As President Trump and China escalate their trade war, there is a tariff champion in the White House that strongly supports this kind of approach. It’s not Larry Kudlow, who described himself on his Kudlow.com website as an “Influential supply-side economist, and unapologetic supporter or capitalism and the free markets.” (His website was taken down when he joined the administration.) Instead, it is Peter Navarro, the Director of Trade and Manufacturing Policy, whose raison d’être in recent years appears to be holding China accountable for its economic sins, and prepare the U.S. strategically for the threat the communist country poses economically and militarily.
But while the Harvard educated economist has the president’s ear, he is not universally admired, says Phillip Braun, Professor of Finance at the Kellogg School of Management at Northwestern University. “He has ideas that have no basis in reality. Such as trade wars are good. Or that tariffs are good. But they have severe consequences for the U.S., and we’ve seen this in the past when the U.S. has imposed tariffs.” (Fortune reached out to the White House Press Office for comment from Mr. Navarro, but did not receive a response.)
Nonetheless, Navarro has been able to convince the president to take on China with trade tariffs. There are now plans to expand them to more products beginning September 1st, which compelled China last week to announce retaliatory tariffs on U.S. goods and U.S. crude oil imports, which in turn prompted Mr. Trump to announce additional tariffs on more goods at higher levels as he “ordered” American companies to bring their operations back home. Most economic forecasters—including the Congressional Budget Office—have lowered their GDP forecasts in the coming months and years. And JP Morgan says the average American family will face $1,000 of additional costs per year.
No surprise then that many investors on Wall Street cite “trade uncertainty” as a reason they may not be investing heavily into the future. In fact, in January of 2018, 20 months ago, the stock market was trading around the 26,000 level. That’s almost exactly where it stands today. In other words, we haven’t gone anywhere in the Dow Industrials Index in almost two years—about the time the first Trump tariffs were put into effect.
But Peter Navarro would argue: President Trump didn’t start a trade war with China. We were already in a trade war. Most people just weren’t aware of it.
He made that exact point in his 2012 documentary film, “Death by China,” which supporters would say tells the truth, while critics would call one-sided. It is based upon the book by the same name, co-authored by Greg Autry, Professor of Entrepreneurship and Innovation at the University of Southern California.
“They are systemic cheaters,” says Autry. “It’s important to realize the book and documentary are about the integrated Chinese strategy and threat. It’s not just tariffs and jobs, but includes politics, civil rights—and environmental and military problems are just as important.”
The documentary primarily focuses on showing how China has gained an advantage through a variety of unsavory means. Among them:
• China pollutes, giving them a competitive cost break. They have no OSHA, and no labor unions.
• China has cheap labor, with forced labor camps. A quote from a former factory worker: “Good labor, good food; less labor, less food; no labor, no food.”
• China manipulates its currency. The Communist country picks its currency level to keep its prices low. This makes their products more affordable worldwide.
• China will hack into American companies’ computers to steal intellectual property.
• China will also offer contracts to American companies to do business inside China, where Chinese workers will learn how to counterfeit or produce their own domestically-made product, and then end the business relationship with the American company. From the film: “The Chinese have no intention of turning over their domestic market to foreign companies. Once they master the technology they are going to make it very difficult for foreign nations to make a profit.” In a speech to the Hudson Institute in June of 2018, Navarro described the process in which China will use licenses to extract concessions, usually on technology. “It’s always about technology transfer.”
• China supports its companies—many of them state owned—with illegal export subsidies, giving them a competitive advantage. From the film: “You’re not competing with Chinese companies. You’re competing against the Chinese government.”
Since the entry of China into the World Trade Organization in 2001, Navarro claims that 57,000 American factories have disappeared, and more than 25 million Americans have struggled to find decent jobs. (Keep in mind that this film was made in 2012, and since then unemployment levels have fallen to record lows. Wage increases among the lower income levels, however, have been slow to grow.)
Which brings us to tariffs, which Navarro has favored and the president imposed. Despite the president’s claims to the contrary, the Obama administration did impose select tariffs against Chinese products—such as tires, steel pipes and lawn mowers—but the Trump tariffs have been far more widespread.
Ideally, tariffs on Chinese products would make them more expensive to import, making American products more competitive, resulting in higher domestic sales, creating an incentive for companies to open up more factories again in the United States—voluntarily— employing more American workers. But as the financial markets are reflecting, it hasn’t been a smooth ride. Even the factories leaving China are not relocating to the United States. Almost all of them are moving to low wage countries like Vietnam or Cambodia. When asked why a president would take on this fight with China, Trump looked to the heavens and said, perhaps humorously, “Somebody had to do it. I am the chosen one.” Another answer might be that using China as a foil to talk about bring back American jobs is a strong populist position with a demographic that has been very supportive of the president. The risk is that the economy takes a hit and the president’s reelection chances go down with it.
Tariffs are also being used to get China to the bargaining table, with the goal of fixing the broken trade relationship. In an interview on “Fox News Sunday,” Navarro told host Chris Wallace that there are “seven deadly sins” that need to be addressed. “Stop stealing our intellectual property, stop forcing technology transfers, stop hacking our computers, stop dumping into our markets and putting our companies out of business, stop state-owned enterprises from heavy subsidies, stop the [importation of] fentanyl [and] stop the currency manipulation.”
“The short term solution is to use tariffs to manage China’s behavior,” says Autry, “because it’s the one tool the executive has without waiting for Congress and can be used swiftly and pulled back. So when—not if—China cheats, you whack them again, and when they cheat less, you back off.”
Yet even as economic uncertainty has coincided with the tariff tit-for-tat, it seems unlikely that Navarro would suggest that his boss stand down from a trade war. As we hear in “Death by China,” “Every time a consumer walks into a Walmart,” says Navarro, “the first thing they have to do is be aware enough to look for the label. Then when they pick up that good and it says ‘Made in China,’ I want them to think, hmmm, it might either break down or could kill me, number one. [Also], this thing might cost me or someone in my family, or my friend, their job. Lastly, if I buy this, this money is going to go over to help finance what is essentially the most rapid military buildup of a totalitarian regime since when? The thirties.”
In other words, members of this Administration have been itching for this fight for a while. And it’s not one they’re likely to wrap up anytime soon.
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