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.
