In a July 20th editorial, the Wall Street Journal offered this pithy appraisal of one of the Trump administration's top economic advisers on the negative consequences of the burgeoning U.S. trade war with the rest of the world: "Peter Navarro says the harm is a 'rounding error.' He's out of touch."
Navarro is an economist and director of the Office of Trade and Manufacturing Policy (OTMP), a White House agency created by President Trump. He is one of the rare economists to occupy a high-level advisory role in the White House. A Harvard University Ph.D., he is a stiff protectionist, which is rare among economists.
In June, the OTMP published a report titled "How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World." It argues against the Chinese government's rule-breaking mercantilism and industrial policy, which are deemed unfair, exploitative, and even extortionist. (Mercantilism includes both protectionism against imports and the promotion of exports.)
This raises the general question of what a national government's trade policy should be toward a foreign country whose government pursues a mercantilist industrial strategy. A related issue is that Navarro himself was once a promoter of free markets and free trade (and was a contributor to this magazine in its early years). There is, of course, nothing wrong with changing one's mind; if new evidence contradicts one's theories, one should change one's mind. But is today's protectionist Navarro right, or the young, free-trade Navarro of a few decades ago?
In 1984, Navarro published a book titled The Policy Game: How Special Interests and Ideologues Are Stealing America. Reading it, I get the sense of a young Navarro who was a politically moderate and mainstream economist. He argued against the producers' special interests that politically win out over consumers' diffuse but more important interests. He blamed protectionist corporations and labor unions. He observed that protectionism "as a job program or form of income redistribution ... fails miserably." Invoking the Smoot-Haley tariff adopted at the beginning of the Great Depression, he pointed out the danger of retaliation and trade wars: "And as history has painfully taught, once protectionist wars begin, the likely result is a deadly and well-nigh unstoppable downward spiral by the entire world economy." Elsewhere in the book he noted, "The biggest losers in the protectionist game are consumers." He also warned against the danger of using national security as a justification for protectionism.
Fast-forward 23 years to Navarro's 2007 book, The Coming China Wars: Where They Will Be Fought and How They Can Be Won. Largely devoid of economic analysis, it looks like a pre-write of the June OTMP report. In the book, he argues that China is a totalitarian and corrupt country on the verge of popular revolt, and that the Chinese government is trying to build an empire. Chinese producers, he charges, are guilty of unfair competition: they steal intellectual property, pay low wages, destroy the environment, and are subsidized and supported by their mercantilist government.
His fixation on the U.S. trade deficit and manufacturing industry dates from that book. He advocates environmental and labor standards for China. He speaks highly of trade unions, without which "exploitation cannot be far behind." He lauds China's 2006 Five-Year Plan, which was supposed to end that country's "Adam Smith on steroids" attempt at market liberalization and replace it with government-managed "sustainable growth."
He still wants to work within the system when he recommends using international organizations and negotiations to pressure the Chinese government to reduce its protectionism. However, he does not exclude "military might to back up the prescriptions." He also advises the American government to stop running budget deficits that allow the Chinese government to buy Treasury securities and thereby fuel the U.S. trade deficit through upward pressure on the U.S. dollar.
He further developed and espoused his protectionist views in subsequent writings. Navarro contributed a chapter entitled "Benchmarking the Advantages Foreign Nations Provide Their Manufacturers" to the 2009 book Manufacturing a Better Future for America. The book was published by the Alliance for American Manufacturing (AAM), which describes itself as "a select group of America's leading manufacturers and the United Steelworkers." Navarro's chapter provides a rare glimpse into his current theoretical framework. He argues that the conception of free trade pioneered by David Hume, Adam Smith, and David Ricardo--which lies at the foundation of the modern economic analysis of trade--is inapplicable to today's conditions for two reasons: First it is not true that "all free trading countries ... refrain from the practices of either mercantilism or protectionism." Second, not all trading countries have automatic adjustment mechanisms that prevent chronic trade imbalances. In other words, the world is protectionist and therefore America must be, too. Ricardo's theory of comparative advantage--a cornerstone of modern economic understanding of trade--is briefly mentioned and summarily dismissed.
Navarro's 2011 book Death by China, coauthored with Greg Autry, an assistant professor of "clinical entrepreneurship" at the University of Southern California, argues that the United States and China are in an "undeclared state of war" and that a real, non-trade war between them is possible. Consequently, American industrial capacity must be protected against Chinese competition. Navarro and Autry point out that countries in the "free world," such as Japan, Mexico, and Germany, are "our real free trade partners." Yet the book generally views trade and trade negotiations as analogous to war. Trade unions must protect jobs against shoddy and dangerous Chinese products. A companion documentary film, produced by Autry and partly financed by steelmaker Nucor, is even more radically protectionist.
In 2015, Navarro published Crouching Tiger: What China's Militarism Means for the World. It deals mainly with a future military confrontation between the United States and China, and ways to prevent it if possible. It too has a companion documentary, subtitled "Will There Be a War with China?" In both, Navarro argues that the U.S. government must build a strong military advantage over China with the help of its allies. American consumers must stop financing China's own military expansion with their purchases of Chinese goods. A "trade rebalancing" would "slow China's economy and thereby its rapid military buildup," according to the book. "It would also provide America and its allies with both the strong growth and manufacturing base these countries need to build their own comprehensive national power."
Last June, the news and commentary website Axios prodded Navarro on why he had changed his opinions on trade so radically after The Policy Game. He explained that after China joined the World Trade Organization (WTO) in 2001, he realized that free trade cannot work when it is not fair--for example, when one of the countries involved practices "non-market economy industrial policies." "The traditional approach to evaluating tariffs," he wrote for Axios, "ignores the external costs or 'negative externalities' associated with unfair trade." These "externalities" include the loss of factories, jobs, and incomes, and their consequences in workers' lives.
In his writings, Navarro makes five distinct arguments against open trade with China and other countries. They can be summarized as follows:
* The impossible-competition argument: We cannot compete against a dirigiste and even totalitarian country like China. Trying to do so generates negative externalities.
* The fairness argument: "Unfair" trade is not free trade and is destroying the American economy.
* The trade deficit argument: The U.S. trade deficit is a serious problem that reduces gross domestic product and indicates unfair trade.
* The retaliation argument: Retaliatory protectionist measures are justified against protectionist countries; such retaliators are the real free-traders.
* The national security argument: Protectionism is required for reasons of national security.
Many of these arguments are now echoed by large groups of the America public. I examine each of them in the following sections.
THE IMPOSSIBLE-COMPETITION ARGUMENT
Navarro and others invoke China as an extreme case that authoritarian governments make...