Category Archives: Trade

Peter Navarro’s Economic Ignorance on Trade

Trump economic adviser and Death by China author Peter Navarro’s recent column in The Wall Street Journal, “China’s Faux Comparative Advantage,” is a doozy. This is not a compliment; it is dangerous that someone so uninformed about basic economics has the president’s ear. Navarro’s mercantilism is the economic equivalent of Ptolemaic astronomy, and should be treated as such—a historical curiosity and an obstacle to human progress. Navarro’s thinking on trade suffers from three big-picture errors. This post will look at those, then see how they apply to his column. The result is not pretty.

The first big picture flaw is that mercantilism. It is an old economic doctrine, rooted in nationalism and what is euphemistically called anti-foreign bias. Mercantilist policies usually take the forms of trade barriers against foreign businesses, special favors for domestic businesses, and sometimes currency manipulation. They aim to maximize exports while minimizing imports from abroad. The result is that people have more money in their pockets from selling all those exports.

The tradeoff is that there is less stuff people can buy with that extra money, since imports are restricted and more goods and services are going overseas. Mercantilist policies not only reduce consumer choice and standard of living, but having more currency without more wealth to match it causes inflation and distorts the price system.

Adam Smith, as far back as 1776, wrote of “those vulgar prejudices which have been introduced by the mercantile system,” (pp. 597-98 of the Modern Library edition of “The Wealth of Nations”) and the “mean and malignant expedients of the mercantile system,” (p. 660), while noting that “in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer” (p. 715). Note that the word “consumer” does not appear in Navarro’s column.

Second, Navarro badly misunderstands the theory of comparative advantage. This has been a standard piece of the economist’s toolkit ever since David Ricardo published “Principles of Political Economy and Taxation,” 201 years ago. Yes, Navarro is that far behind the curve. Fortunately, Ricardo spells it all out in a mere nine pages (pp. 133-41 of the Liberty Fund edition, available for free here), using an easy-to-understand example of England and Portugal trading cloth and wine. And if that’s too much, George Mason University’s Don Boudreaux explains comparative advantage even more concisely here. The lesson is simple: do what you’re good at, and don’t do what you’re bad at. That way everyone can make more wealth using the same amount of resources.

Third, Navarro thinks in aggregates, not individuals, joining the Keynesian and Harvard-MIT traditions in error. Countries don’t trade with each other, people do. “China” and “America” do not trade with each other; people who live in China and people who live in America do.

Remember this every time Navarro’s boss tweets something like “We are on the losing side of almost all trade deals. Our friends and enemies have taken advantage of the U.S. for many years. Our Steel and Aluminum industries are dead.” As Ludwig von Mises points out on p. 44 of “Human Action,“ “It is always single individuals who say We”. Also, domestic steel production is above its 40-year running average, according to the St. Louis Fed. Ditto aluminum.

Individuals would not trade with each other unless both parties expect to be better off. Otherwise they’d never make a deal in the first place. And in a world of more than two countries, those aggregate figures between any two countries almost never perfectly balance out in a given year. Americans don’t just trade with Chinese, they also trade with Canadians, Germans, Brazilians, Kenyans, and more. And those trades make a lot of sense for the people involved in the deals, even as they confuse and enrage aggregate-thinkers such as Navarro.

Now to go through Navarro’s column point by point.

“In large part because of China’s dominance in manufacturing, the U.S. last year ran a bilateral trade deficit in goods of $375 billion, or more than $1 billion a day.”Two things to pick apart here. One, China’s manufacturing output is roughly $5 trillion per year. The U.S., despite having roughly a quarter of China’s population, generated more than $6 trillion of manufacturing output last year, just shy of 2014’s all-time record. Moreover, China has to devote nearly half its GDP just to manufacturing to reach that figure, while the U.S. economy is so diversified that its manufacturing sector is less than a quarter of its GDP, even as it exceeds China’s by a trillion dollars in absolute terms.

So even with the Chinese government’s own mercantilist policies helping to increase exports, they do not dominate U.S. manufacturers. Also, much of what goes on in Chinese factories is simple assembly of components designed and manufactured elsewhere—my tablet, for example, says on the back, “Designed by Apple in California, Assembled in China”. Are such products really Chinese-made if the design and components all come from elsewhere? That is a difficult question to answer.

The second flaw in Navarro’s single sentence—an impressive achievement—is the trade deficit fallacy. For example, I run a massive trade deficit with my local grocery store. I purchase thousands of dollars of groceries from them every year, but I don’t remember them ever buying a single thing from me. And yet, we’re both better off. I get groceries, and my grocer gets money to stay in business and make a profit. If this wasn’t a win-win relationship, we would not consent to trade with each other. My trade deficit with them has no bearing on human well-being; it is an accounting artifact. Writ large, the same reasoning applies to U.S.-China trade. If it didn’t, there would be no trading.

“Contrary to the textbook model, whereby currency adjustments help rebalance trade, the U.S. trade deficit with China has been persistent—more than $4 trillion cumulatively since 2002—and growing.” Navarro can use the word textbook as much as he wants—and he uses it four times in the span of 700 words—but it doesn’t mean what he says is true.

If anything, the Chinese government’s currency adjustments have had the opposite effect. An artificially cheap yuan means that not only do Chinese companies send more of their products overseas where Chinese consumers can’t use them, but imports become artificially expensive, even without additional tariffs. The result of these real-world currency adjustments is less consumer choice and higher prices for Chinese consumers. America’s government should not compound the Chinese government’s mistakes with its own. I don’t know what textbooks Navarro has been reading, but none that I’ve come across say anything remotely like what he alleges.

“To protect its market, China erects high tariff barriers—e.g., its auto tariff is 10 times that of the U.S. China has high nontariff barriers, too, including intrusive licensing requirements and foreign-ownership restrictions that keep the playing field tilted in favor of Chinese companies.” Navarro rightly wants the Chinese government to lower its trade barriers and open its markets. Current policies obviously hurt the Chinese people, though they seem of little or no concern to Navarro; he neglects to mention them in his article. China’s mercantilism also puts U.S. producers at an artificial disadvantage in one of the world’s biggest markets, which does concern him.

“China’s faux comparative advantage is the result of its state-directed investments, nonmarket economy, and disregard for the rule of law.” These three things are precisely the opposite of advantages for Chinese consumers and producers. State-directed investments prioritize politics over people, and usually have a lower rate of return to boot. China’s recent growth only began post-Mao, when its near-total state slowly began to tolerate some form of a market economy.

And until a reliable rule of law does arrive in China, legal uncertainty will limit what its wealth creating sector can achieve. The Chinese people still suffer from what economists Daron Acemoglu and James Robinson call “extractive institutions.” Until the Chinese government becomes less predatory, Western living standards will elude hundreds of millions of deserving people.  Time will tell which direction the Chinese government chooses, but all three of Navarro’s assertions here are wrong.

“Because high-technology acquisitions often generate spillover benefits for the Chinese military, its SWFs [Sovereign Wealth Funds, basically government-run investment portfolios] are often willing to pay distortive prices, far above what the free market would dictate.” The Chinese government is no saint when it comes to foreign policy, or how it runs its state-owned enterprises. But this is no reason for Navarro to get a case of the vapors—or to offer support for starting a trade war.

Regarding actual war, since Navarro seems to think is part of the Chinese government’s economic aims, not only does the U.S. have a larger, better-equipped military than China, it outspends the next eight largest militaries combined. Navarro’s national security arguments might appeal to some conservatives—and defense contractors. But mercantilism’s economic harms mean fewer resources are available for defense than would otherwise be the case. And as a foreign policy gesture roughly equivalent to a middle finger, mercantilism raises the risk of a war happening in the first place.

Many businesses love mercantilist policies. Trade barriers hobble foreign competitors, while subsidies, sweetheart financial deals, and other domestic favors let executives sit back in their chairs instead of rolling up their sleeves and making the best possible products for consumers at the lowest possible price. This is why nearly all economists agree that mercantilism hurts people.

“It is in the name of fair, reciprocal and ultimately free and prosperous trade that President Trump is standing up to China’s intellectual-property theft and other unfair trade practices.” Not by repeating the Chinese government’s mistakes, he’s not. Navarro and Trump’s belligerent, zero-sum approach to trade hurts both the U.S. and China. Rather than copying China’s failed policies, the U.S. government should lift its trade restrictions and encourage other governments to do the same. Sadly, this does not seem to be the current path, and Navarro is partly to blame.

He should take the same advice that Brett Favre once gave to a referee: take two weeks off, then quit.


Export-Import Bank Drama Continues

The Senate’s main business right now is the annual Defense Appropriations bill. The Export-Import Bank, or Ex-Im for short, might become part of that bill. Ex-Im caused one of the most contentious political fights in recent years. While the fight seemed over when Ex-Im re-opened last December after a five-month shutdown, there is still one more bit of drama to be resolved. That might happen this week.

Ex-Im is currently unable to make transactions larger than $10 million—essentially neutering an agency that does nearly 80 percent of its business in big deals with a literal top-ten of big businesses such as Boeing, General Electric, Caterpillar, and a handful of others. But Sen. Lindsey Graham (R-S.C.), who counts Boeing as a constituent, is trying to restore cronyism as usual at Ex-Im.

A bit of background: Ex-Im offers loans and loan guarantees to foreign buyers of U.S. products. For example, Ex-Im will guarantee loans that a foreign airline takes out—if the airline buys its jets from Boeing instead of Airbus.

For a number of reasons, free-market activists want to permanently close Ex-Im. These range from numerous corruption scandals to the harm Ex-Im does to other U.S. businesses, such as domestic airlines that compete with Ex-Im-subsidized foreign airlines.

Last year Congress refused to renew Ex-Im’s charter, which expires every few years. Ex-Im actually closed for five months, able to do nothing more than maintain its existing portfolio. It reopened when Ex-Im’s supporters succeeded in placing its reauthorization in a must-pass spending bill.

But their victory was a partial one. Ex-Im has a five-member board of directors that must approve any transaction larger than $10 million. As directors’ terms expired during the shutdown, the board was down to two members.

Here’s where the fun begins: Any vote on a $10 million-plus transaction has a quorum requirement of three members—meaning Ex-Im, though open for business, can only perform relatively small transactions until it gets more board members. These require Senate confirmation, and the Senate has shown no interest in considering any nominees.

Enter Sen. Graham, and the current controversy. He is threatening to create a loophole large enough to drive a truck through. If the president decides a $10 million-plus Ex-Im project has national security implications, Sen. Graham proposes giving the president the power to override Ex-Im’s quorum rule, allowing Ex-Im’s current diminished board to approve it.

We all know how creative politicians can be when it comes to tying anything and everything to national security. No doubt Boeing, which typically receives about half of Ex-Im’s business, will work very hard to push as many of its potential loan guarantees as possible through that loophole.

The worst part is that Sen. Graham isn’t pushing this idea as a stand-alone bill that could succeed or fail on its own merits. He is trying to fold it into the must-pass Defense Appropriations bill, which even Ex-Im’s fiercest opponents have to vote for.

What to do about it? Sen. Graham’s proposal is in an amendment he is offering to the defense bill, which is still in the Committee phase. So either the amendment must fail, or another senator must offer a counter-amendment to nullify the Graham amendment. The defense bill is in markup this week, so we could find out soon if Ex-Im’s cronyism will return to its previous vast scale.

Ex-Im Revival Passes the House

The House has passed Rep. Stephen Fincher’s Ex-Im revival bill, by the margin of 313-118. Senate Majority Leader Mitch McConnell has publicly said the Senate will not act on the bill, so last night’s vote was more of a public statement than anything else. While the statement might be unpleasant, the public now has a much better idea of which Congressmen are pro-business, as opposed to pro-market—an important distinction. So at the very least, voters now have a better idea of who to hold accountable, and who they might support in primary elections.

With no stand-alone vote, Ex-Im reauthorization will instead be folded into an upcoming must-pass transportation bill. A Senate vote on that could happen as soon as next week.

Both parties share blame for Ex-Im’s possible revival. Nearly all Democrats voted in favor of reviving Ex-Im—a curious reversal of decades-long opposition. Rep. Alan Grayson (D-Fla.) is the only one to stay consistent. Progressives have been Ex-Im’s traditional opponents, not just on corporate welfare grounds, but on human rights grounds—Ex-Im subsidizes many governments with checkered human rights records, and helps to keep them in power. See for example, this Mother Jones article from 1981, this one from 1992, and another from as recently as 2011, which is based on environmental grounds.

The GOP’s small pro-market wing began actively opposing Ex-Im in 2012, so Mother Jones therefore changed its stance around that time; see here and here. See also a thoughtful piece at Salon on this curious role reversal.

So Democrats deserve criticism for abandoning principle, seemingly for no reason other than to take the opposite stance from Republicans. “If you say X, therefore I saynot X” is hardly a sign of intellectual rigor, but such is the nature of partisan politics.

But the goal here isn’t to pile shame on just one party. Both parties deserve it. The traditional pro-business Rockefeller Republican mindset—recall the famous slogan “what’s good for GM is good for America,” as well as a certain bailout from a few years ago—is the party’s traditional stance, and one for which it is often rightly criticized. Republicans are a major reason why Ex-Im was able to survive for more than 80 years, and Republicans are why it is on the brink of revival.

By the time Ex-Im’s 2012 reauthorization came up, a small GOP minority rejected pro-business thinking in favor of pro-market thinking. Rather than making sure to help GM or Boeing or some other specific business, their priority is to maintain an open competitive process under which any entrepreneur with a good idea and a good product can succeed.

These free-marketers raised a bit of a stink about Ex-Im, catching a sleepy Washington by surprise. Then the alarm went off, leading to a pitched intra-party fight that has been raging ever since, with major Ex-Im beneficiaries and traditional pro-business groups adding to the decibel level.

This culminated in the most recent Ex-Im vote. As mentioned above, Democrats deserve criticism for abandoning long-held principles on corporate welfare, international human rights, and clean government (Ex-Im is a well-known hotbed of corruption), seemingly for no reason other than to oppose the other party.

Republicans deserve criticism for their long-standing milquetoast pro-business mindset. Their pro-market minority deserves praise on the Ex-Im issue, but pro-market thinking sadly remains a minority stance in both parties. Hopefully Boeing’saggressive lobbying push doesn’t have too much to do with it.

In fact, corporate welfare issues like the Export-Import Bank provide a wonderful opportunity for progressives and free-market-oriented conservatives to work together. So why aren’t they?

In politics, the minority party’s job is to deny the majority party any possible political victories, even when they agree. At least that’s my theory for Democrats’ sudden, and nearly uniform Ex-Im reversal.

But if members of both parties could put principle ahead of politics, then progressives and the GOP’s free-market wing, and hopefully some others, could very likely cobble together a majority on several issues on which they agree. They can change the country for the better, even as they continue to disagree on other issues. Ex-Im andOPIC could serve as starter issues. There are many more.

I conclude with a small public service: a list of all 127 Republicans who made a public statement by voting in favor of reauthorizing the Export-Import Bank:

Brady (TX)
Brooks (AL)
Brooks (IN)
Carter (GA)
Collins (NY)
Costello (PA)
Curbelo (FL)
Davis, Rodney
Ellmers (NC)
Graves (LA)
Graves (MO)
Hurd (TX)
Jenkins (WV)
Johnson (OH)
Kelly (MS)
Kelly (PA)
King (NY)
Kinzinger (IL)
McMorris Rodgers
Miller (MI)
Murphy (PA)
Poe (TX)
Rice (SC)
Rogers (AL)
Rogers (KY)
Rooney (FL)
Smith (MO)
Smith (NJ)
Thompson (PA)
Walters, Mimi
Weber (TX)
Wilson (SC)
Young (AK)

Signs of Life for Ex-Im?

Last night the House of Representatives voted on a rare discharge petition, under which a controversial bill can skip the usual committee process and go straight to a floor vote. In this case, the discharged bill is Rep. Stephen Fincher’s Export-Import Bank revival bill. It passed, 246-177, with 62 Republicans joining nearly all Democrats. It was the first successful discharge petition since the McCain-Feingold campaign finance regulation bill. For more on discharge petitions, see my earlier post.

So what happens now? On Tuesday, the House will hold further procedural votes on the Ex-Im bill, which will almost certainly pass. Then it’s off to the Senate, which is unlikely to act on the bill.

So crisis averted? Not quite. Because Senate Majority Leader Mitch McConnell is unlikely to allow a vote on the Fincher bill, reauthorization will instead likely be folded into a must-pass transportation bill. So while Fincher’s discharge petition will likely amount to nothing, it does give Ex-Im beneficiaries a backup plan if they have trouble getting Ex-Im reauthorization into the transportation bill.

For more on why Ex-Im is bad policy, bad politics, and bad economics, see my paper.

Finally, for all the sky-is-falling hyperbole coming from Ex-Im beneficiaries, regular readers will remember that Boeing alone receives nearly half of Ex-Im’s business. Despite Ex-Im’s closure, they recently announced that their earnings were up 25 percent in the third quarter. More than 98 percent of U.S. exports happen without Ex-Im assistance. As with many other companies, Boeing will be just fine without Ex-Im and corruption it enables.

Latest Ex-Im Revival Tactic: The Discharge Petition

One of the classic lines from the 1990 novel and 1993 movie Jurassic Park is that “life finds a way.” As with dinosaurs, so with government programs. The Export-Import Bank expired on June 30, and has been in liquidation ever since. But Ex-Im’s supporters may have found a way to bring it back to life. Just as frog DNA implanted in Jurassic Park’s all-female cloned dinosaurs allowed them to reproduce by causing some of them to switch genders, Rep. Stephen Fincher (R-Tenn.), who once opposed Ex-Im, has found a way to get Ex-Im past its own obstacles in the House: a discharge petition.

In the House of Representatives, a bill must typically be approved by a Committee before it moves to a full floor vote before all 435 members. A successful discharge petition circumvents Committees and brings a bill straight to a floor vote, but it is rarely used. The last time a discharge petition succeeded was in 2002—ironically, in Fincher’s case, for the McCain-Feingold campaign finance regulation bill.

Fincher’s re-election campaign has received about 150 donations totaling a little more than $250,000, as of the most recent campaign finance disclosures. Two of those donations come from his home state of Tennessee, totaling $750. As journalist Tim Carney puts it, this “rounds to 0 percent of his money raised.” In total, “More than 99 percent of the money powering Fincher’s re-election bid comes from political action committees (almost all of them corporate PACs) and K Street lobbyist types.” Among those corporate PACs are all of Ex-Im’s biggest beneficiaries, including Boeing, General Electric, and other large firms.

This does not make Rep. Fincher unique. It merely makes him conventional. But so far, his decidedly unconventional political strategy is working. Fincher’s Ex-Im revival bill is being held in purgatory in the House Financial Services Committee, where Chairman Jeb Hensarling is one of Ex-Im’s strongest opponents. Since Hensarling has no intention of moving on Fincher’s bill, Fincher countered with a discharge petition. Nearly all House Democrats joined about 40 Republicans in signing it, giving Fincher the 218 signatures he needs to force a floor vote (here’s the full signatory list from October 9).

Under House rules, the soonest a floor vote can happen is October 26. Then, assuming it passes, Fincher’s Ex-Im bill moves to the Senate.

Since the bill is unlikely to pass the Senate, Fincher’s gambit may not matter too much in the end. But it is appearing likely that an Ex-Im revival will be folded into an upcoming must-pass transportation bill. That opens up a whole new set of negotiations, but Fincher’s cronyist quest may well succeed, even if its path is long and indirect.

Dinosaurs were around for nearly 200 million years. So long as people like Rep. Fincher are in Congress, government agencies can expect similar longevity.

OPIC Interview

On September 30, I appeared on The Wall Street Journal‘s OpinionJournal Live with James Freeman to talk about OPIC. It went well, although my cat Murky makes a surprise cameo near the end of the segment. Such are the perils of working from home.

Here’s the link.

OPIC “Paying Off Friends In The Climate Change Business?”

It’s possible. See here for more. Even some Republican presidential candidates, as establishmentarian as they are, are getting on board. Hopefully the Democratic field gets on board.