Via Max Keiser

Watch the latest episode of Front Running here.

Front Running looks at the ‘Sputnik moment’ for the US as China overtakes it in high-tech achievements. Donald Trump won 2016 on the promise to ‘Make America Great Again’, but has imposing new trade conditions on China worked? Are any candidates proposing an industrial policy that can trump Trump’s policy? How was it that China was able to overtake America in the first place?

Max and Stacy are joined by guests Dan Collins, a businessman who lived and worked in China for 20 years, and Marshall Auerback, a market analyst and a researcher at the Levy Institute. They trace the history of the policy first set in motion by the Clinton administration in 2000 when Congress was urged to accept China into the WTO. Trump’s current trade representative, Robert Lighthizer, was almost the lone voice at the time arguing that allowing China into the WTO would destroy US manufacturing. He was right, everyone else was wrong. How can the US be extracted from its own disastrous mistakes? Is it possible to catch up to China’s high-tech advantage? Dan Collins notes that there has been a manufacturing boom over the past two decades, only it’s been happening in China, not America. Marshall Auerback believes it is possible to remedy that. Tune in to learn how.

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Transcript is below the fold — >

MAX KEISER: Welcome to Front Running 2020 with Max Keiser and Stacy Herbert. As we look ahead to the 2020 election, looking at all the policies and issues. Today, we’re going to take a deep dive into China.

STACY HERBERT: China: Is it forcing us into a Sputnik moment? Now, of course, Donald Trump ran in 2016 on “Make America Great Again” and part of that is now a clash with China. Joining us to discuss this issue is Dan Collins and Marshall Auerback. Now, according to the IMF using purchasing power parity. China is already 25% larger economy than the United States. Dan Collins, of course, you lived there for 20 years. What did you see? Here you’re in Brooklyn as you can hear around us. We’re across the river from Manhattan. You’re seeing a construction boom here by US standards, but put this into context of our ‘competitor nation’ as Trump calls it. What’s going on there compared to here?

DAN COLLINS: China has a distribution problem economically of course, and so do we, right? The economy in Brooklyn, where we’re at, is going to be different than Little Rock, Arkansas. China today, they passed us on a PPP basis on the GDP back in 2016. So it’s been a few years already. The way I like to look at it is to just step back and look at it from an economic standpoint, they make their shoes and they make our shoes, they make their TVs and they make our TVs, they make their car parts and they make our car parts. I think their economy, the way we estimate it, is their economy is absolutely massive. You go to any city in China, they basically have new airports, new roads, new buildings, new schools. So there’s been a massive economic boom that probably is going to be difficult to keep up with but I personally believe China’s GDP over the last few years is much, much lower than the official.

MAX: Right. So I’m looking at some of these technologies like 5G with Huawei, they are leaps and bounds ahead. Continue on the Sputnik moment, you know we had the Cold War frisson going on with the Soviet Union that seemed to get the NASA program going, which gave us a lot of new technologies and that was a huge boost to our economy. Should we look at this in a similar way and say, “look, they are clearly ahead of us. Huawei and 5G, they are ahead of us and they are also way ahead of the US on AI, artificial intelligence. So is that how we should approach this, do you think?

DAN COLLINS: Absolutely, there are a lot of areas of the economy where China has caught up or surpassed us. You know the mobile payments market is 50 times the size of the US. We are over still writing checks. Our banking system is not innovative. 5G we’ve kind of recently woken up the last couple of years, and go wow, we don’t even have a company that can make 5G equipment. Huawei is the 800 pound gorilla of 5G. They’ve been putting hundreds of billions of dollars behind this company. They have 100,000 engineers, 50,000 engineers are foreigners. They’ve hired the best talent in the space to produce 5G equipment. We’re so far behind, the game’s over. I mean you can’t catch up on 5G at this point with Huawei.

STACY: And as a geopolitical super power that we are in the United States, and we’re a competitor to China. We’re seeing with 5G, because the US doesn’t even have one single manufacturer of this telecoms equipment. We see Germany, we see Brazil likely to do deals with Huawei despite the US saying ‘no.’ What do you think of this?

MARSHALL AUERBACK: Well, they certainly are putting pressure on the Europeans not to do 5G, and indeed also the same question is confronting India right now. President Modi is also being pressurized not to adopt Huawei’s 5G standards. So the question is, if you want to use the Sputnik analogy, the Russians were ahead of us when they launched a man into space before we did, and the US mobilized its considerable national resources and ultimately caught up and did surpass the Russians. So I would say that it’s not impossible that the same thing could happen, but, of course, it would mean invoking things like national industrial policy, which is something we haven’t liked since the 1970s

STACY: How much of this, of course is to do with the fact that when you ship all your manufacturing overseas, when you ship it to China, it was always . . . the theory was that they’re just going to do the low value added jobs, the tedious menial labor, and they’ll never do innovation and come up with the great ideas. We’re going to innovate here, but, of course, innovation happens on the factory floor and so how and why did we send our factories over there? What role did Bill Clinton do with basically fighting to have China be part of the World Trade Organization. In 2000, he argued in front of Congress in March of 2000 he said, “By joining the WTO, China is not simply agreeing to import more of our products. It is agreeing to import one of democracy’s most cherished values, economic freedom.” Of course, this is the sort of lie we push on ourselves when we invade a country that we’re going to go liberate the women, and here it was like we’re going to liberate their economy.

MARSHALL AUERBACK: It was the China fantasy, the idea that somehow if they start to embrace capitalist forms of economic development, that they’re ultimately going to evolve into a liberal democracy and that’s turned out to be a complete delusion and fantasy. In fact, you can argue that that even the idea that trade liberalization would ultimately work in our favor. It hasn’t, there’s been a number of studies suggesting that,you know our manufacturing sector has been devastated by this manufacturing as a percentage of GDP is at its lowest point in 72 years. So this idea that we retain the software, but we offshore the manufacturing, that’s going to be great for both sides. Win-win. It’s, it’s been a win-win for China and it’s been a lose-lose for the US.

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MAX: Right. I’m looking at a quote from Biden here. One of the candidates of course, who said, quote, “China’s going to eat our lunch? Come on, man.”

MARSHALL AUERBACK: Yeah, he hasn’t been doing particularly well in the polls, and I think part of the reason for that is because he still use as a playbook that’s about 20 years out of date politically and economically.

STACY: Of course, he was part of the government when Bill Clinton, the great Democrat, shipped our jobs overseas. And it is interesting that we’ve come full circle that Robert Lighthizer, who was almost the lone voice in the neoliberal American economic and political system back in the late nineties, he said in a piece in the Wall Street Journal, no the New York Times, he warned that, “if admitted to the WTO mercantilist China would become a dominant trading nation. Virtually no manufacturing job in the US will be safe.” He was right. Today, he’s now the U S trade negotiator against China. When you’re reading the Chinese press, what … how are they looking at Trump? How are they looking at Robert Lighthizer in particular and their trade position against China?

DAN COLLINS: So Trump was kind of an X factor. They didn’t know how to deal with Trump. I mean, Trump is not acting like a normal politician. They know how to deal with the Biden family, they gave his son 1.5 billion dollars. So that’s, you know how you can deal with some politicians, Trump has just his acting . . . is just all into negotiation. He realizes, back to the point of the manufacturing space, you can’t continue to innovate when you don’t make anything. All the innovations happen on the manufacturing floor,and we’ve had this illusion, and a lot of it comes from academia, these economists that “you don’t need to make anything,” “manufacturing’s going away.” The reality is we’ve just had the greatest manufacturing boom in the history of the world. It just occurred in China, not the United States. And we’ve gotten rid of all our jobs. You can’t have a country of 330 million people and not be able to make anything for yourselves. And Trump realizes that, and this is all part of the strategic kind of realignment that is going to have to happen.

MARSHALL AUERBACK: And to be fair, I think there’s been a number of economists now that say, in retrospect, that that whole model was wrong. Even Paul Krugman has dared to admit that he might’ve overestimated or rather underestimated the impact of allowing China to go into the WTO. And this this idea that free trade would somehow be great for both sides. And I’m personally regarding Lighthizer, I think he’s the best thing that’s happened to the US economy and the government. He’s probably the most qualified guy in the Trump cabinet. Granted that’s not setting exactly a high bar, but he is an exceptionally talented trade negotiator, and he’s the first guy that we’ve had in that position who not only is the dominant voice, he superseded treasury, which was basically happy to offshore those jobs so long as, you know, the capital markets were happy. But he’s been doing this for over 40 years. He’s been doing this since the Reagan years.

STACY: So the Democrats aren’t discussing this issue in particular actually during their primaries. But will it become a huge issue against them in the race against Trump?

MARSHALL AUERBACK: Certainly if Biden is the nominee it will, because you know, as you’ve pointed out earlier, Biden embodies the so-called “Washington Consensus,” but there are signs that some of the other candidates are embracing a different approach. Notably Elizabeth Warren, she came out with a paper on ‘economic patriotism’ and reviving manufacturing. So she seems to be adhering a bit to that playbook. And I think that’s a rather hopeful sign as far as the Democrats are concerned.

MAX: Right. Well, aside from the economic advantages or disadvantages and shifting jobs overseas, it does appear China’s making a pretty aggressive move militarily. And so, just looking at some trends coming out of there, they’ve perfected the rail gun technology that they can now put on a Naval vessel. You know, I’ve been following the rail gun technology for a number of years now and this is an electromagnetic projectile when fired into . . . it has the range of a missile. What you can do with a rail gun is you can knock a satellite out of the sky. Which if Huawei got aggressive, they could start knocking competitor satellites out of the sky for one thing. Number two, the US can only build two submarines per year. It is retiring three per year. Meanwhile, China is able to manufacture more submarines per year, so there’s a military advantage there as well. Militaristically, is there … should that be something?

MARSHALL AUERBACK: You know, I would say that’s, you’ve got to consider the base from which it starts. I mean, we still spend on defense, the US spends on defense, more than the next 10 countries combined. So we spend a massive amount more money. Now we don’t spend it particularly efficiently. If you look at some boondoggles we have out there, and the political engineering that comes down, but I think we still have a qualitative edge. The question is whether you want to continue to surrender that qualitative edge, which you will do if you perpetuate this offshoring manufacturing particularly to China.

STACY: But of course, China and the Republican administration under Trump, he’s met them head-on in terms of trade. The previous administration under Obama said, we’re doing the Asia pivot and we’re going to confront them militarily. The point Max was making about the fact that we can only build two submarines a year, even with Trump’s new funds for the military, because you know why? Because we rely on China for many of the parts!

DAN COLLINS: Yep. And that’s all part of the manufacturing base you have to get back. All of these technologies are interconnected. Castings, forgings, electronics, embedded systems. These are all . . . if you can make the cars, you can make the systems in the plants, and then you can use it for the defense industry. When you get rid of all that, and the Pentagon has come up with papers on this . . . guys, we have mostly one supplier for each type of our systems and these defense suppliers have become completely dependent on federal government money and completely inefficient.

MAX: All right, well we’re going to take a break. We’ll come back talking a lot more about China on Front Running 2020.

===== BREAK ====

MAX KEISER: Welcome back to the Front Running 2020 with Max and Stacy. Were talking about this new Sputnik moment between the US and China. Will the US catch up? Can the US even catch up, Stacy, without some kind of industrial policy?

STACY HERBERT: Exactly. In order to compete on that sort of scale, we need industrial policy, I would think, because, of course, the Apollo program, which we introduced under JFK to compete with Russia, it cost $600 billion dollars in current terms, but we had the manufacturing capacity at that time. Do we need an industrial policy in order to even rise to this challenge that China presents to us?

MARSHALL AUERBACK: Well, in a word, yes. And, we used to do industrial policy very well until Ronald Reagan came into office in the 1980s and said that government is the source of the problem rather than part of the solution. But, there’s been a number of scholarly works by people like Mariana Mazzucato who pointed out, for example, that the iPhone is a good example, which was derived and stood on the shoulders of a considerable amount of government R&D, and the idea that these things just magically appear through the magic of the free market is just a fantasy. And given how financialized our economy is that you can’t rely on the free market alone to get us anywhere near to the right kind of policy to catch China.

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MAX: This is one of the things in the political season I don’t understand, because a lot of flag-waving, and a lot of “USA! USA!” from the hoi polloi in the audience, but then when you ask them about economic policy, they hate the USA right? It’s like, “no, the USA can’t do anything, the government stinks. It’s all about private corporations. That’s where we should throw everything, and the government can never accomplish anything” and they’re very negative toward their own country. But there’s a duplicity there, and they don’t understand that. As you point out, without the U S government, there would be no iPhone, there would be no internet, there would be no win in World War II, there would be no man on the moon. Right? Right? So they don’t … there seems to be a disconnect.

DAN COLLINS: And if you look at the things we fund, we fund the wrong things, right? What do we publicly fund? Sports stadiums. China funds chip factories. So, while we’re trying to figure out what happened to 5G, they just rolled out their 6G center. 6G is going to be 10X over 5G. You know, look at electric vehicles, right? They pour hundreds of billions of dollars behind EV battery maker who’s now becoming the number one in the world and controlling the EV space. They have 4% penetration of electric vehicles already, which is twice the US, and they’re going to be 50% within a couple of years. There rolling out EV charging stations all over the country. So they have a plan, they have a policy to dominate the century. Integrated circuits … I mentioned the chip funds? You know the USA, we used to make 25% of the world’s semiconductors, we’re going down to 5% because we live in a world of finance capitalism, and we’re getting outplayed by China who’s really playing state capitalism.

MARSHALL AUERBACK: And we have done this before. I mean, in the 1980s, there was a concern that the semiconductor chip market was going to be dominated by the Japanese and the Koreans and we set up something called SEMATECH, which was a private sector consortium with the government, and, effectively, the US was able to leapfrog and move to the next form of semiconductor technology. It was a very, very successful project and it was profitable, but somehow we’ve decided that that’s not a good model to follow anymore. I would argue that that’s exactly the kind of model that you can follow, and you can use the military as well. You don’t have to pick winners and losers. You can just have the military saying, “you know, we want say a vehicle with these kinds of specifications. If you can build it for us, we will guarantee you a market of X,” and that’s the way you can actually support private industry in that regard.

DAN COLLINS: Quantum computing, another example, China put $11 billion into a quantum computing center. We’ve allocated just under a billion dollars for quantum computing. That’s going to be the next, you know, next big thing. So, absolutely. Look at every technology we need to have some type of plan around it.

STACY: I mean, the absence of an industrial policy in America is quite apparent during this time of a trade war and Trump has applied all these tariffs to Chinese goods. We’ve also had the tax cuts, $1 trillion of tax cuts. Where does everything go, but into share buybacks?

MARSHALL AUERBACK: Yeah, well that’s just it. I mean you, first of all the tax reform was a joke, because it was basically a means for the companies to use the resulting cash flow to juice up their stock prices, because CEO compensation is basically predicated on what the stock price of the company does, as opposed to the underlying operations. Which is why a disaster like Boeing, even though the company…

STACY: But, getting back to the China policy and industrial policy.

MARSHALL AUERBACK: Yeah, well, exactly the point is that you have to direct these things in the right way, and the problem with Trump is that, he’s got a handle on the problem in the sense that he said he recognizes there is a problem, but he’s using a 19th century solution. Protectionism tariffs is as a means of dealing with the problem. In fact, I would argue that instead of trying to dismantle China’s elaborate system of state support, the US should be doing more to try to replicate it and copy it as they did, for example under Alexander Hamilton when the big competitor was United Kingdom.

DAN COLLINS: I would agree and disagree on some of those points. I think the tax cuts were good. On the Fortune 500 standpoint, absolutely they’re not paying . . . they weren’t paying the 38% corporate tax rate anyway. They’re all offshore. Everything in the US has become warehousing and distribution and you recognize your profits offshore. The small and medium sized businesses, that’s absolutely important to get the tax rate to some type of competitive level from 38% down to 21%. Now we matched Sweden, for instance, on the corporate tax rate, so we had the highest corporate tax rates in the world next to North Korea. That had to come down. So I think that’s part one of Trump’s strategy. Part two of the strategy is you’ve got to keep the tariffs on, because you’re going to drive the manufacturing back here.

STACY: How’s it going to drive it back here and not to Vietnam or Cambodia or to Indonesia?

DAN COLLINS: A lot of processing technologies, Vietnam has gone to Vietnam to close these types of things, but keep in mind, Southeast Asia doesn’t have the population or the manufacturing base to absorb all that Chinese manufacturing.

Stacy Herbert: Okay, but you had lived in China for 20 years. You did the China Money Report. When the Chinese government meets, and the party meets, and they do a 5 year plan, a 10 year plan, what sort of policy, like what are they looking at? What are they .. are they telling manufacturers in their Michigan, their equivalent to build this stuff?

DAN COLLINS: Yeah They do. I’ve met with, I don’t know how many Chinese government officials and they’re all impressive. Most of them are engineers, right? If you look at the Politburo, everybody comes from an engineering or a science background. They spend decades within the CCP system, you know starting out in the provinces, learning how to build economies, learning how to support social systems, and at the end of the of decades of a career when their in their sixties then they only get up to the top. We have politicians whose last job was at bartender, so that’s where we’re getting schooled.

STACY: Yeah, but I think AOC is a fantastic leader. She’s charismatic, she’s articulate, and she comes up with good ideas. Our leaders, our older people that you say are great, they’re the ones that have failed us. The Boomer generation has totally failed this generation. We have a generation of millennials and generation Z who have . . . they’re waitresses simply because the previous generation sent our manufacturing jobs to China. So how do you answer that?

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MARSHALL AUERBACK.: The whole model is wrong. You can’t keep it. You know, the argument is you’ve got to offshore manufacturing because you’ve got to compete against the sweatshop labor in Asia and, therefore, you pay your workers accordingly. And that’s the soft option and ultimately is a race to the bottom. In fact, there’s another school of thought and that is there was a prominent political economist, Seymour Melman, in the 1960s through to the 1980s who pointed out that if you didn’t offshore your labor but labor was a constant or even a rising cost that forced you to invest and move up the technological curve and go for the higher value added type of products. And that, for example, is what’s happened in Japan and Germany. So you know, they clearly believe in the importance of an industrial ecosystem. And I think we have to get back to that sort of thinking as opposed to saying, well, we’re going to offshore it all to low cost jurisdictions. Because ultimately that’s just not going to get you to a position where you can compete in a viable way with China.

MAX: But can the US get off the addiction of short termis?. So, the S&P 500, no matter what company it is, they go to the cash desk and they are going to financialization, and they typically manipulate futures products et cetera. They don’t want to look beyond the next quarter . . .

MARSHALL AUERBACK: The part of that is the problem is introduction over the SEC rule 10B, which Reagan introduced in the early 1980s. Before that, share buybacks were considered a form of stock manipulation.

MAX: Yeah but it’s deregulation across the board for the last 30 years.

MARSHALL AUERBACK: But the point is that if you don’t…

MAX: Disbanding Glass Steagall.

MARSHALL AUERBACK: Yeah, absolutely.

MAX: And it goes right down the list, right?

MARSHALL AUERBACK: You have to definancialize the economy. But one of the ways in which you do that is by eliminating the incentives to goose up share prices and that has to be a necessary first step.

STACY: Okay, now we’re, of course, in a trade war. There is an emergence, sort of a Cold War with China. First of all, can maybe a Cold War do for American manufacturing and innovation, what the Cold War, the last Cold War did? But also this notion of China holding so many of US treasuries. Is that really an issue? Or does that give them any power over us in any way?

MARSHALL AUERBACK.: No, that’s just bogus. The so-called nuclear option. I mean, the reality is if the Chinese wanted, first of all, they’d be cutting their noses to spite their face, to sell their huge stock of treasury. And in the second instance, the reality is the federal reserve simply debits it from the savings account into the so-called checking account, the reserve account and boom, the money has shifted back and they can do whatever they want.

MAX: But they seem to be doing an end run around that by buying gold.

MARSHALL AUERBACK: Well, part of it. But they certainly don’t have the… I just refuse to believe that … they played us for suckers on this whole, they can, they’ll dump our Treasuries, and that we have this, they have this nuclear option. The thing about nuclear options is when you start to use the nukes, everything gets blown to pieces. But I don’t actually believe it’s a real problem.

STACY: And I want to move on to the fact that if we’re in a Cold War, of course you need propaganda. And who owns Hollywood? Is it the US, or is it China because that’s the biggest market.

DAN COLLINS: Yeah. I mean the second largest theater chain is Chinese owned. They own a lot of the studios now, especially minority ownerships of them, Ten, twenty percent, some higher. There is a lot of pushback now on that, you know, a lot of the censorship is actually moved from over there to over here, because of this financial ownership.

MAX: And a lot of revisionism right? So we sent over these war epics and then suddenly the ending is different. Tom Cruise is looking different, and they are censoring and editing.

MARSHALL AUERBACK: But we don’t need the Chinese to help us with self-censorship. When you have a high degree of corporate concentration as we do in the US right now in media, it will inevitably circumscribe the range of views that you see …

MAX: But if we are going to take on China in a race in this Cold War era, we need better propaganda. Like we had in World War II., Hollywood was instrumental in coming up with great propaganda films and if our propagandists are going to be working for the Chinese, who’s going to be doing our propaganda?

MARSHALL AUERBACK: I mean there’s a certain degree of hypocrisy. I mean Google proudly trumpets the fact, for example, that they won’t work with the US Pentagon, but they are perfectly happy to help China with artificial intelligence, which of course is being used . . .

MAX: Well, that’s a factor if we were heading into a more contentious relationship.

MARSHALL AUERBACK: Yeah. I mean I’m not in favor of Cold Wars in principle, but one of the nice things, or one of the good things about Cold Wars, or even Hot Wars is that they do engender a broader sense of patriotism and they also do tend to override the logic of pure free trade or globalization. You start thinking about activities that are consistent with broader public purpose in your own country. And the problem when you have … the irony is that when you have a very, very peaceful environment and no external threat is that the billionaire class is able to act like a bunch of sociopathic monsters and there’s no constraint because there’s no external threats. So that’s the one thing you hope that if we do have a Cold War 2.0, that somehow there will be a renewed sense of an embracing patriotism to some broader public purpose.

MAX: Okay. Flash round. Will this new Sputnik, China, America moment be resolved peacefully or more war-like, Dan?

DAN COLLINS: Hopefully it’s not too late to disengage from a Cold War. We also have the issues of a Thucydides Trap, right? It’s the rising power versus the declining power. We need to take a step back. We need to re-industrialize here. We got to focus policy and engage peacefully around the world. Hopefully that happens and it doesn’t get out of control.

MAX: Marshall?

MARSHALL AUERBACK: The Cold War One did not lead to a global conflict with the Soviet Union, so I see no reason why the embrace of Cold War Two, even if it does happen, will invariably lead to a military conflict with China. There’ll be competition, but it certainly is not negative for the US if they do exactly as Dan suggests.

MAX: Right. Well, that’s going to do it for this edition of Front Running 2020. Obviously the future is nothing but sunshine and Chinese lollipops. Well, stay tuned for our next episode. We’ll continue to dig deep into the issues and policies leading up to the election, until then. Bye y’all.