McDonald’s, Not Microchips: The New Rules of Trade with China. With Michael Sobolik

Kit Conklin: Welcome to the Extra Exchange. I'm Kit Conklin. This is where you'll hear unfiltered conversations with the people shaping the global economy, the policymakers writing the rules, the executives whose decisions move markets and nations. Today, we're talking China. The defining bet of the post-Cold War era was simple. Bring China into the global economy, and it would become freer, richer, and more responsible. My guest today argues that bet didn't just fail. It gave Beijing the capital, the technology, and the access to challenge the United States and the West head on, both economically and militarily. And here to help us understand how we got here is Michael Sobolik, a senior fellow at the Hudson Institute and the author of Countering China's Great Game, a Strategy for American Dominance. It's a sharp, unapologetic case for why America needs to stop managing the competition with the Chinese Communist Party and start trying to win it. Let's get to it. Michael, thanks so much for joining us. Your book opens by saying the West is in a cold war with the Chinese Communist Party and we're losing. How do we get here? Two things we we got here because Xi Jinping and the Chinese Communist Party are bound and determined to unseat the United States as the most powerful country in the world. And secondly, the United States has been slow to internalize that reality. I I think this is the biggest asymmetry between Washington and Beijing. And it's it's not necessarily new, but it's still persisting, which is the CCP has made it abundantly clear. within China and now externally in their diplomacy and in their own rhetoric, that they view themselves in a zero-sum relationship with the United States. Whereas successive American presidents and American presidential administrations believe that there's this opportunity to get a deal, that there's the chance for a positive sum actual win-win outcome. Between America and the Chinese Communist Party. So when you see President Trump pursuing what he's always pursued, which is a trade deal, at one level that's fine because he's right that China has exploited America economically. But they've actually done quite more than that. They're attack they're trying to attack the foundations of our political system. And that w takes a whole bunch of different forms, which maybe we'll get into as the conversation goes on. But what we got here. Because we've been too slow and I think maybe too optimistic and too naive about our ability to shape the Chinese Communist Party. And we've have a track record of failure doing that. And I I think unfortunately we're we're still caught up in some old habits and old rhythms. There was consensus across Republicans, Democrats, ⁓ in the United States and across the line in in Europe. ⁓ European capitals as well, that once China acceded to the World Trade Organization almost 30 years ago at this point, that China would become freer, more prosperous, that ⁓ trade would be even and democratic, and the global trading system that was built by the United States after World War Two would welcome China in and China would change. And that's clearly not happened. And we see some of that in the most recent Trump Xi summit. Can you tell us a little bit about what happened at that summit? And from your perspective, thinking about this as a strategic competition and thinking about a trade deal, what happened that went well and where do you see things going over the next couple of months? Yeah. So the the summit was, ⁓ my gosh. I I I the amount of punditry I did in the lead up to that summit and a lot of China watchers did leading up to that summit was insane because there was a lot of anticipation. But There wasn't really that much of substance to come out of the meeting. So, like you you had a few things that there's the Board of Trade and the Board of Investment, which I think it's really premature to say that these are big deals. Maybe they become actual institutions that lubricate trade or, you know, facilitate trade in segmented, safe, non-security threatened industries. Maybe they're nothing. Maybe they're just a rebrand of. prior ambitions. I I'm not sure. The most substantive thing was that shortly after the meeting, there was this deal announced between Qualcomm and ByteDance for data center chips, which was really interesting. I haven't seen any reporting to verify that that deal was a product of the summit, but Qualcomm's e executive was on the trip with the other CEOs that ⁓ went over there. So That's interesting. To me, the really consequential stuff that happened was number one, the president's comments about Taiwan with Brett Bear, which were interesting in and I I would argue a bit of a diversion from America's historic policy, historical policy on Taiwan. And then secondly, the fact that there wasn't really that much resolved, I think speaks to this trade truce that Trump and Xi negotiated back in November of last year. The big question that Trump is angling for here is number one, can he keep that truce more or less continued? And so far he's succeeded in that. And can he get a deal? But let's talk about what he's paid in order to sustain that truce. Before the summit, Trump said that if any country supplied Iran with any sort of military ⁓ capability, he would hit them with a fifty percent tariff. And then news broke not that long after that China was doing exactly that with transferring some components that would be involved in weapons to Iran. And Trump just dismissed it. And I think this is an interesting pattern with Trump, where he has a history of saying something like a definitive policy statement. And then when the question comes of okay, are you going to back this up? ⁓ his position will morph and it will change. And sometimes it's good for a president to have that flexibility because you always want to retain options if you're a policymaker. It also, I think, has the risk of weakening deterrence. Because if we say we're going to do something and we don't follow through, that does signal a revealed preference to the CCP. So to me, I think the interesting thing about the summit wasn't what were the deliverables, because like, listen, like Boeing's stock price went down when the 200 jet purchase was announced. Like they weren't. terribly happy with the outcome there. So there wasn't that much substance, I see. But the real question is, what is Trump paying in order to sustain this trade truce? And what will he have what will the United States have to continue to pay to sustain it until November comes? It's a fair point. And I think right now it's fair to say that we, the United States and China, are in a sustained detente on trade at least. And there's been some pitter patter ⁓ after the summit. You mentioned that there was a threat of additional tariffs on any country that was supplying goods or technology to the Iranians, who in then turn would use that technology to attack American men and women in the Middle East. Well, I mean, there were sanctions placed on several Chinese companies for doing just that. And there's been an uptick ⁓ for example, in other types of economic security toolkits post ⁓ summit. The biggest one that I wanted to get your opinion on is the Chinese military companies list that the Pentagon publishes. For those in the audience that are not familiar with this, it's referred to as the 1260H list within industry, 1260H being ⁓ the line within the National Defense Authorization Act where this was originally codified into legislation many years ago. But this is a list of Chinese military companies that are, quote, operating in the United States. Now, it doesn't mean once the Pentagon publishes a name to this list that industry can't do business with that party necessarily, but it does create some elevated risk. And after the summit, ⁓ the Pentagon did add several huge Chinese companies to this list Alibaba, BYD, NIO, Woshi Aptech, ⁓ familiar names with anybody in the economic security space, but these companies alone have a market cap. Combined well over a trillion dollars. And in some instances, these companies are actually publicly traded in the United States. So, Michael, we have this world where the Pentagon is designating companies as a Chinese military company operating in the United States. These same companies are publicly traded in New York, and we're trying to still figure out whether there's a trade detente coming off of the summit. What do you make of this? There's some kind of There's some differences in that that policy approach. Sure. So 1260H, let's start there, which is if your eyes haven't glazed over with the term 1260H, let's let's break it down. that refers to the section of the Defense Authorization Act from a number of years ago where Congress ⁓ authorized the creation of this Chinese military companies list that the Pentagon will curate. And the the point is not. Have like they're on the list and then automatically hit with tons of sanctions and penalties because you're right. There are no there's no trigger mechanism with 1260H. But it I find that it's usually a great indicator of where the interagency is probably gonna be heading over the next year or two. It's not a guarantee, but it's a pretty decent indicator. And one of the reasons for that is ⁓ a couple of years ago or so, Congress. included this investment prohibiting outbound investment into the PRC and one of the People's Republic of China and one of the ⁓ elements of this bill, which is kind of nerdy and wonky for us DC insiders, but is actually really important for like interagency cooperation, is that it says if you have a company put on this list, then the other interagencies that have their own China lists, whether it's in Treasury or Commerce or state, There needs to be a due diligence step of, ⁓ they just designated Alibaba on the Pentagon's military list. Should we consider them as a candidate for these other punitive responses? And what would the logic for it be? So it's not binding, but there is that ⁓ requirement that that ⁓ evaluation has to be undertaken, which I think is a very good thing because there's a lot of there are a lot of lists in the US government. So if we can harmonize them, that's good. But industry certainly wouldn't want that. That's yes. But I think to your broader question about like what this signals, where we have this trade truce, but then we also have all this activity with ⁓ designating companies. Listen, the US-China relationship is very complicated. And for a long time, the through line, I I would say maybe from like 2017 to 2018 to now, we have been in this chapter. Between Washington and Beijing, where we realize that unmitigated cooperation and engagement is not producing the outcome that American leaders hoped it would a few decades ago. So on the one hand, of course we're not gonna stop trading with China because that that's just an infeasible policy. nor ⁓ are we going or n I think nor should we Have zero checks for national security. So we've been in this middle space where there's cooperation and competition happening at the exact same time, sometimes in the same industries with different companies. And there's usually a lag and a delay. Where I think comp the competitive posture has been on the upswing, generally speaking, I would argue since 2018 or so. But industry. Has understandably had a lot of opinions on that. And some companies have been fairly resistant to ⁓ investment restrictions, ⁓ tariffs, and ⁓ and other instruments too. And there have been elected officials that are very hesitant to take votes that would impact jobs in their state or their districts. So you see this tug of war and this really interesting interplay between cooperation and competition. And my Big ⁓ message when I wrote the book that you asked about countering China's great game. And now at Hudson Institute has been any every single day in the short term that we delay getting China out of our critical supply chains, that we delay investing in their critical industries, that we avoid getting their kill switches out of our critical infrastructure. Every single day that we delay that reckoning. increases the future cost of of dealing with it. Cause at some point we will have to deal with it, whether it's a war or a crisis or what have you. And if deterrence fails and we have not taken those steps, then I think we're gonna look back on this chapter in US China relations with a lot of regret and frustration. But I think what you're seeing is that tug of war and that tension right now. No question. And I think about it from the perspective of having spent a lot of time in the region I when I go to Asia, when I go overseas and I see McDonald's or Starbucks or Nike, I want that. I want American companies to succeed globally. I want American beef to be sold into China and sold through a McDonald's because I'm an investor, right? You I'm sure are also an investor. We have retirement accounts where American companies succeed, they they raise ⁓ revenue for all of us, right? And so there is a line that you mentioned. Between economic cooperation and competition. So I personally want American brands to succeed in China. But at the same point in time, I don't want our highest end compute going to military end users that support the PLA, the People's Liberation Army. So drawing that line is certainly something that I feel like we need to spend more time on. And I think the biggest example of this is compute and the AI. Cold war or hot war that we're now in with respect to US China tech competition. From where you sit, why is compute now that strategic asset? Why is compute and AI at the forefront? Where I think everybody agrees that selling McDonald's and China is okay, but top line AI compute chips, that's a different story. Yeah, if we can get China hooked on Big Macs, that's great. I don't think we're gonna get them hooked on Nvidia's chips. So let's let's unpack some of this. ⁓ China is let's be specific here. The Chinese Communist Party ⁓ deals in economic statecraft with a lot of precision and intention and focus. And they have made it clear ⁓ for well over a decade now that they will not abide dependencies on the United States in critical industries and in critical technology. you can even go back to the nineties where the United States went into China to help build up the internet there. And not only did China appropriate a lot of that intellectual property, and over time you have a company like Huawei emerge where ⁓ with you know sub-market pricing and through some predatory actions as well and some ⁓ espionage for trade secrets. ⁓ they have not only dominated the market inside of China, but they've squeezed out their foreign competitors in global markets. So I think what you do inside of China doesn't stay in China. It's kind of like Vegas in that way. Like the decisions you make there will have global ramifications. So, like when you talk about Nvidia and something as critical as AI chips, I understand Nvidia's argument that listen, we want the tech stack of the United States to be the global standard. I do too. I I think that's something that just about everybody can agree on. And even the folks on the Hill who are advocating for export controls want the same thing. Cause if you look at like the AI Overwatch Act, which has the argument that we need to treat chips like weapon sales, ⁓ in terms of how Congress reviews those export licenses, there's this other section in the bill that has gotten virtually no press at all, which is saying. Forget about China for a second. If you're dealing with a trusted partner, pedal to the metal for export licenses. Let's get this the stack diffused around the world. I completely agree with that. I think we're the real nub of this debate is China. And Nvidia's position is not only do they need AI talent inside of China, which which I think to a point is an interesting and a fair argument, but they also make this argument. That for if we can increase global sales, that increases revenue, which increases our RD, which actually keeps us further ahead of our Chinese competitors. I also think that what they ignore is that by selling, for instance, an H200 chip to China, if you believe analysis that the Institute for Progress put out a few months ago, Huawei will not be able. To design a chip that is competitive with the H200 until the fourth quarter of 2027. So when you sell a chip to China that they themselves cannot make themselves, you are doing a couple of things. You are solving a compute challenge that cannot be solved domestically. You are also solving a supply problem for them because China cannot fabricate enough chips to meet their own domestic demand. And part of that is a function. Of the semiconductor equipment ⁓ tools that we have put in place on them dating as far back as the first Trump administration. So you're giving them technology they can't build, you're giving them supply that they cannot produce themselves, and you're equipping their AI models, either their LLMs or their boutique, military-coded ones that the PLA is specifically working with, to train the People's Liberation Army for warfare against the United States. So what I don't hear from Nvidia is a good faith reckoning with those arguments. If anything, they generally dismiss them. And I understand the move and the desire to boost your revenue. Like this is the United States, like profit matters here. It may not matter in China, but it matters here. So like to a point, like I respect where they're coming from. But it's the job of policymakers and elected officials to consider the costs and the trade-offs. And I think that the risks of selling these highly advanced chips into a foreign adversary country with military civil fusion strategy inculcated throughout the entirety of that economy, I think the risk outweighs the benefit. And I think your comment on selling more is super critical here. And I think that debate is largely missing from The policymaking community and certainly those in industry, I think, are are struggling to grasp ⁓ some of this. This concept that if we are able to export more to allies, then the revenue that those increased exports could gain for American ⁓ technology companies could far surpass what they would get from ⁓ short-term access to the Chinese market. So, this concept of global technology assurance, for example, where the American AI exports program is just absolutely pumping AI and the data centers and the chips into third countries that enable ⁓ the hyperscalers and the large AI companies and labs in the United States to grow and dominate the global AI economy. I think From a policymaking perspective, that's what many want. And I think there's a way to thread the needle on the national security side by restricting those high-end chips from our foreign adversaries while expanding market share and protecting ⁓ the capitalization that these companies have that in some ways are lifting the American economy right now overall. On AI, though, I want to slightly change topics to a recent story that came out from OpenAI. And I want to get your take on this for a couple of reasons. But here's the background. OpenAI came out and said that Chinese malicious actors, so the Chinese intelligence services or the Chinese military, are using AI models to create propaganda and influence campaigns targeting American citizens and specifically targeting the public debate right now that's happening all over the country. For data centers and whether data centers can or should be built in certain cities or certain states across the country. This is without question a hot button issue for the electorate across the country. There are real challenges with data centers, whether it's power or the water that's needed to actually enable that compute to work. But when we start thinking about Chinese influence operations, targeting that. type of domestic policy in the United States. How do you think about that? I think that the Chinese Communist Party is looking to slow the United States down when it comes to the AI race. So I I look at what they're doing with inserting their own party narratives into our domestic discourse as the other side of the coin with their chip smuggling operations. On the one hand, I I think the two are kind of linked. On the one hand, they want to get US compute ⁓ either by remote access or by smuggling, diversion, what have you. And on the other hand, they want to slow down our own compute at the same time. And if they can ride the wave of domestic discourse that's already happening and insert their narratives and their own disinformation and propaganda, all the better for them. Listen, the Chinese Communist Party has a really effective track record of using propaganda to deceive Americans. And and I hasten to add here, just because the CCP is doing this does not invalidate genuinely held opinions by Americans about AI. That we are an open book, we're a democracy. And I I have my own opinion of data center data centers generally. I think we need to build them and we should build them. And I also think that folks who have concerns about them, their concerns should be heard, not just at the national level, but especially in their towns and their cities where these things are actually going to be built. So I think it's really important not to view our fellow Americans as pawns of China just because they have an opinion about AI. I think what's important here is to focus on the Chinese Communist Party. They have an interest of slowing down America's ability to compete in AI and to build data centers for compute. So if they can find a way to do that, they're gonna do it. And we need to call it out when it happens. And I'm glad OpenAI did that. We need sunlight because the C C P hates it. And generally that's what America is really good at. I love that. And the CCP hates sunlight for a variety of other reasons, some of which are related to your comments earlier about supply chain choke points. This concept that ⁓ China has spent years of industrial policy creating kind of hidden amongst global supply chains, these choke points where they control the majority of the ingredients that create pharmaceutical goods. Whether it's antibio ⁓ antibiotics or the cancer ⁓ drugs that millions of Americans rely on for treatment. China is the linchpin. They are the global producer for those pharmaceutical goods, the same way that they are for critical minerals and rare earth magnets. That ⁓ there's there's a real risk right now that these supply chain choke points that are hidden amongst the global economy are going to create long-lasting issues, ⁓ not just ⁓ for AI, but for a whole swath of other industry verticals. I think a lot of folks in industry are waking up to that. They see where these risks are, they see increased policymaker pressure on some of these topics. But if you could get every American CEO or every Western CEO and and listen to you, what would you tell them to do differently? What's what's the one thing that you would share with CEOs as they think about this type of competition. Honestly, I I would extend an invitation to have more effective conversation and dialogue between the China Hawk community and industry. I think it is really easy for folks in my camp to get very frustrated when we don't see change moving as quickly as we think it should be going. And it's really easy To get frustrated not just with political stuff here in DC, but to get frustrated with industry because from our DC swamp perspective, we think all the national security concerns are so abundantly clear. I am becoming increasingly convinced that that frustration is not very helpful when it comes to actually changing this the posture of the United States toward China. And it's also not really helpful. For helping our companies succeed, because we should be proud of our private sector. We should be proud of our innovators. I am. And I want my community and like myself here included, like, I want us to be helpful and a resource. And I want to understand what these companies are going through. And my simple invitation would be ⁓ please consider this a like. Investing in dialogue is something that a lot of us in DC are very interested in. I've talked with Frontier Labs over the past year and a half, with a lot of chip companies, ⁓ with some biotech firms as well. Not only do I learn from the innovation and that a lot of these companies are doing, that cross-pollinization in very like ⁓ respected, safe private circles, I think is gonna build the vision and the trust. That we all need in the United States to really systemically change our footing toward China, but we need to be talking with each other and not at each other. So honestly, that that's as simple as it is, that's what I would say. I would love to have conversations. And I think a lot of my colleagues in the China Hawk space would too. You hit a central thesis for the extra exchange. So thanks very much for that plug. ⁓ Michael, I always ask this question what's your favorite book that you've read recently? We'll close here. Yeah. Two. Two of them. So ⁓ I actually have one of them actually physically here, so I'll hold it up. The Irony of American History by Reinhold Nieber is ⁓ one of the best books on American foreign policy I have ever read because he talks about the soft underbelly of the United States during the Cold War. It was written in the fifties, and he talks about how America has This perennial problem where it's really hard for us to sacrifice material comfort for strategic necessity and for moral necessity. And the second, which ⁓ was written in the 70s, is by Vaklav Havel called The Power of the Powerless. And he writes about that same tendency in the United States where we're not communists, we're not authoritarian or totalitarian, but our streak of that is in our materialism. And I think that is a problem that is beset. America throughout different decades and different chapters, but we've also overcome it before. And I think that is a problem that we're encountering now in our relationship with the Chinese Communist Party. And I think the more we engage with that strategic tendency, the better positioned we'll be to address it. Great additions. Thanks, Mike, for Michael, for joining us. Thanks so much. Thanks to Michael for a sharp conversation today. Here's what I'm sitting with after the discussion. The competition with China was never really about any single headline. It's not about tariffs or chips or Taiwan alone. It's all of these things together. It's about whether the United States and its allies can understand risk clearly enough to act with strategy and discipline. And the same goes for industry operating in this space. So thank you for joining us on the Extra Exchange today. Do us a favor. Subscribe and share this with someone who needs to hear it. We'll see you next time for another unfiltered conversation with the experts moving markets and nations.