While it’s difficult to leave politics at the door when talking about tariffs and the trade fight with China, I want to step away from the emphasis on Washington and toward an economic discussion of this critical issue. To do this, I want to dissect and discuss the recent insight into the current tariffs from the director of the National Economic Council, Larry Kudlow.
A few weeks ago, CNBC’s Jim Cramer interviewed Kudlow and asked him about the trade squabble. Kudlow was the chief economist for Bear Stearns from 1987-1994, and served as associate director for economics and planning in the Office of Management and Budget under President Ronald Reagan. But he’s probably best-known for hosting several shows on CNBC. In his talk with Cramer, Kudlow had some very wise things to say about where we are now and where we want to be.
Kudlow started by saying, “I’m not a big fan of tariffs … I don’t like blanket tariffs.” Still, Kudlow added, he has been a longtime critic of China, and he believes the president is doing what needs be done and should have been done long ago.
Kudlow believes that our world trading system is broken and that the World Trade Organization (WTO) is ineffective at resolving trade disputes. He also thinks that the biggest contributor to the current dismal state of things is China, as trade relations have particularly declined since that country came onto the WTO scene in 2000.
Incredibly, the WTO still considers China to be an underdeveloped, third-world country. This in spite of the fact that China has the second-largest economy on the globe, clocking in at a tremendous $12 trillion. What’s more, if we consider the GDP at Purchasing Power Parity (GDP PPP) (another way of looking at GDP that considers the spending power of their currency), China has the largest economy.
So, despite its size and dominance, China has been using this WTO designation as an excuse to impose its own high tariffs and other trade barriers.
According to Kudlow, China also continues to steal U.S. intellectual property (IP). China has policies that require the forced transfer of technology, meaning that when American companies set up a partnership or joint venture with a Chinese company to sell their goods in China, a technology transfer typically makes it into the bargain. This practice prevents an American company from fully owning (and protecting) the IP it brought to the deal.
Say, for example, that you open a firm in a Chinese province on a joint-venture basis, which is the vast majority of how these new businesses are formed. You now own 49 percent, and the Chinese government owns 51 percent. Next, local party leaders require that you detail all of your business plans and blueprints. Their experts then have the opportunity to review all of the material — including the new technology pieces.
This is a real problem. And “The problem is getting worse,” says Kudlow. Remember, China doesn’t really have an open-door economy; it is still largely controlled by the Chinese government. The U.S., on the other hand, is the lowest tariff country in the world — our doors are wide open. While our average tariff comes in at around 2.5 percent, Chinese tariffs average 14 percent.
So, the only way to mitigate and extinguish a problem that rises this high through China’s ranks is to involve our government and policies. And both experts and politicians, including our president, believe the solution lies in lower barriers — whether they be tariffs or other political obstacles — to doing business in China.
Most of the U.S. is also on board. According to a recent Gallup poll, 62 percent of Americans believe China’s trade policies with the U.S. are unfair, which suggests the public supports the concept of attempting to change China’s policies.
If China’s leaders were to slacken the reins and make their country more open for trade, America could benefit handsomely. Because we are the most competitive economy in the world, we could have a proverbial economic field day and our GDP could expand even more.
Is there hope for anything close to an open-door trade policy from China? Perhaps. According to Kudlow, there has been much progress with the Chinese economic team.
Kudlow recently met with Vice Premier Liu He, a key economic adviser to China’s President Xi Jinping. From Kudlow’s recount of the conversation, Liu was sincere in his expression of a desire to compromise and to change the course of Chinese trade policies.
At the moment, Xi is another story. Xi doesn’t seem to have any real intention of following through with previous discussions. Hence why President Donald Trump is dissatisfied with China and movement from these talks. This inertia is why we will likely continue to see Trump put pressure on the Chinese to level the playing field.
Of course, we have to be careful in taking this skirmish too far. The Chinese can come after our joint venture companies already in China. The U.S. film industry is an example of this point. Hollywood filmmakers currently take home only 25 percent of the revenue they generate in China; the Chinese government system takes the rest.
We can’t abide these percentages indefinitely. And we can’t allow China to continue to siphon our IP. American technology is what helps make us the strongest player in the world economy. Our innovation has been our launching pad for top economic performance globally since as early as the 1800s and the Industrial Revolution. It’s sewn into the fabric of who we are as a nation.
Unfortunately, China has yet to concede to our requests to curb IP theft and the forced divestiture of our technology. That doesn’t mean, however, that they don’t see the error of their ways, just as the rest of the world does. Europe, Canada and, according to Kudlow, even some Chinese officials agree that this practice is inherently wrong. And these Chinese officials also understand that these practices are under a global microscope right now.
This all means that something has got to give. The White House is doing something about it.Trump, Kudlow and Treasury Secretary Steven Mnuchin are all working toward some sort of solution. The U.S. just wants a level playing field. Why wouldn’t we?
Let’s bring these issues together in a relatable, day-to-day example. Say you are in charge of your neighborhood association. For years, the last three heads of the association allowed the landscaping company to raise prices, and this is the largest expense in the community. Imagine, for instance, that the bill comes in at $10,000 each month. Why not shop around, you say? Well, because the deal is that the neighborhood has to use this company. Still, you know that realistically the landscaping should cost only $2,000 a month.
What would be your first item on the to-do list for this new position? No doubt, you’d call the company and negotiate your way back to more fair pricing. In fact, you may call them and demand that the terms go in a much more equitable direction. This is precisely what’s happening with the U.S. and China.
We need equal footing. China isn’t a third-world economy; its economy could become larger than ours (in size) before we know it. So, of course, the U.S. should be working toward a more level playing field. Once all the negotiations are said and done, I believe we’ll be more “level.” China stands to benefit because we will do much more business within its borders. And given more economic choice, the U.S. could see its own economic boon. That’s progress if you ask me.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than seven years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
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