"Peter Navarro, director of Trump’s White House National Trade Council, has been in the news recently for his speech on Monday to the National Association of Business Economists and his op-ed in Monday’s Wall Street Journal “Why the White House Worries About Trade Deficits.” In his speech and op-ed, Navarro laid out Team Trump’s trade agenda that involves expanding US exports, reducing imports, and thereby reducing America’s merchandise trade deficit and supposedly therefore increasing our nation’s economic growth. Unfortunately, that’s a pure mercantilist trade agenda, which is an approach to trade that has been discredited now for several hundred years. Navarro’s op-ed was a real bouillabaisse of economic errors, misunderstandings and false presumptions, and his “river of rubbish” (according to Don Boudreaux) invoked a swift round of responses and rebuttals, some of which are featured below.
The general consensus of the responses summarized below is that both Navarro and Trump suffer from a massive “understanding deficit” about international trade issues (or “trade deficit disorder” as Stephen Roach describes it below), and deserve a failing grade for International Trade 101. Here’s a collection of responses to the “two most dangerous men in global economics” to paraphrase Linette Lopez’s description of Navarro.
1. Dan Griswold: “Peter Navarro misfires again on the U.S. trade deficit“:
As Navarro should know, and as any economics undergraduate is taught, the size of the U.S. trade deficit is determined by the gap between our level of national investment and savings. If a trade or industrial policy does not affect total investment or savings, it will not change the overall size of the trade deficit.2. Dan Ikenson: “Peter Navarro, Harvard Ph.D. Economist, Trade Warrior”
Navarro’s theory about the U.S. trade deficit is contradicted by recent U.S. economic history. If Navarro is correct, how does he explain the performance of the U.S. economy in the 1990s, when rising trade deficits were accompanied by strong economic growth, a robust increase in industrial output, and full employment? That period was also a time of falling trade barriers abroad, with the implementation of NAFTA and the Uruguay Round Agreements.
At the enterprise level, outsourcing and domestic production are not substitutes. They are complements. The BEA data reveal that when U.S. multinational corporations invest more in foreign operations (production, assembly, R&D, hospitality service provision, etc.), they invest more in the parent operations at home. My research shows positive correlations between a U.S. parent companies’ and its foreign affiliates’ capital expenditures (i.e., when a U.S. MNC spends more/less on capital investment in its foreign affiliates, it spends more/less on capital investment in its parent operations), value-added, R&D expenditures, compensation, employment, and compensation per employee.3. Stephen Roach: “Donald Trump is suffering from trade deficit disorder“:
The data suggest that when companies shift particular operations abroad, resources are freed up to invest in other company operations stateside. When U.S. multinationals expand their operations abroad, greater demand is placed on headquarters and other complementary operations in the United States, which results in new domestic investments as well.
The US has trade deficits with 101 nations. This is not a bilateral problem, as the Trump administration insists. It is a multilateral one. This profusion of deficits reflects a far deeper problem: the US’s saving deficit. … Lacking in saving and wanting to grow, the US must import saving from countries like China, Germany, and Japan, which have big surpluses. But it must run a massive balance of payments deficit in order to attract the foreign capital. … This underscores why tough talk aimed at one nation or another is nothing more than political bluster.4. Dalibor Rohac: “Trade chief’s policies could be disastrous for Eurozone”
Without dealing with the root cause of the problem, eliminating a trade deficit with a few nations will simply be reflected in expanded deficits with others. … The Chinese chunk of the US’s multilateral trade imbalances would have to be absorbed by other nations, most of which have cost structures and product prices that are well in excess of those currently available in China. The labor compensation rate in Chinese manufacturing runs at about 10 per cent of that of America’s top 10 non-Chinese foreign suppliers. Asking them to fill the void would be tantamount to a large tax on Walmart prices and US consumers.
In short, Mr. Navarro confuses the simple accounting relationship between GDP and net exports (the difference between the value of exports and imports) with a causal, economic link. That leads him to believe, wrongly, that the U.S. economy can be expanded simply by boosting net exports — by exporting more, by importing less, or both.5. Phil Levy: “White House Whiffs On Trade Deficit Defense”
However, imports into the United States are part of a story much more complicated than Navarro’s accounting exercise would lead one to believe. For starters, imported goods often serve as inputs into production in the United States.
Then, the dollars paid by Americans for goods and services from overseas can be used to buy dollar-denominated assets, thereby boosting another component of GDP — investment.
For over four decades, the United States has recorded a trade deficit. Throughout much of that period, writes Dan Ikenson, the director of Cato Institute’s Center for Trade Policy Studies, “annual changes in the value of imports and the value of GDP moved in the same direction.” This is because importing more does not simply reduce net exports — it also provides inputs for domestic production and boosts investment.
One core argument that Navarro puts forward is simply incorrect. In considering the repercussions of offshoring, he writes: “If such offshored production then generates products for export back in to the U.S. – say, an American consumer buys a Ford Focus imported from Mexico rather than assembled in Detroit – the trade deficit rises, further reducing growth.”6. Don Boudreaux: “What an Embarrassing Performance by Peter Navarro”:
The error here is a basic one. Based on the formula [Y=C + I + G + (X-M)] he is saying that when M goes up (equivalently, when X-M goes down), then Y goes down. This demonstrates a fundamental misunderstanding of how the accounting works. The reason imports are subtracted is to avoid double counting.
Following Navarro’s example, consider the buyer of the Ford Focus. Purchasing a car is consumption, so this gets tallied in the “C” category as U.S. economic activity. If the car was made in Detroit, this is appropriate. If, instead, production took place abroad, then it wasn’t U.S. economic activity, and the import gets subtracted out. Navarro is right that a newly imported car raises M, but it raises C by the same amount, thereby having zero net effect on U.S. growth and GDP.
Peter Navarro’s attempted justification of policies to reduce America’s trade deficit is a river of rubbish. Our first hint of Mr. Navarro’s confusion comes when he writes 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 famous C+I+G+(X-M) equation – to which Mr. Navarro here refers – breaks down GDP, not according to how it is produced but, rather, according to how it is spent. So for Mr. Navarro to suggest that U.S. national income will rise as a matter of arithmetic if government forces us Americans to stop spending more on purchases of imports than we earn on goods that we export from our country makes no more sense than to suggest that Mr. Navarro’s household income will rise as a matter of arithmetic if government forces him to stop spending more on purchases of books and movies than he earns on the books and movies that he produces and exports from his household.7. Linette Lopez: “The guy running Trump’s trade policy just wrote a seriously troubling op-ed in The Wall Street Journal”
Navarro’s article opens with an incomplete premise, that US GDP growth comes from “only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports).” This is the basis on which Navarro argues that having a trade deficit — buying more goods than you’re selling to your trading partners — hurts growth and that the best way to grow faster is by closing this deficit. That is to say, selling more goods than you buy.
In the most practical terms, for you that means fewer cheap South Korean flat-screen TVs until we can figure out a way to sell the South Koreans more stuff. Trump released a trade agenda that complained about that very thing last week, actually. Thing is, the trade deficit is far from the most important part of GDP. According to the Bureau of Economic Analysis, the 2016 trade deficit was about $500 billion. That’s a lot, but it’s a fraction of the other main components of GDP, like the $3 trillion of private investment and the $12.8 trillion in consumption last year.
Two main factors for GDP growth — the trade deficit not among them — are accepted by economists pretty much the world over: labor-force growth and labor-force productivity. You can hire more workers, who then spend their wages and buy stuff, growing the economy, or you can make the workers you have make more stuff.
As for the importance of a trade deficit as a measure of how healthy your economy is, note that during the Great Depression, the US had a trade surplus. It didn’t matter that we were selling to the rest of the world like crazy because no one here had any purchasing power. What we import and export takes a seat way in the back compared with whether American citizens can buy things, go places, and make our economy move."