U.S. State Capitalism as a Response to Chinese State Capitalism
In an interview last week, David Faber of CNBC pressed Commerce Secretary Howard Lutnick on several Trump administration actions that could be characterized as "state capitalism":
Faber:
As somebody who's been around the capital markets for years, as you have been, I do wonder, how do you view this idea of state capitalism that's being introduced? I mean, you mentioned the golden share in US Steel, the 10% potential stake in Intel, the 15% of the revenues that Nvidia gets from selling chips in China, the $400 million in that rare earths company. You know, I'm curious how you think about it, Howard, given, of course, your long career at the center of the capital markets for all those years, I think of you as a capitalist, but this doesn't quite sound like that.
Lutnick:
All right, well, let's talk about the Japan deal. So Japan has offered to buy down their tariffs, from 25% to 15%; they offered us $550 billion investment fund, and then Korea came in on top of it, $350 billion. So what are we going to do with those $900 billion? We are going to fix the infrastructure that China has competed away. What China does -- and it's really very, very thoughtful, and it's an attack -- they sell product here for half of what it costs. So they put the capitalists out of business, put us out of business in rare earth magnets. We invented rare earth magnets. Why don't we make them anymore? Because they sell them for half the value, and we don't have them, and then they hold it over you, like a giant axe. And we've got to fix ourselves. We've got to make semiconductors, we've got to build pipelines, we've got to build nuclear. We've got to have the infrastructure to help our national security and our economic security. And that's what Donald Trump is bringing to America. When he leaves office, he is going to leave America safe, secure and economically powerful. And if you don't do that, and you don't handle the Chinese risk and the risk that these people are attacking us, and basically we don't make generic pharmaceuticals. Imagine that we, if we had conflict with China, what are we going to do? Ask them to send us antibiotics. We've got to build those things in America. And that's what Donald Trump is doing.
Lutnick doesn't seem to deny that what the administration is doing through the four examples noted by Faber could be characterized as state capitalism. He just explains that they see it as a necessary response to China's own state capitalism.
This may be a good opportunity to raise something I've brought up before: What is the best way to respond to China's state capitalism (or non-market policies and practices, or whatever term you prefer here)?
Many years ago, my sense was that U.S. policymakers were hoping to encourage China to move its economy in a more market-oriented direction, shifting it away from state capitalism. This was an important part of the U.S. negotiations on China's WTO accession.
But now the prevailing view in Washington seems different. Despite some past successes with filing WTO complaints against specific Chinese measures, the recent and current U.S. government approaches are less focused on ways to induce economic policy change as it relates to the role of the market in China, and more on intervening in the U.S. economy with the goal of outcompeting, or perhaps just limiting competition with, China.
This new view can be seen on both the left and the right, albeit with some differences between the two. The view from some on the left may be that the Chinese state capitalism approach worked, at least to some extent, and the U.S. should emulate it. Others on the left may see U.S. economic intervention more as a defensive tactic. The views coming from the right are a little more difficult to follow, but the weight may be a bit more on the defensive side (a position Lutnick seems to take above). Whatever the rationale, it has led us to "state capitalism with American characteristics," as people have put it.
As I've talked about before, I would favor a different approach for responding to Chinese practices. In particular, rather than move the U.S. in a less market-oriented direction, I would try to finish the job that was started a long time ago, and continue to push China to uphold the commitments it made when it joined the WTO -- and add new commitments as well -- so as to move it in a more market-oriented direction. But that approach does not seem to be of interest to U.S. policymakers at the moment.
Maybe they don't think it's possible, based on the view that all possible efforts have been made in this regard, and those efforts failed. I disagree, and I think that in fact not enough effort was put into it.
Or maybe they don't think it's even desirable. They don't want the Chinese economy to be more competitive because they think this will be bad for U.S. companies. I'm not sure I've heard anyone say this explicitly, but I've wondered if some people are thinking it.
Regardless of the reasons, one of the main U.S. responses to Chinese state capitalism has been to adopt a bit of American state capitalism. I'm skeptical that this will be good for the American and global economies, but that's where we are for the time being.