Caleb Brown: This is the Cato Daily Podcast for Monday, January 9, 2017. I am Caleb Brown. Donald Trump’s proposed trade team is a triumvirate of protectionist thinkers. Wilbur Ross, as head of the Commerce Department, Peter Navarro as head of the new National Trade Council, and Robert Lighthizer as U.S. Trade Representative. Cato Institute’s Dan Ikenson and Dan Mitchell discuss the team’s background and why U.S. trade policy is now more uncertain than ever.
Dan Ikenson: Yes, the three have in common this economic nationalist view where trade is a competition, a zero-sum competition, between team U.S.A. and the foreign team. I have happened to debate all three of them at different points over the past decade-and-a-half, and they each are prominent advocates of protection. Wilbur Ross has been in the business, he is a successful business man. He was in the business of purchasing and selling steel companies in the mid-2000s and textile companies around the same time, so he was advocating for prolongation of textile quotas, steel restraints that the Bush administration put into place, primarily because it was beneficial to the transactions he was trying to conduct, but he is committed to the idea that we need to restrict imports, that the key to growing the economy is to increase net exports. He and Navarro believe that the national income identity is a growth equation, a growth formula, rather than just an income identity. Really what it demonstrates is what we do with national output. Output is either consumed by citizens, by government, by business, or it is exported. There is a minus IM there, minus imports, because embedded in C, I, and G are imports, so we have to subtract them out. They present the national income identity as though it is an equation which demonstrates that there is an inverse relationship between imports and GDP, when in fact 40 out of the last 41 years, both have moved in the same direction. When imports rise, GDP rises. When imports rise, jobs increase. So that’s at the center of the debate right now. It is a fallacy that has been promoted by economists on the Left, labor-oriented economists, and now Trump’s protectionist triumvirate.
Dan Mitchell: The problem I have with their outlook is they really seem to think that trade deficits are a sign that you are losing, when from a macroeconomic perspective, in addition to what Dan was talking about, trade deficits are actually the flipside of a capital surplus. So if foreigners want to invest a lot of money in the U.S. economy, that’s usually a positive referendum on America’s economic outlook and yet they seem to think that somehow if a trade isn’t exactly in balance with every single country something must be wrong, somebody must be cheating, somebody must be losing, and I think that’s just a silly thought. And I feel sorry for my colleague Dan Ikenson for having to deal with this economic mythology.
Caleb Brown: We are talking about a triumvirate. These are people who will be deeply involved in the Trump administration’s dealings on matters of trade. Robert Lighthizer is designated to be U.S. Trade Representative. What do we know about him?
Dan Ikenson: Well, he’s a longtime trade attorney in Washington, representing U.S. steel interests primarily in anti-dumping and countervailing duty cases. He has seen some of his cases — you know his professional effort has been committed toward keeping foreign steel out of the U.S. market. And some of the cases in which he has been involved were brought to the World Trade Organization. The governments of the companies caught up in these cases said hey the United States is implementing its anti-dumping law in ways that contravene their obligations under the WTO’s Anti-Dumping Agreement. And the U.S. lost many of those cases. And I think that left a bad taste in Lighthizer’s mouth. He seems to think that the dispute settlement body at the WTO has overstepped its bounds, has usurped U.S. sovereignty, has read obligations into the agreement that don’t exist, and he and I had a debate at the Council on Foreign Relations about ten years ago and he advocated that we should assemble a panel of retired federal judges to review all of these adverse WTO decisions. And you know, the purpose of which would be to collect evidence to support the idea that the WTO is anti-American, or that we should withdraw from the WTO, and we have never had anybody like that as the U.S. Trade Representative. The USTR is supposed to more of a diplomatic, outgoing, collegial sort of negotiator type. He is more of an enforcement, hard-driving enforcement, anti-China, pro-protection, economic nationalist. And so we are in uncharted waters with him at that post.
Caleb Brown: Alright now with respect to, and of course the third member of the Trump protectionist triumvirate, say that three times fast, is Peter Navarro, who has — I’ve heard that name for so many years and from Cato people it has never been a particularly positive assessment of his conclusions.
Dan Ikenson: Yeah, so he’s a professor at the University of California. He is Harvard-trained. His views on economics are unique in the sense that there probably isn’t another living person on the planet who endorses his views. He is stridently anti-China. I imagine him conducting trade from a bunker you know, wearing military fatigues. He considers trade to be you know, a branch of warfare. He is adamant that the Chinese have been cheating ever since they joined the WTO in 2001 and he is pretty convinced that they are out to get us and that we have no business engaging in trade with China, with a country that is intent on dominating the world. And he wants to stop China’s rise. So he — it’s funny, over the summer I got a call from a reporter asking you know, who Trump might appoint to positions at Commerce, or in the White House, or at USTR, and what came to mind were the names Peter Navarro, Wilbur Ross, and Bob Lighthizer. And it turns out that maybe I actually gave the administration an idea to go out and seek these guys. But for those of us who are free trade oriented, for those of us who believe in markets, this is just a nightmare come true.
Caleb Brown: Dan Mitchell, to you — Ross and Navarro have written together on subjects related to the things you talk about, global taxation and that sort of thing. What have been their writings in your assessment?
Dan Mitchell: Well, the paper they wrote for the Trump campaign, which is still out there on the internet, made a remarkable claim dealing with tax policy that touches on my areas of interest, where they said that if other countries have value-added taxes, that’s an unfair trade penalty against America. But that’s nonsensical. I’m not a fan of value-added taxes, by the way. I’m going to fight to the death to make sure we never have one in the U.S., but if, say Mexico, has a 16% value-added tax, yes. That means when America exports to Mexico, that 16% tax, value-added tax, is imposed on American products. But guess what? Every single product that is produced in Mexico also has that 16% tax, so there’s no discrimination against American goods. The Mexican government is skimming off 16% of the value of everything. And likewise, if products are produced and sold in America there is not VAT, and if Mexican products are imported into America we obviously don’t impose a VAT on them. So there’s a level playing field on both sides of the border. The VAT — it’s a bad idea from a fiscal policy perspective for financing bigger government, but it doesn’t give another country a trade advantage over us. And yet Ross and Navarro genuinely seem to believe this.
Caleb Brown: Well why, what is the source of that argument, then?
Dan Mitchell: Well, the source of the argument is that the way a VAT works is you are imposing the VAT on everything produced in your country, and then anything that is imported into your country you also impose the VAT at the border. And so they are looking just in isolation at what happens at the border. Ah — look at those Mexicans imposing a 16% VAT on American products, that must be discriminatory. But it’s not discriminatory because they are imposing that VAT on their products as well. It’s bad fiscal policy, but it’s not bad trade policy.
Dan Ikenson: You know I would say this. At least that border tax adjustability issue is something that is being addressed in Congress through typical normal channels. What Lighthizer and Navarro are also proposing is to impose a 10% across-the-board tariff on all imports, which is separate and apart from this border tax adjustability issue. The idea, the way they sell it, is we need balanced trade. And how are we going to balance trade? Let’s impose taxes on imports so that you know, we import less. But what is crazy about this is that last year we imported $2.2 trillion worth of goods. Half of that, $1.1 trillion, were intermediate goods, inputs, raw materials, capital equipment.
Caleb Brown: Which is a point that should never be minimized, when that is all the stuff that Americans use from overseas to make stuff that employs Americans.
Dan Ikenson: Exactly. That’s $1.1 trillion worth of goods. You throw a 10% tax on that, that’s $110 billion added to the costs of U.S. manufacturers. Can they make it up by selling more abroad? No, because foreigners will have fewer dollars to buy U.S. exports with and foreigners will certainly retaliate. Foreign governments will put tariffs on U.S. exports, which will reduce U.S. revenues. So it’s going to squeeze profits and what is that going to do? It’s going to cause manufacturers to lay off workers, not to invest. And those manufacturing workers who were laid off, the ones Trump is allegedly going to bat for, are also going to see their cost of living rise because we are talking about a 10% tariff on the consumer goods, as well as these capital goods and intermediate goods. So they are going to have to pay more for everything. It’s going to be a disaster. And what I think is important is after just a few months the negative repercussions will be manifest, people will notice them, and hopefully that will be enough to cause Trump to reverse course.
Caleb Brown: Well you would hope that. Peter Navarro has been tapped to head a new National Trade Council. What do we know about that group and what their purpose is?
Dan Ikenson: You know I’m not sure. You know some people think that hey, maybe Navarro needed to get some payback for his role in the campaign for his contributions, and keeping him out of Commerce, or USTR, where he would have had maybe more power is a good thing. It is unclear what kind of influence this new council will have on Trump. It is unclear who will be the tiebreaker if there are differences of opinions among his advisors, but certainly if you have your office right down the hall from the President and you learn the President’s habits, and this President’s tendency is to like advice that corroborates his own views and rubberstamps them, it will be easier for Navarro to you know, customize his perspectives so that they are easily spoon-fed to Trump. But it’s not clear what that agency’s role is going to be.
Caleb Brown: And with Robert Lighthizer at USTR, what is the U.S. Trade Representative and what does he do?
Dan Ikenson: Well they have two major functions. The primary one is to negotiate trade liberalization and new trade deals around the world. The outgoing administration just negotiated the Trans-Pacific Partnership, which is a big comprehensive trade agreement, but this administration has rejected it on its face. The appointment of Lighthizer indicates that the emphasis at USTR will shift from trade liberalization and pursuit of trade agreements to trade enforcement prosecutions, so the other function of USTR is to hold our trade partners to their obligations. So there’s a general counsel’s office there which looks at the policies of our trade partners and matches them up to their obligations at the WTO or in our bilateral trade agreements to see if they are living up to their obligations. And if they are not, we can bring cases. But that process has always been very circumspect. It takes a while. The general counsel’s office usually doesn’t want to bring cases unless they are sure they are going to win. And for political reasons sometimes they defer altogether. But this administration seems very intent on bringing a lot of cases against China, Mexico, other developing countries that American firms outsource to, and probably Europe as well. And that probably has something to do with this tax issue, as the tax code is overhauled and there are some provisions in it that run into, that are questionable, at the WTO, the Europeans would be the most likely complainants. But if the Trump administration can find some areas where the Europeans are in violation of their obligations, maybe that would keep them sitting on their hands rather than challenging the new U.S. tax code.
Caleb Brown: But in general you know, Republicans have been fairly free trade for many years. What does it have to an incoming Republican administration with three noted protectionists in key positions related to trade dealing with a Congress that would, one assumes, like to continue to liberalize?
Dan Ikenson: You know I think we are going to have to see how this all plays out. This is not your father’s Republican presidency, but it’s your great-grandfather’s, you know. The Republicans were pretty protectionist from the Civil War until the you know, mid-30s. There is — Lighthizer likes to point out you know, that Teddy Roosevelt, from Teddy Roosevelt to Ronald Reagan, and Lincoln, to Roosevelt, to Ronald Reagan, Republican presidents have not been blinded by free trade ideology but in fact were skeptical of free trade. I think that Congress has more members who are committed to the idea of free trade and understand the importance of markets. There is a honeymoon period right now. Right now I think Congress is being more Republican than it is being Congress. But at some point this honeymoon period will expire and I think there’s a chance that the TPP could actually be revived. I just think this is going to be a transitional period here and hope is not all lost. We will see how it goes.
Caleb Brown: Dan Ikenson directs trade policy studies at the Cato Institute. Dan Mitchell is a senior fellow at the Cato Institute. Subscribe to and rate this podcast at iTunes and Google Play, and follow us on Twitter, @CatoPodcast.