A Trade War With China Will Plunge The World Into Recession – But This Idiot Doesn’t Care

Last Wednesday, Donald Trump decided that China critic Peter Navarro should oversee American trade and industrial policy.

The Harvard-trained Navarro is the director of “Death by China,” a documentary you can now suffer through watch for free on YouTube if you’re too cheap to pay for Netflix. I’ve embedded it below for posterity’s sake.

Navarro isn’t what you might call a universally respected academic. He’s had a rather peculiar career that’s seen him try everything from running for elected office to penning books on how to get rich with macro analysis to tilting at Chinese windmills. He seems to have found his niche with the latter thanks in no small part to Donald Trump, who apparently believes he has found a kindred spirit in the University of California, Irvine professor.

Whether or not Navarro knows what he’s talking about is debatable (see here for instance). As The New Yorker’s Adam Davidson wrote back in October, “Navarro’s views on trade and China are so radical that, even with his assistance, I was unable to find another economist who fully agrees with them.”

Similarly, Davidson says “Navarro is the only Ph.D. economist I was able to find who enthusiastically supports Trump.”

It’s a match made in heaven (or hell).

More than one observer has even gone so far as to suggest that Navarro’s understanding of economics is on par with that of a college freshman. But to Trump, he’s a “visionary economist.”

In any event, you don’t have to have a doctorate in econ to understand why Trump’s policy proposals for dealing with the Chinese “threat” are borderline delusional. At the most basic level, the new President is essentially proposing that we begin to dismantle global trade altogether in favor of a kind of inward-looking, neo-isolationist regime. Obviously this represents a step backwards for society and should thus be cast aside without further consideration.

But alas, it wasn’t cast aside and now we’ve got what amounts to a trade Czar -in Navarro -that actually believes in Trump’s ravings. And why shouldn’t he believe in them? After all, he inspired them!

Here are some other rather obvious obstacles to adopting a Trumpian stance on trade with China (again via The New Yorker):

Navarro’s view is not just simplistic, it is wrong and dangerous. There’s no reason to think China would acquiesce to Trump’s threats; doing so would all but guarantee that China would face an unending series of similar threats from America and others. Instead, it would most likely respond with tariffs of its own, shutting down American imports.

Navarro and Trump also assume a manufacturing universe that no longer exists. American manufacturers have shifted away from making lower-cost commodity goods and focus, instead, on more expensive, complex products, like medical devices, automobiles, and airplanes. All of those goods require a steady input of smaller, commodity components like screws and circuit boards that are made in China and other countries.

Trump and Navarro focus on America’s manufacturing-trade deficit. But the global economy has also brought the U.S. a tremendous investment surplus. Foreign governments, companies, and citizens spend much of their savings on U.S. government bonds and the stock of American companies. While this investment has not always led to benign outcomes (the financial crisis of the previous decade was, in part, caused by all that cash from all over the world seeking returns in the U.S.), shutting down global trade would, necessarily, also shut down this investment. Interest rates would skyrocket, and the U.S. would enter a painful recession, possibly a depression.

It has been an awful few decades for manufacturing workers and for many others, especially those with less education. While a good chunk of the blame should fall on our dramatic increase in trade with China, other onslaughts have contributed greatly. Workers have been displaced by technology and discouraged from getting more education because of the rising cost of public universities.

Right. These are all things that Trump either hasn’t thought about or if has thought about them, he just doesn’t care. And why would he? It just sounds so much better to shriek “China is killing us!” from the campaign bully pulpit than it does to try and explain to angry, jobless manufacturing workers why starting a trade war with Beijing is a horrible idea. The New York Times puts it quite succinctly:

A wide range of economists have warned that curtailing trade with China would damage the American economy, forcing consumers to pay higher prices for goods and services. Experts on manufacturing also doubt that the government can significantly increase factory employment, noting that mechanization is the major reason fewer people are working in factories.

Now with all of that in mind, consider the following from Citi, who explains, in four short bullet points, why a trade war would “lead to significant losses for both sides”…

From Citi:

  • If high trade tariffs were to be slapped on Chinese exports to the US, China’s economy would slow further in the short run and the unemployment rate in export industries could rise sharply, potentially leading to social instability. As a response, China could retaliate by repatriating its US treasury holdings, sending shock waves into global financial markets.
  • In addition, China’s capital controls could be tightened and even re-imposed. This would affect many US MNCs operating in China. Such disruptions would hamper consumer and business confidence through lower stock market valuations and a negative wealth effect in the US.
  • Given China’s GDP size and its growing importance for US MNCs, US growth would also be affected (Figure 26).
  • In the medium term, China could rely on the EU or even Japan for its technology upgrades, possibly shutting US technology firms out of China and leading to large job losses in services and the high-tech sector in the US, defeating the intention of the Trump administration to create millions of local jobs.

china

And Citi’s conclusion: “In a nutshell, both economies would suffer significantly in a trade-war scenario. As China still contributes 25% to one-third of global economic growth, a trade war between the largest and second-largest economies could potentially send the world economy into a recession.”

So much for making things “great again.”

*****

Watch Navarro’s documentary below to see if you agree with one reviewer who called the film “the documentary equivalent of a raving street-corner derelict.”

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5 thoughts on “A Trade War With China Will Plunge The World Into Recession – But This Idiot Doesn’t Care

  1. Someone should tell Trump that one of the consequences of the Smoot-Hawley Tariff Act of 1930 was that Smoot, Hawley, and President Herbert Hoover, who signed the Act into law, were all bounced out of office by the electorate in 1932.

  2. Thank you so much for your link to Navarro’s book. I watched the entire thing with my Chinese significant other last night. I sure hope this is not president-elect Trump’s only source of information on China. It’s filled with alarmist and outdated information such as product quality, environmental disregard, and human rights abuses such as organ harvesting. I would not recommend anyone view it unless you know someone Chinese or have another way of fact checking for current information. I see why she says that the Chinese all hate Navarro so much.

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