Sir Niall Ferguson decodes Trump, China, and the new world order

Sir Niall Ferguson, renowned historian and Milbank Family Senior Fellow at the Hoover Institution, joins Azeem Azhar to discuss the evolving relationship between the U. S. and China, Trump's foreign policy doctrine, and what the new global economic and security order might look like.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Azeem Azhar?

  How would you characterize this new Trump doctrine?

• 0:03Speaker 01

  If you just follow the more bombastic things that the administration does, laying claim to Canada, Greenland, the Panama Canal, you think it's American empire. But inside the Oval Office, their real preoccupation is with the weakness of the American position.

• 0:20Azeem Azhar?

  We've heard it again and again from members of the administration that there's going to be pain.

• 0:26Speaker 01

  To go full Tariff Man, to close the southern border, those things will have meaningful costs for American households. And so by the end of the year, even more people than currently will be saying, what do we vote for?

• 0:38Azeem Azhar?

  How does that reduce the room for maneuver to execute on the strategy, right? Does it constrain them at all?

• 0:44Speaker 01

  He can course correct. He likes to open really strongly, that's all in the arts of the deal, see what the other side does. And if it doesn't really go anywhere, he's perfectly capable of declaring victory or claiming a win and retreating.

• 0:58Azeem Azhar?

  How do you read China at this moment?

• 1:01Speaker 01

  Anybody who bets against Chinese STEM is likely to lose their bet over a 10-year time horizon. The problem is that you're also making a bet on the CCP's ability to manage Chinese economic policy and national security. I think that the harsh reality is that despite the mood music coming out of Beijing, they still have a problem that is deflationary, that the property sector is very hard for them to fix. And they may say they're going to have a 5% growth target. I just don't think they're going to do it.

• 1:29Azeem Azhar?

  The degree to which the Chinese have been misbehaving around Taiwan has increased dramatically. I mean, it could be a real issue.

• 1:37Speaker 01

  President Trump could at some point be faced with the dilemma. Do you accept a quiet Chinese takeover of Taiwan? Or do you risk World War III?

• 1:49Azeem Azhar?

  Now, the discussion today is the $120 trillion question. US, China and the New World Order. And I'm really happy to be speaking to the renowned historian and author Sir Neil Ferguson. He is the Milbank Family Senior Fellow at the Hoover Institution and one of the world's foremost geopolitical analysts. Neil, it's great to have you here.

• 2:12Speaker 01

  Very good to be with you.

• 2:14Azeem Azhar?

  Let's start with perhaps the most fundamental question. How would you characterize this new Trump doctrine? Is it a coherent strategy? Or is it more a guiding direction, which is going to be delivered by a series of reactive measures?

• 2:29Speaker 01

  Well, I quite deliberately teed myself up with an allusion back to the Nixon administration, because I do think that there's something going on there, which is being missed by most analysts. If you just follow the more bombastic things that the administration does, laying claim to Canada, laying claim to Greenland, laying claim to the Panama Canal, you think to yourself, it's American empire. This is as shocking as it's been since William McKinley was president. And the administration wants you to think that. And that's part of the reason for trolling everybody on issues like Canada and Greenland and the Panama Canal.

• 3:10Speaker 01

  But inside the Oval Office, and I think we begin to see this, their real preoccupation is with the weakness of the American position. And there's a belief, I don't think it's right across the administration, but it's certainly in the president's inner circle, that they have to reduce commitments in Europe, stop sending money and weapons to Ukraine, reduce commitments in the Middle East, reduce your presence in Syria and Iraq, in order to focus on China, because China's the other superpower and China's a formidable antagonist. So that does remind me of Nixon. And part of what we see here is what Nixon did in seventy one, which is shock the allies. He said, I'd shock the Europeans and also shock your Asian allies by saying things like,

• 3:53Speaker 01

  we're going to put tariffs on you and we might do something with the dollar. And you guys have to pay for your own defence. That was all out of Nixon's playbook. And I do think Trump has a debt to Nixon that doesn't get nearly enough recognition. They had a relationship back in the eighties and it was Nixon who encouraged Trump to think of politics. So this is not just something I'm making up.

• 4:12Azeem Azhar?

  You have an advantage on me in having obviously written books on this subject. And you spent the whole day reading old telephone transcripts from Henry Kissinger after he had first gone to China in the seventies. So, so, you know, advantage, Neil, at this point. There's another part, though, of the vernacular that comes out. And I agree, we should look below the bluster, which is the sense of that America and American lives in the middle and the working classes have been deeply hollowed out by. What most of us call the Washington consensus, is that part of the driving force? Or is this really more of a question of the strategic competition with China?

• 4:50Speaker 01

  Well, I don't think there's any doubt that the president has thought since the 1980s that you need to do a couple of things to reduce the impact of foreign competition on American livelihoods and particularly middle class and working class livelihoods. One of them is you put up tariffs. He's been out of consensus on this issue for close to half a century. And the other is that you force everybody else to take care of their insecurity and you stop subsidizing it by providing umbrellas to other powers. So I think that's right. And I think when we're trying to understand what comes up next week, when a whole bunch of new tariffs are going to be imposed on American trading partners, you have to understand that Trump believes that tariffs aren't just a source of revenue, though he doesn't think

• 5:35Speaker 01

  that, they will help to re-industrialize America and to reduce the trade deficit, which he regards as a sign of weakness. And Trump has this very unorthodox economic theory, an enormous trade deficit will somehow subsidizing the rest of the world. And if you're paying a significantly bigger share of the NATO budget than, say, the Germans, then you're subsidizing them too. And actually, on the second point, he's right. So that's part of it. But Azeem, I think the really important idea that's at work here is the reverse Nixon theory that he pro- close to the president occasionally talk about. And that's the idea, that by being very nice to President Putin over Ukraine, you are

• 6:17Speaker 01

  going to peel him away from Xi Jinping and try and drive a wedge between the Russians and the Chinese. And the reason people say reverse Nixon is that they're thinking of that moment in 71, 72, where Nixon and Kissinger got into touch with Zhou Enlai and Mao Zedong. Nixon went to China in 72. That was the big moment when suddenly the Soviets woke up and realized that the US was closer to China than they were. And I think the idea here, it helps explain why they appear To be so inexplicably nice to Putin, why they seem to be ready to throw Volodymyr Zelensky in Ukraine under the bus is they're trying to get into a closer relationship with Russia and peel Putin away from Xi Jinping.

• 7:02Speaker 01

  That's the most Nixonian thing about this administration strategy. And I want to just, you know, spoiler alert, I don't think it's going to work.

• 7:11Azeem Azhar?

  Yeah, I don't think that would work as well, partly because Russia is quite a weak player in some sense. It's weak economically, it's in a way, whatever's happening on the ground in Ukraine, it's rather on the back foot. I mean, it has to go back and rebuild itself and think again about how it should leverage power and exert that power. And it's quite a long journey. But there is the obvious point about Europe. I mean, I found myself agreeing with J D Vance, the vice president in that Signal chat. There are very, very simple analogy, you know, I live in a, in North London, I have lovely neighbours, we talk a lot. But ultimately, my wife and I are responsible for the security of our home.

• 7:51Azeem Azhar?

  We don't expect our neighbours to run the CCTV and the burglar alarms and maintain the fences. There is something quite odd about how for 30 years, the Europeans have ignored every warning that's come out of successive American administrations about looking after their own security. What's the psychology behind that?

• 8:10Speaker 01

  Well, first of all, I'd be really careful about saying you agree with J D Vance in Hampstead. Because your neighbours will be far less friendly towards you if you go around saying that. This administration is making itself very unpopular, very fast in Western Europe, in the UK, in liberal America. So when you're agreeing with J D Vance, you need to take.

• 8:31Azeem Azhar?

  Well, I just agree with that one little point, which is, you know, Europe has just not risen to the challenge over 20 years. And when I was in Davos in January, the mood around Europe was absolutely funereal. You'd run into people in the street and they'd say, the mood around Europe is terrible. It's like being at a wake. And we're just six weeks later and I see European leaders stepping up, giving each other support, taking really proactive steps to rearm, rebuild, re-energise the continent. And there's a different feeling. See, I think of the shock, the shock doctrine that has emerged out of Washington DC. But the question is whether that sense can be maintained and we can start to address thirty years of underinvestment.

• 9:11Azeem Azhar?

  But but I think the thing that I've struggled with a little bit is what was the internal political motivation for decades not to do that? Didn't it just seem unfair to expect your major ally to to shoulder the burden?

• 9:25Speaker 01

  Well, it actually went back much further than that, even in the nineteen sixties. Americans, including Kissinger, were complaining about the unevenness of the burden sharing. And this was a recurrent theme right the way through into the Obama administration. And it was a theme in Trump One, the first series, just as it is now. And to answer your first question, why did this go on for so long? The answer is because every president from Nixon down to Obama did nothing really beyond say please do more. They didn't actually apply any pressure to the Europeans. And the Europeans realised that they had a peace dividend that was being paid annually from the minute the Soviet Union collapsed.

• 10:09Speaker 01

  So the defence budgets went down well below two percent of GDP in the majority of NATO countries. Now, Trump discovered that if you actually get serious and apply pressure and make it seem like you might withdraw from NATO, you got the Europeans' attention. And I I think it's important for us to give Trump and Vance credit where it's due. In the space of two weeks, with the most obvious example being Vance's speech at the Munich Security. But yeah, the the encounter with Zelensky in the Oval Office was equally important. In just two weeks, they completely worked the Europeans up in a way that no president has been able to do since the nineteen sixties. And in that sense, he's making Europe great again. There's no question about that.

• 10:54Speaker 01

  And he's addressing this longstanding American grievance. The European defence budgets were already going up, were majority above two percent. But but what's really interesting here, Azeem, is that the Germans are now seriously going to invest hundreds of billions of euros. In defence and infrastructure and at the same time at the European Union level, the Commission is going to launch some multi billion dollar fund for European wide rearmament. So that's a win for Trump and it's a meaningful win, but it's also a win for Europe. I did an interview for DIT last week and I said, you know, you all hate him, but this is actually really good for you and you're going to one day have to acknowledge

• 11:34Speaker 01

  that Trump did you a solid because the German economy is going to benefit hugely from rearmament. But it took Trump to convince the Germans they had to do it because Trump credibly seems to question the future of NATO and therefore the future of Article Five, the all for one, one for all clause. So this is very transformative of the European scene and it also illustrates, last point, always bet against the Davos consensus. I was there too and my perception was the same as yours. European business leaders wandering around saying everything is terrible. If only we could have Trump, if only we could have Musk. And I said, in that case, I'm short US, long Europe because the Davos consensus

• 12:15Speaker 01

  is always wrong. And if you had simply taken my advice back there, coming out of Davos and gone long Europe, long European stocks, short US equities, you'd have done very well and you'd have been right.

• 12:28Azeem Azhar?

  Always trust Neil. I would say that from my perspective, seeing the startup community, it's become electrified. It's become electrified in areas of hard technology, defence tech, AI that can be used in that way. There is a deep, deep motivation and a lot of this was building over the last two or three years anyway, just a sense that Europe can do much more technologically than it has. But I think the interesting thing is that it's also provided a lifeline in a sense for industrial Germany. All of those VW factories that were soon to be empty because all the cars are coming from BYD will turn into Rheinmetall factories at some point and they will produce useful material for that eastern flank. Then I got a little bit confused though, in the last couple of

• 13:10Azeem Azhar?

  weeks. And I got confused when these big carrier strike groups, which have been the pride of the US military for decades, and I speak as an avid fan of Top Gun and Top Gun Maverick, both of which I have rewatched in the last month. I'm just curious about why keeping the Red Sea open matters to the United States under the new Trump doctrine.

• 13:32Speaker 01

  Oh, it's not hard to figure that out because thanks to the generosity of Mike Waltz, the National Security Advisor, in inviting my friend Jeffrey Goldberg into his chat group, we know, and we know exactly why he and Pete Hegseth, the Defence Secretary, wanted to do those strikes against the Houthis, not particularly because of trade in the Red Sea, because of the need to re-establish deterrence, number one, and to send the Iranians a signal, number two. And so I think this is perfectly reasonable in the sense that the Biden administration was very bad at deterrence. It was really a group of law school educated people advising the president that if anything bad happened, you should de-escalate, above all else,

• 14:16Speaker 01

  de-escalate. And de-escalation turns out to be the functional opposite of deterrence. If you de-escalate in Afghanistan by handing it to the Taliban, Putin will decide, hey, I can take Ukraine at low costs. And if you try to de-escalate there, then the Iranians will say, hmm, we can do whatever we like in the Middle East. These people aren't serious. So I think the Trump administration, at least some of the more hawkish elements within it, want to re-establish deterrence. And there's nothing like precision missile strikes, this has been true since the 1980s, to remind everybody that when the sheriff is around, you are actually quite vulnerable. The Iranian point, though, is the more important one.

• 14:55Speaker 01

  What is coming, I think, this half of the year is that the Iranians are going to say at some point, no, we won't just give up our nuclear weapons programme as you, President Trump, want us to. And at that point, the Trump administration will say to the Israelis, okay, go ahead and do what you can do to the Iranian nuclear facilities, and we'll kind of not participate, but kind of will participate to make sure that you get the job done.

• 15:25Azeem Azhar?

  And is that, sorry, is that why we've got all these B2 spirits sitting in Diego Garcia right now? Because those aren't the cheapest planes to move around and keep ready?

• 15:34Speaker 01

  Yes, so I think we should assume that the reckoning is impending for Iran. My friend Ron Derma, a minister closest to Prime Minister Netanyahu, who's just been in Washington, I think his main message will be, we can't wait indefinitely. We've got to do this while the Iranians don't really have much in the way of an air defence. So I think there's going to be some quite meaningful action there. And then the US is simply going to leave and the troops will leave Syria and Iraq and the Middle East will be far less a preoccupation of this administration than has been true of any administration in the last 50 years.

• 16:10Azeem Azhar?

  Right, so there's a sort of a push and then we see this sort of, I guess it's a kind of a neo Monroe style pullback to the most relevant borders, which will be certainly in the Asia Pacific and to some extent yet to be seen.

• 16:24Speaker 01

  Well, I think there are three groups within the Trump administration, at least three different theories of this, as is often the case, that US administrations are complex things and there are at least two, if not three, foreign policy theories in any given administration. The maximalist position, which is quite well represented in the National Security Council, which is we're up against an axis of authoritarians, China, Russia, Iran, North Korea, and we can't give them an inch anywhere, not in Ukraine, not in the Middle East, not in the Far East. The middle position is, yeah, that's right, but we can't possibly do all of this at once. We'd better focus on China and that would be, I guess, British Columbia and others. And then the people who think it's Monroe Doctrine, let's go back to the 19th century

• 17:09Speaker 01

  and just do our hemisphere and just leave everything else to others. That, Stephen Miller in the White House, I think it's J D Vance, the Vice President, they are the people who really want to focus on the Western Hemisphere. That's why in the now famous chat group on Signal, it's Vance who says, why the hell are we doing this? I don't even think we should be bothered to do this because who cares about who sees anyway. He loses the argument, of course, interestingly.

• 17:37Azeem Azhar?

  Okay, so I want to ask one more question about the US before we turn to the other superpower, which is, you know, we've got April the 2nd, Tariffs Day, Liberation Day, whatever it's going to be called by the journalists and the noises, maybe it's going to be 20% broad tariffs on the EU. I mean, this is obviously going to create a lot of pain for a lot of people. But I'm curious about whether the US economy can weather it. You know, you're going to see prices rise. You've already got consumer and business uncertainty. So reducing spending and investment. You may have another half a million federal employees joining the unemployment lines, spending less as well. I mean, that's quite significant even for a powerful economy. So can the economy weather that?

• 18:22Azeem Azhar?

  Does that start to temper the ability to execute on the plan?

• 18:27Speaker 01

  Well, in the last few months, we've gone from the euphoric vibe shift that followed the election to everybody throwing up on Wall Street. And this one hundred and eighty degree shift seems worthy of some scrutiny. Net negative for sure. If you do tariffs to the extent that Trump may next week, you could take the average American tariff rate back to where it was in nineteen thirty seven. And I don't know about the six hundred and seventy people listening to us right now, but I don't think of the nineteen thirties as a particularly great time for the global economy.

• 19:02Azeem Azhar?

  Right.

• 19:03Speaker 01

  I think that's clearly going to be negative. It's it's certainly going to impose meaningful costs on American businesses and consumers. It's highly disruptive, particularly if one thinks of the automobile tariffs as they impact the North American supply chains. Very, very seriously costly. And if it's costly for Americans, it's even more costly for their trading partners because the trading partners are by and large more exposed to trade. So this is bad. Hard to see any real upside to this. At the same time, you've mentioned it, the cuts that are happening in the federal government are going to have at least some impacts on the economy. Unemployed people tend not to spend more money. And then you've missed something out, which is really important, and that is the closing of the southern border.

• 19:48Speaker 01

  Why did we not have a recession in twenty twenty three? What happened to that? All the economists predicted it, it didn't happen. Well, one reason it didn't happen was six percent of GDP deficit all the way. The other reason is that eight million people were added to the labour supply through illegal immigrants. And that that's over. I mean, the southern border is Essentially close. And so the the positive labor supply shock has gone. That will be a headwind to growth for sure. On the other side, deregulation coming for sure. No taxes going back up. The tax cuts from 2017 are going to be extended. So it's not all negative, but I think I'm in agreement with the economists at Goldman and Morgan Stanley.

• 20:29Speaker 01

  If you do the arithmetic, it's clearly going to be a significant decline in growth this year. Possibly recession, though I think that's not the base case. And so by the end of the year, even more people than currently are will be saying, what do we vote for?

• 20:47Azeem Azhar?

  Right.

• 20:47Speaker 01

  Is more painful than we had been led to expect because of course, if you think back to the first Trump administration, it was actually economically pretty beneficial for the average American household. That's because Trump didn't go full tariff man. Trump was very much constrained in his first term on every major policy domain. But this time, after four years in the wilderness, the MAGA gang have a plan, and that plan is to go full tariff man. And also to close the southern border. And those things will have meaningful costs for American households that they weren't expecting to have to pay when they voted for Trump.

• 21:23Azeem Azhar?

  Well, we we've heard it again and again from members of the administration. Scott Besant has has said it and and others have said it, that there's going to be pain. And I I guess just as a brief thought, how does that reduce the room for maneuver to execute on the on the strategy, right? To what extent does displeasure turn into the administration feeling they can't do all the things they want to do? Obviously, the midterms are, you know, still a while away. And does it constrain them at all? Or is this something that you think, knowing them, that they'll just push through?

• 21:57Speaker 01

  Well, I I think we've already seen the way in which even a 10% stock market drawdown sends Scott and and Kevin Hassett into the TV studios to reassure markets that actually the tariffs are going to be just a transactional, temporary thing. I'm not sure Trump is bothered by 10% stock market decline. I think twenty percent might get his attention. It did in late twenty eighteen. But then he just piled the pressure on the Fed and said it was on Jay Powell to cut rates. So I think this second Trump administration is is going to be much harder to blow off course. Not least because there are few elements inside the administration that are actively hostile to this.

• 22:40Azeem Azhar?

  Right.

• 22:41Speaker 01

  Agenda. At the moment, the obvious sources of opposition, say Senate Republicans with more mainstream views on trade and national security. They're very quiet, very quiet indeed. They'll get louder if things look like they're going badly wrong economically. And at some point, the dread word midterm will be heard and people will start pointing out that if this thing doesn't turn around in time. Then Republicans will lose at least one of the chambers of Congress. So. American politics is still running in a normal way. Despite what you might think if you follow it in the Guardian newspaper or.

• 23:17Azeem Azhar?

  Absolutely, yes. Pretty shocking out here, but, you know, yes, as you say, the wheels are still turning.

• 23:21Speaker 01

  Supreme Court has already fired the first shot across Trump's bows. They're gonna get some wins, I suspect, in the court, but they will also be handed some defeats. So the other thing I'd add is that the administration is still taking shape. The whole process of confirming nominees is so extraordinarily protracted that there are plenty of key jobs that haven't yet been filled. There'll be some turnover. He's Trump. He's gonna fire somebody at some point.

• 23:47Azeem Azhar?

  Right.

• 23:48Speaker 01

  This year, and that too will have its consequences. So. The one thing you know about Trump from his first presidency is that he can course correct. He likes to open really strongly. That's all in the art of the deal. See what the other side does. And if it doesn't really go anywhere, he's perfectly capable of declaring victory or claiming a win. And retreating. I mean, think how the trade talks went with China last time around. Was that a great, big, beautiful deal? No, it wasn't. It was a really bad second rate. Phase one trade deal, which the Chinese didn't even honour. So I think we should be prepared for. Trade negotiations after April second, after Liberation Day, i.e. tariff mageddon.

• 24:33Speaker 01

  And in those negotiations, I don't think the major counterparties will give that much ground. And then at some point, the administration will have to declare victory to avoid really severely adverse economic consequences.

• 24:46Azeem Azhar?

  Wonderful, right, so that's America, that's the first half of China America. I'll summarize what we we just talked about here, which is there is going to be sort of forward momentum to use tariffs as a mechanism to strengthen America's trading position or bargaining position rather than trading position. We should expect there to be at some point a winding back of some of these global commitments. And that the administration probably feels it's willing to take the pain and can take the pain to get to the other side. But that other side might involve some sort of consensus reconciliation, but we don't quite know when. Now, we also start our discussion, you were recounting, reading about sort of Kissinger's trip to Shaanxi about fifty years ago.

• 25:29Azeem Azhar?

  Back then, the world was completely different. The US was forty five, fifty percent of the global economy. China was a couple of percentage points. And here we are, America at about twenty five percent, China approaching nineteen or twenty percent. So we are in a very, very different world. So let's talk a little bit about China. From where I sit, I think China is a little bit understudied and underrepresented in the dialogue. And one of the things I thought would happen a few years ago was that the export controls and the diffusion controls that were going to, as they became around chips and advanced technology probably wouldn't work. They would probably trigger innovation and invention in China. I think we've started to see that happen. You've just come back from Asia.

• 26:15Azeem Azhar?

  How do you read China at this moment in all of this? And what are we not seeing about it?

• 26:20Speaker 01

  Well, I think the big takeaways from my trip last week were that the Chinese are feeling their strength in not only artificial intelligence, DeepSeek was a big win, but it's just part of a success story and also in electric vehicles, where the only question that I heard asked was, well, who will the other two Chinese companies be that share total global dominance of automobiles with BYD?

• 26:50Azeem Azhar?

  Let me just say something about about BYD, actually just for the audience. I mean, it's just past a hundred billion. In revenue, obviously, the cars are cheaper than Teslas, but they are selling a lot of vehicles. I've just seen the first BYDs in North London in the last six months. And BYD has got a strong and growing market in the global south. I mean, in Ethiopia, for example, it's growing very, very strongly. So this is a company that is not really present at all in the US, but is really substantial, both in terms of its scale, number of cars sold, but also how good those vehicles actually are.

• 27:25Speaker 01

  And I think we can't overstate the speed with which this has happened. I can remember being in China not long before the pandemic, when Chinese automobile companies seemed like the Wild West of the Chinese economy, and people didn't take it seriously in the West. Well, they're taking it seriously now, because unless you erect your tariff barriers double quick, your domestic market is going to be overrun by Chinese competitively priced and pretty impressive technologically vehicles. So that's part of the mood of this is going our way. I really was struck by the change in mood over 12 months, because 12 months ago, Chinese investors, Chinese tech companies were still pretty down in the mouth.

• 28:09Speaker 01

  And there was a general feeling that the big guy doesn't love us, and the big guy doesn't get the economy, and we're all going to move to Singapore, or we're all going to get out. So this was the kind of conversation 12 months ago. Now, the conversation is, well, he seems to get the message now, so we're actually getting some sensible policy advice out of the two sessions, out of the kind of policy discussion in Beijing. And he loves Jack Ma again, and the rehabilitation of Jack Ma, as well as the fading of Chinese entrepreneurs, including the DeepSeek founders, has sent a signal to the Chinese private sector. The big guy, i.e. Xi Jinping, gets the message. We're course correcting at the macro level,

• 28:51Speaker 01

  and we're also recognizing that you guys are indeed the rock stars of the Chinese economy. So this is important, because it means that the mood in China has changed. Now, let me make two distinct points. Number one, the technology story. Is unquestionably very impressive. I can remember meeting Caifu Lee last year in Beijing and he said, despite the constraints imposed by the US Commerce Department that restricts China's access to GPUs, to the most sophisticated semiconductors, China's going to just do so well, at least at inference, so well at adoption, that it will be able to hold its own in AI. That turns out to be pretty much right. Yeah.

• 29:34Speaker 01

  And so I think there's a big deal here, which is the success of China in not circumventing, but simply overcoming the obstacles put in its way by the Biden administration mostly. But the second point, which I don't think is getting enough attention, is that it is really hard to turn the macro around in China, because consumption took such a hit between COVID, zero COVID going on and on and on, and the crisis in the property sector. Households, which predominantly middle-class households save by acquiring apartments, have been rinsed. Their balance sheets are a disaster. And it is really hard for the Chinese government to turn that around.

• 30:17Speaker 01

  Two really striking things. The population is falling and it is falling faster than people expected. So the base case halves between now and the end of the century. Second startling statistic, the public sector deficit is larger in China than in the United States today by IMF measure, because if you look at local government, which of course a proper public sector measure does, there's just a huge amount of public sector borrowing still going on. So you have actually got a public sector deficit north of seven percent in China. That means there are limits to just how much fiscal stimulus they can do. And I think that the harsh reality is that despite the mood music coming out of Beijing,

• 31:02Speaker 01

  they still have a problem that is deflationary, that the property sector is very hard for them to fix. And while they they may say they're going to have a five percent growth target, I just don't think they're going to do it. I think they'll have to cook the books to get to.

• 31:15Azeem Azhar?

  Report it as five percent, Neil. We know there's a technique for that. Okay, two important points there. Let's take the economic one in a second. Let's come back up to the technology one. And I do agree with you that some of the language around how these Chinese firms have developed AI tends to focus around circumvent rather than overcome. And, you know, we we have seen in our conversations with with Kai Fu Li at the end of last year, his firm was already achieving the mythical GPT four quality capability on much smaller models. And then out shows arrives deep seek. The things that I have seen in the last few weeks, and I'm I'm sure you've come across them as well.

• 31:52Azeem Azhar?

  And this is quite a mix, a broad picture, but it all points in the same type of direction of a scientific, technological and industrial confidence. That is building as a flywheel in in China. So the number of breakthrough drugs that are in in development and coming through the the funnel from China is now, I believe, about twenty twenty percent or so, or twenty five percent of the global total. That's pretty remarkable. There are small milestones happening in fusion. But the thing that is most interesting is what's happening with semiconductors and that supply chain. Because the story has been that, look, you need Nvidia and Nvidia needs TSMC.

• 32:33Azeem Azhar?

  And it's not quite turtles all the way down because below TSMC is ASML, the Dutch company that makes those very, very specialist extreme ultraviolet lasers. The new machines cost three hundred and fifty million dollars and, you know, China hasn't been able to get its hands on them for a few years. It's stuck on the D U V technology, which doesn't allow cutting edge chips. And what has changed that calculus, I think this is this is quite important, I suppose, is that on the one hand, your deep seek has demonstrated you can do this on much lighter processing. Inference, which is where the economic benefits come from, doesn't necessarily require all of the best chips all the time. And in the last couple of weeks, we've seen a few things happening around this photolithography.

• 33:17Azeem Azhar?

  Some noise that maybe Huawei has an EUV machine that might be ready, that's homegrown, might be ready at the end of this year. We've seen ASML agree to set up a repair facility for the older machines in China. And and so I I see in that aspect of that the hard technology against which, in a way, a lot of American economic power had been bet was being bet. It was bet on the NASDAQ essentially that. The big tech companies would win in AI globally and that's, I think, one reason we saw those extreme valuations. And there's a new story that might be emerging in China. Is that something that you recognise?

• 33:53Speaker 01

  Yeah, I think it's a new story. I'm not sure whether it's true, but it's certainly plausible enough at this point for the old story to be regarded with more scepticism by investors. Now, that's not to say that the hyperscalers aren't still ahead and that's not to say the OpenAI is not making a lot of money. I gather they're making money right now by allowing people to generate an infinite number of cartoons of themselves. My general feeling is that if this is the net result of all of this innovation, we have a problem as a species. But let's just assume that there are more important things going on, and say drug discovery.

• 34:33Speaker 01

  I think anybody who bets against Chinese engineering, anybody who bets against Chinese STEM is likely to lose their bet over a 10-year time horizon. The problem is that you're also making a bet on the CCP's ability to manage Chinese economic policy and national security. And here are the two uncertainties. Number one, there is a way of getting the Chinese economy to grow in a more balanced way that doesn't require it to flood the world with cheap manufacturing exports. Michael Pettis has been writing about it for as long as I can remember. And it's about helping Chinese households to consume like they're in a normal society, rather than to have their incomes effectively repressed. And I just don't see it happening.

• 35:17Speaker 01

  I just don't think Xi Jinping will ever fully believe that it's healthy to have a Chinese economy led by consumption. The other problem, which is, I think, where you're probably going, is that potentially there's a collision coming between China and the United States. Because the CCP under Xi Jinping's leadership has made it really clear that the capstone achievement of his career is bringing Taiwan under the control of Beijing. And if you watch what's going on in the waters off Taiwan, looking back over the last couple of years, with every passing month, the PLA and the Navy do more and more aggressive things that worry the people running the Indo-Pacific Command for the United States.

• 36:01Speaker 01

  So the the most precarious issue, the most contentious flashpoint in the world is not Ukraine, nor is it Israel. It's Taiwan, because a Taiwan crisis would simultaneously be enormously destabilizing to the security system of the Indo-Pacific, but it would also be destabilizing to the world economy. Because this would be a Cuban Missile Crisis, except that the island in question this time is off the coast of China, not the United States. And they export GPUs, not cigars.

• 36:34Azeem Azhar?

  Right. I mean, it could be a real issue, and you're right. I mean, I think that for the audience, the degree to which the PLA, which is the Chinese Navy, and the Air Force have been misbehaving around Taiwan has increased dramatically. I sometimes watch these these betting markets, prediction markets, because they are, well, they're fun to watch. I think they're quite good rearview mirrors at times. But I have noticed that the odds on a Chinese attack on Taiwan haven't really increased over the last few weeks. I wonder whether you think that's just a blind spot of the people playing in that market, or whether you think that the the odds are increasing.

• 37:13Speaker 01

  Well, I think the problem is the way the question's framed, because I don't think that there's going to be an invasion kind of D-Day Taiwan Strait Edition. I'm not even expecting a blockade. But I think what happens is that at some point on Trump's watch, the Chinese say, just to let you know, anything going in and out of Taiwanese ports has to clear PRC customs, and our Coast Guard will be going to to collect those. That's a big problem for the United States, because it's not clear that the world would perceive that as aggression by China, but the only way that the United States could counter it would be, in fact, by taking naval action.

• 37:55Speaker 01

  So the worry in Washington and in Honolulu is, what if we're confronted by something that's ambiguous and hard? For us to react to. So the the betting market isn't really asking the right question there. The question is, does China assert its notional rights? Since after all, we accept that there is only one China. And if it does, can the Trump administration stop a gradual Hong Kongisation of Taiwan? I was just in Hong Kong. One of the interesting conversations I had was with somebody who said, you know, the way that the Chinese, the way that Beijing is treating Hong Kong right now, which is relatively gently economically, though firmly politically,

• 38:38Speaker 01

  is to signal that one country, two systems is okay for business. And it's okay for most people in Hong Kong. Right. That's that's an ad to Taiwan, ahead of what will be a pretty subtle but meaningful pressure from Beijing. And I think that's the scenario to watch out for because if you ask the hawks in the Trump administration, well, what will you do then? They'll say, well, we can't possibly do nothing. We have to act. Because this would be a fundamental challenge that would lead implicitly to the end of American primacy in the Pacific. The Japanese would see that immediately. And it would put TSMC in the hands of Xi Jinping. We can't let that happen.

• 39:20Speaker 01

  And then you'll go to the president and the president will say, as he said to John Bolton, in a famous chapter in John Bolton's memoir, he picks up the Sharpie and he says, you see this Sharpie, John? This this is Taiwan. And then he points to the desk and he says, you see the desk there in the Oval Office? It's the Resolute Desk. The desk is China. And Trump effectively said to Bolton, why would I send the US Navy across the ocean to fight a war over a Sharpie? So the Chinese know that Trump is not really that into Taiwan. The Chinese know that he, Trump, wants to do a big, beautiful deal. And remember, Trump is Nixon. He wants to go to Beijing. He wants 1972 to happen and for him to be the one who goes there and does the great, big, beautiful deal.

• 40:05Speaker 01

  If that's the case, and I'm Xi Jinping's advisor, I'm like, boss, this is your moment. Only now is the President who could actually hand you this without a fight, but you've got to push the envelope. You've got to make your move.

• 40:18Azeem Azhar?

  I mean, I'm just digesting the scenario you you presented, and it's a very difficult one for the US to work its way out of. You know, this sort of gradual restriction and then this declaration that is logically consistent with the notion of one China. And how do you find a reasonable response through that, especially as you say, given who's in the White House right now? I mean, it's a really tricky scenario, but it must be one that they've wargamed. They must have played this through.

• 40:48Speaker 01

  So this is why Elon wanted to see the war plan, because it's really quite important to know what the US move would be. Now, I don't know, although I could get added to a Signal chat group later today that might tell me. But assuming that doesn't happen, I can only draw inferences from what's not classified. And it's clear that the United States is developing a deterrent strategy for the Taiwan Strait called Hellscape. We know this because San Papparo talks about it, the Washington Post last summer, with the very obvious intention of communicating to Beijing. We've got a plan for you, and that plan is to use air, sea and undersea drones to sink Chinese vessels, which is quite a big move when you come to think about it.

• 41:33Speaker 01

  So Hellscape implies war and all the war games I'm aware of, even the ones that the US comes out of ahead, are really large scale conflicts in which a lot of ships get sunk, planes get shot down, missiles get fired and people die. So President Trump could at some point be faced with the dilemma. Do you accept a quiet Chinese takeover of Taiwan like what they did in Hong Kong? Or do you risk World War Three by actually letting Hellscape happen? And having US naval assets sink Chinese ships. That's going to be the decisive moment of Donald Trump's presidency if it happens.

• 42:18Speaker 01

  Because they're in the Situation Room, they will have to decide, is America going to stay number? One in the Indo-Pacific but have to fight a war to do it. Or is it going to accept Chinese primacy, in which case the whole world reconfigures, particularly in the Indo-Pacific region and Beijing becomes the central hub.

• 42:36Azeem Azhar?

  I'd also say there's another, a second ramification, which is essentially around the control of this enormously important economic asset, which is the Taiwanese semiconductor industry, right? And these are losing control of that or rather handing control of that to China. There's an issue with Helscape, of course, which is that it relies on the availability of many thousands of drones, which right now I believe probably exist in a procurement spreadsheet rather than in, you know, the US naval material stores on their ships. So there's also that additional challenge, right? Which is that, that that notion of a remote control defence by robot of Taiwan remains fictional and will remain fictional for a few years.

• 43:19Speaker 01

  We don't really know how advanced it is. I think that if one talks to the people who do know that there's still quite a bit of confidence in the US military about what they could do right now. But the Chinese are adding to their own naval submarine, air missile and space capabilities at a much faster rate than we are modernising ours. And so I've just been reading an excellent forthcoming book about this by my Hoover colleague Ike Fryman and his co-author Harry Halum. And the balance of military power in the Indo-Pacific is inexorably tipping China's way. So that's the kind of military naval dimension.

• 44:03Speaker 01

  It's going to get worse. And remember Ferguson's Law. Ferguson's Law states that if a great power is spending more on interest payments than on defence, it won't be great for much longer. The US crossed the threshold last year and it's very hard for me to see anything that the Trump administration can do, including don't, that is going to fix that because the debt dynamics are really quite unhealthy for the US over the next, not just the next three or four years, but over the next 40 years.

• 44:32Azeem Azhar?

  You wrote a great opinion piece in the Wall Street Journal about that. We will put that in the show notes. I want to turn in the last eight or nine minutes to bringing these two big pieces together. So we have lived in a world of the last thirty years since the collapse of the Soviet Union with a particular security architecture and a particular set of economic rules. They were freedom of navigation, reduce tariffs, trade everywhere, move things to the lowest cost production, production is moving from China to Vietnam, which is doing very well. Thank you very much. It's clear that that is now over. So what is the shape of that new economic and security order? You know, I see certain things are easier to pick out in a way.

• 45:17Azeem Azhar?

  The notion that we might have more regionalized trading blocks. There might be a resurgence of the Belt and Road, which didn't do particularly what it set out to achieve a decade ago, but it may now do so with sort of software exports through DeepSeek amongst other things and the fact that you can sell cheap BYD in other cars. But there also seems to be a pressure for dual or maybe even three-track technology ecosystems, which would be, you know, core technology, but maybe it's even in some of the financial rails that might exist and a reshuffling of the global south and where it sits and who it looks to to buddy up with.

• 45:59Azeem Azhar?

  That feels to me like the most 101 answer to where this ends up. How do you imagine this settling down and equilibrating over time?

• 46:09Speaker 01

  Well, I'm not sure you necessarily do get an equilibrium under these circumstances. After all, what happened in the 20th century was the rival power blocks or empires ended up in two massive conflagrations.

• 46:22Azeem Azhar?

  Right.

• 46:23Speaker 01

  It was not a self-equilibrating system, was it? And the danger of unraveling the, what we call the liberal international order, a phrase that I don't like any more than the Holy Roman Empire, was like the Holy Roman Empire, which Voltaire said was neither holy nor Roman or an empire. The liberal international order wasn't really very liberal, wasn't very international and wasn't very. Orderly. But anyway, there was a system that essentially relied on US predominance. The best way of thinking about it, I did a book called Colossus on this, was it's just an American empire, an all but name. And the United States performs these unusual functions, but it essentially projects military power. It has complete military ascendancy, it has the reserve currency and it runs an international system where

• 47:05Speaker 01

  it buys, it's the consumer of first and last resort. And it sells claims on the US Treasury to finance it. This was the international order that emerged during the Cold War, triumphed in the 1990s and has persisted really down until the great Trump backlash. And this raises the question that you've posed, what comes next? Well, I think read George Orwell, don't overthink this. We end up in a world where there are three, not two, but three nuclear superpowers. Remember, that's Orwell's vision. He saw this very early on, but it's taken until now for China to be a nuclear superpower. And that's different from being a nuclear power. Nuclear power is, you got a couple of nuclear weapons, big deal. Nuclear superpower is you've got an absolute ton, you've got tons and tons of nuclear weapons.

• 47:50Speaker 01

  And China's getting there and it soon will be there. So that's the world in which three nuclear superpowers are in a dominant position. Nobody can argue with them. And if they choose to have spheres of influence, then that's the world. It's the world of 1984. The danger of this is, as in the 20th century, that it's not stable. And you end up with a conflict. And that's the thing that I I regard as the biggest risk in all of this. The miscalculation, whether it's like the miscalculation the Germans made over Belgium in 1914 or the miscalculation that Hitler made about Britain and Poland in 1939. Somebody miscalculates and then you end up with a conflict.

• 48:32Speaker 01

  And as we've seen already in Russia, Ukraine, it's easy to start a war, hard to stop one. So I think there's a risk that this system that is evolving here, which Gideon Rachman called the sort of age of empire, that this system is unstable as the last of the age of empires was. Now. Key point, history is not a deterministic system and we can't sit here and project with nice straight lines how we get from liberal international order to nineteen eighty four or World War Three. There's a scenario in which Trump turns out to be a very stable genius and it all works out much better than you or I expect.

• 49:14Azeem Azhar?

  Yeah.

• 49:15Speaker 01

  For example, the counterparties fold in the trade war, they just all fold and we end up with Bob Lighthizer's fairer trade. There's a scenario in which we underestimated Elon, he actually does fix the federal government and it gets more efficient and it costs less money. There's a scenario where the interest rates come down and that actually ultimately delivers something meaningful to households. And the stock market only corrects a little and then it's all the way back up because deregulation is real, et cetera. It's always a mistake to be too negative about the United States. One always has to remember its innate advantages over everybody else.

• 49:51Azeem Azhar?

  Absolutely.

• 49:52Speaker 01

  You get to attract all the talent, give it money, it does amazing things. Elon is only one of many. And then the other side is like not that strong. What if the Russians just overdo it? What if the whole system that Putin's built is actually very fragile and can't withstand a ceasefire? That's often the way about wars. And then finally, China. China has these profound structural problems that aren't really fixable, demographics, the debt dynamic. So although we can see it all going to hell and public intellectuals get paid more when they say things are going to hell. There's a scenario in which it turns out better than most people expect. Because Trump gets lucky and the other side is actually quite weak. And that's the future that not many people are betting on at the moment.

• 50:35Azeem Azhar?

  Uh, well, I mean, Neil, that's a wonderful way to summarize where we might end up. I'm glad that you're speaking with such doom and that you are a public intellectual. I hope business is exceptional for you. It it is going to be an increasingly complex world. I think one of the things that needs to happen and people are waking up to it is dusting out their histories. Because if you've been in the diplomatic service, if you've been in trade and negotiations over the last. Forty years, you've played with such a different playbook to the one that you currently have. And so with that, I think your own Substack is a great place for people to to start. Why don't you give a nod to where people can find you on it?

• 51:17Speaker 01

  Well, I have a Substack, which is called Time Machine, where I post everything that I write. My core competence is writing books. There are still bookshops as well as Amazon, and I think there are sixteen books by me to choose from, of which maybe the most relevant to this conversation is War of the Worlds. Though the most recent book is Doom. And as I think I mentioned, Azeem, I'm in the midst of volume two of the magnum opus on on Henry Kissinger, who had quite a good handle on all the issues that we've been discussing. And and though he's not around to to comment anymore, he left quite a lot of commentary for me to plow through as I write the second volume.

• 51:51Azeem Azhar?

  Well, absolutely. You you've inspired me to go back and dig into Kissinger a little bit. Thanks again for being with us today. Neil, you are at Neil Ferguson on Substack as well. I am at Exponential View. And and if you enjoyed today's conversation, we've got many more. Every Friday, the intersection of technology, economics and geopolitics. So until next time, thank you so much and thank you for being part of this community.

• 52:18Speaker 01

  Thanks, Azeem, and thanks, everybody, for joining. Have an amazing weekend, everybody.

• 52:22Azeem Azhar?

  And to you. Bye bye, Neil.