David R. Henderson  

Henderson Review of a Peter Navarro Book

Why it's so hard to figure out... Huemer Replies on the Ethical ...

Adam Davidson, in the New Yorker, highlights the thinking of Peter Navarro, a Ph.D. economist who is on Donald Trump's economic team.*

In 2010, I reviewed Seeds of Destruction, a book by Glenn Hubbard and Peter Navarro, and quoted some sections of it in a blog post. My review was titled "Good on Taxes, Bad on Trade." I think it's even clearer now, and it was pretty clear even then, that the sections on trade were written by Navarro, not Hubbard.

Some excerpts from my review:

So what's not to like about the book? Most of the worst parts are in the sections on international trade. Let's start with what economists know about international trade. We know that, by standard measures of economic well-being, a country is better off having free trade than not having it. We can go further. We can show that even if the government of another country restricts imports or foreign investment, we are better off if our government does not retaliate with its own restrictions on trade. The other government hurts its own consumers by restricting imports and, if our government retaliates, it hurts not only the other country's exporters, but also our country's consumers. Ronald Reagan, although he did not always practice free trade, understood this argument and, in a 1982 speech against protectionism, used a beautiful analogy to make the point. Imagine you and someone else are in a lifeboat in the middle of the ocean. If the other person foolishly shoots a hole in the boat, so that water comes pouring in, are you better off, asked Reagan, if you shoot a second hole in the boat?

Yet this clarity seems to have eluded Hubbard and Navarro. They write, "Free trade between two nations will never lead to stronger economic growth for both countries unless both play by the rules." That's simply false. It's true that if both play by the rules, the average person in each country will be better off than if one side doesn't play by the rules. But we can have -- and, indeed, have had -- strong economic growth in this country even if some other countries' governments break the rules.

The chief villain in the authors' account is the Chinese government. What are its sins? They include "illegal export subsidies, an undervalued currency, counterfeiting and piracy, and lax environmental and health and safety standards." Consider each charge in turn.

First, while it's true that illegal export subsidies hurt our competing producers of the exported goods, those same subsidies help our consumers by making the product artificially cheap. Whether they are a net loss or gain to the United States depends on whether the losses to our producers exceed or are less than the gain to our consumers. If the United States exports a major share of the world's production of a good, as it does with airplanes, a Chinese export subsidy for airplanes would probably hurt U.S. producers more than it helps U.S. consumers. But Hubbard and Navarro don't even consider this tradeoff. For them, illegal export subsidies are bad per se. Of course, there is one group for whom such subsidies clearly are bad, but this group gets no attention from the authors: That group is Chinese taxpayers.

Second, an undervalued currency, while it causes Chinese consumers to pay too much for imports and earn too little on exports, is a clear-cut boon to the U.S. economy. I feel for the hapless Chinese who have to pay for this, but if a government offers us lower prices, we shouldn't kid ourselves that these lower prices make us worse off.

Third, the authors' point about counterfeiting and piracy is well taken. This is bad and the U.S. government, to the extent that it pressures the Chinese government to play by the rules, should focus on this issue.

Fourth, Hubbard and Navarro argue that the Chinese government's environmental and health and safety standards are "far below international norms." They never specify what these norms are. China is a poor country. Yes, it's now the second-largest economy in the world, but that large gdp, divided by over 1.3 billion people, gives China a gdp per capita that is less than one-sixth of ours. Environmental quality and safety are what economists call "normal goods" -- that is, goods that people demand more of as their real income rises. So it's not surprising that China's standards are currently well below ours. Moreover, to the extent that they are "too low," whatever that means, this hurts the Chinese people but helps American consumers. I suspect, though, that most Chinese want such low standards so that their wealth will grow and their children can have more wealth, more safety, and a better environment.

"How can the United States reduce its chronic trade imbalances with China -- its largest trading partner?" ask Hubbard and Navarro. But their premise is wrong. The United States' largest trading partner is Canada, with China a fairly distant second.** They state that "in a world of free trade characterized by floating exchange rates, the U.S.-China trade imbalance could never persist." That's incorrect, also. Nothing in the theory of international trade says that people in country A should buy the same value of imports from country B that people in country A sell as exports to people in country B. Just as I have a "trade imbalance" with the Hoover Institution -- I sell much more to Hoover than I buy from it -- so the same applies to trade between various countries.

The authors claim that a reduced demand for our exports costs the U.S. economy jobs. No, it doesn't. If a foreign government restricts our exports to its own consumers, that costs jobs in our exporting industry, but those people find work in other industries. The long-run issue with jobs is not job loss but job switching. People have jobs in different industries, but they still have jobs.

The authors state that America will increasingly depend on oil and natural gas from "countries that have historically been our enemies or . . . countries that are prone to frequent supply disruptions because of political instability." They're more certain of this than I am. But they may be right. So what's the problem with that dependence and what's their solution?

They write: "Oil's brake on net exports is an obvious problem." No, it's not. As international-trade economists have understood since Adam Smith, it's better to buy cheaply from people in another country than expensively from high-cost producers in our own country. Incidentally, they write that Adam Smith and David Ricardo were contemporaries. No, they weren't. When Adam Smith died in 1790 at age 67, Ricardo was eighteen years old.

For more on Navarro's thinking, see Alan Reynolds, "Trump Adviser Peter Navarro: Reagan Critic, Industrial Policy Fan," October 11, 2016.

* Davidson calls Navarro the "only economist" on Trump's team, but he has too narrow a view of economist. Steve Moore is on Trump's team too and, although I have my differences with him and he has "only" a Masters degree in economics, I certainly think of him as an economist. One way of judging (though, admittedly, not a sufficient way) is whether Steve understands the economics of trade. He clearly does.

** When I wrote this in 2010, that was true, if the measure is exports plus imports. It's no longer true. I should not have said "fairly distant second." That's too vague.

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CATEGORIES: International Trade

COMMENTS (2 to date)
Jon Murphy writes:

Regarding perpetual trade deficits, I think it's worth pointing out that countries could, in theory, all have trade deficits and yet there would be no problem. This is because trade is multilateral, not unilateral.

Allow me to demonstrate my point with a baseball metaphor:

In baseball, there are often 3 (or more) team trades. Players are swapped among multiple trades. Let’s look at a hypothetical example here:

Team A trades their superstar to Team B. Team B sends a moderate player Team C. Team C then sends prospects to Team A to complete the deal.

Looking at this trade, one could make the argument that, bilaterally, each team loses. Team A sent their superstar to Team B and got nothing in return. Team B sent a moderate player to Team C and got nothing in return. Team C sent prospects to Team A and got nothing in return.

But looking at it bilaterally misses the complex essence of the trade. In reality, everyone won the trade: Team A got prospects to build upon. Team B got a superstar who could get them over the hump into the playoffs. Team C got a solid player to come off the bench and help them on a stretch run.

In reality, all trade is like this. I give money to my grocer. I got that money by selling my labor to my company. They got that money by selling products to clients who got their money by selling to their consumers, etc etc. One could make the argument that, bilaterally, every single actor is losing, but the reality is every single person is winning!

Looking at just a single direction of trade is too myopic.

Andrew_FL writes:

Perhaps, on the last point, they confused Ricardo with Hume.

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