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
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.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
With steel industry lawyers and executives populating key trade policy positions in the Trump administration, we are witnessing the return of an old, rusty narrative that portrays the World Trade Organization as unaccountable global government intent on running roughshod over U.S. sovereignty. On the Forbes website, today, I explain why that is a protectionist canard.
Here are the opening paragraphs:
John Bolton took to the pages of the Wall Street Journal yesterday to assert America’s interest in abandoning international institutions that threaten U.S. sovereignty. In identifying the World Trade Organization’s Dispute Settlement Body as such an institution, Bolton was reinforcing a central theme of the Trump administration’s recently‐minted 2017 Trade Policy Agenda. That document is short on specifics, but makes one thing clear: Under threat of going rogue, the United States will leverage its indispensability to compel changes at the WTO that accommodate a more expansive, less surgical application of domestic trade laws.
“Defending our national sovereignty over trade policy” and “strictly enforcing U.S. trade laws” are, explicitly, the top two priorities on the agenda. Taken together, those priorities suggest the Trump administration will aggressively execute U.S. trade laws with little regard for whether that execution violates internationally‐agreed rules established to prevent and discourage abuse of such laws. Agreeing that “all animals are equal,” then adding the famous caveat “but some are more equal than others” is what is meant by “defending our national sovereignty.”
Given the prominence of domestic steel industry representation in the Trump administration, these priorities aren’t surprising. High on the list of talking points of the Washington‐swamp‐savvy U.S. steel lobby is the assertion that the WTO’s DSB, by finding U.S. antidumping and countervailing duty practices in violation of WTO obligations on numerous occasions over the years, usurps U.S. sovereignty over its own laws. This is a complaint frequently made by Robert Lighthizer, Trump’s USTR‐designate, who for decades has represented domestic steel interests in AD/CVD cases before U.S. agencies.
And here are the concluding paragraphs:
The prominence of the claim that U.S. sovereignty is threatened reflects the over‐representation of steel interests in the Trump administration. It is intended to add credibility to the implied threat that the United States will ignore DSB rulings with which it disagrees unless and until there are changes made to the WTO texts that render compliant the United States’ non‐compliant actions on trade remedies. But it is irresponsible to risk blowing up the system, especially on behalf of an industry that accounts for less than 0.3 percent of the U.S. economy.
The bottom line is that the WTO dispute settlement system, though not perfect, offers a reasonable formula for balancing the simultaneous imperatives of preserving the rule of international trade law and national sovereignty.
But there are many paragraphs in between that I hope you will find time to read here.
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.
In two earlier posts on this blog, I described how President Trump said he had required the use of American steel in the Keystone XL and Dakota Access pipelines, while the reality seemed to be only an interagency consultation that would “develop a plan” on the issue and had some important qualifiers (only “to the maximum extent possible and to the extent permitted by law”). Now Politico is reporting that any such requirement will not apply to Keystone:
The Keystone XL Pipeline will not be subject to President Donald Trump’s executive order requiring infrastructure projects to be built with American steel, a White House spokeswoman said today.
Trump signed the order calling for the Commerce Department to develop a plan for U.S. steel to be used in “all new pipelines, as well as retrofitted, repaired or expanded pipelines” inside the U.S. projects “to the maximum extent possible.”
By the White House’s judgment, that description would not include Keystone XL, which developer TransCanada first proposed in 2008.
“The Keystone XL Pipeline is currently in the process of being constructed, so it does not count as a new, retrofitted, repaired or expanded pipeline,” the White House spokeswoman said.
Assuming this report holds up (I’d like to hear it from additional White House sources), it is a small victory for free trade. There is still a great deal of uncertainty on the direction of U.S. trade policy right now, but at least for the moment I have a bit of hope. Cooler heads seem to have prevailed on this one issue. Perhaps they will have similar success on other issues.
If you did not see President Trump's press conference yesterday, you might want to watch. It was quite the spectacle. His statements on "Buy America" issues may not have been the highlight of the event, but they raise some interesting questions. Here's what he said:
We have also taken steps to begin construction of the Keystone Pipeline and Dakota Access Pipelines. Thousands and thousands of jobs, and put new buy American measures in place to require American steel for American pipelines. In other words, they build a pipeline in this country, and we use the powers of government to make that pipeline happen, we want them to use American steel. And they are willing to do that, but nobody ever asked before I came along. Even this order was drawn and they didn't say that.
... And I'm reading the order, I'm saying, why aren't we using American steel? And they said, that's a good idea, we put it in.
I mentioned this issue on this blog a couple weeks ago. As I pointed out then, Trump is saying that he put measures in place to require pipeline companies to use American steel, but the Presidential memo he signed does not, in fact, do this. Instead, it instructs the Secretary of Commerce, as part of an inter-agency consultation, to "develop a plan" under which pipelines "use materials and equipment produced in the United States, to the maximum extent possible and to the extent permitted by law."Read the rest of this post »
At noon on January 20th, Barack Obama stepped aside, leaving Donald Trump as the leader of the free world. In his inaugural address, Trump pledged to implement an ‘America First’ doctrine. But while the implications for trade and immigration are relatively clear, his speech brought us little closer to understanding what this will mean for foreign policy.
Indeed, thanks to the incoherence of the president-elect’s foreign policy remarks during his campaign, the range of potential outcomes is wide. But Trump’s past comments suggest four potential paths that his ‘America First’ Doctrine could take.
The first option is true isolationism. Though it remained unclear throughout the campaign the extent to which Trump truly understood the historical baggage that came with the term ‘America First,’ many commentators assumed that he would indeed pursue a classic isolationist policy. And Trump seems to mean it literally in some cases: only a week into office, he has already sought to erect trade and immigration barriers. He may also seek to withdraw from the world in military terms, abandoning alliances, and refusing to engage in even the diplomatic resolution of international problems which don’t directly concern the United States.
Yet elements of Trump’s own statements call this assumption into question. From his insistence on increased military spending to his promise in the inaugural address to eradicate radical Islamic terrorism ‘completely from the face of the Earth,’ Trump has repeatedly implied that he is likely to pursue a relatively hawkish foreign policy.
Regardless of whether wall construction is funded through a discriminatory tariff on imports from Mexico or the border adjustment taxes envisaged in the GOP tax proposal, U.S. consumers and taxpayers will be flipping the bill. The very idea of building the wall in the first place is a disgrace, but demonizing our neighbors and hatching plans that could subvert the Mexican economy and put another Venezuela on our southern border, is belligerent and potentially disastrous.
Hitting all Mexican imports with a 20% tariff is, unfortunately, something the president could do. Under the Constitution, Congress is authorized to regulate foreign commerce, which includes imposing tariffs. But over the years, Congress has delegated some of that authority to the president through various statutes. All of those statutes require that some condition be met (findings of a surge in imports; subsidized imports; unfair foreign practices that hurt U.S. companies; national security crises; public health or safety threats, etc.) before restrictions can be imposed. Sometimes the restrictions are limited in magnitude and duration, sometimes not. Sometimes the actions are subject to judicial review, sometimes not.
By and large, these statutes were passed in conjunction with legislation to implement trade agreements, lower tariffs, or otherwise liberalize trade. They were crafted as safeguards to assuage those concerned that the country’s seemingly inexorable march toward free trade would bring rapid change, which would carry massive adjustment costs and other maladies and threats that the government would be incapable of addressing. The expectation was that the president would use this conditional power sparingly and in the service of greater openness and liberalization. In other words, unlike the Founding Fathers, U.S. Congresses during the 20th century failed to imagine adequately the likes of a Donald Trump as president.