tv Peter Navarro Outlines Trump Administrations Trade Policy at Economic... CSPAN March 27, 2017 2:44pm-3:33pm EDT
we are here today on the 33rd economic policy conference, wonderful to see to many of you with us here. of our conference theme this year is recalibrating policy growth. i think that's quite -- given the topics that'll be debated of our first opening session. >> i am delighted to invite moderator for this session. our director and code chair of our planning committee for this conference to introduce our speakers. thank you. [ applause ] thank you very much, george, it is a pleasure to invite pete
navarro to come and present to us today. he's currently the director of the white house national trade council and prior to that, he's been a professor and economics and public policy at the university of california of irvine for the last 25 years. he comes with a great deal of experience. join me and welcoming peter to the platform. [ applause ] morning. >> it is not church yet. good morning. >> thank you, thank you. >> i want to thank you to deliver this address. today the broad topic i want to talk about is whether trade deficits matter. before i do that, let me tell
you about what i do as a director of the white house national trade council. at the micro level, i manage a trade council s.w.a.t. team to assist our nation's manufactures and workers and ranchers and farmers with any type of trade problems they maybe having. everyday as the request for assistance coming in, i am amazed how difficult it is for our company to compete on the lec level plainfield. this heart land of america icon is grappling with a practice called country hopping which two of its south korean competitors, lg and samsung moving their
productions to another country which time there is adam p ca w case on them. >> this is precisely the kind of trade cheating that must be stopped. it underminds the whole order even if it puts thousands of americans on the unemployment line and imposes millions of dollars of losses on companies like whirlpool. at the macro level at the national trade council, i have been tasked with assisting on trade related issues and the important trade negotiations that'll be moving more ward with nafta partners like mexico and japan as well as other allies such as japan and great britain. the over arching goal is to promote what president trump has
called free, fair, and reciprocal trade. >> let me say it one more time, free, fair, reciprocal trade. america's trade with the world is anything with reciprocal. >> while we have the lowest tariffs in and non tariffs barrier in the world and foreign capitols entering this country with few restrictions, american exporters and service providers and investors are not of the same receiving the same treatments. that observation is a perfect segway to our topic today. do trade deficits matter? this is an important question because america's trade deficit in goods is large and persistent. $734 billion in 2016 and on the order of about $2 billion every
single day. communist china accounts for half of that deficit in goods, 47% to be exact. capitalist gero and japan each run annual surpluses with america of over $60 billion which accounts cumulatively for another 27% of that deficit. if we measure our by lateral deficits using the volume of our two-way trade, ireland and vietnam curvee vietnam actually outstrip china, while malaysia, thailand and italy onto faren't far behind. other countries which run significant deficits include india, south korea, taiwan,
france and switzerland. what all this adds up to is a group of 16 countries that account for the lion's share of our deficit problem. if, of course, you see these by lateral trade deficits as a problem, that's the question for us. do trade deficits matter. more specifically, do america's large and persistent trade deficits pose an economic and national security threat. to begin our inquiry, let's first knock down the straw man typically set up to debunk concerns over the trade deficit. that view is summarized in a quotation from a think tank analyst. i'm going to read it to you in two parts. here's part one. quote, the trade deficit is not caused by unfair trade practices abroad or declining industrial
competitiveness at home, unquote. if this is true, one must wonder why other countries force technology transfers or currency manipulation to boost their competitive advantage abroad or protect their markets at home. one must also wonder why countries ever try to improve their industrial competitiveness by lowering their corporate tax rates or reducing their regulations, or by trying to boost research and development, rates of innovation, and capital investment. in fact, after some breathe thoug -- brief thought you may agree with me that it seems silly on its face. quote, trade deficits reflect the flow of capital across
international borders, flows that are determined by national rates of savings and investment. here's the important point. this renders trade policy an ineffective tool for reducing the nation's trade deficit. this of course is the age-old accounting identity argument that any deficit in the current account must be offset by a surplus in the capital account, so that at least from a balance of payments point of view, the country is always in balance. true that as far as it goes but there are two obvious problems with this statement. first, it fails to recognize that a persistent current account deficit offset by capital inflows inevitably must involve an equally persistent transfer of assets and net worth from the deficit country to the surplus country. over time this can have
significant long-term negative consequences, and in the limit may result in what warren buffett has referred to as conquest by purchase. this is a risk i shall return to later when i discuss the trade deficit as it relates to national security. the second obvious problem with the statement is that it far too narrowly construes trade policy when it describes it as an ineffective tool for reducing the nation's deficit. at least in the trump administration we see tax, regulatory and energy policy reforms, along with eliminating currency manipulation and other forms of trade cheating as essential elements of a broader policy aimed at reducing our bilateral trade deficits and increasing jobs. for example, suppose the trump administration succeeds in lowering the corporate tax rate,
trimming the regulatory burden, reducing the cost of energy and imposing duties on currency manipulators. in this changed incentive structure and improved business climate, companies like ford and carrier will tend to invest more in michigan and indiana rather than offshore their production to mexico and china, and then it's worth their products back into the u.s. market. this more broadly defined trump trade policy, working in concert with traditional tools to defend against practices like dumping will hardly be ineffective. indeed, this broadly defined trump trade policy will create many more jobs in the homeland and the heartland, even as it improves our trade balance. the larger point is that this current account versus capital account view of the world has failed to grasp the full significance of the trump view
of trade policy even as it ignores the basic realities of the global marketplace. with that as a prelude, let me turn in the arguments in support of the claim that trade deficits not only matter when it comes to jobs and growth and national security, they matter a great deal. at this point in my remarks, you may have noticed that i prefer to focus on the trade deficit in goods rather than the overall trade balance which includes services. while services are a critical part of our economy and an essential part of trade, as our incredibly productive and equally important agricultural sector, the production of manufactured goods tends to have both a higher job multiplier and command higher wage levels. it follows that if the u.s. is to increase its rate of job creation and see its income
levels rise and in the process rejuvenate the once vibrant manufacturing hubs of states like ohio, michigan, north carolina and pennsylvania, we must focus on enhancing and expanding our industrial base through prudent tax, regulatory energy and trade policies. for those of you who will inevitably claim that bad policy is the real villain in the decline of american manufacturing employment, i simply note this for the record. while the percentage of americans working in manufacturing has fallen to 8%%, germany by contrast which has some of the most advanced robotics in the world, continues to employ fully 20% of its workforce in manufacturing. at this point, i also note for the record that a strong manufacturing and defense
industrial base is the very bedrock of america's national security, a theme i will return to later. for now, let's turn to the question as to why trade deficits matter when it comes to economy growth and job creation. let's begin by noting that growth in any nation's real gross domestic product or gdp, and therefore it's ability to create jobs and generate additional income and tax revenues, depends on only four factors. consumption, government spending, business investment, and net exports. let's look first at the net exports term which is simply exports minus imports. of course, when imports exceed exports, that's a trade deficit. but if we are able to reduce our trade deficit through tough, smart negotiations, we should be able to increase our growth rate. let me give you an example. suppose the u.s. successfully
negotiation bilateral trade deals with germany and mexico this year, and as a key part of the term sheet, each country agrees to purchase more products from the united states than it now purchases from the rest of the world. this would show up in the government data as increased u.s. exports, a decreased trade deficit, and an increase in u.s. gdp growth. at the same time, if the u.s. uses its leverage as the world's largest market to persuade india to reduce its notoriously high tariffs and japan to lower it's nontariff barriers, we will surely tell more washington apples, florida oranges, california wine, wisconsin cheese and harley davidson motorcycles. we will see our trade deficit fall, our growth increase and real wage levels rise from
seattle and orlando to sonoma and milwaukee. what about the investment term in the gdp equation? here, to the extend unfavorable tax trade energy and regulatory policies push capital investment offshore or discourage new investment at the margin, it's reduced in the gdp equation and so too quarter to quarter and year to year will the rate of economic growth and job creation that we could otherwise have achieved also be reduced. >> chris e: this is not the end of the general equilibrium story however. if off shore production generates products for export back into u.s. markets, for example, an american consumer buys a ford focus imported from mexico rather than assembled in detroit, there is a further
reduction in gdp growth through the export channel. to understand this complex dynamic better, let's take a specific example that has been in the headlines, the carrier company. during the 2016 presidential campaign, carrier's management announced its decision to close its air conditioner factory in indianapolis and move production to mexico with the intent of selling some of its products back into the u.s. tariff-free under the nafta treaty, a move harshly criticized by candidate trump. after the election, president-elect trump together with vice-president elect pence successfully negotiated a deal in which carrier will remain in the u.s. and expand its facilities. down the road the carrier deal will show up in government statistics as an increase in
fixed nonresidential investment rather than a decrease. imports from mexico will be lower than they otherwise would be. and u.s. exports will be higher if carrier sells more products overseas. of course, critics might say the deal will make carrier's air conditioners more expensive and harm consumers, but you can't buy an air conditioner much less pay your mortgage if you get laid off because your job went off shore. a happy epilogue to this story is that carrier's sales appear to be up on the basis that they have made a strong commitment to made in the usa and consumers are responding to that positive message. so the bottom line here to paraphrase gordon gecko, is that growth is good, and growth that comes from a strategic reduction in the trade deficit and an equally strategic increase in
business investment is especially good. now, let's turn to the question of whether america's large and persistent trade deficits might pose a threat to our national security. this, frankly, is a question that usually falls outside the siloed walls and world of academic and business economists. yet stripped rhetoric, this type of question within the context of the trade deficit is simply a form of strategic risk assessment. in assessing this risk, here we must remember the central premises of those who debunk the dangers of trade deficits. to wit, any such deficits must be offset by surpluses in the capital account brought about by investment into the u.s. by foreigners. in the benign version of this
view, those foreigners with whom we accumulate large trade deficits will productively return our dollars to u.s. shores. they will do so by investing in our bonds and stocks and by building new production facilities and of course our mortgage and loan rates will be lower, our stock market will be capitalized and our people will be fully employed. here's the best yet weakest part of the debunkers argument. they say such a pattern of wealth transfer offshore can't possibly persist. you know the argument, eventually the dollar must weaken, our exports must rise, our imports must fall, and trade t at least according to the theory, must inevitably come back into balance. of course, here's the problem. in the real world the fixed exchange rates, managed floats and outright currency manipulation, we are not seeing
any of the appropriate or expected adjustments. instead, our trade deficit remains both large and persistent. and if the current distorted market patterns continue, and to paraphrase canes, in the long run, we are all likely to be owned by foreigners. this is precisely the threat i alluded to earlier, that radical warren buffett first raised, so-called conquest by purchase. in buffett's view, the u.s. trade deficit is allowing our net worth to be transferred abroad at -- in his words -- an alarming rate. he warnings that foreigners will eventually own so much of america that we will have nothing left to trade and that we will wind up working long hours just to have food to eat and to service our debt. in truth, even the buffett version of conquest by purchase is too simplistic, too sanitized
and too benign. the only real danger in buffett's squander land is that our future generations will work more for less. suppose instead that it is not a benign ally, buying up our companies, our technologies, our farm land and our food supply chain, and ultimately controlling much of our defense industrial base. rather, it is a rapidly militarizing strategic rival, intent on ha gemny in asia and perhaps world ha germany. how might this alternative version of conquest by purchase end for us and our sons and daughters? might we lose a broader cold war for our freedom, prosperity and democracy, not by shots being fired but by cash registers ringing. might we lose a broader hot war simply because we have sent our manufacturing and defense industrial base off shore on the wings of a persistent trade
deficit. today, after decades of trade deficits and a mass migration of our factories off shore, we have only one company in the entire united states that can repair navy submarine propellors. today, we do not have a single company in the u.s. that can make flat panel displays for our military aircraft. other items that we can't produce in the u.s. include everything from might vision goggles and certain types of armor plated steel to integrated circuits. meanwhile, our steel industry is on the ropes and our aluminum industry is flat on its back under the weight of massive dumping. our shipbuilding industry is gathering barnacles. we have already begun to lose control of our food supply chain, and there is a full bore
ground game under way now for the foreign purchase of large swaths of the treasures of silicon valley. my point is simply this. most of those in our profession have chosen to ignore the broader national security risks that stem from large and persistent trade deficits and the concomitant decline of our manufacturing and defense industrial base. instead, most of our profession as well as much of the mainstream media, continues to embrace and espouse an antiquated view of the world that has little to do with the events or risks of our time. however, as vice-president pence once remarked on the campaign trail, the people of ft. wayne know better. i might add here, the pentagon knows better as well. with that admittedly harsh judgment of the state of international trade economics,
let me conclude these remarks by addressing several of the most well known arguments against taking action to reduce our trade deficits. first, there is the inflation argument i alluded to earlier that goes something like this. if the trump administration succeed in balancing our trade through tough negotiations and cracking down on cheating, this will drive the cost of products up and disproportionately harm the poor. the extreme view here is that even if a country is dumping products below cost in our markets, we should simply take whatever they want to export and applaud them for providing consumers with great bargains and lowering our inflation rate. to me at least this seems to be an elitist out of touch argument as it assumes that the poorest segments of our society would rather have cheap products than a good job and a good paycheck. and i for one amfar mo far more
focused on increasing the job growth and job creation than worrying about any modest inflationary effects that might result from wiping away any unfair trade practices from the liberal trading order. as a second argument in defense of trade deficits, there is the we don't or can't make it here gam gamut. as this story goes, the united states does not and cannot produce many of the things that it ports either directly for its consumption or indirectly for its supply chain. therefore, even a more muscular trump trade policy will have no effect on u.s. manufacturing jobs. the only thing i can tell you here is that one of the major goals of the trump administration is to reclaim all of the supply chain and manufacturing capabilities that would otherwise exist if the playing field were level.
let me say that again. one of the major goals of the trump administration is to reclaim all of the supply chain and manufacturing capabilities that would otherwise exist if the playing field were level. no more, but certainly no less. and remember here, 20% of germany's workforce is in manufacturing compared to 8% here in the united states. of course, i know there will be difficulties and bottle necks and labor issues that address as we seek to rebuild our manufacturing base and the domestic supply chain to help support it. and i know this will all take time, but that doesn't mean we shouldn't try. now, the final common argument used in defense of trade deficits and, more broadly, the status quo, is that if we try to stop the cheating and unfair trade practices that contribute to these trade deficits, that
will just start a trade war. i would simply ask in response to this obvious alarmism the following question, would not both america and the global trading order be better off if trade were truly free, fair and reciprocal as president trump is asking for. to the principles of fairness and arrest prosty, i would pose these additional questions. is it a coincidence that japan has very high non-tariff barriers and also exports more vehicles to the united states in two days than the u.s. exports to japan in a year. is it fair for germany to provide its exporters with a 19% vat rebate when under the unequal treatment of our income tax system by the world trade organization, american exporters
to germany can't get a reciprocating rebate. is it a coincidence that india has some of the highest tariffs on finished goods in the world and a company like harley davidson has to export its motorcycles to india in parts for assembly by local hands. is it fair for countries like vietnam and thailand to serve as platforms foor the diversionary jumping of chinese state industries and korean conglomerates. how come a chinese company can set up production on u.s. soil and sell freely into our market when a u.s. company producing on chinese soil must take on a 50% joint venture chinese partner and run the very real risk of losing its intellectual property. i could go on and on here. you know this. and if i had to filibuster all
day during this conference -- i won't do that -- all i would need do is pull out a copy of the latest annual national trade estimate report on foreign trade barriers published by the united states trade representative and start reading it. by the end of that filibuster, i could just as easily ask this: how come that report gets bigger every year? so, what i'm saying here is that trade should indeed be free, fair, and reciprocal just as president trump has stated. on that note, let me be abundantly clear. the broader goal of a free trade policy based on fairness and rest prosty is not to raise either tariffs or nontariff barriers. rather, it is simply to encourage our trading partners to lower theirs.
this is a policy of free and fair and truly reciprocal trade that begins and ends with the belief that bilateral trade deficits do indeed matter, and it is a critical economic goal and in the interest of national security to reduce these deficits in a way that expands overall trade even as americans are allowed to compete on a level playing field. our workers and domestic manufacturers and our farmers and our ranchers deserve no less from our country's trade policies, and it is long past time that we delivered both for them and for america. thanks for listening, and i look forward to your questions. [ applause ] >> you should have cards or a sheet of paper at your table for
questions. pass it to a staff member and they'll bring your questions to me here. while we're waiting for questions to make their way up here, peter, thank you again for your remarks here today. one principle that you made very clear was that trade to be free, fair and reciprocal and i think that's something that a lot of nabe's leadership would agree with. today nabe is releasing a survey of its membership and on the questions of free trade, it was clearly a majority that felt that trades should be freer, we should have freer trade, and generally oppose any restrictions, unfair restrictions on trade. there was also a sentiment in the survey that u.s. tax policies may be impeding the export sector. you mentioned that tax reform was one of the critical or essential elements that the
administration would be looking at to support the export sector. what parts of the tax code are you all looking at? >> so one of the key themes that wilbur ross and i continually hammered on during the campaign was the idea that if you're going to solve your economic problems, you had to think of it holistically and ginner jisicily. it's tax policy, regulatory policy, energy policy and trade. so, the analysis that we've seen show that if you're at 2% growth and you deconstruct that and try to figure out how to get to 3.5 or 4 like we want to do, each one of those components of policy, tax trade, energy and regulatory, give you a little bit of an increment towards that, and then together there's an additional sin ner gistic
component. we always talk about the corporate tax in the context of how that would increase domestic investment and thereby help us on the trade issue. we have the highest corporate tax rate of any major country in the world by a significant amount, and it's not just that we have the highest tax rate, it's that other countries have strategically used and gained their own tax system to accentuate our disadvantage. we've seen going back to when we signed the nafta treaty a movement towards the vat tax, and as you all know, the unequal treatment of our income tax by the world trade organization provides countries with a vat an
advantage. so, frank, to your question, really the most important thing is to get our tax rate and our regulations and our energy prices down. all of that working together, and the corporate tax for me was always where i would start first. >> thanks. there are a couple of questions on tpp and nafta. >> i got to ask here, can't these people afford to hand out three by five cards for the table and maybe some pens? this is priceless. in the economic policy survey there was strong favorable sentiment toward nafta. i have a couple questions about nafta and tpp. tpp moved the u.s. towards free and fair trade. why did the administration walk
away from it? >> read that again for me. >> tpp moved the u.s. towards -- >> i'm saving this for my memoirs. tpp moved the u.s. towards free and fair trade, yeah right. is that what tpp did? what tpp did was basically create a trade agreement which would have been a death knell to our auto and auto parts industry in the middle of the country which we urgently need to bring back to full life. tpp had nothing to do with free, fair and reciprocal trade. it was simply a bad deal. there's certainly some things you can pull out of it in terms of, well, that was a good idea, but for me, the worst thing about tpp hands down was the rules of origin. it was pathetically low.
one of the things that we're going to be doing moving forward -- and this is publicly stated -- is to try to significantly increase rules of origin provisions in all the bilateral trade deals that we are going to pursue. here's the problem we have right now. we have a lot of big buildings in this country that say things like ford and g.m. and caterpillar and whatever it is, the big oems. but those are basically assembly plants for foreign components. and the jobs that this country needs are not just in those big boxes. the jobs are in the second and third tier, small and medium size firms that constitute the supply chain. and tpp moved us in exactly the opposite direction from that
goal. of course, the other problem with tpp is it was a multi-lateral deal that raised significant sovereignty issues, and it didn't really leverage our bargaining power as the world's largest market, biggest economy in the world. so yeah, i'll cherish this card. anybody want to own up to this one so i can put your name on it? tpp moved the u.s. towards free and fair trade, okay. next question? >> we have a couple of questions about the carrier -- >> yeah, you pushed my button on that one. >> you started by highlighting the mobility of capital. doesn't the tax break required to keep carrier in the u.s. highlight there was no free lunch? you may get more gdp from net exports but less g given lower tax revenue. >> let's look at the chess board
here. i think most of us would agree here that if we cut our -- anybody want to raise taxes in this room? how many want to lower the corporate tax rate, come on, give me a hand. only four people in this room want to lower the corporate tax rate or you don't want to agree with me on anything? tough crowd. our policy is simple. lower the taxes, cut the regulations. when you cut the regulations you're going to be lowering our energy costs. crack down on trade cheating and make sure our bilateral trade deals include things like rules of origin that benefit our supply chain. that's where we're looking at. we're trying to skate to where the puck is going to be. what else you got? >> okay, here's one on currency manipulation. during his campaign, president trump said he would direct the treasury to declare china a
currency manipulator. so far that declaration has not been made. has the president changed his mind on that point? >> the treasury department has to report twice a year on that issue and it's coming up in april. so i suggest you get steve mnuchin here the end of the month and put him on the hot seat. >> do you have it's overvalued right now? >> that's an interesting question. he asked whether chinese currency was under valued or over valued which is a different question as to whether you think they're man ill laipulating it. let me say on the under valuation question, look within the context of the bilateral trade deficit between china and
the u.s. it it's half of our trade deficit in goods, and if you believe the old style ra card yan david humstuck, what's supposed to happen is that the luann is supposed to increase, the dollar is supposed to weaken. we're supposed to sell more exports, buy fewer imports and trade is supposed to come back into balance. if you look at it through that lens, it's clear that the chinese currency is under valued. it's also clear that historically the chinese have taken aggressive policies to make sure the currency was under valued. now, to the question of whether it's under or over valued today, let me say two things about that. there is a point of view that
because of the crackdown by president she in china that there's a lot of money trying to get out of the country and that's driving the currency d n down. i think that's the second order small effect compared to a conscious strategy by the chinese to essentially dramatically increase their foreign investment around the world, including here. fact of the day, i can't verify this but i've been told by several people this is true, china is buying one company a week in germany. certainly they're very aggressive about buying assets here. it's an interesting question but it's going to be april until we get some clarity on that.
>> let's move to germany now. here's a question about germany. you mentioned the possibility of goesh negotiating a trade deal with germany. is that a goal of the administration and how would you do that since germany is a member of the eu and doesn't have an independent trade policy? >> this is the problem with germany. it is able, basically, to use the argument that they're in the eurozone, therefore, they can't have any kind of discussions with the united states about reducing their almost $70 billion trade deficit. that may or may not be true. i think that it would be useful to have a candid discussion with germany about ways that we could possibly get that deficit reduced outside the boundaries and restrictions that they claim
that they're under. but it's a serious issue. germany is one of the most difficult trade deficits that we're going to have to deal with, but we're thinking long and hard about that and i know that angela merkel is coming here soon and perhaps there will be some discussions about how we can improve the german/u.s. economic relationship. i'm sure they can teach us a thing or two about how to get more of the workforce in manufacturing. >> the instituit was estimated that the dollar was overvalued. the overvalued dollar is like a tax on sales of u.s. factories. what can the u.s. do to reduce the over valued dollar?
>> i don't really have any thoughts on that. the premise of the question i'm not wild about. i don't -- in terms of policy, i know there's always a debate about strong or weak dollar or whatever. what i'm focused on is simply how this country can compete better internationally, how we can sell more exports and how we can prevent imports that are illegally dumped into our country. and that's my focus. >> here's a question on the bilateral surplus and services that the u.s. had. what does free, fair, reciprocal trade mean for these u.s. companies, companies that specialize in services? >> services of course is a great
counter balance to our trade deficit in goods, and the administration is going to do everything it can to continue to promote services abroad. >> kwhaes yowhat's your positio export/import bank? >> i don't have a position on that. it's interesting. that one is above my pay grade. >> how do you square the likelihood that a return of manufacturing jobs would be skewed to high skilled jobs when we don't have adequate job training programs like in other countries like germany? >> sure. so, as the director of the national trade council, my mission is to stand up for american workers and domestic manufacturers. we are well aware of the need in
a rapidly changing technological world to continually renew the skill sets of our workforce, and so in order to address these kinds of problems, this is going to be a synergistic effort between the department of commerce, the department of labor, other agencies, the government, the white house, to try and address these skill gaps, and we're going to work really hard to do that. the first way to solve a problem is to recognize there is one, and we know that. >> synergies across the different parts of the federal government sounds like a really good first step. >> unique idea, yes. should call it the silo. it's going to be different in the trump administration. >> thank you so much, peter, for being here today.