Navarro’s “Fair, Reciprocal, and Balanced Trade”
By Pierre Lemieux
Peter Navarro is director of the Office of Trade and Manufacturing Policy, a White House agency created by President Trump, and one of the latter’s main trade advisers. He is a mystery: despite an economics Ph.D. in economics from Harvard University, he seems ignorant of economics. What he now says contradicts virtually everything he wrote in his 1984 book, The Policy Game: How Special Interests and Ideologues Are Stealing America, where he defended free markets and attacked protectionism with standard economic arguments. His Wall Street Journal op-ed of May 28 (“A Tariff Issue on Which Free and Fair Traders Can Agree”) illustrates his current arguments or lack thereof.
The keystone of his claims in this op-ed is the distinction between “pure free trader” and “fair, reciprocal and balanced trader.” The latter concept is at best underdetermined and at worst absurd. There have been as many definitions of “fair” as there have been political theorists and moral philosophers. Is it “fair trade” that American producers have a big advantage as they master the language of international trade better than their German or Vietnamese competitors? Isn’t that the sort of “trade barrier” that Navarro said should be compensated by a tariff in order for trade to be “reciprocal”? Reciprocity is usually a mere excuse for protectionism. As for being “balanced,” trade is generally unbalanced, especially bilaterally: you don’t sell as much to your butcher as you buy from him.
A statocrat who says he wants “fair, reciprocal and balanced trade” really says that he wants the power to prevent his subjects from importing what he or his supporters (like steel executives and trade unions) want them to import. (“Statocrat” comes from an old French word re-actualized by Bertrand de Jouvenel in his book On Power to label somebody whose power and only power comes from the position he occupies in the State apparatus.) A protectionist statocrat will never find that trade is really fair, reciprocal, or balanced. It would be as useful to replace “fair, reciprocal, and balanced” with “smurfy.”
Navarro repeats, but a bit impressionistically this time, his idea that imports “don’t contribute to gross domestic product” (emphasis his). He used to say instead that they subtract from GDP, based on an accounting identity that cannot be used to show that for the simple reason that imports are not part of GDP. (My latest EconLog post on this topic provides further explanations and sources.) This time, instead of using an accounting identity incorrectly interpreted, Navarro seems to invoke a theory instead—which is the beginning of wisdom. But it is a vague theory that leads him to the same conclusion:
But because imports don’t contribute to gross domestic product, unfair trade reduces growth, and narrowing the trade deficit through higher exports and lower imports boosts growth.
This is a muddled statement, to say the least. If imports don’t contribute to GDP, how does this imply that unfair trade reduces growth? And if “unfair” trade reduces growth, why would “fair” trade increase it instead of decreasing it less or having no effect? How would narrowing the trade deficit boost the growth of GDP, of which the trade deficit is no part? Some Keynesian theory can probably answer these questions, but Navarro should say so, explain it, and admit that he is as Keynesian as the wicked Democrats. (Don Boudreaux also criticizes Navarro’s op-ed in a Café Hayek post.)
It as if Navarro were just throwing at his bête noire, the trade deficit, a near-random sequence of words reminiscent of postmodern talk. The trade deficit was a standard fear before the 18th century. But about two centuries and a half ago, Adam Smith, following David Hume, criticized this mercantilist (or protectionist) doctrine in The Wealth of Nations:
Among all the absurd speculations that have been propagated concerning the balance of trade, it has never been pretended that either the country loses by its commerce with the town, or the town by that with the country which maintains it. …
Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints [upon the importation of goods], but almost all the other regulations of commerce are founded. …
There is no commercial country in Europe of which the approaching ruin has not frequently been foretold by the pretended doctors of this system [mercantilism], from an unfavourable balance of trade. … [I]t does not appear that any one nation in Europe has been in any respect impoverished by this cause.