In WSJ Op-Ed, Peter Navarro Writes Deficits "Could Put US National Security In Jeopardy"

Tyler Durden's picture

At the end of January, the Euro soared following an FT piece in which Trump's trade advisor and director of the White House National Trade Council, Peter Navarro, launched what was then seen as the first shot in the transatlantic trade wars, when he accused Germany of using a “grossly undervalued” euro to "exploit the US and its EU partners", comments which triggered alarms in Europe’s largest economy.

Navarro  told the Financial Times the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany an advantage over its main partners. While not necessarily novel - Germany has often been accused of being the biggest winner from a weak euro at the expense of peripheral Europe - his views suggested the new administration is focusing on currency as part of its hard-charging approach on trade ties.

Since then immediate worries about bilateral trade wars have taken a back seat after several paliative comments from Trump's Treasury secretary, Steven Mnuchin as well as a de-escalation between Trump and Beijing after the president softened his rhetoric on the One China policy. However, worries about trade wars may reemerge following a Sunday evening op-ed in the WSJ by the same Peter Navarro in which he explains "why the White House worries about trade deficits" and highlights that "an imbalance imperils economic growth—and could put U.S. national security in jeopardy."

Needless to say, from that line alone it is safe to say that the op-ed is hardly USD-positive.

Navarro asks "do trade deficits matter", noting that the question is important because America’s trade deficit in goods (the Obama administration tends to ignore the trade surplus in services) is "large and persistent, about $2 billion every day." His affirmative response boils down to the the observation that growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports). "Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth" Navarro writes, by which he simply reflects that positive net trade translates into higher GDP, even if in practice it is never quite that simple as substantial shifts to global trade patterns usually result in subtantial changes in domestic consumption as a result of violent market rebalancing.

Global trade nuances aside, Navarro uses the example of Carrier to demonstrate the "complex adjustments" resulting from changes to trade policy, and invokes the capital account to suggest that as a result of foreign investment in the US to plug the current account shortfall, foreigners may - to cite Warren Buffett - eventually own so much of the U.S. that Americans will wind up working longer hours just to eat and to service the debt.

To better understand these complex adjustments, consider Carrier. Its management had announced the company would close its air-conditioner factory in Indianapolis and move to Mexico—and then sell products back into the U.S. tariff-free. But President-elect Trump and Vice President-elect Pence negotiated a deal to keep Carrier in the U.S. and expand its facilities. How will this show up in government statistics? Fixed nonresidential investment will increase rather than decrease. Imports from Mexico will be lower than they would be otherwise, and U.S. exports will be higher. In today’s parlance, that’s “all good.”

 

The national-security argument that trade deficits matter begins with this accounting identity: Any deficit in the current account caused by imbalanced trade must be offset by a surplus in the capital account, meaning foreign investment in the U.S.

 

In the short term, this balance-of-payments equilibrium may be benign, as foreigners return our trade-deficit dollars to American shores by investing in U.S. bonds and stocks and perhaps by building new production facilities. The extra capital keeps mortgage rates lower, the stock market abundantly capitalized, and Americans more fully employed.

 

But running large and persistent trade deficits also facilitates a pattern of wealth transfers offshore. Warren Buffett refers to this as “conquest by purchase” and warns that foreigners will eventually own so much of the U.S. that Americans will wind up working longer hours just to eat and to service the debt.

Navarro then interpolates his favorite topic, China, and what the consequences of this ascendant superpower's trade relations with the US could mean for US national security in the long-term:

Dark though it is, Mr. Buffett’s scenario may still be too rosy. Suppose the purchaser is a rapidly militarizing strategic rival intent on world hegemony. It buys up America’s companies, technologies, farmland, food-supply chain—and ultimately controls much of the U.S. defense-industrial base. How might that alternative version of conquest by purchase end for our sons and daughters? Might we lose a broader cold war for America’s freedom and prosperity, not by shots fired but by cash registers ringing? Might we lose a broader hot war because America has sent its defense-industrial base abroad on the wings of a persistent trade deficit?

Supposedly, the theoretical answer to these questions is yes, although the practical response has yet to be written. Furthermore, all of the above is generic Econ 101 textbook stuff.

So does Navarro make any practical trade policy recommendations besides his brief economics lesson?  For that we fast forward to the final two paragraphs which tie into Trump's Feb. 28 Congressional address, in which he expounded on "FAIR" trade, as follows:

Today, after decades of trade deficits and a mass migration of factories offshore, there is only one American company that can repair Navy submarine propellers—and not a single company that can make flat-panel displays for military aircraft or night-vision goggles. Meanwhile, America’s steel industry is on the ropes, its aluminum industry is flat on its back, and its shipbuilding industry is gathering barnacles. The U.S. has begun to lose control of its food-supply chain, and foreign firms are eager to purchase large swaths of Silicon Valley’s treasures.

 

Much of Wall Street and most economists simply don’t care. But to paraphrase Mike Pence on the 2016 campaign trail, the people of Fort Wayne know better. The analysts at the Pentagon know better, too. That’s why, for both economic and national-security reasons, it is important to bring America’s trade back into balance—through free, fair and reciprocal trade.

In retrospect, Navarro's op-ed is less fiery than his initial "trade war" statement to the FT, even if it ultimately reverts to a core Trump theme, namely boosting exports to stimulate growth. Perhaps a better question than what is Navarro's purpose by writing it, is why he is writing it, and does his use of a public forum like the WSJ mean that there is friction between him and Trump camp, especially since in recent weeks it appears that a core pillar of Trump's trade policies, namely the border adjustability, appear to no longer be on the docket of actionable items. If BAT goes, what else will follow, and will any of Navarro's trade deficit-cutting plans ever materialize?

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FatTony7915726's picture

You can blame the former head nigger in charge.  Turning America into Zimbabwe!

Antifaschistische's picture

Thank you Captain Freakin Obvious!!!....what rock have these guys been hiding under for the past 20 years.

red1chief's picture

The article is nonsense. If push comes to shove we will stiff them. "Ok China, you want your $2 trillion? Just wait 'till we rev up the printing presses a little."

Antifaschistische's picture

when the Federal government has every incentive to collapse the value of dollar, because it collapses the real value of their 30 trillion dollar debt.....then, watch out below!!!

ILIKEMITTENS's picture

Which is ALL theyve been doing for the last eight years. Newsflash-it doesnt help.

RedBaron616's picture

You destroy every American's savings and paycheck with such a move. You destroy the economy. Look what happened in Germany after that happened. Hitler looked like a savior. It could happen here just as easily.

red1chief's picture

In fairness to them, if they didn't get it someone else would.

IridiumRebel's picture

People think I'm into creating my own fuel for my veggie car for environmental reasons. I'm into for the ability to manage issues of shortages we will see in the near future.

Elco the Constitutionalist's picture
Elco the Constitutionalist (not verified) Mar 5, 2017 11:23 PM

The USA is one of the few countries that would benefit from cutting off most all foreign trade. We have almost all of the resources we will ever need, making trade a losing proposition because of artificial competition and adverse sociological forces caused by trade.

scoutshonor's picture

Anytime you read "could damage" you know bullshite is coming.  The U.S. ceased to be a going concern in 2008.

Atomizer's picture

Alex, I'll take Intelligence Agencies for $1,000.

OK, Atomizer.. Why does America have 17 spying agencies? Answer? 

Atomizer, Good question Alex. 

Alex, you have won the round of jeopardy Atomizer, congratulations. 

silverer's picture

I love it when a house is on fire, and flames are just pouring out the windows and leaping into the air scores of feet high, and somebody pulls up in a car, looks out, and says "Hey, is that house on fire?" Politicians do that, mostly.

redc1c4's picture

they are just NOW figuring this out?

#idiots

ILIKEMITTENS's picture

Yea but when will they figure out that indiscriminately bombing every other cuntry on earth has the same effect. And is in fact the cause of said "defecits". Parenthesised because it seems more like "credits" to a chosen few. As frankie says "the usual suspects".

Ink Pusher's picture

Buffet made the call. It's a done deal.

Chris88's picture

No, no, now that leftist Donny is in office debt into the stratosphere is a good thing!  Let's hear his lemming apologists.

micksavage2010's picture

peter navarro fantasizes too much about sheeite. just imagine and then fill in the blank about totally hysterical and impossible events. to even consider another country on planet terra "suddenly militarizing" to jeopardize the ever indefinable amerikkan national security. amerikkans are such effing bedwetters that have their pathetic military occupying over 100 countries on the planet terra.

when will amerikka crawl out from under beds again?

Anonymous IX's picture

Of course.  Economic destabilization of this magnitude can never sustain any massive disruption to a country.  Whether geological, agricultural, pandemical, etc.

slammin_dude's picture

Ummm...whatever....debt willNEVER be paid back...the time to worry about deficits was 40 years ago....now you may as well run them till people no longer take our paper...like seriously if theyre dumb enough to give stuff for treasuries we'd be dumb not to do it....