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Tariffs and US Trade Policy History with Douglas Irwin (Dartmouth Economics Professor) · The Capitalism and Freedom in the Twenty-First Century Podcast

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[MUSIC]
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>> Jon Hartley: This is the Capitalism and Freedom the 21st Century podcast,
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an official podcast of the Hoover Institution.
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I'm Jon Hartley, your host.
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Today, my guest is Doug Irwin,
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who is the John French professor of Economics at Dartmouth and
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a senior fellow at the Peterson Institute for International Economics.
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Doug's specialty is in both trade and economic history.
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And given that trade is certainly a very topical policy issue right now,
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I think it's gonna be a very interesting discussion.
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Welcome, Doug, thanks so much for joining us.
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>> Douglas Irwin: Thanks for having me.
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>> Jon Hartley: So I wanna first start talking about your background.
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How did you first get interested in economics?
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>> Douglas Irwin: Well, I resisted it at first.
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My father's an economist, so I wanted to do something different.
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I was very much interested in international politics, in world affairs,
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but sort of realized that economists had a great framework for
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understanding the world, including international relations.
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And so I sort of gradually migrated over to economics and
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specialized in international economics.
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>> Jon Hartley: That's terrific.
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PhD at the University of Chicago, I mean, what was the department like then?
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>> Douglas Irwin: No, actually, I got my PhD at Columbia University.
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I had some great trade people there.
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Robert Mundell was there.
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Jagdish Bhagwati was my thesis advisor.
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Maury Obstfeld, Rob Feenstra, maybe these names don't mean anything to you,
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but they're great international economists, including Ron Finlay,
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who's also on my committee.
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>> Jon Hartley: I'm gonna restart that question, because I've gotten that right.
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Okay, restart in three, two, one.
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And you did your economics PhD at Columbia University,
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a lot of great trade and monetary luminaries at the time.
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I mean, who was at the department at the time and who was on your committee?
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>> Douglas Irwin: Well, I really lucked out, because it was just chock full with
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great international economists, Jagdish Bhagwati, Ronald Finlay, Rob Feenstra.
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In terms of international trade, I mean,
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those are three just great individuals sort of.
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Jagdish took me under his wing to some extent.
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Then international finance, Maury Obstfeld, Jerome Ocalvo,
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Robert Mundell, who won the Nobel Prize in 1999.
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So it was great on that side as well.
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So both on the international macro side and international finance side, and
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then the trade side and commercial policy is just an abundance of riches.
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>> Jon Hartley: It's amazing.
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What an amazing set of luminaire international macro space at the time.
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And I mean, all those folks, think Robert Mundell,
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and international monetary economics think about the euro.
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He was super influential in the creation of the euro thinking about currency,
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optimal currency zones.
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And also, he spent a lot of time as well in sort
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of the fixed versus floating exchange rates debate.
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Friedman obviously won the Nobel Prize as well for the Mundell Fleming Trilemma.
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And Jagdish Bhagwati, I mean, an amazing figure and
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very influential, I know certainly in trade and in India as well.
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I also know you spent some time at the Reagan CEA.
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It's amazing how many influential people served at the Reagan CEA
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in part thanks to Marty Feldstein being the chair for many years,
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like Larry Summers, Paul Krugman, John Cochran, Greg Mankiw,
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Rich Clarida, they were all there at the Reagan CEA at different points in time.
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What was it like when you were there and what were you working on?
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Were you working on trade or other international issues or
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something completely different?
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>> Douglas Irwin: Yeah, so actually,
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I was there the same year Rich Clarida to was there,
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who was a guest on your podcast just a little while ago.
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This is towards the tail end of the administration.
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It was in 86, 87, and I had finished two years of my coursework at Columbia.
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I didn't have a thesis topic yet.
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And I asked people what they did in their third year in graduate school and
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most of them said, well, you sort of sit around and look for a topic.
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And I thought I might as well do something different and productive during that year.
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So applied to go to the CEA and Michael Moussa was there, who's professor at
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the University of Chicago, but a member of the Council at the time and
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one of the great international economists of his generation.
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And so I went there, had an incredible year, learned so
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much about trade policy, so that's what I worked on trade policy.
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Also turned out Jagdish Bhagwati was on leave from Columbia that year at
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the World Bank.
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So he was two blocks away and involved me in a lot of the conferences there.
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So between the CEA, the bank, the whole environment was wonderful.
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And I worked for a senior economist in international trade who was just so
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gracious at including me in all the meetings he went
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to at US Trade Representative's office and Department of Agriculture and
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things of that sort.
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So just immersed myself in international trade.
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It was wonderful year.
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>> Jon Hartley: Wow, that's amazing.
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And yeah, to think about all the folks who were around at that time and
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the folks who were at the World Bank at the time.
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And it's an important time in, I think, trade history,
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some degree of globalization sort of really beginning around that time.
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But I wanna go back further in economic history,
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because you wrote a really wonderful book.
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The real, I think, the canonical history of US trade policy titled Clash Commerce,
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that was published in 2017 by the University of Chicago Press.
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Could you explain to us a little bit about what the three main periods of
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trade liberalization in the US are?
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I think you call them the three R's.
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Could you explain to us sort of a succinct history of US trade policy?
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>> Douglas Irwin: Yeah, so I came up with something called the three R's to describe
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what is the purpose of trade policy.
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Why would a country impose tariffs on imports?
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What is it trying to achieve?
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And so the three R's are, first of all, revenue.
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Import tariffs are taxes, and taxes raise revenue.
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The second R is restriction.
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You might wanna impose a tariff to restrict imports and keep out foreign
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goods to protect the domestic producers from foreign competition.
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And the third R is reciprocity.
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You might wanna use your tariffs to negotiate with other countries to have
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a free trade agreement to reduce the tariffs, or you might wanna use that
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reciprocity to inflict harm on others by raising the tariff to retaliate against
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what you might perceive as unfair trade practices against the other country.
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So what's interesting is these three R's align almost perfectly with three
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different periods in US history.
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So the second Act passed by Congress under the new constitution in 1789 was
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a Tariff Act, because the government newly independent, we have these war debts.
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We need to fund the national government.
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One of the problems with the Articles of Confederation is that there's no power of
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taxation on the part of the national government.
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The Constitution remedied that, and so they needed revenue.
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And so the main purpose of the tariff prior to the Civil War was revenue.
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But then the Civil War, there's this sort of break in US history,
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a different political party takes over.
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The Republicans, they wanted high tariffs to restrict imports,
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to help out domestic industries, which were located mainly in the North.
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And so we had this period basically from the Civil War until the Great Depression,
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which is a period of restriction.
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We're trying to maintain high tariffs to keep out foreign goods.
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Then, of course, we have another transition during the Great Depression,
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and that leads us up to the Great Depression, which leads not just to
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a political change in the US where the Democrats really become the dominant
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party, but also a change in US trade policy where we move to reciprocity.
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And we had these high tariffs in place.
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The Smoot hawley tariff of 1930 being a dramatic example of that.
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And the Roosevelt administration, subsequent administrations thought we have
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to bring down tariffs not just in the US but around the world.
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So we're going to have to negotiate with other countries and have these reciprocity
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agreements such as the gatt, the General Agreement on Tariffs and Trade.
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And that sort of ushers in this period of reciprocity which passed through
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the Reagan administration, through the Bush administration,
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really up until quite recently, bringing tariffs to a relatively low level.
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>> Jon Hartley: Interesting, interesting that reciprocity.
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I mean, correct me if I'm wrong, but
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reciprocity seems like that's a bit of a different message than I guess,
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the neoliberal message that sort of all tariff reductions
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are kind of good, even if they're one sided.
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I mean, is that a fair characterization of those?
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>> Douglas Irwin: Some extent.
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I mean the US is in a different situation than many countries around the world.
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For small countries, a New Zealand, you know, a small African country,
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really you have no bargaining power with other countries.
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No one really cares about what you're doing.
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So if you're going to reduce your tariff and open up to international commerce,
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you have to do it yourself.
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There has to be that domestic political consensus.
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The US Is a large country.
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We do have bargaining power.
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And in particular, in fact we had had unilateral tariff reductions in the past.
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If Congress passed that usually under the Democrats, but with the Great Depression,
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there's a big problem is because of the Depression and
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the retaliation of other countries against Smoot Hawley, all tariffs,
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all trade barriers had risen around the world.
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And so we could have unilaterally gotten rid of Smoot Hawley, but
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it wouldn't really solve the problem of US access to other markets.
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So that's where the U.S. the Roosevelt administration said we're not going to
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undertake a unilateral tariff reduction.
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We're going to try to negotiate with others to bring everyone's tariffs down to
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restore world commerce because we have a stake in flourishing world commerce so
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that we don't get these fascist regimes in Europe that are going to cause another
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world war like we had in World War II.
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>> Jon Hartley: You're saying that that began before the that.
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You're saying that that happened with the FDR administration.
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You're saying.
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>> Douglas Irwin: Exactly.
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It was in 1934 that the reciprocal Trade act of Reciprocal Trade Agreements Act
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1934 was passed which delegated powers to the President.
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Before then under Article 1 of the Constitution,
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Congress has sole authority over the tariffs.
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>> Jon Hartley: Right. >> Douglas Irwin: So Congress had to take.
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But this was delegated- >> Jon Hartley: Treaties and so forth.
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>> Douglas Irwin: Exactly. So
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Congress can't negotiate with other countries, but the President can.
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So this empowered, really for
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the first time the President to undertake negotiations with other countries and
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basically committed Congress to saying if the President reaches an agreement,
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we'll approve it or we'll pre approve it, because you can't bring an agreement back
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to Congress and then have them renegotiate it based on domestic interest.
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So it really was this delegation of power to the President
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in the early 1930s that made a huge difference for US trade policy.
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And then I just also add,
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it wasn't just sort of the economics of it is foreign policy.
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The US wanted to now shed its isolationism and become a world leader.
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And the way you could do that is through trade and leading other countries towards
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a more prosperous world by reducing trade barriers.
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>> Jon Hartley: That's fascinating.
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And it's interesting too.
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I think in that prior period you had obviously there was the Smoot Hawley
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tariffs, which some people as a cause or one of the causes of the Great Depression.
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And it's interesting too that you have this dynamic where
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you had Republicans raising tariffs, I'd imagine,
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prior to the Wilson era and then following Wilson tariffs.
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Coming back, do you subscribe to the view that Smoon Hawley played a big role in
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causing the Great Depression or what's your.
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Obviously that's sort of in contrast with Milton Friedman's view that, you know,
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tightening of monetary policy by the Federal Reserve, that played a big role.
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I'm curious,
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what do you think Smoot Hawley fits into causes of the Great Depression?
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>> Douglas Irwin: Yeah, I don't think any economic historian really seriously
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believes that the Smoot Hawley tariff caused the Great Depression.
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I think there's a debate and
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maybe a little bit of a consensus that it exacerbated the Great Depression.
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So it wasn't passed until June of 1930 and
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we already were well past the business cycle peak.
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And of course, the stock market crashed in the fall of 1929.
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So most people would say, yes, Milton Friedman was right,
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its monetary policy was the main cause.
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Barry Eichengreen has sort of modified that, saying it wasn't just monetary
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policy in the U.S. it was around the world and the gold standard, all countries that
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were on the gold standard and went through this big deflationary bust.
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And it wasn't until you got off the gold standard and
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devalued your currency that you actually had economic recovery.
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And that fits the US as well,
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because it wasn't until April 1933 when FDR took us off the gold standard,
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that we moved towards a more reflationary monetary policy and industrial production.
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Everything sort of comes back to life.
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So it contracted world trade.
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It wasn't a good thing.
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It was really unnecessary because I mean Congress began considering it in
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the spring of 1929.
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Well before we had sort of entered the Depression.
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We had full employment.
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The economy was doing all right.
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They did it purely for political purposes.
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It wasn't a reaction to the Depression, but
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it certainly didn't make matters better going into 1931 32.
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>> Jon Hartley: Absolutely.
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And yeah, it's, it's very interesting that whole, that whole period.
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I'm curious too, like you're talking about the post war trade liberalization period.
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In the post World War II trade liberalization period,
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we also had this thing called the Cold War and largely this precedes
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the globalization of the 1990s through the 2010s.
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And I'm curious, what was the trade relationship between us and the USSR?
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Because I feel like today when we talk about trade particularly China
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looms very large and there's I think often this sort of non economic case for
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tariffs and trade barriers which often comes up or
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is rationale and to try and deter China's influence.
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I'm curious, what was the trade relationship like between US and ussr?
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I mean, we still have an embargo on trade with Cuba.
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I mean that's sort of a, maybe perhaps a relic of that era.
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But when the USSR existed, what was the US vs USSR trade dynamic like?
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>> Douglas Irwin: I'll sort of back up and
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sort of explain the geopolitical situation of the world at that time.
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So yes, after World War II, the US helped create the GATT,
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the General Agreement on Tariffs and Trade,
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which is a trade agreement to sort of set trade rules and bring down trade barriers.
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But really it wasn't a global agreement.
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It was, it was a multilateral agreement, but it wasn't fully global in extent.
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We really did have three worlds back then.
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First world, which is largely of us, North America, Western Europe, Japan and
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a few other market oriented democracies.
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They were members of the gatt.
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They want to expand trade.
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They cooperated on trade.
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The second world was the communist world, the Soviet bloc,
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Eastern Europe, China, Vietnam and other countries.
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Cuba later on late 1950s, they were, you know, they were centrally planned.
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They were not democracies, they weren't market oriented.
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They really stood outside of the GATT system.
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And of course there's what became known as the Third World,
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poor countries in Latin America, Africa, South Asia, Southeast Asia.
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They protected their industries through import substitution policies.
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So they really weren't participating in the global commerce of the period as well,
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or at least to an attenuated extent.
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So after World War II, we didn't reunite the world in terms of global commerce.
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We had these three worlds that were quite separate.
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And of course, it wasn't just market-oriented economies versus
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centrally-planned economies like in the Soviet Union.
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There was geopolitical tension.
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So even if the Soviet Union want to move towards more trade,
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it just wouldn't fit really well with the US.
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The big change, of course, is in 1989, the fall of the Berlin Wall and
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then later the collapse of the Soviet Union.
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That led to a term that I don't like, but it's sort of common, hyperglobalization,
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where developing countries opened up, Eastern bloc opens up,
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China opens up, and we really become an integrated world economy.
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But the period you're talking about is the Cold War.
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We had a lot of restrictions on trade with the Eastern bloc,
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particularly in terms of technology.
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Even if we didn't have those restrictions, I think there would have been not
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much trade anyway because of the nature of the Eastern bloc economies.
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>> Jon Hartley: Very interesting, because I do see some parallels today with,
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I think, potentially sort of rivals,
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this era of great power competition.
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Obviously we see the BRIC countries, China and Russia are a part of.
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But also you see China trying to assert itself in Latin America and
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elsewhere, I mean, in almost every continent.
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And obviously, the US, in part, feels threatened by this.
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And so in part, I think part of the response is for
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the US to sort of maintain its own trading block or to build its own trading block.
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And I see that, as an argument, I guess,
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brought forth by some individuals in a non-economic case for tariffs.
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But I guess I wanna focus, so we had this period of
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globalization that was really big starting in the 1990s.
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And I think that period where many free trade agreements are being signed by
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the US and many other countries throughout the world, we have prices coming down.
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Places like Walmart and big-box retailers are coming online,
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and that, I think low-cost retailers are part of that story.
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I mean, you also have the China trade shock as well,
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which obviously has moved many manufacturing jobs overseas and
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has had a pretty, I'd say, significant effect on
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manufacturing employment in particular in parts
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of the Midwest and other parts of the US as well.
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But it's interesting how that period, I think, kind of culminates.
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2016, I think, is a pretty clear demarcation point.
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And you had both parties really, I think, rewriting their scripts on trade.
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And you had the Democratic primaries.
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You had Bernie Sanders forcing Hillary Clinton to concede on the TPP,
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which was this sort of Asia partnership free trade agreement with the US that
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was being negotiated part by Hillary Clinton,
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which she once called the gold standard herself, and she capitulated on that.
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I think that was a pretty seminal moment in economic policy for
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the Democratic Party, turning against the sort of Clintonite years of free trade.
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And then, obviously, Donald Trump becoming the Republican
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nominee based on largely a pro-tariff platform.
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And I feel like we're still in that same era, it seems like.
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And both parties have, I think, kept, or
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presence from both parties have kept tariffs on
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various items and not just [INAUDIBLE].
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For example, on aluminum, various tariffs that I think started during the Trump
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administration have been kept on, in fact, even increased during the Biden years.
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So I'm curious, what's your assessment of the impact, for
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example, on consumers in terms of price increases?
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And I'm curious what you think the impact is on employment.
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I mean, from my standpoint, I see they're being documented,
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small increases in prices.
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And I'm not too sure about the evidence on employment.
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I know that manufacturing share of total employment in the US is maybe just below
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10%, which is still much below where it was in, say, 1980, around closer to 20%.
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But I think one thing that we saw in response to a lot of the tariffs of
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the past ten years or so is a lot of trade diversion.
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So sending trade through Vietnam, and so directly from China to the US, and
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that can avoid these tariffs.
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I'm curious, what's your assessment of the impact of this sort of new trade policy of
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terrorists and other barriers that have sort of been inaugurated since 2016?
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>> Douglas Irwin: Well, there's a lot in there.
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And so I'm going to simplify it.
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And it's very important to distinguish two things.
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One is the tariffs on China.
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So that's part of the geopolitical fallout of what's happened with the US
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relationship with China, the movement of China towards much more intensive
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industrial policy and industrial subsidies under Xi Jinping.
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We had a very different relationship with China in the 1980s and
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1990s when Deng Xiaoping was in power, or his acolytes.
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China was moving in a liberalizing direction.
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They're opening up their economy, they're moving towards more markets.
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And under President Xi- >> Jon Hartley: Communiques,
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I guess the famous three communiques sort of began with Kissinger.
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>> Douglas Irwin: It was sort of on that basis that we agreed to let them into
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the World Trade Organization.
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But shortly thereafter, under President Xi Jinping,
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they moved in a very different direction.
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Not a market-oriented direction, much more state-controlled and
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much more possibly threatening in terms of national security.
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So it's sort of inevitable, I think,
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that the US Would react against that at some point.
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And that's what we saw with the Trump administration really,
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boldly imposing tariffs on China for the first time.
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Now, the cost of those, or let me say, first of all,
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the design there is to separate the two economies to some extent.
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And there are costs to that, of course.
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But as Adam Smith said in the Wealth of Nations,
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defense is more important than opulence.
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So one could make a national security case for
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not allowing China to dominate certain industries in the US or
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having a domestic grown capacity to for production and things of that sort.
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That's sort of a case-by-case basis.
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But also the costs are minimized in some sense because when you impose
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tariffs just on one country, as you mentioned, trade diversion is huge.
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So we're now importing a lot more from Mexico,
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but a lot more from Vietnam and other Southeast Asian countries.
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Now, it's true, Apple hasn't moved the iPhone production away from China so much.
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In fact, Apple got sort of an exemption from the tariffs that the Trump
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administration imposed.
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So we didn't hit consumer electronics.
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We'll see whether that changes or not.
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But there are a lot of things that we were buying from China that we could buy from
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other countries as well.
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So that's sort of a geopolitical take on what one thing that was happening at
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that time.
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But then we have other tariffs, like the steel tariffs or
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the aluminum tariffs that you referred to.
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Those are more across the board on all countries.
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Here, I think economists can object much more strongly and have a more solid basis.
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First of all, we're hitting friends when we do that.
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We're hitting Canada, although they got an exemption.
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We're hitting the Western European countries, we're hitting Japan and Korea.
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These are our allies.
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And the question is, why are we hitting our allies with these import duties when
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they operate more on a market oriented basis?
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And the second point with regard to the steel tariffs is you're not really
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helping out American manufacturing, you're helping out the steel industry.
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But for every job in the steel industry, there are many more in downstream
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industries that use steel as an input to production.
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When you impose those tariffs,
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you raise the cost of domestic product producers using steel.
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That's the Caterpillars, that's the John Deere's, that's the GM and
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Chrysler and Fords.
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All their costs are going to go up.
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It makes it more expensive to make things in the US and
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there's been studies by economists at the Federal Reserve and
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elsewhere showing that we've lost more jobs in other downstream manufacturing
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industries than we gained in terms of helping out the steel industry itself.
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So that's a case where two tariffs are counterproductive to the goal.
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And we can question the goal too.
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But if we don't question the goal of trying to increase or
24:58
help out US Manufacturing tariffs are a blunt instrument and don't achieve that.
25:04
>> Jon Hartley: So I'm curious, what do you think about the whole argument that
25:08
some people make and this is, I guess talk more about sort of the economic debate and
25:15
economic cases for and against terrorists.
25:18
What do you take, what do you think about the whole argument that we don't
25:23
really have a fully free trade regime or we never really achieved it?
25:29
And that really in part tariffs can be used as
25:33
negotiating tool to get even more free trade.
25:38
And so for example, even with some of our example.
25:42
I grew up in Canada, I know that Canada, for example has had a lot of trade
25:46
disputes with the US over time over softwood lumber.
25:50
And it's sort of a back and forth thing where the lumber industry in Canada
25:54
is largely controlled by the government and the price is set by the government and
25:58
they tend to set the price below the market price in the US And
26:02
US doesn't like that.
26:03
And so they put on tariffs.
26:04
And I mean they also have subsidized dairy industry.
26:10
It's a big political thing in Canada and there was a big king conservative
26:15
party race that was actually decided by this issue about nearly 10 years ago.
26:21
But I'm curious, you know, is there an argument to be made that, you know,
26:26
that some short term tariffs that sort of force other countries to obviously,
26:30
I mean they could retaliate with tariffs as well and it kind of ratchets up and
26:34
hurts consumers further.
26:36
But I mean, do you think that it's possible to get more reciprocity and trade
26:41
out of some of this, some of these sort of trade negotiations and tariff threats?
26:47
>> Douglas Irwin: Well, it's amazing you mentioned softwood lumber because that's
26:50
one of the issues that was on the agenda in the late 1980s when I was at the CEA in
26:53
the Reagan administration.
26:55
That's a trade dispute that's been going on for 50 years or so.
26:58
And you know, there are always going to be these trade disputes.
27:01
You know, and you're right, we don't have free trade in everything.
27:04
First of all, there's anti dumping and countervailing duties which are used quite
27:07
extensively to increase tariffs on particular products.
27:10
But >> Jon Hartley: Nafta, for example,
27:12
I think Reagan and George W.
27:14
Bush.
27:15
>> Douglas Irwin: Well, first of all, it goes back decades.
27:17
And it's also not a political process.
27:19
Any firm can file an anti dumping or countervailing duty complaint.
27:22
It doesn't involve the White House.
27:24
It goes through the Department of Commerce and
27:26
the US International Trade Commission and pretty much they both.
27:28
To say they rubber stamp those petitions would be a stretch, but
27:32
Department of Commerce certainly approves them all.
27:35
And about two thirds to half,
27:37
half to two thirds get approved by the International Trade Commission.
27:40
In other words, it's pretty easy for a domestic industry to get tariff protection
27:45
if they ask for it and have good trade lawyers in Washington.
27:48
But let's set that aside for the moment.
27:51
There's always going to be these trade disputes.
27:53
You know, even in nafta, which is a free trade agreement, we don't allow in Mexican
27:58
sugar, we don't allow in even Canadian sugar that's rerouted from Canada.
28:03
So every country has their domestic political sensitivities and
28:06
exempt certain sectors from the negotiations.
28:09
Dairy is an important issue in Canada.
28:11
I know that's been a source of friction.
28:13
And what you have to do is manage the relationship.
28:15
And sometimes retaliation can be useful and effective.
28:19
So when I was at the cea, the Reagan administration retaliated against Japan
28:24
for non compliance with an agreement on semiconductors.
28:27
Semiconductors are still in the news today.
28:30
But the trade disputes go back to the 1980s.
28:34
The Reagan administration had thought that Japan had a closed market, domestic market
28:38
for semiconductors and intel and Texas Instruments couldn't sell in Japan.
28:43
And the Reagan administration free trade administration imposed retaliatory duties,
28:49
quite stiff ones, against Japan.
28:51
And that did bring them to the negotiating table.
28:53
And that was resolved.
28:55
So you never want to.
28:56
In fact, Adam Smith has a whole passage on use of retaliation in terms
29:00
of opening up foreign markets.
29:02
So it's long been a practice of countries.
29:05
The US Is a large country, so it has some leverage.
29:08
And you don't want to get rid of all tariff threats necessarily.
29:11
But the question is, do you abuse it and
29:14
you raise tariffs when you really don't want an agreement at the end of the day.
29:19
So you may say you're raising them to negotiate or to get bargaining leverage,
29:23
but the US Already has a lot of leverage.
29:25
So I'm not sure that's.
29:26
Those are good cases to be made.
29:28
>> Jon Hartley: Interesting.
29:29
Interesting, I guess.
29:31
I mean, what do you like I've seen some estimates from the Peterson Institute and
29:37
elsewhere.
29:38
I mean, how big do you think the benefits so that the,
29:42
I guess aggregate benefits were sort of over the 20th century.
29:48
I know there's some estimates that Peterson,
29:51
various Peterson scholars have put out that are I think, quite substantial.
29:56
I mean, what do you see that impact being?
29:59
And I mean like do you think that I guess, how would you rate,
30:06
I guess the price impacts of both the China tariffs and
30:11
then the ex China tariffs and trade barriers in
30:16
recent years in terms of small, medium and big?
30:22
Where would you rate those just general impacts in general?
30:29
>> Douglas Irwin: Well, one of the things about the US and
30:30
international trade is world large economy.
30:32
Obviously trade is a relatively small part of our economy.
30:35
So trade's not nearly as important as it is to Canada.
30:38
It is to the UK it is Japan or Korea or something like that.
30:42
So we can afford more shocks in some sense to trade and we won't feel it in
30:47
our standard of living quite as directly as many most countries in the world.
30:53
So we're very fortunate that way.
30:55
And of course, there's another law from Harberger, Al Harberger,
30:58
that if you multiply a small number by a small number, you get a small number.
31:02
So if you're talking about specific tariffs on individual items,
31:06
it's going to be pretty small for the US.
31:08
So even the steel tariffs, which I think are quite objectionable because they're
31:12
imposed supposedly under the guise of national security, when even Jim Mattis, I
31:17
believe a fellow at the Hoover Institution when he was Secretary of Defense.
31:21
He wrote the memo from the Department of Defense saying there's
31:24
no national security rationale or necessity for
31:27
the steel tariffs that the Trump administration imposed,
31:30
even though steel tariffs, it's not going to have a huge impact on the US economy.
31:34
But you add up the steel tariffs, you add up China tariffs,
31:38
even the Congressional Budget Office, which is nonpartisan congressional outfit,
31:43
that sort of scores, Budgetary affairs, what have you.
31:46
They had US GDP being 0.2% lower so once again,
31:49
that's not I don't know whether you can call that large or small, but
31:54
it's saying if we're growing at 2%, we're going to grow at 1.8 instead and
31:59
have a 0.2% level effect at the end of the day.
32:02
It's making us worse off.
32:05
It's a cost, maybe it's achieving some objectives that countervail that cost.
32:10
But it's a small cost, but
32:12
it is one that can accumulate if you keep imposing these tariffs.
32:17
>> Jon Hartley: Interesting, yeah, that's fascinating.
32:21
I want to get back to I guess maybe the non-economic sort of case for
32:26
tariffs and because I think that that's sort of perhaps the best case and
32:32
certainly countervailing China's influence.
32:36
Yeah, I don't necessarily see manufacturing jobs coming back
32:40
anytime soon.
32:42
I mean certainly things could change and technological advancements
32:48
that somehow reimagine manufacturing in the US in some high tech way.
32:55
But you know, we, again, you getting back to this point that we said before we
32:59
didn't have free trade with ussr, right.
33:01
And we had sort of two different worlds.
33:03
We had the communist world and we had the free world or
33:07
the world of largely capitalist democracies.
33:13
I'm just curious, one could argue that sort of the same about China,
33:19
that maybe there should be some tools at least used to counter China's influence.
33:26
China's for example, they've had this massive stride recently
33:31
in manufacturing electric vehicles more cheaply than say the US and
33:36
they're trying to subsidize BYD in Latin America and
33:40
put them into international markets.
33:45
There's been some responses from the US in terms of tariffs on Chinese electric
33:49
vehicles.
33:50
In your mind, how effective are terrorists?
33:53
In your mind as a deterrent, how effective do you think they are compared
33:58
to say sanctions or threats of military force?
34:03
>> Douglas Irwin: Well, certainly threats of military force would be an extreme sort
34:07
of action.
34:08
I think about if the goal is really deterring an invasion of
34:12
Taiwan from China, that's really the grip.
34:16
>> Jon Hartley: I don't necessarily see China, you know, building some global
34:20
empire, you know, with, with their militaries immediately at least.
34:25
But I think Taiwan being the huge sort of deterring a Chinese
34:29
invasion of Taiwan being sort of the primary goal.
34:33
I mean, where do you see, I guess, terrorists ranking
34:38
in terms of their ability to really influence.
34:43
>> Douglas Irwin: So raise a number of points here.
34:45
So one is a potential invasion of Taiwan and what we could possibly do.
34:50
And then in some sense you want to keep the relationship open so that you have
34:54
leverage to impose those tariffs later on rather than sort of preempt things.
34:58
But I think the real issue today is not so much that, but it's are there certain
35:03
technologies that we want to deny China and are there certain domestic industries
35:08
or production capability that we need at home that China has,
35:12
such as batteries, for example, such as drones and things of that sort?
35:17
And how much do we want to be economically independent in those areas from China?
35:21
You know, that's something that the Biden administration sort of grappled with.
35:24
And you're right, they've imposed extra, really high tariffs on EVs from China,
35:30
even though we don't import them at all yet.
35:33
That's sort of this preventive action.
35:37
And here's where it's sort of hard for economists to weigh in.
35:40
So I think economists need to be part of that debate because we can weigh costs and
35:45
benefits, but also you need someone to make an assessment about national security
35:50
and the importance of certain technologies or
35:53
certain production capability to future defense needs.
35:57
And so you need the national security people there.
35:59
You know, one, I guess,
36:01
complaint that I've heard many economists make about the Biden administration is
36:05
that the national security team has really taken over trade policy and
36:09
are running things on that basis without thinking about costs and benefits,
36:13
without thinking really more about building alliances with other countries or
36:18
how we can cooperate with our allies in that effort, but acting more unilaterally.
36:23
So that's a question of sort of tactics, not strategy.
36:27
And so I'd say, it's really open and
36:29
difficult area in which we're gonna have to navigate in the future.
36:33
>> Jon Hartley: Fascinating, so I guess another recent big trade shift or
36:39
a big piece of news is the Biden administration
36:44
blocked the acquisition of US Steel by Nippon Steel,
36:49
which is a Japanese steel manufacturer.
36:53
What are your thoughts on that?
36:55
Obviously, Japan's an ally.
36:58
And I'm curious, there's been a lot of critics
37:03
of the decision to block that acquisition.
37:08
Or I'm curious, what's your take there in terms of what's the story?
37:15
And also, how bad or stupid of a decision might it be in your mind?
37:23
>> Douglas Irwin: Well, the phrase that the Biden administration has used
37:26
regarding its sort of trade and foreign investment policy is friendshoring.
37:30
That is, we want to sort of keep China out, but keep our friends in.
37:34
There's a heck of a way to treat your friends.
37:37
I mean, Japan is an ally, and
37:38
what they're doing is making a capital investment in a US firm.
37:43
They've made pledges to keep employment high and
37:46
to reinvest in the US that should be something that we would welcome.
37:51
And once again, it's sort of sending a wrong signal.
37:53
I think that here's sort of a bulwark to our East Asian alliance system,
37:58
a country that's been friendly with us for many, many decades,
38:03
that we cooperate with on so many dimensions.
38:06
And yet the president made a decision,
38:08
really at the behest of the president of the labor union, to block this sale.
38:13
The rank and file of the union, the United Steel Workers, they generally supported
38:17
the agreement because they wanted new capital investment because it would help
38:21
preserve their jobs and make US Steel a much more competitive enterprise.
38:25
Why we're denying this, it makes little sense,
38:28
particularly since the politics are sort of off the table.
38:31
President Biden is not going to be serving another term.
38:34
He doesn't have to win more votes, but he sees himself as a union man and
38:40
somehow identifies US Steel with America in this way.
38:44
I should note that there have been press reports that many of
38:48
President Biden's economic aides wanted the sale to go through.
38:51
So it was really his call.
38:53
And he overruled him, overruled many of the advice that he was getting.
38:58
>> Jon Hartley: Interesting, interesting, I'll get back to friendshoring a little
39:01
bit just when we talked about industrial policy.
39:04
But I want to just talk about the WTO, because I think the WTO this long time,
39:10
certainly in the 20th century period, globalization and
39:16
trade liberalization played a big role in strengthening multilateralism.
39:23
Is it fair to say that we've now that the trade policy discussions have
39:28
become largely bilateral instead of multilateral?
39:32
We had these sort of big multilateral trade agreements,
39:37
TPP, there's a European version, that those are kind
39:42
of off the table now and that are largely bilateral and
39:47
that the WTO become an inert kind of organization.
39:52
If any country can sort of slap on tariffs now with some
39:57
sort of a national security case.
40:00
There's not much minor sayings, there's not much the WTO can do
40:05
when a country makes a national security justification.
40:10
Is that kind of your sense in terms of how trade negotiations have evolved?
40:14
>> Douglas Irwin: Yes, absolutely.
40:15
In fact, it's sort of worse for the WTO than you just put it.
40:18
And its woes predate even the national security concerns that have just come up
40:22
in the last five years or so.
40:23
So it's sort of interesting you break bring this up because it's 30 years ago
40:28
this month that the WTO came into existence in January of 1995.
40:33
And there were high hopes that this is going to bring the world together and
40:37
really cooperate on trade policy and help foster world commerce and
40:41
bring prosperity to the world.
40:44
And it just really hasn't worked out according to plan.
40:47
I think a couple things went wrong.
40:49
First of all, the gatt, which we talked about earlier,
40:52
was sort of this Cold war institution with just these like minded countries,
40:55
as I mentioned, Western democracies that were market oriented.
40:59
They all want to cooperate on trade.
41:00
They all basically got along.
41:02
Now we have an organization with 166 members from all across the world.
41:07
We're not necessarily all on the same page in terms of wanting more liberalized
41:12
trade and more open markets.
41:14
So it's interesting that because it operates by consensus,
41:18
what that means is that all 166 countries have a say in terms of the negotiation and
41:23
what will be agreed to.
41:25
It won't surprise you that if you operate need sort of almost unanimity.
41:30
The WTO has yet to reach a single major trade agreement since its existence.
41:35
So it was found the Uruguay Round, which the Reagan administration started,
41:39
led to the WTO and then nothing has happened since.
41:41
There was something called the Doha Round which was started in 2001,
41:46
utterly failed, could get no consensus.
41:49
The Director General Mike Moore at the time used to say that the WTO
41:53
is like a car with one accelerator and 150 handbrakes and any, any person,
41:58
any passenger can pull up that handbrake and negotiation just stopped.
42:02
So the WTO is,
42:03
there used to be these every 10 years a gat round of negotiations.
42:09
Now the WTO is really accomplishing nothing through the negotiations,
42:12
even areas like fisheries and what have you.
42:14
Second problem is there's a dispute settlement system that the WTO created.
42:19
One of the problems with the GATT is that it really couldn't enforce the agreements.
42:22
And the WTO had a really strong judicial system, if you will,
42:26
to adjudicate these disputes and set the rules of the road.
42:30
And that's just been that worked very well for about 10 years, but for
42:34
various reasons we don't have time to get into that's deteriorated too.
42:38
And now the dispute settlement system is a shambles.
42:41
It used to be called the crown jewel of the trading system.
42:44
Now it's just inoperative and not working.
42:47
And then when you throw in national security concerns where basically
42:50
countries can justify anything on national security, it's even worse than that.
42:55
Countries are just doing things and not even worrying about the WTO rules anymore.
42:59
So it's really a shell of its former self in the future.
43:02
To the extent that some countries want to still move forward within this process
43:07
of trade opening is exactly as you said, bilateral agreements, regional agreements.
43:13
So there's the Trans Pacific Partnership,
43:16
which you mentioned, which more countries have tried to join.
43:21
The European Union just signed an agreement with MERCOSUR in South America.
43:27
The African countries recently concluded an African Free Trade Agreement.
43:32
So all these different regions and
43:33
parts of regions are sort of getting together and seeing where they can align.
43:37
You know, Mexico, if the US were to do something to pull out of NAFTA or
43:42
usmca, Mexico has free trade agreement with the European Union.
43:47
They're participating in South America.
43:49
They've positioned themselves in Asia as well.
43:51
So they've tried to keep their options open with trade as well.
43:54
So even if the US and China are sort of at loggerheads and the WTO is going nowhere,
44:00
other countries are still trying to keep commerce going to their advantage.
44:05
>> Jon Hartley: I think fair to say that the BRICS countries, Brazil, Russia,
44:10
India, China, South Africa, like to position themselves as a anti American or
44:16
anti Western trading bloc, though I think they have a lot of their own challenges.
44:22
One thing that they often talk about is trying to dethrone the US dollar and
44:26
US dollar status is worlds.
44:28
Done some research myself that looked at the US dollar
44:33
share of say FX reserves at central banks or trade invoicing or
44:39
FX trades or the denomination of global debt securities.
44:45
And largely speaking, even through Covid, even through,
44:48
I think the Russian invasion of Ukraine, it's fair to say that the US Dollar's
44:52
status is completely unchanged and still extremely dominant.
44:56
But that's not to say that change in the future.
44:59
Obviously we've had people, some scholars like Barry Eichengreen, say over the past
45:04
10, 15 years, I think sort of take the position that the US dollar is kind of
45:09
on its way out and that the renminbi, the Chinese renminbi or yuan is ascendant.
45:14
I don't think we see that in the data at all.
45:16
In Fact, if anything, the Yuan is losing some share in recent years.
45:21
I'm curious in obviously prior to the US dollar there was a time when the British
45:27
pound was world reserve currency and there were others prior to that.
45:32
I'm curious, where do you see the whole discussion around the status of
45:36
the US dollar in the world?
45:38
And I'm curious, do you see brics as being any kind of a threat to it in any way?
45:44
>> Douglas Irwin: Well, in terms of the brics, first of all there is a worry that
45:47
the world is fragmented and the trade system and possibly in
45:50
the national financial system too, but certainly with, you know, these regional
45:55
blocs that we're not going to have this open multilateral system anymore.
45:58
And I think the US China relationship is just sort of an indication of that.
46:02
I don't think the brics necessarily have a coherent unified position on this,
46:06
at least in terms of trade.
46:08
You know, the interests of India are very different than South Africa or Russia.
46:13
Russia is sort of a pariah state, faces a lot of sanctions,
46:17
isn't really an open society or even an economy in some sense.
46:22
India has tremendous potential.
46:25
You should note just, you know, in the last month Manmohan Singh passed away.
46:29
He's the former Prime Minister of India and the former finance Minister.
46:32
He's the one who in 1991 opened up the Indian economy and really transformed it.
46:38
It started growing much more rapidly, put a big dent into poverty.
46:42
India is well positioned if they can get their domestic act together
46:47
to really become a powerhouse in global commerce once again.
46:51
They have domestic impediments to that.
46:54
But they've won so much, they've gained so much by engaging in the world economy.
47:02
They're in a very different position than I think of South Africa which is more
47:06
insular.
47:07
Brazil which sort of shifts back and forth depending on the regiment.
47:10
Russia which really doesn't have their natural resource exporter, not much else.
47:16
So I think it would be hard for
47:17
them to coordinate in terms of being a trade bloc or anything like that.
47:20
The interests are just too diverse.
47:25
>> Jon Hartley: It's interesting.
47:26
One of those things I think, I totally agree with that.
47:29
I think there's a lot of talk at these but I don't know how much real follow up or
47:36
bite their or agreement there actually is.
47:40
And I mean there was this sort of agreement a few years ago that I think
47:45
China or China Brazil were going to stop using the US dollar in their trade.
47:50
But how you would even force to do that,
47:52
how would you force firms to do that I think is also very complicated.
47:56
But I want to our last question.
47:59
I want to really just talk about because it's very intimately related to trade.
48:07
I mean, what's your sort of take on the renewed interest in industrial policy,
48:12
I mean, obviously there's been a lot of interest in chips,
48:17
given the potential invasion of Taiwan by China and
48:21
the chips manufacturers being based there like TSMC.
48:25
I mean, there's been.
48:27
The Chips and Science act has funded a bunch of things,
48:32
but I think there's varying degrees of pluses and minuses.
48:39
Intel is sort of floundering and
48:41
the US Government's been trying to subsidize its foundries,
48:46
but it's floundering with the rise of Nvidia and its GPU chips,
48:51
which have sort of made a lot of other business is somewhat, somewhat redundant.
48:57
But also there's a CSMC, actual chip manufacturer that's being built or
49:02
manufacturing plant that's being built, or fab that's being built in Arizona.
49:07
Some people are saying, you know, or I mean,
49:10
it seems to be coming online a bit slower than some had originally hoped for.
49:14
And some people said, I think, made arguments that, you know,
49:18
if anything, we should be subsidizing places like Mexico to build these plants
49:23
because they've got maybe the sort of workers that have skills and
49:27
more sort of less sort of labor issues that say, compared to the.
49:32
And has maybe a labor force that could be more similar to, say, Taiwan.
49:36
I'm curious how you think about industrial policy and the pushes for it so far.
49:43
>> Douglas Irwin: Well, it seems like semiconductors are critical input to so
49:47
many products, and we saw the impact of the shortage during COVID And of course,
49:52
national security concerns about China dominance are also very important.
49:58
And when we think that, first of all,
50:00
I should back up and just say that region of the world where you live is
50:04
just this innovative hub of new ideas in terms of semiconductor technology and
50:09
the great new firms that have come about the innovation, the RND.
50:14
But the manufacturing takes place a lot in East Asia and in particular in Korea and
50:19
Taiwan.
50:20
So we're doing the innovating.
50:21
We have the fantastic RND, but not a lot of production here.
50:26
And it just seems that with China's rise and
50:29
whether they become aggressive or not in the future,
50:33
those are two sort of odd places to have a lot of semiconductor production
50:39
capacity right on the doorstep of North Korea and right on the doorstep of China.
50:45
So as a matter of prudence, I think one could debate whether we should have more
50:49
semiconductor capacity in the US or Europe or some other place.
50:54
And then the question is how to achieve that tariffs are not the way to do it
50:58
because you don't want to make the US a high price island and you don't want to
51:02
stop the re importation of various components and things of that sort.
51:06
So that raises the question of subsidies.
51:08
Subsidies will keep prices lower, which is good for consumers and what have you.
51:12
They're also transparent, and also there's an accountability I think with subsidies
51:17
that we don't get with tariffs.
51:19
So once tariffs get in place, first of all, once again,
51:22
it's just a very crude instrument that raises prices to consumers.
51:25
At least with subsidies there's accounting that can take place.
51:30
It's not something that Congress wants to do in perpetuity.
51:33
So it gets reviewed often.
51:36
So subsidies are much better than tariffs that will get forgotten and
51:40
have many more distortions associated with them and can be sort of last for
51:44
some time without the sort of end date of having the taxpayer write another check.
51:50
So I think there's a case where, you know,
51:53
there has to be a discussion of economists with national security folks.
51:57
We can't subsidize everything.
51:58
We don't want industrial policy for everything.
52:00
But if there was a case,
52:02
I think semiconductors is a debatable one that should be considered.
52:06
>> Jon Hartley: And it seems like, I mean, to some degree there is some sort of
52:10
bipartisan consensus or you know, perhaps, new Washington consensus that,
52:14
by National Security Advisor Jake Sullivan's talked a little bit about.
52:19
I've written a national affairs essay recently titled
52:23
the Neopopulous Economic Consensus that discusses some of this,
52:27
bipartisanship and within certain factions of.
52:32
It's interesting too because I do think on the industrial policy front,
52:36
one major difference across the parties is certainly the Democratic Party is very big
52:41
on green industrial policy.
52:42
Think about the Inflation Reduction Act which had a lot of things
52:47
like electric vehicle subsidies and had been sort of famously criticized
52:53
with various charging stations being coming online too slowly.
52:59
And from what I understand,
53:02
a lot of the Inflation Reduction Act will likely be repealed in part to pay for
53:09
the soon to be negotiated and passed tax cuts and
53:13
Jobs Act extension or tax reconciliation bill.
53:18
That's my understanding.
53:19
So I think the whole industrial policy conversation is very much evolving and
53:24
it'll be interesting to see how much or how it plays out in the future.
53:28
Doug, it's been a real honor to have you to hear about ideas and
53:32
to talk about trade policy.
53:34
It's been a real honor.
53:36
Thank you so much for joining us.
53:37
>> Douglas Irwin: Great discussion, thanks for having me.
53:41
>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast,
53:43
an official podcast of the Hoover Economic Policy Working Group,
53:46
where we talk about economics, markets and public policy.
53:49
I'm Jon Hatley, your host.
53:50
Thanks so much for joining us.
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