A lively ideological clash is unfolding within the Trump administration, driven by two distinct factions. One faction, led by Peter Navarro, embodies the “true believers” in mercantilist economic policies reminiscent of Argentina’s approach during the mid-20th century. The opposing camp, spearheaded by Elon Musk, champions free trade. Between these two extremes lie the moderates, represented by figures like Scott Bessent and Howard Lutnick.
Donald Trump, undeniably a believer in Navarro’s mercantilist vision, has advocated for tariffs since the 1980s. His ambitious “Liberation Day” tariff proposal showcased the radical economic ideas pushed by Navarro. However, when the market responded negatively, igniting fears of an economic downturn, Bessent and Lutnick urged Trump to postpone the “reciprocal tariffs”—a term that amusingly misrepresents their intent—by 90 days.
As this internal debate rages on, the skirmish intensifies:
In a dramatic exchange on social media, billionaire advisor Elon Musk lambasted White House trade counselor Peter Navarro as “dumber than a sack of bricks,” as discord over President Donald Trump’s tariff policies spilled into the public domain.
Navarro, who holds a Harvard PhD in economics—typically a badge of honor—once authored a book that ridiculed protectionist views. Yet, by 2016, his claims had taken a turn for the bizarre. A post I penned back in December 2016 highlighted his fundamental economic missteps:
Navarro and Ross are making the EC101 blunder of misinterpreting the well-known GDP identity:
GDP = C + I + G + (X – M)
Students often mistakenly believe that trade deficits diminish GDP due to the minus sign associated with imports. However, those imports contribute positively to either consumption or investment. It appears Navarro may have overlooked this essential fact.
Moreover, Navarro has committed various elementary errors in economic reasoning. He even concocted imaginary experts to support his arguments. In 2024, he was sentenced to four months in prison and is currently recognized as the architect of one of the most disruptive policy initiatives of the 21st century.
So how has Musk managed to advocate for free trade while still maintaining Trump’s favor? His clever approach hinges on exposing the fallacy underpinning the Trump/Navarro trade philosophy: the belief that our trade deficit stems from the unfair practices of trading partners. In reality, the deficit arises from domestic factors that lead to low savings and high investment in the U.S. economy. Musk seized upon this misconception, suggesting that if unfair practices were truly at fault, a logical remedy would involve negotiations where both sides lowered their trade barriers:
“Ultimately, I hope we can agree that both Europe and the United States should ideally move towards a zero-tariff scenario, effectively creating a free trade zone between Europe and North America,” Musk stated in a conversation with Matteo Salvini, leader of Italy’s right-wing League Party.
While it’s plausible that Trump might dismiss Musk’s proposal, he may find himself navigating a path that straddles the divide between Navarro’s hardline stance and Musk’s free-trade ideals, primarily to stave off a stock market crisis. Only time will tell.
It’s been said that “truth is the first casualty of war,” and in the realm of trade wars, economic truths often suffer the same fate. To persuade the public to accept higher import prices, a narrative had to be constructed: the notion that malevolent foreigners were pilfering American jobs.
In my December 2016 post, I included this postscript:
PS. It remains uncertain whether Navarro’s ideas will come to fruition. Some believe Trump is more likely to govern as a traditional Republican. The next four years will serve as a litmus test for the “Great Man” theory of history. I lean towards the view that presidents wield less influence than is commonly thought.
My skepticism regarding the “Great Man” theory was largely validated during Trump’s first term. However, signs are emerging that in his second term, he may be more determined than ever to carve out his legacy as a Great Man at almost any cost. Perhaps, in the long run, I will be proven wrong.
(Let’s hope it’s Austerlitz, not Waterloo.)
