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The Trump Trade Doctrine: A Path to Growth & Budget Balance

October 24, 2016

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[Wilbur Ross & Peter Navarro| October 18, 2016 | Real Clear Policy]

Budget-deficit hawks often insist that the only way to balance the Federal budget is to raise taxes or cut spending. The far smarter path to balance the budget is simply to grow our economy faster. 

From 1947 to 2001, the U.S. real gross domestic product grew at an annual rate of 3.5 percent.  Since 2002, that rate has fallen to 1.9 percent — at the cost of millions of jobs and trillions of dollars of additional income and tax revenues.

Donald Trump’s economic plan will restore America’s real GDP growth rate to its historic norm.  It proposes tax cuts, reduced regulation, lower energy costs, and eliminating America’s chronic trade deficit.

Hillary Clinton’s economic plan, by sharp contrast, will further inhibit growth. It proposes higher taxes, more regulation, and additional restrictions on fossil fuels that will significantly raise energy and electricity costs. Clinton will also perpetuate trade policies and trade deals she has helped put in place that have led to chronic trade deficits and reduced economic growth.

Our analysis, released in a 30-page report, indicates that the Trump trade, regulatory, and energy policy reforms would collectively increase Federal tax revenues by $2.4 trillion. In a separate analysis, the Tax Foundation has reported a dynamically scored $2.6 trillion revenue reduction from the Trump tax cuts. Taken together, these two analyses, along with proposed budget cuts, indicate that the Trump economic plan is both revenue neutral and fiscally conservative.

The Clinton plan of higher taxes, more regulation, and chronic trade imbalances promises merely more of the same slow growth, stagnating wages, and chronic budget deficits Americans have endured for the better part of this new century. While it took America over 230 years to run up a $10 trillion government debt, the Obama-Clinton Administration doubled that debt in just eight years.

It would be one thing if this massive deficit spending had spurred growth — or at least had been used to refurbish our crumbling infrastructure. Instead, all we have gotten is slow growth far below historic norms and the weakest economic recovery since World War II.

Many economists have described this era of slower growth as the “new normal.” They blame this plunge at least in part on demographic shifts such as a declining labor force participation rate and the movement of “baby boomers” into retirement. This Clintonian view of America’s economic malaise is incomplete — and unnecessarily defeatist. It ignores the significant roles higher taxes and increased regulation have played in inhibiting U.S. economic growth since the turn of the 21st century as well as our ability to fix the problems.

This new normal argument — it should more appropriately be called the “new dismal” — also ignores the self-inflicted negative impacts from poorly negotiated trade deals and the failure to enforce them. These bad deals include, most notably, NAFTA, China’s entry into the World Trade Organization in 2001, and, most recently, Hillary Clinton’s debilitating 2012 U.S.-Korea Free Trade Agreement.

In 2012, then Secretary of State Hillary Clinton promised that the “cutting edge” South Korean deal would create 70,000 new jobs. Instead, the US has lost 95,000 jobs and America’s trade deficit with South Korea has roughly doubled. Moreover, workers in the U.S. auto industry, particularly in states such as Michigan, Ohio, and Indiana, have been hard hit. 

Donald Trump has pledged to renegotiate every one of America’s bad trade deals according to the principles of the Trump Trade Doctrine. The Trump Trade Doctrine states that any new or renegotiated deal must increase the GDP growth rate, decrease the trade deficit, and strengthen the U.S. manufacturing base. 

Each Clinton bad trade deal — NAFTA, the fiasco of China’s entry into the WTO, the South Korea trade deficit eruption — achieved just the opposite of what the Trump Trade Doctrine would do. Collectively, the Clintons’ bad trade deals have helped shutter over 70,000 American factories, destroyed over 5 million manufacturing jobs, prevented any real growth in the average median household income, and cut our historic growth rate of 3.5 percent almost in half.

Some critics will argue that reducing the flow of cheap imports from locales such as China, Mexico, and Vietnam will be inflationary and act as a regressive tax by denying lower-income households cheap imports. In reality, four decades of one-sided globalization and chronic trade deficits have shifted wealth and capital from workers to the mobile owners of capital and reduced the purchasing power of Americans.                                         

A visit to cities like Johnstown, Pennsylvania, and Flint, Michigan, reveals quickly the falsehoods and broken promises of those who preach the gains from trade deficits — which are often financed by those who turn a profit from offshoring production. Trump’s proposals will reverse these trends, concentrate more wealth and purchasing power in the hands of domestic workers and result in substantially higher employment. This will more than offset any price increases. Moreover, as products develop a competitive advantage in America and increase their production and margins, prices per unit will go down.

To those alarmists who insist Trump’s trade policies will ignite a trade war, we say we are already engaged in a trade war — a war in which the American government has surrendered in before even engaging. Unfair trade practices and policies of our competitors are simply overlooked or ignored. As a well-documented result, America has already lost tens of thousands of factories, millions of jobs, and trillions in wages and tax revenues.

Donald Trump will simply put our government on the field in defense of American interests. As Trump pursues a policy of more balanced trade, our major trading partners are far more likely to cooperate with an America resolute about balancing its trade than they are likely to provoke a trade war.

This is true for one very simple reason: Our major trading partners and deficit counterparties are far more dependent on our markets — the largest in the world — than we are on their markets.

Consider that in 2015, we ran a trade deficit in goods of $746 billion. 76 percent of that trade deficit in goods concerned just four countries: China ($367 billion); Germany ($75 billion); Japan ($69 billion); and Mexico ($61 billion).

If we look at the bilateral relationships of America with each of these countries, improvement in our trade balance is clearly achievable through some combination of increased exports and reduced imports, albeit after some tough, smart negotiations — an obvious Trump strength.    The same possibilities exist with countries where we are running smaller, but nonetheless significant, deficits, such as Vietnam ($31 billion), South Korea ($28 billion), Italy ($28 billion), and India ($23 billion).

Such deficit reduction negotiations will not be wild-eyed, hip-shooting exercises. A key part of the Trump strategy will be to divert some of the products our deficit counterparties import to U.S. suppliers.

For example, many of our trading partners with which we run large trade deficits import substantial hydrocarbons from elsewhere. It would not be difficult for, say, China, Japan, Germany, and South Korea to buy more U.S. hydrocarbons. Trump intends to end the regulatory constraints on hydrocarbon production and hydrocarbon exports, resulting in as much as $95 billion gains for the U.S.

Our deficit counterparties also import lots of industrial equipment and supplies of plastics and other materials, some from the U.S. already. There is ample room here for them — along with countries like India, Mexico, and Vietnam — to switch vendors.

Trump’s strategic approach to trade negotiations would begin with product-by-product and country-by-country analyses. Our negotiators would set goals that are achievable and pursue them fiercely. No prior administration has ever approached trade as surgically as a Trump Administration would. 

As a business person, rather than a politician, Trump understands this: There is no more reason to let our major trading partners take advantage of us than there is for a large private company to permit its vendors to do so.

You will notice we have not mentioned tariffs. They will be used if necessary against mercantilist cheating, but only in a very precise and defensive way.

Ultimately, our view is that doing nothing about unfair trade practices is the most hazardous course of action — and the results of this hazard are lived out every day by millions of displaced American workers and deteriorating communities. We simply cannot trade on their one-sided terms; they are just too destructive to the U.S. growth process.

At the end of the day — and on November 8th — voters have a very clear choice between Trump’s smart path to rapid growth and budget balance and Hillary Clinton’s new dismal world of economic stagnation. At least on the economy, this choice is clear.

Wilbur Ross is a private equity investor. Peter Navarro is a business professor at UC-Irvine. Both are senior policy advisors to the Trump campaign.


Showing 13 reactions

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  • Mr. Kirkland,

    On this point we have significantly different perspectives. When I read the work of the Richmans, for example, I notice their desire to contain the argument within the boundaries of financial engineering. In this respect they come across as typical, free market, conservative economic theorists. Politics, governance, and judgement are inherently bad and to be avoided. Hence the problem is rationalized, made calculable, and given to technocrats to manage.

    Simply put in this worldview good will between nations is irrelevant. And that is simply not the case.
  • While no trade policies or regimes would be perfect, trade-balancing tariffs as suggested by Mr. Pettitt can, if wisely determined and implemented, be superior to any other competing ideas now on the table. Ideally they would be set on a country-by-country basis based on the bilateral trade imbalance and would adjust dynamically to adjust to changing conditions and potential countermeasures. Such “closed loop” regimes have been put forward, including by this party and by the Richmans. Such strategies have numerous inherent advantages, including that they can replace all of our current tariffs and quotas and content rules, etc. that favor certain goods and industries. Balanced trade where the winners and losers are determined by the marketplace, not by lobbyists – truely free, fair and balanced trade.
  • Mr. Crawford,
    You are correct in your acknowledgement that our elite may have goals other than the economic welfare of our middle class when they promote conditions that result in the export of capital from our shores and the stagnation of our middle class (and short term enrichment of us elite).

    Balance is only part of the necessary condition. We need balance with exports about 6% of GDP AND median incomes rising at about the same rate as per-capita RGDP. We get this by providing more of our workers with better tools (to avoid the word “machine”).

    Economists often seem to get lost in abstractions. Watch the show “Naked and Afraid” and see what life is like without tools. The world is labor rich and capital poor. In India, tens of thousands still harvest wheat with a knife even though harvesters exist. Surround an average person with a million dollars worth of productive capital (another word for tools), and she can produce more value than if she is flipping burgers. We must create value in America to be prosperous and strong and we are too big to specialize.
  • Mr. Pettitt,

    It is a delight to read a short essay of yours that manages to use the word “machine” only 3 times! Even better, in the process you make an excellent point about the futility of using the “fairness” standard to regulate trade.

    I doubt, however, that all of our trade problems can be solved mechanically by the “calibration” of tariffs. A useful tool to be sure, but no substitute for making political judgments amongst competing goals and historical twists of fate. “Balance”, for example, might one day be less desirable than peace, good will, or some other humanitarian objective,
  • Borders are economically significant for many political reasons:
    1) Nations exist to protect its citizens from being exploited by another people. Predatory nations have existed throughout history and exist today. A nation is most secure if it has an industry that supplies the vast majority of its needs and trades on the fringes (as the USA did for most of our history). This secures the country from the political and economic woes of other, potentially hostile, societies. America’s current economic dependence on Chinese tyrants, for example, is a travesty.
    2) People within a country are free to move to other parts of the country as the effects of competition are felt.
    3) More and more productive machines generate more wealth. The machines of production are owned by the winners of the competition. Citizens are free to redistribute resources to reduce suffering from the winners of competition to the losers of competition within their country. Citizens cannot redistribute the wealth generated by the people and machines of foreign countries.
    4) Competition within a country is not distorted by differences in laws and social values as it is between countries. It is impossible to “level the playing field” through “trade rules” between countries as economically and socially diverse as China, Japan, Vietnam, Saudi Arabia, and the United States. For one, there can never be an agreement on what “level playing field” means.

    The most straight forward solution to this intractable “fairness” meme is simply to abandon that useless concept and calibrate tariffs to levels that balance trade. History has conclusively proven that America is large enough to support robust competition and economies of scale that bring economic growth without subjecting our workers to such competition from the world’s poor billions that their wages cease to grow along with our real per-capita GDP. If you want full blown socialism in America, where the central government controls everything, just continue the globalism of the last 40 years.
  • Mr. Crawford,
    Yes, a few have gotten rich and we have some cheap goods, but the median income has been flat for decades. The cheaper goods don’t compensate for list wage growth. We need the industrial production to be here as the primary engine to feed our middle class. The quickly advancing automation is another reason to make sure the machines evolve here. Our political process can determine what happens with the wealth generated by machines here. We need more long term thinking from policy makers.
  • Mr. Sanguinett,

    I agree with your emphasis on returning the power and practice of managing our imports / trade to congress.

    Mr. Pettitt,

    Your narrow focus on the physical location of machines provides a fairly unhelpful form of tunnel vision. For example, in point of fact machines located in China now are enabling some Americans to get very rich and showering the rest of us with cheap goods.

    One of the reasons for this has to do with the necessity for China to acquire a large cash reserve in dollars, which serves as the global reserve currency.

    Another reason is the lack of a social safety net for the elderly in China. This forces them to save for old age rather than consume now.

    As for trickle down economics, that’s what you get from pissing into the wind.
  • http://www.tppbadforus.info/index.php/u-s-constitution
    Here is a web page with general information on U.S. managed trade according to the U.S. Constitution. The first paragraph is as follows:
    The Constitution gives Congress express power over the imposition of tariffs and the regulation of international trade. As a result, Congress can enact laws including those that; establish tariff rates; implement trade agreements; provide remedies against unfairly traded imports; control exports of sensitive technology; implement U.S. product standards, such as food safety & environmental protection; require that import tariff rates charged are by product type and country from which received. Tariffs by product type is what the United States historically has done in previous centuries and decades when it had a yearly trade surplus or close to balanced trade with other nations. Today other nations, for example China, currently manage trade in this manner charging tariff taxes by product type and have a yearly trade surplus. In contrast, the United States today has low tariff tax rates for products imported and a high yearly trade deficit. Fast Track and the Trans-Pacific Partnership would not allow congress to apply the U.S. constitution to our U.S. foreign trade.
    The authority of Congress to regulate U.S. international trade is set out in Article I, Section 8, Paragraphs 1-3 of the United States Constitution;

    Goods produced in the U.S. by productive workers and their employers are taxed in a number of ways. In contrast, there are very low taxes on imported goods. There needs to at least be a level playing field of taxation in the U.S.
  • The United States built the richest economy on earth with the richest median income (excepting a very few small countries) in an environment of balanced trade with exports at less than 5.5% of GDP (1840 – 1975). In this environment of relative economic “isolation”, America achieved a consistent, long-term 2% growth in per-capita RGDP and median income. In the period of greatest growth in median income (1910-1975), immigration was restricted and foreign born population decreased from 14.7% to 4.7 %. TRICKEL DOWN WORKED because we capitalists had to compete for workers.
    REMEMBER, as this article implied: Wealth is created and largely retained in the land where the machines are located. It is beyond naïve to believe that foreign machines will be allowed by their masses to generate wealth for the “rich” median income American. Prosperity for the median income American will come from a continued, steady increase in American productivity. This means the machines must be on American soil so the American worker/voter has access to the wealth generated by the machines through competitive employment or redistribution.
    Help seal the defeat the Republican and Democrat globalists…vote Trump.
  • I strongly agree with Frank’s argument against trickle down economics. The horse in this story is trade policy. Fix it and the quantity of domestic investment will grow without cutting taxes on the wealthy. Conversely, as we have seen under our present trade policies lowering taxes does very little to promote growth.
  • Peter and Wilbur,

    It would be helpful if DT was as sane as you are. Unfortunately as Peggy Noonan recently lamented in the WSJ, that is just not the case. So even though I agree with and support much of your argument, DT cannot be elected P.

    I believe that work should begin immediately on bringing the DT and Bernie S coalitions together in order to create sound, long term political support.

    And I believe it would be wise to under promise and over deliver to the American people on this issue. The course of history, for example, is far less predictable than either of you make it sound.
  • It is discouraging to see CPA, in its well founded zeal for fair and balanced trade, become a platform for associating America-first trade policies with the failed trickle-down economics that have lead to our historically unprecedented income inequality and rapidly growing national debt. Balanced trade policies are much more appropriately associated with a “bubble up” economic philosophy where we use trade and other tools (e.g., increased minimum wage and less regressive taxation) to put money in the hands of the middle class and working poor while simultaneously limiting the growth of the national debt by making the very well-to-do pay more for all the benefits accrued. It is well documented, using 6 decades worth of data, that GDP growth does not correlate to cuts in either the upper marginal tax rate or in the capital gains rate. (There is in fact a mildly negative correlation.) While Donald Trump deserves credit for shining a bright light on bad trade policies, there is no reason to also buy into his myriad of regressive tax policies.