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The Daily 202: Marco Rubio slams CEOs for bad China deals, short-term thinking and not investing in U.S. workers

May 16, 2019

Editors note: Senator Rubio is doing a great job moving the debate towards a US competitiveness strategy.

THE BIG IDEA: Marco Rubio argues that the escalation in the trade war with China stems more from corporate chieftains selfishly seeking big paydays for themselves by agreeing to bad deals with Beijing over the past several years than President Trump’s latest brinkmanship over tariffs.

[James Hohmann | May 15, 2019 | The Washington Post]

“If you go to China, they promise you ‘X percent’ of their overall market share,” the Republican senator from Florida said in an interview yesterday. “You make money, and you look good in front of your shareholders, but you're also turning over your intellectual property and eventually they're going to replace you. But who cares? You won't be CEO in 10 years when that happens.”

Rubio said Trump’s biggest problem right now is that Chinese leaders are unaccustomed to a president going to the mat this way and have therefore miscalculated his resolve. “They have traditionally been able to unleash the American corporate class to march up to D.C. and pressure their policymakers to back down because so many of these companies have established a market presence in China that in the short-term is very beneficial but in the long-term is probably suicide for those companies,” Rubio said. “That's what's happened in the past. This is the first administration that has not backed down.”

The senator’s comments on China came as he uncorked a broader, extended critique of American corporate culture. Rubio, the chairman of the Senate Committee on Small Business and Entrepreneurship, faulted CEOs for focusing too much on the next quarter and not enough on the next generation. He blamed warped incentives from Wall Street and Washington for driving this shift. And he complained that the “shareholder primacy theory” — which is taught at business schools and accepted as gospel in the C-suites of most Fortune 500 corporations — has prompted too many business leaders to care more about returns for shareholders than the people who work for them.

Rubio gave me the first look at a 37-page report he plans to release later today on the decline of business investment over the past several decades. It details how nonfinancial corporations, for the first time, now consistently spend more on acquiring financial assets than on capital development. “At its core, the problem is that, beginning in the 1970s, the primary objective for companies became maximizing return to shareholders, and that came at the expense of investing in new capacities and in innovation,” Rubio said. “In essence, it’s coming at the expense of the things that lead to growth. In key industries that are critical to our national security and our national interests, that's even more problematic.”

He declined to name names, as has become so fashionable among politicians of both parties during the Trump era, but Rubio’s unsparing rebuke of the business community more broadly was no less searing as a result.

“What it's resulted in is that you can become a very profitable company that returns a lot of money to shareholders by taking your productive capacity and sending it to China or by turning over your intellectual property because they're allowing you market access, which is generating new revenue,” he added. “That's great for the short- to mid-term. Your stock performance can be very good. Your shareholders are going to be very happy. But it's devastating for American workers, and in the long term it's devastating for America.”

The senator will chair a hearing at 2:30 p.m. Eastern to consider the reauthorization of the Small Business Administration’s innovation programs. He’ll question two administration officials, and he’s invited four outside witnesses to offer ideas for how government policy can spur additional business investment.

Rubio questions a witness during a Senate Intelligence Committee hearing. (Andrew Harnik/AP)

There is a growing recognition among elites across the ideological spectrum that capitalism itself is in trouble. The 47-year-old son of Cuban immigrants said he wants to save the economic system that made America exceptional by paying more attention to its excesses. “Our economy today is really not working the way free enterprise works at its best,” he explained. “I'm an enormous supporter of free market capitalism because I've seen and know that it's generated more prosperity than any other economic system in human history, but when it stops working the way it's supposed to work, it creates the structural imbalances that lead to many of the problems that we're seeing across not just the U.S. but across multiple developed Western economies. We are certainly doing well in the short- to mid-term in our growth, but we also have an obligation to think about the structural challenges that will make it difficult to sustain that in the long term if we don't make additional changes.”

To do that, he wants more rewards for long-term investments in workers and facilities. “We can't force companies to be innovative, but we shouldn't have tax provisions or policy provisions that incentivize against it,” Rubio said. “And we do.”

The senator said he tried to push for things that would advance this aim during the debate over the GOP’s 2017 tax bill, but he couldn’t get them all. The legislation made full expensing available to capital investment, except facilities, plus research and development expenses. Those provisions are scheduled to expire. Rubio wants to make them permanent, as well as expand the full expensing to cover facilities. He said he wanted to see the full refundability of the child tax credit because it would help workers.

“If we're going to have preferences in our tax code, and the tax code always has preferences, they should be in favor of things that create strong and stable jobs,” he said. “Returns to shareholders should be treated equally, no matter which route you choose, whether it's a buyback or a dividend.”

As a political matter, Rubio has concluded that the GOP focused too much in the past on catering to corporate executives at the expense of their consumers and their employees. This year he’s rolling out a series of proposals aimed at restoring the balance between businesses and their workers. “We have a free market, but that free market operates under the conditions created for it by policymakers,” he said. “Those conditions should reflect our national priorities. And one of our top national priorities should be creating strong and stable jobs upon which strong families and strong communities can take root.”

Rubio’s emerging “pro-work agenda,” as he calls it, reflects the GOP’s broader embrace of populism during the Trump era. For others following this zeitgeist, read my Big Idea from yesterday about freshman Republican Sen. Josh Hawley from Missouri.

Rubio’s new report and Hawley’s maiden speech, which he’ll deliver on the Senate floor later today, can be viewed against the backdrop of growing tensions between corporate America and the Republican Party. The U.S. Chamber of Commerce and the political network led by the billionaire industrialist Charles Koch have both distanced themselves from the GOP in the wake of Trump’s takeover, which has made the party less supportive of free trade and expanded immigration.

Rubio debates Donald Trump in Detroit in March 2016. (Chip Somodevilla/Getty Images)

In our interview, Rubio recounted how his unsuccessful bid for the GOP nomination against Trump in 2016 opened his eyes to the number of people being left behind by the changing economy, especially in places like the industrial Midwest.

“Heading into 2014, I started to become very interested in not the daily ups and downs or twists and turns of markets but the broader structural challenges,” he said. “And then I ran for president and it gave me the chance to travel the country and meet people and interact with people of various backgrounds, which I had not been directly exposed to representing only Florida. … Someone working in an industrial city that's been hollowed out isn't necessarily going to move to Silicon Valley and work for a high-tech firm. And even if that transition eventually happens, in the interim period, these are real people and real communities that are left behind. So that stark reality, coming back to the Senate, led me to further explore this.”

Rubio added that he also came to understand why government must play a more muscular role in doing something. “We need to get back to a point where we don't solely analyze the American economy on traditional economic measures,” he said. “GDP growth is important, but that alone doesn't tell us the full story. It has to be not just growth that we care about, but the kind of growth that creates stable jobs that allow strong families and strong communities to develop, which are the backbone of a strong economy. Our public policy should reflect that.”

Bigger picture, Rubio lamented that Americans in the modern era have become overly susceptible to the temptations connected to the pursuit of instant gratification. “We have a challenge that's developed in our culture writ large in that we seek immediate returns, whether it's in our own lives or in corporate life, and we oftentimes do so at the expense of long-term development,” he said. “That is best encapsulated by what’s happened in the private sector in this country.”

Defending Trump’s hard-line approach toward China, Rubio said it’s imperative to fight for a better balance in Sino-Americans relations. “I believe that the imbalance that has developed between our countries on economics and geopolitics is dangerous,” he said. “It will leave us with a world in which China grows emboldened and aggressive, and the U.S. will be forced to respond. And it could lead to conflict. It's already leading to trade conflict, and it could lead to worse. For the sake of global stability, there has to be equilibrium in that relationship, and we don't have it right now. At its core, this is very simple: China is allowed to do anything they want in our economy and in Western economies, but our firms are allowed to do very little of anything and pay a tremendous price over there.”

Rubio acknowledges that the trade war with China is harmful to the American economy in the short term and that the tariffs increase costs for U.S. consumers. But he says he believes it’s worth it. “Surrendering to China will be devastating,” Rubio reasoned. “It will fundamentally alter our place in the world and the very nature of our economy for two generations or more.”

THE LATEST ON THE CHINA STANDOFF:

-- Trump thinks his China tariffs will help him win reelection. Robert Costa, Josh Dawsey and Sean Sullivan report: “‘I don’t see him crying uncle anytime soon,’ said Stephen Moore, a conservative economist who withdrew from consideration as a Trump Federal Reserve Board nominee amid an uproar. ‘It’s a high-risk strategy, but it’s not in his personality to back down. This goes back to what he said that first time he came down the escalator at Trump Tower.’ Speaking to reporters Tuesday before boarding Marine One en route to Louisiana, Trump insisted that he is in a ‘very, very strong position’ and called the stalled negotiations ‘a little squabble.’ … But as Trump expresses confidence, there have been tensions inside the White House, with some advisers uneasy with Trump’s strident nationalism and firm belief in tariffs as economic weapons.”

-- Some Republican senators expressed fresh concern over the impact of the trade war on rural America. Damian Paletta, Erica Werner and Taylor Telford report: “‘I’m not sure if you talk to him face to face, he hears everything you say,’ said Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) … Republican lawmakers are also looking for ways to provide a taxpayer bailout to farmers, perhaps adding billions of dollars to a disaster bill that has languished in Congress for weeks. … Until last week, many Republican senators supported a tougher approach with China. But with Trump’s decision to increase tariffs, GOP lawmakers are now fielding angry calls. Soybean farmers, pork producers and a growing number of other agricultural interests across a range of states — including cherry producers, corn growers and lobstermen — have complained that they are collateral damage caught in the middle of the escalating trade battle.”

-- Trump continues to insist China is paying for the tariffs, but it does not feel that way for many Americans. David J. Lynch reports: “A pair of recent studies, by two teams of economists from institutions such as the Federal Reserve Bank of New York, as well as Princeton, Yale and Columbia universities, both concluded that Americans are bearing nearly the entire cost of Trump’s tariffs. … If he opts to proceed — and he took the first official step toward doing so on Monday — the economic impact will dwarf his previous levies on foreign washing machines, solar panels, industrial metals and about half of what the United States purchases each year from China. Once in place, the tariffs would cost the typical family of four nearly $2,400 annually, destroy 2.2 million jobs and shave more than $200 billion from the size of the economy, according to a study for an anti-tariff group by Trade Partnership Worldwide, a Washington-based consultancy.”

-- Despite blasting Beijing’s trade policies in the recent past, Democrats are not supporting Trump’s new tariffs on Chinese imports. Politico’s Burgess Everett and Heather Caygle report: “In interviews with a dozen House and Senate Democrats from the Midwest and in leadership, most lawmakers refused to back Trump's offensive against China, particularly as he’s kept tariffs on U.S. allies. Even those most willing to praise Trump on trade have been notably reserved. … Nancy Pelosi told reporters Monday that Trump’s action toward Beijing is ‘in recognition that something needed to be done.’ But she again criticized the president for ‘antagonizing’ Europe with a separate series of tariffs last year instead of trying to join with European Union allies to pressure China. … ‘I still hope he can reach an agreement, but I don’t know. He’s pretty unaware of the damage they’re doing if they don’t get an agreement soon,’ said Sen. Sherrod Brown (D-Ohio), who has otherwise supported Trump’s tough-on-China approach.”

-- Trump continues to push a misleading narrative about his trade war. Fact Checker Glenn Kessler reviewed some of the president’s latest tweets: He constantly claims “that the United States has been ripped off by other countries for years. … But Trump consistently gets two things wrong here. First, he overstates the trade deficit with China. It was $378 billion in 2018, $336 billion in 2017 and $308 billion in 2016. But for Trump, it’s always been $500 billion. Even if one just focuses on trade in goods, the deficit in 2018 was still not $500 billion, but $419 billion. Given the rise in the trade deficit during his presidency, perhaps one day Trump will be right. Second, countries do not ‘lose’ money on trade deficits. A trade deficit simply means that people in one country are buying more goods from another country than people in the second country are buying from the first country.”

-- There’s a new effort in Congress to prevent Chinese interests from gaining access to sensitive information by hiring former national security officials as lobbyists. From Josh Rogin: “The case of former Obama administration cybersecurity official Samir Jain has sparked a reaction from lawmakers who see his new gig as a lobbyist for Huawei as problematic. After the news broke last month that Jain, who served as National Security Council senior director for cybersecurity policy in the Obama White House, had registered as a Huawei lobbyist, [Trump] tweeted: ‘This is not good, or acceptable!’ … Last month, [Rep. Mike Gallagher (R-Wis.)] introduced the Congressional and Executive Foreign Lobbying Ban Act, which would prohibit former members of Congress, retired senior military officers and former senior political appointees from lobbying for foreign governments.”

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