My little China girl, you shouldn’t mess with me. I’ll ruin everything you are. You know, I’ll give you television, I’ll give you eyes of blue. I’ll give you men’s who want to rule the world. And when I get excited, my little China girl says, “Oh baby, just you shut your mouth.” You have to think that Peter Navarro sat in a dark room listening to this song written by David Bowie and Iggy Pop and first released on Pop’s 1977 album appropriately titled The Idiot.
While I have been very supportive of many of the Administration’s economic policies, the fact that President Trump is enthralled by the bizarre teachings of his trade adviser makes me worry that just like the Romanov Dynasty, the Trump Presidency may be falling under the sway of a new Rasputin.
I have often criticized those on both the left and the right who use the fact that they somehow received a PhD in the dismal science as some sort of proof that they had some inkling of an idea about how the economy performs. There are a lot of TV economists that can be put in this group and even a few Nobel Prize winners. And while I have always argued that a diversity of thought is something that is missing in the economics profession, having an adviser that, say, believes an extraterrestrial invasion would be a good way to bolster the economy, is probably not what a President needs.
That brings me to Dr. Navarro and his 16th century beliefs about how the world works. In the 16th century, for example:
- Doctors used tobacco as a cure for cancer
- Barbers were surgeons, and surgeons were barbers
- Women put lead on their face to make them look whiter – and then continued to do so to cover up the scars caused by the lead
- There were still witch trials, and
- Trade was considered a zero-sum game.
In other words, people (or companies or countries) can only benefit at the expense of others. Under this sort of mindset, every transaction, every negotiation involves a winner and a loser – there is no mutual benefit. This is the underpinning of mercantile economic thought that prevailed in the 1600s and is the basis of Dr. Navarro’s thoughts on trade.
Just as people in the 16th century truly believed that malevolent spirits haunted people bodies, or that bleeding was a good way to cure the common cold, they believed that trade was a form of war. So too does Navarro (at least about the trade part – I don’t know his position on witches). His writings treat trade (particularly trade with China) as a form of warfare and suggests that China’s competitive advantage is not due to lower wages, which would be a fair fight, but from unfair trading practices such as illegal export subsidies, currency manipulation, and theft of intellectual property. Navarro believes that the American economy has been dramatically harmed both by NAFTA and by China’s entry into the World Trade Organization – suggesting that these bad trade deals are at the heart of America’s economic malaise.
Of course, these ideas were completely refuted by Adam Smith in 1776 and David Ricardo in the early 1800s. These authors documented how, when there is trade between companies (trade does not happen between nations), both sides benefit from the transaction. The economy is simply a market where thousands of individual transactions take place, and for a transaction to take place, both parties must come out ahead. The same is true in international trade.
A trade deficit simply means that the businesses and consumers in the United States are purchasing more from businesses located in other countries. This is perfectly okay as long as the nation, as the sum of its businesses and consumers, is generating enough income. If the nation’s workforce generates enough money to buy what it needs, and if everyone involved in the trade is benefiting, the balance of payments does not matter.
Navarro correctly worries about other countries adopting mercantilist trade practices, and no doubt China is an offender. But his understanding of how markets work seems quite flawed, ensuring that his recommendations (like basing tariffs or restrictions on the idea that trade deficits are a net loss to the country) are not appropriate.
For example, Navarro has stated that countries that use dollars from trade surpluses to buy up American assets are pursuing a strategy of “conquest by purchase.” However, this is exactly what those countries must do. A dollar is not generally of use in China, or India, or Britain. It simply is not a unit of exchange there. The dollars must either be used to purchase something from a country that uses dollars (be that Panama or the United States, or any other dollarized economy), loaned to someone that needs dollars, or converted through foreign exchange markets thereby reducing the value of the dollar relative to other currencies. All of these have the same effect and are the result of how markets work – not the result of some nefarious action on the part of China.
Just like Iggy Pop and David Bowie, Navarro is correct when he states: My little China girl, you shouldn’t mess with me. But rather than using blunt instruments like tariffs which are simply taxes on American companies and consumers, the Administration would do better to address the individual issues that it has with Chinese mercantilism either through direct negotiations or through the WTO systems that all trading nations have agreed to. Otherwise, he might get the China Girl excited enough to say, Oh baby, just you shut your mouth.