Tuesday, December 27, 2016

Is the Navarro appointment some kind of a joke?

This is piece originally appeared in Asia Times.

The Trump transition team recently announced the appointment of Peter Navarro to a newly created post as the head of newly created National Trade Council.

Apparently this appointment will not require a Senate hearing and confirmation. Thus a lightweight could be rewarded for his loyalty and not risk embarrassing the new administration.

On the other hand, Trump could be seriously considering Navarro as his point person in trade negotiations with China. Either way, the possible involvement of Navarro on the most important bilateral relations of the world deserves serious analysis.

At one time, Navarro tried his hand at politics and ran for U.S. Congress, mayor and city council. Each time he came up empty—a many times loser.

Then he became a lame pundit who concentrated his vitriol on China mixed with questionable reasoning in economics.

As one indicator, Gordon G. Chang wrote the forward to his more recent book on China’s militarism. Chang was the pundit who wrote the book that predicted the collapse of China in 2001, only to see China’s economy doubled and then doubled again.

Navarro came to Chang’s rescue by blaming the Clinton’s Administration for letting China into the WTO and thus supposedly prevented Chang’s forecast of doom from coming true.

Then Navarro expressed his unreserved admiration for Harry Wu because Wu was a willing talking head in Navarro’s video interviews. Of course, since his death Wu’s sordid past for lying, stealing other people’s money and cheating on his wife has come to light.

Until Trump’s appointment, that’s the kind of company Navarro keeps.

Apparently, he came to Trump’s attention when he said 4 to 5% GDP growth is possible under Trump’s administration even while imposing import duties on goods made in China. If that’s really so, the economic growth would have to be increasing at better than twice the historic rate associated with a good year.

The simple but erroneous idea is that import tariff will protect jobs in the domestic market. It simply doesn’t work that way and unbecoming for a Harvard PhD economist, like Navarro, to say so.

Ronald Reagan tried to protect America’s auto industry

A fairly recent example that comes to mind was when Reagan wanted to protect the American auto industry by imposing an import duty on cars made in Japan. The idea was to give the U.S. carmakers breathing space to become more competitive.

Instead of taking advantage of the import barrier to work on their competitiveness, the U.S. car companies simply took advantage of the new prices for imported Japanese cars by raising their own sticker price. It was only after the Japanese makers transferred their plants into the U.S.—and thus avoided the import duty—that the American companies began the serious task of having to compete.

In effect, the import duty “protected” by allowing the American companies to remain inefficient. Only after the Japanese carmakers built their plants in the U.S. that the American companies had to trim their workforce to compete. And by the way, the workforce that went to work for the Japanese carmakers were non-union and got lower pay.

Imposing import duty across the board on goods made in China would be wrong-headed and even more disastrous than asking the American consumer to pay more for their cars.

Most of the consumer goods made in China such as apparel, shoes, toys, and hardware haven’t been made in America in decades. There are no domestic industries to protect and the import tax would just add the daily cost of living for every American.

American companies did not establish plants in China just for low cost labor but also to serve a growing local market there. The personal computer is an illustrative example.

The PC used to be assembled in Taiwan and then the Taiwanese companies moved to the mainland because of the significant savings in labor. Economic pressures forced their component suppliers to follow them. Component suppliers for the PC came from Japan, Korea, Taiwan as well as the U.S.

Intel combined its China and U.S. manufacturing to stay competitive

One of the U.S. suppliers was Intel. They first set up an integrated circuit assembly and test plant in Chengdu to perform the final manufacturing steps on the microprocessors made in the U.S. The finished ICs were then shipped to the PC makers all over China.

Gradually as China become a major consumer of PCs, Intel expanded their operations in China, not only at Chengdu but also added a semiconductor fab operations in Dalian.

However, even today Intel continues to make 75% of their semiconductor chips in their U.S. operations even as 75% of their market is outside of the U.S.

Intel’s total U.S. manufacturing payroll is much higher than its payroll for their Chengdu operation, even though the number of workers employed in Chengdu is “orders of magnitude” bigger than the number engaged in the U.S.—according to my source inside Intel.

The explanation is that the U.S. manufacturing steps are technology intensive and highly automated. Not many workers are required but each has to be highly trained and very well paid. The Chengdu operations involving test and packaging require many workers, but each does not have to be highly technical nor highly paid.

Taking advantage of the comparative advantage (that’s jargon from Econ 101) of each place gives Intel the means to maintain their technical dominance over their competition. This is nothing to do with currency manipulation, just simple economics.

Most of the American companies that set up operations in China may have the low cost labor in mind initially but subsequently justified added investments because China had become a huge market in its own right.

In some cases, China did impose import duty on foreign made products and thus encouraged the American companies to operate inside China—just as Reagan’s import duty encourage Japan’s auto makers to move into the U.S.

In the end, the local investment benefitted the foreign investor but also China’s economy with a more skilled workforce. The same could apply in the reverse, i.e., as regards to China’s investments coming into the U.S.

Chinese companies are looking to invest in the U.S. to be closer to the major markets here. They certainly wouldn’t be looking for lower cost of labor but would be paying higher salary for more technically demanding jobs. This could only benefit the local economy in the U.S.

Xenophobia and stupidity should not discourage these investments just because they are from China.

Navarro makes no bones about demonizing China in everything he has said but is he really compatible with Donald Trump’s real personal interests?

Last month, a video of Trump’s granddaughter, Arabella Kushner, won the hearts of millions of Chinese by reciting a poem in Chinese. This suggests that Trump’s daughter, Ivanka, and her husband, Jared Kushner, understand the importance of learning Chinese in their 5-year old daughter’s future. Surely they have more influence on Ivanka’s father than Navarro?

Sheldon Adelson has been one of Trump’s major supporters. His billions of net worth is tied to majority ownership of Las Vegas Sands and more than 60% of revenue and profits of the company is derived from Macau. He could hardly be pleased if Trump were to deliberately raise the tension between the U.S. and China.

China exercises its international influence far differently from the American way of relying on military alliances. Close to 100 countries have China as their largest trading partner. Among them, some 60 plus are also members of the Asian Infrastructure Investment Bank or are recipients of AIIB investments. Their relationship with China is based on common economic interests.

The Trump Administration should also consider the merits of developing a bilateral relations based on shared economic interest.

Bilateral basis for common economic interest

Consider for example the economic benefits of tourism from China to the U.S. Last year, less than 3% of China’s total outbound tourists came to the U.S. and they spent over US$30 billion. That was the first full year when the Chinese were granted 10-year, multi-entry visas to visit the U.S.

The future impact of Chinese tourists on the American economy will continue to grow exponentially, provided of course that the U.S. and China are not engaged in some mano a mano test of military armament.

There are over 330,000 Chinese students studying in the U.S. in the academic year just past. According to the Department of Commerce, these students contributed US$11.4 billion to help prop up the finances of the U.S. universities as well as the local economy.

Not to be overlooked another benefit of these students is that as much as 75% of the graduates would prefer to stay and work in the U.S. if the U.S. would permit.

China produces many more times graduates in science, technology, engineering and mathematics than the U.S. can produce. They are just the talent pool American companies desperately need to keep their plants operating and not having to move them offshore.

Trump has to understand that America is losing jobs to automation and technological advances and not to China. Someday, for example, Uber is going to rely of self-drive cars and all the drivers will have to find another job. Amazon will use drones to deliver their packages and UPS will have to either operate the drones or else find some other line of work.

Encouraging the employment of Chinese graduates will buy Trump time to figure out how to save high paying jobs that will stay ahead of the technology evolution. America’s future lies in generating highly qualified and skilled workers and not in bringing back low paying jobs from overseas.

Thus, we hope that Trump will have the wisdom to look for the win-win approach with China. To promote Navarro’s line of military confrontation and a restart of a nuclear race can only lead to lose-lose outcome and such outcomes would be devastating beyond imagination.

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