China Trade Deal Becoming A Reality?
February 28 (King World News) – CNBC sent King World News the following transcript of the interview with Larry Kudlow, Director of the National Economic Council:
DAVID FABER: Let’s get to the news this morning on GDP. The Commerce Department reporting better than expected fourth quarter GDP. That capped off the strongest economic expansion since 2015. Annual growth hovering right near 3%, the target that had been set out by the Trump administration. Joining us now first on CNBC top White House economic advisor, National Economic Council Director Larry Kudlow. Getting seated there. Good morning, Larry.
LARRY KUDLOW: Good morning, David. How are you?
DAVID FABER: I’m doing well. You know, 2.6 was the number, strong year. Some concern about December and sort of a lag toward the end of the year. You kind of dismissed those retail sales numbers that jarred the market for about 20 minutes. What is your sense as we’ve come into this year for economic growth coming out of that fourth quarter GDP number that was better than expected?
LARRY KUDLOW: Well, look, first of all, I think that 2018 was a good year. Fourth over fourth, 3.1%. Calendar year over calendar year, 2.9. I would just call it a 3% year. The first half was, what, 3.2, the second half was 3.0. The policies are working. I need to say that. Lower tax rates, deregulation, trade reform, the energy reform. It’s working. And I think more of the same. Now, let’s not forget, at the beginning of the year, January employment was 300,000 plus. That was a gigantic number. And I think that bodes very well for the first quarter and we’ll get off to a good start. And you look at other things, S&P 500, CAPEX spending is about 15 or 16% growth, new business formations are strong, consumer confidence snapped back after the shutdown, and maybe we’ll get to the improved prospects for China trade and even USMCA. So, I’m very optimistic, David.
DAVID FABER: Alright, well, you mentioned China trade and I’d love to just get there. Because we heard from Ambassador Lighthizer yesterday, there does seem to be a positive tone, Larry. What is your sense as to the likelihood there is going to be an agreement reached, something even potentially signed in the not too distant future between the U.S. and China?
LARRY KUDLOW: Well, look, we’re moving forward on it. Moving forward. The progress last week was fantastic. And, really looking at the pages, looking at the documents, whether it’s all the structural issues, you know, I.P. theft and forced technology transfers and ownership, we’re making great headway on non-tariff barriers and tariffs regarding, you know, various commodities such as soybeans and energy and beef and whanot. We have mechanism, with respect to enforcement, which is I think unparalleled to be honest. I think Bob Lighthizer has just done a tremendous job. You know, when we had the Chinese over last week, the first day of the deputies’ meetings went very poorly. And the second day was cancelled because of that. And then the principles met at the plenary session. I was there. Led by — Lighthizer read them the riot act. And Vice Premier Liu He was the leader of the Chinese side responded. And all of a sudden everything picked up. And so we had line-by-line discussions on Thursday and Friday, and then it was extended to Saturday and Sunday. So I have to tell you, the progress has been terrific. We have to hear from the Chinese side. We have to hear from President Xi and his Politburo, of course. But I think we’re heading towards a remarkable historic deal. That’s what it looks like to me. We still have to get their sign off, you know, that’s important. But I think we’re heading for a historic deal.
DAVID FABER: Yeah. Larry, and what about this idea that has certainly been reported on that there is, well, light between Lighthizer and the President in terms of their view here. And that the President might be willing to accept a deal that Mr. Lighthizer, who made it clear in his testimony yesterday, would not necessarily favor because it would be more about removing tariffs and/or money coming back and forth, if you want to call it that, as opposed to the real structural changes that need to take place.
LARRY KUDLOW: I just said, look, the structural changes are there. I mean, again, the tech transfers, the I.P. theft, the issue of ownership – you know, the joint venture ownership is really the key to the transfers. And the Chinese have gone forward on this. We’re going to see an across the board, especially financial services. but American companies will be able to own American companies for a change. And that takes away most of the issues regarding the forced transfers. As far as daylight between President Trump and Mr. Lighthizer, I think that’s just untrue. I just think that’s completely untrue. I know people are reporting it. I was in the oval office when we decided that ‘Memoranda of Understanding’ worked in trade but not for real estate, so we don’t use that term anymore, and we’re now using ‘trade deals’ or the word ‘contract.’ Mr. Lighthizer talks to the President every day. He wouldn’t have made this deal if the President weren’t signing off on it. So I want to just put these rumors to rest. Bob Lighthizer has done a terrific job. He’s the best trade lawyer in the business. And President Trump is very close to him, and I think we’re all fortunate. Look, again — again, the Chinese side has to come back and agree. I believe they will and I believe there will be a meeting in late March down at Mar-A-Lago. But we have to wait for their decision. But let me just say, Mr. Lighthizer for my money, and I’m the free trader in this building, he has worked miracles on this Chinese deal. We’ve never ever come this far with China trade. And again, the outlook for a deal is very positive.
JIM CRAMER: Wow, Larry, that’s much stronger than I’ve heard yet. And I think it’s kind of monumental. Does this mean that — you introduced me to Peter Navarro. We’re friends, I admit that. I’ve been where he is for a very long time. Is there anyway the Chinese can, let’s say, back away from the Made in China 2025 initiative. Is there any way we can get them to go back a little from Belt and Road? Can we make it so we say ‘You know what, we’re going to approve American Express, we’re going to approve JP Morgan’? Can those things really happen?
LARRY KUDLOW: Yes. Look, Jimmy, as part of the documents — and I can’t go too deep into that. But as part of the documents, the de-emphasis of their 2025 and the significant reduction of China subsidies to those target industry is part of the documents, okay? That is so important because it gets to your point. And again, I’m sitting here talking to you all this morning. We have to have a sign-off, right, from President Xi and as I said the Politburo — the top brass. But the documents are very clear. I mean, even things like a currency deal, Jimmy—you know, got – no manipulation, they’ve got to report any in interventions in the market. That’s part of it. As you know, yesterday Mr. Lighthizer announced before Congress that we were suspending the 25% tariff on the $200 billion of good and services, a suspension for now, awaiting the China’s response. We have never gone this far. We have never covered so much ground. And it’s a question now of waiting for the other side to come back and say, you know, shall we say, sign on the dotted line. And I’ve been a realist. I’ve been on the networks. Sometimes I’ve been so realistic the market has fallen on this. Right now, we have just moved further, specifically across the board. And I think — I’m not sure people get that. I mean, they should. That’s part of my message.
JIM CRAMER: No, no. Wow. I’ve got to tell you, this is so much more hopeful in terms of for both countries. I wanted to ask you, Larry: Has it mattered that our country’s numbers are getting stronger and stronger whereas China had export figures last night worse than ten years, manufacturing worse than three years. Does it play a role that one country is ascending and that another country seems to have a harder time and really these us perhaps more than they thought MAYBE six months ago?
LARRY KUDLOW: I think that’s a fair assessment. I heard you say that earlier on “Squawk Box.” I think that’s a very accurate assessment. And I think there’s two parts to it, Jim. One is, China has in the last 10 years moved away, maybe 15 years, moved away from market based reforms, during what I’ll call the Deng Xiaoping period which is principally the ‘80s and the ‘90s. This decade, they’ve moved away from those reforms. They’ve become more centralized, more dictatorial, more control, more central planning, if you will, more socialist. And the free enterprise reforms have been knocked out. So that’s hurt their economy. And if you run a chart, you know go back 20 years, you’ll see it. Business investment has faltered. Retail sales have faltered. And so forth and so on. Secondly, I think President Trump, his tariffs really hurt China. Okay. It came at a bad time for China, cyclically it came at a bad time, but I think the tariffs really hurt. And I will say this, again, I’m the free trader in the building. One thing I’ve learned from President Trump is that tariffs can be a very fierce strong negotiating tool. And in this case I think it’s a great illustration, to be honest. Mr. Trump wants to see free, fair and reciprocal trade deals. And ultimately, he believes we should have zero tariffs and non-tariff barriers and subsidies. But to get from here to there, you know, everything’s fair in love and war. And I think the tariffs have had a bad effect on China’s economy. And yes, I do think it brought them to the table. But I want to give China credit, you know I’ve been involved in these negotiations, I’ve been in office about a year. The Vice Premier Liu He and his top deputies worked very well with us, very well with us, in those last three or four days and the extended weekend. So, there seems to be good will and there seems to be phenomenal progress. I just think it’s the coolest thing imaginable.
JIM CRAMER: Larry, that’s outstanding.
DAVID FABER: Larry, last question: back to the U.S. economy, revenues into the IRS seem to be running below some estimates. People got their tax cut, so to speak. But now they’re not getting as much of a refund as they hoped, and that’s not even taking into account those of us in states where we don’t have the SALT deduction. Are you concerned at all that perhaps the consumer will suffer as a result of not getting as much back and/or the Treasury is suffering because revenues are running below estimates?
LARRY KUDLOW: Actually, I just want to dispute that. I guess the tax refunds are running slower. That is a function I think — that had something to do with the government shutdown, but I think in general some of the tax credits, some of the family tax credits and so forth, were seen to be slow to come out. But look, let me make this important analytical point. Give me a moment, David.
DAVID FABER: Of course.
LARRY KUDLOW: The key so understanding our tax plan is we reduced marginal tax rates. These are not rebates. They’re rate reductions. They’re incentive-oriented rate reductions. So, you tax something less, you get more of it. Work and investment and risk, Particularly on the business side but also on the individual side. So, people are saying, ‘Well, there’s a sugar high. One year. That’s it.’ They’re just plain wrong. The tax rate reduction will be in place for years to come. In fact, the business tax rates are permanent. The individual tax rates I think expire in 10 years. And the 100% expensing have another four or five years. That’s going to go on. And that’s one of the reasons I’m very optimistic. The policies we put in place on these lower tax rates and deregulation and you know, China trade, USMCA — we haven’t talked about Mexico, Canada and the U.S. There’s a historic agreement there that’s going to be great for business and economic growth and jobs. These policies are working so I’m going to say 3% 2018 and I’m going to say 3% for 2019 and 3% as far as the eye can see. I’m sure we’ll revisit that at some point.
DAVID FABER: And, do you want to weigh in on this debate about the impact of the corporate tax cuts and the that people seem to be focused on the large number of corporate buybacks, as opposed to perhaps what had been hoped for in terms of increased CAPEX? I know there have been increases but perhaps not as much as many hoped given the significant tax cut that corporate America saw.
LARRY KUDLOW: Well, you know, courtesy of my pal Dan Clifton of Strategas, S&P 500 CapEX has been terrific. I mean, it’s up — I’ve got the number here. I was afraid you’d ask. Up 14% year on year. So that’s a pretty good number. Point number two: share buybacks just transfer, the money goes from the corporate lock box to the individual investor, which I think is efficient. If the businesses don’t have use for it or enough of a rate of return, why not give it back to their own investors who are the owners, and that money doesn’t go under a mattress — that money from the investors and the shareholders will be recycled into the economy and they will start new companies, new businesses. Have you ever — look at the new business formations and applications which are soaring that’s a tremendous sign of the healthy free enterprise economy, and I’ll just say this: as far as those who want to nationalize healthcare and everything else in the world. We’re putting socialism on trial. We are not going socialist. We are not attacking business. We are not getting rid of incentives. We will not permit an end to free enterprise, nor will we replicate failed government planning models in the future. Trust me on this. I’m putting socialism on trial. Not going to happen. That’s why I’m optimistic.
JIM CRAMER: Okay, Larry, one more thing that I think you’ve got to put to rest. There’s this huge wrap which says that the tax cut, what happened with corporations, they just gave back buybacks and dividends. I’m looking at this GDP numbers. Larry, that’s just not true. They are spending like mad and bringing money back into the country. How do we end that ridiculous narrative that money is being used for dividends?
LARRY KUDLOW: Look, we have to keep talking about it. Again, to me, dividends to me are a good thing, not a bad thing. The cost of capital has been sharply cut via lower tax rates. That gives tremendous incentives. Again, businesses are investing heavily. That’s why I used the S&P 500 number. There are good numbers for the entire economy.
JIM CRAMER: Right.
LARRY KUDLOW: You know what? Think of it this way. Money is flowing into the USA like every before. We are the hottest economy in the world.
JIM CRAMER: Sure.
LARRY KUDLOW: Of the major economies, and I guess I’ll throw China into that, of the major G7 economies plus China, we are the hottest economy in the world. Money and capital is flowing into the USA at unprecedented rates. By the way, check out the repatriation numbers which are coming in way above budget. So what does that tell you? We are the most hospitable free enterprise economy left, and this thing is playing out — we are — not only is 2018 going to be the peak in growth. This growth spurt is going to continue for years to come, as long as we hold the line on our policies. And trust me on that. We will hold that line.
DAVID FABER: All right. Perfect place to end. Larry, thank you as always. Certainly appreciate it.
The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2019/02/28/watch-cnbcs-full-interview-with-larry-kudlow-on-china-trade-and-q4-gdp.html.
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