Tyler Cowen linked to a paper by Peter Navarro, which discusses Trump's economic plan. To put it simply, it's a complete mess. Here are just a few examples:
Under WTO rules, any foreign company that manufactures domestically and exports goods to America (or elsewhere) receives a rebate on the VAT it has paid. This turns the VAT into an implicit export subsidy.
At the same time, the VAT is imposed on all goods that are imported and consumed domestically so that a product exported by the US to a VAT country is subject to the VAT. This turns the VAT into an implicit tariff on US exporters over and above the US corporate income taxes they must pay.
Thus, under the WTO system, American corporations suffer a "triple whammy": foreign exports into the US market get VAT relief, US exports into foreign markets must pay the VAT, and US exporters get no relief on any US income taxes paid.
The practical effect of the WTO's unequal treatment of America's income tax system is to give our major trading partners a 15% to 25% unfair tax advantage in international transactions.
This is a very basic error. International economists almost universally agree that a VAT is neutral with respect to trade. An across the board 10% import tax, combined with a 10% export subsidy, offset each other, leaving no net impact on trade. Instead they convert the tax from a production tax to a consumption tax. But it's a consumption tax that applies equally to all goods, whether made domestically, or imported. This is not even a tiny bit controversial.
In 2015, the US trade deficit in goods was a little under $800 billion while the US ran a surplus of about $300 billion in services. This left an overall deficit of around $500 billion.9 Reducing this "trade deficit drag" would increase GDP growth.
I suppose there might conceivably be some policy that would reduce the trade deficit and also increase growth, but I can't imagine what it would be. Navarro's confusion about the effect of VATs doesn't inspire confidence that he knows either.
Trump proposes eliminating America's $500 billion trade deficit through a combination of increased exports and reduced imports. Again assuming labor is 44 percent of GDP, eliminating the deficit would result in $220 billion of additional wages. This additional wage income would be taxed at an effective rate of 28 percent (including trust taxes), yielding additional tax revenues of $61.6 billion.
Actually, eliminating the trade deficit would have no first order effect on wages. Any second order effects might lead to higher wages, but more likely wages would fall.
According to textbook theory, balanced trade among nations should be the long-term norm, and the chronic and massive trade deficits the US has sustained for over a decade simply should not exist. This textbook state of balanced trade would exist because freely floating currencies would effectively adjust differences in national domestic cost
structures to bring about balanced trade.
The problem, however, is that not all currencies freely float. Many are actively managed, and some are pegged to another currency or currency basket. This hybrid international monetary system makes it impossible for market forces to bring about balanced trade and thereby fairly distribute what the textbooks promise us will be the "gains from trade."
A poster child for this problem is China and its narrowly pegged currency. In a world of freely floating currencies, the US dollar would weaken and the Chinese yuan would strengthen because the US runs a large trade deficit with China and the rest of the world.
Where does one start? No, China is not intervening to lower the value of the yuan; they are intervening to raise its value. And no, textbook theory does not say that exchange rates should adjust in the long run to balance trade in goods and services, unless long run means 1,000,000,000 years, in present value terms. But in that case the current US deficit presents no puzzle; it hasn't lasted for a billion years.
Textbooks say that exchange rates should adjust in the short run to balance trade in goods, services and assets. Trade deficits (actually current account deficits) are caused by imbalances between domestic saving and domestic investment. Those can persist indefinitely. And currency "manipulation" (which is a meaningless concept) is completely beside the point. A country can have a laissez faire policy towards its currency, and still run deficits or surpluses for centuries.
Now let's think about the broader Trump economic plan, how would that impact the saving/investment relationship? To make my point more clearly, I'll compare his plan to Reagan's, which has some similarities:
1. Reagan rebuilt the military and cut domestic spending. Trump promises to rebuild the military, and an increase infrastructure spending by more that twice the rate of Hillary's already generous plan, and protect Social Security (perhaps even increase it?) and protect Medicare. Yes, there is the usual hand-waving about reducing waste, fraud, and abuse. But that requires a high level of expertise, and a candidate deeply immersed in the details of governance. Does that sound like Trump and his advisers? So I think it's reasonable to assume that spending will be more expansionary than under Reagan.
2. Trump promises deep tax cuts. How deep? The Tax Foundation says $2.6 trillion over 10 years. But the proposal he submitted to the Tax Foundation is not the proposal he is campaigning on, which calls for far deeper cuts. Whichever plan you use, I think it's fair to say that the deficit will explode were Trump's promises to be enacted (and perhaps under Hillary too, that's a different issue.)
3. Like Reagan, Trump promises supply-side reforms, including lower marginal tax rates on income, as well as a big reduction in government regulation. This should lead to higher investment.
Reagan's plan caused the trade deficit to increase sharply, and I'd expect the same under Trump's plan. Recall that:
CA deficit = Domestic investment - domestic saving
Trump's plan would (Navarro claims) boost domestic investment. It would certainly sharply reduce government saving. It seems reasonable to assume that domestic saving would also decline, pushing the current account deficit much higher. BTW, Reagan also had a few trade barriers against Japan, which did almost nothing to impact the size of the CA deficit.
To be fair, I do not view a larger CA deficit as a problem---it isn't. Nor do I view higher investment as a problem. But I do worry about our fiscal policy, which seems likely to become increasingly irresponsible regardless of who is elected.
And yes, I do realize that actual policies often differ dramatically from proposals. This post is not a prediction about what will actually happen, but rather a comment on the quality of the advice Trump is receiving.
PS. The document says Navarro has a PhD in economics from Harvard.
Any excuse to show a Richardson building---magnificent.
Update: After posting this it occurred to me that I did not answer the question in the post title. Peter Navarro teaches at UC Irvine, and advises the Trump campaign on economic issues.