Peter Navarro's views,
along with those of Wilbur Ross, that reducing the U.S. trade deficit would
increase economic growth have created a firestorm that continues to burn.
They have been attacked from all portions of the political spectrum for
their position that a reduction in the trade deficit as a percentage of GDP
would lead to increased GDP growth.
Supporters
of Navarro's position have appeared, but there has been an overwhelming
onslaught of opinion pieces against them. Effectively, Navarro is
opposing the mainstream academic economic view. For that, he has been
accused (wrongly, we argue) of making rookie-level mistakes in interpreting the
fundamentals of his discipline.
The
arguments against Navarro can be summarized as follows: (1) the equation for
GDP (GDP = G + C + I + NX; where G is government purchases, C is consumption, I
is investment, and NX is net exports) only subtracts the trade deficit (a
negative NX) because imports are already included in G, C, and I, and thus, it
is just an accounting trick that in no way implies that a trade deficit is bad
for economic growth; and (2) reducing the trade deficit by curtailing imports
and promoting increased consumption of domestic goods and services will only
drive up the costs for consumers, thereby harming economic growth.
Both
of these concerns can be summarily dismissed with two graphs using six decades
of empirical economic data for the United States. Unfortunately, there
has been little use made of actual data and their relationships in the debates
over the trade balance, leading to arguments that are unnecessarily verbose.
If
the trade balance does not affect economic growth, there should be no long-term
relationship between these two variables. On the other hand, if running massive
trade deficits is positive for economic growth (as Navarro's opponents either
outright argue or strongly imply), there should be a negative relationship
between the variables (i.e., higher trade deficits lead to greater economic
growth). Finally, if trade deficits harm economic growth, the
relationship between the variables should be positive, meaning that higher
trade deficits should correlate with lower rates of growth.
One
must acknowledge in advance that there are many influences on economic growth,
and a relationship between two variables does not prove causation; it is merely
supportive of causation. Alternatively, only by engaging in fanciful
feats of multivariate econometric analyses coupled with substantial hand-waving
can one attempt to make a case that a desired causation exists when the
straightforward correlation opposes your theories.
In
the first
plot, we consider the external balance on goods and services (the value of
exports of goods and services less imports of goods and services) versus
nominal GDP growth for the U.S. since 1960. There is a high level of
statistical significance (p = 0.0005), and the slope is positive (+0.71) with a
95% confidence interval that includes 1.0 (0.71 +/- 0.39 – or that for every 1%
of GDP increase in the trade deficit, nominal GDP growth is decreased by 1%).
What this means is that over six decades of data, trade deficits
correlated extremely strongly to lower – not higher, nor even neutral –
economic growth. Thus, the actual data show a relationship heading in the
opposite direction from what the free trade activists believe. That alone
causes serious problems for their case.
In
addition, the slope of the relationship is supportive of the view that despite
all the underlying complexities in the GDP formula, subtracting the trade
balance is far more than just an accounting procedure. There are, as one
might suspect, real economic costs in choosing to purchase goods and services
from outside a country rather than internally. Trade is not all benefits,
as the proponents argue, and the failure to adequately consider the empirical
data when shaping economic theories and trade policies has done significant
damage in recent decades.
As
for the second branch on which Navarro's critics have placed their hopes – that
reducing imports will drive up costs of goods and services and thereby damage
the economy – if such were the case, we may expect to find lower rates of real
economic growth with trade surpluses. In other words, as the U.S. moved
from chronic trade surpluses to endemic trade deficits over the past 60 years,
the rates of real economic growth should be increasing with the influx of cheap
imports. As the second
plot of the external balance on goods and services versus real
(inflation-adjusted) GDP growth shows, this is not the case. When the
economy grows in real terms, it grows more rapidly when a trade surplus is
present.
These
are all inconvenient truths to the free trade-boosters. There is a strong
case, founded in both empirical and theoretical terms, to support Navarro's position
on the trade deficit. Ross Perot started this discussion back during the
second 1992 presidential debate:
We
have got to stop sending jobs overseas. It's pretty simple: If you're
paying $12, $13, $14 an hour for factory workers and you can move your factory
South of the border, pay a dollar an hour for labor, ... have no health care –
that's the most expensive single element in making a car – have no
environmental controls, no pollution controls and no retirement, and you don't
care about anything but making money, there will be a giant sucking sound going
south ... when [Mexico's] jobs come up from a dollar an hour to six dollars an
hour, and ours go down to six dollars an hour, and then it's leveled again.
But in the meantime, you've wrecked the country with these kinds of
deals.
Fast-forward
more than a quarter-century, and every nation in the West failed to heed
Perot's warning. The jobs went overseas, real wages stagnated, the Rust
Belts accelerated their rusting, and real economic growth trended toward zero.
A return to more nationalist economic policies throughout the West will
stop the wealth flow to authoritarian regimes being propped up by capital flows
from their cheap imports flooding the West and who show no signs of democratizing,
improve our collective national securities by allowing us to properly fund
individual militaries and the collective defense network, and – most
importantly – increase the standard of living for freedom-loving citizens.
https://www.americanthinker.com/blog/2018/07/are_trade_deficits_good_ask_60_years_worth_of_data.html