The absurdity of Navarro’s death by China

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 PhD 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.

The economics of 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 are predisposed toward chronic trade deficits.

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. 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 supplychain distortions. As seen through their “trade in value-added” database, USChina bilateral trade deficit would be between 35 and 40 percent lower than officially stated.

America’s saving-investment imbalance is likely to worsen 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 2017.

With a PhD in economics and a long academic career, one would think Navarro would understand this basic framework. Apparently not. To the contrary, his policy advice will surely backfire. Putting pressure on China over the US’ bilateral trade deficit will simply shift the low-cost Chinese portion to higher-cost foreign producers. In my latest book Unbalanced: The Codependency of America and China, 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 US import demand toward these higher cost sourcing alternatives.

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 basic charge here is that “the Chinese state seeks to access the crown jewels of American technology and intellectual property.”

Not 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 evidence in support of the tariffs and other punitive trade measures that the Trump administration has initiated against China.

The report is wide off 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 allegedly takes place within the structure of joint-venture arrangements – partnerships with domestic counterparts. 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. 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. Former president Barack Obama did present top-secret evidence of state-sponsored computer hacking to Chinese 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 largely predates the Sunnylands Summit.

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. This is the fear factor behind Navarro’s “crown jewels” threat.

Of course, it’s not that China stands alone in using so-called industrial policies to achieve national economic and competitive objectives. Japan, Germany and even the US through its “militaryindustrial complex” all embraced such strategies in the aftermath of World War II.

All this gets to the third leg of America’s anti-China stool – power politics. From Trump to Lighthizer to Navarro there can be no mistaking Washington’s thinly veiled effort to contain China as a geostrategic global force.

Both the president 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. Not only are they both at risk of underestimating China, but may be even more at risk of overestimating 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.

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). opinion@globaltimes.com.cn