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CNBC Transcript: Lawrence Summers, Former U.S. Treasury Secretary

Following is the transcript of a CNBC interview with former U.S. treasury secretary Lawrence Summers at the China Development Forum in Beijing. The interview was broadcast on CNBC's Squawk Box on 26 March 2018.

All references must be sourced to a "CNBC Interview'.

Interviewed by CNBC's Martin Soong.

Martin Soong (MS): I'm sure you agree that losing precious American intellectual property is an issue, it's a problem. Tariffs though you're probably agree, that's not the way to solve them?

Lawrence Summers: I think there are important issues on both sides. We need to address them in some kind of broad strategic context. Ronald Reagan said about nuclear wars that they can never be won and must never be fought. I confess I have the same view of trade wars. I don't see that the steel tariffs are a prudent bit of public policy. Forty times as many people work in steel using industries as in the steel producing industry, so I think that's a bit of a stop-or-I'll-shoot-myself-in-the-foot kind of strategy.

MS: So you think that the tariffs will backfire then?

Lawrence Summers: I think the risks to the American economy from the steel tariffs are far greater than the risks from the absence of the steel tariffs.

MS: And far greater than the damage that they could potentially cost China?

Lawrence Summers: I don't know what damage they'll do China. I just think that they'll do damage to the American economy even before China retaliates. They'll do damage because they'll mean higher prices in all the industries that use steel where 40 times as many people work.

MS: That must then put the Fed in in a tougher position?

Lawrence Summers: Well I think the Fed is in a challenging position in any event having to read what's happening in the economy, having to read possible inflation pressures, having to read developments in markets. My own view is that the Fed should be very very cautious about hiking rates given that if the economy were to turn down, we have less ammunition than we usually have.

MS: And do you get that sense from Jay Powell's first time at FOMC with the recent decision to hike?

Lawrence Summers: I'm going to let Jay's words speak for themselves and not try to interpret them. I think he did a very solid job.

MS: OK. Let me ask you. It might be easier for me to ask you now that you're out of government, but John Bolton now appointed, also accepted the new National Security Adviser. McMaster is out. We know his views, we know he's a very hard line and a hawk especially on Iran but also on North Korea, how concerned are you?

Lawrence Summers: I think diplomatic solutions are better than military solutions. I'm well aware that you only reach diplomatic solutions with the possibility of military force as a threat. But it seems to me that some of the more extreme directions that have been proposed in terms of preemptive attacks or in terms of abandoning treaties with respect to Iran are really highly ill-advised.

MS: The China side, obviously deep down in their tool bag they've got two options and they may be sort of the nuclear options right. One is what they happen to decide to do, will they push the RMB button or will they push the U.S. Treasuries button. Do you think they will get to the point where they might consider either of them?

Lawrence Summers: I'd be very surprised. I think in both cases the loss to the Chinese economy would far exceed any pain they would be able to impose on others. So I don't see trade warfare having any substantial chance of becoming financial warfare. That seems to me to be an overdone concern.

MS: And the reaction so far, the return salvo from the Chinese has been fairly limited and fairly modest. Three billion versus let's say up to 60 on the part of the...

Lawrence Summers: I don't think we know yet where we are. I think the three billion salvo was a response to the earlier aluminum and steel tariffs and we haven't really seen what the response is to the 301 measures so we'll have to wait on judgment on how well this is being contained.

MS: Do you have any sort of sense at all what the president's endgame or end goal is in all this?

Lawrence Summers: President certainly doesn't confide in me. If he did I certainly wouldn't be confiding in you.

MS: As far as China goes though, what sort of sense do you get under Xi, President Xi Jinping now more powerful than ever I think after this last Parliament session, is it more or less open to U.S. business?

Lawrence Summers: I think China is gradually becoming more open to U.S. business. I think the question is how quickly is the Chinese potential market expanding, and how quickly is the greater openness to U.S. business happening. And it may be that there's more opening to U.S. business but that that extra opening isn't keeping track with the growth in the Chinese market's potential, and therefore business frustration is growing. It's not enough to simply look at whether there are more opportunities than there were last year. It has to be more opportunities relative to the potential opportunities.

MS: Give us a sense of here at the CDF, what is the mood like this year?

Lawrence Summers: I think there's a lot of unease, a lot of unease around broad geopolitical developments and a lot of unease around the conflicts of last week.

MS: There's also unease that, we talked about this with many people that, rules-based sort of engagement with other nations or between nations, that is breaking down or we're seeing a regression, not even WTO, not even GATT even pre-GATT, almost prehistoric.

Lawrence Summers: Well I think when I say that it is rising geopolitical tensions and concerns about trade, you describe what form some of them are taking. I don't think we've previously at the CDF felt like we might be on the brink of a trade war. And I think that certainly is a very unfortunate development.


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