Peter Navarro is considered to be the closest to President Trump when it comes to tariffs. He's the most hardline protectionist in the White House.
But as we revealed, Navarro used to preach the views of globalists, advocating for free trade and warning against the economic and national security risks of protectionism. We asked Navarro why he changed his tune so dramatically given the underlying economics haven't changed. He wrote lengthy responses to our questions and below we quote him in full.
At what point in your career as an economist did you change your view of tariffs and protectionism — and why?
"It is a running joke between me and the President as to who figured out the problems with free trade first but it’s not even close. President Trump was critical of free trade as far back as the early 1980s when I wrote the Policy Game while my epiphany came in several stages. In the early 1990s, in San Diego, I began to learn the importance of a strong manufacturing base as San Diego was losing critical pieces of its defense industry and falling further into an economy overly reliant on low wage service sector jobs.
The turning point in my trade thinking came several years after China joined the World Trade Organization in 2001 and began dumping heavily subsidized products into our markets. As a business professor, I began to notice my fully employed MBA students were losing their jobs and when I began to look into that, all roads led to Beijing’s protectionist and mercantilist industrial polices. In response, I conducted a year-long project involving over a hundred students and the result was a report and academic article on “The China Price.” My conclusion was that while cheap (often sweat shop) labor provided China with an advantage, the bigger advantage came from a suite of unfair trade practices that included illegal export subsidies, production subsidies, currency manipulation, and intellectual property theft.
These findings formed the basis of my first book on China’s unfair trade practices, The Coming China Wars. It was this book that led to my crossing paths with President Trump as he would rate it in his top ten China books some years later, and I thanked him for that. What I wrote in The (2006) Coming China Wars and in the 2011 Death By China was criticized by traditional economists and the globalist elites; but these books are generally regarded today as both prescient and the conventional wisdom on China’s unfair trade practices – the only major area of disagreement about the China problem today is what the appropriate remedies are. Virtually everyone outside of Wall Street and the Washington Swamp recognizes the threat."
At what point and why did you change your view on the impact of tariffs on consumers?
"By the time I published Death By China in 2011, I had come to realize that the typical economic model to measure the costs and benefits of with tariffs failed to properly analyze the complete problem. The typical approach is to assert that the market is free, impose a tariff, observe a rise in price and a fall in quantity, calculate an efficiency loss (known as the 'deadweight loss') associated with a misallocation of resources, and declare tariffs to be 'bad.' One obvious problem with this approach is that it ignores that the starting point of the analysis is typically a market highly distorted by unfair subsidies which is far from the optimal outcome. On this basis alone, a tariff can move the market towards a more efficient solution. The bigger problem is that the traditional approach to evaluating tariffs ignores the external costs or 'negative externalities' associated with unfair trade.
When China, for example, dumps heavily subsidized products into the U.S., it leads to a loss of factories and jobs and a diminished defense industrial base. China’s unfair trade practices can also put downward pressure on wages and result in a U.S. tax base lower than it would otherwise be. Some of the more enlightened economists also now recognize that unfair trade also imposes heavy socioeconomic costs in the forms of higher crime, divorce rates, drug use, and suicide rates. None of this was evident to me in 1984 when I wrote the Policy Game, and it would take China’s non-market economy industrial policies to underscore the failures of the traditional tariff analysis."
At what point and why did you change your view of effectiveness of the national security justification [for tariffs]?
"The research I did in preparation for my 2015 Crouching Tiger book and companion film provided much greater situational awareness about how unfair trade practices perpetrated by a strategic rival can lead to very serious national security vulnerabilities. Since China joined the WTO in 2001, the U.S. has lost over 70,000 factories, more than five million manufacturing jobs, and suffered from substantially lower real GDP growth rates. As America’s manufacturing and defense industrial base has weakened, China’s has strengthened and we now face a strategic rival in places like the South China Sea whose military forces have been largely financed by the massive trade deficits the U.S. runs with China.
In the specific case of China’s attack on America’s technological crown jewels, as I argued recently in an article in the Wall Street Journal in defense of tariffs, 'The 25% tariffs recently announced on $50 billion of China’s exports to the U.S. are targeted at high-tech industries. These tariffs will form a critical line of defense against predatory trade practices China has used to the detriment of American industries.'"
At what point and why did you change your view on the effects of tariffs on jobs?
"It became increasingly obvious during my research for the 2006 Coming China Wars that protectionism to defend against unfair trade practices is an essential element of free and fair trade. The U.S. has lost tens of thousands of factories and millions of manufacturing jobs precisely because China and other countries were maintaining tariffs and non-tariff barriers higher than that of the U.S. The only line of defense against such unfair trade practices are countervailing duties and tariffs. As President Trump has imposed such tariffs on solar, washers, aluminum, and steel, there has been a strong domestic investment response that will reap job creation dividends for years to come."
As trade tensions between the U.S. and foreign countries escalate with new rounds of tariffs and retaliations, Navarro also commented on the state of play:
To the question of whether we are in a 'trade war,' as the president has said, we lost the trade war decades ago once we entered into NAFTA and let China into the WTO. Now, as the president has also said, we are the 'piggy bank' of the world and trade is not free and fair but simply 'fool’s trade.' All the Trump Administration seeks is free, fair, and balanced trade with our friends and allies together with an ironclad defense against the attacks on America’s technological crown jewels by China through theft, forced transfer, and what I referred to in the WSJ article as 'colonization by purchase.'"