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Ex-Reagan advisor John Rutledge: Trying to get China to change its economic policy in trade deal is 'just nuts'

Key Points
  • The U.S. is wrong to try to get China to change its economic system during the ongoing trade talks, says Safanad's John Rutledge.
  • The trade war between the two nations escalates as China says it will increase tariffs on U.S. goods.
  • Rutledge blames neoconservatives in the Trump administration for the shift in tone.
VIDEO4:4904:49
We're beyond trade war with China, says Safanad's CIO

The Trump administration is wrong to try to get China to significantly change its economic policy during the ongoing trade talks, John Rutledge, a principal architect of Ronald Reagan's economic plan, told CNBC on Monday.

The big sticking point for President Donald Trump in the negotiations is China's intellectual property theft and forced technology transfers, as well as the trade deficits.

"The idea that you can change China's entire economic system — the way they manage state-owned companies, the way they manage their technology policy or their industrial policy — in the course of a trade discussion is just nuts," said Rutledge, now chief investment officer at the global investment firm Safanad. He has also advised leaders in the Chinese government.

"It was nuts in the beginning. It's nuts now," he added.

The trade war between the two nations escalated on Monday after China said it would increase tariffs on $60 billion in U.S. goods, beginning June 1. The move came in retaliation for Trump's decision to hike duties on $200 billion in Chinese products to 25% from 10%.

Rutledge said he's advised his own group, "You will not succeed in China turning itself inside out for you and not become China anymore. And you will not be able to walk around on the ground inside China and do checks on whatever you agree to."

Before the recent escalation, it appeared that progress was being made. In explaining the boost in tariffs, the White House said Beijing backed out of major parts of the developing agreement.

Last week, negotiators for both sides met, but no deal was struck. While Treasury Secretary Steven Mnuchin called the talks "constructive," no new date was set for negotiations to resume.

Rutledge blames neoconservatives in the Trump administration for the shift in tone.

"This is not China reneging on the trade deal the last week. This is the hawks taking control, getting Trump's ear and pushing the trade war off the edge of a table. This is not going to go away," he told "The Exchange. "

"We are beyond a trade war," he said. "We are now moving into more conflicts on more fronts with China."

— CNBC's Jacob Pramuk contributed to this report.