Larry Kudlow on the Phase 1 Trade Deal with China

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First On CNBC: CNBC Transcript: National Economic Council Director Larry Kudlow Speaks with CNBC’s “Squawk on the Street” Today. Kudlow discussed the signing of Phase 1 of the trade deal and what comes next.

WHEN: Today, Wednesday, January 15, 2020

WHERE: “Squawk on the Street

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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, Wednesday, January 15th. The following is a link to video of the interview on CNBC.com:

Watch CNBC’s full interview with Larry Kudlow on the 'phase 1' trade deal with China

All references must be sourced to CNBC.

Carl quintanilla: The U.S./China phase 1 trade deal set to be signed later this morning. Joining us to talk about it the national economic councul director Larry Kudlow good to have you back. Good morning

Larry Kudlow: thank you, good morning appreciate it.

Quintanilla: a big day, something the market’s been looking forward to for a long time as sort of the pieces start to fill in here what is most important to the market is it the commitment on these purchases? I’m seeing a headline now, the treasury secretary saying that there will be 100% ownership of chinese companies for americans in china

Kudlow: financial

Quintanilla: what’s key?

Phase 1 and financial ownership

Kudlow: financial companies, 100% ownership of financial companies, which is great progress on the whole issue of tech transfers and ip, but ownership is very important. Look, I think that, first thing I want to say is, for both teams, for both sides, this is a pro-growth deal. In fact, we think it’s going to add to the growth of our economy by at least a half a percentage point in 2020, and ’21 china state organizations are putting that out chinese consumers want american imports, things that america sells to china, it’s a big step forward on that front, and we will fill in a lot of details and I’m happy to tell you everything I can tell you.

I just want to make this point between the two great nations, nothing like this has ever happened before, and in fact, as we’ve talked over the past two years, a lot of times didn’t look like we’d get to the finish line, but this is such an important deal, presidential leadership, trump, lighthizer, Mnuchin the rest of the team backing them up. Nothing like this has ever happened in history.

Trade and collaboration

It shows cooperation is possible, it shows a more balanced trading relation is possible and also shows that america is ready, we are so competitive in this country with productivity and more people working and growing faster than before, it just shows you, if you give us open door, okay, lower trade barriers, let us sell you our great goods, services, manufacturing, energy, we will take that opportunity so this is pro-growth, more balanced relationship, and general terms, I think those are the key points

David faber: Larry, specific to the purchases an which is an important part of this --

Jim cramer: Larry--

Faber: sorry, jim, I’ll let you go in a sec

Cramer: sure.

Faber: height of chinese purchases was 186 billion in 2017, the deal requires them to increase by an additional $200 billion over the next two years, roughly a 30% growth rate including an additional $80 billion of manufactured goods you have the confidence they’re going to be there with those kinds of purchases, just given the ultimate increase that is demanded of them

Kudlow: well, these are good numbers. You’re right look, it can only be what the market bears but the china side believes their economy both needs and can absorb those kind of increases so it gets better balance.

On the numbers, it sounds like you’re right we will publish this today in the general categories, but agriculture exports $40 billion to $50 billion per year, manufacturing $75 billion increase, not enough attention has been paid to that manufacturing number, that is a very large number, and as you know, we’ve had a little softening in manufacturing, so that’s going to be a good thing.

Energy exports

Overall, services plus $40 billion and energy plus $50 billion, not enough attention has been paid to that, as you know, america has become energy power, we’re independent number one in the world china, look, if you read the chinese newspapers in various state-run organizations today,what they’re saying is, better balance, but they’re basically saying chinese consumers and the chinese economy needs these american products, and so this deal will codify that, and create this agreement for the first time ever, and I think of course we can meet it. I think the supply side, the production by the united states, I’m not going to say it’s unlimited but I’ll say we’ve got plenty of capacity to open up the throttle, and that’s why this thing’s going to be so pro-growth

Cramer: Larry, congratulations. It is a deal that I think is not, let’s just say, would never have even dreamed of just a couple years ago one thing I want to know is, you and I have often disagreed on fair versus free trade, but since you came into the administration, I think you’ve seen that there is definitely a problem with china, because they did not level the playing field. Larry, tariffs worked. They didn’t produce any inflation.

Tariffs worked they made it so that the chinese had to play more fair. Are you shocked that tariffs just in your history of all your, what I regard as brilliant thinking about the economy, are you surprised that tariffs were so effective

Kudlow: well I think, you know, I’ve said this before i think president trump has shown all of us that you know, you have a policy to defend the american economy and the american worker, and china had generated a very unbalanced trading relationship they were breaking rules left and right, whether it was ip theft, whether it was forced tech transfer, whether it was market closings, and so forth and so on. So we had to deal with these so-called structural problems.

President trump, who ultimately I believe is a free trader, and wants barriers lowered to enhance american economic growth and exports, that’s the best way to get your trade deficit down, he’s shown us that tough negotiation as a means to the end works, and tough negotiation includes tariff and you know, going back almost two years,I’ve been here nearly two years, I have signed on to that mission, and I have signed on to those strategies and tactics he has shown that tariffs are part of tough negotiating, in pursuit of market openings, you know, more balance, stop the unfairness, stop the theft and so forth and so on so yes, I will say I’m proud to have been part of this, because again, this kind of deal and this kind of cooperation did not seem possible two years ago.

Cramer: Larry, I --

Kudlow: I think that, you know, this is a -- I talked to lighthizer about this, jimmy. Lighthizer was such a driving force, such a driving force through this lighthizer will say don’t tell me we just got the low-hanging fruit. The toughest thing to get in this whole argument, arrangement, negotiation, the toughest thing, jimmy, was the first deal, phase 1. You know why we’ve never had a phase 1 before, and yes, tariffs have been a crucial part of this. President trump was right.

Cramer: Larry, I totally agree with you on everything you said have the chinese ever said to lighthizer, you know what? We have been stealing. And we have not been a good actor. We are going to change our ways, and you know what? We’ll let you keep the tariffs on, we’ll sign this, because we are going to change. Have they ever admitted to the terrible things they’ve been doing to our country

Kudlow: well, look, I would simply say, if you look at the agreements here, whether it’s intellectual property theft or forced transfer, or ownership of joint ventures, or trade barriers, either tariffs or non-tariff barriers, if you look at what’s changed in all these details will be published in an hour or two, if you look at what’s changed, jimmy, you see that their side is in effect acknowledging to have a more balanced relationship, they have to provide these kinds of remedies all right, now, I’m not here to beat up china.

I’m here to praise this arrangement, and I’m here to praise chinese cooperation, along with america I’m just saying the remedies were broad-based and we’ve talked about this for two years now, so the fact that china came to the negotiating table, yes, with tariffs, they came to the negotiating table with an enforceable agreement, and we can talk about the enforcement if you like in a moment or two that shows that they understand they had to make reforms, and changes.

Phase 1 over what to look for in phase 2

That shows that. And now hopefully if they accommodate and abide by this agreement and the rules, we had a very good dinner last night with their team, and talked about these matters, if they abide by the agreement, we’re opening up a new chapter it’s a new chapter for better trading and more open markets, and for american exports, it’s also hopefully a new chapter for better economic growth look, their economy has been very, very weak, as you report all the time, and they need help I think from american products and services and so forth. You know, the fact that they came to the table, the fact that they agreed to the agreement, the fact that they agreed to the remedies, all I’ll say is what does that tell you

Quintanilla: Larry, but for those who say tariffs are largely still in place, the purchases get us back basically above 2017 levels. Xi is not even here to sign this today, that people still wonder the impact on corporate confidence, on capex that we’ve been through for the past year and a half and people ask was it worth it you think it was

Kudlow: I do. I mean, you know, look, carl, don’t go there, please don’t make this little this is not little this is huge, and by the way, the stock market has been rallying --

Quintanilla: I’m not going to make it any way, Larry. I’m not going to make it big or small.

Phase 1 and tariffs

Kudlow: okay, I’m going to make it big, because again, nothing like this has ever happened before in history. Look, regarding the stock market, you’ve had tremendous rallies in the stock market. 2019 was an amazing year, but I think besides an easier federal reserve, I think the progress on the china trade talks, as it was revealed – and I’ve been out here talking to Mnuchin and others – has been a big boost to the stock market and I think the stock market is an important scorecard here, not only saying that this is for real, but also it is going to improve confidence, investment, and economic growth between the two countries.

And you know, last night vice premier liu he and I were talking about this, not only for the U.S. and China, it’s going to improve growth for the rest of the world. Does it inspire more confidence? I think it does. Look we pulled back, we made adjustments to pull back the december tariffs, about whatever $150 billion, we lowered the tariff rate on the september tariffs, I think it was $120 billion from 15 to 7, but, and this is an important but, we maintained tariffs on the original $250 billion at 25%.

That is, if you will, our statement that we want to wait and see, number one, how does enforcement of phase 1 go, and number two, what sort of progress will we make on phase two. If the enforcement does not occur, if we don’t have adequate dispute resolutions, then we will take proportionate actions and responses and china knows that, and they don’t have the reciprocal agreement to counter it so, this is – we’ve gone further than we’ve ever gone.

Phase 1 and hacking

Faber: Larry, you know, in the world that I report on, that you know well, of course, given your many years here at cnbc, a lot of the ceos, senior executives at multinationals don’t really care that much about the purchases numbers.

They care a lot more about forced technology transfers, the endless cyber espionage they’ve been subjected to, where the chinese try to steal their corporate secrets and the state supported enterprises that competes unfairly with them in markets around the world. What is in this agreement that addresses that, and specific to what you keep mentioning, what are the compliance mechanisms that we really have here that we can rely on to make sure whatever we got we actually get?

Kudlow: those are very good points, david. Some of the industries are very, very happy with the export increases, but I think you’re right about the structural problems. So let me just suggest here, number one, on the theft of intellectual property. You know, intellectual property, which is technological inventions, advances and innovations, is the kind of creativity and freedom that makes america the greatest economy in the world. It’s like you cannot steal our freedom or our inventiveness and creativity.

Now, numerous changes, david, are in the agreement – you’ll see it when it’s published later, if you haven’t already – importantly, in china, the definition of criminal offenses regarding theft of ip and related matters is absolutely a crucial ingredient in this. Furthermore, a number of regulatory changes are being made, and we have this appeals process, this dispute resolution process, so with regard to counterfeiting and stolen goods and stolen ideas, there are a number of very important reforms in here that can be easily monitored.

So that’s probably the single biggest area, the ip theft. Now, there have been some important ownership changes as was mentioned before, I think by carl. Mr. Mnuchin negotiated 100% U.S. ownership of financial service companies, that’s been in the works for a long time, it’s very, very important. Hopefully that idea of 100% ownership will spread into other areas, that will be left for phase two.

But again, regarding the ip, I will also say in general terms, the so-called forced transfer of technology, which is an ownership issue, number one, and a licensing issue, number two. Strictures have been provided in phase 1, but there will be heavy lifting on that. The more comprehensive lifting on that will be done in phase two and indeed will probably be the central aspect of phase two. I will say this, of all of the companies we talked to, all of the wonderful ceos – I’ve met so many ceos in this job coming to see me up on the second floor, going with me to see the president in the oval. People are extremely happy, not just that we put this stuff on the table.

Let’s take ip theft. I mean, that is the family jewels, isn’t it? What technological innovation, no other country in the world comes close to what the U.S.A., so we must protect that. We must protect that at all costs. And ceos we talked to, all kinds of executives, are very happy with the progress that we have made, and, again, remember in china – this may be a side bar but it’s very important. Vice premier liu he told me this almost two years ago.

One of the biggest problems in china is chinese companies steal ip from each other. And so, they are hoping to use trade reform as a way to stop domestic problems. So, they’ve changed their regulations, they’ve changed their criminal law codes and there will be more coming. And it is all – you know, if you want to make a complaint now, an american company operating in china can make a complaint directly to the U.S.

Before they were only going to china. And we have set up a bilateral process of resolution dispute to make sure different layers will have courts, will have testimony, staff level, deputies level, and if need be principles level. And again, if the enforcement fails, if the complainants in the U.S. Government are not satisfied with any remedies, we will take additional proportionate actions.

Cramer: Larry, one thing you are talking about a lot of goodwill. To me that goodwill would have translated to much more of a decline in tariffs. We are not giving them that. And what would be a demonstration on their side of goodwill? Could they say, you know what, apple isn’t being installed based on doing a credit card we’re going to let Goldman and Apple do their own credit card. Is this about jpmorgan coming in and saying we are not going to demand they have a partner.

What can they do? Can they buy something? Can they let some companies in? I want to know what concrete is going to change because it does seem you left the tariffs in because you may not expect there’s something concrete that could occur.

Phase 1 legal details

Kudlow: step by step, brick by brick, I think the most important part of your point is the 100% ownership provision. As far as I know jimmy, almost all versions of financial services – banking, investing, distressed loans, money management – this year, I believe it’s april 1st, I might be wrong, but I believe april 1st, 2020 this year, these things will go into effect 100% ownership for united states companies. That’s really important breakthrough stuff.

You know, to your other question, david faber’s question, I just want to read this. I’m not smart enough to remember every legal detail. But I want to say this. Regarding the intellectual property structural issues which is so important to protecting our creative freedoms, changes to china’s criminal and civil procedures.

Changes to china’s criminal and civil procedures with appropriate penalties if that is broken. And chinese government agencies cannot force their companies to disclose information from our companies, nor can they force our companies from disclosing information.

These are fundamental high standard provisions. We’ve never had anything like it before. And, again, if they’re not enforced, we will take appropriate action, proportionate response action.

Tax cuts coming?

Quintanilla: Larry, real quick, I’m going to get in trouble for this, but the tape has white house mulling payroll tax reduction and increased in earned income tax credit for this election year. True?

Kudlow: I’m still running a process of tax cuts 2.0. We’re many months away. It will come out sometime later during the campaign. No discussion specifics. Tax cuts 2.0 to help middle class economic growth is still our goal. I had a tremendous meeting with my friend, Kevin Brady, who will undoubtedly be the new chairman of the house ways and means committee in the next congress. But we will unveil this perhaps sometimes later in the summer.

Quintanilla: all right Larry, always helpful. Appreciate it very much. We’ll see you soon.

Kudlow: thank you.

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