Global Trade: Inside Navarro’s Mind

It is not hard to find critics of Peter Navarro’s protectionist views on trade, especially given the negative effects that they could have on the economy and the financial markets.

Since the White House director of the National Trade Council seems to be gaining influence and may even be up for a promotion, Melissa and I have been trying to get into his head to understand his thinking.

From Navarro’s perspective, the national security benefits of “fairer trade” outweigh the economic risks. Navarro is willing to accept any “modest inflationary effects” that might come along with US-imposed tariffs or barriers to trade.

During a 3/6 keynote address and panel discussion at the National Association for Business Economics (NABE) conference, the Harvard PhD explained his views to a mostly disagreeable crowd.

Focusing on a few key takeaways from this speaking engagement, let’s try to understand the unpopular economist’s point of view:

(1) Identity crisis. To support his claim that trade deficits are bad, Navarro calls on the following economic 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.” That’s what Navarro wrote in a 3/5 WSJ op-ed adapted from his NABE speech. In other words, the dollars traded for America’s imports will come back to the US in the form of foreign direct investment. For the markets, that’s good because the demand for capital should push interest rates down and stocks and employment up. But for protectionists, that’s bad because there will be more foreign owners of US assets.

(2) Conquest by purchase. Coined by Warren Buffett, “conquest by purchase” is Navarro’s ultimate concern. The premise is that running “large and persistent trade deficits” facilitates a “pattern of wealth transfers offshore.” Suppose a rival “buys up America’s companies, technologies, farmland, food-supply chain”? That rival may ultimately control “much of the U.S. defense-industrial base,” Navarro contends.

(3) Trade deficit in goods. Navarro focuses on the trade deficit in goods rather than in services. Navarro told the NABE conference attendees that “a strong manufacturing and defense industrial base is the very bedrock for America’s national security.” The economist noted that only one company in the US can repair Navy submarine propellers, and zero can create flat panel displays for our military aircraft. It’s the goal of Trump’s trade policy, he says, to “reclaim all of the supply chains and manufacturing capabilities that would otherwise exist if the playing field [were] level.”

(4) Trade motto. “Free, fair, reciprocal trade” is the trade motto of the administration, according to Navarro, who repeated it at least four times during the NABE conference. As examples of unfair trade practices, Navarro cited non-tariff barriers on imported goods in Japan, tariffs on imports to India, unfairly biased rebates to German exporters, and the dumping of goods through Vietnam and Thailand by Chinese state-owned enterprises and Korean conglomerates. Navarro also criticized the practice in China of requiring foreign business owners to establish 50% Chinese ownership through joint ventures, putting domestic intellectual property at risk.

The silver lining for investors is that Navarro claims the intent of the administration’s tough stance on trade is simply to “encourage our trading partners to lower” their tariffs and barriers to trade. So the latest tariffs slapped on our trading partners may be negotiable for the US. That now seems especially likely given the pushback that the President is getting for supporting Navarro’s trade approach.

(5) It’s the principles. On the other hand, the swift resignation of Gary Cohn following Trump’s announced tariffs on aluminum and steel signifies the administration’s commitment to Navarro’s ideals. Navarro previously reported to Cohn. White House Chief of Staff John Kelly in September folded Navarro’s Office of Trade and Manufacturing Policy into the Cohn-led National Economic Council, according to Politico. Reportedly, the move kept Navarro out of high-level meetings on the principles of trade and forced him to work under Cohn, with whom he has disagreed. With Cohn out of the picture now, it seems to us that Navarro may soon be sitting closer to Trump both figuratively and literally at the trade table, although The Hill reports that Navarro says he’s not in the running to replace Cohn.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.