In lieu of the most nationalistic, err… patriotic, holidays of the year, let’s celebrate the Fourth of July by diving into this year’s EconIcon –Trump’s economic trade advisor, Peter Navarro.
Independence Day marks the day the United States decided to stop taking sh** from Great Britain. Similarly, today the U.S. is deciding to stop taking sh** from China. As director of the National Trade Council, Navarro has taken the role of protecting U.S. interests by informing and backing Trump’s decision to impose tariffs on Chinese-imported goods. Recently, Trump declared a 25 percent tariff on $84 billion worth of Chinese imports. The tariff applies to 1,100 exports targeting the aerospace, robotics, and manufacturing industries.
However, the coming tariff battle is ironic to talk about on this holiday because our celebrations are almost completely dependent on Chinese-imported fireworks. According to the executive director of the American Pyrotechnics Association, Julie Heckman, “Ninety-nine percent of the backyard consumer fireworks come from China.” Though the fireworks industry has yet to be tampered with, fireworks importers are super nervous.
Ha. “USA! USA! USA!”
The China Price
Navarro’s stance on China goes against the common rhetoric of economics. Despite the countless disagreements in economics, free trade gets almost unanimous support. Free trade benefits the consumer in the form of lower prices because it motivates producers to specialize and continually innovate in the face of competition. Navarro, though, thinks that is a bunch of baloney when it comes to the real world, especially in regards to China.
Navarro harps on what was coined by Business Week as the “China Price” — the low prices Chinese manufacturers offer, supposedly undercutting the world’s prices by upwards of 50 percent!
There are two general reasons for why China can undercut prices so much. The first reason is that they might have better resource advantages like cheap labor and have highly evolved supply chain and production process allowing them to produce things more efficiently. The other reason is that China is cheating. They can cheat by manipulating currency and engaging in mercantilist-type practices that violate norms and rules of trade. Navarro stands with the second reason.
Navarro conducted a year-long study–the China Price Project–which aimed to highlight the factors contributing to the low prices of Chinese products. In accordance to the better resource advantages (which is a good thing), China enjoys a well-educated workforce, low wages due to the large supply of peasant farmers transitioning into factory jobs, and “industrial network clustering.” To illustrate, Silicon Valley in the U.S. is an example of an industrial network cluster, where a bunch of tech firms group around an area. Being in a cluster reduces transportation costs, reduces the cost of sharing information, and makes things more efficient. In China, these types of industrial clusters are everywhere, from laser diodes and DVD players to washing machines and refrigerators.
According to the study, 55 percent of the China Price is attributed to these reasons. However, Navarro harps on the other 45 percent–the cheating factors. China’s mercantilist practices like subsidizing industries, devaluing their currency, counterfeiting, and the pirating of American ideas. With government support, Chinese businesses can reduce their prices to increase their competitive edge in the global marketplace. By printing more money, or inflating their currency relative to the U.S. dollar, Chinese goods appear cheaper than U.S. goods. Plus, if Chinese manufacturers can copy U.S. businesses from their production processes to the actual product themselves, they don’t have to waste money on research and development.
Buy American, Hire American
As a result, Navarro has led the “Buy American, Hire American” campaign, propagated tariffs on Chinese imports, and advocated a tightening of H1-B visas in the United States. When someone walks into a Wal-Mart, all he or she is looking at is the price. Peter Navarro and Co. want you to think not just about the price, but to think about how it got there.
The whole point of the price mechanism is that we don’t really need to think about anything else other than the price. Thinking of “how it got there” not only defeats the purpose of prices but is an incredibly difficult (OK, more like impossible) thing to do. Leonard Read’s I, Pencil explains how interconnected and complex the production of a simple pencil can be.
Though Navarro is pretty alone among economists, he is welcomed among non-economists. Around 76 percent of Americans agree that if you “Buy American” has a positive impact on manufacturing employment. Only 11 percent of economists agree with this. Furthermore, important folks like Abraham Lincoln and Alexander Hamilton would probably agree with some, if not most of what Navarro is proposing these days.
In any case, whether or not you stand with Navarro, perhaps “Buying American” for the Fourth of July would have likely made Independence Day a dud.