The value proposition for partner countries in PaxSilica is that the AI revolution is fueling rapid economic growth with an expanding pie, allowing for genuinely win-win, mutually beneficial partnerships where risk and upside are shared.

(00:00:00) We're not going to do government-operated supply chains because that's not how we shine as a country. Our superpower is really our private sector and our companies. The old Steve Jobs quote that American products enchant and delight users around the world by the billions, that really is our edge as a country. And so the answer has been trying to work in lockstep with our private companies and our builders to build platforms that are commercially viable (00:00:29) and that can ultimately live outside of the government as a private service. The Dan Enterprise were joined by Jacob Helberg, the Undersecretary of State for Economic Affairs, (00:00:46) We spoke with Jacob before he was confirmed in this role, and we're very excited to have him back to discuss Pax Silica, which is a multi-nation effort to secure the AI supply chain for the United States and its allies. (00:00:59) Jacob, thanks so much for being here. Yeah, thanks for joining us. Thanks for having me. So let's get right into it. Three months ago, you announced PaxSilica, a super ambitious coalition. Can you explain what it is and where you are in it? Yeah, absolutely. So I gave a speech at the Hudson Institute that was really meant to be our blueprint for PaxSilica. PaxSilica is an economic security coalition that now has 14 countries. And the idea is really to have an ecosystems-based approach to our supply chains and specifically the AI supply chain. (00:01:29) And in my speech at Hudson, I outlined our different lines of efforts, including our policy roadmaps and our projects. And about a week and a half ago, we basically did the first big, you know, what would be the tech equivalent of a product rollout where we announced a forward deployed industrial base with our oldest ally in Asia, the Philippines. We made this arrangement with them where they are granting us 4,000 acres, which is obviously very substantial. It's 1/3 of the size of Manhattan. (00:01:58) to do a very large industrial build out that's one of a kind that helps combine the predictability and certainty of the American common law system with the industrial comparative advantages that the Philippines offers. And the goal is really to secure inputs that are vital for our supply chains. And so we're super excited to be here in San Francisco, talk to builders and see ways that we can actually accelerate supply chain security for our tech companies. (00:02:23) Is this set up as a special economic zone in the Philippines? Or could you tell us more about the details beyond sort of the legal side that you mentioned? Yeah, absolutely. So right now, there are two phases to the plan. The first phase is the State Department taking into custody the zone. We are referring to it as an economic security zone because it is a very unique type of arrangement. The State Department (00:02:50) has authorities to take in land and property into custody, sort of how foreign governments gift the State Department counselors and consulates and embassies. It's very unique to do a gift of 4,000 acres, but fortunately there's no statutory limits on how big or small property can be. And so that's phase one. So right now it's actually diplomatic property that is effectively, you know, governed by the same laws as our embassies are. (00:03:18) Phase 2 will be the long-term development and build out of the land. And so we are going to spend, we have two years, a two-year window to negotiate the details with our Filipino counterparts on the investor protections that will apply to the land, the taxation regimes, and (00:03:38) and all of the different legal safeguards that investors will be able to benefit from for the long term. And the goal is within that two-year window to actually have a long-term framework that will be multiple decades. (00:03:51) It's an amazing innovation. Are there specific domains that you think make sense to invest in there from a manufacturing, minimum processing, whatever it is, perspective now? Yeah, so the goal is really to actually test a concept that could potentially be replicable. I mean, right now, when we think about the AI supply chain, a lot of people just think of chips, but the reality is that the AI supply chain (00:04:15) actually includes thousands of inputs like precision reducers and servo motors and rare earth magnets and actuators. And our concentration risk as a country is incredibly high for basically all of those inputs. And so the goal is to identify key geographies that actually have (00:04:37) industrial strengths and bring unique capabilities to the table that could actually help us move the needle meaningfully in different segments of the supply chain. So the Philippines already has a native indigenous manufacturing ecosystem that's already quite deep. It's our oldest ally in Asia. So we have a very deep values alignment with the Philippines. And so (00:04:59) We think that the nexus between the values alignment combined with their industrial advantages actually makes for a very compelling value proposition for a lot of companies. We're talking with a number of companies focused on the robotics supply chain. As you guys know, living out here, and I'm sure you guys include robotics companies in your portfolio, but the robotics supply chain, robotics is an incredibly promising industry. (00:05:25) that really is poised to change a lot of things in manufacturing as well as in people's daily lives. And the supply chain is right now completely dominated by China. And so that's an area where that's, you know, we're particularly interested in potentially making a bet on. (00:05:43) When most people hear economic security policy, one of the first things they think of is the Belt and Road Initiative. How would you contrast your strategy and the State Department's strategy here with that approach? Yeah, so that's such a great question. And I think one of the benefits that we've been able to leverage (00:06:05) developing the strategy today is the ability to study 25 years of, China's Belt and Road Initiative, how they've done what they've done, you know, what's worked, what hasn't worked. And, you know, fundamentally. Do you want to explain what that is too for our audience? Yeah, so the Belt and Road Initiative is a very, very large foreign policy project of the Chinese government that basically involved using state-owned enterprises that are essentially extensions of the government. (00:06:31) to carry out massive infrastructure projects overseas. And the idea is using infrastructure projects as a tool of foreign policy to achieve foreign policy outcomes. So this was the big build-outs, for example, in Africa that planted in a variety of countries there. That's right. So whether it's creating mines or, you know, processing facilities, a lot of the times it involved building out, you know, very big roads, sometimes bridges. A lot of the times it included railways. (00:07:00) And fundamentally, what it was state-owned enterprises, building government-operated railways, government-built roads and bridges. And the Chinese government, by virtue of its system, really built all of this in-house, which for us, when we think about how should we, want to secure our supply chains, we need to make a lot of investments, you know, that (00:07:26) that are, touch upon these kinds of industrial capabilities. But as Americans, we're not going to do this in-house inside of the government. I think the side effects of this for China was basically both building out their industrial base, but then also securing natural resources in some of these countries. Exactly. So they were able to build a network that ensured that their factories in China had all the inputs in order to actually really, you know, thrive. And, you know, Shenzhen today is really (00:07:56) the world's factory floor, because they have deep relationships with suppliers and vendors, on every continent, basically. And the infrastructure that they leverage allows them to get access in a way that's very, very competitive. So the question for us is, how do we compete in that landscape at a time when we want to re-industrialize? And the answer is, we're not going to do (00:08:20) government operated supply chains, because that's not how we shine as a country. And I, the, sort of where we've landed is our superpower is really our private sector and our companies. And it's sort of the old Steve Jobs quote that, you know, American products enchant and delight users around the world by the billions. And that's how (00:08:43) that is really is our edge as a country. And so how do we, adopt A product-based, a product-centric approach to, our foreign policy where we can actually use that kind of approach to achieve foreign policy outcomes? And what we've done, so that's very much sort of the lens of how we've, you know, decided to focus our economic security strategy. (00:09:08) The answer has been trying to work in lockstep with our private companies and our builders to build platforms that are commercially viable and that can ultimately live outside of the government as a private service. And so the forward deployed industrial base is meant to be a platform for private investment that will be viable for the long term. It's the first of its kind. We're thinking about making a big play in the logistics space in partnership with (00:09:38) large, corporates. And in June, we're looking at potentially doing a broader rollout where we're going to roll out four or five different big lines of effort. You guys are both invited to Washington for it. And so, you know, having a product-based approach is very much how we're thinking about it. As somebody who's done a deep study of the pros and cons of Belt and Road, (00:10:02) There's obviously access to infrastructure and inputs as some dimension of success here. What's been the failure point for Belt and Road? Well, the failure point is, you know, so first of all, obviously, some of the projects, you know, have been useful for China. There's a lot of waste in the Belt and Road Initiative. And, you know, mainly it's because (00:10:24) Whenever you have, central planning and really government bureaucrats effectively, allocating large pools of capital, there's a lot of waste because vendors, massively overcharge things. There's a lot of waste because there's a lot of roads to nowhere. And what happens is, you know, China will basically deploy capital to its own companies that then, you know, basically write IOUs to the host country (00:10:54) And the host country realizes that, they, they've gained A reputation for these projects have gained A reputation for being in debt trap because China will say, we'll build a road and, as a loan, except the company building the road is Chinese. And so China can basically decide (00:11:16) what the price is. And as you guys know, when you build a house or when you do any construction project, a lot of projects run over budget A lot. And so, when a host country thinks it's taking on, X $1,000,000 in liabilities and it actually ends up being 10x that, that's when they kind of end up in quicksand. And so the Belt and Road Initiative has really garnered A reputation for really being a tool of political leverage. (00:11:45) that a lot of countries are still digging themselves out of. And so- Versus one of partnership. Exactly, versus one where it's positive sum. I think a lot of countries don't feel like they have enough upside in it. is Chinese work. (00:12:00) workers, Chinese companies, and a lot of the times it's Chinese equity because the debt converts to equity if the host country defaults. They do a lot of the times. And so, we're approaching it totally differently. And because we're approaching it by putting our companies in the driver's seat, it's actually, you know, in a lot of ways, it's much more ethical because the deal is structured in a way that's really meant to be (00:12:29) a true joint venture and one that will be optimized for commercial viability, not just, for political purposes. When you think about the 14 countries that are already part of Pax Silica or, this as a potential blueprint for others to be involved in American for deployed industrial bases, like what's the value prop for them? (00:12:52) So the value prop is, one of the amazing things that we're seeing is obviously the AI revolution is leading to huge growth. I mean, despite the volatility in the energy markets, the American economy has been proven incredibly resilient. And a big part of that is AI being this incredible, incredibly strong economic force that is already fueling over 1/3 of our economic GDP growth right here in the US. (00:13:20) Overseas, we're leading, we're seeing that growth translate to record demands for copper, record demands for cobalt, record demands for lots of different inputs that go into data centers and record demand for electricians and all the rest. And so the takeaway for a lot of these countries is (00:13:37) If they find ways of actually having a bigger part and a bigger stake in that supply chain at different layers, layers that make sense for their companies and their economy, they can actually derive a lot of economic growth from that revolution. Because the amazing thing about the tech industry, especially when we go through these inflection points, as you guys know, is the pie grows really fast. And so it's really not zero sum, which actually makes it (00:14:06) incredibly conducive to forge very mutually beneficial partnerships because we're not approaching it as, you know, what I gain, someone else loses. It's actually because the pie is growing, we're partnering together. And this is very much part of the ethos of how we're partnering with the Philippines. We are developing a partnership where we both have skin in the game and we both share in the upside of success. And so, you know, risk is evenly allocated and so is upside. And so (00:14:36) Ultimately, it's very much a win-win proposition. How do you think about the areas where you want to partner with other countries versus have things happen in the US? I know, for example, there's been a longstanding effort to bring back fabs and the ability to manufacture semiconductors at sort of state-of-the-art line widths and everything else in the US. That hasn't quite happened yet. I know there's active efforts to do that. (00:14:59) What do you think is important to do in the US itself versus to partner with other countries? And how do you figure out what goes where? Yeah, so that is such a great question. And I think, you know, I would answer that question in a few different parts, but the first part is (00:15:14) maybe starting with some stats. And we, America consumes, accounts for, somewhere in the neighborhood between 20 and 30% of global consumption on any given quarter. It's obviously huge because we're 4% of the world's population, but we're basically 1/4 to 1/3 of the world's total consumption. (00:15:33) Is that Celsius or other things like that? It's other things than Celsius or no name coffee. We consume a lot of stuff. I mean, Americans like to consume. We're A risk-taking culture. We're a high consumption society. And our production levels are not 20 or 30%. We produce a lot less than that. And so part of what we're seeing is (00:15:59) If we narrow the gap between what we consume and what we produce, we will re-industrialize America because that will be a massive re-industrialization plan that will inevitably include a lot of semi-autonomy or full autonomy. And because if we industrialize in an economy where unemployment's already at 4%, (00:16:20) it will have to be, very, very autonomous, which is possible. Singapore has proven that that's possible. They have highly autonomous ports, you know, factories. And so that, you know, so that's number one. Then there's a question of, you know, what happens with the other 70% of the world's consumption that is currently, you know, mostly concentrated in China. (00:16:42) And so the idea is if we want to have a supply chain system where America and its allies and the global economy has access to suppliers that are more evenly distributed, that are reliable, trustworthy, transparent, I think a lot of countries actually really see that as a business opportunity for them to also be able to have more production in their respective regions. (00:17:08) And so part of the idea for the forward deployed industrial base and these economic security zones is actually to have a hub-based approach where we can leverage the industrial attributes. So for example, if regions have a lot of rare earth minerals or, you know, for example, in the case of the Philippines, a very deep indigenous manufacturing ecosystem, you know, things that they're really good at or have unique advantages in, we can leverage that to really help capitalize on that and (00:17:38) and make sure that they can actually contribute to those supply chains for areas that they're really good in. And ultimately, help foster regional hubs because, the population of Africa, for example, is growing massively. The, South America is also growing very, very quickly, places like Brazil, Argentina. And so I think having a hub-based approach is very promising. And ultimately, America is, remains the economic engine (00:18:09) of the global economy. And so I think the parts that we re-industrialize here will definitely be the biggest driving forces. And you're totally right. I mean, the effort to bring back semiconductor fab production here is already well underway. And so that will continue. It's already in flight and there's a whole host of reasons why it wouldn't necessarily make sense to try to replicate that elsewhere because (00:18:35) It's highly technical. The global supply of talent available in that area is very finite and limited. And it's also extremely capital intensive. So it wouldn't make sense to replicate that elsewhere before it's finished here. But the unfortunate and good news is the supply chain is vast and there's a lot of things that still need to be built. And so (00:19:04) The world, I think, is actually really, really ripe with opportunity in that sense. How do you think about other inputs into what you're talking about? So for example, you mentioned rare earth magnets. And my sense, and I haven't verified this, so please correct me if it's wrong, is that, you know, the A, rare earths are not actually rare. (00:19:25) B, the total market sizes in the few billion dollars a year, and C, that market is heavily subsidized by China in order to basically control supply. It's sort of a lever from like a political basis. And so are there considerations around other mechanisms that the government can use? I know there have been, but I'd be love to hear how you all are thinking about other aspects of the supply chain that may be raw materials, that may be (00:19:48) heavily subsidized or propped up by foreign governments, et cetera, and how we should address those areas in addition. Absolutely. And so you're exactly right. The total, the really interesting thing about rare earths is obviously, as you point out, they're not that rare. I think, you know, some people have said that they're everywhere. It's not totally true either. I mean, they're not everywhere, but they're in lots of different places. I think the sort of key thing is (00:20:14) that really drives, the economics of those industries is how much energy do you need to pump into the ground in order to extract a given mineral at a given, quality grade. (00:20:25) And then what's actually really rare is the refining process, because the number of refining, or the number of processing facilities for these minerals is very, very limited outside of China. (00:20:37) They exist, but in very limited, you know, quantities. (00:20:41) And you're right, and China obviously subsidizes the hell out of them. (00:20:46) And so it's very exciting to be able to share with you on that, the Trump administration's actually really had a very, very comprehensive approach. (00:20:57) I mean, we've been really focused on the mineral security issue pretty much since day one of the administration. (00:21:02) We did the largest critical minerals summit in the history of the State Department. (00:21:08) In February, on February 4th, with over 55 countries that participated, we signed critical mineral MOU deals with dozens of countries who have lots of different kinds of minerals. (00:21:21) And now one of the things that we're doing and have been aggressively pursued across the administration is allocating capital and investments into a lot of these projects to make sure that they have access to the resources to expand production. (00:21:35) So that's on the supply side. (00:21:37) On the demand side, (00:21:38) The administration is hard at work at negotiating deals with countries to address the pricing issue. (00:21:44) Because as you guys know from the business that you invest in, you can invest a lot of money in a startup, but ultimately a lot of the economics of whether a company can be viable is really based on the price that company is able to provide a service for. (00:22:01) And so the pricing mechanism is really, really central to unlocking (00:22:06) long-term commercial viability. (00:22:08) And I'm incredibly confident that we actually will resolve the pricing issue for the minerals market before the end of this administration. (00:22:17) You mentioned that you are directly investing in domains of importance where you're trying to like trigger better supply capability with us and allies. (00:22:28) Like how do you think of the role of asking for a friend, private capital in these initiatives? (00:22:35) so I think, I mean, you guys have such an important role to play, mainly because, they're so much of, whether a project materializes or not, as you guys know, it hinges on execution, capacity. (00:22:53) Can a company really execute on a very aggressive, ambitious plan? (00:22:57) And one of the amazing superpowers of the venture capital business is (00:23:01) you guys are kind of hardwired to be able to assess a lot of the personality attributes of founders and operators to tell, some of the things that are harder to read from a deck or a spreadsheet on does this person really have, what it takes to be able to execute, and address execution risk, underlying scientific risk, all the different risks that inevitably exist in any company. (00:23:28) And so the feedback, and so we actually would really love for the venture capital ecosystem to help be part of the solution, because I think you guys are better positioned to assess who are the best players in the space. (00:23:44) And we can take that as an important signal to help inform capital allocations that we make on the government side to make sure that we allocate money in the right places. (00:23:55) and in the most efficient way possible, especially,