Rebuttal of Larry Kudlow's trade views

Well written opinion piece by David P. Goldman for the Asia Times. "Larry, you're going about it in the wrong way"

Rebuttal of Larry Kudlow's trade views

Economist David P. Goldman gives Larry Kudlow a rebuttal after his CNBC interview. He argues that President Trump is right to worry, but they are going about it in the wrong way.

Goldman gives several reasons why he thinks their approach is wrong. Firstly, he argues; “You do not negotiate with China by trying to make its leader lose face.”

Secondly, the US isn’t even the biggest export partner of China. The rest of Asia is. Furthermore, Asia provided the biggest growth margin in China’s exports. All charts in this post come from Goldman's article.

He then questions on which goods tariffs should be imposed, and concludes that tariffs that would have the most effect (on consumer electronics) would also impose a significant pain on the average US consumer.

Goldman even goes on to argue the Chinese would be hurt much less than American consumers;

Most of these consumer goods, especially electronics are assembled in China from imported components. China adds only a third or so of the value added to these goods. China has a chronic labor shortage and is shifting low-paid assembly to lower-wage countries in Asia. If you tax consumer goods from China, American consumers will pay more, and the Chinese will accelerate the shift of low-wage employment to the new economic zone they are building in Asia through the $1 trillion One Belt, One Road program.

Goldman concludes; “You’re ten years too late, and $1 trillion short.”

In the second part of his writing Goldman goes on to put his finger on what he thinks is a major flaw in US policy; The continued underestimation of China as a (the most) powerful economy and a highly innovative nation.

What he writes can be summarized by his chart;

He then addresses the Chinese race for innovation.

We need to worry less about what technology China may have stolen in the past, and more about what kind of technology it may invent in the future. If China leaps ahead of us in quantum computing—which it is trying hard to do—they will secure an advantage as big as America’s advantage in semiconductors during the 1970s and 1980s. That will be game over.

He also notes that Europe has taken advantage of US-China tension. The latest example of this is that German companies (VW, Daimler, BMW, BASF, Siemens) announced tens of billions of dollars of investments in China. Europe and Japan have also signed FTA’s recently, of course.

In conclusion, Goldman writes that the US should strive to be innovative once more, like in the 1960-70s when they invented CMOS chips, LED screens, and the semiconductor laser. “The US hasn’t invented anything really new in half a century”.

David Goldman’s letter to Larry Kudlow ends with repeating what he proposed shortly after the election, in a piece he wrote with Dr. Henry Kessel for the WSJ right after Trump’s election:

First, encourage innovation, which is the precondition for economic growth. The U.S. can’t bring back most of the jobs it has lost, but Americans can create new and better ones. It goes without saying that Washington should aggressively defend intellectual property rights and enforce anti-dumping laws. But that isn’t enough.

Although private investors should take all the risks in commercializing new technology, federal R&D support is key. The civilian spinoffs of defense research gave us many of the new products of the past 30 years. Yet federal R&D spending as a share of the economy has fallen almost in half, to 0.73% of GDP in 2013 from 1.2% in 1987, at the peak of Reagan’s Strategic Defense Initiative. The next administration should raise R&D spending back to 1.2% of GDP by 2018.

Second, ensure that the resulting innovation turns into American jobs. High-tech is capital intensive, and modern manufacturing is expensive. But CEOs have learned that the market rewards companies that are light on capital investment and big on share buybacks. To change this behavior, lawmakers could give companies tax incentives to invest in capital assets in the U.S.

Washington should also enforce strict U.S. content rules for sensitive defense technology. Many of the Pentagon’s military systems depend on imported components. That’s a concern on security grounds alone. Procurement rules should be changed to require that critical components be manufactured in the U.S….

When Russia took a lead in the space race with the 1957 launch of Sputnik, the U.S. responded with aggressive support for science and engineering education. That helped make America the world’s leader in innovation. This should be a Sputnik moment. High schools could offer intensive training in science, technology and math. The U.S. should develop—with local, state and federal support—technical institutes on the German model to channel students into corporate internships and, ultimately, well-paid industrial jobs. Americans are at a turning point. They can either resign themselves to decline or revive their country’s industrial pre-eminence.

Please find David P. Goldman's article here