Peter Navarro misfires again on the U.S. trade deficit

In an address earlier this week, Trump trade advisor Peter Navarro criticized two assertions in my past writings on the U.S. trade deficit. Without mentioning me by name, Navarro quoted directly from a previous paper of mine, “America’s Maligned and Misunderstood Trade Deficit,” in which I argued, among other points, that:

The trade deficit is not caused by unfair trade practices abroad or declining industrial competitiveness at home.

And that:

Trade deficits reflect the flow of capital across international borders, flows that are determined by national rate of savings and investment.

Navarro calls the first point “silly,” but he provides no evidence that the overall U.S. trade deficit is driven by anything other than our national rates of savings and investment, which is what assert in my second point.

Instead, Navarro asks:

If this is true, one must wonder why countries ever bother to use unfair trade practices like tariffs, quotas, nontariff barriers, forced technology transfers or currency manipulation to boost their competitive advantage abroad or protect their markets at home. … The fact is that after some brief thought, you may agree with me that this statement seems silly on its face.

The simple answer is that countries engage in those practices for a variety of reasons — protectionist pressure from domestic industry, state directed industrial policy, or mercantilist beliefs about trade that are similar to Navarro’s. But that does not mean those policies can ultimately change the size of the U.S. trade deficit.

Note that my focus was on the overall U.S. trade deficit, not bilateral deficits with individual countries. As Navarro should know, and as any economics undergraduate is taught, the size of the U.S. trade deficit is determined by the gap between our level of national investment and savings. If a trade or industrial policy does not affect total investment or savings, it will not change the overall size of the trade deficit.

Navarro’s theory about the U.S. trade deficit is contradicted by recent U.S. economic history. If Navarro is correct, how does he explain the performance of the U.S. economy in the 1990s, when rising trade deficits were accompanied by strong economic growth, a robust increase in industrial output, and full employment? That period was also a time of falling trade barriers abroad, with the implementation of NAFTA and the Uruguay Round Agreements.

Reaching further back in U.S. history, America ran almost half a century of continuous trade deficits from the Civil War to World War I. That was a time of rising American industrial might, and also a time when our own trade barriers were higher than many of our major trading partners, including Great Britain. I’ve explained elsewhere why this is not an argument for high trade barriers, but it does knock a gapping hole in the argument that trade deficits are synonymous with “unfair trade” and industrial decline, as Navarro contends.

There is much more that could be written, but economists across the spectrum have been taking issue with much of what Navarro asserted in his talk.

The Mercatus Center is planning later this month to publish a paper I’ve written on the U.S. balance of trade that will further answer the flurry of misunderstandings that Peter Navarro is injecting into our trade policy discussion. Stay tuned.