Last September an economist called Peter Navarro and a billionaire private equity tycoon called Wilbur Ross published a document which attempted to justify the ways of the Republican presidential candidate Donald Trump to the world.
The pair also unveiled something they called “the Trump Trade Doctrine”.
The document made few waves at the time, mainly because few believed Trump would actually win the election.
But things have moved on somewhat since then.
Trump is in the White House, Navarro has now been appointed to head the President’s official National Trade Council and Wilbur Ross is set to be Commerce Secretary.
Given how things have unfolded, that document from last September deserves a little more scrutiny, not least from Brexiteers whose hearts are fluttering over Trumpian promises of a quick post-Brexit trade deal with the US.
From an economic perspective the Navarro/Ross paper is a joke; a catalogue of confusion and basic conceptual errors bound together by a conspiracy theory. “Magical thinking” is the description from Marcus Noland of the Peterson Institute for International Economics.
The document cites estimates that the “cost” of domestic US regulations is $2trillion, 10 per cent of US GDP. But this is disingenuous, not only because the figure is grossly inflated, but because it completely ignores the economic benefits of regulations.
The requirement to fit seat belts in cars costs money, but it also saves lives. Anti-pollution regulations push up businesses’ costs, but they also result in cleaner air. One can – and must – put a monetary value on these benefits. The US Office of Management and Budget has estimated that each dollar of regulation brings benefits several times the value of the costs.
Navarro and Ross say Trump will cut this regulation bill by $200bn without saying which regulations will be axed – or what benefits will be destroyed in the process.
But it’s on trade where the fallacies really flow.
Navarro and Ross assert that Value Added Tax imposed by America’s overseas trading partners (including Britain) on US imports amounts to a “backdoor tariff”.
This is simply nonsense given that the VAT is chargeable on all domestic sales – whether the product is imported or domestically produced. This is a tax on domestic consumption, not imports. There is no discrimination here.
The document talks as if “bad” trade deals like the North American Free Trade Agreement (Nafta) of 1994 and China’s full accession to World Trade Organisation membership in 2001 are responsible for the collapse in American manufacturing employment.
This is literally incredible. US manufacturing employment has been falling since the 1950s, long before these deals were struck. And over this period US manufacturing output has been rising, revealing that this is mainly a story of automation and rising productivity, rather than good American jobs being off-shored.
Some individual communities in America have undoubtedly suffered as result of shifting global trade patterns and China really did undervalue its currency for many years to boost its domestic manufacturing sector.
But the idea that multinational corporations colluded with foreign governments to poach high-paying US jobs is a paranoid fantasy, as is the idea that Trump ripping up trade deals will bring back low-productivity manufacturing jobs to America.
But perhaps the most disturbing element of the prospectus is that Navarro and Ross come across as unabashed “mercantilists”.
They appear to believe trade surpluses are an indication of national economic health and trade deficits are a symptom of a disease, a fundamental misconception that the father of economics Adam Smith sought to banish 240 years ago.
Which brings us to the “Trump Trade Doctrine”.
Here’s how Navarro and Ross describe it: “Any deal [that Trump makes] must increase the GDP growth rate, decrease the trade deficit, and strengthen the US manufacturing base.”
Increasing the GDP growth rate is innocuous; that’s what increasing trade does for a country, mainly through applying more competitive pressure to its domestic industry.
But decreasing the US trade deficit? That’s where alarm bells should ring. According to our own Office for National Statistics the UK ran a £40bn trade surplus with the US in 2015. Our surplus is, of course, America’s deficit.
That implies that Trump will not sign a trade deal with Britain unless the terms are so stacked in favour of US exporters that its bilateral deficit with us will fall. This means that the Trump White House will expect to export more to us than we export to them. So any UK firms exporting to the US should be scared, not heartened, by talk of a deal (manufacturers in particular given the third leg of the doctrine).
The ONS figures may not be right. For various technical statistical reasons, they may overstate UK exports and US imports. Other figures suggest trade flows between the UK and the US are roughly equal.
Yet, even if they are, why would the White House’s mercantilists not want to turn that balance into a hefty US trade surplus with Britain, to erode their own overall deficit? “America first” is not an ambiguous slogan. This is where zero sum attitudes to trade lead. Their gain is our loss.
One hope expressed when Trump won the US election was that when he entered the White House he would be forced to listen to people who actually know what they’re talking about.
But if this is the calibre of “expert” that Trump is now receiving this might even be even worse than him listening to his gut.
Guided by the likes of Navarro and Ross, Trump can be confidently expected to make decisions that will harm the livelihoods of all Americans, not least those “forgotten men and women” who he claims as his constituency.
And dollars to doughnuts, as they say in America, he will also make decisions that end up harming the economic interests of Brexit Britain.