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?