Interview: David Goldman on China’s Miraculous Tech Revolution

David Goldman is an author, economic strategist, investment banker, and music critic. He is President of Macrostrategy, LLC, a Fellow at Claremont Institute, a Senior Fellow at the London Center for Policy Research, and a Senior Editor of First Things. His writing has appeared in Asia Times, Forbes, and The Wall Street Journal. He can be found on X @davidpgoldman. This interview was edited for clarity.

Ari: What encouraged you start writing about China?

David: I thought I was long retired from Wall Street but, in 2013, some friends helped establish a boutique investment bank in Hong Kong, and they asked me to survey the Chinese economy. When I examined China’s ambitions for high tech, I did a double-take because the strategy was extremely impressive. Given its resources, if China pursued that policy, they possessed a serious opportunity to surpass us within a few years.

After the survey, I joined the investment bank. One of the first things I did was advise Huawei, the telecommunications company, regarding its expansion into Latin America, particularly Mexico. This was before Huawei was considered a threat to American national security. I accompanied Huawei officials to Mexico and introduced them to cabinet members.

I saw their presentation on the Mexican economy, which was extremely thorough. They deeply understood Mexico’s telecommunication system — its strengths, and weaknesses; I complimented them on the research. They explained that they had a plan to digitize economies of 100 countries, just after Xi Jinping had announced the Belt and Road Initiative. At that point, I knew we weren't in Kansas anymore.

Huawei has broader ambitions for telecommunications than downloading favorite TV programs and making calls on smartphones. They considered digital transformation of the Global South a starting point for broader economic transformation that reaches into e-commerce, e-finance, telemedicine, productivity applications in manufacturing, and more.

The Chinese were willing to invest enormous sums in both physical and digital infrastructure. They developed a plan for the Global South — for six billion people in the poorest part of the world — and executed it. I was a very minor observer and participant. They transformed the world’s balance of economic and political power.

Ari: What do Americans or mainstream media get wrong about China and the threat it poses?

David: Mainstream media tends to deprecate China's accomplishments and view its successes as anomalies. They argue that China’s success must be temporary, the Chinese system can't possibly work, it's not capitalist, and it's not a democracy. Prevailing wisdom is that only democracies can succeed.

Mainstream media chronically underestimates what China can accomplish. I would never live in a country with a political system like China's because I find many aspects repugnant. However, China is a radically unique civilization that works differently than ours. It has been very successful.

China increased its per capita GDP in real terms by approximately 27 times since Deng Xiaoping’s 1978 reforms fostered China's great industrialization and lifted more people out of poverty more quickly than any country in world history.

China is trying to expand its approach by harnessing the labor of billions of people outside its borders as part of its broader economic sphere and, in many respects, is succeeding. For example, Donald Trump is concerned that Mexico will flood the United States with cheap electric vehicles. Five or ten years ago, who thought Mexico would threaten the United States?

China’s direct investment in Mexico, its technology, and its supply chain is suddenly a serious threat to the American auto industry, as opposed to a minor adjunct. The world has changed significantly.

Ari: Has the U.S. succeeded in slowing China’s progress?

David: The U.S. has slowed China and imposed substantial costs. In 2020, the Trump administration imposed restrictions on high-end chips for Huawei and other Chinese companies. Most American analysts thought that would end China’s plan to roll out a national 5G network because it can only be done with advanced chips.

However, Huawei found a workaround using older chips to perform the same functions. That tweak probably cost them substantial power consumption because higher-end chips are energy efficient. However, China now boasts 95 percent 5G coverage — real 5G coverage, much faster than the so-called “5G” from American telecom providers.

In the grand scheme, the U.S. cost China a lot of money and slowed them down, but didn’t stop them.

Notably, different applications of technology require different computing power. Texting a video requires a fabulous amount of computing power. Artificial intelligence can be applied to a coal mine to check machinery wear and tear and to run machines remotely to ensure worker safety, which can be done with older chips.

China is doing things differently than us, focusing on industry and transportation — also known as the Internet of Things, and applications for AI. They produce spectacular results, though the results are preliminary and partial.

About a year ago, Huawei announced the first fully automated plant to make washing machines. Last week, smartphone producer Xiaomi announced the opening of a 3 billion RMB facility (~$400 million USD) that can produce 10 million smartphones a year — one every second.

I've seen automated plants in China; they're spectacular. The Chinese surpassed us in industrial automation. China now installs more robots and graduates more engineers than the rest of the world combined. They employ spectacular effort, and it has been selectively successful. China has many economic problems, but it has also achieved important successes.

Ari: Touch on China’s problems.

David: China’s population is slowly declining. If the birth rate doesn’t increase, the population will decline rapidly in 50 years, which would be disastrous. South Korea is a good example. After the 1997 Asian financial crisis, South Korea quintupled its industrial production in 15 years. However, its industrial labor force shrank by 20 percent.

China has pockets of real excellence. It dominates electric vehicles, solar cells, telecommunication, and infrastructure. The reason it achieved higher industrial production with fewer workers was that, instead of making cheap stuff, it manufactured cars and built ships. It made semiconductors and high-value-added manufacturing.

However, China's economy is still based on semi-skilled labor and older technology. The question is whether it can implement AI-driven manufacturing in the rest of the economy. It’s a race against time with no guarantee of success, but there's also no reason to think they will fail. The strategy is impressive and on schedule.

China’s enormous problem is shifting the bulk of investment from real estate to manufacturing. In two generations, from 1979 to the present, 700 million people were relocated from the countryside to the city. That required building homes for 700 million people. As a result, real estate became the largest sector of the economy.

China has largely accomplished its urbanization plan. The number of people likely to move to cities now is significantly smaller. In typical Chinese fashion, a forced shift from real estate investment to manufacturing investment was achieved by bashing the real estate sector, making credit scarce, and collapsing real estate prices — which negatively affected consumption.

June data for China shows retail sales up by only 2 percent year over year. Consumption is weak because individual wealth shrunk as housing prices fell. Simultaneously, industrial investment is up 10 percent year over year. The net result is 4-5 percent annual growth — levels necessary to achieve benchmarks the Communist Party established through 2050.

Ari: Is China’s development a vindication of Xi’s ideology? Or is something else at play?

David: China encouraged many companies to enter the EV market; there are now 100 Chinese EV producers. That's what America looked like 100 years ago. There was an enormous proliferation of entrants into the market and, after the dust settled, there were the big three. That's probably what will happen in China.

Similar to its approach with semiconductors and semiconductor equipment, the Communist Party encouraged many entrants. Ferocious competition erupted among privately-held firms receiving government support. Entrants duked it out to determine a winner. BYD looks like a winner.

This is not ideology. China has great national goals. The means they adopted to achieve those goals include a mixture of an old-fashioned, state-directed economy and cutthroat capitalist competition.

Sometimes, they go too far in one direction or the other. Beginning five years ago, the Communist Party's crackdown on Jack Ma, AMP Financial, and a number of big internet firms was very costly. They miscalculated, discouraging private investment. Other manufacturing is progressing slowly. They’re trying to build a civilian airliner; that’s been slow-walked.

However, the EV and telecom infrastructure sectors are big successes. In specific pockets of excellence, they're the best of the best. The challenge is to extend that to much broader economic sectors.

Huawei’s YouTube videos show them doing exactly that. Their AI approaches to manufacturing are amazing. Now they’re moving into coal mining, heavy equipment production, and other areas. Will they succeed? There's no reason to assert a priori that they’ll fail.

Ari: Some question China’s ability to authentically innovate.

David: Developing countries that are trying to catch up imitate. It's much cheaper to imitate than innovate. Fifteen years ago, that was probably a correct characterization of China. However, a great deal of innovation is happening now.

It is extraordinary that BYD can produce a Seagull EV for $9,000 and sell it for a profit. The fact that Xiaomi can produce one smartphone per second in a fully automated plant is remarkable. China's research and development surpassed the European Union's and is moving up on the United States.

Some of that R&D — perhaps the most important part — compensates for technology restrictions we placed on China. For example, Huawei produced and designed a seven-nanometer chip that can drive a 5G smartphone. It shocked everybody. No one expected that.

They used an expensive, circuitous workaround: older chip lithography equipment which involved a lot of innovation. It hurtled them to one generation behind us instead of three generations. Much Chinese innovation involves doing what we did, but with limited means.

In many respects, China is innovating. Innovations they made in applying AI to manufacturing are state-of-the-art. It’s foolhardy to think China can't innovate. Western culture is more conducive to innovation than Chinese culture, but that doesn't mean the U.S. is a 1 and China is a 0.

Ari: How does America compete with China in manufacturing?

David: On several occasions, Donald Trump proposed that Chinese EV bankers set up shop in the U.S. and employ American workers — exactly what Ronald Reagan did to the Japanese in the 1980s when more efficient Japanese automakers threatened to destroy the American auto industry.

Reagan imposed a ceiling on the number of Japanese cars sold in the U.S. If Japan wanted to sell more in America, they had to manufacture them here. That strategy was transformative for the American auto industry and raised the overall standard.

We can emulate Chinese industrial methods. However, more important is doing things no one has thought of. As I said at Nat-Con, during the Cold War at the peak of the moonshot program in 1965, one out of every $8 spent by the federal government went to R&D.

The space program, smart weapons programs, and other programs we implemented to win the Cold War spawned the digital age. All digital-age innovations begin with the Defense Department funding a military program and then applying it to civilian purposes.

We have to leapfrog the Chinese instead of playing catch-up. We have to create new industries. An obvious example is directed energy weapons — using lasers, microwaves, and other methods to interdict missiles. That involves a whole set of problems in physics and computation, with numerous applications outside the military sphere.

Quantum computing and drone development are palpable examples. We should learn from past successful programs the U.S. implemented using defense technology to generate civilian spin-offs. Incremental measures won’t do us any good, nor will a return to where we were. Industries China wrested from us 20 years ago are moving to Vietnam or Indonesia.

Ari: What are misconceptions about the military threat posed by China?

David: The United States has 230,000 military personnel deployed globally. China has only 200 combat troops deployed outside China — its Marines are doing anti-piracy work in Djibouti on the Horn of Africa. China's military footprint outside China is minimal. There's talk about a possible base in Cambodia; that would total two bases outside China. The U.S. has hundreds.

China has invested massively in defense of its coast. Its inventory includes thousands of anti-ship missiles. It's mass-producing cruise missiles, which differ from ballistic missiles. Cruise missiles are slow-moving, jet engine-powered devices. Ballistic missiles enter the stratosphere and come back down at Mach 5 or 6.

China invested enormously in satellites that can identify and track moving ships. According to the Pentagon's 2023 assessment of the Chinese military, China can sink anything on the surface within 1000 miles of its coast. That's not counting modern aircraft and submarines.

It's an elementary conclusion that China has us massively outgunned in its home theater. Missiles can be shot down with other missiles, but an American destroyer can carry only 100 interceptors. China can fire unlimited interceptors from land. No expeditionary force composed of surface ships can match what a land-based power can muster in its home theater.

We built the wrong kind of military to take on China. In 1996, all we did was sail an aircraft carrier through the Taiwan Straits, and the Chinese shut up. Bill Clinton did that. Now, our aircraft carriers are sitting ducks. The Chinese can throw scores of vessels at every one we deploy. This insight is not unique to me. We just don't discuss it because it's humiliating.

Ari: Can America continue to defend Taiwan? Is reunification inevitable?

David: Taiwan has the lowest birth rate in the world. In this century, Taiwan will lose 75 percent of its working-age population. At some point, the labor loss must be replenished by immigrants from the mainland. As a result, unification will take place de facto.

I don't think China wants to invade Taiwan; there's no strategic reason. Taiwan produces no energy. They do consume natural gas, and storage capacity for natural gas is roughly three weeks. All China has to do is put a shot over the bow of an LNG tanker approaching Taiwan, and the island will shut down in a month.

American war games and policy speculation have focused on a potential Chinese invasion because the aggressors would have to cross 90 miles of open ocean. The Navy could shoot them up badly during the journey. However, the Chinese are not stupid. An invasion is an extremely improbable scenario. Blockade is very easy and would accomplish the same thing.

I don't know Taiwan's ultimate disposition. The Taiwanese people don't want war with China. They don't want to provoke China to military action by declaring independence. Nor do they want to be governed by Beijing. They prefer their own democratic system.

The best we can hope to achieve is maintaining the status quo — meaning Taiwan makes no move toward independence, and China understands there will be severe penalties for any military action.

Ari: What are you optimistic about when it comes to China?

David: China is skilled at applying technology to solve the fundamental problem of increasing the income of people who make $3 per day to $20 per day. They did it at home, and they're trying to extend it to another 2 billion people in the Global South. In my 2020 book, I call that “Sino-forming” of the Global South.

China’s problem is that it doesn't know what it wants as a civilization. East Asia is childless — not just China, but Japan and South Korea as well. The region has extremely low fertility rates. Once people achieve a certain security, they lose interest in having children.

There's a sadness and malaise about East Asia I find disturbing, and don't completely understand. People think the Chinese are family-centered and love children. But East Asians are at the forefront of demographic decline. If they don't reverse it, China will be a very different, shrunken place in a century.