Peter Navarro is one of Donald Trump's most visible advisors on the economy and trade. Photo: Orange County Register
by Tom Holland
by Tom Holland

Trump’s anti-China trade chief is no economic illiterate

Critics fixate on a few of his glaring miscues, but Peter Navarro has ideas on international trade that deserve an airing, even if they are fated to fail

“A complete incompetent” whose ideas are “dangerous, misguided” and downright “crazy”, and whose work is “incredibly shoddy” and “a complete mess”; the chorus of protest that has greeted the appointment of economics professor Peter Navarro to head US President-elect Donald Trump’s new National Trade Council has been excoriating.

At first glance much of the criticism looks justified. Navarro is best known for his YouTube video Death By China, which accuses China of deploying “weapons of job destruction” against the US. It’s a crude polemic, short on serious analysis and long on highly emotive language; hardly the sort of thing you’d expect from someone tasked with formulating trade policy for the world’s largest economy.

WATCH: Death By China

But Navarro also has a record of weightier research. For example, 10 years ago, when US politicians and economists were calling for a marked upward revaluation of the yuan to redress the trade imbalance between China and the US, Navarro pointed out that currency undervaluation barely contributed to China’s overall competitive advantage in international trade. Far more important were unit labour costs at just one-fifth of the US level, coupled with extensive subsidies and the clustering effect of supply chain concentration. The implication was that an upward revaluation of the yuan would do little or nothing to slow the offshoring of American jobs to China or to narrow the US trade deficit. It was a message few of those in Washington calling for yuan appreciation wanted to hear, but it undeniably proved accurate.

US President-elect Donald Trump’s pick to head the National Trade Council had some insights a decade ago about the futility of a proposed upward revaluation of the yuan. Photo: AFP
So it is worth looking a little more closely at Navarro’s current approach to trade policy, and seeing whether the accusations levelled by his critics stand up. Navarro outlined his stance in a paper co-authored with Wilbur Ross, Trump’s appointee as commerce secretary, and published in September. In it, the authors sketched their plans to boost US growth and create jobs by cutting taxes, reducing the regulatory burden and “eliminating America’s chronic trade deficit”.

Trump picks fierce China critic Peter Navarro to lead new trade office

It quickly becomes clear that in accusing Navarro of “economic illiteracy”, his detractors have zeroed in on a couple of paragraphs in the 30-page paper as the focus of their criticism. Most notably they seize on the authors’ assertion that in national accounting, a trade deficit is subtracted from gross domestic product. Therefore, if all else is equal, reducing the trade deficit will equate to faster GDP growth.

The critics point out that the role of the trade deficit – negative net exports, in the jargon – in GDP is merely an accounting identity, not causation. In other words, you can’t boost GDP simply by erecting barriers to imports. On the contrary, interfering with imports is more likely to throw sand in the wheels of the domestic economy, slowing growth.

Criticisms of Peter Navarro’s trade positions are often simplistic and do not put his proposals in a larger context. Photo: AP
The trouble is that the criticisms alleging economic illiteracy are themselves simplistic. Navarro and Ross are not suggesting that they can conjure up additional growth just by tinkering with the import element of the GDP equation. Rather, they are arguing that if Washington reduces the heavy burden of tax, regulation and energy costs on US-based businesses relative to foreign-based competitors, the result will be a combination of higher exports together with some degree of import substitution that will be positive for domestic growth.

Trump has a point when he says US lost out in China trade deals

As one aspect of levelling the playing field, Navarro and Ross want to end what they believe is the advantage afforded by World Trade Organisation rules to countries, such as China, which levy a value-added tax relative to the US, which relies primarily on income taxes. US businesses have long complained that foreign exporters to the US enjoy VAT rebates, while their exports are slapped with VAT in overseas markets. Here Navarro’s critics accuse him of “a very basic error”, arguing that VAT is neutral towards trade. But that is to miss the point. VAT may be neutral to trade, but the US tax system is not, effectively imposing double taxation on US producers attempting to compete in international markets.

Peter Navarro’s widely derided YouTube video, Death By China, paints an ominous portrait of Beijing’s trade strategy. Photo: AFP

In short, it looks very much as if Navarro’s opponents have leaped on a couple of points in his paper, taking them out of context in order to point, shriek and ridicule in a vicious ad hominem attack that does their criticism no favours.

Because, despite the shortcomings of the arguments levelled against Navarro’s trade policy, it looks highly unlikely that his plan can achieve its desired result of eliminating, or even substantially reducing, the US trade deficit.

Attempts at import substitution have an inglorious economic history. They didn’t work in Latin America and India in the 1960s, and it is hard to see how they could work in the US today. Yes, reductions in the tax and regulatory burdens on US companies will no doubt be positive at the margin for US businesses. But they will do little in a single presidential term to offset the advantages of cheap unit labour costs and clustering that Navarro identified 10 years ago. Trump’s trade policy may not be as economically illiterate as its critics insist, but it is still unlikely to succeed.

Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years