Exclusive – David P. Goldman: Tariffs Are Not Enough to Beat China; U.S. Needs to ‘Seize Technological Leadership’

China's President Xi Jinping (L) and US President Donald Trump attend a welcome ceremony at the Great Hall of the People in Beijing on November 9, 2017. / AFP PHOTO / FRED DUFOUR (Photo credit should read FRED DUFOUR/AFP/Getty Images)
FRED DUFOUR/AFP/Getty Images

Columnist and author David P. Goldman discussed the trade war with China with SiriusXM hosts Rebecca Mansour and Joel Pollak on Tuesday’s Breitbart News Tonight.

Although he is a supporter of President Donald Trump and believes China presents “the most dire problem we face in the world,” he warned the administration may be underestimating China’s economic strength and that tariffs alone are not enough to confront them. The U.S. “should determinedly seize technological leadership the way we did against the Russians after Sputnik under the Eisenhower and Kennedy administrations, as Reagan did during the Cold War.”

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“I just don’t think that tariffs will hurt China sufficiently to get accomplished what Trump wants to get accomplished,” Goldman said.

“There’s a very simple reason for it: if you look at what China exports to the United States, it’s overwhelmingly consumer goods, mainly consumer electronics,” he explained. “The biggest item is cell phones. Tim Cook has said Apple cannot produce their top-of-the-line smartphone in the United States because the Chinese have spent the last 30 years developing the specific skills they need to manufacture it there. We just don’t have them. It would take years to bring it back.”

“So you put on a 25 percent tariff, as Bloomberg says this evening the administration might do, and instead of paying $800 for a new Apple phone or a new Galaxy, you’ll pay $1000. That’s not something which I think Americans will be pleased about,” he cautioned.

Goldman noted that China exports three times as much to Asia as it does to the United States, and many of the assembled goods they sell to the U.S. are made with components from other Asian nations, so only about a third of the price paid by the American consumer is added by Chinese value. This will greatly reduce the impact of tariffs leveled by the U.S. against China.

“It will hurt them, but not enough to turn that supertanker around,” he said. “Ten years ago, we would have crushed them, because 40 percent of China’s exports ten years ago were going to the U.S. Now it’s 20 percent.”

Mansour brought up the counter-argument made by Don Luskin on Monday’s Breitbart News Tonight that China cannot easily replace the American demand for consumer goods like high-end smartphones with domestic demand, in part because Chinese companies already sell cheap knockoffs of these products to local customers.

Goldman replied that China is already trying to shift the manufacturing of these items to countries like Vietnam, Indonesia, and Pakistan because China’s growing economy is making Chinese labor too expensive.

“This will simply accelerate what they’re doing,” he predicted. “Foxconn will open plants in Vietnam. It will be a Vietnamese import.”

Goldman also challenged Luskin’s assessment that China’s economy is more fragile than it appears.

“I was a Chinese banker. I worked for a Chinese-owned bank in Hong Kong. I’ve spent years looking at the numbers of Chinese corporations. America and China have exactly the same ratio of debt to GDP, which is about 2.4 times. The difference is, China has very little central government debt and tons of corporate debt, but their corporate debt is just disguised government debt because they’ve used their state-owned enterprises to build all their infrastructure,” he said.

“The difference is, we’ve got all this debt and we use it to pay for entitlements. The Chinese issue tons of debt, but what they have is the most modern rail system in the world, brand-new airports, cities with brand-new subway lines, and so forth. They’ve got much better infrastructure than we do. The president has made a big point about how bad our infrastructure is and how much we need to invest,” he noted.

“Overall our debt is the same – but what the debt is pledged against in China is, unfortunately, a little bit more sound than what we’ve got here,” he concluded.

Goldman pointed out that China has used this infrastructure to move some 600 million people from rural communities into cities, taking them from subsistence agriculture to industrial jobs and increasing China’s national income by 17 times over the course of a single generation.

“It’s the equivalent of building two whole Americas from scratch in 35 years,” he contended. “Now, you’re going to have a few empty places. There’s going to be some slippage and a little bad planning. But it’s remarkable how little slippage there has been. Every once in a while you find an empty city. It fills up pretty quickly.”

“Chinese investment in infrastructure has by and large been very successful, although you can certainly point to some grotesque errors. In the big picture, it’s been productivity-enhancing. Compare it to India, where you still have half a billion people living in the most extreme poverty, mass illiteracy, really primitive conditions of life. You can’t get around the country,” he said.

“Chinese infrastructure spending has been, by and large, very effective and very successful. I wish it weren’t the case, because they’re the Borg, and they’re going to try to assimilate us, and I don’t like that,” he chuckled ruefully.

Goldman drew on his experience with the final years of the Soviet Union to assure the audience that China in 2018 bears absolutely no resemblance to the dying Soviet empire of the late 1980s.

“For thousands of years, every hundred years or so, five or ten percent of the population would die in a famine. It was sort of normal to have mass extinctions of a large part of the Chinese. This is the first generation of Chinese where no one is afraid to die of hunger, or in fact of ordinary diseases. It is a golden age for the Chinese. Their living standard has gone up 17 times – 1,700 percent. Nothing like that has ever happened in the history of economics,” he said.

“China is not unstable. They’ve got a labor shortage. They can’t find workers. If you knock out some Foxconn plants, yeah, maybe you’ll have a little bit of friction here and there, but it’s not going to take them down,” he said.

Goldman hastened to add that China is a “horrible totalitarian society,” although the government generally leaves citizens alone if they are productive and refrain from challenging the regime. The incredible level of surveillance China directs against citizens, through everything from monitoring the coordinates of their cell phones to spying on them with facial recognition software, intimidates the vast majority of the population away from effective resistance.

“I get very nervous when people say, ‘Don’t worry about them, they’ll fall apart, there will be riots.’ No, there won’t. And what if we’re wrong? What if we’re dealing with a tenacious system that’s not going to go away, that’s producing twice the number of doctorates in science and technology that we are, that’s growing three or four times as fast as we are?” he asked.

Pollak cited China’s tendency to buy property and make investments in countries like the United States as evidence China’s elites are not entirely confident in the strength of their own economy.

“Every generation of Chinese for the last 500 years has been expropriated, so it’s normal for affluent Chinese to put some of their money overseas,” Goldman replied.

“The ‘ghost cities’ are vastly exaggerated. In terms of the Chinese banking system, they don’t have a municipal bond market. They don’t have a national highway trust. What they have is state-owned companies who build infrastructure. They borrow from the banks, and they build railroads, and power plants, and airports, and harbors, and whatever else,” he said.

“I’ve downloaded the balance sheet of every publicly traded Chinese company, including all the state-owned companies, thousands of them, and analyzed them. I spent years doing this. Most of the expansion of debt has been to fund infrastructure,” he stressed.

“It would the equivalent of, let’s say, President Trump doing a public-private partnership: initially a ton of debt to build new roads, bridges, and airports, all the things we need. You’d see debt go up, but there would be something against that. Most of that stuff is state-owned companies, which will be bailed out by the government if necessary, and most of it against things that actually add value, for the most part. You can find stray examples of things that are a waste, but for the most part China’s infrastructure has been a productivity enhancer,” he assessed.

Goldman noted that consumer debt in China is “a fraction of what it is in the United States,” which means that “if the Chinese decided to start borrowing and spending, you could double consumption in a couple of years.”

“A trade war has no winners, and it would be bad for China, so the threat of a trade war certainly has hurt Chinese stocks,” he allowed. “After the big drop, I bought some, because I think some of them are now extremely cheap. Particularly, I like some of the large banks at the lower prices.”

Goldman noted that since China’s stock market capitalization is only about 30 percent of its national Gross Domestic Product, versus about 140 percent for the United States, “the effect of a stock market drop is much smaller on the Chinese economy.”

“It reflects nerves, but it’s not going to affect the flow of financing to large parts of the economy,” he said. “In fact, tech IPOs are still going very well, and very much in demand. To the extent that the more productive and forward-looking part of the economy needs money from the stock market, they’re still getting it.”

Goldman disputed the notion that China has seen a trillion dollars of capital flight over the past few years.

“During the five years, six years, up to late August of 2015, the Chinese currency was going up continuously. It was being revalued almost every month,” he explained. “Every Chinese business borrowed in U.S. dollars or other currency because they figured they would be paying them back with higher-priced RMBs. They’d simply make money on the foreign exchange differential. They had about a trillion dollars worth of foreign currency debt built up.”

“Once the Chinese government stopped the upward path of the RMB – it had gotten very overvalued by the middle of 2015, it was hurting the economy – all the Chinese businesses had to pay back these dollars and other foreign currency debts and substitute local currency debt, so there was a trillion-dollar balance sheet shift. If I were a Chinese business and I owed money to somebody in dollars, I’d pay it back and replace that with a loan on my own currency,” he continued.

“The China central bank reserves fell by a trillion dollars. The liabilities of the Chinese private sector fell by a trillion dollars. That’s just basically a bookkeeping transfer. The overall financial position of China didn’t change at all during the whole period,” he concluded.

Despite these gloomy assessments of key arguments made by supporters of President Trump’s China strategy, Goldman did not say the president should back away from his economic confrontation with China. On the contrary, he thought stronger weapons than tariffs should be deployed.

“The thing about being a command economy that subsidizes industries is you put vast amounts of your social wealth behind existing technologies,” he said. “I think the United States should target a half-dozen key technologies – starting with, say, quantum computing – put Manhattan Project-style resources behind them in a public-private partnership, and decide to dominate those technologies and turn whatever the Chinese have into the equivalent of 8-track tape players.”

“That would really hurt them,” he predicted. “We should determinedly seize technological leadership the way we did against the Russians after Sputnik under the Eisenhower and Kennedy administrations, as Reagan did during the Cold War. We want a Manhattan Project, moon shot, Strategic Defense Initiative kind of technology driver to grab the frontier industries away from China.”

Goldman noted that the public sector has always handled basic research, while the private sector commercializes the technological products of that research. He saw no reason that relationship could not continue despite the vicious budget battles between the American left and right, provided the roles of public and private are not confused.

“The private sector is not going to put massive amounts of money into basic research,” he said. “Relative to GDP, we’re spending about half on basic research what we did during the Reagan years. That’s one of our biggest problems.”

He further observed that fruitful basic research is most commonly funded by the military, “because that’s where you push the frontiers of physics.”

“We don’t want an industrial policy. We don’t want to imitate the Asians and have the government actually build factories. We need a partnership where the government pays for basic research and the private sector takes the risk on commercialization,” he advised.

Goldman found the recent drop in foreign applications to study at American universities alarming, since “a lot of that is the Chinese deciding to stay home” because American schools no longer offer a superior education in vital high-tech fields.

“That means two things. One is the Chinese are afraid that we’ll pick off their smartest people, which I think we should be doing. I’d love to organize a brain drain out of China,” he said.

“The other thing is, it used to be that if you wanted a top of the line education in these fields, you had to come to America. Now it appears that Chinese universities have played catch-up and they can train a lot of their top people without sending them overseas. That’s what really scares me,” he said.

“Remember, China a thousand years ago developed all the technologies that made the Industrial Revolution. They had a compass, gunpowder, the clock, moveable type. They were the world’s great center of innovation. I’m not saying we can’t beat them at the game. It’s a tortoise-and-hare thing. We’re really the sleeping hare, and the Chinese tortoise is crawling past us,” he warned.

“That’s why I’m very concerned about complacency and the argument that China will somehow collapse of its own weight. It would be nice if it did, but what if it doesn’t? That’s not a strategy, counting on the other guy to collapse of his own weight,” he said.

Goldman said Chinese tech theft was a legitimate concern, but ultimately it’s impossible to maintain an edge in technology by fiercely guarding existing developments. Constant innovation and a steady stream of new inventions are necessary.

“I would like to see the Pentagon decree 100 percent domestic content for high-tech defense goods,” he recommended. “Force manufacturers to bring chip and other high-tech production onshore, even if it’s a lot more expensive, because there’s the national security gap.”

“I’m not too convinced that buying Canadian steel is a threat to national security, but buying Taiwanese chips to go into American fighter aircraft – that is a national security issue,” he said.

Goldman expressed surprise that the U.S. government has not acted more decisively to prevent American companies from surrendering technology to China.

“I’m not a lawyer, so I’m not sure exactly the best way to do this, but it’s one thing to tell the Chinese: ‘Stop telling our companies they have to transfer the technology.’ Why can’t we tell our companies: ‘You’re not allowed to transfer the technology, and if that means you get kicked out of the Chinese market, that’s too bad for you. We simply won’t let you do it,’” he said.

“I think we should be extremely aggressive in stopping technology transfer,” he recommended. “From the standpoint of the shareholders in a high-tech company with a five-year horizon, if you make a deal with the devil you get access to the Chinese, and in return you hand over your technology – well, the next five years might be great and your stock price might go up, but the United States of America would be the loser in the long term.”

“On national security grounds, there has to be a way for the United States to simply tell these top American companies that are trying to get into the Chinese market, ‘You are not allowed to transfer that technology. We will monitor you, and we’ll make sure you don’t do it.’ There would be a lot of upset about that on the part of the high-tech companies. They wouldn’t like it, but national security comes first,” he said.

“Tariff wars are not going to do the job on China right now,” Goldman said summation. “It’s simply not an effective instrument. We need a broader array of policies to stay several steps ahead of them in terms of technological dominance.”

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