Topic: Trade 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!

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Trading with Germany

I’ve mentioned before on this blog the strange idea apparently supported by some in the Trump administration that the U.S. government should conduct trade talks with individual EU member states, even though the EU itself has responsibility for trade policy and under EU law member states are not allowed to negotiate on these issues bilaterally.  The Trump administration view on this issue may be based on a number of factors, including a general skepticism about international institutions such as the EU.  But I suspect one reason is their misguided focus on bilateral U.S. trade deficits.  They see a big trade deficit with Germany, and they want to go after it.  

The issue came up last Friday when German Chancellor Angela Merkel met with President Trump.  Trump offered the following comment on trade with Germany:

On trade with Germany, I think we’re going to do fantastically well.  Right now, I would say that the negotiators for Germany have done a far better job than the negotiators for the United States.  But hopefully we can even it out.  We don’t want victory, we want fairness.  All I want is fairness.  

Germany has done very well in its trade deals with the United States, and I give them credit for it, but – and I can speak to many other countries.  I mean, you look at China, you look at virtually any country that we do business with.  It’s not exactly what you call good for our workers.  

When Trump says German negotiators have “done very well,” presumably he is referring to the existence of a U.S. trade deficit with Germany.  In his mind, a trade deficit means the U.S. negotiators did a bad job, and the Germans “won” the negotiation.  But as Merkel pointed out, “When we speak about trade agreements, … the European Union is negotiating those agreements for all of the member states of the European Union, … .”  So regardless of the U.S. trade balance with Germany, German negotiators did not play much of a role here.

Earlier this month (before the Merkel visit), White House Trade Council Director Peter Navarro (read more about him herespelled out the Trump view in a little more detail, during a Q & A session after a talk he gave:

Question: Let’s move to Germany now. Here’s a question about Germany. You mentioned the possibility of negotiating a trade deal with Germany. Is that a goal of the administration, and how would you do that, since Germany is a member of the EU and doesn’t have an independent trade policy?

Peter Navarro: Sure. This is the problem with Germany. It is able, basically, to use the argument that they’re in the eurozone, therefore they can’t have any kind of discussions with the United States about reducing their almost $70bn trade deficit. That may or may not be true. I think that it would be useful to have candid discussions with Germany about ways that we could possibly get that deficit reduced outside the boundaries and restrictions that they claim that they are under. But it’s a serious issue. Germany is one of the most difficult trade deficits that we’re going to have to deal with, but we’re thinking long and hard about that and I know that Angela Merkel is coming here soon, and perhaps there will be some discussions about how we can improve the German-U.S. economic relationship. And I’m sure they can teach us a thing or two about how to get more of the workforce in manufacturing.

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The Practical Side of Trump’s Trade Policy

Yesterday, John Bolton had an op-ed in the WSJ criticizing the dispute settlement process used at the World Trade Organization.  He argued that this process “is often criticized for failing to deter violations of the WTO’s substantive trade provisions,” and it also exceeds its mandate “by imposing new obligations on one or more parties, particularly against American interests.”  Somehow, then, in his view, the process is both ineffective AND infringes on sovereignty, an impressive achievement.  My colleague Dan Ikenson systematically dismantles the piece here.

Talking about international dispute procedures in the abstract can be a little hard to follow sometimes, but something happened earlier this week that helps illustrate the value of the WTO dispute process.  This is from a Reuters report on an outbreak of bird flu in Tennessee which has led to some U.S. trading partners imposing import restrictions on U.S. products:

Top U.S. chicken and egg companies ramped up procedures to protect birds from avian flu on Monday, a day after the federal government confirmed the nation’s first case of the virus at a commercial operation in more than a year.

The U.S. Department of Agriculture said on Sunday that a farm in southern Tennessee that is a supplier to Tyson Foods Inc. had been infected with the virus. All 73,500 birds there were killed by the disease, known as avian influenza (AI), or have since been suffocated with foam to prevent its spread.

Already, U.S. trading partners, including South Korea and Japan, have restricted shipments of U.S. poultry because of the infection in Tennessee.

There are more details on the import restrictions here.

While some of Trump’s trade policy staff obsesses over trade deficits or the number of Americans working in manufacturing, the practical side of trade policy these days is often about regulatory trade barriers such as these, which are said to be about food safety but are sometimes just disguised protectionism.  In this case, our trading partners definitely have a reason to be concerned.  But are the actions they take in response based on sound science, or is the disease outbreak being used as an excuse for protectionism?  The restrictions may be justified now, but will they be removed when the threat is gone?  That’s one of the core functions of trade agreements:  Detailed rules and a neutral dispute process to decide whether regulatory measures are legitimate or are disguised protectionism.  In fact, the United States filed a WTO complaint against India in 2012 on these same issues, after India imposed restrictions that were purportedly to address concerns about outbreaks of bird flu.

There will continue to be pushback against the Trump administration’s misguided view of trade deficits and economics more generally.  But there is also the practical question of how this administration will approach day-to-day trade concerns like this one.  In the past, the staff at the U.S. Trade Representative’s Office has shown great skill in using the dispute process at the WTO to address these issues.  Hopefully the Trump administration will let them continue to do their work.

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The WTO Does Not Usurp U.S. Sovereignty

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.

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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.

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Clayton Yeutter, RIP

After a long battle with cancer, Ambassador Clayton Yeutter passed away on Saturday at the age of 86 at his home in Potomac, Maryland. With his passing, the world parts not only with a brilliant, effective, accomplished leader, but an extraordinarily generous, decent man whose enduring kindness and humble demeanor made politics and policymaking in Washington more tolerable for all involved.

Clayton Yeutter had a long an illustrious career spent in both the private and public sectors, as well as in academia, but he is probably best known for his service during the Ronald Reagan and George H.W. Bush administrations.

As Reagan’s U.S. Trade Representative from 1985 to 1989, Ambassador Yeutter presided over implementation of the very first U.S. bilateral free trade agreement (with Israel) and he launched and oversaw negotiation of the U.S.-Canada Free Trade Agreement, which evolved into the North American Free Trade Agreement, to include Mexico, in 1994.

As USTR, Ambassador Yeutter also launched and advanced the “Uruguay Round” of multilateral trade negotiations in 1986, under the auspices of the General Agreement on Tariffs and Trade, which resulted in broader and deeper reductions in global barriers to trade than had previously been achieved, and it established the World Trade Organization in 1995.

During the first two years of the George H.W. Bush administration (1989-91), Yeutter served as Secretary of Agriculture, where he was instrumental in steering U.S. agricultural policy back to a more market orientation, from which it had deviated in the mid-1980s. The 1990 farm bill (The Food, Agriculture, Conservation, and Trade Act of 1990) included reductions in agricultural subsidies that were negotiated during the Uruguay Round.

Yeutter held other high-profile positions, including an eight-year stint as President and CEO of the Chicago Mercantile Exchange—a period during which the volume of trade in agricultural, currency, and interest rate futures more than tripled. He served as Republican National Committee Chairman for two years, following the death of Lee Atwater.

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Signs of Hope on Trade Policy?

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.

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