The absurdity of Navarro’s Death by China

By Stephen Roach Source:Global Times Published: 2018/7/15 18:33:39

Peter Navarro, director of the White House Office of Trade and Manufacturing Policy, is President Donald Trump's stalking horse in a potentially open-ended trade war with China. Armed with a Harvard Ph.D. and academic tenure from the University of California (Irvine), a well-credentialed Navarro was in the right place at the right time to make the leap into the political arena and orchestrate America's increasingly aggressive China bashing strategy. Smooth talking, with book and screen credits (Death by China, 2011) that would make any zealot proud, Navarro is now leading the charge in Trump's trade war.

Like Wylie Coyote, Navarro may be leading the US over a cliff. Don't kid yourself. While purportedly an economist by training, Navarro's economics is misguided, inaccurate and politicized. Economics has always attracted more than its fair share of pretenders. The latest in a long line of faux economists, Navarro personifies all that can go wrong when economic policy is twisted into an instrument of geostrategic power.

The economics of Peter Navarro are at odds with what most college undergraduates learn in macroeconomics: Trade imbalances don't occur in a vacuum — they are an outgrowth of saving-investment imbalances. Saving-short nations like the US, whose net domestic saving rate was just 1.8 percent of national income in the first quarter of 2018, are predisposed toward chronic trade deficits. Lacking in saving and wanting to consume and grow, the US imports surplus saving from abroad and runs massive balance-of-payments and trade deficits to attract the foreign capital. 

The trade deficit is, of course, the lightning rod of Trumponomics.  Drawing encouragement from the Navarro narrative, the president constantly attacks China, Japan, Germany, Mexico and Canada, among countless others for running large trade deficits with the US. In Trump's view, these deficits are all emblematic of "horrible trade deals" made by his predecessors — deals that only he can reverse. 

This fixation on bilateral trade imbalances is flawed for three key reasons: First, America's trade problem is multilateral, not bilateral. In 2017, the US had trade deficits with 102 countries. In keeping with one of the oldest principles of economics, the distribution of those trade deficits from country to country reflects comparative advantage. Currencies, tariffs, and other distortions can influence a country's bilateral share of the multilateral total. But these distortions do not alter the basic premise that nations short on savings, like the US, are destined to run large multilateral trade deficits.

Second, trade today is less about individual nations and more about multi-country supply chains that reflect a wide cross section of components and parts that come from many nations. This increased fragmentation of production and assembly distorts official nation-specific trade statistics that are based solely on the final shipment of an assembled good. A massive research effort by the OECD and the WTO has established the broad parameters of such supply-chain distortions. As seen through their "trade in value-added" database, US-China bilateral trade deficit would be between 35 and 40 percent lower than officially stated; that would cut the $375 billion Chinese portion of America's $800 billion merchandise trade deficit from 46 percent in 2017 to 27 percent. While that's still a big number, to be sure, it is more in keeping with the general dictates of comparative advantage - and specifically, the important role that low-cost, increasingly high-quality Chinese sourcing plays in making ends meet for American consumers.  

Third, America's saving-investment imbalance is likely to get worse in the years ahead, pushing the multilateral trade gap deeper into deficit. That is a direct outgrowth of the outsize tax cuts and federal government spending increases that were signed into law in late 2017. According to the US Congressional Budget Office, federal budget deficits are projected to average 4.7 percent of GDP over the five years ending in 2022 versus 3.4 percent in the preceding five years ending in 2017. That will put further downward pressure on domestic saving, requiring ever larger balance-of-payments and multilateral trade deficits to satisfy the growth imperatives of the US economy. 

With a Ph.D. in economics and a long career as a professor, one would think Navarro, as a key advisor to the president of the US, would understand this basic framework. Apparently not. To the contrary, his policy advice will most assuredly backfire. Significantly, putting pressure on China's bilateral piece of America's large and expanding multilateral trade deficit, will simply shift the low-cost Chinese portion to higher-cost foreign producers — the functional equivalent of a tax hike on American consumers. In my latest book (Unbalanced: The Codependency of America and China, Yale University Press, 2014), I point out the disparity between average manufacturing compensation rates in China of about $2.30 per hour versus about $26 per hour for America's next nine largest foreign suppliers. Make no mistake, the first tranche of Trump's tariffs on China is already diverting still voracious US import demand toward these higher cost sourcing alternatives, with important and lasting consequences on price pressures that will hit income-constrained American families.

But it's not just economics that Navarro has wrong. China, as the lead actor, in his tabloid-like screenplay, Death by China, is portrayed as the ultimate threat to the American way of life. This was underscored by a June 2018 white paper issued by Navarro's White House Office of Trade and Manufacturing Policy, entitled "How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World." The bottom-line accusation of this narrative is the charge that "the Chinese State seeks to access the crown jewels of American technology and intellectual property." It is nothing short of a call to arms — justifying the President's penchant for an "easy-to-win" trade war fought on behalf of a victimized American public that has nothing short of its basic economic future at risk.

Not exactly known for original thinking, Navarro's latest opus draws heavily on the so-called Section 301 findings released three months earlier by US Trade Representative (USTR) Robert Lighthizer ("Findings of the Investigation into China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property and Innovation and Section 301 of the Trade Act of 1974"). The USTR's March 22 findings have quickly been accepted as foundational evidence in support of the tariffs and other punitive trade measures that the Trump administration has initiated against China in recent months.

The report is wide of the mark in several key areas. First, it accuses China of "forced technology transfer," arguing that US companies must turn over the blueprints of proprietary technologies and operating systems in order to do business in China. This transfer is alleged to take place within the structure of joint-venture arrangements - partnerships with domestic counterparts on which China and other countries have long established as models for the growth and expansion of new businesses. Currently, there are more than 8,000 JVs operating in China, compared to a total of over 110,000 JVs and strategic alliances that have been set up around the world since 1990.

Significantly, US and other multinational corporations willingly enter into these legally-negotiated arrangements for commercially sound reasons - partners working together not only to establish a toehold in China's rapidly growing domestic markets, but also as a means to improve operating efficiency with a low-cost offshore Chinese platform. Portraying US companies as innocent victims of Chinese pressure is certainly at odds with my own experience as a senior executive in Morgan Stanley's joint venture with the China Construction Bank (and a few small minority investors) to establish China International Capital Corporation in 1995.

Second, both the USTR and Navarro reports underscore the role of cyber-espionage in their case against China. President Barack Obama did, indeed, present top-secret evidence of state-sponsored computer hacking to President Xi Jinping at the so-called Sunnylands Summit in September 2015. Since then, most reports point to a reduction in Chinese incursions. Unfortunately, the evidence cited by both Navarro as well as the USTR report in support of cyber-related trade violations largely predates the Sunnylands confrontation.

Finally, both the USTR's Section 301 report and Navarro's recapitulation of the same portrays China's focus on outward investment - its "going out" strategy - as a unique state-directed plan aimed at gobbling up newly emerging US companies and their proprietary technologies in the great industries of the future: artificial intelligence, autonomous vehicles, high-speed rail, advanced information technologies and machine tools, exotic new materials, biopharma and sophisticated medical products, as well as new power sources and advanced agricultural equipment. This is the fear factor behind Navarro's "crown jewels" threat.

Of course, it's not as if China stands alone in using so-called industrial policies to achieve national economic and competitive objectives. Japan, Germany and even the US through its "military-industrial complex" all embraced such strategies in the aftermath of World War II. Such efforts, of course, take on special meaning for developing economies like China seeking to avoid the dreaded middle-income trap by shifting from imported to indigenous innovation by focusing initiatives such the "Made in China 2025."

All this gets to the third leg of America's anti-China stool — power politics. From Donald Trump to Robert Lighthizer to Peter Navarro there can be no mistaking Washington's thinly veiled effort to contain China as a geostrategic global force. In its National Security Strategy published in December 2017, the Trump administration left little doubt of the motives it imputes to China as an aggressive actor on the global stage, stating without equivocation that, "China and Russia challenge American power, influence, and interests, attempting to erode American security and prosperity." This is the call for action in America's purportedly just trade war.

Both Trump and Navarro have argued that America is now strong enough to have reached a propitious moment in the economic cycle to play the power game and go after China. Like Trump, Navarro claims that trade wars are easy to win. Not only are they both at risk of underestimating China, but they may be even more at risk of over-estimating the underlying strength of a saving-short US economy. In keeping with Navarro's imagery of death by China, Trump may now be asking America to fall on its own sword.

The author is a faculty member at Yale University, former chairman of Morgan Stanley Asia, and the author of Unbalanced: The Codependency of America and China (2014). [email protected]

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