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Mark as favorite Donald Trump and Peter Navarro – the ‘most dangerous men in global economics’ – suffer from ‘trade deficit disorder’
From Mark Perry.
"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.
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.
2. Dan Ikenson: “Peter Navarro, Harvard Ph.D. Economist, Trade Warrior”
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.
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.
3. Stephen Roach: “Donald Trump is suffering from trade deficit disorder“:
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.
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.
4. Dalibor Rohac: “Trade chief’s policies could be disastrous for Eurozone”
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.
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.
5. Phil Levy: “White House Whiffs On Trade Deficit Defense”
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.”
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.
6. Don Boudreaux: “What an Embarrassing Performance by Peter Navarro”:
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."
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