Our inaugural edition of the daily CQ Radio show featured an excellent chat with Congressman Duncan Hunter. Hunter has started campaigning for the Republican presidential nomination, and his efforts are based on his national-security and trade policies. Hunter served for years on the Armed Services Committee and chaired it for four years, and he brings an informed perspective to those issues. This is Part 1 of the Hunter interview; part 2 will be posted tomorrow.
EM: Our first guest and it’s a tremendous honor, let me introduce Congressman Duncan Hunter, the Congressman has served 27 years in the House, chairing the House Armed Services Committee for four of them. He fought in Vietnam with Airborne and Ranger units, and he lives near the Mexican border and wants to be our next President, and those two facts are not unrelated. Welcome to CQ Radio, sir.
DH: Thanks. Great to be with you.
EM: Well, Congressman Hunter, we certainly appreciate you taking time off of your busy schedule to talk to us here today. I got a chance to take a look at your campaign website today, and I’m just going to give that address out for our listeners. The address is www.gohunter08.com. On the website, you have three main issues highlighted for your campaign, and that’s securing the borders, fair trade, and the war on terror. I’d like to start with the second, as it seems to be a little different than the traditional Republican things of free trade, and I’d like to ask you what the difference is between free trade and what you’re representing as fair trade.
DH: Well, right now, China is cheating on trade. And let me tell you as Chairman of the Armed Services Committee two years ago when our guys started getting hurt by roadside bombs in Iraq, I sent our teams out from the Armed Services Committee in Washington to find an American steel company that could make high-grade armor steel plate that we could put on the sides of our Humvees. We found only one company left in America still capable of making high-grade armor steel plate, and when the Swiss cut off our main guidance devices for our smart bombs because they didn’t like our Iraq policy, we could only find one company left in this country that still made those guidance devices. So the great arsenal of democracy, that is our industrial base, our ability to make things, is being fractured and sent overseas because of unfair trade practices by other countries, and China is a big part of that and China is cheating on trade right now.
Let me tell you what they’re doing. They’re devaluing their currency by 40%. That means that if the microphone that you’re talking into right now is made in China, and it costs a hundred bucks, and it’s shipped to the United States, when it goes to the water’s edge in China to be shipped, to be exported to us in the United States, the government of China gives that exporter, that Chinese company, a 17% rebate of all their taxes. They have a VAT tax, that’s a value-added tax in China; they give them all their tax money back. Now everybody, except the United States in the trading regimen that we operate under, under GAT, gets to rebate every country except the US gets to rebate to its exporters all their tax money. We’re the only dummies who signed up to this deal with an agreement that we couldn’t rebate our taxes to our exporters. But beyond that, China devalues its currency by 40%. That means that if that microphone you’re talking into is on a showroom floor somewhere in the world, and there’s an American microphone sitting next to it and they’re both a hundred bucks, the government of China basically walks by and says, “We just had a markdown. We marked our product down to $60.” Because by devaluing their currency as compared to the American dollar, they make that product cheaper, in many cases they’ve made the Chinese product cheaper than even the materials that the Americans would use to build the product. Now what that does is sweep American products off the shelf around the world, not only in the United States but around the world, and that is motivating many American companies to pack up and move their production to China. What that means to me as a guy who cares about defense is that at some point in the future, we’re going to need this great arsenal of democracy, this industrial base of this country, and we’re going to find out that by dumb trade policies, and by allowing others like China to cheat on the policies, we’ve moved a great deal of our industrial capability offshore. I’m very concerned about that.
As the American President, you do a couple of things that are uniquely reserved to the Executive branch. One is to negotiate arms control deals, and the other is to negotiate trade deals. And like Ronald Reagan negotiating arms control deals, when he was saw a bad one, he junked it and he brought they guys back to the table for another deal. I will junk bad trade deals and bring our competitors back to the table for another deal. There is no such thing as free trade when one country is cheating and not following the rules. That’s another saying of Ronald Reagan. Right now, the Chinese are cheating, and they’re buying ships and planes and missiles, lots of military equipment, with American trade dollars.
EM: Do you see this as primarily a problem with the Chinese, or do you see NAFTA and CAFTA as being part of a trade policy that may be too problematic for American businesses?
DH: I see first that we’ve signed a dumb trade deal with the rest of the world. If you understand what we’ve done, we’ve signed a deal that says with all these countries which have value-added tax systems, that’s a VAT tax, that they can rebate all of their taxes to their exporters. So that means that if you have a table company or a car company in Mexico, in France, in Japan, take any of the top 25 trading nations in the world, all of those countries rebate, give back all the taxes to their manufacturers. There’s only one country that’s not allowed to give its taxes back to its manufacturers under the deal we signed. That’s the United States. So that means if you make a product in your studio where you’re at right now, you’re probably going to pay 20% of your cost will be embedded tax cost. Corporate taxes, property taxes, etc. When you send that product to another country, you will have paid American taxes while you’re making the product here, and when it arrives in the other country, like China, they will hit you with a penalty for all of their taxes, which in China is 17%. So you’ll pay 20% taxes in the US making your product, then when your product gets to China they’ll add 17% on top of that, so you will have a product that ends up on the showroom floor in China at 37% taxes. Your competitor, who may be shipping his product to the United States, will have no taxes. He will have his taxes rebated to him by the government of China, so he pays no Chinese taxes. And when that product gets to the United States, we let it in duty-free, so he pays no American taxes. So this is like you working with a competitor across the street who operates tax free. That means that basically you have to hit a home run every day just to keep your head above water. That’s why hundreds of financial consultants around the country every week are advising their companies to pack up their production and move it offshore.
So you have a problem with the deal that we made. We made a dumb business deal. Trade deals are basically business deals between nations. We made a dumb business deal with the rest of the trading world, but beyond that, China is cheating on the deal that we do have because they’re devaluing their currency 40%. What that is, is a government subsidy of 40% to every product that they make, and that is killing American industry in this country.
EM: So, is there a way out of …
DH: There’s a way out…if you’ve got a bad business deal you can always pull out of it. We reserve the right to remove ourselves from these deals. We need to renegotiate. Very clearly, the people that told us that NAFTA was going to be the greatest thing in show business have been proven wrong. When we passed NAFTA, they said that we’re going to build on this $3 billion trade surplus that we had with Mexico in 1994. It went immediately to a $15 billion trade loss. With respect to China, we’ve given Most Favored Nation trading status to China and we’d have this deal with them that they’re cheating on right now. They now have us at a $2-$300 billion trade loss annually with China and they’re using American billions to buy ships and planes and missiles. They just bought these Sovremenny-class missile destroyers from the Russians, which were designed to kill American aircraft carriers. So we need to do what Ronald Reagan did when he saw bad arms-control deals. That’s to junk those deals, bring the competitors back to the table for another deal, put together a group of good, hard-headed, sharp businessmen, let’s put together a deal that benefits American workers and American businesses. That’s called smart trade.
We’ve been engaged in to date dumb trade, and the problem with China is that that involves a security element because Chinese are one country with the industrial capacity that could challenge us strongly in the future in a military way, and it’s not very smart of the United States to be sending them the hard dollars that they’re using to arm. China I arming right now. They’ve got heavy submarine development right now. They’ve got lots of tactical fighter development going on. They shot a satellite out of space January 11th. That heralded a new era of competition in space on a military basis with China, because America’s military assets depend highly on our eyes in space. And so we have a real security dimension to the trade problem with China. The answer is we’ve got to fix those things, and the American president is the one who’s in the best position to negotiate change; I’m going to negotiate change.
EM: Congressman Hunter, I’m glad we’re talking about this because there’s another aspect to the supplier issue, I think, in terms of defense. By the way for our listeners, if you want to call in and talk to Congressman Duncan Hunter, you can call (646) 652-4889. But Congressman, I worked with the defense industry a long time ago, and at the time that I worked in the defense industry, there were probably one or two dozen companies that could be prime contractors, defense contracts for defense systems, and over the years the consolidation of the defense contracting industry, we’re really left with about only two or three different companies that are capable of being prime contractors for systems. Do you see that as also part of the problem in getting supplies and getting sources for some of these materials?
DH: Of course, that’s totally unrelated to the trade issue.
EM: Exactly, and you’re right. I’m sorry.
DH: No, no, that’s still an issue and it’s still a problem and you’re absolutely right, Ed. You know, the less competition you have in defense, the fewer innovations you’re going to have, and of course, the higher the cost is going to be. Now let me tell you what I did a couple of years ago to meet this problem. I introduced a program and put it into law called the Challenge Program. The Challenge Program was based on the idea that even though you had a prime contractor, let’s call him an incumbent contractor, which were generally the biggest contractors, which had a system. Let’s say it made a particular system for the F-22 aircraft. Because most of our innovation comes out of small companies, a small company could challenge that large company for that particular component of that big program. Let’s say there was some kind of a guidance system in the F-22 aircraft. You could challenge the incumbent and the Department of Defense could take a look at what you had and if it was a throwaway idea, it wasn’t very good, they could dismiss it very quickly, but if it looked like it had some merit they could evaluate it, and if it looked like you did have more war-fighting capability for a better price, or a combination of those two factors, then the challenger could be given the contract and the incumbent booted on that particular contract. And I gave lots of discretion to DOD. They could wait, for example, until the present contract ran out and then renegotiate using the challenger with the better system, or if it was a very extreme situation, or a critical situation, one in which they were being vastly overcharged, they could actually kick out the incumbent contractor and give the new guy, the challenger, a shot at the deal. That was passed to encourage innovation.
Now in practice, the Pentagon hasn’t made it all that I wanted it to be. They’ve relegated it to more of a small business set-aside type of thing, but they way you get innovation in defense is to get lots of defense companies into the game and the rounds of consolidation did not help our innovation in national security.
EM: Well, I’m glad you answered that question because it’s been a concern of mine over the years watching this consolidation. It’s one of the reasons why I think that your candidacy has got so much substance to it. It’s because you’ve been really working on all of these issues around national security and national defense for all these years, and I’m glad to be able to pick your brain on that. Thank you very much.
Note: I received dozens of offers for transcriptions, and I will reply to each of you shortly. I'd love to spread the effort around, if people don't mind, so please accept my apologies for a slow response and stay patient. I honestly had no idea I'd get this much of a response!