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Instead of imposing additional tariffs, which will hurt the Chinese and U.S. economies, the U.S. should have its own research and development strategy, says Richard Vague, author of The Next Economic Disaster

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GREG WILPERT: It’s The Real News Network, and I’m Greg Wilpert in Baltimore.

Earlier this week, on Monday, President Donald Trump announced that tariffs on Chinese goods will be increased from 10 percent to 25 percent on $200 billion worth of annual imports. Trump administration officials justified the move by saying that China is reneging on earlier commitments that had already been reached in the trade talks. It now looks like months of intense trade negotiations with China could fail to reach an agreement. Markets around the world, but especially in Asia, took a dive at the news.

China’s response to the Trump administration’s declaration was measured. Vice Premier Liu He said that he still intends to continue with the talks, and that he will be heading to the US this week to do so. Chinese Foreign Ministry Spokesman Geng Shuang had the following to say.

GENG SHUANG: Adding tariffs can’t resolve any problem. What I need to make clear here is that talks are, by their nature, a process of discussion. It’s normal for both sides to have differences. China won’t shun problems, and is sincere about continuing talks.

We hope the U.S. can work hard with China to meet each other halfway, and on the basis of mutual respect and equality resolve each other’s reasonable concerns, and strive for a mutually beneficial win-win agreement.

GREG WILPERT: Joining me now to discuss what all of this means for the U.S. and for China is Richard Vague. He is managing partner of Gabriel Investments, an early stage venture capital fund, and chair of the Governor’s Woods Foundation, a nonprofit philanthropic organization. Also, he’s the author of an upcoming book on the history of financial crises titled A Brief History of Doom, as well as The Next Economic Disaster, a book on the global economy. Thanks for joining us today, Richard.

RICHARD VAGUE: It’s a pleasure to be here.

GREG WILPERT: So, until recently, it looked like an agreement between the U.S. and China was closed. But now it’s far from certain, and more tariffs could be levied on Chinese imports very soon. What do you think is going on here? What is holding up an agreement?

RICHARD VAGUE: You know, negotiations are hard. And this is as complicated a negotiation as you can imagine. So I think the expectation for a quick resolution has been optimistic all along.

GREG WILPERT: And one of the main sticking points seems to have been the issue of technology transfer. At least, that’s one of the issues that have come up occasionally. And the Chinese, that require foreign investors to transfer some of the technological knowhow or intellectual property when investors begin operations in China, now the U.S. says that this is a violation of U.S. patent rights. Just how important is the technology issue for both the U.S. and for China? What role does this play?

RICHARD VAGUE: You know, it’s probably as or more important than any single component of the agreement, whether the U.S. recognizes that or not. And I get the sense that they at least partially recognize that. China has been moving aggressively forward in research and development; you know, building up cadres of researchers within their own government, funding it heavily. And they are making enormous progress in areas like 5G, AI, electric cars, genetic engineering, and the like, that are really the most important industries of the future. So you know, their focus on this is very appropriate. And our need to be cautious here is very appropriate. We’re in danger of being bypassed in many of these industries.

GREG WILPERT: Now, of course, in theory, I guess, the U.S. could require something similar that as, you know, technology transfer from the Chinese. And maybe that would be more necessary. I’m just wondering. And after all, I mean, for a long time, you know, patent rights is usually something that that countries that are, so to speak, at the forefront usually want to deploy in order to guarantee their their monopoly power, essentially, in those areas that they’ve developed. Now, of course, the Chinese, obviously, are trying to overtake the U.S. economically. I’m just wondering, now, to what extent is this–I mean, is this something that the U.S. really–I mean, can it really go against this? I mean, to what extent can the U.S. really avoid falling behind, in a sense, even if they come to an agreement on the patent issue?

RICHARD VAGUE: I think the most important thing for the United States to do, and this is not on anybody’s agenda, this is not anywhere in the conversation, but our own investment in research and development in the United States has been flat as a pancake. We have not been increasing our investment at the government level in genetic engineering, or 5G, or AI, or any of these things. If we want to keep our lead, or even expand on our lead against China in any of these areas, we need to be all hands on deck. And you know, I’m deeply involved in a number of areas of research. I know a lot of areas of potential development are underfunded in the United States. There’s ample funding in China. I think it’s a huge, huge issue. But I think the discussion in trade is just part of the equation. We need to be investing.

I’ll give you one example. All 12 of the most important components of your iPhone came, indirectly or directly, from government research. The touch screen, the Internet itself, lithium batteries, GPS, that’s the kind of research we need that brought us to where we are. It’s not the kind of research we’re doing enough at this point in time.

GREG WILPERT: Yeah, I think that’s a very interesting point. I just want to return to the issue of the tariffs. The U.S. economy is doing very well, according to the latest economic figures. At 3.6 percent, unemployment is at a historic low. And quarterly GDP growth is at the highest level since 2015. Do you think these tariffs will have an impact on the U.S. economy? And could it drag the U.S. economy down into a recession, or even a global recession?

RICHARD VAGUE: I think the U.S. economy is far more stressed than those numbers would indicate. I think GDP is at 3-plus percent, but I can’t find too many folks that don’t think that’s going to be trending down over the next few quarters, and quite a bit down in 2020. So I don’t think that numbers is as indicative as you might otherwise conclude.

I think the unemployment number is misleading, as well. A lot of that gain came from folks leaving the workforce. I’ve spent a lot of time going around the country talking to folks. Folks have jobs, but by and large they’re jobs that don’t lead anywhere. So you know, there’s a lot of stress in the economy. We get a little bit of an indication that we’re already seeing a modest amount of decline in GDP because of these tariffs. I know it’s hurting places like farm communities badly, in the soybeans and dairy industries in Iowa and other states, California, Arkansas, and others, are being badly hurt. You know, I hear even the manufacturing industry is being hurt because of delays in receiving subcomponents. So, you know, it’s going to be tough on us, too.

GREG WILPERT: Now, if Trump goes ahead with these tariff increases, how would they then affect China? I mean, how serious do you think it is for them, and can they retaliate or find a way to minimize the harm to their economy?

RICHARD VAGUE: You know, China’s economy is under a lot of stress because of the amount of private debt that they piled up over the last few years. The amount of overcapacity they’re building, the amount of political unrest that’s out there. So they got their own list of problems that they’re wrestling with. Nevertheless, if you look at the numbers right now, the impact on China is, you know, is not as great as I think the U.S. was hoping. Chinese growth is still good. If you look at the net export position in the United States and in China, you know, it really hasn’t gone the direction that the U.S. would have predicted, or certainly the current administration would have predicted. You know, our net export deficit is in a little bit worse shape over the last few quarters than it was previously.

So you know, I think China–as stressed as China’s economy is, I think China has the capacity to continue to have a tough negotiating posture. And don’t forget that China has political control of dissent that the U.S. doesn’t have.

GREG WILPERT: I’m wondering, though, what role does the–I mean, you mentioned that private debt is very high in China. But on the other hand, I’ve seen analyses also that the Chinese have not built up their own domestic market sufficiently. In other words, instead of exporting all of their products, perhaps they could be and should be selling to their own population, and raising their own standard of living. What do you make of that argument?

RICHARD VAGUE: Well, they certainly need to do that. And if you look at the numbers, it certainly appears they are doing that. The question has always been, you know, can they do that fast enough? And will that sustain a 5-6 percent GDP increase? I’m going to argue that it will continue to happen, but it won’t justify or sustain a 6 percent GDP growth over the next several years. I think we’ll continue to see that decline. And a lot of that selling to the domestic market is really households who have been rapidly building up their own debt as part of that equation. So you’re starting to see a lot of stress on household debt in China, as well.

GREG WILPERT: All right. OK, well, we’re going to leave it there for now. I’m speaking to Richard Vague, managing partner of Gabriel Investments. Thanks again, Richard, for having joined us today.

RICHARD VAGUE: Thanks for having me.

GREG WILPERT: And thank you for joining The Real News Network.

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Richard Vague is currently managing partner of Gabriel Investments and chair of The Governor’s Woods Foundation, and previously was co-founder and CEO of Energy Plus, and co-founder and CEO of two consumer banks, First USA and Juniper Financial. He currently serves on the University of Pennsylvania Board of Trustees and the Penn Medicine Board of Trustees, and on a number of business boards including the Franklin Square Energy and Power Fund.

He is also the author of The Next Economic Disaster, a book on the global economy, as well as a number of published articles on economic theory.