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Larry Kudlow: Talks Fentanyl And U.S.-China Trade War

First On CNBC: CNBC Transcript: National Economic Council Director Larry Kudlow Speaks with CNBC’s “Squawk on the Street” Today

Fentanyl
Image source: CNBC Video Screenshot

WHEN: Today, Tuesday, August 6, 2019

WHERE: CNBC’s “Squawk on the Street

The following is the unofficial transcript of a FIRST ON CNBC interview with National Economic Council Director Larry Kudlow on CNBC’s “Squawk on the Street” (M-F 9AM – 11AM) today, Tuesday, August 6th. The following is a link to video of the interview on CNBC.com:

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National Economic Council Director Larry Kudlow weighs in on the escalated US-China trade war

All references must be sourced to CNBC.

JIM CRAMER: The President Tweeting that we’re in a strong position. And joining us now first on CNBC is President Trump’s top economic advisor and Director of the National Economic Council, Larry Kudlow. Always great to see you, Larry.

LARRY KUDLOW: Good Morning, Jim. Thank you. Appreciate it.

JIM CRAMER: All right, Larry, are we in a situation where we are struggling for a commercial agreement with the Chinese, or do we want a new Cold War and contain the Chinese?

LARRY KUDLOW: Oh, well, look. The President said many times that he’s willing to negotiate. We’re still planning on the Chinese coming over here in September. I mean this latest round -- the President was not happy with the progress when Secretary Mnuchin and Ambassador Lighthizer went over to Shanghai, so he wasn’t happy. There were no AG purchases, as you know. He’s also very unhappy with the fentanyl story. He’s very heartfelt in his concerns about fentanyl, killing Americans by the way, as well as Chinese and others. So, he moved toward 10% tariffs on September 1st on the remaining $300 billion. But, I want to say that in the course of his Tweets and his conversations with the trade team, he would like to continue negotiations. He would like to make a deal. It has to be the right deal for the United States. But, no, we would much prefer a commercial transaction. But on the other hand, Jim, I’ll just add this parenthetically, the President is defending the American economy. And China, as you know, has had a lot of unfair trading practices. We can go into that later if you want to. But the point is the President is determined to defend the American economy. And by the way, and I hope we get to this, the American economy is in great shape. It is booming. There is no inflation. Retail sales, even things like CapEx, durable goods, we can walk through that if you want, wages, and salaries and jobs, we’re in terrific shape. The Chinese, regrettably, are not.

JIM CRAMER: Well, let’s go back to this fentanyl issue, which I understand is made -- not nearly enough in the media. This is something the President feels personally very important and his advisers think it. Wouldn’t it be easy for the Chinese to actually live up to what they said in Buenos Aires and go after – go after the companies that are making the fentanyl that are killing our people? It’s just a sign that they’re even listening to what Trump has to say.

LARRY KUDLOW: Well, it’s a tough point, Jim. And you’ve got your finger on it. I was at that dinner at the G-20 in Argentina, Buenos Aires, last whenever it was, last December. And actually, that was the first topic that President Trump raised with President Xi. And, at that time, President Xi without hesitating said he would take care of it. He would make the penalties for fentanyl selling the worst -- perhaps that meant the death penalty. He would stop the sales of fentanyl. So, you’re quite right. This is a heartfelt issue. You know my view on these things. And I don’t understand why the Chinese can’t seem to get there. We will see. Again, I want to emphasize this morning as much as I can: as difficult as things may be, and I know the markets are a bit volatile, but the reality is we would like to negotiate. We’re planning for the Chinese team to come here in September. Things could change with respect to the tariffs. The President has said if you make a good deal -- good progress on a deal, maybe he’ll be flexible on the tariffs. On the other hand, if there’s no progress on the deal, then the tariffs might get worse. But he’s open to it. That’s really the key point.

DAVID FABER: Yeah, but Larry, it’s David. I mean, in the year and a half or so we’ve been watching these potential negotiations and the time that you’ve come on so many times and we’ve asked you about them, I can’t remember a time when it’s felt worse. I mean it can’t feel any worse to you than it does right now, in terms of our relationship with China over these key issues, can it?

LARRY KUDLOW Well, I don’t know. These things, you know, they go up and down. There’s a lot of disappointment last May, a couple of months ago, when it seemed like the Chinese were pulling back. It’s ebbed and flowed. That’s all I want to say on that point. And again, the issue is I believe the President is still very much open to the negotiations. I do want to say a couple of other things, though, worth noting. On the Chinese yuan and the Treasury Department’s declaration that they have been accused of manipulating their currency, I mean, look, they’re down 10% in the past year or so. So, that is something that we can’t tolerate. Now, ironically, that actually lowers prices. That takes the pressure off any consumer price increases at home. But that’s the wrong way to do it. That abrogates a lot of pledges and promises. And after all, if China keeps devaluing its currency, then money is just going flow out of there. It’s already started. We know that production and supply chains are moving out of China. We know China firms are desperately trying to cut prices to mitigate the effects on U.S. consumers. We -- we don’t have to buy -- you know, a lot of these tariffs, let’s narrow in on this because I think there’s some misunderstanding: there’s a lot of elasticity of demand. American importers can go elsewhere --

DAVID FABER: Sure.

LARRY KUDLOW: -- for certain goods and services. So, I think we’re in pretty good shape. I guess I’m scratching my head, Jimmy, I’m scratching my head at the idea that consumer prices are booming because of tariffs. I mean, the PCE Deflator, as you know, is up less than 1.5%. The PCE Deflator, so there’s no inflation. And in special instances where there may be some consumer issues, it’s a very tiny part of overall consumer spending. And Jimmy, consumer spending is booming. It’s the best part of the economy. Retail sales, they’re up like 6% or 7% annually the last three months. So, I just don’t understand why people are harping on that.

DAVID FABER: We -- Larry, Larry, it’s David and we follow that closely, as you know, here every morning. But, you know, you mention all the leverage in a way that we may have with the Chinese. But there are many people who believe, well, they have got leverage with us too, which is just to wait. Just to wait us out, wait till the election, take their time. Much longer time frame than we have. It’s not a democracy, obviously. Their leadership doesn’t have to answer to the people in the same way ours does. Doesn’t that give them an advantage here over time if they just say, “Hey, you know what, we’re just going to step back and let this thing sit”?

LARRY KUDLOW: Well, look, that may be their political analysis. Maybe yes, maybe no. I will just say this, the economic burden of these tariffs is falling almost 100% on China. So, their economy, which has been deteriorating, you can look at any long chart of Chinese investment, retail sales and so forth, and you see a steady downdraft. Their GDP, which is probably inflated by several points, is coming in lower and lower. In other words, my point is with respect to our disagreements and with respect to the President’s tough negotiating with tariffs, I think China is getting hurt significantly much more than we are, as I said before. So, okay, if they want to wait, maybe so. But the Chinese economy is crumbling. It’s just not the powerhouse it was 20 years ago. Everybody knows that. And, as I said before, you know, supply chains are moving out. The demand for their goods is moving to other places. A lot of people are coming back home. Very important, lost in the tax reform debate, lost in the tax reform debate, we’re seeing now because of our new tax laws companies are repatriating their revenues and their profits and their whole factories and their productions to the United States. Some of that is coming from China.

DAVID FABER: Who?

LARRY KUDLOW: So, my basic point is -- by the way, it’s about a trillion dollars, which has not been adequately counted yet in the overall revenue flow for the budget gap. Separate subject. But nonetheless, my point is this: with a 21% corporate tax rate and tremendous rollback of regulations and much easier tax policies with respect to repatriation, you’re seeing American firms move back all those inversions, Jimmy – all those inversions --

DAVID FABER: I mean, alright, Mylan is moving back because they’re getting acquired. Allergan is moving back because they’re getting acquired.

LARRY KUDLOW: That’s correct. That’s correct.

DAVID FABER: Great, that’s great. That’s not manufacturing. That’s not jobs. That’s just tax rate stuff now. That’s not actually anything else. They’re both being acquired. They both inverted and now they’re both coming back.

LARRY KUDLOW: That is correct, but remember you’ve got home company administrative offices and so forth. You’re also going to have factories moving back in from other places around the world, including China. So, my generic point: China can wait, that’s up to them, but I think they will continue to do great damage to their economy. The American economy is very strong. Theirs is not.

SARA EISEN: Larry, you’re giving a textbook reason of why the dollar should be strong and the Chinese currency should be weak. So, why go after them on manipulation? Their economy is getting hurt a lot more than ours. The new threat of tariffs only puts more pressure on things like capital outflows like you’re talking about. Clearly the currency is a very sensitive issue for the markets, Larry. So, what are you guys hoping to accomplish here?

LARRY KUDLOW: Well, look, the Treasury Department has monitored this very, very closely at the direction of the President. Secretary Mnuchin has been all over this for a long time. At some point in time, if they are violating our laws, WTO laws, and frankly G20 laws of currency stability, we have to take the action. We just have to. I mean, the issue of laws –

SARA EISEN: I think you had a better case eight years ago, when they actually were artificially keeping their currency weak. Now the dollar is up against everybody and China is getting hurt. So, it makes sense for the market to guide their currency lower.

LARRY KUDLOW: Well, look, we’ve seen China in the past defend the currency. We don’t see that right now. And as I said earlier, the best we can determine, roughly in the past year it’s actually been a little more than a year, it’s about 14, 15 months going back to April 2018, their annuity has dropped about 10% in nominal market terms. That’s not acceptable. Again, we have to keep our laws intact. There’s G20 deals, there’s WTO deals. So, we did what we have to do.

JIM CRAMER: All right, Larry, let’s clear up something that happened last week. All the press reports, which I think have been pretty inaccurate about the White House, said that you, Mr. Lighthizer, Secretary Mnuchin, were on one side saying, ‘Please don’t do this tariff.’ Our old friend, Peter Navarro, saying, ‘Let’s do the tariff.’ Is that right – is that a right narrative or a wrong narrative?

LARRY KUDLOW: Look, I would never talk about internal discussions. I read a lot of stuff in the papers. I don’t have any comment on that. What I will say is the trade team, including myself, stands 100% behind President Trump. I went out with that last Friday. I repeat it today. We understand what he’s doing to protect and defend the American economy. So, we stand 100%. There’s always internal discussions. I have no comments on that. We are there. Look, the President -- you know, let me just make this generic point. The President is a transformative President. He’s rebuilding the American economy, and we’ve had some considerable success. These things are not easy. And that includes trade imbalances. So, what we’re trying to do is have fair, free, reciprocal trading with China. We asked them to abide by international trading laws with respect to IP theft, voice transfers of technology, cyber tariffs, nontariffs, you know that story as well as I do. We’ve talked about that. The President is trying to defend America’s economy: farmers, cattlemen, manufacturers, autoworkers, high-tech people, you name it. You know, I saw a stat the other day: just IP alone, intellectual property alone, if we were able to reclaim what we have lost by unfair practices of China, it might come to $600 billion back to the United States and maybe more. Now, nobody counts that $600 billion as a benefit to our consumers and our business, but we should. Because after all, Jimmy Cramer, you know, the United States, our innovation, our inventions, we’re the -- that’s the crown jewels of what makes this the greatest economy in the world. We can’t allow that theft. And hanging numbers on it is very interesting. It’s at least $600 billion. So, that’s the kind of thing, Sara, we have to do. The currency is part of what we have to do. It’s -- there’s no motive other than to try to have a fair and free and legal and reciprocal trading system. You’ve got to have international rules and every member of the G7 stands behind us on this one.

JIM CRAMER: All right, Larry, I agree with you. This is the strongest I’ve ever seen the economy and it’s also an unbelievable moment in terms of inflation. It’s just not there. Why do we need the Chinese at all? Why don’t we just say, “You know what? Pound sand, Chinese. We don’t need your market. We don’t get much from you. We don’t care about what you do with Apple or Starbucks or Yum China or whatever. Be our guest.” Don’t let them sell any IPOs in this country. How long would they last, Larry? How long would they last with this current sense of we don’t -- we’re a long gamer and we do not need the U.S.?

LARRY KUDLOW: Actually, by the way, I’ve always felt the U.S. and President Trump have the long view. A lot of people don’t understand that. Because his long view, as I said earlier, is to defend the American economy and the great progress we’ve made. Look, Jimmy, I think if you can have a regime, and I’ll just call it free, fair and reciprocal trading, the President has said numerous times his ultimate goal with respect to the world trading system is zero tariffs, zero nontariff barriers and zero subsidies. There are benefits-- there are considerable benefits to truly free and lawful trading. There are consumer benefits and business benefits on both sides. I believe if China lowered its trading barriers and make other reforms, the United States economy, which is so competitive now, so competitive, we are the class of the world economy, we would export tons and tons and billions and billions and billions of goods and services that would help to rectify our trade imbalance. I believe there are benefits. But, on the other hand, unlawful practices may erase those benefits. So, we will see. Again, I will repeat the President and our team is planning for a Chinese visit in September. We are willing to negotiate. Movement towards a good deal would be very positive. It might change the tariff situation. But then again, it might not. I don’t know. I wanted to make one other point, especially to you, Jim Cramer. Productivity is the seat corner of the American economy. We’ve been watching CapEx business investment, which has slowed a lot in recent months. I just want to insert this. I’m looking at the last two months of durable goods, the nondefense core CapEx, excluding aircraft, it’s starting to boom. We’re running now 5%, 6% annual rate the last six months. I think that’s been ignored because our tax cut plan was geared towards that. We had it for a while and then in the face of very severe monetary tightening, we seem to have lost it. Now it looks like it’s coming back. So, I think that’s a very -- another big plus for our economy.

DAVID FABER: Larry.

JIM CRAMER: But – go ahead, David.

DAVID FABER: Larry, I mean I still talk to a lot of CEOs who are not in a position to feel like they can make those big kind of decisions in terms of capital investment right now because of the uncertainty. Obviously, they are companies that are typically dealing with international markets as well. But these are amongst our largest companies in this country. What do you tell those CEOs who say, “I don’t know what the playing field looks like, and, if I don’t know what I return on capital is going to be, I’m going to wait”?

LARRY KUDLOW: Well, look, it’s a fair point, I’ve heard some of the same things. A lot of those CEOs are going to move their production and supply chains out of China, and that does take some time. So, they’re going to do what they’re going to do. We are trying -- look, we are trying to make it easier for them. We’ve been negotiating. It wasn’t us who pulled back. We went to Shanghai. Ambassador Lighthizer, Secretary Mnuchin – they went to Shanghai. We’re wide open to negotiations on this. That would add some certainty. But it takes two to tango. You know that. So, we’ll just see how this plays out. But we must protect American interests here. We just must.

JIM CRAMER: Right. Okay. Larry Kudlow, thank you so much for coming on “Squawk on the Street.” Always great to see you, sir.

LARRY KUDLOW: Thank you, Jimmy. Appreciate it.