Tag: policy

Peter Navarro Responds to His Trade Critics (Sort of)

White House National Trade Council Director Peter Navarro’s views have been roundly criticized by economists and policy professionals from across the political and ideological spectra. There seems to be an emerging consensus that the more Navarro speaks and writes, the more he marginalizes his influence within the administration. It is with that cause and (positive) effect in mind that I continue pulling on this thread.

A couple of weeks ago, Navarro wrote an oped in the Wall Street Journal, offering some really unconventional perspectives about trade policy and revealing a profoundly unique understanding of economics. I replied (in long form) on the Cato blog and (in shorter form) with a letter to the editor of the WSJ.

This afternoon, the WSJ published a response from Navarro to me and the authors of the two other letters published in response to Navarro’s original oped. And in response to Navarro’s response, Cafe Hayek’s/Mercatus’s/GMU’s Don Boudreax wrote this letter to the WSJ editor:

22 March 2017

Editor, Wall Street Journal

1211 6th Ave.

New York, NY 10036

Dear Editor:

The headline is promising: “Peter Navarro Responds to His Trade Critics” (March 22). So I eagerly anticipated reading Navarro’s substantive defense, against knowledgeable critics, of his reasons for fearing trade deficits. Alas, disappointment. Navarro offers not a single relevant argument.

Typical is his contemptuous treatment of Dan Ikenson. To establish that Mr. Ikenson has an “Alice-in-Wonderland worldview,” Navarro merely lists some of Mr. Ikenson’s policy positions without offering as much as a syllable to inform us why these positions are untenable.

The closest Navarro comes to making a relevant argument is when he writes, responding to Desmond Lachman, that “if India agrees to lower its tariffs on Harley Davidson motorcycles, Indian consumers will buy more Harleys and save less while Harley will sell more Harleys and invest more.” Well, no one has ever denied that Indians would buy, and Harley would sell, more Harleys if India reduces its tariff on these bikes. But it doesn’t follow that Indians would necessarily, as a result, save less. (Does Navarro always save less when his cost of living falls?) And while more resources would indeed likely be invested in Harley’s operations, these resources would have to come from foreigners if Americans don’t increase their savings. Contrary, therefore, to the conclusion that Navarro wants us to draw from what he pretentiously (if inaccurately) calls “obvious general equilibrium effects,” a cut in India’s tariffs on Harleys is not remotely guaranteed to lead to a decrease the U.S. trade deficit.

Sincerely,

Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030 

Stay tuned!

Topics:

Peter Navarro, Harvard Ph.D. Economist, Trade Warrior

Peter Navarro, director of the newly-established White House National Trade Council, gave a speech last week to the National Association for Business Economics, which he condensed into an opinion piece for the Wall Street Journal. The analytical errors and the fallacies portrayed as facts in that op-ed are so numerous that it is bewildering how a person with a Ph.D. in economics from Harvard University—and a potentially devastating amount of influence within the White House—could so fundamentally misunderstand basic tenets of introductory economics.

Almost every paragraph in the op-ed includes an error of fact or interpretation.  I’ll focus on a few, deferring to others’ noble efforts (Phil Levy, Don Boudreaux, Linette Lopez) at wading through the rest of Navarro’s confused and misinformed diatribe.

Consider Navarro’s portrayal of the national income identify as an economic growth formula.  He claims:

The economic argument that trade deficits matter begins with the observation that growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports).

The sentence betrays a deep and troubling misunderstanding of the factors of economic growth. Real GDP growth (growth in the total value produced in the economy) depends on increases in the factors of production and increases in the productive use of those factors, which trade and specialization facilitate. What Navarro refers to as the drivers of growth are actually the channels that account for the disposition of our output – what we do with our output.

The national income identify is expressed as: Y=C + I + G + X – M.  It tells us that our national output is either consumed by households (C); consumed by business as investment (I); consumed by government as public expenditures (G); or exported (X). Those are the only four channels that can account for the disposition of national output.  We either consume our output as households, businesses and government or we export it.

Imports (M) are not a channel through which national output is disposed.  We don’t import our output. But M appears in the identity and is subtracted because we consume – as C, I, and G – both domestically produced and imported goods and services.  If we didn’t subtract M in the national income identity, we would overstate GDP by the value of our imports.

But Navarro believes – or wants the public to believe – that the national income identity is an economic growth formula or function, where Y (GDP) is the dependent variable, C,I,G, X, and M are the independent variables, and the minus sign in front of M means that imports are inversely related to (or detract from) GDP.  That’s wrong and a Harvard Ph.D. economist should know that.

Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth.

The evidence is overwhelming – month after month, quarter after quarter, year after year – that the trade deficit and GDP rise and fall together. The largest annual decline in the trade deficit ever recorded was between 2008 and 2009, during the trough of the Great Recession. The largest annual increase in the trade deficit occurred between 1999 and 2000, when the economy grew by 4.7 percent – the strongest annual economic growth in the past 33 years.

When the economy grows, households, businesses, and government tend to spend more, and they spend more on both domestic and imported goods and services.  When the economy contracts, there is less spending on both domestic and imported goods and services.  For the past 42 straight years, the United States has registered trade deficits.  In 40 or those 42 years, annual changes in the value of imports and the value of GDP moved in the same direction.

Navarro either believes, or would have the public believe, that imports detract from GDP and that our national security requires all of the gears of U.S. trade policy be put to the service of eliminating our trade deficit. This is a fool’s errand and a Harvard Ph.D. economist should know that.

Suppose America successfully negotiates a bilateral trade deal this year with Mexico in which Mexico agrees to buy more products from the U.S. that it now purchases from the rest of the world. This would show up in government data as an increase in U.S. exports, a lower trade deficit, and an increase in the growth of America’s GDP.

First, note the implication that Navarro expects U.S. trade agreements to include commitments by our trade partners to meet certain outcomes – “…Mexico agrees to buy more products from the U.S.”  This kind of managed trade is unprecedented and utterly defies the purpose and spirit of trade liberalization.  Trade agreements are intended to reduce barriers to competition, not to preempt competition by anointing the winners at the outset.  But, okay, the administration believes it has a mandate to blow things up on the trade front.

But, here’s another problem with Navarro’s scenario.  If Mexico agrees to buy from the United States some of what it now purchases from other countries (Navarro’s key to decreasing the bilateral trade deficit with Mexico), then won’t those other countries have fewer dollars with which to purchase U.S. exports?  Wouldn’t that, all else equal, increase bilateral trade deficits or reduce bilateral surpluses the United States has with those other countries?  Yes and yes.  What Navarro is suggesting is a game of trade policy whack-a-mole. Bilateral trade accounting is utterly meaningless, and a Harvard Ph.D. economist should know that.

Topics:

Lighthizer Completes Trump’s Protectionist Triumvirate

Former Reagan administration deputy U.S. trade representative and longtime trade-remedies attorney, Robert Lighthizer, is President-elect Trump’s choice for United States Trade Representative. Considered in conjunction with the appointments of Peter Navarro to head the newly-created National Trade Council at the White House (my take) and Wilbur Ross at the Commerce Department (my take), Lighthizer’s selection seems to confirm fears that U.S. trade policy is descending into darkness.  At the very least, it is reasonable to assume that for the foreseeable future trade policy will be overwhelmingly enforcement-oriented, while trade agreements and other forms of liberalization will be relegated to the doghouse.

For many years, Lighthizer has represented U.S. steel companies, America’s most trade-litigious industry, filing dozens of antidumping and countervailing duty petitions to keep foreign steel out of the United States. Some of the cases in which he was involved were brought before WTO dispute settlement, where the panels and Appellate Body ruled that the United States was administering its antidumping law in ways that violated U.S. commitments under the WTO Antidumping Agreement.

Perhaps, as a result of those experiences, Lighthizer has been a strident critic of the WTO’s dispute settlement body, which he accuses of overreach and usurpation of U.S. sovereignty. (Here is a debate from 10 years ago between Lighthizer and me on the merits of the WTO.) The fact is that there may be somewhat of a pro-complainant “bias” at the WTO because governments don’t bring cases to dispute settlement unless they are reasonably certain of victory.  There is a selection bias.  When the United States is the complainant, it wins most of the issues in most of the cases.  When the United States is the defendant, it loses most of the issues in most of the cases. It just so happens that the United States has had to defend its indefensible antidumping regime many times at the WTO, and in most cases it has lost.  Antidumping litigation is Lighthizer’s bread and butter.

Topics:

Reality Will Curb Trump’s Protectionist Fantasies

I said there was no way Trump would last through the early primaries.  I belittled the prospect of Trump even attending the convention, much less accepting the Republican nomination.  And I was cavalier in my certainty that Trump would be making a concession speech early Tuesday night.  In other words, by Washington’s standards, I have established credibility on the subject. 

So you should feel reassured that I am less bearish about the direction of President Trump’s trade policy than I probably should be given candidate Trump’s bellicose campaign rhetoric.

The trade policies Trump outlined in broad strokes on the campaign trail would – to put it mildly – devastate the economy.  For example, Trump has said he would:

  • impose duties on 35 percent on imports from Mexico and 45 percent on imports from China;
  • impose special taxes on U.S. companies that incorporate foreign components or labor into their production or assembly operations;
  • tear up the North American Free Trade Agreement – or at least renegotiate what he calls “the worst trade deal ever negotiated,” and abandon the Trans-Pacific Partnership, which he calls a “rape of our country”; 
  • declare China a currency manipulator and impose countervailing duties to mitigate the export price advantages that practice allegedly bestows;
  • use tax policy, protectionism, and the threat of more protectionism to compel China, Mexico, and all of the other countries with whom the United States runs bilateral trade deficits to buy more from U.S. producers and sell less to U.S. consumers in order to achieve a state of balanced trade;
  • tax manufacturing companies that lay off workers.

The list of angry, knee-jerk, foolish ideas goes on and on. If you take candidate Trump at his word, U.S. trade policy is going to be an unmitigated disaster.

RIP, TTIP?

U.S. Trade Representative Michael Froman is having a bad week.  First, Senate Majority Leader Mitch McConnell put the kibosh on lingering prospects that his chamber would consider ratification of the Trans-Pacific Partnership deal this year.  Then Germany’s economy minister proclaimed the 3-year-old Transatlantic Trade and Investment Partnership negotiations had “de facto” failed, with the French trade minister promising to pursue formal termination of the talks – adding that “the Americans give nothing or just crumbs” (which puts the USTR beneath Marie Antoinette, who at least offered cake). 
 
Whether McConnell is being coy in hopes of extracting concessions from the administration on TPP is unclear, but either way the likelihood is approaching certainty that ratification of the Pacific trade deal will become the responsibility of the next president and Congress.  For reasons given here and here, I’m bullish on that outcome within two years.
 
But the TTIP is a different story.  Although the negotiations are not officially dead, they might as well be. Talks were doomed from the outset, laden with too many intractable issues, too many red lines, a thorough lack of realism concerning the time and effort required for success, and a profound asymmetry in the desire to get a deal done. With U.S. negotiators focused on completing the TPP, the EU’s embrace and commitment to the TTIP became a case of unrequited love.  With each EU overture, the U.S. negotiators could play hard to get.  And they did.
 
Now, the United Kingdom’s likely departure from the EU complicates matters further, with uncertainty about the future composition of the EU impeding proper evaluation of the expected tradeoffs from a prospective TTIP. So, while the prevailing uncertainty likely means TTIP stasis for the next couple of years, Brexit would give U.S. negotiators even more leverage in TTIP than they already have. The possibility of a US-UK free trade agreement or a UK accession to the TPP would undoubtedly shift TTIP dynamics further in favor of U.S. negotiators – and give the UK added leverage in negotiating its own post-Brexit relationship with the EU.
 
TTIP isn’t dead. It’s in a coma. For it to have any hope of recovery and real success – an outcome with real liberalization that is – a restoration of some semblance of symmetry in demand for that outcome is necessary. With the existing imbalance, it’s better to have no deal at all because the misguided objectives of negotiators are to open foreign markets as much as possible, while keeping their own as closed as possible. Negotiators with leverage are more likely to succeed at keeping their own markets closed, depriving their fellow citizens of the real benefits of trade. For Americans to realize the most important benefits of trade liberalization, its negotiators must be matched up against foreign negotiators with approximately the same strength (or leverage). When the foreign trade negotiators don’t have enough leverage, U.S. consumers and import-consuming industries lose.
 
For any TTIP outcome to be considered successful, the deal must tackle U.S. restrictions on competition in shipping (repealing the Jones Act), commercial air services, and government procurement projects. Trillions of dollars of annual economic activity in the United States is provided by domestic suppliers facing no foreign competition, which represents an enormous drag on U.S. growth.  In the TTIP negotiations to date, the United States hasn’t budged an inch to accommodate any liberalization in those areas.  Until that is no longer the case, the TTIP should be considered a failure.
 
When the TTIP negotiations were launched in 2013, I warned in this paper that the talks included the seeds of its own destruction and that a successful outcome would require a new approach:

As great as the benefits may be, the TTIP was not borne of any genuine enthusiasm for the enterprise. In Europe, it was seen as a last resort. Frustrated by the failures of monetary policy and restricted by the imperative of fiscal austerity, policymakers were looking for something—anything—to embrace as a potential economic tonic. Whether they actually thought TTIP likely to bear fruit is an entirely different matter. They wanted something to behold as evidence that Greece did not represent Europe’s fate. Potential voter wrath, political backlash, and stalemate–historically effective deterrents to initiating transatlantic trade talks–took a back seat to the affirmative optics of embracing some plausible initiative that might steer Europe from the abyss.

For U.S. policymakers, the main motivation for launching TTIP was to assuage EU concerns that the United States had written her off in its “pivot” to Asia.
 
Other rationales for pursuing TTIP include the argument that the world needs the United States and European Union to reassert global economic leadership at a time when no other country or group of countries is willing or able to do so. Another is that there is a race to establish global production standards and TTIP, representing half the world’s output, presents an opportunity to establish them here and now. A third ex-post rationale is that by establishing disciplines on issues where other trade agreements are silent—issues like currency manipulation, the operations of state-owned enterprises, local content rules, and others—the United States and EU could establish rules that China and others would eventually have to heed.
 
It is within this context that TTIP emerged. But none of those rationales–pursuing TTIP as a last resort, assuaging hurt feelings, establishing standards, disciplining China and others–seem likely to provide the motivation for negotiators and governments to dig deep and remain committed enough to make difficult choices that may carry political consequences. As the talks drag, will governments remain committed to the goals? Will governments motivated by the “last resort” rationale continue to invest seriously in the negotiations if their economies experience growth and the political costs of TTIP no longer look so necessary to incur? Already there have been signs of retreat from the ambitious goals articulated at the outset.
 
From the outset, negotiators erred by setting a 2014 completion date for the negotiations. There is absolutely no plausibility to that deadline and, frankly, failure to amend the timetable with realistic deadlines will only undermine the credibility of the undertaking with a public already skeptical of trade negotiations.

There are dozens of issues on the table of varying complexity that will likely take several years to resolve. Rather than have a single deadline for a single undertaking, the negotiators should announce that their intention is to achieve a multi-tiered agreement that yields multiple harvests at established time intervals. Some analysts have referred to the TTIP as a “living agreement,” although a common understanding of that concept is not evident nor, to my knowledge, have the governments or their negotiators used this characterization in any official context. They should. And it should work something like this.

Negotiators would take stock of the issues on the table and rank them in order of importance to a successful TTIP conclusion. They would then rank those same issues in terms of order of difficulty to resolve. Based on averaging and some agreed upon weighting of those two sets of rankings, negotiators would identify what they and their counterparts see as the most important and least important issues, as well as the most difficult and least difficult issues to resolve. That exercise would produce a road map for how to proceed.

When the dust settles and greater certainty emerges, the United States and EU (and UK) might consider relaunching the TTIP negotiations along these lines. But the parties should come to the table with a genuine willingness to liberalize everything (including sacred cows) because that is what will generate the interest, excitement, and leverage to achieve a really successful outcome.

Topics:

Why We Trade

Imagine life in isolation, waking every morning before sunrise to make your own clothes, build and repair your meager shelter, hunt and harvest your own food, concoct rudimentary salves for what physically ails you, and attend to the upkeep of your brutish existence engaging in other difficult and tedious tasks. Forget leisure or luxuries; all of your time would be consumed trying to produce basic necessities merely to subsist.

Fortunately, that’s no longer the way most of humanity organizes its economic activities. We don’t attempt to make everything we need or want to consume, but instead specialize in a few, or a couple, or just one value-added endeavor – one profession. This specialization is possible because we accept and embrace the concept of cooperation in the form of exchange. We realize that by specializing, we can focus our efforts on what we do best, and produce more value than would be possible if we had to attend to the production of all of our needs and wants. Because we can exchange our output (monetized in the forms of wages and salaries) for the output of others, we don’t even have to know the first thing about hammering a nail, mixing mortar, making thread, yarn, and cloth, threading a needle, whittling an arrow to kill a deer, or any of the details of the incredibly complex processes and supply chains that generate the products and services we consume daily.  Fortunately (but sadly, too), most of us never give it a second thought.  

If two people focusing their efforts on the tasks they do best and exchanging their daily surpluses enables both to consume more or better quality output, then it should readily follow that four people or eight or eighty or eight million participating in this cooperative economic relationship can lead to much higher volumes of output (wealth) and much greater consumption and savings (higher living standards).  This is the purpose of exchange. It enables us to specialize.  And when there are more participants in the market (more with whom to exchange) there is greater scope for more refined levels of specialization. That means greater opportunities to match individuals’ precise skills and faculties (or to cultivate then match those precise skills and faculties) with increasingly specialized tasks and professions created in response to the increasingly refined demands of societies as they produce even greater wealth and higher living standards. 

We’ve come a long way from exchanging cloth and wine.  No longer are people’s choices restricted to being sober and clothed or naked and drunk. Today, we can almost have it all. Whereas once there were witchdoctors serving as generalist medical practitioners, today (in Washington, DC, I am told) there is burgeoning demand for the services of psychiatrists who specialize in treating the emotional and psychological adjustment costs associated with being an expat spouse of a foreign diplomat from Western Europe.  It’s become that specialized. Imagine hearing: “Sorry, my specialty is in talking spouses of diplomats through their neuroses brought on by resettling in Washington from places like Stockholm, Amsterdam, Paris, or London.  Since you’re from Warsaw, let me recommend a different specialist who focuses on treating Polish ex-pats with similar conditions.”

The purpose of exchange is to enable each of us to focus our productive efforts on what we do best.  By specializing in an occupation — instead of allocating small portions of our time to the impossible task of producing each of the necessities and luxuries we wish to consume — and exchanging the monetized output we produce most efficiently for the goods and services we produce less efficiently, we are able to produce and consume more output than would be the case in the absence of specialization and trade. The larger the size of the market, the greater is the scope for specialization, exchange, and economic growth.

Free trade is the extension of free markets across political borders.  Enlarging markets in this manner – to integrate more buyers, sellers, investors and workers – enables more refined specialization and economies of scales, which lead to greater wealth and higher living standards. When goods, services, capital, and labor flow freely across borders, Americans can take full advantage of the opportunities of the international marketplace.

The purpose of trade is to enable us to specialize; the purpose of specialization is to enable us to produce more; the purpose of producing more is to enable us to consume more.  More and better consumption is the purpose of trade. Thus, the benefits of trade come from imports, which deliver more competition, greater variety, lower prices, better quality, and innovation. The real benefits of trade are measured by the value of imports that can be purchased with a unit of exports — the so-called terms of trade. When we transact at the local supermarket, we seek to maximize the value we obtain by getting the most for our dollars.

But when it comes to trading across borders or when our individual transactions are aggregated at the national level, we seem to forget these basic principles and assume the goal of exchange is to achieve a trade surplus. We forget that trade barriers at home raise the costs and reduce the amount of imports that can be purchased with a unit of exports.  U.S. trade barriers hurt U.S. citizens, as consumers, taxpayers, workers, producers, and investors. Americans would be better off if we simply undertook our own reforms – on tariffs, regulations, and other artificial impediments to commerce – without regard for what other government’s do. Yet we don’t.

Although tariffs and other trade barriers have been reduced considerably since the end of the Second World War, U.S. policy continues to accommodate egregious amounts of protectionism.  We have “Buy American” rules that restrict most government procurement spending to U.S. suppliers, ensuring that taxpayers get the smallest bang for their buck; heavily protected services industries, such as air transportation and shipping, that drive up the cost of everything; apparently interminable farm subsidies; quotas and high tariffs on imported sugar; high tariffs on basic consumer products, such as clothing and footwear; energy export restrictions; the market-distorting cronyism of the Export-Import bank; antidumping duties that strangle downstream industries and tax consumers; regulatory protectionism masquerading as public health and safety precautions; protectionist rules of origin and local content requirements that limit trade’s benefits; restrictions on foreign investment, and so on.

It is sad, but true, that Congress seems to have forgotten why we trade.

Topics:

Miscellaneous Tariff Bill Shows Why Washington Needs a Refresher in Business Accounting

Nearly two and a half centuries after Adam Smith vanquished the mercantilists, mercantilism is the beacon of U.S. trade policy.  In descending order of priority, U.S. trade policy is oriented toward three objectives: (1) Accelerating export growth; (2) Limiting import growth; (3) Effectuating a trade enforcement regime that maximally supports the first two objectives. The coexistence of the “exports good, imports bad” philosophy with 41 straight years of trade deficits explains why trade is so often maligned and demagogued (i.e., “We’re getting crushed in trade!”), and why trade liberalization is such a tough slog politically. 

Anyone who reads the press releases from the U.S. Trade Representative’s office, the House Ways and Means Committee, the Senate Finance Committee, or the big business trade associations is familiar with the statistic that 95 percent of the world’s consumers live outside the United States.  That mantra is deployed to promote the importance of exports – to suggest that removing foreign trade barriers is essential to U.S. export growth, which is essential to U.S. economic growth.  But rarely does anyone in official Washington make the valid point that if 95 percent of the world’s potential customers live abroad, so do 95 percent of the world’s suppliers, 95 percent of the world’s supply chain partners, 95 percent of the world’s workers, and 95 percent of the world’s investors.

The fact that the United States accounts for only 5 percent of the world’s population means there are numerous channels through which engagement with the world increases U.S. wealth and living standards, and that U.S. barriers to imports, investment, and immigration are at least as important to surmount as are foreign barriers to U.S. exports. But official Washington considers dismantling foreign market barriers, while fortifying U.S. import barriers, to be its remit.

A brief refresher on business accounting is in order.

Lesson 1:

Profits equal revenues minus costs.

In simple arithmetic terms: P = R – C.

Lesson 2:

With reference to the simple equation above, a business can realize higher profits by increasing R or decreasing C.  To be more precise, higher profits require revenues to increase faster than costs increase or for costs to decrease faster than revenues decrease.

Lesson 3:

For any given firm, revenues equal the value of its domestic sales plus the value of its export sales, and costs equal the materials, labor, and overhead used in production, as well as transportation expenses, selling expenses, taxes, and other expenses incurred in the process of delivering the good or service to the customer.

Lesson 4:

By increasing overall supply and reducing the average price of manufacturing inputs and final end-user products, imports help reduce the cost of production for businesses and the cost of living for American households. For businesses, those lower costs generate greater profits to reinvest or distribute to shareholders or they enable lower prices to help them compete.  For households, those lower costs mean lower prices and more resources to save or spend elsewhere in the economy.

Lesson 5:

The goal of trade policy should not be to maximize business revenues.  The goal of trade policy should be to maximize profits (or put in economic terms: to maximize value-added, i.e. GDP). The equation in Lesson 1, above, shows that reducing costs contributes to profit growth just like increasing revenues contributes to profit growth.

Congress demonstrates occasional, attenuated appreciation of these lessons.  Every few years (8 times since 1982), Congress has passed a Miscellaneous Tariff Bill, which temporarily suspend duties on certain, “noncontroversial” products—usually intermediate goods, such as chemicals, electronic components, and mechanical parts—that are not manufactured domestically but are needed by U.S. producers to generate their own output. Although limited in impact by its temporary nature, by the “no domestic production” requirement, and by the caveat that the suspended duty must not reduce tariff revenues by more than $500,000, the MTB does provide some cost savings to U.S. producers. The last MTB provided an estimated $748 million of import tax relief.

As described in this new paper – released ahead of a House vote tomorrow on legislation to resuscitate the MTB process – Congress should recognize that tariffs are always costs that reduce GDP and act with greater resolve to eliminate all import tariffs permanently.

Topics: