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CNBC Transcript: Michael Froman, distinguished fellow, Council on Foreign Relations and former U.S. Trade Representative

Following is the transcript of a CNBC interview with distinguished fellow, Council on Foreign Relations and former U.S Trade Representative Michael Froman 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): You're a former USTR before Bob Lighthizer. Now we've got this trade war brewing, first salvo President Trump. Well actually we had, washing machines, we had solar panels, now we've got steel aluminum then $60 billion worth of IP related stuff. China finally fires back return salvo $3 billion, modest response so it doesn't look so bad. How concerned are you?

Michael Froman: Well, I think it's premature to call it a trade war per se because a lot will depend on how each side reacts to react to the other and nobody wants a trade war. There is no winning of a trade war, it's only a question of how much each side loses. But I think the Trump administration has made clear that business as usual, going through these dialogues that we've had in the past, or even relying on the WTO mechanisms are not sufficient. They haven't produced the kind of results that we'd like to see from China, in terms of reforming its economy and playing by global rules. And so this is their next step. This is their new approach.

MS: But are tariffs the answer, do you think?

Michael Froman: Well I think ultimately the answer is getting countries to agree on what appropriate policies are, and practices living by international obligations and resolving their issues that way. But we've tried that for a number of years with China being involved in the Joint Commission on Commerce and Trade or the S&ED over the years and to be frank there's been a lot more rhetoric than action.

And so I think the Trump administration made this decision that they needed to get the attention of China, through tariffs, as a way of ultimately saying this relationship has to change.

MS: Ok, fair enough. But how much of this is just tactical President Trump, the 'Art of the Deal', kick him in the teeth first, to get their attention, then after that let's sit down and when we finally actually comes to a negotiated solution everybody seems reasonable and sane?

Michael Froman: Well, hopefully that's the way that this will play out. I don't think tariffs are the answer per se. I think there's a series of policies that the U.S. and other countries have concerns about with regard to China, and ultimately would like to see China change those policies and practices. And the administration has also laid out what they like to see, the trade deficit, the bilateral trade deficit come down by $100 billion in the short run. And that's a metric that they have put a lot of emphasis on. Whether or not that's something that can be achieved in the short run remains to be seen, since we know that trade deficit is a function of a lot of other macroeconomic factors. But certainly they want to get to a more balanced relationship and one that is based on a series of policies and practices that are not seen as taking advantage of the United States and other countries.

MS: Some experts I've just recently talked to think that, look, it's all about that. If the Trump administration can manage to hack $100 billion off that deficit with China, that's basically only one of midterms. Do you think so? Do you think that is the endgame? Does anybody know?

Michael Froman: I don't think anybody really knows. And I think well politics I'm sure play some role in this. I think we have to remember that unlike a lot of other area of policies, trade is an area that Donald Trump has had longstanding views. For 20 years, he's been critical of Republican and Democratic administrations alike for pursuing trade policies that he thought were not in the interest of the country. And he talked about this during the campaign and he's very much focused on delivering what he promised. Now we can disagree with some of the tactics and whether they'll have the desired effect.

But the concerns that he's raised about China and about the challenge that China's state capitalist system poses for the global trading system...

MS: Are legitimate.

Michael Froman: Are legitimate and are real. I think that's the sentiment that he's responding to, not simply the upcoming election but this longstanding view that China has played by a different set of rules and has achieved remarkable results. But oftentimes at the expense of other countries.

MS: Do you think it's kind of ironic now that there's tariff track. You know you've got both sides saying OK look we're going to file cases against you and you at the WTO. For China, it's like OK so look who needs the WTO now? For Trump, the president, what he said of the WTO, that's ironic as well.

Michael Froman: Well I think they have a somewhat different view of the WTO than previous administrations. I think they are also pursuing reform of the WTO, particularly the dispute settlement body and some of the issues they put on the table.

Again I think are legitimate, but I think that what that says is over the long run we want a stronger dispute settlement process, one that's quicker, that gets resolution more expeditiously, that has real teeth. We don't want to see it undermined. And I think that in the long run it's what's in the U.S. interests.

MS: Now this is a cheeky question, so I want to warn you about it ahead of time. Before Bob Lighthizer, it was Mike Froman right? If you actually had his ear, what kind of advice would you be giving him right now?

Michael Froman: Well again I think we may we may disagree over particular tactics or a particular priorities. But I think Lighthizer has a longstanding history in trade, he's worked in trade for more than 30 years, on Capitol Hill and in the administration of Reagan administration, and of course in the private sector as well as as a renowned trade lawyer. So he knows the issues. I think some of the advice I would give is that, it's very important for the U.S. to continue to show leadership in the global trading system. That's what the Trans-Pacific Partnership was all about, in terms of bringing other countries together, to define a higher standard set of rules for the global system, to provide an alternative model out there for our partners and our allies in the Asia Pacific region. And I would hope that over time the administration finds a way to reassert U.S. leadership and reassure our allies and partners in the region that the U.S. is a Pacific power, is here to stay and as a power that they can rely upon.

MS: Now TPP of course was your baby right, you literally delivered it right. Then, one of the first acts in January, after inauguration was to pull the U.S. out of it. Did you rip the phone off the wall?

Michael Froman: No, I take a long term view of it, and the fact that the TPP 11 the other 11 countries have decided to move forward with TPP without the United States, that there continues to be other countries that want to join TPP after those 11 have implemented it, I think shows that the rules that we negotiated there are very important for the global trading system, that other countries are moving ahead with or without the United States. We see the TPP 11, we see the Pacific Alliance deepening their integration in Latin America, we see the EU pursuing a very robust trade agenda. We see Africa pursuing free trade agreements across the continents. And so while the U.S. has stepped back from the global trading system and from global leadership, the rest of the world is in fact continuing to move ahead.

MS: Do you think the U.S, could… is there any chance it could actually join back, let's say TPP, or the best of the rest as some people think of it during the Trump administration?

Michael Froman: Well the agreement is designed and the TPP 11 that move forward, with a framework designed to allow the U.S. to come back in, if and when it decides to do so. I don't have any great insights into whether the Trump administration would reconsider their position on this, but I think over time after NAFTA renegotiated after the TPP 11 is put in place, one could see a situation in which there's an effort to find some way to bring together countries across the Asia Pacific bilaterally, or plural-laterally to try and achieve an overall high standard set of rules.

MS: We were talking about Bob Lighthizer a couple of minutes ago and despite obviously having differences, or different views, at least for opinions you have great respect for him, for his history, for his track record and for service of course. Peter Navarro the head of the president's trade council, a guy who wrote a book 'Death by China', accompanied by a movie which showed a knife plunging into a bloody map of America, an academic with kind of wonky views. I don't think there's that much disagreement on that.

Here's the thing though. There's one school of thought that thinks look it's really not that bad because now that Bannon is out, who's left, you call them trade hawks, hardliners or whatever China hawks etc. but at least there are adults in the room, and they're sane. Are they?

Michael Froman: Well, I think commentators are always looking for stories about who's up and who's down at administration. I think when it comes to trade, in this administration there's really one person that matters and that's the president, because he has his own views and whether it's the pro-trade, pro-international engagement caucus, or the more nativist protectionist caucus that happens to be talking to them at the time, ultimately it's the president who is making these decisions and he's made very clear his perspective he's had it for a long time. And I think that's the person one has to watch on this.

MS: Then, what is the end goal? What is his game then, is it ahead of midterms he just wants to bite somebody and get his pound of flesh? Or is the whole thing about, you know, the fight for the future of digital supremacy whether it's the U.S. or China on top?

Michael Froman: Well I think he's been pretty clear that part of what he thinks makes America great is to pursue a different trade policy than we have in the past, one that is more focused on America first, America's interests instead of being the one who maintains the health and welfare of the global trading system. Pursuing our narrow national interests and let others pay the costs of maintaining the multilateral system. Defending manufacturing in the U.S, that's something that the Obama administration did as well, we certainly pursued policies to promote more economic activity in the U.S., more activity by American workers and farmers and ranchers, raising labor standards environmental standards around the world. Those are the sort of things that we did and he will have to pursue his own approach to this. But I think his goal is to drive more economic activity to the United States and do so in part by addressing what he thinks is the major problem which is the trade deficit.

Economists will tell us that that's not necessarily the right metric. That has a lot more to do with savings and investment, rates differential growth rates than it does around trade policy. But this administration is very much focused on bilateral trade deficits, as the measure as to whether an economic relationship with a country is working or not.

END

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