The guy running Trump's trade policy just wrote a seriously troubling op-ed in the Wall Street Journal

Standing behind the President, from left to right: US Vice President Mike Pence; White House Chief of Staff Reince Preibus; Peter Navarro, Director of the National Trade Council; and Jared Kushner, Senior Advisor to the President. Photo: Ron Sachs – Pool/Getty Images

Peter Navarro writes like a man ready to start a trade war.

In an op-ed in the Wall Street Journal on Sunday, the head of this administration’s National Trade Council laid out succinctly why he thinks the US is losing its grip on the economy. Step by step he breaks down his view on GDP growth, trade deficits, and how our national security depends on keeping American assets in American hands.

The problem, however, is that his conjectures have almost no relationship with the reality of how our economy works. Navarro misses the most important part of economic growth, demonizes innocuous trade measures, and paints a dark picture of America’s place in the world.

This has the effect of making Navarro seem paranoid, and for all the wrong reasons.

Navarro’s views expressed in the op-ed shouldn’t surprise many who’ve been following his career. The Economist called him a “China bashing eccentric,” and much of the US economics community was surprised by his appointment to the White House.

Economist Lee Branstetter, a professor at Carnegie Mellon and a former Presidential trade adviser told Business Insider that Navarro never studied the global free trade system.

“He doesn’t publish in journals. What he’s writing and saying right now has nothing to do with what he got his Harvard Ph.D. in … he doesn’t do research that would meet the scientific standards of that community. As far as I’m concerned he doesn’t know what he’s talking about in terms of trade policy.”

But Navarro does fit with the Trumpian world view that the US is a victim, and that there is no win-win situation in international economic dealing.

So lets tip toe through this one, shall we?

How do we grow?

The op-ed opens with an incomplete premise, that US GDP growth comes from “only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports).”

This is the basis on which Navarro argues that having a trade deficit — buying more goods than you’re selling to your trading partners — hurts growth, and that the best way to grow faster is by closing this deficit. That is to say, selling more goods than you buy.

In the most practical terms, for you that means fewer cheap South Korean flatscreens until we can figure out a way to sell the South Koreans more stuff. Trump released a trade agenda that complained about that very thing last week, actually.

Thing is, the trade deficit is far from the most important part of GDP. According to the Bureau of Economic Analysis, the 2016 trade deficit was about $US500 billion. That’s a lot, but it’s a fraction of the other main components of GDP, like the $US3 trillion of private investment and the $US12.8 trillion in consumption last year.

Rather than focusing on narrowing the trade deficit, there are two main factors for GDP growth that are pretty much accepted by economists the world over — labour force growth, and labour force productivity. You can hire more workers — who then spend their wages and buy stuff, growing the economy — or you can make the workers you have make more stuff.

As for the importance of a trade deficit as a measure of how healthy your economy is, note that during the Great Depression, the US had a trade surplus. It didn’t matter that we were selling to the rest of the world like crazy, because no one here had any purchasing power. What we import and export takes a seat way in the back compared to whether or not American citizens can buy things, go places, and make our economy move.

So this right here, from Navarro’s op-ed, is a bit of a red herring according to modern economic thinking:

“Suppose America successfully negotiates a bilateral trade deal this year with Mexico in which Mexico agrees to buy more products from the U.S. that it now purchases from the rest of the world. This would show up in government data as an increase in U.S. exports, a lower trade deficit, and an increase in the growth of America’s GDP.”

Two things here. One, nearly all economists think that ripping up our current deal with Mexico and Canada (NAFTA), and dealing with them one on one puts us at a disadvantage in negotiating, and is a waste of time and money.

Two, focusing on something as comparatively small as our trade deficit takes the Trump Administration away from the real issue with slow GDP growth, and that’s whether or not our workforce is growing, or becoming more productive. Right now, both are slow. There are bunch of reasons for that, including a massive demographic shift as Baby Boomers leave the workforce, and technological advancements that have changed the nature of American jobs.

War ready

Now we have to talk about the paranoia in Navarro’s piece. Navarro is worried that the US isn’t battle-ready because, in his mind, it doesn’t make anything. He is also concerned that foreign countries will buy up our military industrial complex:

“Suppose the purchaser is a rapidly militarizing strategic rival intent on world hegemony. It buys up America’s companies, technologies, farmland, food-supply chain — and ultimately controls much of the U.S. defence-industrial base. How might that alternative version of conquest by purchase end for our sons and daughters? Might we lose a broader cold war for America’s freedom and prosperity, not by shots fired but by cash registers ringing? Might we lose a broader hot war because America has sent its defence-industrial base abroad on the wings of a persistent trade deficit?”

At this point Navarro is hysterical, painting a picture of a US that is rapidly selling itself off bit by bit. This not the country of Google and Exxon Mobil. It’s certainly not the country of Boeing and Lockheed Martin. This is a vision from a man who desperately fears a modern, globalized world and the change it brings with it.

Instead of moving us forward, into a future where American technology and innovation win in a dynamic interconnected world, he wants to take us back.

For example, in the piece Navarro makes a plea for a dying industry: “America’s… shipbuilding industry is gathering barnacles.”

That’s true, but ship building has been declining around the world for years. Last year saw a 91% y/0/y decline in shipping contracts. It’s a dying thing that no amount of government economic planning can rescue.

The things that Peter Navarro wants to fight against — the things that keep him up at night — are windmills, waving their blades at a paranoid mind. To charge them he wants to disrupt global supply chains and put up tariffs, he wants to bully the US’s way into new markets and upset our trading partners. This is no way to do trade policy.

But Navarro and his team seem on a reckless mission to try.

This is an opinion column. The thoughts expressed are those of the author.

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