One of Donald Trump’s economic advisers will point out the shortcomings of U.S. trade policy by citing less-popular passages of classical theory. Another has witnessed the deficiencies firsthand in the steel industry.
Peter Navarro, a trained economist with a doctorate from Harvard, says Trump’s critics ignore the caveats in David Ricardo’s early-19th century work on the benefits of free trade. As former chief executive officer of steelmaker Nucor Corp., Dan DiMicco wants Trump to slap tariffs on Chinese goods.
Navarro, an economics professor at University of California at Irvine who advises the Trump campaign on trade issues, explains the Ricardian formula depends on countries operating with freely floating exchange rates and assumes all involved play by the rules. But Navarro says China is in violation of both conditions, so the theory breaks down.
“I know how it works, but more importantly I know how the Ricardian trade model doesn’t work,” Navarro, who over a 15-year period has written books and directed a documentary on the U.S.-China trade relationship, said in a phone interview. “Bad trade deals are at the heart of America’s economic malaise. Trump knows that in order for the global economy to prosper, we need to trade freely. But he’s not going to stand, for a second, cheating.”
Navarro blames Nafta and China’s 2001 entry into the World Trade Organization for much, if not all, of a 15-year economic slowdown in the U.S. The world’s largest economy grew an average 1.8 percent during that span, down from 3.4 percent growth from 1986 through 2000.
For a quick explainer on why trade has become a campaign issue, click here
China is Trump’s biggest target, with his campaign charging that illegal export subsidies, currency manipulation, intellectual property theft, and lax worker safety and environmental standards amount to an “undeclared trade war” on the U.S.
“There’s a natural antipathy on the part of the voters to a continuation of
globalization as we know it,” Navarro said. “It’s simply a code word today for bad trade deals that disadvantage the American people.”
Navarro and DiMicco, the campaign’s senior trade adviser, slam both political parties for not recognizing this “war,” much less fighting it. They point to Ronald Reagan as the last president to tackle the issue responsibly, and use his example as inspiration for Trump’s plan of action.
First, Trump will play “nice guy” by employing a “defensive” 45 percent tariff on Chinese goods, said DiMicco. That’s merciful compared with the 100 percent tariff that Reagan slapped on Japanese electronics in 1987, DiMicco said in a phone interview.
That has other economists concerned.
“Trump’s protectionist push risks fueling tariff retaliation, which could hit U.S. growth,” Thomas Costerg, a senior economist at Standard Chartered Bank in New York, wrote in a July 28 research note. “The U.S. president has wide unilateral powers regarding international trade, making it one area where Trump’s agenda could indeed be applied, unlike other matters, which mostly need congressional approval,” Costerg added.
Another Trump plan -- and the one roiling economists from across the spectrum -- is to rip up trade agreements and pull out of international memberships, including Nafta, the International Trade Commission, World Trade Organization and the pending Trans-Pacific Partnership deal now languishing in Congress.
“It’s like breaking up a marriage when you break up a free-trade agreement,” said Ethan Harris, head of global economics research at Bank of America Merrill Lynch in New York. “It’s not just between the husband and wife but all the other relationships that go with it -- the kids, the friends, the house, the 401(k).” Similarly, businesses would have to deal with disruptions up and down supply chains and a great amount of uncertainty, he said.
Harris notes that while China’s short-cutting is a “legitimate concern,” the charge of currency manipulation is outdated, and assailing all trade deals on this worry is overdone.
To the Trump camp, the divorce has been a long time coming and worth what they calculate will merely be near-term disruptions.
“The pain will be short-lived,” said DiMicco, because the U.S. will get China to change its behavior.
For DiMicco, who has written two books on how to make U.S. manufacturing flourish, Trump’s economic platform is both business and personal. As chief of the Charlotte, North Carolina-based Nucor, he faults trade deals for the industry’s ills as companies relocated overseas. Because China doesn’t play by the rules, the U.S. can’t benefit from productivity-inducing advances in technology.
U.S. manufacturing’s share of overall employment has been plunging for decades, challenging the idea that trade deals alone are to blame. Factories account for about 12 percent of the economy and services the remainder.
But it doesn’t have to be that way, DiMicco says. In another challenge to conventional economics, the 40-year steel industry veteran argues that the traditional pattern of an economy graduating from one based on agriculture, to manufacturing and finally to services is flawed.
“That whole economic policy -- that we could be a services-oriented country and not make things anymore -- is a failed economic strategy, absolutely grossly failed,” he said. “The emphasis on services versus making things and building things has resulted in one economic bubble after another since the mid-90s,” including downturns in the savings and loan industry, technology, real estate and financial services.
And what about the discounts that American consumers have enjoyed via open channels for imports, including goods from China?
“We’ve become dependent on cheap goods,” said DiMicco. “We never can lose sight of the fact that every consumer must first be a producer so that they have the financial wherewithal to be a good consumer” and keep the economy in balance, he said.
Navarro and DiMicco, while not in regular contact with Trump himself, said they frequently provide feedback to the campaign. They also started relationships with the Republican presidential nominee in similar fashion: Each has written books that earned Trump’s praise.
“He called me up and said, ‘Hey, I’ve been a student of a screwed-up trade system for decades,’” said DiMicco.