Markets continue to remain volatile from the Trumpian Trade Tirades, as well as his monetary grievance tweets. These problems are not unrelated, although we’ll only get to the former in this post. In today’s headlines, Peter Navarro, Mr. Trump’s pro-trade war economist (yes you can find an economist somewhere for almost any position you want to hold) is quite upset that China has devalued (in his mind) their currency by exactly an amount to offset the effects of the proposed tariff hikes. The idea that China would not or should not respond does not seem to have any basis in any model of geo-political behavior that can spell the words game theory. Yet seemingly that is Mr. Navarro’s perspective:

“Clearly, they are manipulating their currency from a trade point of view,” Navarro told CNBC’s “Closing Bell ” on Friday. “They’re going to, and we’re going to take strong action against them…..China has devalued its currency by over 10% with the express purpose of neutralizing tariffs, full stop,” Navarro said that every American farmer will be “made whole” and “will not be hurt by China.” He also insisted that China, not U.S. consumers, will suffer financially because of tariffs. “China will bear virtually the entire burden of that through the currency manipulation and by slashing prices,” he said. “China is the one that suffers far more harm than what might be inflicted on us.”

Fortunately for the American consumer, the Chinese are as equally confused about tariffs as is Mr. Navarro. Because if Mr. Navarro is correct, what has actually happened is that the Chinese, by allowing their currency to fall–more below on this*–have ensured that the effects of the tariffs will be that the Chinese producer will actually receive less dollars for each sale, with the reduction in dollars the exporters receive being approximately equal to what the U.S. Treasury will receive in revenue, while the U.S. consumer would be paying the same price! Both our government as well as China seemingly fail to understand the purpose of a trade war is to harm your own citizens. So Mr. Trump and Navaro put the punishment on the U.S. consumer, and then the Chinese government says no, we’ll not let you harm your consumers. We’re going to win by harming our producers instead!

But Mr. Navarro is having none of that. The U.S. consumer must be made to pay! I recently read a very old Paul Krugman paper from 1987, and whatever disagreements I have with Mr. Krugman on economics, he is obviously a first rate international trade economist, even though the Nobel prize seems a stretch.** In that article, Is Free Trade Passe?, Krugman, while noting the theoretical possibility of increased social welfare by selective trade interventions, nevertheless concludes with the following:

The economic cautions about the difficulty of formulating useful interventions and the political economy concerns that interventionism may go astray combine into a new case for free trade. This is not the old argument that free trade is optimal because markets are efficient. Instead, it is a sadder but wiser argument for free trade as a rule of thumb in a world whose politics are as imperfect as its markets.

Of course, most of us would conclude our politics are far less perfect than are markets, but I digress. BTW, doesn’t it strike some Trump supporters as odd that the one more hawkish on China and trade than Mr. Trump is Ms. Warren?

*Interestingly, China is actually manipulating its currency to hold it higher than it otherwise would be. They have had to implement capital controls to stop their own citizen from jettisoning their currency. Were markets to actually set their currency, it would be much lower than it is today.

** There are very few economists actually worthy of a Nobel prize. If we had one every five years or so you’d probably have a much better class of economist in the winner’s circle.