Category Archives: International

Trade Restrictions Will Not Improve National Security

One of the most persuasive arguments trade protectionists use is the national security argument. It serves as a “get out of jail free” card with many conservatives, and progressives will also often let slide policies with national security implications. When it comes to trade, it turns out that not only do trade barriers fail to improve national security, they actually hurt it in the long run—as Iain Murray and I briefly spell out in our recent study, “Traders of the Lost Ark.”

When a country goes to war, one of its first actions is to blockade the opposing country’s trade. If protectionist logic held, this would stimulate the blockaded country’s domestic industry to new heights.

There is also the matter that an effective blockade is impossible in a global market:

As noted, trade helps industries diversify their supply chains. China might refuse to sell steel to the U.S., but some steel buyers would happily turn around and resell Chinese steel to American buyers for a profit. The OPEC oil cartel learned this lesson the hard way, when its own member countries undercut its attempts to fix the global price via restricted supply.

But suppose an effective blockade were in place. Without trade barriers to ensure a viable domestic industry, how would the military fare? Quite well, as it turns out. The U.S. military is the world’s largest. In fact, it is so large that it outspends the world’s next seven largest militaries—combined. Even at its current size, the military only accounts for about 3 percent of domestic steel consumption. Automobile production uses 26 percent, or almost 9 times as much. Construction uses 40 percent, or more than 13 times as much steel as the defense industry. Security hawks should be arguing against steel tariffs, not for them.

Finally, politicians often play the national security card frivolously. This hurts foreign relations, not just the economy. President Trump, for example, cited national security concerns in raising steel tariffs against Canada. When Canadian Prime Minister Justin Trudeau asked Trump during a phone call what national security threat Canada posed to the United States, Trump was reduced to mumbling something about the War of 1812. The phone call was an embarrassing and avoidable low point in relations with our closest neighbor and one of our staunchest allies in the world.

In sum, national security concerns do not justify trade barriers. By harming growth, they leave fewer resources available for defense. Blockades are impossible in a global market. And even if they were, the U.S. has more than ample infrastructure to meet any military needs domestically. And by sending negative foreign policy signals, trade barriers strain relations with needed allies and make war with enemies more likely, not less.

For more, read the full “Traders of the Lost Ark” study.

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New Paper: Traders of the Lost Ark

With the sudden reversion to mercantilist trade policies over the last year and a half or so, my colleagues and I decided some economic archaeology was in order. So Iain Murray and I, with contributions from Fred Smith, Marc Scribner, Daniel Press, and Ryan Khuranaco-wrote a a new “principles of” paper, “Traders of the Lost Ark: Rediscovering a Moral and Economic Case for Free Trade,” which you can read online for free here. Daniel Hannan was kind enough to wrote a foreword.

Iain wrote a short blog post explaining our goal for the paper here.

Press release here.

The American Spectator’s Johnny Kampis did a nice writeup here.

As did World Trade Online, though it’s behind a paywall.

The paper was also mentioned in Politico’s Morning Money and Morning Trade newsletters.

The full paper is here.

Trump’s Trade Meeting with European Commissioner Juncker: Better than Nothing

Tariffs are the greatest!

-President Trump, July 24, 2018

I have an idea for them. Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies!

-President Trump, also on July 24, 2018

Many trade-watchers are breathing a sigh of relief about President Trump’s meeting yesterday with European Commission President Jean-Claude Juncker. The result was essentially a cease-fire. Juncker agreed that the EU would not impose a retaliatory car tariff it has been considering. In return, Trump agreed not to further raise steel and aluminum tariffs. These are both good things. But neither side is lowering any barriers. And neither side’s promises involve making things better. They have agreed to not make things worse. But in a bizarre, only-in-this-administration kind of way, nothing is better than nothing.

President Juncker also promised that the EU would buy more U.S. soybeans and natural gas, as though he has control over EU consumers’ spending decisions. He also pledged to work toward a US-EU bilateral trade agreement. Negotiations for such a deal will almost certainly last longer than Trump’s presidency, even if he wins reelection. This could be precisely why Juncker made the promise—Trump saves face, which is important to him, while Juncker can kick that can down the road until the White House has a less mercurial occupant. So even the actionable takeaways from the meeting amount to essentially nothing.

What does the new EU ceasefire mean? It is probably more of a strategic shift than anything else. The president’s biggest target on trade issues is China. To get China to reform its bad-faith trade policies—here the president has a point—will require both internal reform in China and international pressure. The U.S. is hardly the only country upset with the Chinese government’s penchant for intellectual property theft, disdain for property rights, and need for state control. And that’s ignoring the Chinese government’s human rights record, which we shouldn’t.

Trump’s tariffs are alienating allies the U.S. needs to achieve its policy goals against China. So rather than shifting toward free trade, what Trump is likely doing with the EU meeting is simply prioritizing the Chinese theater as the most important front in his imagined war.

While I dislike the phrase “trade war,” it may be an apt description for the way the Trump administration views trade. The analogy is obviously incorrect; trade is based on mutual consent, while war is the opposite. But the president and several of his advisors don’t see the issue the same way most people do. To them, trade really is like a war with winners and losers, fought at the level of nation-states and regional alliances. For one side to win, another side must lose.

Trade doesn’t work that way, of course. People only agree to a trade in the first place unless everyone involved expects to benefit. And, as even the best analysts sometimes forget, countries do not trade with each other, people do. But, with apologies to Larry Kudlow and a few other sound thinkers, the president hasn’t exactly chosen the best advisers on trade issues. So here we are, in a self-created trade war.

I no longer believe the president when he says he wants free and open trade (there are many other skeptics). Trump’s nationalism and zero-sum, adversarial thinking won’t allow it. So while it’s good that his trade battle against the EU won’t be escalating any further for the time being, that doesn’t mean Trump is admitting that his protectionist policies aren’t working. He is sacrificing one battle to gear up for a larger trade war against China. After all, Trump has the power to lower tariffs right now with the stroke of a pen, but he is not doing so. The Juncker meeting is likely the first step in doubling down against China, and that could hurt the United States economy, and the world’s, for years to come.

CEI Press Release: CEI Criticizes European Union’s Antitrust Decision Against Google

The European Union announced its decision today to fine Google $5 billion in an antitrust case involving the tech giant’s Android operating system. Competitive Enterprise Institute (CEI) regulatory experts lamented the decision.

CEI fellow Ryan Young said the following about the news:

The European Union’s $5 billion antitrust decision against Google’s Android operating system could cause immense consumer harm by requiring Google to provide an inferior product for no good reason.

The decision is reminiscent of the EU’s similarly baseless crusade against Microsoft in the 1990s and 2000s. Not only are Google’s Android operating system, Chrome browser, Maps, Calendar, and other applications already available free of charge to consumers, but Google provides consumers easy access to competitors’ software through its Google Play app store.

Just as consumers used Microsoft’s own Internet Explorer browser to install Firefox and other competing software they liked better, unsatisfied Google users have easy, often free access to competing products. They can also leave the Google ecosystem entirely by buying an Apple iPhone. The real threat to innovation and consumers here is the EU, not Google.

CEI Vice President for Policy Wayne Crews also commented on the decision:

Dominance and popularity are not the same as a coercive monopoly. The European Commission is behaving in protectionist fashion, not in a manner benefitting consumers, and the fines are inappropriate, unwarranted, and plain wrong. Google is no monopoly, as the existence of Apple’s iPhone and other options attest; and there is always some new disruptive technology on the horizon (remember the MySpace monopoly? The AOL one?).

Different vendors have the right to test out different business models without interference from regulatory authorities, and consumers have the right to accept or reject them. And the core justification, the European Commission’s idea that people, otherwise capable of downloading millions of files on Play and iPhone mobile stores, cannot substitute a search engine or other preinstalled app is absurd on its face.

There are many ways that predatory antitrust adventurism, such as that of the European Commission and the United States alike, must be reformed to prevent future damage to the technology sector. The very phrase “competition commissioner” is internally contradictory, and stands in stark contrast to the phrase free enterprise.

Read more from CEI’s Wayne Crews: “European Regulators Wrong on Google Fine, Wrong on Antitrust Policy

CEI Book Club: Peter Navarro and Greg Autry, Death by China

Trump economic adviser Peter Navarro has a longstanding animus against China. It is important to know Navarro’s thoughts on China. He played a major role in pushing for the 25 percent tariffs on 1,108 Chinese goods currently being implemented (see this release from the United States Trade Representative for details). Those goods are worth a total of $50 billion. China announced retaliatory tariffs on $50 billion worth of U.S. goods, and another round of U.S. action is likely, possibly against $200 billion worth of Chinese goods. If a trade war is in fact brewing, Navarro will have played a large role in starting it.

In 2011, Navarro and coauthor Greg Autry published Death by China: Confronting the Dragon—A Global Call to Action. Navarro has written other books on China, such as 2008’s The Coming China Wars and 2015’s Hidden Dragon, coauthored with Gordon G. Chang. But Death by China is Navarro’s best known book. As with my previous critiques of Navarro’s thought, this review will start with some general observations about Death by China, then analyze specific parts of the book.

A striking theme in Death by China is that its tone and thought are very macho—and juvenile. The language is very strident, a strategy adolescent males often use to display confidence. It is easy and psychologically rewarding to belittle one’s opponent and feel bigger in comparison. It is also a way to distract attention away from the arguments at hand. This is handy if one lacks confidence in the arguments or in one’s ability to defend them.

Death by China is a sterling, if non-academic example of an attitude Deirdre McCloskey criticizes in “The Boys in the Sandbox,” the opening chapter of her book, The Vices of Economists—The Virtues of the Bourgeoisie:

It’s like an aunt watching her three-year old nephew and his friends playing in a sandbox. They are so earnest in their play, so full of confidence and life, so sure that what they are playing with is reality. The aunt would have to be a monster to be happy they are wrong. (p. 13)

It is opposite the strategy Homer and Herodotus used in The Iliad and The Histories. They humanized their antagonists and put noble words in their speeches. They made their Trojan and Persian opponents strong and cunning so that when the Greeks won, their victories were even more impressive. Navarro and Autry instead call their enemies “morally degraded Chinese ‘black hearts’” (p. 16) who were “raised in an ethical vacuum.” (p. 59) They contrast China with “the truly civilized nations of the world like the United States, Great Britain, France, and Japan.” (p. 104)

Of 16 chapters, all but two titles contain the word “death.” On the plus side, the table of contents provides several possible titles for heavy metal albums and horror movies, with chapters such as “Death by Red Hacker” and “Death by Darth Liu: Look Ma, There’s a Death Star Pointing at Chicago.” That chapter calls for the creation of a military space force, another juvenile idea, about which more below. The opening chapter simply asserts, “It Isn’t China Bashing if It’s True.”

One of the Internet’s guiding rules is a variant of Godwin’s Law, in which the probability that any philosophical argument will turn to Nazi Germany approaches 1 the longer it goes on. The rule is simple: the first person to invoke Adolf Hitler, or Nazi Germany, automatically loses the argument (unless, of course, that is actually the topic of discussion). By that rule, even the publisher’s blurb on the book’s Amazon page loses its argument:

Death by China documents the myriad ways that a powerful, wealthy, and corrupt Chinese Communist Party emboldened by a growing nationalistic frenzy is becoming the biggest threat to global peace, prosperity, and health since Nazi Germany.

The word “Nazi” appears six times in the book itself. But Navarro and Autry also use other language to make the same comparison—for example writing of the “most rapid military buildup of a totalitarian regime since the 1930s” (p. 112), and referring to Chinese submarines as “U-boats” (p. 123).

Navarro and Autry go out of their way to tell the reader about “the profound portrait of today’s China so accurately painted in the book.” (p. 263) For the most part, it isn’t. But Navarro and Autry do make some good points. Let’s look at those before turning to areas where their arguments fall short.

The Chinese government has a horrible human rights record, and Navarro and Autry give many examples, from Tiananmen Square to the Falun Gong persecutions to unsafe working conditions. As much as life in China has improved since Mao Zedong’s death in 1976, the Chinese government still has a long way to go before its treatment of its people can be called humane.

Chinese government officials cannot abide political disagreements that pose no threat to their power. They persecute many non-threatening religious beliefs and mistreat ethnic minorities, as well as domestic and foreign businesses. And the Great Firewall around China’s Internet is one of the world’s most egregious examples of censorship. China still has a prison camp system, the Laogai—interested readers should turn to survivor and Laogai Research Foundation founder Harry Wu’s Bitter Winds: A Memoir of My Years in China’s Gulag.

China’s economic policies also still have a very long way to go. As economist Jagdish Bhagwati often says about illiberal countries, the problem is that Adam Smith’s invisible hand is nowhere to be seen. The state still owns, whether de facto or de jure, a large percentage of businesses. Corruption is high, ranking 77thin the world in Transparency International’s 2017 Corruption Perception Index. Regulatory enforcement and punitive measures are applied arbitrarily, often with no apparent rhyme or reason, discouraging long-term investment. The government often requires Chinese control of foreign business investments. And the Chinese government and even many private businesses are guilty of widespread intellectual property theft.

Navarro and Autry also rightfully point out that China’s currency manipulation is bad policy, arguing that “a stronger yuan would put significantly more purchasing power in the hands of a woefully underdeveloped Chinese consumer.” They correctly argue that a floating yuan would provide a better deal for Chinese consumers, as well as their foreign trading partners, than the current policy of pegging the yuan to the dollar.

Daron Acemoglu and James Robinson argue in Why Nations Fail that countries with extractive rather than inclusive political institutions will find limits to their growth. Extractive institutions are those that enable include expropriation of private industries, high corruption, suppression of political dissent, and arbitrary regulations. Inclusive institutions, by contrast, incentivize political accountability, open democratic elections, judicial integrity, and consistently enforced property and other rights. As impressive as China’s reform program has been to date, its government is still more extractive than inclusive. Its growth is likely unsustainable without continuing political and economic liberalization. If that process were to stop or reverse, the Chinese people will never truly be free or become as rich as the United States, Western Europe, or the nearby Asian Tiger economies.

Navarro and Autry might disagree with Acemoglu and Robinson, though. Acemoglu and Robinson’s argument that China’s economy stands on fragile ground without liberalization doesn’t play into Navarro’s theme of China as the biggest threat to U.S. national security since the Nazis.

Regarding national security, President Trump recently made headlines when he proposed creating a new military branch called the space force. The idea may have come from Death by China, in which Navarro and Autry warn of China’s military aspirations in space:

Options run the gamut from boulders hurled off the moon with enough energy to destroy a metropolis on Earth, EMP pulse bombs designed to disable our electronic infrastructure, and directed energy weapons fired from space to orbiting H-bombs and space planes capable of raining nuclear death on any city in the world. (p. 162)

The boulder idea is straight out of Robert Heinlein’s 1966 science fiction novel, The Moon Is a Harsh Mistress. They also worry about China’s ability to destroy satellites:

When a few kilograms of gravel are thrown into orbit, they will attack the satellites like meteor showers and incapacitate the expensive GPS constellation. (p. 168)

The trouble with this fear is that such an attack would not advance Chinese interests. Debris does not discriminate, and China has its own satellite network to worry about. So while it could easily take out America’s military and commercial satellites, it would have to be willing to sacrifice its own satellites. The rest of the world would lose its satellites too, which would anger more than a few countries. Such is Navarro and Autry’s justification for the U.S. to establish a military space force.

There are also some errors of fact. For example, China is not “a country originally founded on anti-colonial, Marxist principles.” (p.4) China was first unified under the Qin dynasty in the third century B.C. Karl Marx was born in 1818. Mao and his fellow communist revolutionaries changed China’s flag and renamed it the People’s Republic of China, but they did not create a new country.

A common theme throughout the book is a decline in American manufacturing. According to the data, U.S. manufacturing is near an all-time high, both in terms of real output and in value added. Increased worker productivity can increase manufacturing output as manufacturing employment is reduced. This is actually good news; the U.S. economy gets spectacular output, plus more time and talent left over for other, additional purposes.

This is why manufacturing’s decline as a percentage of total U.S. GDP is also a good thing. Not only is U.S. manufacturing healthy and growing, but the rest of the economy is growing even faster. It turns out that non-manufacturing jobs are more lucrative on average, so the more of those, the better. Our diversified economy is better able to withstand economic shocks than less diversified countries like China, which not only has much smaller per capita output, but relies on manufacturing for 29 percent of its GDP, compared to less than 12 percent in the U.S. (See data here.)

Death by China also bemoans that current U.S. policy is “allowing a mercantilist and protectionist China to destroy the American manufacturing base and vitiate our economy.” (p. 124) Economists have long pointed out that mercantilism and protectionism are self-harming policies. When China raises trade barriers, it hurts itself. Its export subsidies take money away from Chinese taxpayers and transfer it to much wealthier U.S. consumers, who benefit from artificially low prices. Americans give up less to get more, and have more money left over for other purchases. All this is at Chinese expense.

Chinese currency manipulation has a similar effect. American consumers have to give up less money to get more stuff. This is a good deal for U.S. consumers, but a bad deal for Chinese consumers, who must give up more and get less to the same degree. And this speaks nothing of the opportunity costs and distorted decision making that accompany distorted prices.

Navarro and Autry also worry about America’s trade deficit with China. They argue against an exhaustive literature explaining why trade deficits are worse than useless as a measure of economic health, going all the way back to Adam Smith and David Ricardo. Countries don’t trade with each other, individual people do. Navarro and Autry assume the opposite. Their aggregate thinking is a common analytical mistake. People won’t make deals with other unless both parties expect to be made better off. Add up all these win-win deals, and it turns out that a lot of people are making win-win deals.

Moreover, this would be the case whether the trade deficit is positive or negative, and whether it is small or large. The trade deficit simply does not measure economic well-being. If anything, it inversely correlates with unemployment. When times are good and unemployment is low, the trade deficit tends to be high. It usually shrinks during recessions, when unemployment is high.

Navarro and Autry fall for the zero-sum fallacy, writing that in U.S.-China trade, “one country wins at the expense of the other’s income, jobs, manufacturing base, and prosperity.” (p. 219) Post-Mao China has experienced rapid growth, and currently enjoys per capita income of about $8,827—the highest it’s ever been. This is up from $959 as recently as 2000. In the U.S., per capita income also grew, increasing more than $22,000 over that time. These numbers are from a World Bank dataset measured in constant U.S. dollars, available here. For one country to have more, it is not necessary for another to have less. Economic growth is just that—growth. The pie gets bigger.

Navarro and Autry are convinced that China is responsible for sky-high American unemployment, writing again and again about China’s “weapons of jobs destruction,” and predict massive unemployment. As of this writing, unemployment is 3.8 percent, which is historically quite low. The unemployment rate will go up and down as the economy goes boom and bust, but overall, trade does not affect the number of jobs. It affects the types of jobs.

Trump’s recent steel and aluminum tariffs, which Navarro has publicly defended, will according to a Trade Partnership study save roughly 33,000 jobs in the steel and aluminum industries, and cost about 179,000 jobs in downstream industries—in the short run. In the long run, employment effects are about nil. Many of those steel workers will probably eventually lose their jobs anyway and find different work elsewhere. Displaced workers in downstream industries will find different jobs, too. But artificial restrictions and distorted prices imposed by the tariffs mean that those jobs will likely create less consumer value, on average, than if the government had left well enough alone. And jobs that create less value tend to pay less. China’s unfair trade policies are a direct result of its autocracy. While Navarro and Autry are right that China needs to both open its markets and free its political system, the trade policies they suggest will not solve the problem.

Other statistics in Death by China are misleading. The late Hans Rosling warns about lonely numbers in his book Factfulness, coauthored with Ola Rosling and Anna Rosling Rönnlund:

Never believe that one number on its own can be meaningful. If you are offered one number, always ask for at least one more. Something to compare it with. Be especially careful about big numbers. (p. 130)

Navarro and Autry give just such a lonely number when they argue that, “On [President George W.] Bush’s watch alone, the United States surrendered millions of jobs to China.” (p. 10) Let’s give that large, lonely number some company. In January 2001, when Bush took office, the U.S. labor force was 143.8 million people. When his term expired in January 2009, it was 154.2 million people, despite the economy being in recession. The data are here.

So even if “the United States surrendered millions of jobs to China,” those losses were outweighed by gains elsewhere, most of which have nothing to do with trade policy. Technological change and changing consumer tastes cause more than six times as much job churn as trade, according to a Ball State University study. The size of the labor force is tied more closely to population size than anything else. Today, after nearly another decade of rapid Chinese economic growth, the U.S. labor force stands at 161.5 million people, a net gain of nearly 18 million since Bush took office. Navarro and Autry have misled the reader about the significance of their lonely number.

Navarro and Autry give another lonely number: “a staggering 750,000 Chinese have settled in Africa over the past decade.” (p. 98) Again, they give no other numbers to compare this to. I’ll fill in the gap. In 2011, the year of Death by China’s publication, Africa had a population of just over 1 billion. Adding 750,000 people to that 1 billion is an addition of less than one person in 1,000, or about 0.075 percent.

Put another way, the city where I grew up, Racine, Wisconsin, has a population of about 77,000. The “staggering” migration Navarro and Autry describe is equivalent to about two Chinese families moving into my hometown per year for 10 years. Now that we have compared Navarro and Autry’s lonely number with other relevant numbers, we can better see how meaningful it is as a guide to policy.

On the next page, Navarro and Autry express worry about “Africa, where there are already over a million Chinese farmers. That’s right, over a million Chinese farmers” (italics in original). They don’t say if any, or how many, of those people are double-counted from the 750,000 number on the previous page. And they again decline to give this lonely number some companions.

Navarro and Autry also tell numerous scare stories about consumer products, quoting on p. 44 from a 2007 Chicago Tribune story that “Despite 55 complaints, seven infants left trapped, and three deaths, it took years for the Consumer Product Safety Commission to warn parents about 1 million flawed cribs.” They do not put these scary numbers in context. In 2007, the overall mortality rate for children under 5 in the U.S. was 7.8 per 1,000 per year. That’s a rate of 0.78 percent per year. Three deaths out of a million flawed cribs is 0.0003 percent. This number, which is 3,846 times less than the general child mortality rate, overstates the danger. And the Chicago Tribune story does not specify how many of those million cribs were Chinese-made. Navarro and Autry do not provide a comparison for mortality rates from cribs made in China versus those made in other countries.

America’s child mortality rate is less than half what it was when China began its economic reforms in 1978. Back then in it was 16.3 deaths per 1,000 children under five. By 2015, the number was 6.5 per 1,000. So by that measure, children in the U.S. are more than twice as safe as they were before Chinese products began flooding American store shelves.

Navarro and Autry also point out appalling environmental conditions in China, noting that, “as China has established itself as the world’s manufacturing floor, it has also turned itself into a toxic waste dump and the world’s most polluted country.” Here they have a point, though it might not be valid for much longer. Initial stages of industrialization are indeed very polluting. But when per capita income reaches a level of $4,500 or $5,000 per person, something changes.

At that level of development, families can begin to stop worrying about where their next meal will come from. They can afford sturdier housing, some health care and transportation, and can afford to send their children to schools instead of the farm or the factory. People can afford to care about environmental quality, and do. From that point on, environmental quality tends to improve as a country gets richer.

Economists who graph pollution against per capita income call this U-shaped curve the environmental Kuznets curve. This pattern has held in country after country, and researchers are finding that that it is also holding true in China. One 2016 study in the journal Energy Policy looks at 28 different measures of environmental quality in China and finds that:

[T]he Environmental Kuznets Curve (EKC) hypothesis is well supported for all three major pollutant emissions in China across different models and estimation methods. Our study also confirms positive effects of energy consumption on various pollutant emissions.

This makes sense. According to World Bank data, China reached that $4,500 threshold in 2010, one year before Death by China’s 2011 publication. So as Navarro and Autry were writing their book, China was at the very nadir of the environmental Kuznets curve. By 2017, per capita income in China had reached $8,827 per person, and continues to climb.

The U.S. reached its $4,500 per person environmental Kuznets curve threshold in 1968, just six years after Rachel Carson’s Silent Spring was published, which Navarro and Autry cite. Today, per capita income in the United States exceeds $59,000, and environmental quality has greatly improved. Even since Death by China’s publication, China’s environment has improved enough to show up in the data, though it clearly still has a long way to go. My colleague Iain Murray’s chapter on the Aral Sea in his book The Really Inconvenient Truths gives another example of this process.

Death by China also contains contradictions. I already mentioned how Navarro and Autry apparently believe in some kind of Schrodinger’s China: they belittle Chinese people as backward and poor while also portraying them as an unstoppable high-tech economic juggernaut. Which is it?

Navarro and Autry also write that “one of the advantages that China has over America is its ability to focus on the long term and think in terms of generations rather than individuals.” (p. 162) But they also have “an almost perfect lack of future vision.” (p. 184) Which is it?

Navarro and Autry are right that China has a repressive government and that its people deserve freedom. They are also right that the Chinese government doesn’t always play fair in international trade. But China has little to gain from military action against the United States, and everything to lose. The right way to encourage China to drop its protectionist and mercantilist policies is not for the U.S. to adopt those same policies, as we are currently doing. It is for us to drop our own trade barriers and liberalize our own economy, and reap the benefits, regardless of how China reacts. Veronique de Rugy of the Mercatus Center recently made this case in a brilliant New York Times column:

President Trump should take a page from Hong Kong. As that territory’s experience demonstrates, and as economists have long argued, lowering trade barriers regardless of other governments’ trade policies fuels domestic economic growth. So if Mr. Trump insists on acting unilaterally, he should cut rather than raise tariffs.

The U.S. would gain economic strength from unilateral free trade, and have more resources to address conservatives’ national security concerns. And we can turn to China and say, “economic and personal freedom is what made us rich. And it is how we are becoming richer still. You’re more than welcome to join us. Here’s how you do it.”

Death by China’s sensationalist tone, weak arguments, erroneous economic reasoning, contradictions, and confusions do a disservice to both the U.S. economy and the cause of Chinese freedom. But Navarro has the president’s ear, and Trump is already enacting some of Death by China’s policy prescriptions. Better for cooler heads to prevail over frustrated men competing over who can appear more hawkish against non-threats.

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.

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.