October 19, 2018

Kudlow: Economic boom here to stay as U.S. faces new trade talks

By Dustin Walsh, Crain’s Detroit

The Trump administration aims to keep up the U.S. economy’s trajectory as it faces new trade talks with the European Union, Japan and China in the coming months.

Speaking to the Detroit Economic Club in Detroit at MotorCity Casino Hotel, Larry Kudlow, director of the White House’s National Economic Council, said he expects the current economic expansion, which has been underway since 2010, to continue for years.

“I believe this economic boom is going to go on for a bunch more years,” Kudlow said. “This is not a sugar high.”

When prompted about any fear over the economy’s future, Kudlow said he has only one.

“My biggest worry is that new Congress will overturn these policies that are working,” he said.

Kudlow cited new administration policies such as deregulation of the energy sector, cutting of the corporate tax rate and the new trade deal with Mexico and Canada as catalysts to the already strong economy.

Kudlow, however, is more optimistic about the longevity of the U.S. economy’s expansion, which is already almost nine years in length, than most experts.

The probability of a U.S. recession in the next 24 months is modeled at greater than 60 percent, according to research by JP Morgan Chase & Co. The odds rise to more than 80 percent when extended to 2021.

To keep the momentum going, Kudlow is calling for infrastructure spending increases, specifically on oil and natural gas pipelines.

“Pipelines are safe, they really are,” Kudlow said. “Everyone knows it, but it’s become ideological …”

Another avenue for expansion is to level the playing field in trade with the EU, Japan and China, Kudlow said. The U.S. Trade Representative Office has already begun early negotiations with the EU and Japan and Trump will initiate new talks with China when he meets with China’s President Xi Jinping at the G20 Summit in Argentina in late November.

Kudlow, who has been vocal in not supporting the use of tariffs in trade negotiations, said the administration has other means to negotiate with the EU and Japan, specifically, but would not get into the details.

The U.S. has initiated tariffs on more than $300 billion in goods coming from China, as well as a 25 percent tariff on aluminum and steel for most countries. The Commerce Department, at the urging of the president, began an investigation into whether car imports are a threat to national security and whether the U.S. should impose an up to 25 percent tariff on the cars. The investigation wraps in February and will likely be used as a negotiating tactic against the EU and Japan. Very few cars, only a couple of domestic brands, are imported from China to the U.S.

Kudlow said the administration’s plan is to get all trading partners, including the U.S., to zero tariffs and duties. But there’s a caveat. The U.S. is not keen on ending the 25 percent tariff it institutes on the import of trucks.

President Lyndon Johnson, just in office following the assassination of John F. Kennedy, implemented a 25 percent tariff on potato starch, dextrin, brandy and light trucks in 1963 in a tit-for-tat move, called the Chicken Tax, after France and West Germany installed a tariff on U.S. chicken imports.

The move collapsed the U.S. truck business for Volkswagen and later Toyota. Toyota, of course, inevitably invested in U.S. operations, and the Japanese automaker now assembles its Tundra full-size pickup in San Antonio.

Of course, domestic automakers have since continued to lobby to keep the Chicken Tax long after tariffs on U.S. poultry subsided.

“We’ve looked at it, but there’s no change right now … but I see your point,” Kudlow said in a meeting with reporters following his speech. “It will likely come up with the EU, but there’s no plans to change it.”

The U.S. is likely to protect the Chicken Tax because trucks are so valuable to domestic auto companies, where margins are as a high as $50,000 on some truck models. Especially after U.S. automakers have already taken a steep hit from the administration’s steel and aluminum tariffs.

Ford CEO Jim Hackett said last month that the metal tariffs shaved $1 billion in profits from the automaker.

While the Chicken Tax may not be on the table, Kudlow believes Europe’s desire for liquid-natural gas will open up the European market further to the U.S.

“Europe wants LNG and we have enough to sell them,” Kudlow said.

But some economic barriers stand in the way. Europe gets the majority of its natural gas from existing pipelines from Russia and Norway. Kudlow believes the U.S. market can still be competitive with Russia even given the logistics cost of getting it across the Atlantic. But costs must continue to drop for it to become a profitable endeavor.

On Detroit, Kudlow thinks the strong economy will “lift all boats” and that there are policy decisions the state could be enacting to get more businesses to Detroit.

“Don’t make them pay capital gains taxes for 25 years. Don’t make them pay income tax for five to 10 years,” Kudlow said in an onstage question-and-answer session with Deloitte’s Detroit office leader Mark Davidoff. “If it pays to work in Detroit, people will come to work in Detroit.”