Noah, why do economists constantly ignore Wright’s Law and learning curves?
Manufacturing scales on learning curves; services and farming don’t. That alone makes manufacturing fundamentally special. Some economists seem skeptical that these curves even exist. I own two manufacturing companies, and I’d literally bet my life they do. And if we accept that they exist, doesn't that break the standard assumptions about free trade? If one country captures all the volume, they capture the entire learning curve and inevitably dominate the global market.
Look at Ricardo’s classic comparative advantage example. If it’s wine vs. cloth, you obviously want the cloth. Textile production has a learning curve and massive technological spillovers (the Jacquard loom literally led to the first computers). Wine doesn't. If Portugal had all the looms and the Brit’s had all the wine and farming, I think we would live in a much different world today.
Comparative advantage assumes efficiency is static. If Portugal starts out better at both, but Britain gets all the cloth production, a 10% learning curve changes everything. Give it ten years, and Britain gains an absolute advantage, swamps Portugal with cheap textiles, and wipes out their manufacturing base. Meanwhile, wine just stays wine.
This isn't an argument for pure mercantilism. Free trade between peers like the US, Europe, and Japan works because we trade advanced goods back and forth. We scale in different subcomponents without anyone trying to monopolize the entire global learning curve. But the idea that we should just surrender an entire industry like autos because another country is slightly more efficient is suicidal. You lose all the technological spillovers, and once you lose the manufacturing base they’re almost impossible to restart so the company that has them can own you. You have to separate high learning curve products from low ones. If a rival country aggressively targets all the learning curves and only buys our agriculture in return, that is a terrible deal. Who cares if they buy our soybeans? Soybeans don't have learning curves. When a country tries to capture the entire market for the things that actually matter, you have to throw up protectionist walls.
I’d love to see you write an article on learning curves and how they have the potential to break the rules of comparative advantage in some situations. Seems like that’s a more straightforward explanation of why a ricardian framework is wrong here.
But the issue I’m trying to highlight is that the economics profession has a massive blind spot regarding learning curves (Wright’s Law). Economists usually brush this off as just another version of static "economies of scale," but that’s a category error. Comparative advantage assumes that production possibility frontiers are fixed and endowments are given. But in manufacturing, endowments are created by what you choose to produce. The causality runs backward, a country doesn’t dominate an industry because of its natural resources; it dominates because capturing the volume permanently shifts its production frontier.
If you push an economist on this, they might claim that agriculture and services have learning curves too, but that’s (mostly) wrong. A farm’s productivity gains are mostly exogenous—they come from buying better tractors or fertilizers. But all manufacturing has endogenous learning curves where efficiency is generated strictly by cumulative volume. This isn’t just true for frontier tech like semiconductors (which ride 20-30% curves); it’s equally true for foundational industries like steel, chemicals, and shipbuilding (which ride 10-15% curves). Manufacturing is an ecosystem. These legacy industries provide the spillovers and the supply chain bedrock for everything else. You cannot hollow out the mid-curve industries and expect the high-curve ones to survive. Ricardo is perfect for soybeans and services, but he is catastrophically wrong for anything that requires a factory floor if the country (or trade block) you’re importing from isn’t buying our industrial outputs back.
This is why the standard dismissal of trade deficits is so dangerous. Economist used to say "deficits don't matter," but they absolutely do when you are dealing with a strategic rival. In industrial production, cumulative volume is a zero-sum resource. When we import Chinese steel, chemicals, or EVs in exchange for agricultural exports, we are effectively "exporting our volume." We are financing their trip down the experience curve while starving our own domestic industrial base of the throughput it needs to ever become competitive. Because these cost drops are exponential, standard self-correcting mechanisms fail—a 10% currency shift doesn't help you when your rival is structurally 40% cheaper because they’ve already mastered the curve.
This isn’t an argument for protectionism across the board, because free trade still works when it’s symmetric. When the US trades Boeing aircraft for Japanese robotics or European machine tools, we are trading high-learning-curve goods for other high-learning-curve goods. Both sides maintain a technical industrial base, and the competitive pressure actually accelerates the learning curve for everyone. Ricardo works here because both sides' production frontiers are advancing.
But China’s strategy is explicitly asymmetric. They are targeting the volume in every learning-curve industry simultaneously (steel to EVs) leaving us to produce the commodities. If we don't start distinguishing between static scale and dynamic, cumulative learning, we are going to keep making suicidal trade deals (that soybeans deal made me want to scream!). I’d love to see you write a piece digging into this boundary and why the free trade consensus breaks down for manufactured goods, and why trading our manufacturing ecosystem for commodities or saying “deficits don’t matter” is a huge mistake.
I understand why economists are gun-shy about letting the protectionist cat out of the bag, but if we don't start thinking about the real reason why trade with Europe or Japan is a win, while trade (in its current form) with China is a bad, we're going to end up with more tariffs on penguins.
The corollary would be: When faced with an epic global transition, like renewable energy, what's the quickest & most efficient policy in a modern economy? Transportation electrification appears to be the answer, based on Chinese & European policies. To illustrate the contrast:
China has established the world’s largest electric vehicle (EV) charging network, totaling over 21 million charging points. This reflects a nearly 48% year-over-year growth, widening a massive gap with the United States (~200,000 public stations) and the European Union (~910,000 public chargers). You can't expect or achieve rapid adoption of EVs (transportation electrification) without providing readily accessible, cheap EV charging infrastructure. France and South Korea have already mandated construction of solar parking lot canopy Virtual Power Plants at ALL existing lots larger than 80 spaces, nationwide, within 3 to 5 years, largest lots first. That's community tier infrastructure, not utility monopoly or AI industrial tier infrastructure.
Parking lot owners get entirely new income from 25-year airspace leases on their previously non-profit parking lots, and everyone gets lower utility bills by rapidly reducing peak transmission demand for shopping center refrigeration and residential & small business air conditioning. No new utility monopoly transmission or fossil gas peaker plant spending required.
I am skeptical of the learning curve argument. The pattern recently has been to move cheap manufacturing out of China and into South Asian countries with lower labor costs. And in WWII an entire manufacturing base was built in only a couple of years. It seems to me to be more a case of incentives than learning curves.
WW2 is an argument for learning curves. We pumped out so many because we standardized models, built them at scale, and went down the learning curves faster than anyone else. Easier to do when you have a massive existing industrial base and you don’t have to spread out your plants due to risks of bombing raids.
I could agree with the analysis for many sectors, like medicines, drone parts, other military or duel-use products, and transport vehicles, but for 15-year and 30-year investments like batteries and grid electronics and solar, Europe (and the rest of the world) should buy everything China can make at the below-cost prices which China's government-driven internal competition makes available.
Heavily subsidize European production so that you build fundamental industrial capacity, but flood the grid with Chinese solar and wind and batteries to reduce dependence on Middle Eastern (and U.S.) fossil fuels. China could cut off solar panel exports, but if you've already installed much of what you need for the next 30 years, there will be time to develop replacements.
And Europe should realize that it needs Ukrainian military capacity as much as Ukraine needs Europe's financial and military support.
Absolutely. This is why you "heavily subsidize European production"--to build future capacity. But you need batteries and solar and wind right now, and if China will sell them to you for below cost, all the world should take advantage of this opportunity. It's arguable that in the short term, batteries are even more important than solar in the quest to "electrify everything". They are cheap (relatively speaking), easy to install in small quantities even when "grid-scale" has permitting and grid-connection issues, and can fix many grid problems down to the sub-station, local distribution, and even household level.
It's amazing what ordinary Chinese people have to put up with at the hands of their government. They realize that the chance to get rich simply doesn't exist for them. For Chinese, the proverb is, "We missed the train," not, “we missed the boat. "
The Chinese have "put up with" almost 20x growth in real GDP per capita over the last 40 years. Meanwhile Americans and Europeans put up with increasingly authoritarian governments for much less.
Agree very much with this thesis. Is one way of thinking about this, "if China wants to subsidize everything to push every other nation out of the market, every other nation needs to 'anti-subsidize' China in order to restore competitiveness, at least along axes where competitiveness is essential for national security"?
I’ll quote Ian Bremmer: “If the Russian army were to attack Poland, it would be crushed.”
Ukraine is striking targets +1200km inside Russia with smart drones. What does that say about Russian air defense? Putin had to ask Zelensky to suspend drone attacks so he could have his military parade. The Russian casualties are almost at the irreplaceable level. And Russia is going to attack Europe? And Russia was threatening to use nuclear weapons if Finland and Sweden joined NATO. Ukraine hit a couple of big targets in St. Petersburg so Putin had that as a backdrop to his visit and speech. And Russia _____. And Russia ______.
Putin is so paranoid of the oligarchs, he hides in various bunkers. Quite the switch from the days when Russian snipers were hunting Zelensky in Kiev.
Russia’s economy is damaged for two generations. Two million of its best and brightest tech savvy youth settle in Poland. Why? Because they found employment — a tremendous shot in the arm for Poland’s economy in the coming decades. Russia is a vassal state of China. Like Trump, Putin didn’t get much on his list when he visited Beijing.
While I agree with the underlying perspective, I’m not sure it works in the actual, real world, where developed economies/countries are simply unwilling to invest in creating the manufacturing supply chain needed to produce the things they/we need to produce (Noah’s “electric tech stack” value chain). What good are import controls if they simply lead to the same place in the end — Chinese dominance — except with all of us simply becoming poorer and having less access to cool gadgets?
I simply do not believe that import controls will convince any developed economy (save perhaps Canada) from actually deciding to make (important) stuff again.
Change my mind. Seriously. Otherwise, I want to be able to buy a BYD for $30k. If I’m (or any other citizen of a developed economy is) going to give up having nice things, it better be worth it!
It just seems like Canada might be the only fully developed democracy that’s willing to actually dig rare earths out of the ground on its own sovereign territory and refine them all the way into finished consumer (and military) products. No one else seems interested in “the dirty work” which is what is actually necessary (along with things like scaling up hydrofracturing-based geothermal energy and modular nuclear reactors). Maybe I’m wrong though — maybe Canadians won’t have the stomach for it either.
Have you looked at the proposal by the EU to nudge Chinese companies to manufacture key components of main transition sectors (batteries, etc) in the EU? If they don’t, they would not have the right to get EU public subsidies or participate in renewables tenders. More here: https://ec.europa.eu/commission/presscorner/home/en
Also, please come to Paris and meet readers, and announce it in advance!
This argument might work if Europe had a nascent modern defence industry - Ukraine might have but the rest of the continent does not. We have the smouldering ashes of a long outdated industry. Increasing European defence budgets will result in a combination of hyper wasteful public spending and increasing reliance on the US. Any weaponry we buy that actually works will be US or Israeli designed.
We are building one from scratch. It is a combination of Ukrainian IP, some start-ups and the mature autoparts industry looking for new pastures. Also, decent rockets like Iris-T. And even old-school artillery with extended range - when networked - has a place on the modern battlefield.
In comparison, the US arms industry is a lot larger and only very small parts of it will survive. The modern start-ups exist, but the pentagon is really shitty dealing with tiny companies. And making Anduril the new bottleneck would also be a grave mistake.
Israel is only producing expensive shit in small numbers, that is outdated on principle.
There's a lot to unpack here and I'd be interested in reading about who's doing what in Germany and Europe more generally. I can't imagine people are asleep at the switch. How does the EU apparatus hinder or help the effort?
I believe the specific advantage of Europe is the sheer number of governments. If 32 countries (NATO) all pick a winner, someone is bound to get it right. That means a promising start-up should get a contract somewhere and then form a joint venture with an experienced manufacturer. Schaeffler is definitely looking for things like this and all the countries with a Russian border are watching very closely what actually works, with most bang for the buck.
Once you reached size for a production run, you have to send your products to Ukraine to get actual validation, then more goverments might order.
I hope you are right - it feels like you are describing Germany. Here in the UK the only discussion is spending more money. The startups are out there but will they succeed? Big risk that governments pick favourites and the best ideas get lost.
I strongly agree with Noah’s structural take. The geopolitical risk of Europe losing its industrial learning curve is very real. And the crucial question is: What is the actionable playbook?
Ironically, the answer is sitting right in modern Chinese economic history—a history that European automakers (especially Germany) deeply shaped but now seem to have completely forgotten.
In the 1980s and 90s, when China’s automotive sector was practically obsolete, American and Japanese giants like Toyota flatly refused to share their technology. It was Volkswagen that broke the ice. VW went all-in on Joint Ventures (JVs), literally holding China’s hand to build an industrial supply chain from scratch.
Over the next forty years, VW served as the "West Point" for Chinese automotive talent, training hundreds of thousands of high-level engineers, plant managers, and dealers. If you look at the senior executives leading BYD, NIO, or Li Auto today, and trace their professional lineage back two generations, you will find Volkswagen DNA everywhere.
Meanwhile, luxury players like BMW, Benz (Mercedes-Benz), and Audi (BBA) kept their premium models produced overseas. Those vehicles faced aggressive import tariffs in China for decades. China effectively used classical infant-industry protection as a shield, even though market demand for those luxury cars was overwhelming.
Now, the tables have completely turned. Yet, Europe’s current policy response is painfully passive. Tariffs alone are just a static defense; they do not buy you innovation.
If Europe wants to survive this "China Shock 2.0," it needs to copy China’s old homework. Europe must use market access and tariffs as leverage to force Chinese EV and battery giants (like BYD and CATL) to invest locally. But here is the catch: Force them into deep JVs, mandate tech spillovers, and ensure local procurement—just like VW did forty years ago.
Europe once taught the world this masterclass in industrial policy. It is mind-boggling that they are now failing their own test.
Ignoring all the bullying that China can do if they do make everything and import nothing (which honestly is ignoring a lot), is this a deal that works out for them in the long term? Like purely from an economic standpoint.
Eg if money always flows towards China and they never send any of it out, do we get to a point where all other countries are so indebted that they can’t even buy from China at cheap prices? And then does China’s own economic model start collapsing?
It is very sad that China, and now the US, cannot be trusted, so the world has to produce with so much lower economies of scale and specialization. But, this is the current reality. A decent democracy, like those in Europe, can only trust other stable democracies, and tragically the US is no longer one of those, and may well end up having its democracy completely murdered by today's authoritarian GOP, if enough people don't wake up and fight before it's too late.
That said, how to make the best of this manufacturing situation. What about letting Chinese companies sell in Europe without tariffs, if they produce like over 80% in Europe (and include details in the policy like not withholding the local production of bottleneck inputs). This allows Europe to benefit from the Chinese expertise, and learn it, and consumers get the better values, but in the case of a war, those facilities can be instantly nationalized, and the skilled employees are still in your country, and by and large your citizens.
BTW, a very old, but great, example of comparative advantage is the CEO who types better than his secretary. Still, best for her (very old example) to do all the typing. I learned this in 1982.
The US, and other Western nations, are going to have a long, arduous road back to some sort of self-sufficiency in manufacturing. We need to cut China off from our markets as much as possible with a goal of no access period. They are an untrustworthy and mercantilist nation that seeks to dominate and destroy the world order.
Free trade seems good, but should a democratic country trade with a non democratic country? Us policy makers pretend that democracy matters, but very inconsistently. Trade with China and Saudi Arabia, but not with Cuba or N. Korea.
The defense argument is correct. The political economy argument misses where China has already positioned.
The parallel infrastructure to operate without the dollar is already built. mBridge connects China, Hong Kong, Thailand, the UAE, and Saudi Arabia. Two weeks before the OPEC announcement, the UAE central bank governor walked into the US Treasury and put them on notice that if dollar liquidity tightens, they will settle oil in yuan.
European trade barriers are necessary for Europe’s defense. They will not reshape China’s relationship with its own people. That is a political choice the regime has been making for reasons trade barriers can’t reach.
Noah, why do economists constantly ignore Wright’s Law and learning curves?
Manufacturing scales on learning curves; services and farming don’t. That alone makes manufacturing fundamentally special. Some economists seem skeptical that these curves even exist. I own two manufacturing companies, and I’d literally bet my life they do. And if we accept that they exist, doesn't that break the standard assumptions about free trade? If one country captures all the volume, they capture the entire learning curve and inevitably dominate the global market.
Look at Ricardo’s classic comparative advantage example. If it’s wine vs. cloth, you obviously want the cloth. Textile production has a learning curve and massive technological spillovers (the Jacquard loom literally led to the first computers). Wine doesn't. If Portugal had all the looms and the Brit’s had all the wine and farming, I think we would live in a much different world today.
Comparative advantage assumes efficiency is static. If Portugal starts out better at both, but Britain gets all the cloth production, a 10% learning curve changes everything. Give it ten years, and Britain gains an absolute advantage, swamps Portugal with cheap textiles, and wipes out their manufacturing base. Meanwhile, wine just stays wine.
This isn't an argument for pure mercantilism. Free trade between peers like the US, Europe, and Japan works because we trade advanced goods back and forth. We scale in different subcomponents without anyone trying to monopolize the entire global learning curve. But the idea that we should just surrender an entire industry like autos because another country is slightly more efficient is suicidal. You lose all the technological spillovers, and once you lose the manufacturing base they’re almost impossible to restart so the company that has them can own you. You have to separate high learning curve products from low ones. If a rival country aggressively targets all the learning curves and only buys our agriculture in return, that is a terrible deal. Who cares if they buy our soybeans? Soybeans don't have learning curves. When a country tries to capture the entire market for the things that actually matter, you have to throw up protectionist walls.
I’d love to see you write an article on learning curves and how they have the potential to break the rules of comparative advantage in some situations. Seems like that’s a more straightforward explanation of why a ricardian framework is wrong here.
I love to write about learning curves, and about increasing returns in general!
Thanks for the reply Noah. I love your work!!
But the issue I’m trying to highlight is that the economics profession has a massive blind spot regarding learning curves (Wright’s Law). Economists usually brush this off as just another version of static "economies of scale," but that’s a category error. Comparative advantage assumes that production possibility frontiers are fixed and endowments are given. But in manufacturing, endowments are created by what you choose to produce. The causality runs backward, a country doesn’t dominate an industry because of its natural resources; it dominates because capturing the volume permanently shifts its production frontier.
If you push an economist on this, they might claim that agriculture and services have learning curves too, but that’s (mostly) wrong. A farm’s productivity gains are mostly exogenous—they come from buying better tractors or fertilizers. But all manufacturing has endogenous learning curves where efficiency is generated strictly by cumulative volume. This isn’t just true for frontier tech like semiconductors (which ride 20-30% curves); it’s equally true for foundational industries like steel, chemicals, and shipbuilding (which ride 10-15% curves). Manufacturing is an ecosystem. These legacy industries provide the spillovers and the supply chain bedrock for everything else. You cannot hollow out the mid-curve industries and expect the high-curve ones to survive. Ricardo is perfect for soybeans and services, but he is catastrophically wrong for anything that requires a factory floor if the country (or trade block) you’re importing from isn’t buying our industrial outputs back.
This is why the standard dismissal of trade deficits is so dangerous. Economist used to say "deficits don't matter," but they absolutely do when you are dealing with a strategic rival. In industrial production, cumulative volume is a zero-sum resource. When we import Chinese steel, chemicals, or EVs in exchange for agricultural exports, we are effectively "exporting our volume." We are financing their trip down the experience curve while starving our own domestic industrial base of the throughput it needs to ever become competitive. Because these cost drops are exponential, standard self-correcting mechanisms fail—a 10% currency shift doesn't help you when your rival is structurally 40% cheaper because they’ve already mastered the curve.
This isn’t an argument for protectionism across the board, because free trade still works when it’s symmetric. When the US trades Boeing aircraft for Japanese robotics or European machine tools, we are trading high-learning-curve goods for other high-learning-curve goods. Both sides maintain a technical industrial base, and the competitive pressure actually accelerates the learning curve for everyone. Ricardo works here because both sides' production frontiers are advancing.
But China’s strategy is explicitly asymmetric. They are targeting the volume in every learning-curve industry simultaneously (steel to EVs) leaving us to produce the commodities. If we don't start distinguishing between static scale and dynamic, cumulative learning, we are going to keep making suicidal trade deals (that soybeans deal made me want to scream!). I’d love to see you write a piece digging into this boundary and why the free trade consensus breaks down for manufactured goods, and why trading our manufacturing ecosystem for commodities or saying “deficits don’t matter” is a huge mistake.
I understand why economists are gun-shy about letting the protectionist cat out of the bag, but if we don't start thinking about the real reason why trade with Europe or Japan is a win, while trade (in its current form) with China is a bad, we're going to end up with more tariffs on penguins.
The corollary would be: When faced with an epic global transition, like renewable energy, what's the quickest & most efficient policy in a modern economy? Transportation electrification appears to be the answer, based on Chinese & European policies. To illustrate the contrast:
China has established the world’s largest electric vehicle (EV) charging network, totaling over 21 million charging points. This reflects a nearly 48% year-over-year growth, widening a massive gap with the United States (~200,000 public stations) and the European Union (~910,000 public chargers). You can't expect or achieve rapid adoption of EVs (transportation electrification) without providing readily accessible, cheap EV charging infrastructure. France and South Korea have already mandated construction of solar parking lot canopy Virtual Power Plants at ALL existing lots larger than 80 spaces, nationwide, within 3 to 5 years, largest lots first. That's community tier infrastructure, not utility monopoly or AI industrial tier infrastructure.
Parking lot owners get entirely new income from 25-year airspace leases on their previously non-profit parking lots, and everyone gets lower utility bills by rapidly reducing peak transmission demand for shopping center refrigeration and residential & small business air conditioning. No new utility monopoly transmission or fossil gas peaker plant spending required.
I am skeptical of the learning curve argument. The pattern recently has been to move cheap manufacturing out of China and into South Asian countries with lower labor costs. And in WWII an entire manufacturing base was built in only a couple of years. It seems to me to be more a case of incentives than learning curves.
WW2 is an argument for learning curves. We pumped out so many because we standardized models, built them at scale, and went down the learning curves faster than anyone else. Easier to do when you have a massive existing industrial base and you don’t have to spread out your plants due to risks of bombing raids.
I could agree with the analysis for many sectors, like medicines, drone parts, other military or duel-use products, and transport vehicles, but for 15-year and 30-year investments like batteries and grid electronics and solar, Europe (and the rest of the world) should buy everything China can make at the below-cost prices which China's government-driven internal competition makes available.
Heavily subsidize European production so that you build fundamental industrial capacity, but flood the grid with Chinese solar and wind and batteries to reduce dependence on Middle Eastern (and U.S.) fossil fuels. China could cut off solar panel exports, but if you've already installed much of what you need for the next 30 years, there will be time to develop replacements.
And Europe should realize that it needs Ukrainian military capacity as much as Ukraine needs Europe's financial and military support.
As Noah has noted batteries are a key component of the electric stack.
We can't seed them to China.
Absolutely. This is why you "heavily subsidize European production"--to build future capacity. But you need batteries and solar and wind right now, and if China will sell them to you for below cost, all the world should take advantage of this opportunity. It's arguable that in the short term, batteries are even more important than solar in the quest to "electrify everything". They are cheap (relatively speaking), easy to install in small quantities even when "grid-scale" has permitting and grid-connection issues, and can fix many grid problems down to the sub-station, local distribution, and even household level.
It's amazing what ordinary Chinese people have to put up with at the hands of their government. They realize that the chance to get rich simply doesn't exist for them. For Chinese, the proverb is, "We missed the train," not, “we missed the boat. "
The Chinese have "put up with" almost 20x growth in real GDP per capita over the last 40 years. Meanwhile Americans and Europeans put up with increasingly authoritarian governments for much less.
Agree very much with this thesis. Is one way of thinking about this, "if China wants to subsidize everything to push every other nation out of the market, every other nation needs to 'anti-subsidize' China in order to restore competitiveness, at least along axes where competitiveness is essential for national security"?
“If Russia invades Europe.”
I’ll quote Ian Bremmer: “If the Russian army were to attack Poland, it would be crushed.”
Ukraine is striking targets +1200km inside Russia with smart drones. What does that say about Russian air defense? Putin had to ask Zelensky to suspend drone attacks so he could have his military parade. The Russian casualties are almost at the irreplaceable level. And Russia is going to attack Europe? And Russia was threatening to use nuclear weapons if Finland and Sweden joined NATO. Ukraine hit a couple of big targets in St. Petersburg so Putin had that as a backdrop to his visit and speech. And Russia _____. And Russia ______.
Putin is so paranoid of the oligarchs, he hides in various bunkers. Quite the switch from the days when Russian snipers were hunting Zelensky in Kiev.
Russia’s economy is damaged for two generations. Two million of its best and brightest tech savvy youth settle in Poland. Why? Because they found employment — a tremendous shot in the arm for Poland’s economy in the coming decades. Russia is a vassal state of China. Like Trump, Putin didn’t get much on his list when he visited Beijing.
While I agree with the underlying perspective, I’m not sure it works in the actual, real world, where developed economies/countries are simply unwilling to invest in creating the manufacturing supply chain needed to produce the things they/we need to produce (Noah’s “electric tech stack” value chain). What good are import controls if they simply lead to the same place in the end — Chinese dominance — except with all of us simply becoming poorer and having less access to cool gadgets?
I simply do not believe that import controls will convince any developed economy (save perhaps Canada) from actually deciding to make (important) stuff again.
Change my mind. Seriously. Otherwise, I want to be able to buy a BYD for $30k. If I’m (or any other citizen of a developed economy is) going to give up having nice things, it better be worth it!
Why is Canada special here?
It just seems like Canada might be the only fully developed democracy that’s willing to actually dig rare earths out of the ground on its own sovereign territory and refine them all the way into finished consumer (and military) products. No one else seems interested in “the dirty work” which is what is actually necessary (along with things like scaling up hydrofracturing-based geothermal energy and modular nuclear reactors). Maybe I’m wrong though — maybe Canadians won’t have the stomach for it either.
Yeah as a Canadian, I’m fairly certain that Canada won’t do this either but I’d be happy to be proven wrong
Have you looked at the proposal by the EU to nudge Chinese companies to manufacture key components of main transition sectors (batteries, etc) in the EU? If they don’t, they would not have the right to get EU public subsidies or participate in renewables tenders. More here: https://ec.europa.eu/commission/presscorner/home/en
Also, please come to Paris and meet readers, and announce it in advance!
Many thanks
Strongly agreed. Free trade is good, but it must be fair and safe (in regards to national security)
Trade with China fails on both counts.
We should be looking to decouple until China changes its ways and becomes a responsible member of the liberal world order.
This argument might work if Europe had a nascent modern defence industry - Ukraine might have but the rest of the continent does not. We have the smouldering ashes of a long outdated industry. Increasing European defence budgets will result in a combination of hyper wasteful public spending and increasing reliance on the US. Any weaponry we buy that actually works will be US or Israeli designed.
We are building one from scratch. It is a combination of Ukrainian IP, some start-ups and the mature autoparts industry looking for new pastures. Also, decent rockets like Iris-T. And even old-school artillery with extended range - when networked - has a place on the modern battlefield.
In comparison, the US arms industry is a lot larger and only very small parts of it will survive. The modern start-ups exist, but the pentagon is really shitty dealing with tiny companies. And making Anduril the new bottleneck would also be a grave mistake.
Israel is only producing expensive shit in small numbers, that is outdated on principle.
There's a lot to unpack here and I'd be interested in reading about who's doing what in Germany and Europe more generally. I can't imagine people are asleep at the switch. How does the EU apparatus hinder or help the effort?
I believe the specific advantage of Europe is the sheer number of governments. If 32 countries (NATO) all pick a winner, someone is bound to get it right. That means a promising start-up should get a contract somewhere and then form a joint venture with an experienced manufacturer. Schaeffler is definitely looking for things like this and all the countries with a Russian border are watching very closely what actually works, with most bang for the buck.
Once you reached size for a production run, you have to send your products to Ukraine to get actual validation, then more goverments might order.
The last part makes sense. Not sure I believe any number of governments picking winners increases the chances of getting it right.
I hope you are right - it feels like you are describing Germany. Here in the UK the only discussion is spending more money. The startups are out there but will they succeed? Big risk that governments pick favourites and the best ideas get lost.
I strongly agree with Noah’s structural take. The geopolitical risk of Europe losing its industrial learning curve is very real. And the crucial question is: What is the actionable playbook?
Ironically, the answer is sitting right in modern Chinese economic history—a history that European automakers (especially Germany) deeply shaped but now seem to have completely forgotten.
In the 1980s and 90s, when China’s automotive sector was practically obsolete, American and Japanese giants like Toyota flatly refused to share their technology. It was Volkswagen that broke the ice. VW went all-in on Joint Ventures (JVs), literally holding China’s hand to build an industrial supply chain from scratch.
Over the next forty years, VW served as the "West Point" for Chinese automotive talent, training hundreds of thousands of high-level engineers, plant managers, and dealers. If you look at the senior executives leading BYD, NIO, or Li Auto today, and trace their professional lineage back two generations, you will find Volkswagen DNA everywhere.
Meanwhile, luxury players like BMW, Benz (Mercedes-Benz), and Audi (BBA) kept their premium models produced overseas. Those vehicles faced aggressive import tariffs in China for decades. China effectively used classical infant-industry protection as a shield, even though market demand for those luxury cars was overwhelming.
Now, the tables have completely turned. Yet, Europe’s current policy response is painfully passive. Tariffs alone are just a static defense; they do not buy you innovation.
If Europe wants to survive this "China Shock 2.0," it needs to copy China’s old homework. Europe must use market access and tariffs as leverage to force Chinese EV and battery giants (like BYD and CATL) to invest locally. But here is the catch: Force them into deep JVs, mandate tech spillovers, and ensure local procurement—just like VW did forty years ago.
Europe once taught the world this masterclass in industrial policy. It is mind-boggling that they are now failing their own test.
Ignoring all the bullying that China can do if they do make everything and import nothing (which honestly is ignoring a lot), is this a deal that works out for them in the long term? Like purely from an economic standpoint.
Eg if money always flows towards China and they never send any of it out, do we get to a point where all other countries are so indebted that they can’t even buy from China at cheap prices? And then does China’s own economic model start collapsing?
It is very sad that China, and now the US, cannot be trusted, so the world has to produce with so much lower economies of scale and specialization. But, this is the current reality. A decent democracy, like those in Europe, can only trust other stable democracies, and tragically the US is no longer one of those, and may well end up having its democracy completely murdered by today's authoritarian GOP, if enough people don't wake up and fight before it's too late.
That said, how to make the best of this manufacturing situation. What about letting Chinese companies sell in Europe without tariffs, if they produce like over 80% in Europe (and include details in the policy like not withholding the local production of bottleneck inputs). This allows Europe to benefit from the Chinese expertise, and learn it, and consumers get the better values, but in the case of a war, those facilities can be instantly nationalized, and the skilled employees are still in your country, and by and large your citizens.
BTW, a very old, but great, example of comparative advantage is the CEO who types better than his secretary. Still, best for her (very old example) to do all the typing. I learned this in 1982.
The US, and other Western nations, are going to have a long, arduous road back to some sort of self-sufficiency in manufacturing. We need to cut China off from our markets as much as possible with a goal of no access period. They are an untrustworthy and mercantilist nation that seeks to dominate and destroy the world order.
Free trade seems good, but should a democratic country trade with a non democratic country? Us policy makers pretend that democracy matters, but very inconsistently. Trade with China and Saudi Arabia, but not with Cuba or N. Korea.
Very good article. The same arguments could apply to the US and many other countries outside of Europe.
The defense argument is correct. The political economy argument misses where China has already positioned.
The parallel infrastructure to operate without the dollar is already built. mBridge connects China, Hong Kong, Thailand, the UAE, and Saudi Arabia. Two weeks before the OPEC announcement, the UAE central bank governor walked into the US Treasury and put them on notice that if dollar liquidity tightens, they will settle oil in yuan.
European trade barriers are necessary for Europe’s defense. They will not reshape China’s relationship with its own people. That is a political choice the regime has been making for reasons trade barriers can’t reach.