on a model? I find that unlikely. 

I think you’ll see maybe more concentration in the new year of, okay, let’s not actually worry about getting AGI here. Let’s just focus on getting a great model to do code generation, to do summarization, to do all these smaller tasks. 

There’s No Such Thing as a Free Model

Jordan Schneider: Well, what is the rationale for a Mistral or a Meta to spend, I don’t know, a hundred billion dollars training something and then just put it out for free? Does that make sense going forward? Or has the thing underpinning step-change increases in open source ultimately going to be cannibalized by capitalism? 

Alessio Fanelli: Meta burns a lot more money than VR and AR, and they don’t get a lot out of it. I think the ROI on getting LLaMA was probably much higher, especially in terms of brand. I would say that helped them. 

There’s obviously the good old VC-subsidized lifestyle, that in the United States we first had with ride-sharing and food delivery, where everything was free. I think now the same thing is happening with AI.

We have a lot of money flowing into these companies to train a model, do fine-tunes, offer very cheap AI imprints.

At some point, you got to make money. There’s not an endless amount of it. 

But I think today, as you said, you need talent to do these things too. To get talent, you need to be able to attract it, to know that they’re going to do good work.

If you have a lot of money and you have a lot of GPUs, you can go to the best people and say, “Hey, why would you go work at a company that really cannot give you the infrastructure you need to do the work you need to do? Why don’t you work at Meta? Why don’t you work at Together AI?” You can work at Mistral or any of these companies. 

So that’s another angle. It’s almost like the winners keep on winning. It’s like, okay, you’re already ahead because you have more GPUs. Now, you also got the best people. And because more people use you, you get more data. And it’s kind of like a self-fulfilling prophecy in a way. 

So I think you’ll see more of that this year because LLaMA 3 is going to come out at some point. I’m sure Mistral is working on something else. OpenAI should release GPT-5, I think Sam said, “soon,” which I don’t know what that means in his mind. But he said, “You cannot out-accelerate me.” So it must be in the short term. 

So yeah, there’s a lot coming up there. 

Shawn Wang: There is a little bit of co-opting by capitalism, as you put it. Mistral only put out their 7B and 8x7B models, but their Mistral Medium model is effectively closed source, just like OpenAI’s.

In a way, you can start to see the open-source models as free-tier marketing for the closed-source versions of those open-source models.

If this Mistral playbook is what’s going on for some of the other companies as well, the perplexity ones. 

There is some amount of that, which is open source can be a recruiting tool, which it is for Meta, or it can be marketing, which it is for Mistral. And there is some incentive to continue putting things out in open source, but it will obviously become increasingly competitive as the cost of these things goes up. 

Jordan Schneider: One of the very dramatic things that my eyes were opened to at NeurIPS was that it’s one thing to see the charts about the nationality of researchers, and it’s another thing to be like, “Oh, man, everyone’s speaking Mandarin here, that’s cool.”

And if by 2025/2026, Huawei hasn’t gotten its act together and there just aren’t a lot of top-of-the-line AI accelerators for you to play with if you work at Baidu or Tencent, then there’s a relative trade-off.

Staying in the US versus taking a trip back to China and joining some startup that’s raised $500 million or whatever, ends up being another factor where the top engineers really end up wanting to spend their professional careers. 

Open-Source Models & Chinese Labs

Shawn Wang: There is some draw. Yi, Qwen-VL/Alibaba, and DeepSeek all are very well-performing, respectable Chinese labs effectively that have secured their GPUs and have secured their reputation as research destinations. I would consider all of them on par with the major US ones. 

Jordan Schneider: Let’s talk about those labs and those models. I’ve played around a fair amount with them and have come away just impressed with the performance. Any broader takes on what you’re seeing out of these companies? 

Shawn Wang: DeepSeek is surprisingly good. All of the three that I mentioned are the leading ones. There are other attempts that are not as prominent, like Zhipu and all that. But I would say each of them have their own claim as to open-source models that have stood the test of time, at least in this very short AI cycle that everyone else outside of China is still using. 

Usually, in the olden days, the pitch for Chinese models would be, “It does Chinese and English.” And then that would be the main source of differentiation.

But now, they’re just standing alone as really good coding models, really good general language models, really good bases for fine tuning. And I think that’s great. 

Jordan Schneider: What’s interesting is you’ve seen a similar dynamic where the established firms have struggled relative to the startups where we had a Google was sitting on their hands for a while, and the same thing with Baidu of just not quite getting to where the independent labs were. 

Sam: It’s interesting that Baidu seems to be the Google of China in many ways. I know they hate the Google-China comparison, but even Baidu’s AI launch was also uninspired. They announced ERNIE 4.0, and they were like, “Trust us. It’s better than everyone else.” And no one’s able to verify that. 

OpenAI’s Secret Sauce?

Jordan Schneider: Yeah, it’s been an interesting ride for them, betting the house on this, only to be upstaged by a handful of startups that have raised like a hundred million dollars. 

I want to come back to what makes OpenAI so special. You guys alluded to Anthropic seemingly not being able to capture the magic.

What from an organizational design perspective has really allowed them to pop relative to the other labs you guys think? 

Alessio Fanelli: It’s always hard to say from the outside because they’re so secretive. Like Shawn Wang and I were at a hackathon at OpenAI maybe a year and a half ago, and they would host an event in their office. I think today you need DHS and security clearance to get into the OpenAI office. It’s hard to get a glimpse today into how they work. 

Roon, who’s famous on Twitter, had this tweet saying all the people at OpenAI that make eye contact started working here in the last six months. The type of people that work in the company have changed.  

I would say they’ve been early to the space, in relative terms. OpenAI is now, I would say, five maybe six years old, something like that. A lot of the labs and other new companies that start today that just want to do what they do, they cannot get equally great talent because a lot of the people that were great — Ilia and Karpathy and folks like that — are already there. They are passionate about the mission, and they’re already there.  

Going back to the talent loop. It’s like, “Oh, I want to go work with Andrej Karpathy. I should go work at OpenAI.” “I want to go work with Sam Altman. I should go work at OpenAI.” That has been really, really helpful.  

The other thing, they’ve done a lot more work trying to draw people in that are not researchers with some of their product launches. I actually don’t think they’re really great at product on an absolute scale compared to product companies. The GPTs and the plug-in store, they’re kind of half-baked.

But it inspires people that don’t just want to be limited to research to go there. That’s what then helps them capture more of the broader mindshare of product engineers and AI engineers. And they’re more in touch with the OpenAI brand because they get to play with it.  

Also, for example, with Claude — I don’t think many people use Claude, but I use it. I use Claude API, but I don’t really go on the Claude Chat. Like there’s really not — it’s just really a simple text box. It makes that it is hard for exploration.  

I would say that’s a lot of it. One of my friends left OpenAI recently. He was like a software engineer. He said Sam Altman called him personally and he was a fan of his work.

I don’t think in a lot of companies, you have the CEO of — probably the most important AI company in the world — call you on a Saturday, as an individual contributor saying, “Oh, I really appreciated your work and it’s sad to see you go.” That doesn’t happen often.  

That kind of gives you a glimpse into the culture. If you look at Greg Brockman on Twitter — he’s just like an hardcore engineer — he’s not somebody that is just saying buzzwords and whatnot, and that attracts that kind of people.  

How they got to the best results with GPT-4 — I don’t think it’s some secret scientific breakthrough. I think it’s more like sound engineering and a lot of it compounding together.

That’s what the other labs need to catch up on. They probably have similar PhD-level talent, but they might not have the same type of talent to get the infrastructure and the product around that. 

Shawn Wang: There have been a few comments from Sam over the years that I do keep in mind whenever thinking about the building of OpenAI. He actually had a blog post maybe about two months ago called, “What I Wish Someone Had Told Me,” which is probably the closest you’ll ever get to an honest, direct reflection from Sam on how he thinks about building OpenAI.

A lot of it is fighting bureaucracy, spending time on recruiting, focusing on outcomes and not process.  

For me, the more interesting reflection for Sam on ChatGPT was that he realized that you cannot just be a research-only company. You have to be sort of a full-stack research and product company. Now with, his venture into CHIPS, which he has strenuously denied commenting on, he’s going even more full stack than most people consider full stack. 

That seems to be working quite a bit in AI — not being too narrow in your domain and being general in terms of the entire stack, thinking in first principles and what you need to happen, then hiring the people to get that going. It seems to be working for them really well. 

Jordan Schneider: I felt a little bad for Sam. Those CHIPS Act applications have closed. I don’t think he’ll be able to get in on that gravy train. But it was funny seeing him talk, being on the one hand, “Yeah, I want to raise $7 trillion,” and “Chat with Raimondo about it,” just to get her take. 

Engineering Talent at the Frontier

Jordan Schneider: Alessio, I want to come back to one of the things you said about this breakdown between having these research researchers and the engineers who are more on the system side doing the actual implementation. 

There’s a long tradition in these lab-type organizations. The culture you want to create should be welcoming and exciting enough for researchers to give up academic careers without being all about production. 

We’ve heard lots of stories — probably personally as well as reported in the news — about the challenges DeepMind has had in changing modes from “we’re just researching and doing stuff we think is cool” to Sundar saying, “Come on, I’m under the gun here. Everyone wants to fire me. Let’s ship some stuff already.” 

Would you expand on the tension in these these organizations? They have to walk and chew gum at the same time. 

Alessio Fanelli: I see a lot of this as what we do at Decibel. We invest in early-stage software infrastructure. Usually we’re working with the founders to build companies. I’ve seen a lot about how the talent evolves at different stages of it. I just mentioned this with OpenAI. It is not that old. It’s only five, six years old. 

If you think about Google, you have a lot of talent depth. As with tech depth in code, talent is similar.

You’re trying to reorganize yourself in a new area. You have a lot of people already there. They might not be ready for what’s next. 

If you think about AI five years ago, AlphaGo was the pinnacle of AI. It’s a research project. You’re playing Go against a person. But they’re bringing the computers to the place. They’re all sitting there running the algorithm in front of them. It’s not a product. 

Now, all of a sudden, it’s like, “Oh, OpenAI has 100 million users, and we need to build Bard and Gemini to compete with them.” That’s a completely different ballpark to be in.

Some people might not want to do it. They might not be built for it. But then again, they’re your most senior people because they’ve been there this whole time, spearheading DeepMind and building their organization. It takes a bit of time to recalibrate that. 

We see that in definitely a lot of our founders. They are people who were previously at large companies and felt like the company could not move themselves in a way that is going to be on track with the new technology wave. They end up starting new companies.

I think what has maybe stopped more of that from happening today is the companies are still doing well, especially OpenAI. OpenAI is an amazing business. I don’t really see a lot of founders leaving OpenAI to start something new because I think the consensus within the company is that they are by far the best. They have, by far, the best model, by far, the best access to capital and GPUs, and they have the best people.

There’s not leaving OpenAI and saying, “I’m going to start a company and dethrone them.” It’s kind of crazy. 

You see maybe more of that in vertical applications — where people say OpenAI wants to be.

I use this analogy of synchronous versus asynchronous AI. OpenAI is very synchronous. You go on ChatGPT and it’s one-on-one. You use their chat completion API. You do one-on-one. And then there’s the whole asynchronous part, which is AI agents, copilots that work for you in the background. Things like that. That is not really in the OpenAI DNA so far in product. 

You see a company — people leaving to start those kinds of companies — but outside of that it’s hard to convince founders to leave. We tried. We had some ideas that we wanted people to leave those companies and start and it’s really hard to get them out of it. 

But I’m curious to see how OpenAI in the next two, three, four years changes. Because it will change by nature of the work that they’re doing. And maybe more OpenAI founders will pop up. 

Jordan Schneider: Part of the reason you keep your brilliant PhD’s happy is to be the first to find and exploit architectural advancements. 

In part 2, we get into:

• OpenAI's secretive Q* project and what it means for GPT-5.

• How a revolution in AI search could transform algorithmic problem-solving and shape how companies fast follow.

• How AI diffusion could unlock massive productivity growth in GPU “rich” and “poor” nations alike in the coming decades.

• Why the CCP’s biggest obstacle in AI development is… probably the CCP.

• Chinese labs’ innovation on Mixture of Experts models, and how they’re outpacing Western labs in this domain.

• Why coding will still be worth doing despite the rise of prompt engineering.

Read more

Kamala Harris just selected Minnesota’s governor Tim Walz as her running mate. He has a long history of engagement with China dating back to a year he spent teaching in Guangdong in 1989. Here’s our first reporter’s notebook on the topic.

VP Walz — A Sinophile Deeply Concerned with Human Rights

After graduating high school in 1982, he worked in manufacturing and joined the National Guard. He graduated from Chadron State College in 1989 and promptly moved to China. There, he taught high school classes on English and American history through the WorldTeach program.

Specifically, he taught at the Foshan No. 1 High School directly north of Hong Kong. It’s an elite Guangdong school with a hundred-year history and a track record of sending students to top universities. It’s most remarkable for its Tibet Department founded in 1995. In 2002, it started a program taking boarding students from Tibet, and the school proudly boasts about how a number of those students became Tsinghua and PKU undergrads. Walz visited Tibet before returning to the USA, so perhaps there was already a Foshan-Tibet connection back in 1989.

Why did Walz go to China? From a 2007 interview with the Hill:  

“China was coming, and that’s the reason that I went,” said Walz, who was then a rare Westerner in a society only starting to open up. His Chinese students nicknamed him “Fields of China.”

“Because your kindness was as big as the fields of China,” his students explained. They also called him “big-nosed one” and “foreign devil,” though neither, he believes, was uttered with malice. Upon returning stateside, Walz and his wife set up a company, Educational Travel Adventures, to coordinate summer trips to China for American high-school students.

Walz and his wife honeymooned in China after getting married on the 5th anniversary of Tiananmen Square. Why? “He wanted to have a date he’ll always remember,” said his wife.

During his years as a teacher in the US, he ran a summer exchange program with his wife, bringing dozens of students to China every summer for two decades.

If you were part of one of these trips or have any other Tim Walz China stories to share on or off the record, please respond to this email, we’d love to run them!

More from his time in China:

As a representative, Walz served on the Congressional-Executive Commission on China. This body, unlike other Congressional China-oriented initiatives, is exclusively focused on human rights. He often recounted his memories in China during congressional testimonies. 

From his remarks on Tibet in 2016:

As you may know, I had the opportunity to be one of the first groups of Americans to travel to China and teach Chinese high school students in 1989. During that trip, I also traveled to Tibet in 1990 and, most recently, I have returned as a member of the Congressional Delegation visiting China and Tibet. The boosted economic growth, higher household incomes, and constructed railway projects have facilitated the rapid modernization of the Tibet Autonomous Region. However, we need to continue to have constructive dialogues with China to ensure the preservation of traditional Tibetan culture and Tibet's fragile ecology.

…

The U.S. was founded on the ideas of universal freedom, and I believe that we must continue to urge the Chinese government to provide less regulated religious freedom to the Tibetans.

…

I will continue to support attempts to have productive dialogues with the Chinese government concerning the future of Tibet. Improvements in the quality of life, access to clean water, and access to health care services in Tibet must also include efforts to preserve the Tibetan way of life.

From the Commission’s hearing on the detention of Chinese civil rights activist Chen Guangcheng 陈光诚:

I taught high school in Foshan, Guangdong province. I know China has announced notable reforms and advancement in recent years. I applaud the accomplishments of the Chinese people and recognize that some in the Chinese Government advocate for greater rule of law. 

But we cannot believe China is serious about the rule of law while Chen Guangcheng and his family are being forcefully held and abused.

We cannot believe China is serious about human rights while it flagrantly violates its own laws and international human rights commitments.

…

Finally, let us remind our friends in China that all great nations achieve more through open dialogue and free flow of information than through forced silence. 

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Walz co-sponsored a slew of resolutions expressing opinions about China’s human rights record. These include:

• The Hong Kong Human Rights and Democracy Act of 2017,

• A resolution in support of releasing activist Liu Xiaobo 刘晓波 from prison, and another resolution after Liu’s death honoring his life and legacy;

• A resolution for the 20th anniversary of the Tiananmen Square massacre, which called for an investigation into the treatment of imprisoned protesters;

• A resolution expressing support for the Chinese human rights activists Huang Qi 黃琦 and Tan Zuoren 谭作人, who were criminally prosecuted for “slandering” the Chinese government’s response to the 2008 earthquake in Sichuan;

• A resolution expressing concern about reports of state-sanctioned organ harvesting from prisoners in China.

Other relevant bills include one that would award a Congressional Gold Medal to Chinese-American WWII veterans, a bill to ease restrictions on highly skilled immigration from the PRC, and a resolution to dedicate a postage stamp to Chinese railroad workers.

Military Spending and National Security

Walz is a veteran of the Army National Guard and served abroad in support of Operation Enduring Freedom. He is the highest-ranking enlisted soldier ever to serve in Congress.

He joined with Republicans to oppose a drawdown of military spending, specifically citing China as a concern. From his speech before Congress in 2016:

Since the time this plan was written and put into effect: [we have seen] the rise of ISIS, China has built a new island in the South China Sea and is landing aircraft on it now, and a belligerent Russia.

But more than that, we have seen the use of the military force as a deterrent, not just to aggression. We have seen it as a peaceful use, whether it be in Haiti to respond to natural disasters or to respond to Ebola in West Africa. The best trained, the most efficient and the most ready force to be able to use our diplomacy and our humanitarian assets is this land force.

 …

So I think, for many of us, this is not only a national security issue, it is a smart fiscal issue. We have paid dearly with treasure and blood to have this force. I can tell you, if the force shrinks too much — and we have seen this happen — the rotations happen very quickly.

We couldn’t immediately find a video of him speaking a full sentence of Chinese (he doesn’t claim to be able to speak much) but he has consistently wished his constituents a happy Chinese New Year. I’d give his 恭喜发财 a solid 7/10.

More to come on Walz! Please share your Walz China stories (which you can share on or off the record) by responding to this email.

Oh, and he hung with Joshua Wong.

To understand AI’s impact in China, it’s essential to go beyond the sort of coverage we’ve focused on in the past year around cloud computing, AI chips and algorithmic progress and start looking at applications in the real world. To that end, we’re kicking off our China AI Applied series today.

Where better to start than the only industry that really matters, farming?

Sunny Cheung, an associate fellow at the Jamestown Foundation and Dawn A, bring us a deep dive into the techno-agro revolution. We explore the hard tech behind the seed development industry and explore parallels to semiconductor policy questions. We also get into:

• How seriously does the CCP take its food self-sufficiency problems?

• Are seeds really “the chips of agriculture”?

• What is “information construction” 信息化建设, and what does it have to do with food security?

• What are the strategic priorities of Chinese biotech companies? And what should the US government do about their US-based subsidiaries?

  ChinaTalk is a reader-supported publication. To receive new posts and support our work, consider becoming a free or paid subscriber.

“Modern China,” for most people, probably conjures images of an emerging global superpower, advanced technology, and high productivity. Our coverage yesterday on just how central tech policy is to the Third Plenum only underscores that fact. But if there’s one thing Xi cares about just as much as semiconductors, it’s food.

• Xi Jinping in his speeches has repeatedly described food security as “a matter of national importance” 国之大者.

• The annual document No. 1 Central Document, issued by the CCP Central Committee and the State Council, has consistently prioritized agricultural and rural issues — from the 1982 announcement of the Household Responsibility System 家庭联产承包责任制 to this year’s unsurprising priority of “ensuring national food security” 确保国家粮食安全.

• At the Central Conference on Rural Work 中央农村工作会议 in 2020, Xi emphasized that food cannot be treated as a general commodity with short-term economic implications — it must be treated as a strategic commodity with long-term political implications (不能把粮食当成一般商品，光算经济账、不算政治账，光算眼前账、不算长远账).

• Two years later, at the same conference in 2022, Xi said (alluding to the Warring States Period, and then today’s Ukraine crisis),

  Without agriculture, there is no stability; without grain, there is chaos. This scenario has played out repeatedly throughout history, both in China and abroad. Historically, the State of Qi enticed the State of Lu to abandon grain cultivation for mulberry trees, then cut off their food supply to subjugate them. King Goujian of Yue cooked seeds before offering them as tribute to the State of Wu, seizing the opportunity to conquer Wu when their crops failed. Since the Ukraine crisis began this year, over thirty countries have restricted food exports, leading to social unrest and even regime changes in some nations. Only by firmly grasping the initiative in food security can we secure the initiative in national rejuvenation and strengthening.

  无农不稳，无粮则乱。这一幕在古今中外反复上演。历史上，齐国诱导鲁国弃粮种桑，关键时候断粮降服鲁国；越王勾践把种子煮熟贡给吴国，趁其粮食绝收一举灭吴。今年乌克兰危机爆发以来，全球30多个国家限制粮食出口，部分国家因此社会动荡甚至政权更迭。只有把牢粮食安全主动权，才能把稳强国复兴主动权。

Given all this, it should come as no surprise that China is accelerating its progress in improving food security, from central to provincial and local levels, at breakneck speed:

• Since the war broke out in Ukraine — the granary of Europe — several studies have been published in China discussing the diplomatic and strategic role of food security in the war.

• Then in 2023, the National People’s Congress Standing Committee finalized “the Law of the People’s Republic of China on Assuring Food Security,” which embedded a national grain-security strategy into China’s overall national security concept. The law’s provisions stipulate a production strategy based on cultivated land management and application of technology (藏粮于地、藏粮于技), while also establishing a grain-security responsibility system that confines local governments at or above the county level.

• And the Chinese central government is strengthening enforcement. Last year, China’s natural-resources inspectors investigated land in thirty-one provinces and administrative regions, and leaders of nine local governments have been summoned to Beijing and criticized seriously for ineffectively investigating and curbing cultivated-land violations. This February, the Ministry of Natural Resources 自然资源部 found sixteen fraud or misconduct cases of offenses in the latest annual nationwide land-change survey.

Land, Self-Sufficiency, and Soybeans

In 2006, the 11th Five-Year Plan set forth a legally binding goal of maintaining 1.8 billion mu 亩 (about 296 million acres) of arable land. That figure was based on a calculation which included grain production and the population at that time, in theory guaranteeing that the nation’s food self-sufficiency rate will stay above 95% until 2030.

According to the Ministry of Natural Resources, China recorded over 1.9 billion mu of arable land at the end of 2022, an increase for the second year in a row. But Chinese agricultural experts also revealed that about one-third of China’s arable land is suffering from degradation, acidification, or salinization. Perhaps more concerningly, China’s latest food self-sufficiency ratio plummeted to 76%. Although the self-sufficiency rate of the Chinese staple food triad — rice, wheat, and corn — is near 100% self-sufficient, China was the world’s largest food importer in terms of value in 2023.

In fact, China has a structural food shortage. Soybeans illustrate the problem well. China is the world’s largest importer and consumer of soybeans in the world. Due to its culinary culture and population base, China has huge demand for soybeans, 80% of which go to the manufacture of vegetable oils and animal fodder.

Over the past few years, soybean imports have accounted for 60% of total grain imports — but the self-sufficiency rate for soybeans is only 17%. So if China wants to grow soybeans without importing from others, it would need an extra 700 million mu of arable land, in addition to the 180 million mu of land already being used to grow soybeans.

Unsurprisingly, China is seeking substitutions to American soybean imports. According to China’s General Administration of Customs 海关总署, China’s share of Brazilian soybean imports has dramatically increased: in the first two months of 2024, China’s soybean imports from Brazil doubled, compared to the same period last year. But we’re still not getting the full picture: a few months ago, a Bloomberg report revealed significant gaps between China’s soybean import data and exporting nations’ figures — China claims it imported 96 million tons of soybeans in 2023, while exporting nations (including the US and Brazil) say they exported 101 million tons of soybeans to China. A Chinese customs-agency spokesperson attributed the divergence “to various reasons, such as re-exports to third places.”

‘Information Construction’ 信息化建设 for Strategic Grain Reserves

China hopes to get rid of its food-security chokeholds through revolutionary advancements in technology. Article 7 of China’s new national food-security law stipulates that the state should strengthen “scientific and technological innovation capabilities and information construction” 科技创新能力和信息化建设. In March, the National Food and Strategic Reserves Administration 国家粮食和物资储备局 announced that China reached 100% information coverage for grains related to government policies. In other words, China has successfully built a digital regulation system for grain purchases, sales, and reserves.

This milestone also reflects China’s capacity to conduct real-time, dynamic food-security supervision via AI. Sinograin 中储粮 — a state-owned enterprise responsible for purchasing grain, including American soybeans — uses intelligent inspection to detect moisture, impurities, weight, and imperfections in grain. Cameras and sensors, alongside information systems deployed in Sinograin’s depots, can monitor incoming grain in any weather conditions. From 2014 to 2017, Sinograin deployed 4.32 million temperature sensors and more than 80,000 surveillance cameras, and claims it has the world’s largest Internet of Things (IoT) application on grain storage. Earlier this year, the National Food and Strategic Reserves Administration said that its national food and material management platform now integrates 400 million data entries, describing its system as a “digital brain” 数字大脑 for grain purchase, sale, and reserve supervision.

The new national food-security law promises to secure China’s domestic food supply by enhancing international grain-security cooperation — and digitalization has huge potential to improve grain purchase decision-making. Sinograin said it was involved in a macro-control mission last year which efficiently implemented a purchase policy that strongly benefited farmers. The mission included the launch of the minimum purchase price of rice in Heilongjiang as well as an increase in domestic soybean storage.

Information construction for grain storage is more than a series of isolated management systems across scattered depots. It’s an integrated network for all kinds of grain-related decisions:

• A secretary of the Party committee at Sinograin’s branch in Dalian 大连 said that Sinograin regulates the supply and demand of all national grains, maintains the stability of the grain market, and responds to major natural disasters and other emergencies.

• Last year, the Chinese central government revised the “National Food Emergency Preparedness Plan” 国家粮食应急预案, introducing a framework for improving the food-emergency response system with plans introduced for all provincial-, municipal-, and county-level administrations. Notably, the revision also stipulated adherence to “extreme thinking” 极限思维, which implies preparations for contingencies like grains embargo and global food crisis.

• The Joint Logistics Support Center 联勤保障中心 of the People’s Liberation Army has been busy working on information construction projects for military-civilian integration (军民融合军粮供应工程信息化建设), in particular, provincial-level military food supply. These projects are evidence that the PLA is pursuing what it calls “joint security and joint supply” 联保联供, based on the concept of “peacetime to wartime conversion” 平战转换.

The Revitalization of the Seed Industry

In addition to information construction, scientific innovation 科技创新 is another major part of technological applications stipulated in the new national food-security law.

Seeds have been described as the “chips” of agriculture — and considering the unprecedented attention given by officials and scholars, including in the Ministry of Agriculture and Rural Affairs 农业农村部, that doesn’t feel like an exaggeration.

• In 2021, the twentieth meeting of the Central Committee for Comprehensively Deepening Reform 中央全面深化改革委员会 adopted the “Seed Industry Revitalization Action Plan” 种业振兴行动方案, which focuses on “(1) the protection and utilization of germplasm resources, (2) innovation and tackling key problems, (3) support for enterprises, (4) base improvement, and (5) market purification” 种质资源保护利用、创新攻关、企业扶优、基地提升、市场净化.

• The grain-production chapter of the new national food-security law also focused on germplasm and breeding development of the seeds industry.

• Xi published a Qiushi 求是 article titled, “Correctly Recognizing and Grasping the Major Theoretical and Practical Issues of China’s Development” 正确认识和把握我国发展重大理论和实践问题. Xi stressed the implementation of revitalizing the seed industry and ensuring soybean self-sufficiency: “The rice bowls of the Chinese people should be firmly in their own hands at all times, and our rice bowls should be filled mainly with Chinese grains” 中国人的饭碗任何时候都要牢牢端在自己手中，我们的饭碗应该主要装中国粮.

Researchers in China have picked up on those cues, and focused in particular on crop genomics. Their fixation on crop genomics was inspired by “Breeding 4.0,” a concept pioneered by US plant geneticist Edward Buckler. Breeding 4.0 imagines a future generation of breeding in which molecular breeding will evolve into optimized combinations of genes with integrated technologies such as transgenics, whole-genome selection, genome editing, synthetic biotechnology, and artificial intelligence.

That future requires next-generation sequencing (NGS) such as high-throughput sequencing technologies, which can cost-effectively sequence millions of DNA fragments. NGS, for instance, would enable rapid and comprehensive genotyping to find disease-causing variations in a particular breed of crop.

Chinese researchers have enjoyed considerable success in making scientific breakthroughs:

• In 2017, the Chinese Academy of Agricultural Sciences (CAAS) 中国农业科学院 utilized single-nucleotide polymorphism (SNP) and sequencing technologies to study the germplasm of hundreds of varieties of corn, soybeans, and wheat. A year later, the academy published a groundbreaking assembly and sequence analysis on Chinese soybean genomes, paving the way for an evolutionary graph-based genome study of soybeans.

• Chinese scientists in recent years have decoded the complete reference genomes of several different soybean varieties. Nanjing Agricultural University 南京农业大学, for example, used US soybean variety Williams 82 to build the world’s first open mutant library for soybeans, with genome-wide coverage and clear mutation information. Guangxi University 广西大学 and Northeast Agricultural University 东北农业大学 also released the complete genome of Chinese soybean variety Zhonghuang (中黄) 13, and last year they mapped the epigenetic modifications of the variety for the first time.

• And just last year, the Institute of Crop Science 作物科学研究所 of CAAS took the lead in researching domestic wheat, maize, and soybeans. The institute has validated thirty-eight new crop varieties, and ten of those have been selected to be promoted in more than 24 million mu of farmlands. Soybean varieties Zhonghuang 301 and Zhongji (中吉) 602 have set new highs in yield and harvestability in alkali soil, respectively.

The Chinese government firmly believes that the nation’s world-leading germplasm-resources database and competitiveness in sequencing and artificial intelligence will give it the edge in the next generation of breeding. China’s National Intellectual Property Administration 国家知识产权局 confirmed that China has more biological-breeding patent applications than anyone else in the world; the number of applications of molecular-markers breeding also exceeded the United States. And for the first time, China last year approved thirty-seven transgenic corn varieties and fourteen transgenic soybean varieties, effectively beginning a new chapter of biological breeding.

Sequencing Collaborations in the US

In recent years, Chinese biotech companies have strengthened agriculture cooperation with their US counterparts.

Back in 2012, Chinese genomic science giant BGI 华大集团 and California-based Affymetrix announced a strategic cooperation to co-develop and commercialize genomic microarrays for agriculture. (Microarrays allow researchers to analyze and compare genomes of different organisms.) The reason BGI sought out the California company is clear: Affymetrix, later acquired by ThermoFisher, possesses the leading microarray platform GeneChip, which allows high-throughput gene-expression analysis and genotyping based on photolithographic techniques, similar to semiconductor manufacturing processes (as the name “GeneChip” suggests). BGI said the cooperation agreement will improve genomic-selection capabilities for scientists seeking to improve breeding outcomes.

In 2013, the Committee on Foreign Investment in the United States (CFIUS) approved BGI’s purchase of Complete Genomics, another California company which invented a high-density technique to improve NGS. The acquisition gave BGI the capability to produce a DNA sequencer and then combine it with its own trans-omics technology platform. BGI co-founder Wang Jun 王俊, who revealed his company’s intention to Chinese media, said Complete Genomics’ core sequencing technology and other core intellectual properties will take BGI’s scientific research scale up to another level.

The transfer of those core technologies enabled BGI to found MGI Tech 华大智造, a leading producer of high-throughput genome-sequencing machines, in 2016. BGI has received over $1 million in research grants from the US Department of Agriculture’s (USDA) Agricultural Research Service since 2018. BGI’s tech acquisitions also allowed it to reduce its dependence on US sequencing giant Illumina: in 2022, Illumina agreed to pay BGI $325 million to settle a patent-litigation suit, which also resolved a pending antitrust lawsuit.

And MGI Tech’s footprint in the US continues: last year, Complete Genomics became a BGI subsidiary, and announced plans for a $3.2 million NGS-products manufacturing facility at its headquarters in San Jose, California. In a statement, MGI Tech labeled the construction of the San Jose facility as its “second overseas manufacturing base” 在海外布局的第2个制造基地 (Latvia was its first).

This January, Complete Genomics announced an agreement with New York–based Gencove, providing a bundled solution for low-pass whole genome sequencing (LP-WGS). Complete Genomics expected the agreement to empower researchers in molecular breeding and plant and animal research through enabling low-cost, high-throughput sequencing results that could lead to the discovery of novel variants.

Not even a month later, Complete Genomics announced a partnership with Massachusetts-based seqWell, a company which provides NGS library preparation at low cost. Gencove and seqWell promoted their streamlined and cost-effective solutions as innovators in agricultural genotyping, and both have collaborated with the USDA. The aforementioned agreements are set to enhance the sequencing capabilities of MGI-Tech’s DNBSEQ-T7RS sequencers, a model involved in a strategic cooperation between MGI Tech and Higentic 华智生物 in promoting China’s seed industry. (Higentic is a national seed-industry platform and molecular-breeding center advocated and supported by the Ministry of Agriculture and Rural Affairs, the Ministry of Science and Technology 科学技术部, and the National Development and Reform Commission 国家发展和改革委员会.)

MGI Tech’s sequencing platform has used low-pass whole genome sequencing to decipher the genetic architecture of agricultural economic traits in pigs. According to MGI Tech, its sequencing platform has solved the significant “stranglehold” problem in breeding. Moreover, MGI Tech claims its technology provided a new genetic-analysis method — with completely independent intellectual-property rights — to support the “Seed Industry Revitalization Action Plan,” as stated in China’s 14th Five-Year Plan.

Another study by Chinese agricultural experts (on the research progress of whole genome resequencing in soybean breeding) likewise asserts that the technology will effectively solve key issues, including lack of marker genes — and that, eventually, these advancements will allow them to modify the genetic materials of soybeans, give new traits to crops, and significantly improve their yield and quality.

The DNA-sequencing industry — just like the semiconductor industry — can be subdivided into different manufacturing processes. Complete Genomics is a state-of-the-art hardware firm, while Gencove is a leading data platform. Similarly, BGI and MGI Tech tap into distinct, niche areas of the sequencing and breeding industry.

But unlike the chips industry, BGI and MGI Tech’s collaborations with these US biotech companies in agriculture — and their implications on breeding techniques in China — have seldom been scrutinized, either on a political or a compliance basis. Especially given the strategic competition between the US and China and the national-security implications of the agricultural sector, these partnerships should be further investigated.

During the Cultural Revolution, Xi Jinping, then a teenager, was sent to rural Shaanxi 陕西 during the “Down to the Countryside Movement” 下乡运动, and a secretary assigned him to a seed-production site to study breeding. A memoir revealed that he kept his breeding knowledge in a booklet, sharing it with others when the opportunity arose. These experiences planted a seed inside an ambitious opportunist, who decades later finally has a chance to embed his agricultural theories into China’s grand strategy. With a newly enacted food-security law, an agricultural surveillance system, and breakthroughs in breeding technologies, the country is now becoming an agricultural superpower.

From information construction in cultivated lands to scientific innovation in crop breeding, China is entering into an agricultural revolution that promises changes from the peasantry to the military. Beijing is trying to drop the US as its largest soybean supplier, build a surveillance infrastructure that covers all its grains, and mark every trait of crops and livestock that can tolerate an increasingly intolerable climate. And in today’s ever-shifting geopolitical climate, China is ramping up preparedness for contingencies, including grain embargoes and global food crises.

Indeed, as an idiom from ancient China goes, “Before the troops move, the grain and rations go first” 三军未动，粮草先行.

One podcast for the road

What do you get when you take a Chinese national, a rental car, rural Iowa, and a $52 billion seed business hanging in the balance? Said one review, "not since Alfred Hitchcock's in North by Northwest has a cornfield produced so much excitement."

Mara Hvistendahl's book, "The Scientist and the Spy," delivers a compelling narrative diving deep into the nature of Chinese industrial espionage and America's response.

In his book Engineers of Victory, Paul Kennedy argues that the most important historical variable for transforming resources into hard power is a culture of innovation.

How does one achieve one’s strategic aims when one possesses considerable resources but does not, or at least not yet, have the instruments and organizations at hand?

[The answer is] the creation of war-making systems that contained impressive feedback loops, flexibility, a capacity to learn from mistakes, and a ‘culture of encouragement’…that permitted the middlemen in this grinding conflict the freedom to experiment, to offer ideas and opinions, and to cross traditional institutional boundaries.

To discuss the Defense Department’s culture of encouragement, ChinaTalk interviewed Chris Kirchhoff.

Chris served on Obama’s NSC and was a founding member of the Defense Innovation Unit (DIU). He recently published a book called Unit X: How the Pentagon and Silicon Valley Are Transforming the Future of War.

In our interview, we discuss:

• The origin story of DIU and its early struggles to break Pentagon bureaucracy;

• How DIU leveraged “waiver authority” to circumvent red tape under Defense Secretary Ash Carter;

• Why the defense industrial base is ill-equipped to keep pace with technological change;

• The case for shifting more DoD spending to non-traditional tech companies;

• Lessons from commercial spaceflight for future AI governance, including potential issues with a “Manhattan project for AI.”

Secretary Ash Carter

Jordan Schneider: Let’s start with the origin of the DIU. What was Ash Carter’s vision and what was the pre-Ash version of DIU like?

Chris Kirchhoff: The story begins before Ash became Secretary of Defense. At the time, Pentagon leaders were wowed by the revolution in commercial technology in the 2010s. When I worked for General Marty Dempsey, Chairman of the Joint Chiefs of Staff, one of my first jobs was to organize a trip to Silicon Valley.

Marty Dempsey is an extraordinary leader, and he had what he called his “campaign of learning.” At our first event, a breakfast with Vint Cerf and other tech luminaries, General Dempsey announced: “I’m here on my campaign of learning. If I don’t learn something, Chris gets fired.” 

But what’s most memorable about the trip was our visit to Google, where we met with Astro Teller, head of Google X. Teller briefed us on their self-driving car project, which is now Waymo. One of the test cars, a Prius with a lidar dome, was parked next to our motorcade.

As we were walking back, General Dempsey said he wanted to go for a ride - which was absolutely not the plan given security protocols. But Dempsey got in the backseat and drove off, leaving me thinking I was definitely going to be fired.

He came back after 15 minutes, having watched the Prius navigate autonomously and maneuver around a cyclist. Dempsey asked the key question: “How much does all this hardware cost?” The engineers answered, “About $3,000.”

You could see the lightbulb go off in Dempsey’s head. This revolution in consumer electronics wasn’t just about smartphones — it would impact the military as well.

Jordan Schneider: When you think back about various revolutions in military affairs across history, where some people “got it” and others didn’t, what separates those who understand the future from those stuck in the current paradigm?

Chris Kirchhoff: You have to be modest — it’s easy to view the current push to link consumer and military tech ecosystems as unique. But the more military history you read, the more you realize the deep continuity with the past.

What’s different now is the relative scale. Today’s consumer tech market is $25 trillion. The Pentagon buys a lot of stuff, but we’re talking billions, not trillions. Never before has the commercial innovation ecosystem been so much larger than the defense ecosystem. That’s the generational shift Ash Carter spotted and acted on.

Jordan Schneider: If you think about precision targeting in the 80s and 90s, it wasn’t the DoD pushing shrinking nodes, but the relative balance between commercial and defense R&D was much closer than today.

Chris Kirchhoff: Exactly. That brings us to Ash Carter. In a 2001 article as a professor, he hypothesized that growth in commercial tech would quickly make that ecosystem so much larger than defense that it couldn’t be ignored.

With post-Cold War drawdowns in federal R&D, Ash realized DoD needed to shift to being a fast follower rather than always being generations ahead. He saw this clearly in 2001 and shortly after becoming Secretary moved to create the Defense Innovation Board and DIU.

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Jordan Schneider: You have great stories about the outdated tech in military facilities circa 2016. To paraphrase some anecdotes, your co-author Raj Shah visited a command center that “was as if the military had resigned itself to becoming a display in the Museum of Computer History.” Trae Stephens, who co-founded Anduril, said of his early days in intelligence: “20% of my time was merging database files. I thought I’d be doing James Bond stuff with supercomputers. Instead, it was a joke.”

The most interesting part of DIU version 1.0 was that Congress tried to pull the plug and defund the program, which motivated the reset. What drove you and Raj to ultimately get on board for the reboot?

Chris Kirchhoff: It goes back to leadership. Ash Carter is a serious guy who doesn’t miss much. When he heard DIU wasn’t succeeding, he sent Todd Park to investigate firsthand. That says something about how Ash approached his job — not leaving anything unnoticed. 

I credit Ash for realizing DIU’s initial incarnation wasn’t set up to succeed, going back to the drawing board, and thinking hard about how to make it work.

Hacking the Pentagon Bureaucracy 

Jordan Schneider: Can you tell the story of the “term sheet” you crafted at the beginning to set DIU on a path where it could potentially succeed?

Chris Kirchhoff: When Secretary Carter approached us about potentially leading the DIU reboot, we’d already watched the first team struggle. During an earlier visit to their office, I remember literally sitting on folding chairs for our briefing, thinking “I’m glad I didn’t come work here."

Raj and I carefully considered what would be needed for success in the reboot.

First, we needed personal commitment from the Secretary of Defense. We needed his personal buy-in to our unit because we knew how difficult the internal struggles would be. Working closely with the Secretary and his staff was critical to avoid being buried under layers of bureaucracy. 

The second key item on our term sheet was “waiver authority.” This was a new idea in the department. The concept was that if you hit a policy or procedure (not a law) squarely blocking your mission, you could request it be waived. 

Under the policy we set up, the owner of that policy had 14 days to handle a waiver request. If they declined, it would go immediately to Secretary Carter for review. This was an incredible bureaucratic weapon because now anyone who wanted to block us would have to answer to the Secretary of Defense.

That waiver authority ended up being the most important early tool we had at DIU.

Jordan Schneider: It’s striking that waiver authority and Other Transaction Authorities (OTAs) are basically ways to avoid doing things the way everyone else does. Thinking back, to what extent would you keep any of these rules if you could start from scratch?

Chris Kirchhoff: The challenge in any public sector institution is that you can’t really start from scratch. Our government doesn’t allow experimentation easily by design. 

But at DIU, we tried to look afresh at what was possible. We had this phrase among our group of change agents: “Just legal enough.” ‘

There’s often an enormous distance between the strict letter of the law and where the practice is.

The most incredible example is Lauren Dailey, an acquisition dynamo. Her father was a tank driver, and her way of serving was to become a civilian acquisition expert in the Pentagon.

She stayed up late reading the text of the just-passed National Defense Authorization Act and found a single sentence that would change how OTA contracting could be done. It allowed the immediate conversion of a successful OTA pilot into a production contract.

This was a game-changer. Before, if you were a firm and got an OTA, there was no real path to go from a one-off technology pilot to something at scale. Lauren brought this to our attention, and we took it all the way up the chain.

In just over two weeks, we got everyone to agree on a whole new process for OTAs which we called the Commercial Solutions Opening (CSO). That allowed DIU to crack the hardest problem we faced - how to let contracts at Silicon Valley speed.

Jordan Schneider: We’re recording this July 3rd. Everyone across the executive branch is wringing their hands about the Supreme Court’s Chevron decision. Have you put any thought into this? Will this change help the DoD to shed some of its shackles?

Chris Kirchhoff: Well, I’m no lawyer, but I think Chevron will be much more disruptive for regulatory agencies. I’d be interested to learn what the exact implications are for the Department of Defense.

But it’s a general reminder that institutions tend to accumulate rules and procedures over time — and those might not serve their evolving goals. Leaders should consider what they can discard when trying new things.

Jordan Schneider: In the book, you point to an internal vetocracy in the DoD. If you want to do something, you actually need 20 people to not be upset with you. We see similar vetocracies across government with permitting for data centers and so on. There are many veto points where someone can block progress if you haven’t sufficiently convinced them of your vision.

Your theory of success required the buy-in from the person at the very top. What are your recommendations for bureaucrats at the other levels, who don’t necessarily have the Secretary backing them in every knife fight?

Chris Kirchhoff: I’ll explain with an anecdote. In the first couple of months at DIU, Ash Carter became aware of how little time he had left as Secretary. He wanted to make progress every day, which meant he sometimes moved incredibly fast.

Just after Raj and I were appointed, we got a call saying the Secretary was visiting Boston in three weeks and wanted to open a DIU office there during the trip. They also wanted us to have our official charter ratified by then.

Suddenly I found myself in the basement of the Pentagon with the office that writes charters for OSD entities. They have an elaborate process involving circulating drafts to hundreds of offices, any of which can object.

I asked, “What’s the fastest you’ve ever put a charter together.” They said 18 months for JIEDDO during the Iraq War, which they viewed as a land speed record.

I had to uncomfortably push back and say, “The Secretary wants this in 3 weeks.” 

One person raised their voice, insisting it was impossible. I had to respond, “I’d be happy to personally tell the Secretary that you said it couldn’t be done. Is that the message you wanted me to deliver?”

Ruffling feathers like this is uncomfortable but necessary.

We didn’t have the charter ready for Boston, but we had it not too many weeks after. That shows what leadership can do.

In the years after Secretary Carter departed, DIU quickly began to struggle, despite the fact that it did have a lot of support at the top, particularly under Secretary Mattis.

In public institutions, leadership is absolutely essential.

Artificially Unintelligent Institutions

Jordan Schneider: How much can AI reduce paperwork?

Chris Kirchhoff: An OSD AI official recently said to me, “Can you imagine if we had ChatGPT at our desktops? For OSD policy offices that spend most of their time writing briefing memos, reports, and template-compliant staff update emails — can you imagine how much faster they could work with LLM support?"

Even though we now have an entirely new office dedicated to this (the CDAO), it’s still remarkably difficult to make AI work in the public sector.

Any employee of a Fortune 100 company likely has a suite of AI tools at their desktop. In theory, people in OSD policy do as well, because the Pentagon decided to build a bespoke custom AI interface just for the DoD. Rather than buying something off the shelf like every Fortune 100 company in the country, we’ve made the problem harder for ourselves.

We still have a long way to go.

Jordan Schneider: I’m going to quote a show I did a few months ago with Garrett Berntsen of the CDAO:

Garrett Berntsen: In my perspective, having done this for a bunch of years now — that group of folks in the department is so stretched just trying to keep the lights on and get paper out the door. When faced with the prospect of taking on a new thing that’s going to be innovative and cool they’re like, “I don't know if I've got time to do that,” even if it would save them time in the long run.

… They’ve seen a ton of waves of this before. They’ve seen a lot of these, “we're going to modernize everything with X new tool,” 15 years ago. When e-mail rolled out, they were told that it was going to make everything easier. Instead, it’s made their lives an endless cycle of responding to e-mails.

Jordan Schneider: Let’s go a little sci-fi for a second. Beyond just having ChatGPT give you four paragraphs on what’s going on in Pakistan, are there other back-office applications of AI that you’re particularly excited about?

Chris Kirchhoff: Well, I’m sure there are many, and my greatest hope is just that the Department of Defense seizes the opportunity to experiment with AI, increasing their productivity, and making it easier for their employees to do knowledge work. 

This is an incredible opportunity for the department, but again, DIU was created for a reason. There’s a beautiful quote in the opening of our book from Chris Brose, the longtime staff director of the Senate Armed Services Committee and now head of strategy for Anduril:

[T]he second decade of the twenty-first century was one of colossal missed opportunities for the US military. DoD, on the whole, had missed the advent of modern software development, the move to cloud computing, the commercial space revolution, the centrality of data, and the rise of artificial intelligence (AI) and machine learning. This was the case despite having funded the fundamental research that led to many of these advances. DIUx and DDS were to change this by placing DoD personnel directly in the commercial technology ecosystem.

The track record isn’t great. That should be foremost in mind of not only the current Secretary and Deputy Secretary, but the next several.

Jordan Schneider: Mike Horowitz, who is now working on emerging technology in the Office of the Secretary of Defense, previously wrote a book where he describes a two-by-two matrix for the level of organizational capital required to implement a major military revolution, versus the level of financial intensity.

Basically, if an innovation is easy and expensive, then this is something that the US is particularly well-suited to working with. But innovations in quadrant 4 are difficult even though they don’t require a ton of money, but rather require you to reimagine your current bureaucratic infrastructure. Those types of changes are much more difficult for a leading global hegemon to internalize.

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Chris Kirchhoff: I admire Michael Horowitz’s scholarship. His work on innovation adoption is essential reading, and in fact we cite it in DIUx. The reality today, as we’re learning so brutally in Ukraine, is that inexpensive technology is quite potent and powerful. 

But today, what’s perhaps more relevant than the size of the investment, is whether it needs to happen through traditional budgeting channels or through new channels with which the department is not as comfortable.

In other words, it’s really easy for the Navy to buy another aircraft carrier. They know how to do that. They’ve been doing that for a long time. There are very few suppliers, there’s a very set schedule for getting something like that through Congress.

But at smaller levels, what if you want to buy 1,000 drones and experiment with them? Which category of funding and which program office does that?

It could be that there isn’t one and you actually have to create it.

Technology shifts have thrown us into a place where a lot of the department’s traditional processes are simply not applicable. That’s very uncomfortable for the institution. But of course, if you ignore that, you do so at your peril, because for every day you’re not fixing that and addressing that, you’re falling further behind the technology power curve.

There’s plenty of incredible technology floating around the department at places like DARPA and now at DIU. But getting it to work at scale is not something the department does well.

Jordan Schneider: I want to throw two more quotes at you. First is from Bill LaPlante, who’s the most important acquisitions leader in the defense department:

Bill LaPlante: Ukraine is not holding their own against Russia with quantum. They’re not they’re not holding their own with AI.
…
It’s hardcore production of really serious weaponry. That’s what matters. Not to say that we shouldn't invest in quantum or we shouldn't invest in AI. I'm not at all saying that.
…
If somebody gives you a really cool liquored up story about a DIU or an OTA, ask them when it’s going into production, ask them how many numbers, ask them what the unit cost is going to be, ask them how it will work against China.
…
And don’t tell me it’s got AI and quantum in it. I don’t care.

The second quote is from Alex Wang, CEO of Scale AI:

Alex Wang: It doesn’t take a lot of imagination to realize that powerful AI systems, if they existed, would be a definitive military technology.

You could imagine that nuclear deterrence doesn’t even really matter in a world where you have advanced AI systems.

They can do superhuman hacking. They enable autonomous drone swarms. They can give you full situational awareness, they can develop biological weapons.

You can diffuse and perhaps neutralize an enemy’s nuclear arsenal.

Everyone within the national security community in the United States needs to understand, grok, and pay attention. This is a Manhattan project-level of technological capability.

Chris, thoughts on what these two mindsets tell us about the future?

Chris Kirchhoff: Well, I think there’s clearly a tension between those two views. Traditional weapon systems still have incredible relevance in Ukraine and elsewhere. At the same time, when we visited Ukraine, it was just astonishing to see the digital overlay that has been built around artillery, tanks, and trenches - things that have been around warfare for a very long time. 

It really is going to be the synthesis of these two things where you’re going to see new combat power materialize. Ukraine, as horrific as the human disaster has been, has been a real wake-up call.

Jordan Schneider: The thing that Bill LaPlante sort of misses in that quote specifically is the idea that all that technological overlay is almost like table stakes. You have to have it in order to play the more traditional game of attrition with guns and old dumb artillery shells. 

We’re clearly not in the world of Alex Wang’s future, where all you need is great technology and you’ll be able to achieve costless victory. But to completely dismiss the role that the tech bros are playing, I think, is also really missing what’s happening in the present and the future.

Chris Kirchhoff: That takes us back to the cover of the book. Even though the F-35 didn’t become fully operational until 2016, it’s still operating off of PowerPC processors. By 2016, we already had fifth-generation iPhones. It’s a stark reminder of how quickly technology moves compared to traditional defense acquisition cycles.

Lessons from Commercial Space for AI Governance

Jordan Schneider: We’ve seen an interesting arc around national security and AI labs over the past 18 months. More of the world, and the labs themselves, are waking up to the fact that AI is perhaps one of the most important dual-use technologies that will matter in coming years.

There’s increasing awareness around lab security issues and a steady bifurcation of the Chinese and US AI ecosystems. The current discussion among those who claim to be serious about national security assumes we’ll end up in a world where AI development is nationalized like the Manhattan Project. 

The counterargument is that the private sector will end up doing whatever it wants. An interesting middle ground is the arc of the US space industry. What lessons do 20th and 21st-century commercial space hold for the future relationship between AI labs and government?

Chris Kirchhoff: My former colleague at Anthropic, Michael Page, made an interesting observation that commercial space could provide a model for how the US government handles increasingly sophisticated AI.

I’ll tell a quick story. My first job out of college was working on the Space Shuttle Columbia accident investigation. Space shuttles were an incredibly dangerous experimental technology - there are 5,100 critical failure points.

When I was working on that investigation, the idea that a private company could successfully launch people into space seemed far-fetched, maybe even insane. It seemed like you needed the full expertise of government to underwrite that kind of dangerous experiment. 

For the next few years, I looked skeptically at the arrival of commercial space companies like SpaceX. I thought they were doomed to fail - that there was no way to improve on the engineering baselines that NASA engineers had labored for decades to achieve.

I turned out to be wrong.

SpaceX is wildly more successful at safely launching things into space — and at far lower cost than any government launch — with more or less the same tools NASA had all along.

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This becomes relevant to AI, which unlike many advanced technologies has grown almost exclusively in the private sector. That’s after decades of government R&D contributions, but in terms of who’s operationalizing it now, it’s largely private companies.

Could NASA’s model of outsourcing launch to the private sector, with minimal engineering oversight of spacecraft operations, be a model for harnessing the nation’s AI capabilities? Could the government bolt onto itself private AI companies, rather than needing in-house AI development through national labs or another vehicle?

Jordan Schneider: The OpenAI and SpaceX stories are fascinating parables of organizational design. OpenAI didn’t have more compute than anyone else in 2017-2018, but they had the institutional freedom to take different bets than Google. SpaceX could innovate in ways Boeing couldn’t.

Chris Kirchhoff: Yes, and this is important to point out to those who hold up the national labs as a potential model for AI.

The national labs do incredibly important work in many areas. But that said, who produces more peer-reviewed publications, Google or the national labs? My money would be on Google.

The message here is that the private sector has proven to be an incredible national advantage for America. The free market has allowed a flourishing of research and development, particularly in the last two decades, that is just unparalleled.

I mean, DIU had to struggle so hard to pay advanced AI engineers half the salary they’d receive at a tech company.

We broke or nearly broke all the rules in the book, and we still had to convince people to take a 50% pay cut to come and work on the Department of Defense’s AI mission.

That makes me very cautious about those who view the national labs as a kind of turnkey solution.

Jordan Schneider: Chris, you wrote, “Unlike China, we have a system where information flows freely and where competition ensures that the best ideas and products rise to the top.”

Do we though?

Chris Kirchhoff: Well, the whole point of writing the book was to substantiate that claim. My co-author, Raj Shah, now runs Shield Capital, the first venture capital firm dedicated to companies that can contribute to national security.

The defense industrial complex is termed a “complex” because it’s not a free market in the sense that none of the major primes are product companies. They respond to a different set of incentives. They are saddled by the Department of Defense and the federal acquisition regulations and a different set of requirements for auditing and accounting.

They cannot operate like Google, Microsoft, or OpenAI, and they most certainly cannot operate like a startup. The debate we need to be having at some level is — how much of our defense spending do we want to go into institutions in that complex, and how much money do we want to shift into the free market innovation economy?

Jordan Schneider: Ultimately, this debate is going to get hashed out in Congress. What is it going to take for Congress to see the world in your way?

Chris Kirchhoff: On day two of our jobs, Raj Shah and I were saddled with the knowledge that Congress had just cut our entire budget, the whole thing, and that unless we hustled and really pulled a rabbit out of a hat, DIU would cease to exist.

The good news is, since then, there’s been a real swing of support towards the idea that the right thing for the Department of Defense to do is to access Silicon Valley and more technology from it.

In fact, in last year’s NDAA, we actually saw the Defense Innovation Unit get codified in law. Not only that, Congress bestowed upon it a budget of just under a billion dollars, which is really exceptional.

Even with such tremendous progress, only a very small portion of the Department of Defense’s budget goes to the new defense economy. Unless we change that, we’re increasingly going to find ourselves surprised.

We’ll be surprised by what’s happening in Ukraine, surprised by Hezbollah’s use of loitering munitions to depopulate northern Israel, surprised by Hamas using quadcopters to knock down Israeli border towers to enable 1000 fighters to pour over a kind of modern-day Maginot line.

We kind of ignore this debate, I think, very much at our own peril.

The Human Toll of Public Service

Jordan Schneider: One of the things I appreciated you writing about is the toll these jobs take on the people who want to do them well. Would you like to talk a bit about your experience?

Chris Kirchhoff: I left DIU in 2017 when the Obama administration stepped down. I was pretty sure I was done with full-time public service. I had given thirteen exceptional but also exhausting years.

The semester after I left, I taught undergraduates at Harvard. Many took my class because they aspired to work in national security. From their perspective, seeing pictures of me with President Obama in my office, it must have looked amazing.

But during office hours I had to tell them: It is wonderful. You get to work on incredibly important problems with real-world impact. It’s gratifying to use your political science training to make the world better.

But there are things you can’t unsee. I used to get an email before every US drone strike.

Whether in uniform or as a civilian, when that’s your day-to-day, it takes a toll. That weighed on me when I left DIU. I was almost positive I’d never go back into government. But you never say never. 

The day I was most tempted was when Ron Klain, a former boss I really admire, was announced as the next president’s chief of staff. I thought hard about going back in. I called my oldest mentor, and she asked me three questions. The conversation went like this:

1. What do you actually remember about the last time you were working at the White House? 

Driving home at 2 am. I was so tired that all I could think about was trying not to crash my car into Rock Creek Park.

2. How long ago was your divorce finalized? 

About a year. I was with my first husband for 13 years. Not coincidentally, we had separated not long after my time in public service ended.

3. Are you ready to leave San Francisco? Haven’t you just met someone new there?

The answer was no, I wasn’t ready to leave.

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In three minutes, she helped me realize that. I share that story with purpose, because it’s important for people to realize the joys but also the burdens of serving in national security.

Jordan Schneider: You can’t completely remove people from involvement with life-or-death decisions at the Department of Defense. But then there are also stories of George Marshall playing afternoon golf during World War II.

I’m curious, what percentage of those 12-16 hour days actually needed to be worked? If the whole place ran better, might people be able to sustain themselves longer?

Chris Kirchhoff: You’re part of a system and a team, working collectively to help leaders make the best decisions possible.

That’s why it’s hard to go home at 5:30 pm in these jobs - you simply don’t want to do anything but your best.

But in addition to the tough days, there are also some incredible ones.

As the science nerd on General Dempsey’s staff, he asked me to closely track Ebola back when it was still a small outbreak in West Africa. The WHO maintained it was under control, but Dempsey wanted someone watching in case it became an emergency requiring military capabilities.

Fast forward a few months, and we went from a small outbreak to one threatening global security. Thanks to the pre-planning that summer, we had options ready for the Secretary and President on how the military could help.

That led to Operation United Assistance, which deployed 3,500 US service members to support 100,000 medical first responders in West Africa. That operation ultimately ended the Ebola epidemic.

Late in the outbreak, I traveled to West Africa with a White House delegation. I got to meet people who survived Ebola because of what DoD did. All you could do was hug people and cry because you had done something incredible for them and for America by helping stave off a global threat.

The job is full of sorrow and joy, and it’s all incredibly meaningful. With any luck, you do a lot of good even on the worst days.

Jordan Schneider: Chris, you just finished a policy residency at Anthropic. Why were you more interested in working at a lab?

Chris Kirchhoff: I really enjoyed my time at Anthropic, and I actually got to work there on a number of national security issues, including policy issues and issues of practice with Anthropics AI safety team, which they call their Frontier Red team.

I’m really excited to keep working in this area because I think generative AI will have a tremendous impact on American military capability. There are many opportunities but also many risks that need to be managed.

Jordan Schneider: Can you give us some book recommendations to take us out?

Chris Kirchhoff: I’ll give you three.

The first is called Tracers in the Dark: The Global Hunt for the Crime Lords of Cryptocurrency by Andy Greenberg. It’s an absolute page-turning barn burner of a story about crypto lords trying to hide their tracks from law enforcement, and the FBI agents who are hot pursuing them.

It’s a story about state sovereignty in the technological age, exploring whether states have the capacity to enforce the rule of law when criminals are backed by such sophisticated technology. You will tear through it. You won't be able to go to bed.

The second book is Say Nothing: A True Story of Murder and Memory in Northern Ireland by Patrick Radden Keefe. It’s an incredible history of The Troubles in Ireland, based on oral history and a set of interviews that journalists had never accessed before.

It paints this heartbreaking picture of violence between two groups who were sorting out their political institutions. In a strange way, I felt like the United Kingdom went through its own version of the Iraq War in Ireland — Ireland was kind of like Al Anbar, and the British military came in to try to pacify things, using violence that turned even more people against them. In terms of the sociology of violence and the sociology of conflict, it’s a tremendous read.

The last book is Malcolm Gladwell’s Bomber Mafia: A Dream, a Temptation, and the Longest Night of the Second World War, which is best consumed as an audiobook.

Gladwell paints these vivid portraits of characters during WWII. You see history through the eyes of soldiers and air force bombers, in both the Atlantic and the Pacific theaters.

From July 15 to 18, the Central Committee of the CCP convened for the Third Plenum. Historically, Third Plenums have been used to announce foundational economic reforms. Most notably, the Third Plenum of the 11th Central Committee in 1978 marked the beginning of China’s “Reform and Opening Up” policy. 

This Plenum’s main output is the Resolution of the Central Committee of the Communist Party of China on Further Deepening Reform Comprehensively to Advance Chinese Modernization 中共中央关于进一步全面深化改革　推进中国式现代化的决定 (Chinese original; full English translation). The 50-page document boasts 300 reform measures to be achieved by 2029, and is accompanied by a 21-page explanation by Xi Jinping (Chinese original; full English translation).

The Resolution is an abstract document that lays out the Party’s high-level reform priorities, not specific targets or policies. It’s an aspirational document, not a descriptive one.

In this post, Bit Wise curated the Resolution’s top quotes, showcasing what it has to say about science and technology. They cover:

• The infamous “new quality productive forces,” and how those will reshape “relations of production,”

• The role of both the state and the private market in tech innovation,

• Strategies for tech self-reliance and supply chain security,

• Reforms of R&D institutions and funding mechanisms to enhance innovation efficiency,

• Improved incentives for researchers and private enterprises,

• Enhanced integration of finance and technology sectors to support long-term innovation,

• AI safety (!),

• and more!

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The Need for Tech-Policy Reform 

The Resolution places tech and geopolitics at the heart of its reform motivations:

Education, science and technology, and talent function as basic and strategic underpinnings for Chinese modernization.

教育、科技、人才是中国式现代化的基础性、战略性支撑。

To deal with complex developments both at home and abroad, adapt to the new round of scientific and technological revolution and industrial transformation, and live up to the new expectations of our people, it is vital that we continue to advance reform.

面对纷繁复杂的国际国内形势，面对新一轮科技革命和产业变革，面对人民群众新期待，必须继续把改革推向前进。

Xi Jinping explains that the current PRC science and innovation ecosystem falls short:

At present, unbalanced and inadequate development remains a pronounced problem in promoting China’s high-quality development. For example, the market system still needs improvement; the market itself is not adequately developed; the relationship between the government and the market needs to be further straightened out; our innovation capacity falls short of the requirements for high-quality development; the industrial system, while large in size and extensive in scope, is not yet strong or sophisticated enough; the over-reliance on key and core technologies controlled by others has not been fundamentally changed.

当前，推动高质量发展面临的突出问题依然是发展不平衡不充分。比如，市场体系仍不健全，市场发育还不充分，政府和市场的关系尚未完全理顺，创新能力不适应高质量发展要求，产业体系整体大而不强、全而不精，关键核心技术受制于人状况没有根本改变…

Theoretical Musings on Tech and Society

“New quality productive forces” 新质生产力 — the hottest policy buzzword in Beijing this year — is featured prominently in the Third Plenum Resolution, claiming an entire section:

We will work to facilitate revolutionary breakthroughs in technology, innovative allocation of production factors, in-depth industrial transformation and upgrading, and the optimal combination of laborers, means of labor, and subjects of labor as well as their renewal and upgrading. All this will give rise to new industries, new business models, and new growth drivers and promote the development of productive forces that are characterized by high technology, high performance, and high quality.

推动技术革命性突破、生产要素创新性配置、产业深度转型升级，推动劳动者、劳动资料、劳动对象优化组合和更新跃升，催生新产业、新模式、新动能，发展以高技术、高效能、高质量为特征的生产力。

“Productive forces” is Marxist lingo for anything we use to produce things: our body, mind, knowledge, materials, technology, or even management systems. “New quality productive forces” are just smart brains, more advanced tech, better materials, etc. — in other words, less reliance on low-educated physical labor and large swaths of natural resources. Hence, “new quality productive forces” will make society more prosperous and green. The ultimate goal is “a significant increase in total factor productivity” 大幅提升全要素生产率.

Productive forces are closely linked to “relations of production” 生产关系, shorthand for the foundational social and economic relationships between people in the economic process, such as employer-employee relationships or ownership.

We will work to better adapt the relations of production to the productive forces, the superstructure to the economic base.

推动生产关系和生产力、上层建筑和经济基础… 

Relevant rules and policies will be improved to accelerate the formation of relations of production that are more compatible with new quality productive forces.

健全相关规则和政策，加快形成同新质生产力更相适应的生产关系…

While all this may sound esoteric, the idea is simple: as technology advances, social and economic systems need to evolve accordingly. Such theoretical musings can have a profound impact on downstream policy formulation for key questions like, “Who owns the IP of tech innovations?” or, “Who has to bear risks and reap benefits from tech investments?” Hence, this is where the rubber meets the road: the “new quality productive forces” buzz is more about social questions than about technology itself!

State-Market Relations

One specific question that arises when talking of “relations of production” is the relation between the state and the private economy. One of the guiding principles listed in the Resolution is applying “systems thinking” 系统观念:

We must properly handle the major relationships between the economy and society, between the government and the market, between efficiency and fairness, between vitality and order, and between development and security, thus pursuing reform in a more systematic, holistic, and coordinated manner.

坚持系统观念，处理好经济和社会、政府和市场、效率和公平、活力和秩序、发展和安全等重大关系，增强改革系统性、整体性、协同性。

The Resolution repeats the existing policy mantra of the “Two Unswervinglys” 两个毫不动摇:

• “unswervingly consolidating and developing the public sector” 毫不动摇巩固和发展公有制经济;

• “unswervingly encouraging, supporting, and guiding the development of the non-public sector” 毫不动摇鼓励、支持、引导非公有制经济发展.

State-owned enterprises are to play an important role in sci-tech innovation:

State capital will be steered toward major industries and key fields that are vital to national security and serve as the lifeblood of the national economy, toward sectors such as public services, emergency response, and public welfare, which concern our country’s prosperity and our people’s wellbeing, and toward forward-looking and strategic emerging industries.

推动国有资本向关系国家安全、国民经济命脉的重要行业和关键领域集中，向关系国计民生的公共服务、应急能力、公益性领域等集中，向前瞻性战略性新兴产业集中。

At the same time, private enterprises should be steered toward working on the tech priorities identified by the state. This aspiration is not new, but how exactly to realize it remains a mystery. The Resolution offers several carrots:

Reinforcing the principal role of enterprises in innovation, we will establish mechanisms for fostering leading high-tech enterprises and strengthen enterprise-led collaboration between industries, universities, and research institutes. We will set up a reserve fund system for corporate R&D and back enterprises that volunteer to lead or participate in major national science and technology programs.

强化企业科技创新主体地位，建立培育壮大科技领军企业机制，加强企业主导的产学研深度融合，建立企业研发准备金制度，支持企业主动牵头或参与国家科技攻关任务。

…

To encourage sci-tech SMEs to boost their R&D spending, we will raise the rate of additional tax deductions for their R&D expenses.

鼓励科技型中小企业加大研发投入，提高研发费用加计扣除比例。

We will encourage and guide higher education institutions and research institutes in authorizing the use of their proprietary scientific and technological advances by micro, small, and medium enterprises on a “use first, pay later” basis.

鼓励和引导高校、科研院所按照先使用后付费方式把科技成果许可给中小微企业使用。

We will support capable private enterprises in leading national initiatives to make breakthroughs in major technologies and provide private enterprises with greater access to major national scientific research infrastructure.

支持有能力的民营企业牵头承担国家重大技术攻关任务，向民营企业进一步开放国家重大科研基础设施。

We will refine financing support policies and systems for private enterprises to resolve the difficulties they face in accessing affordable financing.

完善民营企业融资支持政策制度，破解融资难、融资贵问题。

…

Move faster to set up a system for comprehensively evaluating private enterprises’ credit status and refine the credit enhancement system for small and medium private enterprises.

加快建立民营企业信用状况综合评价体系，健全民营中小企业增信制度。

Individual scientists and engineers are also promised greater autonomy and returns:

Scientists and engineers will have a greater say in the distribution of gains from the transfer of their scientific and technological advances. We will establish a system to place scientific and technological outputs produced on the job under separate management and deepen reforms to grant researchers corresponding rights over these outputs. We will push ahead with the income distribution reform for universities and research institutes. A greater number of eligible SOEs will be permitted to provide diverse medium- and long-term incentives to encourage innovation and creativity among their research personnel.

允许科技人员在科技成果转化收益分配上有更大自主权，建立职务科技成果资产单列管理制度，深化职务科技成果赋权改革。深化高校、科研院所收入分配改革。允许更多符合条件的国有企业以创新创造为导向，在科研人员中开展多种形式中长期激励。

Platform giants will see continuation of “routine” regulation after the crackdown was declared over in 2023:

We will push forward the innovative development of the platform economy while improving the system for its routine regulation.

促进平台经济创新发展，健全平台经济常态化监管制度。

Rallying Behind Top Tech Priorities

Researchers should focus on what actually matters and coordinate with each other:

Targeting the global frontiers of science and technology, the development of the economy, the major needs of the country, and the health and safety of our people, we will refine the mechanisms under which major scientific and technological innovation projects are organized in order to mount a concerted push for breakthroughs in core technologies in key fields. We will see that the development of innovative capabilities, allocation of innovation factors, and ranks of innovators become more systematic, well-organized, and coordinated.

坚持面向世界科技前沿、面向经济主战场、面向国家重大需求、面向人民生命健康，优化重大科技创新组织机制，统筹强化关键核心技术攻关，推动科技创新力量、要素配置、人才队伍体系化、建制化、协同化。

To achieve this, multiple state R&D institutions are in for reform:

We will refine the system of national laboratories and better define the roles and layout of our national research institutions, advanced-level research universities, and leading high-tech enterprises.

完善国家实验室体系，优化国家科研机构、高水平研究型大学、科技领军企业定位和布局…

…

We will encourage and regulate the development of new types of R&D institutions.

鼓励和规范发展新型研发机构…

…

The management system for science- and technology-related social groups will be refined.

健全科技社团管理制度。

We will refine the mechanisms for allocation, management, and utilization of central government research funds and improve the institutions for the implementation of central government-funded science and technology programs and their management by specialized agencies. We will expand application of the contract system for government-funded research projects and grant scientists a greater say in deciding on technology roadmaps, spending funds, and allocating resources. We will establish a mechanism for adopting non-consensus projects based on real-name recommendations by experts.

完善中央财政科技经费分配和管理使用机制，健全中央财政科技计划执行和专业机构管理体制。扩大财政科研项目经费“包干制”范围，赋予科学家更大技术路线决定权、更大经费支配权、更大资源调度权。建立专家实名推荐的非共识项目筛选机制。

Public institutions engaged in scientific research will be allowed to implement a more flexible management system as compared to general public institutions, so that they can explore approaches to instituting corporate management.

允许科研类事业单位实行比一般事业单位更灵活的管理制度，探索实行企业化管理。

[This follows PRC experts like Yuan Yaxiang 袁亚湘, vice chair of the China Association for Science and Technology, complaining earlier this year that the rigid bureaucratic cadre system ties the hands of scientists.]

Researchers should get better incentives to do groundbreaking research, rather than fabricating tons of papers:

We will also support researchers in diversifying their subjects for study and encourage high-risk, high-reward basic research. We will advance reform of the science and technology evaluation system, ensure that ethical standards are adhered to, and rectify academic misconduct.

支持基础研究选题多样化，鼓励开展高风险、高价值基础研究。深化科技评价体系改革，加强科技伦理治理，严肃整治学术不端行为。

Artificial Intelligence

Though not a central focus of the Resolution, AI is mentioned four times.

First, in the section on “new productive forces,” AI is listed as one of the new growth drivers:

We will establish a mechanism for ensuring funding increases for industries of the future, improve the policy and governance systems for promoting the development of strategic industries such as next-generation information technology, artificial intelligence, aviation and aerospace, new energy, new materials, high-end equipment, biomedicine, and quantum technology, and steer emerging industries toward sound and orderly development.

建立未来产业投入增长机制，完善推动新一代信息技术、人工智能、航空航天、新能源、新材料、高端装备、生物医药、量子科技等战略性产业发展政策和治理体系，引导新兴产业健康有序发展。

Generative AI is discussed in the section on cyberspace and public opinion governance:

We will improve the mechanisms for developing and managing generative artificial intelligence.

完善生成式人工智能发展和管理机制。

On international cooperation on AI development:

We will continue to implement the Belt and Road Science, Technology, and Innovation Cooperation Action Plan and redouble efforts to develop multilateral platforms for cooperation in green development, the digital economy, artificial intelligence, energy, taxation, finance, disaster mitigation, and other areas.

继续实施“一带一路”科技创新行动计划，加强绿色发展、数字经济、人工智能、能源、税收、金融、减灾等领域的多边合作平台建设。

And even AI safety concerns found their way into the Resolution:

We will strengthen the cybersecurity system and institute oversight systems to ensure the safety of artificial intelligence.

加强网络安全体制建设，建立人工智能安全监管制度。

[See also Matt Sheehan’s thread, who says that this language is “the clearest indication we’ve seen that concerns about AI safety have reached top CCP leadership, and that they intend to take some action on this.” “Big deal, imho.” Concordia AI has translated an additional explanation of this section.]

As for the data industry, the Resolution reiterates points largely familiar from the 2023 “Digital China” plan:

We will build and put into operation national data infrastructure to promote data sharing. We will work faster to set up a system for data property rights concerning ownership determination, market transaction, proceeds distribution, and interests protection.

建设和运营国家数据基础设施，促进数据共享。加快建立数据产权归属认定、市场交易、权益分配、利益保护制度…

De-Risking With Chinese Characteristics

Unsurprisingly, tech self-reliance and supply chain security are major themes in the Resolution:

We will move faster to build industrial and supply chains that are self-supporting and risk-controllable, improve the institutions and mechanisms for bolstering key industrial chains such as integrated circuits, industrial machine tools, medical equipment, instruments, basic software, industrial software, and advanced materials, and strive to secure more technological breakthroughs that can be applied across entire industrial and supply chains. A mechanism will be put in place to assess and respond to industrial and supply chain risks.

抓紧打造自主可控的产业链供应链，健全强化集成电路、工业母机、医疗装备、仪器仪表、基础软件、工业软件、先进材料等重点产业链发展体制机制，全链条推进技术攻关、成果应用。建立产业链供应链安全风险评估和应对机制。

The same section also has some interesting bits on restructuring supply chains within China. The general idea seems to be that different localities should complement each other, filling each others’ weak points, rather than relentlessly competing with each other on every technology. It will be interesting to watch whether the party can change local officials’ incentive mechanisms to match these goals.

We will develop a regional economic layout and a territorial space system characterized by complementarity between different regions and territorial spaces.

构建优势互补的区域经济布局和国土空间体系。

…

We will improve integrated regional development mechanisms, build new mechanisms for cooperative development across administrative divisions, and deepen industrial collaboration between the eastern, central, and western regions.

完善区域一体化发展机制，构建跨行政区合作发展新机制，深化东中西部产业协作。

We will improve the coordination mechanism for industries to be relocated domestically in a progressive and orderly manner and promote interest sharing between regions of origin and destination. We will develop China’s strategic hinterland and ensure backup plans for key industries.

完善产业在国内梯度有序转移的协作机制，推动转出地和承接地利益共享。建设国家战略腹地和关键产业备份。

Science and technology should support national security, but the document does not offer many details on what should be reformed:

We will create a coordinated and highly effective system for protecting national security and better leverage science and technology to safeguard national security.

构建联动高效的国家安全防护体系，推进国家安全科技赋能。

Mechanisms for countering foreign sanctions, interference, and long-arm jurisdiction will be strengthened.

健全反制裁、反干涉、反“长臂管辖”机制。

Financing Tech

The link between finance and tech runs like a thread throughout the Resolution:

We will develop a financial system for scientific and technological innovation to provide greater support for major national science and technology programs.

构建同科技创新相适应的科技金融体制，加强对国家重大科技任务…

We will refine the role and governance of financial institutions and the incentive and constraint mechanisms for ensuring that they serve the real economy.

完善金融机构定位和治理，健全服务实体经济的激励约束机制。

We will likely see more reforms to government guidance funds and other state-led investment vehicles:

The institutional framework under which SOEs pursue original innovation will be improved, and the reform of state capital investment and operation companies will be continued.

健全国有企业推进原始创新制度安排。深化国有资本投资、运营公司改革。

Establish better operation and oversight mechanisms for major industrial investment funds to ensure that capital is channeled toward our country’s strategic needs.

优化重大产业基金运作和监管机制，确保资金投向符合国家战略要求。

When it comes to tech finance, the Resolution again envisions a symbiotic relation between the state and private economy:

We will refine the institutions and mechanisms that enable government investment to effectively drive nongovernmental investment.

健全政府投资有效带动社会投资体制机制…

The Resolution gives extra spotlight to so-called “patient capital” — investors who are not in for quick money but can support start-ups through long and risky R&D cycles:

We will set up long-term government investment mechanisms to support the development of major projects that are of fundamental and far-reaching importance.

建立政府投资支持基础性、公益性、长远性重大项目建设长效机制…

We will refine policies for supporting the investment of long-term capital in projects at the early stages, in small enterprises, over long time horizons, and in advanced and core technologies. We will improve the mechanisms for spreading the risks associated with the development of major technologies and introduce a policy system for technology insurance. We will facilitate foreign equity investment and venture capital investment in China.

完善长期资本投早、投小、投长期、投硬科技的支持政策。健全重大技术攻关风险分散机制，建立科技保险政策体系。提高外资在华开展股权投资、风险投资便利性。

We will encourage and regulate the development of angel investment, venture capital, and private equity investment, better leverage the role of government investment funds, and work to promote the development of patient capital.

鼓励和规范发展天使投资、风险投资、私募股权投资，更好发挥政府投资基金作用，发展耐心资本。

Talent Development

The Resolution spends quite a lot of space discussing how to educate, attract and retain tech talent.

To improve the mechanisms for nurturing talent here at home, we will work faster to develop national hubs for high-caliber personnel and platforms for attracting and pooling talent.

完善人才自主培养机制，加快建设国家高水平人才高地和吸引集聚人才平台。

We will step up efforts to build a contingent of personnel with expertise of strategic importance, with a focus on cultivating science strategists, top-notch scientists and innovation teams, outstanding engineers, master craftsmen, and highly skilled workers, while also working to improve the performance of all types of talent.

加快建设国家战略人才力量，着力培养造就战略科学家、一流科技领军人才和创新团队，着力培养造就卓越工程师、大国工匠、高技能人才，提高各类人才素质。

Obviously, the researchers should be loyal to the Party. If you were curious about what the model young Chinese person looks like:

We will improve the mechanisms for fostering virtue through education, introduce integrated reforms and new approaches in the political education curriculum at all levels, from elementary school to university, and refine the systems for nurturing capable young people with sound moral grounding, intellectual ability, physical vigor, aesthetic sensibility, and work skills.

完善立德树人机制，推进大中小学思政课一体化改革创新，健全德智体美劳全面培养体系，提升教师教书育人能力…

We may see the PRC restructuring uni curricula to put more focus on national tech priorities:

We will advance reforms of higher education institutions on a categorized basis and develop discipline adjustment mechanisms and talent training models to meet the needs of China’s scientific and technological development and national strategies. This will see us making extraordinary moves to plan for disciplines and majors that are in urgent demand. We will also redouble efforts to develop basic disciplines, emerging disciplines, and interdisciplinary subjects and work harder to cultivate top talent, with a strong emphasis on fostering innovative capacity.

分类推进高校改革，建立科技发展、国家战略需求牵引的学科设置调整机制和人才培养模式，超常布局急需学科专业，加强基础学科、新兴学科、交叉学科建设和拔尖人才培养，着力加强创新能力培养。

Vocational ed is an important part of the mix to support industry:

We will work faster to build a vocational education system that is well-integrated with both general education and industry and improve the mechanisms for student internships and work experience.

加快构建职普融通、产教融合的职业教育体系。完善学生实习实践制度。

Foreigners are welcome:

We will expand international science and technology exchanges and cooperation, encourage the establishment of international science and technology organizations in China, and improve the management mechanisms whereby China’s universities, research institutes, and science and technology-related social groups engage in specialized exchanges and cooperation with their foreign counterparts.

扩大国际科技交流合作，鼓励在华设立国际科技组织，优化高校、科研院所、科技社团对外专业交流合作管理机制。

We will also explore avenues for establishing an immigration system for highly skilled personnel.

探索建立高技术人才移民制度。

We will promote high-standard opening up in the education sector, and encourage first-rate foreign universities of science and engineering to develop partner schools and programs in China.

推进高水平教育开放，鼓励国外高水平理工类大学来华合作办学。

These were just some selected quotes. If you made it all the way here, you should probably just read the whole Resolution!

After decades of neoliberalism, how much can America’s bureaucrats crank the dial on effective industrial policy? Will the CHIPS Act succeed at reshoring high-tech manufacturing?

Next week is the CHIPS Act’s second anniversary. To discuss, ChinaTalk interviewed Ben Schwartz, the former director for national security at the CHIPS Program Office, which manages a $39 billion grant program appropriated by the CHIPS and Science Act.

Have a listen in your favorite podcast app! Here is the link for Apple Podcasts, and spotify is below.

We get into: 

• The methods and obstacles for American semiconductor policy;

• How CHIPS Act guardrails aim to balance economic growth and national security; 

• The negotiation process for companies interested in receiving CHIPS Act funding;

• Reshoring vs friend-shoring and the challenge of Chinese dominance in legacy chip manufacturing;

• Staffing and organizational structure of the CHIPS Program Office, plus the role of Commerce Secretary Gina Raimondo;

• The challenge of collecting data on secretive semiconductor supply chains.

How to Spend Billions — Grants vs Tax Breaks

Jordan Schneider: To start, why does the CHIPS Program Office matter?

Ben Schwartz: This is the most ambitious industrial policy launched by the US government in more than a generation. What I mean by “industrial policy” is government action to shape the supply chains and market for a major industry — semiconductors, in this case.

This is a huge change. It’s not just that the US is not a centrally-planned communist country — it’s that the US is also not like France. It’s not like Singapore. We don’t have a long history of the central government awarding billions of dollars in grants to shift the economy.

To be candid, it’s anathema to traditional American cultural and political proclivities. A large government-administered grant program is just not the first choice because when you do something like this, you have officials picking winners and losers — and the losers always claim that they were treated unfairly.

Americans just are not really comfortable in having the government get involved with large, profitable companies.

Yet in this instance, the alternative to a grant program would have been the economic equivalent of unilateral disarmament.

That is not an exaggeration. I use a military analogy here because we are in a fierce competition to shape semiconductor supply chains.

For decades, the US government sat back and let foreign governments shape those global supply chains. The US used to be the leader in semiconductor manufacturing in the sixties, some call that our golden age. We did basically everything, but over time we lost leadership, and we went from 40% to 12% of global manufacturing.

We ended up in a situation where we were producing exactly zero leading-edge chips.

That’s a problem that transcends the individual market participants. That’s a public problem, a collective action problem, a national security problem. It’s not just that we lost the leading edge either — we also experienced shortages in legacy chips (also called foundational chips).

During the COVID pandemic, there were acute shortages affecting the auto industry, with huge impacts on our economy. By some estimates, the Chinese government has been adding around 80% of new capacity in legacy chips for the past couple of years.

We face a situation where the absence of US government action here isn’t a free-market, neutral situation. No — foreign governments have acted with their own incentives. Companies acted on a very understandable profit incentive to increase margins and lower costs — but that has resulted in extreme geographic concentration risk in terms of where this stuff was being produced. 92% of all leading-edge chips are produced in Taiwan.

This is a real issue, because if you lose access to those chips, it’s not just going to affect a couple of consumers, it’s going to affect the entire economy. If we lost access to those leading-edge manufacturing capabilities, it could affect 10% of the global economy by some estimates.

This is a major effort to shape supply chains in a way that increases our resilience and helps alleviate a really acute national security risk.

Jordan Schneider: I’m completely convinced that the status quo was not sustainable from an economic and national security perspective. But about the methods we chose for dealing with this problem.

There already was a big tax and investment incentive baked into the CHIPS and Science Act. If we’d stopped there, we wouldn’t have to bother with signing individual agreements, not to mention the heap of riders making demands on companies.

Why did the CHIPS Program Office choose these specific methods?

Ben Schwartz: $39 billion may sound like a lot of money, but in the semiconductor industry, it could cost as much as $30 billion to build just one fab. You really need to be nuanced and creative in how you stretch that funding. We needed to basically negotiate and push companies in directions that they wouldn’t consider for a flat amount of funds.

The fact that there was candid uncertainty about timelines and how much money companies would get, actually crowded in more private investment than a single straight tax deduction.

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The process of negotiating crowded in a substantial amount of additional funding. The Semiconductor Industry Association came out with a figure, in which they stated that they estimate that something like $264 billion had been crowded in since it was signaled that the CHIPS and Science Act would pass with this grant program. The White House website had a more ambitious figure – something like $640 billion in new investments associated with chips. The reality is somewhere in between those two numbers.

[Jordan after the fact: I wouldn’t necessarily put an industry association who has every incentive to show the bill is a success as a lower bound here, but clearly the number is in the hundreds of billions]

It’s also really important what that money represents. Tangibly, the kind of investments we’ve gotten in the United States are themselves quite significant. The $100 billion multi-state program that Intel is committed to is unlike anything we’ve seen in American history. The $65 billion commitment that TSMC has made, the leading semiconductor company in the world, is the largest foreign investment we’ve ever seen. Samsung comes in shortly under that with $40 billion, the second leading-edge foreign company in the world. We have seen Micron’s investment of $75 billion for leading-edge memory. SK Hynix also announced their own investments in the United States.

The fact that those companies are committing to what they’re committing to doing here in the United States is also an unquestionable success of this program. That’s unambiguous. There is no other country in the world that has the combination of that kind of technology and those companies all operating in the same space. It’s not clear to me that you would have gotten that kind of thing just from tax incentives.

Companies are going to do whatever maximizes their profitability. That’s their responsibility to their shareholders, which inherently means that longer-term resiliency questions about supply chains are not going to be prioritized.

If you give a tax incentive — that will cut costs for a shortened period of time, but if there aren’t hooks in that funding stream, then over time those companies are just going to default back to maximizing efficiencies rather than maximizing resiliency.

In this instance, the reason this is a national security problem is not because costs are too high. That’s not the problem. The problem is that there’s this severe geographic concentration risk and that doesn’t get solved with the flat tax. You actually need hooks into these agreements that keep companies focused on where this stuff is manufactured and what their supply chain looks like from a resiliency standpoint.

Jordan Schneider: Regarding supply chain resilience — CEOs read the news too. Would any of these investments happen without the CHIPS Act, or did it feel like you were pushing on an open door?

Ben Schwartz: There’s a spectrum of sensitivity among companies in this space. Companies, particularly those that are feeding the auto industry directly, probably have been more sensitive to the need for resilient supply chains, mostly because the auto industry experienced very painful shortages and have told some of their suppliers to diversify their footprint.

There are other parts of the supply chains that have not. It was shocking to hear how much they simply didn’t care that they were exposed to risk in certain parts of the world.

There would have been some investments in the United States, regardless of the CHIPS program. Would it be anything like the degree that we’ve seen? Absolutely not. This unquestionably had a significant impact in shaping where these projects were to be built.

I have a humble view about the role of the US government in shaping private industry. We need to be aware of the limits of what we know and understand about very complicated supply chains. We have to be humble about the tools that we have available to actually shape those things, which are not nearly as powerful as some people in Washington assume they are. We had really a significant impact here, and we’ll continue to have it as long as this program exists.

If you’re a CEO, you’re focused maybe on the next five years, maybe ten years — your time horizon is just inherently shorter than what’s really in the public interest. This is something that is actually a fundamental issue in terms of the competition we face with the Chinese Communist Party. There is somebody in Beijing that has been focused on industrial policy for decades, and that person has time and the ability to really drill down on a subject and plan things that will impact the Chinese economy for a long period of time that doesn’t like that.

Issues of time and focus are not areas where the US political system has an advantage. We don’t do that well. But industrial policy really does require that focus and the ability to think in longer terms, which is why, candidly, industrial policy in the United States is only going to work if it’s bipartisan. The CHIPS and Science act was a bipartisan thing. My hope and prayer, candidly is it remains that because it’s the only way that it’s going to work over time.

Jordan Schneider: In thinking about Taiwan contingencies, is an ounce of prevention is worth a pound of cure? Is there a possibility to fix this in 15 or 20 years?

Ben Schwartz: There’s no risk elimination in this scenario. This is about risk mitigation in terms of where we try to diversify the geographic footprint of critical manufacturing. I will say that the way that I think about this is that it’s much harder to go from zero to one than go from one to two or one to three in terms of just capacity. Just having a foundation of, say, leading-edge capability here in the United States, even if it’s relatively small in terms of global capacity, is still extremely valuable from a resiliency standpoint.

I also think that there’s a technology leadership factor as well, which is just having advanced technology in the United States can create a virtuous cycle in terms of having people that need to be trained in the United States to operate those fabs to have a research and development function.

I’m very proud that in some of these deals we’ve negotiated, it’s multifaceted. It creates these positive clusters that involve not just manufacturing, but leading edge R&D and supply chain clusters and things like that. You get this virtuous cycle of innovation and growth and whatnot. There’s places for people to go work after they study and et cetera, et cetera. There’s the resiliency question and factor about having capacity here, but there’s also the technology leadership aspect of having advanced capabilities in the United States.

Negotiating Semiconductor Security

Jordan Schneider: We’ve talked a little bit about why leading-edge logic capability in the US is something that’s important and relevant over the long term. But more broadly, how did you guys conceptualize what national security meant in the context of the CHIPS Act’s mandate?

Ben Schwartz: This is a subject that doesn’t get nearly as much attention as some other topics. But obviously, it’s important because it was the NATSEC team, it was my team that was leading a lot of these efforts. Let me break it down into a couple of components.

We use the Presidential Policy Directive 21 to help identify what we mean by “supply chains critical to national security.” These are things like aerospace and defense industries, transportation, the electrical grid — things that affect the public writ large and don’t just decrease the cost of a personal electronic device for an individual consumer.

This is an area that is of greatest interest to the public. When we looked at project proposals, the first thing we asked is, “If we increase capacity here in the United States for this, how is that going to feed these critical supply chains, or will it at all? Will it feed the defense industrial base?”

One of the things that’s absolutely essential for our society to function is not just a free economy and a functioning economy, but military capabilities to protect that economy. Today, that means that we need to make sure that the supply chains behind the F-35, the F-15, and other major weapons systems are not vulnerable to disruption.

I’m especially proud that our team was able to convince some of these applicants to onshore critical defense capabilities. In some instances, they introduced technologies that had just never been available to the DIB, because sometimes you actually can’t incorporate technologies manufactured abroad for security reasons into majority sensitive programs. Now we’re going to have those here in the United States.

Next, we needed to make sure that these investments were reasonably protected from various types of threats. The statute that authorized our program specifically called out things associated with “operational security” — cybersecurity, the threats of counterfeits, concern about foreign influence and control of operations, et cetera.

I was very privileged to work with a team of just absolute superstars with the nerdiest but most critical knowledge of things like cybersecurity standards and how equipment communicates with the internet and outside systems. How do you structure corporate governance to make sure sensitite information doesn’t leak out to foreign countries?

Finally, at the direction of Congress explicitly, the team focused on implementation of guardrails. In Congress’s infinite wisdom, they put in some fairly pointed language about preventing the expansion of capabilities in foreign entities, of concern foreign countries, of concern for companies that receive CHIPS grants. The point is that we don’t want to inadvertently advantage the development of technologies related to national security in a country like China or Iran.

There’s actually a lot of nuance in implementation. It’s actually quite complicated interpreting that statute, applying it consistently, and doing it in a way that maximizes national security but also allows companies to remain commercially competitive and viable.

These things, the resiliency question, the operational security question, and the guardrails implementation are things that don’t get a lot of press. But over time, as people study this program, people will, more people understand, actually the critical importance of this work.

Jordan Schneider: Let’s discuss bringing manufacturing here. Anything can be susceptible to cyberattacks. We just had half of the American economy go offline because Crowdstrike had an incompetent intern.

It’s one thing to have manufacturing here, but these fabs need data flowing in and out. Is it even feasible to secure them?

Ben Schwartz: Yes. There’s a way to structure and manage this problem. I was privileged to serve with cybersecurity professionals. The traditional way of managing this kind of issue is through the formula Risk = Threat × Vulnerability × Consequence. This is typically used in the security community to break down seemingly unmanageable operational security risks into components and address each component reasonably.

Standards exist for cybersecurity, but there’s also the operational structure. You visit these facilities and check their physical security program, insider threat program, contractor vetting processes, and information firewalls to prevent leaks to foreign parents.

We can’t eliminate risk entirely, but we can minimize it, focusing on the most consequential aspects from a national security perspective.

Jordan Schneider: Was this a culture shock for organizations unfamiliar with the Pentagon’s extended universe? Had these companies been thinking about these issues? You mentioned earlier that there was a lot of teaching on your end.

Ben Schwartz: It varies. Some companies have been serving the defense industrial base for a long time and have robust protections in place. They might be part of the Trusted Foundry program, administered by the Department of Defense to ensure classified and sensitive systems are supplied with parts and semiconductors that go through rigorous security structures.

Other companies have never served the defense industrial base and weren’t interested until we pushed them because we had leverage. Some of the most advanced technology comes from companies that get their margins purely in the commercial space. When they look at the margins for working with the defense community, they wonder why they should bother. In our case, we said they should because this is a national security program, and they need to provide a good justification for receiving funding.

There are also companies that will probably never work with the defense industrial base, but were interested in increased security because they were aware of vulnerabilities in their commercial operations. Smaller companies, as well as those that had gone through mergers and acquisitions, didn’t have uniform standards in place. They welcomed the opportunity to learn from and partner with the U.S. government.

Jordan Schneider: Let’s talk about the CHIPS guardrails. What were some of the decision points you had in implementing that provision?

Ben Schwartz: I can’t discuss particulars for individual companies. Legislation is never perfect in terms of its ability to be translated into clear programmatic decisions. Congress used categories of semiconductor technologies of national security importance throughout this legislation. We’ve had to figure out how to use those categories to align with the increased complexity of how things actually work in the real world.

Our objective on the national security side is not to kill projects in the United States through non-commercial security standards, because that doesn’t serve national security. The least secure project, as I told my team, is the one that doesn’t exist.

Jordan Schneider: For context, the CHIPS guardrails essentially state that if you’re going to take CHIPS money, then there’s a time horizon during which the U.S. government has a say in whether or not you invest directly into the PRC. If you decide to build a plant or expand your footprint within China during that period, the CHIPS Program Office can reclaim its money. This was very relevant to many companies because they have fabs, manufacturing facilities, or long supply chains running through China.

Ben Schwartz: To clarify, there’s the expansion clawback that deals with expanding capacity in foreign entities of concern, and the joint technology and licensing clawback that addresses the nature of partnerships with foreign entities of concern. We had to manage both of these requirements in the program.

Jordan Schneider: There’s been news about Intel Capital and other direct investments into startups. Is that your problem, or is it the outbound investment screening team’s issue?

Ben Schwartz: I can’t comment on anything related to a particular company that hasn’t been made public.

Jordan Schneider: Over the course of this process, do you have a favorite deal that exemplifies why the CHIPS Program Office should exist?

Ben Schwartz: Every deal is unique, which makes this program special. We were able to attempt to get the maximum bang for our buck with each applicant by negotiating in a highly particular way to extract the most economic and national security value from these deals.

I particularly liked one of the first deals we announced, with BAE (British Aerospace). It’s a small deal, about $35 million for preliminary terms, but it’s a smart use of U.S. government funding. BAE produces monolithic microwave integrated circuits (MMICs), which are essential to electronic warfare systems in aircraft like the F-35 and F-15. There had been a significant backlog, and they couldn’t produce enough, which held up key components of major defense programs.

By using CHIPS funds to support the expansion of capacity at this BAE facility, we were able to address the backlogs for MMICs and lower the overall production costs due to greater economies of scale.

This eliminated backlogs, created more resilience in a critical supply chain, and reduced costs that would ultimately be borne by taxpayers.

The facility is also a trusted foundry, increasing capacity at a site uniquely suited to creating trusted microelectronics. [Ed: CHIPS incentives quadrupled mature-node production at the BAE facility in New Hampshire.]

Supply Chain Data Sleuthing

Jordan Schneider: Semiconductor supply chains are fed by a long tail of components, which is impossible for one person to fully comprehend.

The type of negotiations conducted by the CHIPS Program Office help the government gather information and get closer to situational awareness.

What was the process like for the team to synthesize all this new data?

Ben Schwartz: It’s not an exaggeration to say that the wealth of information we compiled about certain parts of the microelectronics industry is better than any other collection on the planet.

The government is the only entity that can really solve the collective action problem of dealing with geopolitical risks from high concentration of supply chains. We tried to get the best deal by looking at the finances of these companies to determine what we needed to do to get them to build here sustainably, and not a penny more.

Jordan Schneider: There’s no way that these companies would discuss commercial secrets with any centralized data broker other than the U.S. government.

Ben Schwartz: Having worked in private industry as well, I’m aware of the limits of what these companies will ultimately share with us. We did the best that was possible, and that dialogue will continue over time.

It benefits these companies to think about supply chain resiliency issues.

There are multiplier effects where they identify vulnerabilities such as overreliance on a single supplier, and express a desire for more options or a preference for a specific geographic location.

The U.S. government can then consider that when allocating resources.

Jordan Schneider: Can you talk about the Defense Production Act survey and how that potentially fed into some of the BIS export control efforts?

Ben Schwartz: The CHIPS Program Office isn’t part of BIS, but we all work together. Secretary Raimondo was direct when that survey was released — industrial policy is a multivariable equation. If you want increased resiliency, multiple factors affect that output. Grants are just one tool — others deal with trade restrictions, or protect against the non-market behavior of other countries.

We need to understand where these chips are coming from and what foreign governments may be doing. The survey is a tool for the U.S. government to understand supply chains that affect national security. Depending on what information is received and what we learn about foreign governments, other tools in the U.S. government toolbox will be seriously considered to manage risks.

The Chinese have a playbook for flooding markets, which makes the competition the U.S. faces today distinct from the Cold War era.

The Soviet Union never had the same level of integration in the global economy where its exports could drive foreign companies out of business. The Chinese government has that ability if they decide they want to control certain technologies. They can fund something for a very long period, drive prices down to a level where foreign companies can’t compete, and drive those companies out of the market. We need to ensure that doesn’t happen.

Jordan Schneider: Legacy chips are particularly tricky. We’re currently running an essay contest with Noah Smith and Chris Miller about how the U.S. government could address the impending onslaught of Chinese legacy chips. It’s a similar problem to what happened with solar panels.

Noahpinion

Give us your ideas on how to deal with Chinese chips!

I’ve got something very special for you today. Instead of telling you my ideas, I’m going to ask for yours…

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2 months ago · 105 likes · Noah Smith

It’s challenging because you’ve already spent a lot of the money, but it seems like you’ll need to use many different tools to address it. Do you have any particularly clever ideas or suggestions for tools that would be especially relevant in this case?

Ben Schwartz: This isn’t a new statement, but one thing that must be done is to improve traceability and visibility in supply chains. We can’t take effective action until we have a more granular understanding of where chips are produced and how they’re integrated into manufacturing here.

We don’t want to unintentionally make manufacturing uncompetitive in the United States by cutting out the supply of chips that feed that manufacturing.

We also need to have a dialogue with companies about how to effectively protect these markets from non-market behavior. Companies have been hesitant, partly because they may not have the information themselves. It takes money and time to understand where you’re getting your chips from.

We need to have a conversation about the outcomes we’re trying to achieve and how to get there. There’s an information gap, and if the U.S. government takes action, it tends to be a blunt instrument. These are highly complicated markets, and a blunt-force approach could be counterproductive to our own ends.

In terms of tools, we can use are 301 investigations, 232 tools, and Section 5949. These all relate to trade controls – restricting the import of goods that are being produced for political reasons.

The distinction is important: the U.S. is a market economy, but some governments use market dynamics for political ends. Their goal isn’t to create self-sustaining industries, but to control technologies for leverage in political and military contingencies. That’s where trade barriers come in, and where we have to protect the country from that kind of threat.

Keys for Leadership and Bipartisanship

Jordan Schneider: Is there any Monday morning quarterbacking you want to do here? Any soapboxes you’d like to stand on?

Ben Schwartz: No program is run perfectly, but I’ve never been as impressed with the public servants I’ve worked with as I have been in this program. A professor of mine compared it to the Manhattan Project in terms of pulling talent from the private sector and other parts of the government together to do something critical for the country in a short period of time.

The most important lesson is that there are limits to what you can accomplish in a short time when trying to do something of this magnitude. You really need bipartisan support to allow the longevity necessary to achieve the desired successes. If a program like CHIPS were to get politicized – which happens easily in this town – it would hurt the country’s ability to compete with China and others.

The lesson is that if we’re going to undertake things of this magnitude, which I believe we absolutely must, it has to be a strongly bipartisan program and must be viewed as a longer-term initiative. The second lesson is that grants are just one tool in the toolbox, and you have to integrate that tool with others that the U.S. government has available, such as trade barriers and countervailing duties.

The U.S. government isn’t really organized to do industrial policy the way we’re organized to do monetary policy. The Fed was designed as an institution to handle monetary policy, and it’s done well over time because it’s typically been non-political and bipartisan. We haven’t institutionalized things for industrial policy like the CHIPS Act in that way, and that may be something that’s really required.

Jordan Schneider: You had one tricky news cycle with the daycare issue, but it’s remarkable how much this has stayed out of the political maelstrom. Whether that means we’ll get more billion-dollar industrial policy pushes in the future remains to be seen. But it’s a testament to the work you did to convince people that this is a special initiative that shouldn’t necessarily be leveraged to pursue other domestic policy goals.

On the Manhattan Project talent concentration perspective, you’ve mentioned many other organizations you’ve worked with. Were people excited about it? I know you had special hiring authorities. What were the ingredients to get the right team in place?

Ben Schwartz: You’ve already named one of them. This stuff is fundamentally about people at the end of the day. We were able to benefit from Secretary Raimondo’s leadership, which I haven’t seen anywhere else in my time in DC.

I’ve supported over half a dozen cabinet secretaries in different jobs, and her direct leadership in getting this up and running, combined with the fact that she’s a cabinet secretary working for a president who made this a priority, was crucial.

Jordan Schneider: Can you elaborate on why cabinet secretaries matter?

Ben Schwartz: When they say to get something done, there’s a system in place to compel people to act. When you’re a mid-level bureaucrat in the system, it’s much harder to make things happen. Most programs in the U.S. government are run by mid-level officials because the authorities and responsibilities of a cabinet secretary are vast. Their attention and focus get diffused among many things.

The direct hiring authority was also essential. We didn’t have to go through some of the typical processes that often dilute the quality of people coming into these jobs. The bipartisan aspect was also instrumental in this whole endeavor. There’s nowhere else that I’ve seen that in my experience in government.

Jordan Schneider: Can you give an example of a roadblock that the Secretary could clear that you, as a lower-ranking official, wouldn’t be able to?

Ben Schwartz: The ability to engage with company leadership, the White House, and other agencies is crucial. CHIPS had dependencies outside of the Commerce Department, meaning other agencies needed to act or refrain from acting for us to be successful. In government, you never want dependencies in other agencies because it’s like a tribal confederacy. They have their own imperatives and won’t necessarily do what you want just because you’re part of the same government.

But when you have senior leadership, they can call another cabinet official and say, “Please resolve this by the end of the week,” and things get done. I imagine it’s not that dissimilar from certain companies in the private sector, where if the CEO is engaged in something, it works differently than if it’s just a VP.

Jordan Schneider: Let’s return to the idea of institutionalizing the industrial policy muscle. I love that Fed analogy. This has come up several times on China Talk when thinking about China analysis or net tech assessment. I’m envious of macroeconomists — they have 400 PhDs just sitting there, clocking in at nine and out at five. Whereas the expertise on many of these other things, as you said, Ben, comes from great people cobbled together from various places – tech firms, investment banks, and corners of the deep state. What’s your plan to build the industrial policy muscle?

Ben Schwartz: First, you create an organizational structure designed to achieve specific purposes. If you’re trying to solve a particular problem, you ensure that the organization has all the necessary authorities and resources to solve that problem. For industrial policy, these are dispersed among multiple agencies in the U.S. government. You have USTR, the Treasury Department, and different parts of Commerce, each with their own responsibilities.

Who centralizes and manages the tools of industrial policy? Maybe the NSC, maybe the National Economic Council, or maybe a couple of strong leaders who assert themselves and try to herd the cats. That’s not a great way to do things; you should design a structure tailor-made to serve a specific purpose.

The second thing is about people, and this isn’t new. Some countries have set up systems to effectively do industrial policy. Singapore, for example, has a highly meritocratic civil service. They pay their people well, and the standards are rigorous. If you make mistakes, there are consequences. The reward is decent, and the consequences are significant. This keeps quality people in these jobs, and they don’t necessarily leave for the private sector because there’s something to be gained for them over time.

You need a personnel system that is sustainable and rewards talent.

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Jordan Schneider: I was reading Project 2025 last night, and the Commerce Department chapter was interesting. On one hand, it suggested blowing things up, but there was also a part advocating for significant reorganization.

Commerce doesn’t really make sense in how its various authorities are spread out in different places. This person’s solution was to put a lot of stuff in USTR.

Regardless, it seems like the Commerce Department is ripe for some fundamental restructuring of what it can and can’t do, because historically it has been this big, weird agglomeration of different powers. I would vote in favor of giving it more tools. Do you think it should just absorb USTR? It’s kind of strange that USTR is its own thing.

Ben Schwartz: Upon opening that report, I quickly decided my time would be better spent with my children. Consequently, I set it aside and remain unaware of its contents. 

Regarding the success of CHIPS, in addition to the secretary’s leadership and White House prioritization, we didn’t inherit an organizational structure designed for a prior purpose. Instead, we built a system specifically for this mission. While challenging because we were “building the plane as we flew it,” it was also liberating as we could create significant efficiencies.

Most government structures reflect historical needs, which don’t necessarily address current or future challenges. Organizational structures should be revised over time. In my experience, one of the most crucial aspects of any institution is aligning responsibility with authority. If you’re responsible for something, you should have the necessary authorities to meet that responsibility. These authorities shouldn’t be held elsewhere, preventing you from accomplishing your assigned tasks.

Jordan Schneider: The only other people I’ve encountered in government with similarly positive reflections are those who were in the Consumer Financial Protection Bureau during its early years, before it became politicized and imploded. It seems that organization was also created for a specific purpose and had special hiring authorities to bring on desired personnel.

To quote Jefferson: “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.” Perhaps the tree of liberty also needs periodic refreshing with the hollowed-out husks of bureaus whose relevance have expired.

It’s been a long time since we’ve had a Goldwater–Nichols style hard look at bureaucratic structure and organization. Congress may be too dysfunctional to tackle something like this.

However, in this age of national competition, with China presenting a very different challenge than the Soviet Union did, we might need to reconfigure things from a bureaucratic perspective to respond appropriately.

Ben Schwartz: During my graduate education alongside distinguished military leaders, one wrote a lengthy essay called “Perpetual Adaptation.” This individual, with serious operational experience in complex war zones, argued that successful militaries adapt more rapidly than their adversaries. This lesson applies universally, including to bureaucracies.

You need stability to complete tasks, focus on the future, and maintain predictability. However, you also need the ability to adapt to changing situations. Government isn’t always as incentivized to do this as private industry, where failure to adapt often leads to extinction. Government lacks this imperative, sometimes requiring strong leadership to initiate change.

Over time, if you don’t achieve evolution, you get revolution. That’s how things work, and revolution is often bloody, as you mentioned.

Jordan Schneider: Got a song to take us out on?

Ben Schwartz: I did start a meeting with one of the larger companies where they had submitted a bunch of requests. I said, the theme of this meeting is from the Rolling Stones. You can't always get what you want, but you might just find that you get what you need. And I would say that the meeting proceeded as such.

Hopefully we'll get what we need here in Washington on chips and everything else!

We’ve had another great quarter of deep-dive content on the podcast and newsletter. The past few months have made clear how ChinaTalk is also very much in the business of nailing future headlines.

• Last November, we ran epic breakdown of Commerce’s updated 2023 export controls as viewed by a thirty-year lithography veteran, predicting that BIS regulations would force ASML to stop shipping the 1970i and 1980Di to China. No surprise when BIS blocked precisely those machines a few weeks ago.

• As the PLA purges were just getting underway, we brought on Joel Wunthow to tell us just how bad Xi’s trust issues with the PLA are, and what that means for China’s overall military readiness. No surprise when Bloomberg reported at the top of 2024 that Xi’s purges were prompted by military corruption so pervasive that (per US intelligence assessments) Xi is now “less likely to contemplate major military action in the coming years than would otherwise have been the case.”

• And ChinaTalk’s latest prediction comes from Irene Zhang’s excellent investigative reporting on how easy it is to buy advanced chips on Xiaohongshu, China’s Instagram. No surprise when — a full year after Irene’s report — the WSJ covered the retail smuggling ecosystem, including one student in Singapore who smuggled six Nvidia semis back to China (for a whopping 0.4% commission).

Subscribe for free to get breaking news in your inbox months before they’re mainstream talking points.

Now, on to Q2 hits.

War in Taiwan Month

It’s the question we get asked all the time: “Will China invade Taiwan?” We had some of our best discussions of Q2 taking a stab at answering it.

First, we hosted Jared McKinney of the Air War College and Peter Harris of Colorado State University, who recently co-authored a fantastic monograph, “Deterrence Gap: Avoiding War in the Taiwan Strait.”

Their major value-add to the Taiwan discussion: interlocking deterrents (as opposed to deterrence). The reason cross-Strait conflict has been held at bay for so long, they argue, is because the PLA was simultaneously facing several deterrents, including US naval dominance, Taiwan air superiority, and even the US threatening to use nuclear weapons.

Here’s why there’s cause for concern today:

Constraints (ie. externally imposed limitations) against the PLA have all but disappeared, and restraints (ie. internally motivated reasons to exercise self-control) are quickly dissipating, too.

But there’s a way out. Here’s how McKinney and Harris propose we start layering up deterrents again — and it’s actually not that expensive:

Is there any precedent to invading Taiwan? US Army Lieutenant Colonel J. Kevin McKittrick tells us there is: in 1944, US generals set their sights on Japanese-controlled Formosa as a staging area for attacking Japan and ending WWII.

American warplanners ultimately aborted their Taiwan-invasion plans, however, because the resource constraints of this massive amphibious invasion were just too taxing. Conventional army doctrine has it that the attacker-to-defender ratio should be 3:1 for >50% odds at success; for more complex operations — like amphibious assaults — the ratio should probably be up to 5:1.

The same resource constraints that existed for the US in 1944 probably still exist for the PLA today. LTC McKittrick:

The challenge is that the number of troops that you need to land exceeds the capacity of the Chinese Navy — even with the roll-on, roll-off civilian vessels — to get that number of troops on the ground at the same time.

We just brought up the figure that came from Thomas Shugart’s testimony before the US-China Economic and Security Review Commission, where he stated that it would take roughly 10 days to deliver approximately 300,000 troops on the ground.

That probably is not enough troops, and that is probably too slow.

If Taiwan, conservatively, has 244,000 troops ready to go at a moment’s notice — which it probably does — then using a 3:1 force-ratio requirement, the PLA would have to send 732,000 troops across the Strait. If they want a 5:1 option, the PLA would need 1.2 million troops. It would take more than a month to move that many troops across the Strait.

So, would Xi still send it? Dmitri Alperovitch thinks it’s possible:

It’s true that Putin is much more of a gambler than Xi — I agree with you on that. But I still think that Xi is a gambler.

Xi has gambled and engaged in adventurism, whether it’s the Sierra Madre in the South China Sea, or whether it’s the confrontation with India on the border. Or we can look at zero Covid, which was the ultimate gamble — he shut down the whole country for several years in the hopes of stopping a virus that spreads through air droplets.

Xi clearly wants to invade Taiwan, or at least have that option. You see that from the intelligence community assessments, but you can also see it because the military buildup that he is pursuing is specifically focused on that one thing.

But there’s reason for hope — “we can survive if we settle the Taiwan issue.” More from Dmitri:

I actually think China is a lot weaker than the Soviet Union was during the Cold War, and we beat them. For sure, we can beat the Chinese and make sure that this century remains an American century. But the first thing we have to do is avoid a conflict and hostile takeover of Taiwan.

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Top Pods: Scale AI, Sen. Young, India-China, TSMC in Arizona, Shakespeare and Power

• Scale AI CEO Alex Wang: ChinaTalk has done a ton of coverage on compute over the past few years — but Alex was the first “data” guest of the pod. “For a lot of the problems that we want these models to solve,” Alex said, “the data is not recorded or does not exist.” That’s why we need “frontier data” — high-quality data like logical reasoning, decision matrices of subject-matter experts, complex math — both for successful innovation as well as for national-security imperatives:

  It’s quite frustrating. … For less nebulous technologies, we usually wait until we’ve been surpassed before we get our act together. You can see this with hypersonic missiles, as well as a lot of developments in space technology — we’ve waited for China to catch up a little bit before reigniting the flames. I have a real concern that it will take a crisis to make us take this stuff seriously.

• Senator Todd Young (R-Ind.): One of the few elected legislators who actually legislates, Sen. Young was the latest member of Congress to hop on the pod and discuss tech-policy futures. The CHIPS Act co-author wants to beef up Congress’s tech smarts, revamp the civil service to lure in AI talent, and unlock more data for AI development (without forgetting about property rights). He’s bullish on R&D funding and high-skilled immigration, and he’s even a fan of the AI Safety Institute (don’t mind the GOP platform — “I also know that sometimes these things are developed by 22-year-old interns”).

• C. Raja Mohan (ft. James Crabtree): Modi’s on a roll. He recently clinched a third term, and he’s wooing Western capital like it’s going out of style. As paraphrased by Raja, Modi is basically saying, “What you’ve seen in the last 10 years is just a trailer. The real movie will begin now.” See, e.g., three semiconductor plants, and a potential Elon trip to India later this year. But it’s not just about economic gains — it’s also a strategic pivot to a coalitional strategy:

  We are in a Dengist moment in India. The parallel extends to India’s growth, and India’s opportunity to work with American capital to build itself up. Across the board, I would say, it is an era of partnership with the US. The fact is, the differences between India and China are huge, and the disputes have become bigger.

  [China’s] assumptions that their neighbors were too weak to come together and that America was in decline both turned out to be wrong. … [Crabtee:] It turned out India actually did have some options. It just had to junk many decades’ worth of ideological baggage, which it has done with great speed.

• Viola Zhou of Rest of World: TSMC Phoenix has a culture clash on its hands. Taiwanese engineers are scratching their heads at yanks who dare to eat during meetings and clock out at 5 p.m. sharp, while American workers are balking at the militaristic management style (indeed, Taiwan-based TSMC employees are used to calling their managers zhǎngguān 長官, a military term that means “commanding officer”). We even have a TSMC employee on record saying, “I want to support TSMC to be great. It’s my religion.” And here’s a nominee for quote of the year (oh how I miss Taiwan):

  The bustling cities of Taiwan are densely packed and offer extensive public transport, ubiquitous street food, and 24-hour convenience stores every few blocks. In northern Phoenix, everyday life is impossible without a car, and East Asian faces are scarce. “Everything is so big in America,” said one engineer, recalling his first impression. He recounted his wife summarizing her impression of the US: “Great mountains, great rivers, and great boredom.”

• Eliot Cohen (ft. Phil Schneider) — part 1 and part 2 (ft. Drew Lichtenberg and Kate Pitt): Shakespeare has more to teach us about power than any political science textbook. From the St. Crispin’s Day Speech of Henry V to Mark Antony whipping up the crowd, the Bard nails how leaders manipulate the masses. But he also conveys a real empathy for the burdens of the crown — consider Prospero tossing his magic wand, or Richard II’s impaired sense of reality even after he’s deposed and in prison. Turns out, knowing when to exit stage left might be the trickiest act of all. Biden and Trump, take note: “There is a world elsewhere” beyond the Oval Office. Special thanks to Jordan’s brother for bringing Shakespeare to life in these episodes.

Meanwhile in the Mainland

Welcome aboard to two new ChinaTalk contributors: Bit Wise (pseudonym) and Yiwen Lu.

• Anyone can talk all day about what they think China should do about its various tech bottlenecks and structural industrial challenges, but Bit Wise brings us coverage of what the top dogs in China are actually saying among themselves. Three AI heavyweights — Xue Lan 薛澜, Zhang Hongjiang 张宏江, and Li Hang 李航 — speak openly in a panel discussion about the questions we’ve all been wondering about:

  • Does Sora understand physics? (If so, is a robotics revolution around the corner?)

  • Talent, data, compute — what’s the real bottleneck in China?

  • Which business strategies lend themselves better to open-sourcing models?

  • Should frontier models be open-sourced? And should Chinese companies even be focusing on frontier models?

• China’s hottest model, SenseChat V5, was put through the wringer by Bit Wise and . They compare SenseTime’s performance markers to publicly available rankings (and report on SenseTime’s personal response to their inquiries), run some censorship tests, and also feed some excellent memes to the chatbot. And of course, Lily “math is for everyone” Ottinger takes SenseChat to town on a college-level calculus exam.

• In late June, China lost API access to OpenAI’s services — a decision that signals a tightening of AI export controls, driven by cybersecurity concerns and fears of model extraction. Yiwen’s piece, though, investigates the extent this decision was really anything new; after all, OpenAI and Chinese regulators have each put up their fair share of barriers already. Also, why is OpenAI leaving China when others — like Microsoft’s Azure — are digging in even further?

  In some ways, this is probably the puzzle for all big enterprises: despite all the heartache, it still doesn’t make sense to give up on China. Apple, which just had a grand unveiling of its partnership with ChatGPT to develop Apple Intelligence for its products in the US, reportedly held preliminary talks with Baidu about using the latter’s AI technology in its devices in China — precisely because its flagship global partner ChatGPT is not available in China. Similarly, Samsung uses Baidu’s ERNIE 文心一言 within its latest smartphone model in China, and Google’s Gemini outside of China.

Also: is China becoming a “great nation”? Zhang Yunchen 张运成 of CICIR — a think tank nestled under China’s Ministry of State Security — thinks so. If you want a window into what the CCP’s top leaders are hearing from their advisors, this translation by Dylan Levi King and Nancy Yu is a must-read. The cliffnotes:

Competitions between nations are won by superior resources, territorial advantages, and vast populations.

But scientific, technological, commercial, and political advancement can compensate for shortfalls in resources, territory, and population.

China, Zhang says, rose in the late twentieth century through territory and population — but it has continued on the road to becoming a great nation because it has seized scientific, technological, commercial, and political advances.

US Competition Policy

$11 billion of CHIPS Act funding is headed for the US National Science and Technology Council (NSTC). What should NSTC do with those funds? Jordan and Chip Capitols founder Arrian Ebrahimi make the case in a long-form report that corporate supplements to existing R&D just aren’t going to cut it anymore. We need moonshots. Here’s the TL;DR game plan they propose (9,000 → 160 words):

1. Research Agenda: Focus on addressing market failures and underinvested areas in semiconductor research. Prioritize proactive design for manufacturing, de-risking new materials and eco-friendly chemicals, and organizing cross-sectoral missions for downstream technologies like AI, security, and sustainability.

2. Investment Strategy: Focus on Series A and B startups to bridge the “valley of death” and support ventures outside current trends. Act as a lead investor to organize funding syndicates, leveraging technical expertise and financial resources.

3. Intellectual Property Sharing Model: As the consortium matures, implement a dynamic approach evolving from open access to more restricted models. Tailor IP rights to match members’ contributions and research stages.

4. Geographic Structure: Establish a centralized flagship campus with strategically placed satellite “Centers of Excellence.” Ensure all facilities support centrally determined technology goals rather than pursuing independent verticals.

5. Funding Trajectory: Follow a three-phase approach over 10+ years, transitioning from primarily public funds to a balanced structure of participation fees and fee-for-service projects. Maintain public funding for infrastructure expansion throughout.

If we play our cards right, the NSTC could be the secret sauce that keeps America at the top of the chip game. It’s not just about making faster phones — the US could achieve breakthroughs in national security, economic dominance, and maybe even save the planet.

Next up: we produced two back-to-back deep dives into the Biden administration’s tariffs on Chinese EVs:

• Brad Setser — formerly in Biden’s USTR — hopped on an emergency pod to discuss the national-security justifications for the EV tariffs, why the Biden administration waited so long before imposing these tariffs, and how the policy response to today’s Chinese EV manufacturers differs from the response to Japanese automakers in the 1980s.

• But the wrinkle, per Kevin Zhang: overall, Chinese EVs are just better than their Western rivals, winning in price competitiveness and sporting fancy features that make Tesla look like a Nokia brick phone. So the Biden administration is betting big, trading short-term consumer choice for long-term industrial might. TBD whether the “electric curtain” will spark an American EV renaissance, or leave US drivers in the dust while the rest of the world picks up Chinese EVs anyways.

How do these kinds of policy choices play into a coherent China strategy? (Does the US even have a coherent China strategy?) Do check out our rapid response to the latest mashup at Foreign Affairs, featuring many friends of the pod: Matt Pottinger, Mike Gallagher, Jessica Chen Weiss — plus James Steinberg, Paul Heer, and Rush Doshi.

Japan

ChinaTalk’s first ever staff retreat in Tokyo also let us harvest some excellent content. Jordan published one extended meditation on Japan and three Japan podcasts:

• Ambassador Rahm Emanuel: This one is a classic. Rahm doesn’t mince words — he articulated the Biden administration’s view of China today with language that nobody in the Biden administration would use themselves.

  China has quite an entrepreneurial culture, and [Xi] crushed their entrepreneurship — and in crushing their entrepreneurship and the tactics he adopted, he crushed the confidence of the world in China. … You can’t get anybody in Japan, Europe, or the United States to raise their hand and say, “I’d like to move my family to a city where I could get arrested any given day and be in lockdown.”

• Arrian and Jordan brought on University of Tokyo professor Kazuto Suzuki, who serves as an advisor to Japan’s Ministry of the Economy, Trade, and Industry (METI). Since a tense island dispute with China in 2010, Japan has been busy fortifying its supply chains and pouring yen into R&D — so METI is back in the spotlight, dishing out billion-dollar checks to semiconductor projects, juggling partnerships with frenemies like South Korea, and rewriting the export-control playbook. And as METI charts this course, it’s drawing lessons from its past — from Qing Dynasty tech woes to WWII trade conflicts — to avoid repeating old missteps.

• ChinaTalk next hosted Ryan Takeshita, Chief Global Editor at PIVOT, a new media outlet in Japan focused on the emerging startup scene. In that conversation, we get into the recent economic history leading to today’s “boom times,” why more people are looking to leave traditional occupations for insurgent firms, and challenges surrounding demographics and immigration.

• And of course, we have the travelog report from Jordan — from rubbing elbows with METI officials to chowing down on Kyoto’s finest. He also took up some Zen Buddhism (spoiler: it’s complicated), hung out with samurai ghosts, and even uncovered an Art Deco palace with a dark past. Between those adventures, Jordan found time to read classic Japanese literature, contemplate the merits of batting cages over meditation, and stumble upon Japan’s celebrity-endorsed mushroom market.

Media Diet

Jake Newby of Concrete Avalanche: Best Chinese music of 2024? We covered everything from psychedelic rock and Beijing kawaii core, to rare Uyghur folk and Tibetan Buddhist chants. One listener said, “This deradicalized me a bit — I didn’t know people made music in China like this!”

If you liked that pod, you’ll like ChinaTalk’s recent hire, Alexa Pan, whose first piece asked, “How would William Wordsworth’s The Prelude work with Chinese shoegaze?”

H1 2024 reading list from Jordan:

• Mitsui Empire: Three Centuries of Japanese Business, by John Roberts — the best political economy book on Japan.

• Ed Luttwak’s works: Strategy: The Logic of War and Peace; The Grand Strategy of the Byzantine Empire; and The Endangered American Dream — the last of which was quite prescient on the importance of domestic manufacturing.

• History of the US Civil Service, by Paul P. Van Riper — there should be more administrative-state histories!

• The Ties That Bound: Peasant Families in Medieval England, by Barbara A. Hanawalt — takeaway: life totally sucked until recently.

And finally: the betting markets.

1. Will OpenAI, Google, or Anthropic have a model’s weights hacked before 2025?

   1. Jordan set the market at 30%.

   2. Market at Q1: 27%.

   3. Market today: 13%.

   That said, we did get an OpenAI hack story and Gen. Nakasone appointed to the board! This feels like a buy to me…

   

2. Will a Taiwanese, US, Filipino, Japanese, or Vietnamese servicemember suffer a casualty in a confrontation with China’s military before 2025?

   1. Jordan set the market at 15%.

   2. Market at Q1: 35%.

   3. Market today: 41%.

3. Will China get mentioned more times than AI over the course of the 2024 presidential debates?

   1. Jordan set the market at 60%.

   2. Market at Q1: 91%.

   3. Market today: 89%. (Check out Lily’s Biden-Trump debate roundup!)

4. Will a SMIC 5-nm chip make it into production in a Huawei device in 2024?

   1. Jordan set the market at 65%.

   2. Market at Q1: 27%

   3. Market today: 59%.

5. Will a Politburo Standing Committee or State Council member get purged in 2024?

   1. Jordan set the market at 25%.

   2. Market at Q1: 15%.

   3. Market today: 15%.

Thanks for sticking with us. Please consider a paid subscription.

If you’re feeling overwhelmed by election drama, check out our latest podcast on making clothes in China.

To explore clothing manufacturing in China and beyond, ChinaTalk interviewed Will Lasry. Will is a Montreal-based designer, manufacturing specialist, and founder of Glass Factory. Will flies around the world making documentaries on clothing factories and playing matchmaker between designers and producers. In particular, Will goes on these epic riffs on how jeans and t shirts are actually made that was some of the most compelling content we’ve made all year (“Making a luxury pair of jeans — I would not say it is rocket science — but it’s damn complicated.”). Check out his YouTube channel here.

We discuss: 

• How clothes are made, including the complicated processes behind distressed denim and other trends; 

• What makes a country an ideal destination for manufacturing clothing, and whether rising labor costs will drive the industry out of China entirely;

• Xinjiang cotton, environmental destruction, and other unethical practices hanging over the fashion industry;

• Why Gucci and other high-end designers are betting that “Made in India” will soon be even more chic than “Made in Italy.”

ChinaTalk is now making YouTube-exclusive scripted content!

We’ve just launched our first scripted video, which you can check out here. We’d love your feedback and any pointers to a professional thumbnail designer!

Alexa Pan—Shoegaze Song of the Week

Whichever situation springs to mind - Taiwan, heat waves, or the election - this isn’t it. The Twenties sing only of - and I offer you -  “a shining, giant, pointless diversion”. Formed in Beijing in 2013, The Twenties is a minor indie rock band with a teenage voice and composition wise beyond their years. Their catalog grows slowly: members work for a tea company and teach microeconomics by day, and have consequently only released two albums by night. Their style, too, is one of preserved adolescence (perhaps not uncommon in China, with awareness, reflection, rebellion, and even romance put off by Gaokao), fresh but not totally innocent. 

On “Alarming Situation”, vocalist Findy Zhao recounts briefly getting distracted by a stranger (yes, that’s it). Her voice is reminiscient of Liz Phair’s: laidback, confessional, playful with premature cynical detachment. Other songs hint at more serious themes (““Silence in China/Silence in America/Silence in the very best”), but are musically the contents of the same gumball machine: crisp and measured instrumentation, with just the right amount of noise, delicious guitar hooks, and synth twists, each with a distinctive color. If you have a sweet tooth for this kind of music (e.g. enjoy Pavement or Pixies), it may be worth checking out the rest of this album, Mindful Chaos. 

Barath Harithas—Anatomy of a Technology Blockade

Barath Harithas is a senior fellow in the Project on Trade and Technology at the Center for Strategic and International Studies in Washington, DC.

Introduction

On June 21, 2024, the U.S. Department of the Treasury issued a Notice of Proposed Rulemaking (NPRM) to implement President Biden’s Executive Order 14105 (Outbound Investment Order). The NPRM builds on the Advanced Notice of Proposed Rulemaking (ANPRM) released in August 2023. The Treasury Department is accepting public comments until August 4, 2024, and plans to release the finalized regulations later this year.

The rules seek to address what the U.S. government sees as a loophole in the trade and investment restriction tool kit. While U.S. companies have been barred from selling sensitive technologies directly to China under Department of Commerce export controls, U.S. investors have been free to continue investing in Chinese firms developing the same technologies. U.S. capital may thus be inadvertently fueling Beijing’s indigenization drive.

The proposed rules aim to restrict outbound U.S. investments into Chinese companies developing the troika of “force-multiplier” technologies: (1) semiconductors and microelectronics, (2) artificial intelligence (AI), and (3) quantum information technologies.

Broadly, the outbound investment screening mechanism (OISM) is an effort scoped to target transactions that enhance the military, intelligence, surveillance, or cyber-enabled capabilities of China. U.S. investments will be either: (1) prohibited or (2) notifiable, based on whether they pose an acute national security risk or may contribute to a national security threat to the United States, respectively.

However, the criteria defining what constitutes an “acute” or “national security risk” are somewhat elastic. In certain instances, it is targeted, prohibiting investments in AI systems or quantum technologies explicitly designed for military, intelligence, cyber, or mass-surveillance end uses, which are commensurate with demonstrable national security concerns. However, the NPRM also introduces broad carveout clauses under each covered category, which effectively proscribe investments into entire classes of technology, including the development of quantum computers, AI models above certain technical parameters, and advanced packaging techniques (APT) for semiconductors. This suggests that the OISM's remit extends beyond immediate national security applications to include avenues that may allow Chinese technological leapfrogging.

Tripwires and Thresholds: A Deep Dive into Strategic Sectors

Semiconductors & Microelectronics

The NPRM largely aligns with current existing export controls, apart from the addition of APT, and prohibits U.S. investments to develop, produce, design, or fabricate

1. electronic design automation (EDA) software;

2. semiconductor manufacturing equipment;

3. extreme ultraviolet lithography (EUV) machines;

4. integrated circuits (logic/memory/DRAM) that meet or exceed performance parameters under existing export controls;

5. supercomputers exceeding 100 petaflops (64-bit) or 200 petaflops (32-bit) in compact form (41,600 cubic feet); and

6. APT.

The prohibition of APT under the OISM marks a shift in the U.S. approach to maintaining a competitive edge over China in the semiconductor industry. Instead of just focusing on individual chip performance gains through continuous node advancement—such as from 7 nanometers (nm) to 5 nm to 3 nm—it has started to recognize the importance of system-level performance gains afforded by APT. Current semiconductor export controls have largely fixated on obstructing China’s access and capacity to produce chips at the most advanced nodes—as seen by restrictions on high-performance chips, EDA tools, and EUV lithography machines—reflect this thinking. This was based on the long-standing assumption that the primary driver for improved chip performance will come from making transistors smaller and packing more of them onto a single chip.

However, with the slowing of Moore’s Law, which predicted the doubling of transistors every two years, and as transistor scaling (i.e., miniaturization) approaches fundamental physical limits, this approach may yield diminishing returns and may not be sufficient to maintain a significant lead over China in the long term.

APT helps overcome the constraints of traditional transistor scaling. They facilitate system-level performance gains through the heterogeneous integration of different chip functionalities (e.g., logic, memory, and analog) in a single, compact package, either side-by-side (2.5D integration) or stacked vertically (3D integration).

As a result of the increased proximity between components and greater density of connections within a given footprint, APT unlocks a series of cascading benefits. The reduced distance between components means that electrical signals have to travel a shorter distance (i.e., shorter interconnects), while the higher functional density enables increased bandwidth communication between chips due to the greater number of parallel communication channels available per unit area. Together, these enable  faster data transfer rates as there are now more data “highway lanes,” which are also shorter. The advantages extend beyond just speed. Shorter interconnects are less susceptible to signal degradation, reducing latency and increasing overall reliability. Crucially, ATPs improve power efficiency since there is less resistance and capacitance to overcome.

These features are increasingly important in the context of training large frontier AI models. Current large language models (LLMs) have more than 1 trillion parameters, requiring multiple computing operations across tens of thousands of high-performance chips inside a data center. According to unverified but commonly cited leaks, the training of ChatGPT-4 required roughly 25,000 Nvidia A100 GPUs for 90–100 days. Efficient training of large models demands high-bandwidth communication, low latency, and rapid data transfer between chips for both forward passes (propagating activations) and backward passes (gradient descent). These are precisely the issues that APT overcomes or mitigates. The increased power efficiency afforded by APT is also particularly important in the context of the mounting energy costs for training and running LLMs.

Importantly, APT could potentially allow China to technologically leapfrog the United States in AI. By focusing on APT innovation and data-center architecture improvements to increase parallelization and throughput, Chinese companies could compensate for the lower individual performance of older chips and produce powerful aggregate training runs comparable to U.S. AI labs.

In addition to the prohibitions above, the OISM also requires notifications for

1. design of any integrated circuit not prohibited;

2. fabrication of any integrated circuit not prohibited; and

3. packaging of any integrated circuit not prohibited.

The U.S. government is seeking greater visibility on a range of semiconductor-related investments, albeit retroactively within 30 days, as part of its information-gathering exercise.

AI Systems

AI systems are the most open-ended section of the NPRM. It both narrowly targets problematic end uses while containing broad clauses that could sweep in multiple advanced Chinese consumer AI models. It prohibits the development of AI systems that are designed for restricted end uses or that exceed certain technical parameters, including

1. military, government intelligence, or mass surveillance end uses

2. systems trained using computing power greater than 10^24, 10^25, or 10^26 FLOP (floating-point operations); and

3. systems trained using 10^23 or 10^24 FLOP using primarily biological sequence data.

The OISM also proposes notifications for AI systems that are:

1. trained using computing power greater than 10^23 or 10^24 or 10^25 FLOP.

For the uninitiated, FLOP measures the amount of computational power (i.e., compute) required to train an AI system. It is used as a proxy for the capabilities of AI systems as advancements in AI from 2012 have closely correlated with increased compute.

As a reference marker, an AI model that is 10^23, 10^24 or 10^25 FLOP roughly corresponds to the size of ChatGPT-3, 3.5, and 4, respectively. The Treasury Department is still deciding among the compute alternatives and will likely set the relevant amount of compute under notifiable transactions below the amount of compute for the corresponding prohibited transactions (i.e., if 10^24 FLOP is selected for prohibited investments, notifiable investments will be set at 10^23 FLOP).

In terms of the Chinese landscape, according to Epoch AI, as of April 2024, there were no known Chinese AI models above 10^25 FLOP, 5 Chinese AI models above 10^24 FLOP (Qwen-72B by Alibaba, XVERSE-65B by XVERSE Technology, Chat GLM 3 by Zhipu Ai, Tigerbot-70B by Tigerobo, and ERNIE 3.0 TITAN by Baidu), and 14 Chinese AI models above 10^23 FLOP (Qwen-7B by Alibaba, Qwen-14B by Alibaba, Yuan 1.0 by Inspur, GLM-130B by Tsinghua University, xTrimoPGLM-100B by Tsinghua University, Blue LM-13B by vivo AI lab, Naibeige-16B by Nanbeige LLM Lab, Skywork-13B by Kunlun Inc, Baichuan2-13B by Baichuan, CodeFuse-13B by Ant Group, DeepSeek Coder 33B by DeepSeek, DeepSeek LLM 67B by Deepseek, PanGu-Σ by Huawei Noah's Ark Lab, and Yi-34B by 01.AI).

The reason the United States has included general-purpose frontier AI models under the “prohibited” category is likely because they can be “fine-tuned” at low cost to carry out malicious or subversive activities, such as creating autonomous weapons or unknown malware variants. Fine-tuning refers to the process of taking a pretrained AI model, which has already learned generalizable patterns and representations from a larger dataset, and further training it on a smaller, more specific dataset to adapt the model for a particular task. Similarly, the use of biological sequence data could enable the production of biological weapons or provide actionable instructions for how to do so.

The use of compute benchmarks, however, especially in the context of national security risks, is somewhat arbitrary. Unlike nuclear weapons, for example, AI does not have a comparable “enrichment” metric that marks a transition to weaponization. In addition, the compute used to train a model does not necessarily reflect its potential for malicious use. Smaller, specialized models trained on high-quality data can outperform larger, general-purpose models on specific tasks. For example, the landmark experiment that has become the poster child for how AI can manufacture novel pathogens used a model built on a public database in 2020 that would fall well under the 10^23 threshold. Furthermore, different types of AI-enabled threats have different computational requirements. AI-enabled cyberattacks, for example, might be effectively conducted with just modestly capable models.

Moreover, compute benchmarks that define the state of the art are a moving needle. In 2020, there were only 11 models which exceeded 10^23 FLOP. As of 2024, this has grown to 81 models. And as advances in hardware drive down costs and algorithmic progress increases compute efficiency, smaller models will increasingly access what are now considered dangerous capabilities.

Lastly, there are potential workarounds for determined adversarial agents. They can “chain” together multiple smaller models, each trained below the compute threshold, to create a system with capabilities comparable to a large frontier model or simply “fine-tune” an existing and freely available advanced open-source model from GitHub.

Quantum Information Technology

Unlike semiconductors, microelectronics, and AI systems, there are no notifiable transactions for quantum information technology. The NPRM prohibits wholesale U.S. investments to develop or produce

1. quantum sensing platforms;

2. quantum networks or quantum communication systems; and

3. quantum computers or critical components required to produce a quantum computer.

The first two categories contain end use provisions targeting military, intelligence, or mass surveillance applications, with the latter specifically targeting the use of quantum technologies for encryption breaking and quantum key distribution.

These prohibitions aim at obvious and direct national security concerns. Unlike other quantum technology subcategories, the potential defense applications of quantum sensors are relatively clear and achievable in the near to mid-term. According to a report by the Institute for Defense Analyses, within the next five years, China could leverage quantum sensors to enhance its counter-stealth, counter-submarine, image detection, and position, navigation, and timing capabilities. Quantum computing also threatens to break current encryption standards, posing warranted cybersecurity risks.

The NPRM also prohibits U.S. investments to develop or produce quantum computers and their components in China entirely. The rules estimate that, while significant technical challenges remain given the early state of the technology, there is a window of opportunity to restrict Chinese access to critical developments in the field. This contrasts with semiconductor export controls, which were implemented after significant technological diffusion had already occurred and China had developed native industry strengths. By acting preemptively, the United States is aiming to maintain a technological advantage in quantum from the outset.

The “Radar Effect”: The OISM’s Information-Gathering Potential

The notifications required under the OISM will call for companies to provide detailed information about their investments in China, providing a dynamic, high-resolution snapshot of the Chinese investment landscape. This data will be fed back to the U.S. government, providing visibility on aggregate and sectoral trends and enabling a bidirectional feedback loop to fine-tune or strengthen export controls and investment screening based on gaps or deficits. In addition, by triangulating various notifications, this system could identify “stealth” technological developments in China that may have slipped under the radar and serve as a tripwire for potentially problematic Chinese transactions into the United States under the Committee on Foreign Investment in the United States (CFIUS), which screens inbound investments for national security risks.

The OISM goes beyond existing rules in several ways. It not only fills a policy gap but sets up a data flywheel that could introduce complementary effects with adjacent tools, such as export controls and inbound investment screening.

Looking Ahead

The effectiveness of the proposed OISM hinges on a number of assumptions: (1) that the withdrawal of U.S. capital will be damaging to the Chinese technological landscape, and (2) that U.S. technology scaling know-how and tacit knowledge, which have to date been bundled together with capital, are nonreplicable.

Data from the Rhodium Group shows that U.S. venture capital in China has already fallen off from the peak of $14.4 billion in 2018 to $1.3 billion in 2022. More work also needs to be done to estimate the level of expected backfilling from Chinese domestic and non-U.S. foreign investors. Moreover, while the United States has historically held a significant advantage in scaling technology companies globally, Chinese companies have made significant strides over the past decade. China may well have enough industry veterans and accumulated know-how to coach and mentor the next wave of Chinese champions.

The United States will also need to secure allied buy-in. Encouragingly, the United States has already started to socialize outbound investment screening at the G7 and is also exploring the inclusion of an “excepted states” clause similar to the one under CFIUS.

Kyle Chan is an American postdoctoral researcher in the Sociology Department at Princeton University and the author of the excellent High Capacity substack. Kyle’s guest post unpacks the industrial policy implications of China’s Third Plenum resolution. The Third Plenum is a high-level meeting of the CCP Central Committee, during which the Party’s decision-makers announce their vision for the national economy.

Between an assassination attempt and a last-minute candidate swap, betting markets are having a field day with US political uncertainty. Chinese politics, by contrast, appears quite stable. The latest Third Plenum resolution — a crystalized overview of China’s all-out effort to dominate the industries of the future — represents a doubling-down in the Sino-American industrial policy showdown.

From economic complements to competitors

The US and China used to be economic complements—or so the story goes. China did low-wage manufacturing while the US focused on higher-value services. American companies would come up with products, make them in Chinese factories, and then sell them around the world. “Designed in California, assembled in China” originally seemed like a win-win relationship.

Now, the US and China increasingly see each other as direct economic competitors, fighting for slices of the same pie. This is partly because China has moved up the value chain, challenging the US, Europe, and Japan in high-tech industries from electric vehicles to machine tools.

High Capacity

How China is moving up Apple's supply chain

(This builds on an earlier piece: How China uses foreign firms to turbocharge its industry…

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4 months ago · 32 likes · 2 comments · Kyle Chan

But this is also partly because the US has decided—or realized, depending on how you see it—that letting China take over manufacturing is no longer acceptable. Production of furniture, toys, and clothing will never come back. But for industries like semiconductors and solar cells, the US has started to put up a fight.

Both the US and China are reaching deep into their economic toolkits to outcompete each other. They are dusting off old tools, like tariffs and large-scale government funding programs, as well as coming up with new ones, such as China’s government guidance funds and the China Chips Guardrails. They are using diplomatic and foreign policy measures to shape global supply chains in their favor, with the line between economic policy and national security now more blurred than ever.

The Third Plenum: dominate the industries of the future

The industries of the future addressed by the Third Plenum resolution include information technology, AI, aviation and aerospace, new energy, new materials, biomedicine, and quantum technology. “Made in China 2025” was just the beginning.

I suggest treating the Third Plenum resolution (along with most CCP documents) like a burger and looking for the meat in the middle. There, you’ll find the section on “high-quality development” (高质量发展) and “new productive forces” (新质生产力). These two concepts, taken together, are part of a broader shift in China’s development strategy from catch-up economic growth to pushing out the technological and industrial frontier. (Arthur Kroeber has a great analysis of “new quality productive forces.”)

“High-quality development” focuses on the “hard economy.” This includes building up advanced manufacturing, industrial upgrading, and shoring up supply chains. It also includes infrastructure from railways to the new “low-altitude economy” of drone delivery systems. Digital technology is featured prominently but almost always in the context of enhancing or supporting the so-called “real economy” (实体经济). This lines up with China’s lukewarm attitude towards generative AI, which the resolution only mentions briefly in the context of cyberspace governance (as Kevin Xu has pointed out).

“New productive forces” focuses on science and technology. China doesn’t just want steady improvement but also “revolutionary breakthroughs in technology” (技术革命性突破). These breakthroughs are supposed to give rise to new industries that will become new drivers of economic growth going forward.

[Jordan: this line of thinking has Soviet origins! See Brezhnev and his bet on the scientific-technical revolution as the deus-ex-machina that he hoped would save him from having to do deeper structural reforms to the economy. Excerpt below from Yakov Feygin’s excellent new book Building a Ruin.]

To achieve this, China wants to build up its “comprehensive innovation system” (全面创新体制机制), providing stronger incentives and more flexibility to individual researchers and research organizations. At the pinnacle of this system are China’s top research institutions and universities as well as its “leading high-tech enterprises” (科技领军企业) — think Huawei, CATL, and BYD. The cultivation of human talent (人才), both homegrown and foreign, is also a key pillar in this strategy, which fosters not just top researchers in science and engineering but also a “first-rate industrial technical workforce” (一流产业技术工人队伍) to build and operate the high-tech factories of the future.

A Warped Hall of Mirrors

As I read the Third Plenum resolution, I couldn’t help but tick off the commonalities with Jake Sullivan’s speech on US industrial policy: strategic industries, supply chain resilience, innovation, long-term investments, infrastructure, clean energy. Analyzing American and Chinese economic policy these days feels like looking down a hall of warped mirrors. China and the US have clearly drawn policy inspiration from each other.

China wants to replicate the venture capital ecosystem of Silicon Valley. Efforts to loosen up research institutions and give individual researchers a greater share of the fruits of their innovations are clearly inspired by the American academia-to-commercialization pipeline.

The US, for its part, has become much more open to large-scale state intervention in critical sectors of the economy, like the Inflation Reduction Act and the CHIPS Act. US efforts to leverage access to its large market to compel foreign firms to invest domestically is a classic Chinese tactic (as I’ve written about). American policymakers have a renewed interest in the “hard economy,” often drawing comparisons with Chinese manufacturing and infrastructure.

The Persistence Gap

One major difference between American and Chinese industrial policy is what I call the persistence gap. The Third Plenum resolution lays out the next phase of an industrial strategy that China has been pursuing for years — if not decades. China’s persistence in areas like electric vehicles, lithium batteries, and even aircraft manufacturing seems to be paying off.

The US, on the other hand, faces the risk of sharp pivots in its industrial policy. The sizable progress made in bringing in foreign investment and building up American manufacturing through the IRA and CHIPS Act could be in jeopardy if a new administration decides to abandon these programs. This policy uncertainty and instability creates a “policy discount factor” that undercuts the crowding-in effect of industrial policy when it comes to attracting long-term private investment.

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The Elephant in the Room

China and the US are the elephants in each other’s policy rooms. Parts of US industrial policy is a response to China’s industrial policy and economic statecraft in areas like legacy semiconductors and critical minerals. China’s industrial policy in turn is driven partly by a desire to reduce its economic vulnerability to the US and its network of allies and partners, such as US-led export controls on GPUs and lithography equipment. Both countries are trying to de-risk from each other.

While the US has been vocal about China, China’s focus on the US has been quieter but arguably deeper. Xi Jinping’s explanation of the Third Plenum resolution uses stronger language than the resolution itself. Xi cites “intensifying international competition” (日趋激烈的国际竞争) and states that “external efforts to suppress and contain China are continuously escalating” (来自外部的打压遏制不断升级). Later, Xi is harsh in his assessment of China’s lack of progress in countering these threats, stating that “the ability of others to control key and core technologies has not fundamentally changed” (关键核心技术受制于人状况没有根本改变). The US is the silent backdrop to so many of China’s policy efforts.

As this economic contest heats up, it’s worth appreciating the irony of how China and the US keep defying each other’s ideological beliefs and expectations. Washington is annoyed that an authoritarian single-party system like China can innovate and produce global industrial leaders. Beijing is annoyed that a messy democracy like the US keeps churning out world-changing technology and industrial policy to boot.

Third Plenum full resolution (Chinese / English)

Xi Jinping’s explanation (Chinese / English)

Can Shakespeare help explain the dynamics we're seeing around Biden today?

To discuss, ChinaTalk interviewed a superstar cast to bring Shakespeare’s writing to life. Eliot Cohen is an SAIS professor, military historian, and counselor to Secretary of State Condoleezza Rice. He is also the author of The Hollow Crown: Shakespeare on How Leaders Rise, Rule, and Fall. Drew Lichtenberg is a longtime dramaturge for DC’s Shakespeare Theatre Company. Kate Pitt is a freelance dramaturge and author of the excellent Shakespeare News substack.

Finally, Phil Schneider, my little brother, helped us act out some scenes. He recently graduated from Yale where he starred in a production of Hamlet. He’s played Romeo, Hamlet, Richard II, and Leontes. He’s also still looking for an agent + advice about showbusiness — please reach out at jordan@chinatalk.media to connect!

We discuss:

• What Shakespeare’s play Richard II can tell us about the best of bad outcomes for Biden;

• How to cast Democratic leaders like Jill Biden, Bill Clinton, Nancy Pelosi, and Barack Obama within the Shakespeare canon;

• Historical case studies of presidents who have declined to run for an additional term;

• Strategies for dying peacefully.

Have a listen via the links below! This is one better suited to audio if you listen to podcasts

The Hollow Crown

Eliot Cohen: It's a tragedy.

This is not one of those fun Shakespearean stories where everybody gets married and there's a happy ending. It's a story of a very distinguished old man who is showing the infirmities of age. 

Of course, Shakespeare's great play on that subject is King Lear. There's a wonderful moment in the first scene of the first act. Lear’s two daughters Goneril and Regan, are delighting in the King’s decision to expel their sister Cordelia from the kingdom – even though Cordelia is the daughter who loves King Lear most deeply. 

Goneril:

You see how full of changes his age is; the
observation we have made of it hath not been
little: he always loved our sister most; and
with what poor judgment he hath now cast her off
appears too grossly.

Reagan:

‘Tis the infirmity of his age: yet he hath ever
but slenderly known himself.

Goneril:

The best and soundest of his time hath been but
rash; then must we look to receive from his age,
not alone the imperfections of long-engraffed
condition, but therewithal the unruly waywardness
that infirm and choleric years bring with them.

Eliot Cohen: The sisters — who are terrible people, by the way — see that their father’s erratic behavior is actually rooted in who he was to begin with. There's an insight here with Biden. It’s not that we're seeing a very different Joe Biden who is refusing to acknowledge reality — as people age, they just become intense versions of themselves. As Shakespeare put it — they become choleric, they get angry a little bit more easily.

The question is — does Joe Biden only but slenderly know himself? That is to say, Joe Biden has been in the public eye for over half a century. Do people who spend their lives that way actually know themselves?

In many plays, people figure out who they really are and how they really fit into the world, but by then it’s usually too late. Unfortunately, that may happen here too.

Drew Lichtenberg: What’s interesting about this passage is that this is early in the play, after Lear has dissolved his kingdom. The rest of the play, the next four and a half acts, are kind of a wild ride in which we follow this aging King’s journey towards a very hard won self-knowledge.

The question for America is, what are we in store for over the next four months? Will there be a similarly arduous path to self-knowledge, or will there be a moment of clarity and wisdom? Will there be a happy ending to this story?

Eliot Cohen: I'm not sure there can be a happy ending. I mean, there can be really bad endings, which in this case would be if Biden stuck it out and got thoroughly destroyed by Trump and faced resentment and recrimination from people who have had a great deal of affection for him.

The less bad ending is that he walks off the stage, but he doesn’t get to walk off of his own volition — which is the way that any of us would want to go out. He won’t get to end things on his own terms the way Prospero ends things at Tempest. But this can happen with more or less dignity.

Jordan Schneider: I think I'm going to close with the one last time Washington song. And there are sort of glorious examples in American history of people not running for a second term. But because talking about self-knowledge – he was so unaware that he was willing to put himself in such a humiliating position on the debate stage. He had not priced in the possibility of his age being a problem at all. 

That makes me think you’re right, Eliot – Biden has closed himself off from the most heroic and honorable way out of this situation, because if he ends up leaving at this point, history is not going to forget the pushing that had to happen in order for it to happen.

Drew Lichtenberg: One thing that makes this agonizing is the fact that he prefaced his run in 2020 by calling himself a transitional candidate and by saying that he was going to step aside and make room for the next generation of Democratic leadership. 

Yet, here we are four years later and that has not happened. There's an untold drama that has unfolded within Joe Biden himself, where clearly either he was lying four years ago or he had a change of heart. 

Being in power is so appealing that it makes one want to stay in power – this is also a classic Shakespearean trope. How many tragedies are there from Richard III to Macbeth or Claudius reaching for the throne? And then you get a string of crimes or a string of mistakes that are all in pursuit of power. 

That’s another way of reading this kind of drama of Joe Biden – the corrupting nature of the throne itself. The hollow crown, maybe. You reach for this thing, and then you find it to be something that is not only hollow, but also hollows you out as a human being.

Kate Pitt: That also speaks to the question of what someone in power does in retirement. Lear says he’s going to crawl unburdened toward death. But what he really imagines doing once he gives up power is retaining all of his knights and other privileges of power without any of the responsibilities.

If one is persuaded to give up power, the question of what happens next is an important one. Most of Shakespeare’s kings die pretty soon after that happens.

Eliot Cohen: I remember a conversation I had with a very senior government official, where I was asking why someone even more senior was still clinging to office. He said, “Well, remember, for these guys, the next big job is death.”

The truth is, Lear says that he’s crawling his way to death. Prospero also says, at the end, every third thought will be of the grave. These guys know that they're coming to the end, but theyre not approaching it with the kind of tranquility that Cicero recommended in his wonderful little book for appreciating old age.

It’s different for people who've been powerful. There are examples of people who have managed it, but in some ways, the hunger never goes away. That's something I've seen quite a bit in Washington. People never fell out of love with power, even after they’d lost it. 

When Fritz Mondale famously lost the 1984 presidential election in a landslide, he went to visit Senator George McGovern, since McGovern had been similarly defeated in the 1972 election. Mondale asked, “Do you often think about that presidential campaign?” and McGovern apparently looked at him and just said, “Only every day.”

Drew Lichtenberg: You know, it was LBJ withdrawing his candidacy that led to McGovern getting the nomination, and just as you said, that resulted in a historic blowout. The other example was Truman not running, which led to Eisenhower handily defeating the Democrat who ran in Truman’s place. In the history of the Democratic Party, at least, when the incumbent doesn't run and there's a contested primary or convention, it does not auger well for the upcoming election. 

There's also a tragic nature to the decision Biden is faced with, because who knows what kind of chaos or severely damaging loss would happen if he abdicated. 

It's easy to see how you can succumb to a narrative of success, which, again, is a very Shakespearean theme – “I have to keep on doing this because too much will fail if I get out of power.”

Kate Pitt: That makes me think of a play that Drew's worked on quite recently of Macbeth, where he talks about being steeped in blood so far, and it's just easier to keep going rather than go back. At what point do you just keep going? And it also bears on that point of sort of what happens after power. There's a quote when Macbeth is thinking about the old age that he's not going to have, where he says: 

I have lived long enough: my way of life
Is fall'n into the sear, the yellow leaf;
And that which should accompany old age,
As honour, love, obedience, troops of friends,
I must not look to have; but, in their stead,
Curses, not loud but deep, mouth-honour, breath,
Which the poor heart would fain deny, and dare not.

Eliot Cohen: Ouch. 

Drew Lichtenberg: A speech by a lifelong politician looking at his encroaching obsolescence.

Eliot Cohen: Some politicians leave and are okay, but if you look at, say, LBJ, who made a decision not to run for another term — he declined very, very quickly and died shortly thereafter. If you've read Robert Caro’s biography of him, which is just magnificent, you can understand why. This was a guy whose whole life was spent obsessed with political power. He had it, and he chose to walk away from it, but it left him shattered.

Jordan Schneider: We have more examples in American history of very old, sick people running for that extra term, than we have examples of people walking away. With that, let’s talk about Richard II.

Kate Pitt: This is a very short passage, but it’s when Richard II has been deposed, he’s in prison, and he’s thinking about all of the choices that he made in his life and how his timing was a little bit off. He hears music being played offstage, and he says:

How sour sweet music is
When time is broke and no proportion kept.
So is it in the music of men’s lives.
And here have I the daintiness of ear
To check time broke in a disordered string;
But for the concord of my state and time
Had not an ear to hear my true time broke.
I wasted time, and now doth time waste me;

Drew Lichtenberg: What you hear in that cape is the sound of profligacy. Right. Richard II is not historically considered a strong king, and Shakespeare shows him as someone who is holding on to power. He’s sort of the opposite of King Lear – King Lear abdicates power and then expects to act like a king. Richard II doesn't act in ways befitting a king, but he holds onto power, which creates a huge political dilemma for everyone else in the kingdom, especially for Henry IV, who is charged with deposing him. 

We're in a situation now where the question is – who is going to step forth and be Henry IV? Who can marshal all the forces of the state to depose someone who is acting in ways that seemingly are unfit? 

With Biden, it’s a relative thing – is he unfit to be president? Is he unfit to be running? That’s ambiguous and we don’t have a lot of inside knowledge, which is itself a very unsettling state of affairs to be in. There are questions over his fitness, but that’s so much of the intrigue. 

Eliot Cohen: Richard really believes that he is backed by all these angels and he cannot be deposed. 

King Richard: 

Not all the water in the rough rude sea
Can wash the balm off from an anointed king.
The breath of worldly men cannot depose
The deputy elected by the Lord.
For every man that Bolingbroke hath pressed
To lift shrewd steel against our golden crown,
God for His Richard hath in heavenly pay
A glorious angel. Then, if angels fight,
Weak men must fall, for heaven still guards the right.

Eliot Cohen: I mean, the feeble word that we use these days is entitlement. But there's something much deeper than that. Biden probably doesn’t think that angels are protecting him, but I think he thinks that the legitimacy of his position is so strong, so overwhelming, that nobody can possibly question it. 

Like Richard II, Biden’s sense of reality, I would argue, is pretty severely impaired. For example, he’s said that the polls indicate he and Trump are neck-and-neck. The polls aren’t saying that. But he’s convinced himself that that’s the case. 

But above all, the sense that he has this coming to him makes it even more tragic when the end comes.

Richard suddenly cracks when he realizes that the angels are not going to show up. That’s why part of me thinks that this crisis might end up getting resolved pretty suddenly. We may, in fact, be right in the middle of that at this moment.

Drew Lichtenberg: Here’s a historical fun fact about Richard II – there’s a scene in the play in which Richard is deposed by Henry Bolingbroke and the other lords of the realm. The play was published four times in quarto form during Shakespeare’s life, but that scene was considered so controversial that it was omitted from all four editions.

It’s only after Shakespeare’s death that we get the full deposition scene. That’s how controversial it was, specifically, to show all the lords of England deposing an anointed king. 

As Eliot mentioned, that may be a scene that is playing out right now, offstage, behind closed doors somewhere in the Capitol. It's a scene that will never be published, but we can imagine what it's like, and you can just go read Richard II if you want to get a sense of it.

Kate Pitt: Historically, that scene took place in Westminster Hall, which is still the entrance to the Houses of Parliament in England.

One of the last things Richard did as king was renovate that hall and put his badges and his actual angels carrying his coat of arms in the ceiling. Then the first thing they did in that space was depose him in it. When he’s being deposed, he can look up because his angels are there, but they’re not watching the scene he wants them to be watching.

King Richard:

Alack, why am I sent for to a king
Before I have shook off the regal thoughts
Wherewith I reigned? I hardly yet have learned
To insinuate, flatter, bow, and bend my knee.
Give sorrow leave awhile to tutor me
To this submission. Yet I well remember
The favors of these men. Were they not mine?
Did they not sometime cry “All hail” to me?
So Judas did to Christ, but He in twelve
Found truth in all but one; I, in twelve thousand, none.
God save the King! Will no man say “amen”?
Am I both priest and clerk? Well, then, amen.
God save the King, although I be not he,
And yet amen, if heaven do think him me.
To do what service am I sent for hither?

The Duke of York:

To do that office of thine own goodwill
Which tired majesty did make thee offer:
The resignation of thy state and crown
To Henry Bolingbroke.

King Richard:

Give me the crown.—Here, cousin, seize the crown.
Here, cousin.
On this side my hand, on that side thine.
Now is this golden crown like a deep well
That owes two buckets, filling one another,
The emptier ever dancing in the air,
The other down, unseen, and full of water.
That bucket down and full of tears am I,
Drinking my griefs, whilst you mount up on high.

Henry Bolingbroke:

I thought you had been willing to resign.

King Richard:

My crown I am, but still my griefs are mine.
You may my glories and my state depose
But not my griefs; still am I king of those.

Henry Bolingbroke:

Part of your cares you give me with your crown.

King Richard:

Your cares set up do not pluck my cares down.
My care is loss of care, by old care done;
Your care is gain of care, by new care won.
The cares I give I have, though given away.
They ’tend the crown, yet still with me they stay.

Henry Bolingbroke:

Are you contented to resign the crown?

King Richard:

Ay, no; no, ay; for I must nothing be.
Therefore no “no,” for I resign to thee.
Now, mark me how I will undo myself.
I give this heavy weight from off my head
And this unwieldy scepter from my hand,
The pride of kingly sway from out my heart.
With mine own tears I wash away my balm,
With mine own hands I give away my crown,
With mine own tongue deny my sacred state,
With mine own breath release all duteous oaths.
All pomp and majesty I do forswear.
My manors, rents, revenues I forgo;
My acts, decrees, and statutes I deny.
God pardon all oaths that are broke to me.
God keep all vows unbroke are made to thee.
Make me, that nothing have, with nothing grieved,
And thou with all pleased that hast all achieved.
Long mayst thou live in Richard’s seat to sit,
And soon lie Richard in an earthy pit.
God save King Henry, unkinged Richard says,
And send him many years of sunshine days.
What more remains?

Drew Lichtenberg: You hear a cluster of classic Shakespearean themes in this speech. The repetition of the word “nothing,” as in, “If I’m not king then I am nothing,” echoes a conversation between Cordelia and King Lear in the first scene. 

To paraphrase that exchange, Lear asks his daughter, “How much do you love me? What do you owe to me?” and she says, “Nothing. I don't owe you any of my love. I choose to love.” 

This is a theme Shakespeare comes back to again and again: What does power mean to a politician versus what does love mean to a human being? What is earthly status in comparison to the human connections that really make life worth living? 

Part of the tragedy of Richard’s character is that he's unable to imagine a useful life outside of being king. As soon as he gives the crown to Henry, he might as well be dead. He might as well be nothing.

Eliot Cohen: This absolutely applies to a lot of powerful people that I've known. They no longer know who they are outside of office. Now, in Biden’s case, family matters a lot to him, although his family has rocked by tragedy on numerous occasions. 

But it's not like these guys tend to have hobbies, they don't have other avocations. Their avocation is power. 

I can easily imagine a conversation inside the Democratic National Committe by one of Biden's advocates that sounds a lot like this speech by the Bishop of Carlisle, who is arguing that Richard should not be deposed: 

The Bishop of Carlisle:

And if you crown him, let me prophesy
The blood of English shall manure the ground
And future ages groan for this foul act,
Peace shall go sleep with Turks and infidels,
And in this seat of peace tumultuous wars
Shall kin with kin and kind with kind confound.
Disorder, horror, fear, and mutiny
Shall here inhabit, and this land be called
The field of Golgotha and dead men’s skulls.
O, if you raise this house against this house,
It will the woefullest division prove
That ever fell upon this cursèd earth!
Prevent it, resist it, let it not be so,
Lest child, child’s children, cry against you woe!

Eliot Cohen: You can imagine Ron Klain saying that, though maybe his words wouldn’t be quite as punchy. But he makes an important point – if we get rid of the legitimate king, we could end up tearing ourselves to pieces.

Even apart from Trump winning – when a legitimate leader gets overthrown in a putsch, people fear total implosion. 

The conservative party didn't go through anything quite as grim when Thatcher was deposed by the men in gray suits. But party implosion is not unprecedented, and people are probably right to be worried about it. 

However this ends, there will be a huge amount of recriminations within the Democratic Party.

Drew Lichtenberg: There's also a kind of Last Supper theme being woven throughout this speech – the field of Golgotha is where Jesus was crucified. Richard later compares them all to Judas.

But the imagery of civil war is so remarkable. Shakespeare was in the middle of writing a series of plays that culminated in bloody civil wars, so his audience hearing this play would have seen this speech as a kind of prophecy. 

I don't want to be hyperbolic, but I'm a little bit afraid of violence in the streets. I remember what it was like on January 6, 2021, and in the months leading up to that day. There were helicopters and army vehicles in the streets of Washington DC. There was tear gas being used against citizen protesters.

Hearing the speech awakens all of those feelings that I’m sure were present in the minds of Shakespeare's audience when they thought about Richard being deposed. It’s a terrible thing to contemplate.

Eliot Cohen:  Legitimacy is a very powerful thing. In a system of monarchy by descent, if you break the rules of succession then you pay a price for it. 

In our democratic system with elections and primaries – there's no question that Biden is the legitimate nominee. It’s just that it would be an utter disaster for the Democratic Party — not to mention the rest of us — if he went through with it. I don’t know any analyst who expects an outcome other than a decisive victory for Donald Trump. 

Kate Pitt: Examining this scene makes it clear that it’s really important to choose our language carefully when people step off the stage. This is known as the deposition scene, but it’s supposed to be a resignation scene. 

Richard knows exactly what he's there to do, and yet he essentially asks York, “Why am I here?” York answers, “The resignation of thy state and crown to Henry Bolingbroke,” and the next thing Richard says is, “Here, cousin, seize the crown.” 

He makes it very clear that he thinks of it as a seizing, not a resignation. He's not stepping off the stage. He wants everyone to know he's being pushed.

Eliot Cohen: That’s a wonderful point. I was just thinking about Nancy Pelosi’s remarks on television where she said, “Well, the president really needs to make a decision.” Because the president already decided that he's running! What Pelosi is really doing is saying, “No, we’d like you to make a different decision.”

But she is softening the blow as much as she possibly can by calling it a decision. As you put it, she’s saying “This is a resignation, it’s not a deposition.”

But Joe Biden will unquestionably see this as a deposition, and there will be long-term consequences within the Democratic Party. 

Drew Lichtenberg: One of the fascinating structural things about the play Richard II, is the way that Shakespeare controls sympathy for these two kings. 

Richard has spent the first half of the play acting totally unsympathetic. He’s raiding the taxes of the people in order to fight these terrible overseas wars. He’s surrounded by corrupt cronies who use their positions to enrich themselves. But as soon as he's deposed, he starts acting and sounding a lot like a king. All of a sudden, everyone starts saying, “Hold on, this is wrong. This is a terrible thing we are doing.” Eventually, he is murdered in the Tower of London in the final act. 

Similarly, King Lear begins the play acting unsympathetically. He’s angry, he’s irrational, and he goes to Goneril’s house with all of his knights and trashes the place.

But then he’s cast out onto the heath, and we realize this is an aging man who is losing his mental faculties. There’s something about the stripping away of kingliness and the revelation of the human being underneath that fascinated Shakespeare. 

If Biden is deposed or resigns or the crown is seized by these Democratic Party figures, I wonder if people will start to sympathize with him. Will the public see  Joe Biden as a frail human being who is being victimized? 

That will also be part of the tragedy of this story – the sympathy he garners in stepping down will then be held against his successor.

Eliot Cohen: One aspect of Shakespeare that I love is he never lets the audience off the hook. Whether it’s Lear or Richard, at the beginning of the play you feel, “Yeah this guy really has it coming to him.” But by the end of the play, you do have this sympathy and you think to yourself, maybe I was too harsh. But at the same time, you don’t feel good about this. You feel a little guilty for being sympathizing and being entertained by this monster. 

If this does happen, and Biden is either deposed or resigned – I will not be surprised in the slightest if he goes into a very sudden decline and possibly even passes.  Apparently his father passed away pretty shortly after he stopped working. I can imagine this may be why Jill Biden is not particularly keen to see him quit. 

But after this kind of blow, it would not be surprising if there were a very rapid decline.

King Richard:

For God’s sake let us sit upon the ground
And tell sad stories of the death of kings:  
How some have been depos’d, some slain in war,  
Some haunted by the ghosts they have deposed,  
Some poisoned by their wives, some sleeping kill’d,  
All murthered—for within the hollow crown
That rounds the mortal temples of a king  
Keeps Death his court, and there the antic sits,  
Scoffing his state and grinning at his pomp,  
Allowing him a breath, a little scene,  
To monarchize, be fear’d, and kill with looks;
Infusing him with self and vain conceit  
As if this flesh which walls about our life
Were brass impregnable; and, humour’d thus
Comes at the last, and with a little pin
Bores thorough his castle wall, and farewell king!

Drew Lichtenberg:  It is not just Richard's vision of his own death and obsolescence, but also his realization of the hollowness of the pursuit of power – the emptiness of the human being after power is taken away from them.

It’s this moment in the play where Richard II is almost cosmic in his consciousness. He’s completely transcended the mortal planet. He just sees the whole cycle of power and deposition and death as a kind of eternal play within a play. 

Kate Pitt: Richard became king when he was a boy. He has only known kingship as joy and frolicking with his courtiers. But when he takes off the crown that had been sitting on his head for years, he realizes that death has been inside him the whole time. 

After he’s been deposed, he holds up a mirror and sort of looks at himself without his crown. He looks exactly the same, but he's confused by that. Even though he's no longer anointed, his face remains the same – and that's so heartbreakingly baffling to him. 

When the brains are out, the man should die and there the end. Things should be what they look like, and yet they're not. Power changes people.

Drew Lichtenberg: One of Biden’s refrains is, “When I get knocked down, I get back up. I keep fighting.” But if there's no more fighting to participate in, then what is the reason for getting back up? He's almost defined his very existence in terms of the political cycle.

Kate Pitt: Exactly. Who's going to be the fool who says, “See better?”

Eliot Cohen: Richard gives a speech in act five, scene five. He’s in prison and he knows he’s going to be killed. And he says, “I have been studying how I may compare / This prison where I live unto the world,”

 I mean, he's kind of going crazy. But then he says: 

Thus play I in one person many people,
And none contented. Sometimes am I king
Then treasons make me wish myself a beggar,
And so I am; then crushing penury
Persuades me I was better when a king.
Then am I kinged again, and by and by
Think that I am unkinged by Bolingbroke,
And straight am nothing. But whate’er I be,
Nor I nor any man that but man is
With nothing shall be pleased till he be eased
With being nothing. 

There will be a cauldron of emotions if this happens to Biden. There will be a sense of humiliation, which is very painful to think about for a very proud guy who has surmounted so much. 

But the only thing I would say is, and I think Shakespeare is aware of this as well – you don't let somebody be king out of sympathy.

Drew Lichtenberg: There's no shame in stepping down. Joe Biden, you've had a wonderful career. You've had a remarkable career. Your legacy is secure, that you don't need to do more. You've done a lot. You've exceeded anybody's wildest expectations for what your political career could be. 

Richard II is a self-pitying, vain, pompous character – very good at turning a phrase –  but he's an irresponsible guy. Joe Biden, you don't want to be compared to Richard II. 

This play is a portrait by Shakespeare of somebody who is born into power and privilege and is unable to fathom their life without that power and privilege. This is the problem with kings, and we have a democratic system so that we can elect the best candidate to be president. We don't need to be replaying these Shakespearean dramas, and yet, here we are. Is it just human nature? Isn't there something so wise and penetrating about these plays that they still remain true in their observation of character so many years later?

Jordan Schneider: We've talked about the staffers who want to keep the king in charge, scared of civil war. Let's talk about some staffers who are a little more excited to put the knife in. 

Kate Pitt: This speech is from Richard II as he's being deposed. He's talking to Northumberland, who is one of the lords deposing him, and warning him of what may come in the future. 

King Richard:

Northumberland, thou ladder wherewithal
The mounting Bolingbroke ascends my throne,
The time shall not be many hours of age
More than it is ere foul sin, gathering head,
Shall break into corruption. Thou shalt think,
Though he divide the realm and give thee half,
It is too little, helping him to all.
He shall think that thou, which knowest the way
To plant unrightful kings, wilt know again,
Being ne’er so little urged another way,
To pluck him headlong from the usurped throne.
The love of wicked men converts to fear,
That fear to hate, and hate turns one or both
To worthy danger and deservèd death.

Eliot Cohen: Beautiful. Boy, is that ever going to be true. 

The easiest choice will be Kamala Harris, who will be more or less a more legitimate heir than if there’s just a free-for-all to select the nominee.

It's one dimension of Shakespeare that maybe we don't talk about enough – he does have all these sort of secondary actors out there who are the manipulating and conniving, never get into the top position, but play a somewhat nefarious role – say, the tribunes and Coriolanus. There's a whole slew of aristocrats in Henry VI, all of whom are really problematic one way or another, and they're pursuing their own agendas, as happens in politics.

Drew Lichtenberg: Maybe the ultimate example of that is Falstaff in Henry IV – he thinks that his friendship with Prince Hal means that he's got it made as soon as he becomes king. 

Falstaff is a lot like Roger Clinton, Bill Clinton's younger brother. 

Or maybe he's like a Hunter Biden figure – somebody with a disreputable past but thinks they are protected because of their personal relationship with the Prince. 

Prince Hal has an extraordinary speech at the end of Henry IV, part two, where he does the un-Biden-ish thing of divesting himself of these relationships.

Prince Hal: 
I know you all, and will awhile uphold
The unyoked humor of your idleness.
Yet herein will I imitate the sun,
Who doth permit the base contagious clouds
To smother up his beauty from the world,
That, when he please again to be himself,
Being wanted, he may be more wondered at
By breaking through the foul and ugly mists
Of vapors that did seem to strangle him.
If all the year were playing holidays,
To sport would be as tedious as to work,
But when they seldom come, they wished-for come
And nothing pleaseth but rare accidents.
So when this loose behavior I throw off
And pay the debt I never promisèd,
By how much better than my word I am,
By so much shall I falsify men’s hopes;
And, like bright metal on a sullen ground,
My reformation, glitt’ring o’er my fault,
Shall show more goodly and attract more eyes
Than that which hath no foil to set it off.
I’ll so offend to make offense a skill,
Redeeming time when men think least I will.

Drew Lichtenberg: Right. So Richard II says, I've wasted time and time will waste me. Here we get the opposite – “I will redeem time by doing the ruthless thing that all politicians should do, which is break their word, go back on their promises to their friends, and do the right thing for the state.”

Eliot writes about this in his book – Shakespeare shows us good politicians like Malcolm and Macbeth, like Fortinbras in Hamlet, like Octavian and Antony and Cleopatra. They tend to be men without a lot of friends. They tend to be cold, machiavellian, ruthless, and even deceptive when they need to be. That’s because you need to make a lot of promises in order to become a leader, and then decide on the right course of action later. 

This is Shakespeare writing about a good politician who is not beholden to sentiment or to personal relationships when they are in a position of power.

Eliot Cohen: Of course, Joe Biden is in that way very different. Although he can be difficult to work for – he reportedly throws tantrums and yells at people and so on – but he's also tremendously loyal to the people around him. He does not fire people, by and large.  He has kept a number of people close to him, including Hunter, which is a big mistake.

You're right, Hal is utterly ruthless. The most chilling line is for me is the moment when Falstaff shows up looking for a job. Henry just looks at him and says, I know thee not, old man.

It's just ice-cold. Biden is a hot politician. He's not a cold politician. He's someone who thrives on human contact and chumming around with people. That’s part of the tragedy. 

The people who succeed in climbing their way to the top are those like Bolingbroke or Henry. By contrast, people who are tied up with a lot of meaningful human relationships, alas, often don’t do so well.

Jill and Lady Macbeth?

Drew Lichtenberg: Macbeth is a play about two brilliant people who are married to one another, who together do something more monstrous than either one of them individually is capable of. Macbeth is a killing machine, but he has compunction about killing. Lady Macbeth is not herself a great warrior, but she has a desire for power and she can see the present in the instant as soon as she gets letters from him. 

You have to wonder, is there something Macbeth-like going on between Joe and Jill Biden? Both of them are, by most accounts really good, decent people who individually are more than capable and often do do the right thing, but are in this kind of dynamic where the two of them together are making a tremendous mistake. 

Eliot Cohen: It's clear that Jill and Joe Biden are deeply in love and a great match. Jill Biden is not nearly as sinister as Lady Macbeth, but her overwhelming loyalty to her husband has to mean making him succeed in worldly terms. That dynamic is completely different than the kind of marriage that I've had for 47 years. The best thing about my wife is that she isn’t afraid to say, “You're really being an idiot. You need to stop that.” 

That was closer to the dynamic between Winston Churchill and Clementine Churchill – one of the things that made her such a formidable spouse was her ability to look her husband squarely in the eye and rebuke him in order to steer him away from things. 

Whereas Lady Macbeth is enabling her husband. She's not reinforcing his best instincts, she’s reinforcing his worst ones. 

Alas, I think that's part of what's going on here too. By all accounts, Jill isn’t the one saying, “You know what? Maybe it is time to hang it up.”

Ian McKellen and Judy Dench did this scene!!

Macbeth:

How now, what news?

Lady Macbeth:

He has almost supped. Why have you left the
chamber?

Macbeth:

Hath he asked for me?

Lady Macbeth:

Know you not he has?

Macbeth:

We will proceed no further in this business.
He hath honored me of late, and I have bought
Golden opinions from all sorts of people,
Which would be worn now in their newest gloss,
Not cast aside so soon.

Lady Macbeth:

Was the hope drunk
Wherein you dressed yourself? Hath it slept since?
And wakes it now, to look so green and pale
At what it did so freely? From this time
Such I account thy love. Art thou afeard
To be the same in thine own act and valor
As thou art in desire? Wouldst thou have that
Which thou esteem’st the ornament of life
And live a coward in thine own esteem,
Letting “I dare not” wait upon “I would,”
Like the poor cat i’ th’ adage?

Macbeth:

Prithee, peace.
I dare do all that may become a man.
Who dares ⌜do⌝ more is none.

Lady Macbeth:

What beast was ’t, then,
That made you break this enterprise to me?
When you durst do it, then you were a man;
And to be more than what you were, you would
Be so much more the man. Nor time nor place
Did then adhere, and yet you would make both.
They have made themselves, and that their fitness
now
Does unmake you. I have given suck, and know
How tender ’tis to love the babe that milks me.
I would, while it was smiling in my face,
Have plucked my nipple from his boneless gums
And dashed the brains out, had I so sworn as you
Have done to this.

Macbeth:

If we should fail—

Lady Macbeth:

We fail?
But screw your courage to the sticking place
And we’ll not fail. 

Eliot Cohen: Can I just warn the three of you about something? So, about a year ago, I wrote an article in the Atlantic entitled, “Step Aside, Joe Biden.” I got a tremendous outpouring of hate in response. Really, it was stunning.

So I just… we're all on the record here, kind of comparing Jill Biden to Lady Macbeth. I don’t know if there's a podcast participant protection program out there, Jordan, but if there is, I'd appreciate it if you let us know about it.

Jordan Schneider: Eliot, no one listens to the show anyway. Don’t worry about it. 

Drew Lichtenberg: I should also say that there's a long-standing criticism of associating Lady Macbeth with political figures like Hillary Clinton, for example. It is almost a cliche at this point, and it's considered a misogynistic cliche. 

But my understanding of the play is, again, it’s about two really charismatic, brilliant, likable people who together do something terrible. There is no Lady Macbeth without Macbeth, and vice versa — they’re equally culpable. But yes, I’m comparing her to Lady Macbeth in a specific context. I’m not saying she is the dragon lady or the iron will behind the throne or whatever. These various ideas that have clustered around Lady Macbeth don’t really apply to the character if you read the play closely.

Eliot Cohen: Of course, you’re absolutely right. But I think the positive side, I mean, this is clearly an exceptionally close marriage. They’ve been through tremendous sorrows and hardships together, and it’s a deep love match. That makes it more tragic, frankly, if she really is playing an important role in persuading him not to step down.

Drew Lichtenberg:  The last lines of that speech – we will not fail – communicate this incredibly seductive idea that, “You and me together can do anything.” 

But that notion that having a partner who stands by you makes you capable of anything is just not true. It's what couples tell themselves as a way of avoiding reality, and that's borne out in many, many unhappy marriages. 

Romeo and Juliet have a plan. Antony and Cleopatra have a plan. Claudius and Gertrude have a plan. But it almost never works out for these couples. 

Kate Pitt: Macbeth really goes off the rails when he starts parting from her. 

She says, “What's to be done?” and he replies with the unbelievably condescending, “Be innocent of the knowledge, dearest chuck.” Which always makes me want to sock him. He’s saying, “Don't worry your pretty little head about it. I have plans. They're terrible plans.”

In contrast, the Bidens seem very united. 

Drew Lichtenberg: Well, anyone who saw our production of Macbeth, with Indira Varma playing Lady Macbeth, would agree that she's far from being a gothic dragon lady in popular received opinion. She's a vivacious socialite host, chatty, and personable. She has all of these different and complex colors. 

There is an intimate complexity to their relationship. But they’re essentially entering a mutual delusion pact with one another.

Eliot Cohen: I think the role of delusion is quite important, including Macbeth’s self-induced delusions about his invulnerability, right down to the very end when Birnam Wood comes to Dunsinane

Drew Lichtenberg: Reality will arrive sooner or later. The question is, what is the reality that is coming for Joe Biden? Will he accept that reality? That remains to be seen.

Eliot Cohen: I have this sneaking sympathy for Henry IV, who most people just think was kind of a curmudgeonly character. He is somebody thoroughly grounded in reality. He has a great line, “If these be necessities, let us meet them like necessities.” 

That seems to me to be one of the great political gifts. If you have that, the ability to say, “Okay, this is what it is and I've got to act accordingly. I may not have a whole lot of choice. That is why they are called necessities, after all. But I'm going to confront it head-on.”

That seems to me to be the most tragic part of this, that there are necessities, there are realities, and you have somebody who's had a magnificent career struggling to dodge them.

Drew Lichtenberg: He dies in the Jerusalem room, called as such because Henry IV dreamed of leading a crusade to Jerusalem. But that room is as close as he got to Jerusalem. 

Henry IV is not considered a great king historically, but he was able to accept that at the end of the day. His philosophy is – well, it's a mixed bag being alive. You can't do everything the right way. Maybe that's because he forcefully deposed a king. He knows what it means to seize power. He knows what power can do to somebody. 

There’s a lesson to be learned from Henry IV. He was not the exemplar. He’s not even the main character in the plays that are named after him – and yet he is such a deeply admirable figure because he accepts his own limitations as a king and as a person.

Eliot Cohen: You know, his great blind spot is he doesn't understand that his son Hal will be just as good of a king, if not better. This is also a very common phenomenon where CEOs, deans, provosts, and politicians alike think, “Only I can do it, I'm completely indispensable. My designated successor is just not up to the job.” 

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That is Henry’s great weak point. He can’t see that the next generation coming to power may be just as competent or actually more competent than he was. He thinks he’s got a troubled kingdom and it needs a strong hand, but his heir is not the one who’s going to be able to manage it.

Drew Lichtenberg: There are also a few artistic directors who have remained artistic directors at theaters into their 70s and 80s. There are a lot of stories that have been written about the fact that there was a whole generation of artistic directors who didn't think that they didn't cultivate any successors. That's also true if you look at most of the New York, Broadway, and off-Broadway theaters. This gerontocracy is not just a story of politics, but it's the story of many industries, including the arts.

Casting Obama and Pelosi

Jordan Schneider: Who’s Obama in this arc? Is he Cassius? Brutus?

Drew Lichtenberg: Well, Obama is very much, in my mind, a Fortinbras, or Malcolm, or an Octavian. He is the cold politician. Even though he has an extraordinary ability to communicate rhetorically, he also showed capacity to make ruthless decisions, including by choosing to elevate Hillary Clinton over Biden in 2016. 

He's sort of like the kingmaker in Henry VI – an older, experienced hand who’s behind the scenes pulling the strings in the Democratic Party in sort of the same way Bill Clinton used to. Though that's more Elliot’s field than mine.

Eliot Cohen: The Democratic politician who I think is actually pulling the strings is Nancy Pelosi. She’s an incredibly talented politician. If you read John Boehner’s memoir, he has enormous respect for her political skills and her absolute ruthlessness. I think she's the one who's moving things along, literally as we speak.

But I agree, Obama is a cold politician in the kind of Octavian line. Octavian also was very young.

Jordan Schneider: Who is Nancy Pelosi then? 

Drew Lichtenberg: Maybe she’s Volumnia in Coriolanus – a behind-the-scenes machiavellian.

Drew Lichtenberg: Volumnia, for those who don't know Coriolanus well, is kind of like the ultimate political stage mother. She's groomed her son from childhood to be a great warrior and then to be the tribune, which is basically the president of the Roman Republic. 

In the end, she has to betray her son and she is his undoing. She both builds up this great Macho figure, she makes his political career, and then kills him after he turns against Rome. So she's extremely formidable character and one of the few mothers in the entire Shakespeare canon and just a kind of unforgettable. She's the person that people think of as being Lady Macbeth. She is the real lady Macbeth in the Shakespeare canon.

Kate Pitt: Here’s the speech where Volumnia is convincing her son not to attack Rome:

Volumnia:

Say my request’s unjust
And spurn me back; but if it be not so,
Thou art not honest, and the gods will plague thee
That thou restrain’st from me the duty which
To a mother’s part belongs.—He turns away.—
Down, ladies! Let us shame him with our knees.
To his surname Coriolanus ’longs more pride
Than pity to our prayers. Down! An end.
They kneel.
This is the last. So, we will home to Rome
And die among our neighbors.—Nay, behold ’s.
This boy that cannot tell what he would have,
But kneels and holds up hands for fellowship,
Does reason our petition with more strength
Than thou hast to deny ’t.—Come, let us go.
They rise.
This fellow had a Volscian to his mother,
His wife is in Corioles, and his child
Like him by chance.—Yet give us our dispatch.
I am hushed until our city be afire,
And then I’ll speak a little.

Drew Lichtenberg: Then in response, her son says, “You have undone me, Mother.”

What Volumnia is doing is depriving Coriolanus, her own son, of his Roman-ness. She’s saying, “You’re not a citizen of Rome. You belong to this other city. Your wife is not a Roman, your children are not Romans, and I am not your mother. Your mother is not a Roman.”

If Nancy Pelosi is the Volumnia of our story today, it's a similar excommunication that’s happening to Joe Biden right now.

“You are nothing of Washington DC. You call yourself a creature of Capitol Hill, but you are the enemy, and we are going to strip you of all of these titles and even of your name if you don’t do what we say.”

Eliot Cohen: Pelosi isn’t yet at that point –  it’s more, “Well, we could do this the easy way or we could do it the hard way,” and she's hoping that he'll pick the easy way. But she does have the tenacity that would be required to see this through. 

I’m sure all the Democrats who know Biden have a great deal of human affection for him. But as I said at the very beginning of this, Jordan, this is a tragedy. 

News of the assassination attempt has gone viral on the Chinese internet. Who is responsible? What does this mean for the election? Could America possibly get any weirder?

Let’s dive in.

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We’ve extended the deadline to this Sunday evening and are thankful an anonymous donor upped the prize pool to $2,000. This is a live issue in DC — your ideas have the potential to make a real impact in improving US policymaking in this area in the very near term. Submit here by Sunday evening! Beyond money, the best submission will get interviewed on ChinaTalk about their idea and receive a write-up from Noah!

Historical Parallels: Shinzo Abe, Ronald Reagan, and Chen Shui-bian

The commentariat was quick to compare and contrast the Pennsylvania rally with other attempted (and successful) assassinations.

Jokes about Japanese Prime Minister Shinzo Abe were particularly popular.

11,000 likes from Xinjiang 新疆:

Breaking news: Trump and Abe’s bilateral meeting originally scheduled for today has been postponed

From Tianjin 天津:

Smarter than Abe, Trump squatted down immediately. [doge] This civil war is fierce!

When the gun went off, Abe actually turned around to check. Trump, the King of Understanding, reacted very quickly ~

The more relevant historical comparison is the attempted assassination of Taiwan’s fifth president, Chen Shui-bian 陳水扁. In 2004, Chen was running for a second term as the DPP incumbent. He was shot the day before the polls opened, and then went on to win the election by an extremely narrow margin. (He was later imprisoned for corruption.)

A thread about Chen has wracked up nearly 60 million views on Zhihu 知乎, China’s Quora. Here’s the top answer:

What is important is not the truth of the matter, but that the image of Trump as an “American hero” will be widely spread, forming a sharp contrast with Biden’s senility.

Compare this to the “March 19 shooting incident.” On March 19, 2004, Chen Shui-bian was shot in the abdomen by a gunman while participating in a campaign event for the so-called Taiwan “election.” Subsequently, the election situation — which had originally favored the Kuomintang’s Lien Chan 連戰 and James Soong 宋楚瑜 — suddenly changed, and ended with Chen Shui-bian and Annette Lu 呂秀蓮 being elected. This incident had the effect of urging the green camp to vote. Although it did not change the votes of many blue-camp supporters, many people who were originally unwilling to vote came out to vote for the pan-green camp.

…

The Democratic Party will suffer a big storm. No matter who the gunman is or what his background is, the Republican Party will create momentum to describe the gunman as an extreme white left supporter of the Democratic Party in order to attack white left political correctness.

…

It is estimated that the truth will most likely disappear. But in fact, the truth is no longer important, because the Overton window of the United States is likely to undergo a huge shift because of this shooting. The American people who have long been oppressed by the political correctness of the white left will also stand up and unite under the banner of Trump.

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The final historical case study is the 1981 shooting of Ronald Reagan. According to a political commentary account with a transliterated Russian username,

One bullet changed the world. … The last time something like this happened was the attempted assassination of Ronald Reagan. In the 1984 election, the whole United States was red. Trump is likely to win the election by a wide margin. #TheGunmanWhoShotTrumpIsARepublican

A commenter from Beijing replies,

The only downside is that this happened so early — there are still several months left…

Good Fortune Is Certain After Surviving a Great Disaster 大难不死，必有后福

Some of China’s academics are unconvinced that Trump’s post-shooting photoshoot will be enough to secure victory in October. Zhang Chunman 张春满, associate professor at Fudan University’s School of Marxism, explains in the Shanghai Observer:

It is undeniable that Trump’s calm and firm performance in times of crisis shows his psychological ability to cope with danger. This image of a strong man should give him some points, but this effect will wear off as time goes on.…

Trump’s campaign runs into challenges nonstop, and he will encounter judicial entanglements throughout this election year. He currently has no better way to solve those problems. Although both parties said they wanted to “cool down” after the attack, that’s easier said than done. The two sides have already forged a deep hatred and have reached a life-and-death situation 你死我活的状态.

This incident may have a demonstration effect 示范效应, leading to more political violence, and this year’s election may be even more dangerous. In addition, if the US economy improves and meets everyone’s expectations for Biden, it will be damaging to Trump’s campaign. … There are a lot of contingencies and variables in swing states. … After all, it is only July now.

Due to too many uncertainties, the direction of the US election is constantly changing. After Biden’s debate failure, the election was called “a sure loss.” After the failed attempt to assassinate Trump, the election is now deemed “a sure win,” but what is influencing the election in reality?

The main feature of this year’s election is black swans — unexpected and sudden events are emerging in an endless stream — with an increasing tilt toward political violence.…

But what is certain is that Biden, who was previously troubled by the debate and calls to withdraw from the election, has come out of the shadows. When asked by the CNN host whether he would continue to run for the election, Biden responded humorously, “Unless I get hit by a train, yes.” Moreover, Biden has agreed to fight Trump again on TV in September, and ambitiously stated, “I don’t plan to perform like before.” Questions about age are even less of a problem, and he did not forget to use Trump as a scapegoat — “I am old, but I am actually only three years older than Trump.”

Wishful thinking? Perhaps.

Given this election uncertainty, Chinese academics have opted to analyze how political violence in America will impact China. Wang Yong 王勇, professor of IR at Peking University, is particularly concerned about rally-’round-the-flag dynamics:

Currently, political violence and polarization in the United States interact with each other in a vicious cycle, highlighting a major crisis in national governance. Political violence reflects the people’s despair in democratic politics. They believe that legislation or elections cannot resolve their demands, and that they can only resort to violence.…

As the election competition becomes increasingly fierce, the current political polarization in the United States has become more worrying for the outside world.…

The powerful groups and their political agents in the United States are not interested in real social-reform programs and redistribution of wealth. Instead, the American political establishment will transfer domestic social conflicts to the outside world … as a strategy to oppose fundamental social changes.

Victory for Comrade Trump

Chinese social media overwhelmingly presumed that the shooting would be good for Trump’s campaign.

13,000 likes from Shanghai:

Trump-boy right now: The sound of victory just whizzed past my ear! 😂

2,000 likes from Shandong 山东:

Judging from Trump-boy’s tough expression after being shot in the ear (surrounded by the Secret Service, holding his head high with arms raised to shout, bloodied face, and the flag in the background), we know that he will definitely win. How can The Biden 登子 compare with this image? 🤪

The nickname used for Trump here is Chuānbǎo 川宝. I’ve translated this nickname as “Trump-boy,” but it’s not quite that straightforward. Chuān is a phonetic transliteration of Trump, while bǎo 宝 comes from the word bǎobèi 宝贝, which means precious baby.

So in addition to being pejorative, this nickname seems to imply that Trump’s childish behavior is a valuable asset to China.

7,000 likes from Shandong:

Trump to the shooter: You little bastard~ I might be an old man, but I’ll still win this election easily [doge emoji x3]

7,000 likes from Tianjin:

Trump is now a shoo-in to win the presidency

The verb meaning “win the election” used by both of these comments is bǎosòng 保送, which has the literal meaning of being accepted into college without taking the entrance exam. In this context, it implies there’s no point in even holding the election because Trump’s victory is already assured by the circumstances.

The commentariat also had some more cynical takes on Trump’s photoshoot. Here’s a comment translated by Weibo Doom Scroll:

As someone who regularly participates in reality TV shows, Trump knows how to rile up the audience. I don’t think his heroic pose at the end was a result of his fundamental personality. Rather, he very rationally knew that this was the best way to maximize his win — after all, he’s a businessman. Even if that win is accompanied by huge risk, he’d take it.

Conspiracy Theories and the Official State Response

China’s ultranationalists, including Professor Jin Canrong 金灿荣 of Renmin University, were quick to speculate that the attack was planned by the “deep state.” As translated by Alexander Boyd of China Digital Times:

Some hypothesize that this was the deep state issuing a warning to Trump, in hopes that he would take a more centrist approach. In fact, we can see that many of Trump’s positions are softer than they were in 2016. He is adjusting. Of course, this is just a guess.

The replies to Biden’s Sunday night speech included comments like these:

The first mention of unity 🤨 🍉 is the first sign of collapse

“Don’t make assumptions about the gunman’s motives and affiliations” … Isn’t this just self-incrimination?

The last election was won by cheating, this time they are directly preparing for assassination 🤣

By contrast, when the central government news agency 央视 reported that Xi Jinping had expressed his condolences, the heavily moderated comment section was dominated by permutations of just one message:

If you enjoyed this post, be sure to check out our other Trump roundups:

Where is Congress on AI? How will a second Trump term impact US innovation? Does Congress have what it takes to step up and legislate in a world without Chevron?

To discuss, ChinaTalk interviewed Senator Todd Young of Indiana (R). He’s a rare breed on Capitol Hill these days: an actual legislator. Sen. Young drafted the Chips and Science Act with Sen. Schumer and is the co-author of my personal favorite bill this Congress which aims to establish an Office of Global Competition Analysis. He announced earlier this year that he would not be endorsing Trump’s candidacy this cycle.

We get into…

• Biden’s woes

• The case for an office of tech net assessment

• The future of tech legislation post-Chevron

• The Senate’s AI Policy Roadmap and where the GOP is on AI regulation

• Chinese espionage and high-skill immigration policy

Listen on Spotify by clicking below:

Biden 2024

Jordan Schneider: We’re recording this on the morning of July 10th. Senator Bennett – with whom you co-authored an excellent bill pushing forward an Office of Global Competition Analysis – went on TV last night saying that he didn’t think Biden could win. Do you have any reflections on what’s happening on the other side of the aisle right now? 

Senator Todd Young: I tend to subscribe to the old adage that when your opponents are drowning, you generally don’t want to throw them a life ring. But it suffices to say, this is a sad situation. It really stems from the fact that the president seems to be declining in health, as we all do as we age. Unfortunately, too many people who are close to the president seem to have not been forthcoming — and that includes certain members of the media — about his health. In the near term, that gives me some concerns about our national security, but in the longer term, I think it’s fair for the American people to want more information so that they can make an assessment of his ability to lead going forward.

I do think that these questions are likely to continue, and this will be an ongoing narrative should he stay in the race, but, I don’t want to get into play and pundit. This is a sad situation and the American people deserve better.

AI on the Hill

Jordan Schneider: Let’s start by discussing the Office of Global Competition Analysis. I’d love to hear you reflect on how policymakers got up to speed on semiconductors and how they’re coming up the curve on AI.

What information inputs do legislators receive today around emerging technology and what structural changes do you think the country needs in order to improve that information flow?

Senator Todd Young: The way I gathered information on our semiconductor tech and production gap with other countries, was by talking to certain members of the national security community, who happened to be at some social gatherings I was attending. I heard our precarious situation referenced in a classified setting when we were having a briefing from some military, officials and administration leaders. But there was no systematic way for me to assess the precarity of our technological advancement and our, military, capacity to produce semiconductors and certainly no way for me to compare in a rigorous way, our ability to produce these semiconductors, how important they were, and how other countries were doing.

There was no office of net assessment for us to assess our strength versus the strength of certain adversaries. That’s what we need. That’s what the legislation that Senator Bennett and I have coauthored would provide.

Jordan Schneider: Let’s discuss the overruling of Chevron. In her dissenting opinion, Justice Kagan specifically pointed to AI as the sort of thing that would be really difficult to legislate in a post-Chevron world.

Why are legislators reluctant to give their staffers raises and hire more of them and bring back the OTA? What gives?

Senator Todd Young: Members of Congress believe that those expenditures are unnecessary. I don’t. There will be things that we champion and advance in this generation that in retrospect will be regarded as misguided.

It was misguided to eliminate the OTA as a modest expenditure. It helped members of Congress make smart decisions about technology. There are ways that in my own office, we’ve been able to augment our team. We brought on some scientists and technical experts to interface with the experts, but I think every member of Congress needs that kind of expertise at the ready. 

Let me step back from the question you’re getting at here, which is, with the Chevron doctrine, Sotomayor’s, I think, lamentation that, the government will be unable to adjust policymaking nimbly enough as we learn more things about emerging technologies like AI – I think that’s a fair concern, frankly.

I supported overturning the Chevron doctrine because I think government has grown too distended, too out of touch with the concerns and sometimes the values of the people I represent. But there is a risk here. Congress now needs to fill in the gaps, legislate, and watch for major changes in society that require quick adjustments.

How will we do this? I’ve thought about this. We need to embed, within our federal government, a lot more expertise than we currently have as it relates to AI innovations and AI capabilities. These individuals need to be in touch with members of Congress when there are gaps in our laws. Members of Congress, in turn, need to do their oversight duties, better than they have in the last number of decades. 

I’m on the Commerce Committee. Right now, I’m not as incentivized to get to know people within the executive branch at the Department of Commerce who have expertise in these different verticals. But we’re going to have to do that more, hold more oversight hearings, and work with the experts working in government agencies to figure out where the policymaking gaps are. 

No doubt about it, this is going to require members of Congress not just to lament the state of things and appear on television – but actually to legislate when required and, yeah, it’s our time to put up or shut up.

Jordan Schneider: We only let the adults in the room on ChinaTalk, and you’re one of them, but a lot of your colleagues aren’t. Do you have any structural solutions for changing the incentives to get folks actually focused and excited about legislating again?

Senator Todd Young: Yeah, I do. We need to increase the quality of technical experts in every agency of government. You do that by changing how much you can compensate people in government. In part, we propose more flexibility in government hiring so you can get those AI experts on board. That will also help with retention. 

Some agencies have long done this very well. For example, the Food and Drug Administration is broadly respected. There are some challenges that our pharma, bio, and food companies have with the FDA, but generally it’s a pretty well-respected agency. The Department of the Treasury is also able to attract and retain quite a bit of talent.

We need to do that with other agencies, but I’d say with respect to my colleagues, that’s really where the incentives come in. The number one incentive is the ability to shape these things and not have your handiwork overridden by the agencies.

Next, since Chevron has been overturned, it’s pretty clear that you can’t pass vague laws and leave it to the administrations to figure out the rest. You’re actually going to be incentivized through the law to fill in the messy details of legislation. That requires a lot of work. I know because my legislative efforts actually do fill in the details. To try and Get 60 votes in the United States Senate, which by definition is a bipartisan effort, is oftentimes very challenging and unglamorous. But we will be held accountable for failing to do so. Those incentives will kick in and we’ll respond to them as human beings do.

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Jordan Schneider: You pointed to this idea of civil service reform, which I am worried is going to very quickly become a partisan thing in a Trump administration – they’re already talking about their version of civil service reform. Any ideas about how to pick this up in a bipartisan way in 2025?

Senator Todd Young: This is a tough one. This is admittedly a very tough one. On one hand, you're right. Civil service reform, almost in any form it takes, I think most people would agree, it would become a partisan exercise. But to do nothing is also partisan, in a sense, right? The Democratic Party tilt to our civil service, or at least the Democratic Party tilt to large unions, including government unions, it’s pretty apparent to me. I think what we need to do is step back and say, all right, what does good policymaking dictate? Should we make some changes to how our civil service, operates? I think it’s entirely fair for us to open up this Pandora’s box and try to engage in some necessary and responsible policy changes.

I’m not on this particular committee. That may be a blessing because this would be quite the fight, but generally the decision to take a look at how we hire, fire, and hold accountable government employees, and what sort of responsibilities they should have is an essential function of our Board of Directors or Members of Congress.

Jordan Schneider: You pointed to two places that have a reputation for really good talent. The CHIPS Act program office is another, and part of the way they were able to do that is to basically have it written into the legislation that they didn’t have to follow the rules.

Senator Todd Young: Not to quibble, but they had to follow a different set of rules.

But you are right. Because if you look at the performance of the CHIPS program office, it’s starting to receive rave reviews, even from those who are highly skeptical of the broader CHIPS and science effort. But the performance suggests that maybe we should extend this kind of different framework to other areas of government. 

I think that’s an appropriate conclusion.

Jordan Schneider: Let’s stay on the CHIPS Act. Aside from ducking my interview requests, CPO gets full marks from me and everyone else who isn’t over-indexing on childcare requirements. 

I want to talk about the science part of the CHIPS and Science Act. You’ve spoken in the past about the idea of R&D funding as a national competitiveness imperative. That’s been resonating, but ultimately not enough to get the funding. 

Do you have any thoughts on the future of those appropriations? What’s changed over the past year or two that led to the underfunding of the NSF and similar organizations?

Senator Todd Young: The prioritization of funding for the science portion has mostly fallen on partisan political lines, with Democrats being supportive of more R&D funding and the science portion of the funding, and Republicans being more skeptical. 

I’ve been one of a handful of Republicans who have been vocally supportive of course, being a coauthor of the broader effort, but – this should not be a partisan effort. I authored the Endless Frontier Act, which is the science portion of CHIPS and Science, years before the Chips and Science Act passed with Chuck Schumer. That effort began during the Trump years and we were working with some high-placed individuals in the Trump State Department.

What we saw beginning in the Eisenhower years was a massive increase in federal research investment through our research universities and DOE labs. We were able to win the space race in the subsequent decades. We saw amazing growth in aerospace and many other sectors on account of that seed corn investment through our national research enterprise. But the trend lines began to change in the ‘90s and the 2000s.

Though the benefit-to-cost ratio of research investments is off the charts, we’ve seen we saw the percentage of research applications go down just because the resources to fund them were drying up. Those are lost economic opportunities, for our entire economy.

As our fiscal situation has deteriorated, there’s naturally been a desire to pull back from a number of investments, but I would remind a number of my fellow green eyeshade legislators out there that the real number we should be looking at as we think about our fiscal deterioration is the debt-to-GDP ratio.

It’s a fraction — debt/GDP. You can’t starve your economy of one of the components of your GDP, which is R&D investment, in order to deal with the debt.

Let’s grow the denominator while we try and control the numerator as well. That’s how I look at it. 

Going forward, will things change?

There’s a real opportunity to remind the Trump administration that they can take credit for this reinvigoration of the research enterprise. The genesis of this idea was in part a function of my interaction with the Trump administration. Let’s make America grow again, right?

Jordan Schneider: Yeah, I remember those heady days of a hundred-billion-dollar Endless Frontier.

Senator Todd Young: We had the Endless Frontier Act, and then you had US Innovation and Competition Act (USECA), and then we had CHIPS, and then we had CHIPS Plus, and then we had CHIPS and Science. We went through a lot of iterations. The marketing department worked overtime there.

Jordan Schneider: Speaking of spending lots of money, let’s talk about the AI policy roadmap, which advocates for spending tens of billions of dollars on AI innovation each year. Where did that price tag come from, and what will the government spend that money on? 

Senator Todd Young: I don’t think the government’s going to have to spend a lot of money, except for on some fundamental research. This is one of the categories of government spending that the likes of Milton Friedman and so many others embraced. Spending money on a public good is something that’s been broadly supported in my own party. We found bipartisan support for it through this AI roadmap development, including myself, Chuck Schumer, Mike Rounds, and Martin Heinrich.

Is that a lot of money? Yes, it’s a lot of money and we need to get more clarity for members on exactly what this money would be spent on. But where did this amount of tens of billions of dollars in government research on AI come from? It came from the National Security Commission on Artificial Intelligence. This was a group of experts, co-chairs were Eric Schmidt, formerly of Google, and Robert Work, long time Pentagon luminary and leader. They recommended that figure. 

We embraced it because we had heard from the best minds in the world – from Zuckerberg to Gates to our Pentagon officials and many others – that it made a lot of sense. 

But beyond that, I don’t think much money is going to have to be spent. We’re going to have to change how we spend some of our money on education and the workforce in this country and make sure that every American is literate in artificial intelligence and is ready for an AI-enabled world. 

The main challenge of preparing for this AI-enabled world is going to be one of adapting our existing laws – whether through statute or court-made law through precedent – which hopefully reflect our standards on privacy and consumer protection. Sometimes that will require legislative fixes, and that needs to be handled as it’s always handled through committees of jurisdiction. Occasionally, they can be adjusted even in this post-Chevron environment through regulatory action. 

But here again, this invites members of Congress to do their job, as this technology rapidly changes our society and our lives, mostly in a positive way.

The GOP Platform on Tech and Immigration

Jordan Schneider: You’ve been a strong supporter of NIST and the AI Safety Institute. I’d like to read you a line from the GOP party platform, if I may.

We will repeal Joe Biden’s dangerous Executive Order that hinders AI Innovation, and imposes Radical Leftwing ideas on the development of this technology.

That kind of seems like killing the AI safety institute. What’s the case you’d make to your fellow party members to convince them that the work NIST is doing is valuable and important for the country?

Senator Todd Young: I know some people are on the platform committee, and there are parts of this GOP platform that I think are really important. Our party came together on some provisions related to life and marriage, for example. 

But, I also know that sometimes these things are developed by 22-year-old interns, and they got the AI portfolio because they knew how to operate the latest version of ChatGPT. I am not reading too much into that. It was vague, it was populistic, and it was not of great concern to me.

What I’m more interested in is my interaction with certain, former and probably future Trump administration officials, who are really excited about the possibilities of artificial intelligence, but recognize that we need some responsible regulatory structure. They acknowledge that some of the things in the Biden executive order were quite wise and need to be put into law to be given some permanence. 

Other things are not perfect. It’s going to have to be revisited, which is natural in these early stages. Then in Congress, at least so far, the issue of artificial intelligence and lawmaking around it, has not grown particularly partisan. In fact, if you look at that document, two conservative Republicans and two liberal Democrats put that together and we were able to come together on a whole range of issues.

I think you’re going to see mostly continuity and evolution of policymaking between administrations, but naturally, there will probably be some changes as well.

Jordan Schneider: Trump proposed no tax on tips, and the next day we had bills in the House and the Senate to do that. He also went on a podcast and talked about stapling green cards to PhDs, but I haven’t seen any bills on that idea. What gives here? Where are we on high-skilled immigration?

Senator Todd Young: The more the merrier! That’s where I am. If we can train some of the world’s best talent and help endow them with amazing potential to add value to economies and improve lives – why wouldn’t we want to reap the fruit of our harvest? “You can stay here. You can stay here for a few years and, employ our people, innovate, spend a bunch of money, and lift our economy.”

I think we can do two things at once. We can control our border, we can rationalize our legal immigration system, and we can admit there are certain categories of workers where we need more. We need more rich people. We need more smart people. We need more people with amazing ideas and potential to improve our lives, and they’re graduates of our universities. I’m all in for that. 

Of course, we’ve got to secure the border, Most everyone now agrees with that. I think the Biden, administration only started agreeing a couple of months ago, when it began to hurt them politically, which is unfortunate,

Jordan Schneider: We’ve talked a lot about the “promote” side of the ledger – on the “protect” side of AI and semiconductors, we have compute, we have data, we have algorithms. 

Do you have strong opinions about where and how the US should be decoupling from China when it comes to artificial intelligence?

Senator Todd Young: I think we need to rebalance. Some of our colleges, I think Purdue University in my home state has done a very good job of rebalancing who we train to program these artificial intelligence models. That’s one thing we have to do with respect to the algorithm piece.

With respect to compute, again, we need to be thinking about workforce issues and if we can rebalance away from Chinese nationals – just to be direct about it – toward India and other large economy countries that want to send more students over here. We should be doing that – rewarding very good behavior. But we should invite foreign capital, foreign businesses in. 

If you think about the third leg of the stool, we have to unlock more data and continue to invest in research. To the extent we can produce synthetic data to train these models, that’s going to be a force multiplier. 

State capitalist economies – China and Russia and such – can take the health and genetic data of their entire populations without having any moral qualms or legal obstacles. That produces a lot of data. We’re really going to have to up our game in terms of making sure that we’re able to unlock more data and put it into formats that can be used to train these models.

This is where Congress definitely is going to have a role to make sure that there are secure and clear property rights around data, so developers will know what they can use and what they cannot use to train models.

Jordan Schneider: Interestingly, in that Trump interview I referenced, the interviewers were tiptoeing around by saying, “We need more high-skilled immigrants from India and Europe,” and Trump actually went off and said, “And China too.” 

But we also have this GOP platform that says Republicans “Will use existing federal law to keep Christian-hating communists, Marxists, and socialists out of America.”

Just to push back a little bit, Senator – I don’t want to liken this to, say, the Chinese Exclusion Act – but there is something tricky and very uncomfortable about you saying that one nationality is preferred over others when we’re talking about people who want to live and settle and bring their lives here, right?

Senator Todd Young: Yeah, and it’s uncomfortable for me to say it as well. There’s a thoughtful counter. The fact that it’s uncomfortable for you or me doesn't mean we shouldn’t talk about it. Otherwise, we get into sort of like safe spaces, and that would not lead to very good decision-making or lowercase-l liberal democratic dialogue. 

The challenge is that we’re dealing with dual-use technologies here. The artificial intelligence solutions that are used to help us choose an optimized grocery list are quite similar in how they operate to some of the AI technologies that help you make better decisions on a battlefield.

That’s the challenge. Are you training people who operate within a system that will allow the People’s Liberation Army to improve their capabilities over a period of time. I think that's the sort of hardnosed consideration we're supposed to have.

Now, there’s a competing view here, and it’s a bit in tension with what I've just laid out, and I’m still struggling, admittedly, to reconcile it – and that is, “Wait, what about the opportunity for brain drain out of China?”

But then the counterpoint will be made, thoughtfully, “Isn’t there leakage from that brain drain out of China, into the United States?” Leakage meaning espionage. You have to concede there’s a fair amount of espionage, very difficult to quantify. These are the moral dilemmas that were put in, not because I just decided to go there, but because this horrific regime in Beijing put us in these moral dilemmas.

If we have a limited number of resources to invest in education – we want to continue to invite foreign nationals for all kinds of reasons. In part because it subsidizes tuition for our own students, in part because they add value to the economy, they build better relations with the world and so forth. 

If you have two equally merited students, one from India and one from China, should you give a little favor to the country that is more cooperative with us? 

India may not always be the best example, right? Just this week, we saw Modi, palling around with, Putin – but at least they’re on-side as it relates to the broader competition between us and China. 

I wanted to elaborate because it’s very easy for those who aren’t thinking about the entire picture to just shy away from this conversation because – think of the border security challenge. The Biden administration, for the better part of three and a half years, refused to secure our southern border because they didn't want to be called racist. That’s my reading. That’s a good illustration of what failing to adapt to the times can lead to.

Jordan Schneider: There were a whole lot of foreign nationals who were working on the Manhattan Project, and part of the reason the West won World War II was because we got the better Germans. It’s not an impossible square to circle, and I agree with you that you can’t just refuse to talk about issues of espionage. 

Senator Todd Young: How many individuals was that? How many foreign nationals were on the Manhattan Project? Enough to monitor, right?

Jordan Schneider: The total number of people working on the project was like 130,000. But yes, the core group in Los Alamos is different than a broad innovation ecosystem.

But I guess the ultimate question is this: is the dominant strategy running faster, or ensuring that your secrets don’t leak no matter the cost? Ultimately there is some sort of trade-off there, right?

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Senator Todd Young: There’s absolutely a trade-off. We would all agree, and this is where we’ve ended up on policymaking so far, that there are certain types of research that are so sensitive on account of their national security implications that you have to really be scrutinized before you can participate. 

Through the CHIPS and Science Act, we were actually able to raise the standard, which I think was, broadly agreed to be an appropriate countermeasure to some of the leakage that’s occurred. But still, we’ve had far too much, and I think this will be an ongoing, debate, and candidly, though I landed on one side of the line, I’m open to counter-argument. 

But what I won’t do is embrace a particular position because it feels uncomfortable. Instead, what I’ll do is embrace a position based on what is in the national security interest and broader interest of my constituents.

Jordan Schneider: Senator Young, we end every episode with a song. Do you have one that captures the energy of your tech policymaking?

Senator Todd Young: Ha! Dirty Deeds Done Dirt Cheap – AC/DC. 

​

We’re excited to welcome Yiwen Lu onto the team as a staff writer on China and AI with her inaugural piece! She joins us after a year at The New York Times as a 2023-2024 Reporting Fellow.

Late last month, developers in China lost API access to OpenAI’s services, according to screenshots of emails circulating on social media. OpenAI said that it was part of the steps it was taking “to block API traffic from regions that are not on our supported countries and territories list,” which does not include mainland China, Hong Kong, Russia, Iran, and North Korea.

Through APIs, developers can integrate OpenAI’s machine learning models into their own applications. This change will mostly affect developers building ChatGPT wrappers, apps that are powered by ChatGPT, as well as local LLM developers who train their models with OpenAI outputs. It’s also a sign of the US extending the scope of export controls from hardware to software.

In this article, we will explore:

• Why OpenAI made this decision;

• How Microsoft Azure and Chinese AI providers are fighting to fill the void to OpenAI’s exit;

• How OpenAI’s API was available to Chinese developers in the first place, whether they were surprised at all by the change, and how they’re coping.

OpenAI’s worry: can China hack AI systems, too?

API access is one of the less-discussed vectors of export control. While OpenAI did not indicate why it chose to send the warning email, it is a possible sign of companies complying with incoming national security regulations.

Early last year, a hacker gained access to OpenAI’s internal forum and stole secrets about employees’ discussions of the company’s technology, according to The New York Times. The story broke on July 4, a date indicating a tactical news dump over a holiday weekend. OpenAI executives did not promptly share the incident publicly, nor did they inform law enforcement, because they believed that the hacker was a private individual with no ties to a foreign government.

Taking them at their word: if a random “lone wolf” hacker can get into OpenAI’s slack channels, it’s safe to assume that state adversaries probably can, too. Both Dario Amodei and Sam Altman understand that state adversaries will come for their firms’ secrets sooner rather than later:

• “Recently, we saw that some fairly high officials of the US government had their email accounts hacked via Microsoft,” Amodei said on the Dwarkesh podcast. “Presumably that relayed information that was of great interest to foreign adversaries. It seems to me at least that the evidence is more consistent with, when something is really high enough value, then someone acts and it’s stolen.”

• And Altman said on the Lex Fridman podcast in March 2024 that as capabilities ramped up, he expected “state actors [to try] to steal the model.”

Leopold Aschenbrenner, formerly on OpenAI’s superalignment team and the author of a 50,000-word essay on AI’s long-term future, sent a memo to OpenAI’s board after the security breach, accusing the company of not doing enough to prevent China from hacking it, the NYT article said.

Weeks after Leopold dropped his essay, OpenAI appointed former NSA chief Gen. Paul Nakasone to its board’s Safety and Security Committee, citing the need to protect proprietary data from cybersecurity threats. In February, OpenAI also terminated the accounts of five cyberattack actors affiliated with China, Iran, Russia, and North Korea. These state-affiliated groups used OpenAI services in malicious acts, such as building malware and creating phishing campaigns, OpenAI found.

It is possible that OpenAI decided to more explicitly withdraw from the Chinese market to signal its displeasure with Chinese hackers — just as Google was spurred to withdraw its search engine from China back in 2010 by a cyberattack from within China that compromised the accounts of several human-rights activists. OpenAI might also be concerned with Chinese actors using its API not just to build applications, but also to use outputs to level up domestic models:

• Some researchers raised concerns over a form of attack known as model extraction, where a bad actor tries to replicate a machine learning model by querying it using API and analyzing its outputs, with the eventual goal of developing a similar model. This process can actually be very cheap: DeepMind researcher Nicholas Carlini, for example, extracted “the entire projection matrix of OpenAI’s Ada and Babbage language models” for less than $20.

• Model inversion is another type of attack that involves using a model’s outputs to infer sensitive information about the model’s training data. Facial recognition tools are more vulnerable to those attacks: research has shown that attackers could produce a recognizable image of a person with only API access.

That said, there is little evidence that foreign adversaries have been hacking AI systems using these attacks — and as Kevin Xu points out in his explanation of model extraction, a lot of research on these kinds of attacks is supported by OpenAI and Google. So the companies are likely aware of the risks and have incorporated measures to preempt these attacks in the models.

API Access: A new frontier for export control

Regardless of why OpenAI warned developers of their unauthorized API uses, it may have just seen the writing on the wall as lawmakers tapped into a previously untouched sphere in AI export control: cloud.

For two years, Washington has been preventing China from accessing advanced semiconductors. Now, lawmakers are becoming increasingly uncomfortable with foreign adversaries having free access to the rapidly developing technologies themselves, delivered through cloud platforms. That gave rise to a sequence of events, including:

• Know-Your-Customer (KYC) Rules for cloud providers: the Commerce Department proposed in January that cloud service providers would be required to verify foreign users’ identities, so as to prevent malicious actors from using US cloud to train AI models. See more ChinaTalk coverage of that here.

• Reuters reported on May 8 that Commerce plans to impose export controls on closed-source AI models.

• The ENFORCE Act, proposed by a bipartisan group of lawmakers in early May, would allow the Biden administration to control the export of AI models which they worry has allowed China to advance its military capabilities. The Commerce Department will have the power to regulate Americans who work with foreigners to develop AI under this bill.

Did OpenAI ever really allow API access in the first place?

In February 2023, Nikkei Asia reported that Chinese regulators told tech companies, including Tencent and Ant Group, to not offer ChatGPT services to the public. This attempt, alongside state media calling ChatGPT misinformation on Weibo, is usually seen as the official sign that China is breaking up with OpenAI.

But in fact, OpenAI was the first to put up barriers.

OpenAI geo-blocked China from the beginning, as mainland China and Hong Kong were not among the supported countries upon ChatGPT’s release. But Chinese users have found ways to get around it, including using VPNs to set up accounts and, in turn, get API keys.

The ability to call an API to access OpenAI services from within China, on the other hand, has been hit and miss. (It is unclear why API access was not previously blocked in China.) Over the past year, developers have reported that, while the ChatGPT browser interface was blocked for Chinese IPs, they could still call the API without using a VPN. But this could fail from time to time, indicating that OpenAI may have been aware it was receiving API calls from blocked IP addresses. In any case, until now, OpenAI had not explicitly said it would ban such uses.

Developers I spoke to said that OpenAI’s latest barrier was nothing new, except that this time OpenAI made it official. Many developers don’t call API directly from their local IP address anyway, and there are a few ways to go around this restriction:

1. Use a VPN while making API calls, in the same way that an individual user would access OpenAI services.

2. Use a third-party LLM router/aggregator. Simply put, these services reroute the data requests so that API calls won’t be traced back to your own IP address. Generally, it’s cheaper to use such services than to purchase a VPN and create your own OpenAI account.

But one particularly interesting business case is Microsoft, OpenAI’s largest backer. Enterprise users in China could in fact use OpenAI services through Microsoft Azure, which provides REST API access to OpenAI.

Where OpenAI sees risk, Microsoft sees market share

On June 25, the day many Chinese developers learned about OpenAI’s new policy, Microsoft’s official WeChat account published a step-by-step guide for users on how to migrate their OpenAI workload to Azure OpenAI.

Azure is Microsoft’s public cloud-computing platform, and Azure China is a joint venture between Microsoft and 21Vianet 世纪互联, one of the largest data center providers in China. It is physically separate and operated by local cloud providers.

To access the OpenAI service through Azure China, customers need to apply with their company’s information or a work email. So far, it has been a fairly easy process: customers reported that they were able to use OpenAI models without hassle, including using it to train their own models. (In a statement to Z Finance, Microsoft said that training violated their terms of service.)

Why does OpenAI ban China, while Microsoft takes advantage of its partner’s exit to attract more Chinese customers? It has a lot to do with the different incentives of both businesses. While there are some portions of revenue sharing (Microsoft gets 75% of OpenAI’s profits until it repays the former’s $10 billion investment), they operate independently from each other — and even compete with each other, since OpenAI is free to sell its technology to any of Microsoft’s rivals.

In this case, OpenAI, a startup with no sales quota, is more comfortable leaving a market for non-revenue reasons, including national security as mentioned earlier. Microsoft, which currently has five Azure regions in China, can hardly do the same. Here’s Kevin Xu:

As a massive global organization where every region carries an ambitious sales quota, Microsoft’s Azure team saw OpenAI’s exit in China as not a signal to do the same, but an opportunity (at least in the short term) to gain revenue and fill that quota.

In some ways, this is probably the puzzle for all big enterprises: despite all the heartache, it still doesn’t make sense to give up on China. Apple, which just had a grand unveiling of its partnership with ChatGPT to develop Apple Intelligence for its products in the US, reportedly held preliminary talks with Baidu about using the latter’s AI technology in its devices in China — precisely because its flagship global partner ChatGPT is not available in China. Similarly, Samsung uses Baidu’s ERNIE 文心一言 within its latest smartphone model in China, and Google’s Gemini outside of China.

Are local LLMs having a Baidu vs. Google moment?

OpenAI’s competitors in China are, indeed, wooing customers. Immediately following the company’s announcement, a handful of LLM developers started to offer developers “moving packages” for free, helping customers transfer their services from OpenAI to other models. These include major cloud players like Alibaba, Baidu, Tencent, and SenseTime, as well as startups like 01.AI 零一万物, Moonshot AI 月之暗面, Zhipu AI 智谱AI, and Baichuan AI 百川智能. (Doesn’t that remind you of Baidu, when Google left China? Baidu’s market share in mid-2010 jumped to over 70 percent from less than 60% in early 2009.)

This could be a win-win scenario for both Chinese LLM developers and their customers.

Previously, the main obstacle was cost: it’s expensive for developers to transfer from one foundation model to another. But a recent article by popular AI-focused media channel leitech 雷科技 estimated that Chinese LLMs could replace GPT by 80% of common use cases (It was unclear how this number was calculated, but Zhipu AI said during the January release of its GLM-4 model that it could reach 90% of GPT-4’s capability.)

So now, the LLM providers are offering attractive deals:

• Zhipu AI said that it would offer 150 million tokens (50 million GLM-4 and 100 million GLM-4-Air) for free, while Qwen 通义千问 would offer 22 million tokens.

• Baidu went as far as to brand its service “the hometown cloud” 故乡的云, offering ERNIE’s flagship model for free for the first time, as well as an ERNIE 3.5 flagship model token package.

I haven’t heard very many responses from customers. On June 26, though, DingTalk 钉钉, the professional communication tool, said that its platform would be made compatible with all LLMs, and that seven local models have already been integrated into the platform.

Are developers similarly hyped? At least on social media, developers don’t seem entirely convinced that local LLMs can replace OpenAI models right away. After all, the fact that firms have been willing to deal with VPNs, pay for third-party routers, and bear with an unstable connection to OpenAI models in the first place is a pretty strong revealed preference indicating the gap between OpenAI and its Chinese alternatives.

Social media reactions

Most of the initial social-media chatter I’ve seen after the new policy was about the fate of startups building on top of OpenAI platforms. But the discourse on Weibo, however, quickly shifted to a discussion comparing domestic AI developments with OpenAI. On June 25, Hongyi Zhou 周鸿祎, the chairman of Qihoo 奇虎 360, a Beijing-based internet security and software company, said that this would be an opportunity for companies to shift to Chinese LLMs.

Then on June 27, a few state-owned media accounts started to use the hashtag “China’s LLM became the best open source model in the world,” referring to Alibaba’s Qwen-2 (according to Hugging Face’s new LLM leaderboard).

That seems to be the internet’s main reaction: OpenAI’s official break-up with the Chinese market is a massive opportunity for local developers. The same story was told with semiconductors, as netizens lauded Huawei’s domestically fabricated Kirin 麒麟 9000s chips and HarmonyOS system.