Elon Musk is wrong: Peter Navarro is not a moron. Navarro is one of President Trump’s economic advisers and the one most closely associated with tariffs. Navarro, who has a Ph. D. in Economics from Harvard, holds extremely strong beliefs in the positive power of tariffs. So, what are the arguments in favor of tariffs? Let’s break them down.
If tariffs are so bad, why do all these other countries have them?
This is a popular argument, especially from Scott Bessent, the current Treasury secretary. This has certainly stumped more than one interviewer, but the answer is simple: Other countries have tariffs because their politicians are corrupt. Rent-seeking is the economic term. Hyman Roth said it best in “The Godfather 2” when explaining why he wanted all his fellow mobsters to invest in Cuba. “We have now what we have always needed, real partnership with the government.” Let’s not be pollyannish, this type of rent-seeking happens in the U.S. all the time, but it is still frowned upon here where there is greater belief in free markets. In other countries, this is just an accepted part of society. Russia may be extreme, but no one is surprised in Russia when the number-one attribute of business leaders is their close personal relationship with Vladimir Putin.
Tariffs protect special interests, and that is why other countries do it. It is also why you will hear entrepreneurs in the U.S. cheer the tariff strategy; what is bad for the consumer is good for the businessperson seeking “real partnership with government.”
We must protect certain industries for national security reasons.
There may be some truth to this argument, but the devil is always in the details. Do we need to be protected against China or Russia? Arguably that may be true. What about Canada?
Completely ignored in this argument is one of the primary justifications for cooperative trade between countries: Trade produces peace. Put another way, one does not bite the hand that feeds him. Since Adam Smith first discussed the concept of comparative advantage, the promotion of trade has brought both economic growth and peace.
The Smoot-Hawley tariffs, which triggered a global trade war and were a primary factor in the Great Depression, led to a rise in nationalism and ultimately to War World II. It is not a coincidence that after War World II, the United States led the world in a move to freer trade. We had learned our lesson.
It is also no coincidence that the post-Cold War move closer toward free trade led to the longest period of global peace in modern history. Nothing supports national security as much as a world dependent on the American consumer.
We need to bring back the good blue-collar jobs that have been lost by deindustrialization.
No one could possibly argue against this one, if only it were factual. Here are the facts:
Manufacturing output as a percent of real GDP has varied only 2 percent (13% – 11%) since 1947, according to the St. Louis Fed.
According to data from the U.S. Bureau of Labor Statistics (BLS), manufacturing employment peaked in 1979. Since then we have lost 6.7 million manufacturing jobs, yet we have gained 9.4 million jobs in trade, transportation, and utilities. I am not sure why the BLS lumps utility workers with trade and transport, but the point remains that for every good-paying, blue-collar manufacturing job that has been lost since 1979, 1.4 good-paying blue-collar jobs have been created in trade, transportation, and utilities; and no-one talks about it. They don’t talk about it because we have also added 13.9 million jobs in professional and business services, and another 17.3 million jobs in education and health services. So, we have the narrative that we have gone from manufacturing to services, and those jobs may not be a great fit for the same worker. While that overall narrative is roughly accurate, it ignores the actual growth in good blue-collar jobs.
Finally, there are more automotive manufacturing jobs in America today than there were in 1993 when Bill Clinton signed NAFTA. In the BLS data as of June 2024 there were 308,000 automotive jobs in America, up from roughly 270,000 in 1993 and the previous peak of 298,000 in the late 1990s. Does that surprise you?
Tariffs do not cause harm; we had them in the late 19th century and did great.
I find it difficult to believe that anyone makes this argument with a straight face. In the late 1800s, we were just exiting the age of sail and the steam engine was the cutting edge of technology. Comparing trade in this era to trade today is like comparing the Pony Express to the Internet.
Still, this is one of Navarro’s main arguments, so let’s take it seriously. The economy is more powerful than any government policy. At that time in history in the U.S., we had reconstruction in the South, the great Western expansion, and the industrial revolution in the North and Midwest. The labor needed for all of that was supplied by a surge in immigration from Europe. There is hardly any economic policy that could have been implemented that would have stopped growth in the face of those combined organic forces. Besides, while tariffs were much higher then, they were dropping, not rising.
Additionally, this was the era of the “robber baron,” which brings us back to the first argument. Tariffs are a rent-seeker’s dream. If a businessperson can get the government to limit competition, then he can create great wealth, but that wealth primarily goes to the top.
When you break it down, the arguments for tariffs are a house of cards. So why do I believe that Elon Musk is wrong about Navarro being a moron? It actually takes a very strong intellect to convince oneself of something that is so obviously wrong. To do that with tariffs Navarro must be a genius. At least that is my perspective.
Warm regards,
Chuck Osborne, CFA
