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EU + NAFTA should form a block to lock out Chinese strategic products and keep strategic tech out of Chinese hands.

Then recruit the ANZUS + IJT to join the fray. Others would be welcome to play.

We have procided the Chinese with a LOT of rope, ie, enough to hang us with.

Enough already!

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As a German, who is sharply observing developments here, I praise your analysis.

Regarding the cut-off, leading associations of German companies were speculating that Russia will not cut-off gas supply and, therefore, most companies were active in lobbying instead of substituting the production process. Substitution only started adequately, with the final cut-off coming from Russia. Since then, German companies have been much more successful in replacing their production inputs than in all predictions of their respective think tanks, IW Köln and IMK Düsseldorf.

Regarding the Chinese competition, Germany has already started to trust less, and the government is already preventing the transfer of specific technology or selling companies that own these technologies. Nonetheless, German discourse is strongly biased by its demographic development, with many older people afraid that reducing trade with China would lead to many adverse short-term effects on the current employment level. The inflation development already creates bizarre discussions and inconsistent policy reactions in Germany (as you know, the German trauma).

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China has refused to open it's market to Western goods. Fine. In response:

1. Tariff targeted Chinese goods, like EVs, so they are uneconomical in the West. Don't give them access to wealthy foreign markets.

2. Condition foreign aid, such as to Latin America and Africa, to reject Chinese products.

3. Sanction Chinese companies, like Huawei, that stole Western IP so they cannot sell in Western and developing world markets.

4. Ban technology transfers on national security grounds.

5. Ban Chinese information surveillance technologies from being deployed in the West. And Chinese "police stations".

China is a bad actor when it comes to de-industrializing the West. See https://www.npr.org/2022/08/03/1114964240/new-battery-technology-china-vanadium as an example. (Although this harm was largely self-inflicted.)

But China is heavily dependent on Middle-Eastern oil and Australian coal. Also Taiwanese chips, which the U.S. limited. Economic sanctions issued under the guise of authoritarian COVID restrictions or the genocidal treatment of Uighurs could stand muster and be politically salient.

In other words, the West has the capability to defang the Chinese dragon should it chose to do so. As we did with Russia but cutting them off from SWIFT and a host of other measures. The question is: do Western politicians have the guts to do so?

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So the takeaway from Germany is... mercantilism still works. A result whose shock value is likely proportional to the hearer's educational level. Orwell famously said "there are some ideas so stupid only an intellectual can believe them." Unrestricted international trade with a totalitarian country falls into this category.

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Your articles have a simple common theme, i.e. anti-China. It almost makes me believe you're just another paid writer to dis-credit China.

I have seen many Chinese EV reviews and the Chinese EVs are already better than VW and Tesla. The reason we haven't seen any Chinese EV in American market is because of protectionism which, as an economist, you should know it's a bad thing for N. America long term. It made American auto industry uncompetitive in the 80s and ended up killing Detroit.

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"Germany has been both far too short-sighted and far too naively trusting when it came to its economic relationship with China."

It seems that Germany was also too short-sighted in trusting Russia as well which is why they are in the energy crunch they helped create for themselves and all of Europe. It seems that 'Ost Politics' and Asian politics are based on naivety or perhaps more likely arrogance. I don't generally think of Germans as being naive.

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One thing not mentioned that is in the news here is the effect of the IRA EV credit, restricted to US manufactured vehicles. I understand that there are a lot of complaints from European auto manufacturers about this (arguably WTO-non-compliant) policy.

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The authoritarian leaders of China led by Xi (our man in the politburo) seem to be moving in an even more fascist view of the economy. If you are not building big important stuff (includes housing) than it is not really important to the economy. The goal is to dominate industries and rely minimally on imports, trade is based on we win – you lose. This would seem not to bode well for the German export machine. The ultimate goal is to support the military with a technology superior economy. The performance of Russia in Ukraine helps vindicate this position for Chinese leadership, don’t rely on the west for anything.

The big loser for this thinking would seem to be the Chinese people. The quality of life for average person would increase dramatically if the economy were to go in the direction of a consumer based economy with a strong safety net combined with freedom to move about and create economic prosperity without fear and oppressive surveillance. The Chinese people have proved amazing in their ability to build a dynamic economy, the Xi regime seems to be the main obstacle in their way.

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Nov 30, 2022·edited Nov 30, 2022

When firms sell to China and have their technology stolen, that's obviously bad for the companies in question, like the Siemens example. Is there a clear narrative in economics on what the overall economic impact is? Would Siemens profits pre-unfair-competition be considered normal economic profits or rents? Does additional competition in the market, even if it originated through nefarious means, make the overall market better (i.e., innovative, price competitive)?

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Is this in many ways an argument against the typical Neoliberal drum beat for more deregulation and more free trade? There are advantages to safeguarding certain industries long term. China plays the long game and they will win against players who only look for short term profits in the market rather than looking for long term strategic positions.

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Complacency is a hell of a drug. Based on this article it seems like being the cleanest dirty shirt in the EU has made Germany increasingly vulnerable to short-term shock and to long-term damage.

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Just want to take up a small point in your analysis:

"But the green transition means that the role of the internal combustion engine in the global economy will shrink dramatically — it’ll still be used for planes and some other applications, but as far as autos are concerned, internal combustion will be more or less obsolete. "

It's an interesting question. Leave aside gas turbines for most larger aircraft and power plants for a minute. What remaining applications for the piston-engined Otto cycle engine are there that aren't well on their way to being replaced by electrification, or easily replaceable with near-term technology?

The only significant ones I have on my list are small fixed-wing aircraft, and small boats. Maybe high-end motorcycles, but they might just get regulated out of existence (to the joy of trauma surgeons the world over). Oh, and large ships, which run on massive two-stroke diesels but as I understand it ammonia is one of the ideas currently kicking around for a zero-carbon replacement.

Anything else?

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Its interesting observation. Food for thought: BASF is already repositioning the bulk of its business in China to take advantage of energy at the source. https://www.ft.com/content/f6d2fe70-16fb-4d81-a26a-3afb93e0bf57 - yet BASF's biggest market is still Europe. Erosion of foundational businesses like that sees industrial capability rot from the inside.

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founding
Dec 4, 2022·edited Dec 4, 2022

This post is interesting to read after the post about artificial intelligence - and how it might not be a threat. Also, the Vietnam post addressing the inefficiency of SOEs and how they hold the country back. Noah, do you think a country *always* has a comparative advantage that it can shift to? Is it turtles all the way down? In your post on AI, you sort of posited the question about whether AI will be good at the things we are good at, or whether it's different enough to be complementary - and you implied that it seems to be the latter. AI is venturing into uncharted territory, so it's a bit TBD, sure. But we now have centuries of globalization to derive conclusions from. Is the answer that Germany should be more careful and guarded, or that they should work quickly to see the writing on the wall and figure out what their comparative advantage is? Would a Siemens that isn't competitive with Chinese companies domestically be good for Germany?

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Europe needs to follow the US's lead and not transfer any future technology to the fascist slave-state of China.

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One wrinkle is the extent to which high energy prices are disincentivizing new investment, especially in battery cell plants. See the recent decisions and comments by Northvolt and the CEO of VW:

https://europe.autonews.com/suppliers/vw-backed-northvolt-may-delay-german-battery-plant

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