Project Syndicate: It’s right to emphasize economic issues in assessing national security

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CAMBRIDGE (Project Syndicate) — The National Security Strategy released by the White House earlier this month differs from the previous congressionally mandated strategies that have been prepared every four years. The 2017 NSS is different because it emphasizes the role of the economy: “Economic security is national security,” the new NSS avers.

Much of the report is of course devoted to traditional aspects of national security: military budgets, alliances, and dealing with countries like Russia and China, which the new NSS calls “strategic competitors” (rather than adversaries). But the growth of the domestic economy, the role of international trade and America’s new positive energy position also receive substantial attention.

President Donald Trump’s administration rightly points to its regulatory reforms and its recently enacted tax legislation as strategies for increasing economic growth. A bigger economy provides the resources to build stronger military capabilities. But that economic growth can translate into more effective national defense only if Congress enacts future increases in the defense budget, targeting those areas that are in greatest need of expansion.

Because of the sequestration provision of the Budget Control Act of 2011, the defense budget has been subject to across-the-board cuts that will reduce defense outlays to 3% of GDP in 2021, the lowest share of GDP since before World War II. The Congressional Budget Office projects that defense outlays, relative to GDP, will continue to decline to just 2.7% in 2027. Bringing that up to 5% of GDP in 2027 would add more than $600 billion to total government spending that year.

The NSS’s proposals for dealing with foreign trade combine some valuable initiatives with a false analysis of the causes of the United States’ trade deficit. “[T]rading partners and international institutions can do more to address trade imbalances,” the NSS asserts.

That is wrong. Basic economics tells us that the U.S. trade deficit reflects the aggregate levels of domestic saving and investment. More specifically, the size of the U.S. trade deficit — imports minus exports — equals excess of U.S. investment over U.S. national saving. Because Americans spend more than they produce, they must import more than they export. So, to reduce the trade deficit, households, businesses and governments must increase their saving — obviously the preferred solution — or invest less.

But the NSS is certainly correct in noting that foreign governments hurt American interests by promoting and condoning the theft of U.S. intellectual property. At a summit meeting in 2013 at the Sunnylands retreat in California, President Barack Obama showed China’s President Xi Jinping the evidence that members of the Chinese military had been stealing industrial technology. The Chinese accepted the evidence, agreed that stealing industrial technology was different from other forms of espionage, and said that the Chinese government would not assist in such theft in the future. Since that is not enough to stop other Chinese theft of U.S. civilian and military technology, the new NSS rightly stresses that the U.S. government will take further steps to stop it.

When it turns to specific trade policies, the NSS emphasizes that the U.S. will seek to “break down trade barriers and provide Americans with opportunities to increase their exports.” This emphasis on increasing exports, rather than reducing imports, is a welcome feature. Trade barriers erected by foreign governments reduce the ability of U.S. firms to obtain the real income benefits from exporting products made in America.

But the report also criticizes a variety of other unfair policies pursued by China and other countries, without distinguishing between those that hurt American interests and those that, though “unfair,” actually help Americans. Here’s the list: “Other countries have used dumping, discriminatory non-tariff barriers, forced technology transfers, noneconomic capacity, industrial subsidies, and other support from governments and state-owned enterprises to gain economic advantages.”

Non-tariff barriers to U.S. exports clearly hurt U.S. firms without doing anything to help U.S. households. The same is true of forced technology transfers, although the Chinese position is that American firms that want to operate in China voluntarily agree to transfer technology in exchange for the right to produce and sell in China.

Dumping — selling products at prices that are lower than the cost of production — clearly helps American consumers, even though it hurts American firms. But that is not different from a technological development that allows some U.S. firms to produce more cheaply, thus helping American consumers and hurting other U.S. producers. Although some economic textbooks claim that dumping by foreigners can force domestic producers to go out of business so that the foreign producer can then raise its price, there is no evidence of such behavior actually occurring in practice.

The Chinese are still maintaining excess capacity in some state-owned industries, leading to export sales at money-losing prices. Like dumping, that, together with explicit industrial subsidies, is an “unfair” policy that nonetheless actually helps American consumers.

Looking ahead, the U.S. government should focus on combating foreign governments’ trade policies — such as technology theft, non-tariff barriers to U.S. exports, and forced technology transfers — that hurt American firms without any offsetting benefits to American consumers.

As an economist, I am pleased that the NSS has given substantial attention to the economic aspects of U.S. national security. I hope that this emphasis leads to better domestic and trade policies.

Martin Feldstein is a professor of economics at Harvard University and President Emeritus of the National Bureau of Economic Research. He chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. This was first published on Project Syndicate — “Economics and American National Security.”