Tariffs and US Trade Policy History with Douglas Irwin (Dartmouth Economics Professor)

Jon Hartley and Douglas Irwin discuss Doug’s career, the history of US trade policy, tariffs, globalization, the consumer and labor market effects of trade, the World Trade Organization, and industrial policy.

Recorded on January 9, 2025.

ABOUT THE SPEAKERS:

Douglas Irwin is John French Professor of Economics at Dartmouth College. He is the author of Clashing over Commerce: A History of U.S. Trade Policy (University of Chicago Press, 2017), which The Economist and Foreign Affairs selected as one of their Best Books of the Year. He is president-elect of the Economic History Association (2022-23).

He is the author of Free Trade Under Fire (Princeton University Press, fifth edition 2020), Trade Policy Disaster: Lessons from the 1930s (MIT Press, 2012), Peddling Protectionism: Smoot-Hawley and the Great Depression (Princeton University Press, 2011), The Genesis of the GATT (Cambridge University Press, 2008, co-authored with Petros Mavroidis and Alan Sykes), Against the Tide:  An Intellectual History of Free Trade (Princeton University Press, 1996), and many articles on trade policy and economic history in books and professional journals.

He is a Research Associate of the National Bureau of Economic Research and a non-resident Senior Fellow at the Peterson Institute for International Economics. He worked on trade policy issues while on the staff of President Ronald Reagan's Council of Economic Advisers and later worked in the International Finance Division at the Board of Governors of the Federal Reserve System in Washington, D.C. Before joining Dartmouth, Irwin taught at the University of Chicago's Booth School of Business.

Follow Douglas Irwin on X: @D_A_Irwin

Jon Hartley is the host of the Capitalism and Freedom in the 21st Century Podcast at the Hoover Institution and an economics PhD Candidate at Stanford University, where he specializes in finance, labor economics, and macroeconomics. He is also currently an Affiliated Scholar at the Mercatus Center, a Senior Fellow at the Foundation for Research on Equal Opportunity (FREOPP), and a Senior Fellow at the Macdonald-Laurier Institute. Jon is also a member of the Canadian Group of Economists, and serves as chair of the Economic Club of Miami.

Jon has previously worked at Goldman Sachs Asset Management as well as in various policy roles at the World Bank, IMF, Committee on Capital Markets Regulation, US Congress Joint Economic Committee, the Federal Reserve Bank of New York, the Federal Reserve Bank of Chicago, and the Bank of Canada. 

Jon has also been a regular economics contributor for National Review Online, Forbes, and The Huffington Post and has contributed to The Wall Street Journal,
Today, my guest is Doug Irwin,
who is the John French professorof Economics at Dartmouth and
a senior fellow at the Peterson Institutefor International Economics.
Doug's specialty is in both trade andeconomic history.
And given that trade is certainlya very topical policy issue right now,

(00:31):
I think it's gonna be a veryinteresting discussion.
Welcome, Doug, thanks somuch for joining us.

>> Douglas Irwin (00:36):
Thanks for having me.

>> Jon Hartley (00:38):
So I wanna first start talking about your background.
How did you first getinterested in economics?

>> Douglas Irwin (00:44):
Well, I resisted it at first.
My father's an economist, soI wanted to do something different.
I was very much interested ininternational politics, in world affairs,
but sort of realized that economistshad a great framework for
understanding the world,including international relations.
And so I sort of graduallymigrated over to economics and

(01:05):
specialized in international economics.

>> Jon Hartley (01:08):
That's terrific.
PhD at the University of Chicago, I mean,what was the department like then?

>> Douglas Irwin (01:16):
No, actually, I got my PhD at Columbia University.
I had some great trade people there.
Robert Mundell was there.
Jagdish Bhagwati was my thesis advisor.
Maury Obstfeld, Rob Feenstra, maybethese names don't mean anything to you,
but they're great internationaleconomists, including Ron Finlay,
who's also on my committee.

>> Jon Hartley (01:37):
I'm gonna restart that question, because I've gotten that right.
Okay, restart in three, two, one.
And you did your economicsPhD at Columbia University,
a lot of great trade andmonetary luminaries at the time.
I mean, who was at the department atthe time and who was on your committee?

>> Douglas Irwin (02:02):
Well, I really lucked out, because it was just chock full with
great international economists, JagdishBhagwati, Ronald Finlay, Rob Feenstra.
In terms of international trade, I mean,
those are three just greatindividuals sort of.
Jagdish took me underhis wing to some extent.
Then international finance,Maury Obstfeld, Jerome Ocalvo,

(02:23):
Robert Mundell,who won the Nobel Prize in 1999.
So it was great on that side as well.
So both on the international macro sideand international finance side, and
then the trade side and commercialpolicy is just an abundance of riches.

>> Jon Hartley (02:37):
It's amazing.
What an amazing set of luminaireinternational macro space at the time.
And I mean, all those folks,think Robert Mundell,
and international monetaryeconomics think about the euro.
He was super influential in the creationof the euro thinking about currency,

(02:59):
optimal currency zones.
And also,he spent a lot of time as well in sort
of the fixed versus floatingexchange rates debate.
Friedman obviously won the Nobel Prize aswell for the Mundell Fleming Trilemma.
And Jagdish Bhagwati, I mean,an amazing figure and
very influential, I know certainlyin trade and in India as well.

(03:23):
I also know you spent sometime at the Reagan CEA.
It's amazing how many influentialpeople served at the Reagan CEA
in part thanks to Marty Feldsteinbeing the chair for many years,
like Larry Summers, Paul Krugman,John Cochran, Greg Mankiw,
Rich Clarida, they were all there at theReagan CEA at different points in time.

(03:48):
What was it like when you were there andwhat were you working on?
Were you working on trade orother international issues or
something completely different?

>> Douglas Irwin (03:55):
Yeah, so actually,
I was there the same yearRich Clarida to was there,
who was a guest on your podcastjust a little while ago.
This is towards the tailend of the administration.
It was in 86, 87, and I had finishedtwo years of my coursework at Columbia.
I didn't have a thesis topic yet.
And I asked people what they did intheir third year in graduate school and
most of them said, well, you sortof sit around and look for a topic.

(04:15):
And I thought I might as well do somethingdifferent and productive during that year.
So applied to go to the CEA and MichaelMoussa was there, who's professor at
the University of Chicago, buta member of the Council at the time and
one of the great internationaleconomists of his generation.
And so I went there,had an incredible year, learned so
much about trade policy, sothat's what I worked on trade policy.

(04:39):
Also turned out Jagdish Bhagwati wason leave from Columbia that year at
the World Bank.
So he was two blocks away and involvedme in a lot of the conferences there.
So between the CEA, the bank,the whole environment was wonderful.
And I worked for a senior economist ininternational trade who was just so
gracious at including mein all the meetings he went
to at US Trade Representative's office andDepartment of Agriculture and

(05:01):
things of that sort.
So just immersed myselfin international trade.
It was wonderful year.

>> Jon Hartley (05:08):
Wow, that's amazing.
And yeah, to think about all the folkswho were around at that time and
the folks who were atthe World Bank at the time.
And it's an important time in,I think, trade history,
some degree of globalization sort ofreally beginning around that time.
But I wanna go back furtherin economic history,

(05:28):
because you wrote a really wonderful book.
The real, I think, the canonical historyof US trade policy titled Clash Commerce,
that was published in 2017 bythe University of Chicago Press.
Could you explain to us a little bitabout what the three main periods of

(05:48):
trade liberalization in the US are?
I think you call them the three R's.
Could you explain to us sort ofa succinct history of US trade policy?

>> Douglas Irwin (06:01):
Yeah, so I came up with something called the three R's to describe
what is the purpose of trade policy.
Why would a country imposetariffs on imports?
What is it trying to achieve?
And so the three R's are,first of all, revenue.
Import tariffs are taxes,and taxes raise revenue.
The second R is restriction.
You might wanna impose a tariff torestrict imports and keep out foreign

(06:21):
goods to protect the domesticproducers from foreign competition.
And the third R is reciprocity.
You might wanna use your tariffs tonegotiate with other countries to have
a free trade agreement to reducethe tariffs, or you might wanna use that
reciprocity to inflict harm on others byraising the tariff to retaliate against
what you might perceive as unfair tradepractices against the other country.

(06:44):
So what's interesting is these threeR's align almost perfectly with three
different periods in US history.
So the second Act passed by Congressunder the new constitution in 1789 was
a Tariff Act, because the government newlyindependent, we have these war debts.
We need to fund the national government.
One of the problems with the Articles ofConfederation is that there's no power of

(07:07):
taxation on the part ofthe national government.
The Constitution remedied that,and so they needed revenue.
And so the main purpose of the tariffprior to the Civil War was revenue.
But then the Civil War,there's this sort of break in US history,
a different political party takes over.
The Republicans, they wanted hightariffs to restrict imports,

(07:29):
to help out domestic industries,which were located mainly in the North.
And so we had this period basically fromthe Civil War until the Great Depression,
which is a period of restriction.
We're trying to maintain hightariffs to keep out foreign goods.
Then, of course, we have anothertransition during the Great Depression,
and that leads us up to the GreatDepression, which leads not just to

(07:52):
a political change in the US wherethe Democrats really become the dominant
party, but also a change in US tradepolicy where we move to reciprocity.
And we had these high tariffs in place.
The Smoot hawley tariff of 1930being a dramatic example of that.
And the Roosevelt administration,subsequent administrations thought we have
to bring down tariffs not justin the US but around the world.

(08:13):
So we're going to have to negotiate withother countries and have these reciprocity
agreements such as the gatt, theGeneral Agreement on Tariffs and Trade.
And that sort of ushers in this periodof reciprocity which passed through
the Reagan administration,through the Bush administration,
really up until quite recently, bringingtariffs to a relatively low level.

>> Jon Hartley (08:31):
Interesting, interesting that reciprocity.
I mean, correct me if I'm wrong, but
reciprocity seems like that's a bitof a different message than I guess,
the neoliberal message thatsort of all tariff reductions
are kind of good,even if they're one sided.

(08:53):
I mean,is that a fair characterization of those?

>> Douglas Irwin (08:57):
Some extent.
I mean the US is in a different situationthan many countries around the world.
For small countries, a New Zealand,you know, a small African country,
really you have no bargainingpower with other countries.
No one really caresabout what you're doing.
So if you're going to reduce your tariffand open up to international commerce,
you have to do it yourself.
There has to be that domesticpolitical consensus.

(09:19):
The US Is a large country.
We do have bargaining power.
And in particular, in fact we had hadunilateral tariff reductions in the past.
If Congress passed that usually under theDemocrats, but with the Great Depression,
there's a big problem isbecause of the Depression and
the retaliation of other countriesagainst Smoot Hawley, all tariffs,

(09:39):
all trade barriers hadrisen around the world.
And so we could have unilaterallygotten rid of Smoot Hawley, but
it wouldn't really solve the problemof US access to other markets.
So that's where the U.S. the Rooseveltadministration said we're not going to
undertake a unilateral tariff reduction.
We're going to try to negotiate withothers to bring everyone's tariffs down to
restore world commerce because we havea stake in flourishing world commerce so

(10:03):
that we don't get these fascist regimesin Europe that are going to cause another
world war like we had in World War II.

>> Jon Hartley (10:10):
You're saying that that began before the that.
You're saying that that happenedwith the FDR administration.
You're saying.

>> Douglas Irwin (10:17):
Exactly.
It was in 1934 that the reciprocal Tradeact of Reciprocal Trade Agreements Act
1934 was passed which delegatedpowers to the President.
Before then under Article1 of the Constitution,
Congress has soleauthority over the tariffs.

>> Jon Hartley (10:33):
Right. >> Douglas Irwin
But this was delegated->> Jon Hartley: Treaties and so forth.

>> Douglas Irwin (10:39):
Exactly. So
Congress can't negotiate with othercountries, but the President can.
So this empowered, really for
the first time the President to undertakenegotiations with other countries and
basically committed Congress to sayingif the President reaches an agreement,
we'll approve it or we'll pre approve it,because you can't bring an agreement back
to Congress and then have them renegotiateit based on domestic interest.

(11:01):
So it really was this delegationof power to the President
in the early 1930s that made a hugedifference for US trade policy.
And then I just also add,
it wasn't just sort of the economicsof it is foreign policy.
The US wanted to now shed itsisolationism and become a world leader.
And the way you could do that is throughtrade and leading other countries towards

(11:21):
a more prosperous world byreducing trade barriers.

>> Jon Hartley (11:25):
That's fascinating.
And it's interesting too.
I think in that prior period you hadobviously there was the Smoot Hawley
tariffs, which some people as a cause orone of the causes of the Great Depression.
And it's interesting too thatyou have this dynamic where
you had Republicans raising tariffs,I'd imagine,

(11:49):
prior to the Wilson era andthen following Wilson tariffs.
Coming back, do you subscribe to the viewthat Smoon Hawley played a big role in
causing the Great Depression orwhat's your.
Obviously that's sort of in contrast withMilton Friedman's view that, you know,
tightening of monetary policy by theFederal Reserve, that played a big role.

(12:11):
I'm curious,
what do you think Smoot Hawley fitsinto causes of the Great Depression?

>> Douglas Irwin (12:16):
Yeah, I don't think any economic historian really seriously
believes that the Smoot Hawleytariff caused the Great Depression.
I think there's a debate and
maybe a little bit of a consensus thatit exacerbated the Great Depression.
So it wasn't passed until June of 1930 and
we already were well pastthe business cycle peak.
And of course, the stock marketcrashed in the fall of 1929.

(12:38):
So most people would say, yes,Milton Friedman was right,
its monetary policy was the main cause.
Barry Eichengreen has sort of modifiedthat, saying it wasn't just monetary
policy in the U.S. it was around the worldand the gold standard, all countries that
were on the gold standard andwent through this big deflationary bust.
And it wasn't until you gotoff the gold standard and
devalued your currency that youactually had economic recovery.

(13:00):
And that fits the US as well,
because it wasn't until April 1933 whenFDR took us off the gold standard,
that we moved towards a more reflationarymonetary policy and industrial production.
Everything sort of comes back to life.
So it contracted world trade.
It wasn't a good thing.
It was really unnecessary because Imean Congress began considering it in

(13:22):
the spring of 1929.
Well before we had sort ofentered the Depression.
We had full employment.
The economy was doing all right.
They did it purely for political purposes.
It wasn't a reaction to the Depression,but
it certainly didn't make mattersbetter going into 1931 32.

>> Jon Hartley (13:38):
Absolutely.
And yeah, it's, it's very interestingthat whole, that whole period.
I'm curious too, like you're talking aboutthe post war trade liberalization period.
In the post World War IItrade liberalization period,
we also had this thing calledthe Cold War and largely this precedes

(14:03):
the globalization ofthe 1990s through the 2010s.
And I'm curious, what was the traderelationship between us and the USSR?
Because I feel like today when wetalk about trade particularly China
looms very large and there's I thinkoften this sort of non economic case for

(14:25):
tariffs andtrade barriers which often comes up or
is rationale and to try anddeter China's influence.
I'm curious, what was the traderelationship like between US and ussr?
I mean, we still havean embargo on trade with Cuba.
I mean that's sort of a,maybe perhaps a relic of that era.
But when the USSR existed, what wasthe US vs USSR trade dynamic like?

>> Douglas Irwin (14:52):
I'll sort of back up and
sort of explain the geopoliticalsituation of the world at that time.
So yes, after World War II,the US helped create the GATT,
the General Agreement on Tariffs andTrade,
which is a trade agreement to sort of settrade rules and bring down trade barriers.
But really it wasn't a global agreement.
It was, it was a multilateral agreement,but it wasn't fully global in extent.

(15:14):
We really did have three worlds back then.
First world, which is largely of us,North America, Western Europe, Japan and
a few other market oriented democracies.
They were members of the gatt.
They want to expand trade.
They cooperated on trade.
The second world was the communist world,the Soviet bloc,
Eastern Europe, China,Vietnam and other countries.

(15:37):
Cuba later on late 1950s, they were,you know, they were centrally planned.
They were not democracies,they weren't market oriented.
They really stood outsideof the GATT system.
And of course there's whatbecame known as the Third World,
poor countries in Latin America,Africa, South Asia, Southeast Asia.

(15:57):
They protected their industriesthrough import substitution policies.
So they really weren't participating inthe global commerce of the period as well,
or at least to an attenuated extent.
So after World War II, we didn't reunitethe world in terms of global commerce.
We had these three worldsthat were quite separate.
And of course, it wasn't justmarket-oriented economies versus

(16:19):
centrally-planned economieslike in the Soviet Union.
There was geopolitical tension.
So even if the Soviet Union wantto move towards more trade,
it just wouldn't fitreally well with the US.
The big change, of course, is in 1989,the fall of the Berlin Wall and
then later the collapseof the Soviet Union.
That led to a term that I don't like, butit's sort of common, hyperglobalization,

(16:40):
where developing countries opened up,Eastern bloc opens up,
China opens up, and we reallybecome an integrated world economy.
But the period you're talkingabout is the Cold War.
We had a lot of restrictions ontrade with the Eastern bloc,
particularly in terms of technology.
Even if we didn't have those restrictions,I think there would have been not

(17:00):
much trade anyway because of the natureof the Eastern bloc economies.

>> Jon Hartley (17:04):
Very interesting, because I do see some parallels today with,
I think, potentially sort of rivals,
this era of great power competition.
Obviously we see the BRIC countries,China and Russia are a part of.

(17:25):
But also you see China trying toassert itself in Latin America and
elsewhere, I mean,in almost every continent.
And obviously, the US, in part,feels threatened by this.
And so in part,I think part of the response is for
the US to sort of maintain its own tradingblock or to build its own trading block.

(17:50):
And I see that, as an argument, I guess,
brought forth by some individualsin a non-economic case for tariffs.
But I guess I wanna focus,so we had this period of
globalization that was reallybig starting in the 1990s.

(18:11):
And I think that period where many freetrade agreements are being signed by
the US and many other countries throughoutthe world, we have prices coming down.
Places like Walmart andbig-box retailers are coming online,
and that, I think low-costretailers are part of that story.

(18:33):
I mean, you also havethe China trade shock as well,
which obviously has moved manymanufacturing jobs overseas and
has had a pretty, I'd say,significant effect on
manufacturing employmentin particular in parts

(18:54):
of the Midwest andother parts of the US as well.
But it's interesting how that period,I think, kind of culminates.
2016, I think,is a pretty clear demarcation point.
And you had both parties really, I think,rewriting their scripts on trade.

(19:15):
And you had the Democratic primaries.
You had Bernie Sanders forcingHillary Clinton to concede on the TPP,
which was this sort of Asia partnershipfree trade agreement with the US that
was being negotiatedpart by Hillary Clinton,
which she once called the gold standardherself, and she capitulated on that.

(19:35):
I think that was a pretty seminalmoment in economic policy for
the Democratic Party, turning against thesort of Clintonite years of free trade.
And then, obviously,Donald Trump becoming the Republican
nominee based on largelya pro-tariff platform.
And I feel like we're still inthat same era, it seems like.

(19:58):
And both parties have, I think, kept, or
presence from both partieshave kept tariffs on
various items and not just [INAUDIBLE].
For example, on aluminum, various tariffsthat I think started during the Trump
administration have been kept on, in fact,even increased during the Biden years.

(20:22):
So I'm curious,what's your assessment of the impact, for
example, on consumers interms of price increases?
And I'm curious what you thinkthe impact is on employment.
I mean, from my standpoint,I see they're being documented,
small increases in prices.

(20:44):
And I'm not too sure aboutthe evidence on employment.
I know that manufacturing share of totalemployment in the US is maybe just below
10%, which is still much below where itwas in, say, 1980, around closer to 20%.
But I think one thing that we saw inresponse to a lot of the tariffs of
the past ten years or sois a lot of trade diversion.

(21:06):
So sending trade through Vietnam, andso directly from China to the US, and
that can avoid these tariffs.
I'm curious, what's your assessment of theimpact of this sort of new trade policy of
terrorists and other barriers that havesort of been inaugurated since 2016?

>> Douglas Irwin (21:25):
Well, there's a lot in there.
And so I'm going to simplify it.
And it's very important todistinguish two things.
One is the tariffs on China.
So that's part of the geopoliticalfallout of what's happened with the US
relationship with China, the movementof China towards much more intensive
industrial policy andindustrial subsidies under Xi Jinping.

(21:47):
We had a very different relationshipwith China in the 1980s and
1990s when Deng Xiaoping was in power,or his acolytes.
China was moving ina liberalizing direction.
They're opening up their economy,they're moving towards more markets.
And under President Xi->> Jon Hartley: Communiques,
I guess the famous three communiquessort of began with Kissinger.
It was sort of on that basis that we agreed to let them into

(22:09):
the World Trade Organization.
But shortly thereafter,under President Xi Jinping,
they moved in a very different direction.
Not a market-oriented direction,much more state-controlled and
much more possibly threateningin terms of national security.
So it's sort of inevitable, I think,
that the US Would reactagainst that at some point.
And that's what we saw withthe Trump administration really,

(22:29):
boldly imposing tariffs on China forthe first time.
Now, the cost of those, orlet me say, first of all,
the design there is to separatethe two economies to some extent.
And there are costs to that, of course.
But as Adam Smith said inthe Wealth of Nations,
defense is more important than opulence.
So one could make a nationalsecurity case for
not allowing China to dominatecertain industries in the US or

(22:54):
having a domestic grown capacity to forproduction and things of that sort.
That's sort of a case-by-case basis.
But also the costs are minimized insome sense because when you impose
tariffs just on one country,as you mentioned, trade diversion is huge.
So we're now importinga lot more from Mexico,
but a lot more from Vietnam andother Southeast Asian countries.

(23:15):
Now, it's true, Apple hasn't moved theiPhone production away from China so much.
In fact, Apple got sort of an exemptionfrom the tariffs that the Trump
administration imposed.
So we didn't hit consumer electronics.
We'll see whether that changes or not.
But there are a lot of things that we werebuying from China that we could buy from
other countries as well.
So that's sort of a geopolitical takeon what one thing that was happening at

(23:37):
that time.
But then we have other tariffs,like the steel tariffs or
the aluminum tariffs that you referred to.
Those are more acrossthe board on all countries.
Here, I think economists can object muchmore strongly and have a more solid basis.
First of all,we're hitting friends when we do that.
We're hitting Canada,although they got an exemption.
We're hitting the Western Europeancountries, we're hitting Japan and Korea.

(24:00):
These are our allies.
And the question is, why are we hittingour allies with these import duties when
they operate more ona market oriented basis?
And the second point with regard tothe steel tariffs is you're not really
helping out American manufacturing,you're helping out the steel industry.
But for every job in the steel industry,there are many more in downstream
industries that use steelas an input to production.

(24:23):
When you impose those tariffs,
you raise the cost of domesticproduct producers using steel.
That's the Caterpillars,that's the John Deere's, that's the GM and
Chrysler and Fords.
All their costs are going to go up.
It makes it more expensiveto make things in the US and
there's been studies by economistsat the Federal Reserve and
elsewhere showing that we've lost morejobs in other downstream manufacturing

(24:45):
industries than we gained in terms ofhelping out the steel industry itself.
So that's a case where two tariffsare counterproductive to the goal.
And we can question the goal too.
But if we don't questionthe goal of trying to increase or
help out US Manufacturing tariffs are ablunt instrument and don't achieve that.

>> Jon Hartley (25:04):
So I'm curious, what do you think about the whole argument that
some people make and this is, I guess talkmore about sort of the economic debate and
economic cases for and against terrorists.
What do you take, what do you thinkabout the whole argument that we don't
really have a fully free trade regime orwe never really achieved it?

(25:29):
And that really in parttariffs can be used as
negotiating tool to geteven more free trade.
And so for example,even with some of our example.
I grew up in Canada, I know that Canada,for example has had a lot of trade
disputes with the US overtime over softwood lumber.

(25:50):
And it's sort of a back and forth thingwhere the lumber industry in Canada
is largely controlled by the governmentand the price is set by the government and
they tend to set the price belowthe market price in the US And
US doesn't like that.
And so they put on tariffs.
And I mean they also havesubsidized dairy industry.
It's a big political thing in Canada andthere was a big king conservative

(26:15):
party race that was actually decided bythis issue about nearly 10 years ago.
But I'm curious, you know, is therean argument to be made that, you know,
that some short term tariffs that sortof force other countries to obviously,
I mean they could retaliate with tariffsas well and it kind of ratchets up and
hurts consumers further.

(26:36):
But I mean, do you think that it'spossible to get more reciprocity and trade
out of some of this, some of these sortof trade negotiations and tariff threats?

>> Douglas Irwin (26:47):
Well, it's amazing you mentioned softwood lumber because that's
one of the issues that was on the agendain the late 1980s when I was at the CEA in
the Reagan administration.
That's a trade dispute that'sbeen going on for 50 years or so.
And you know, there are alwaysgoing to be these trade disputes.
You know, and you're right,we don't have free trade in everything.
First of all, there's anti dumping andcountervailing duties which are used quite

(27:07):
extensively to increase tariffson particular products.
But>> Jon Hartley: Nafta, for example,
I think Reagan and George W.
Bush.
Well, first of all, it goes back decades.
And it's also not a political process.
Any firm can file an anti dumping orcountervailing duty complaint.
It doesn't involve the White House.
It goes through the Departmentof Commerce and
the US International Trade Commission andpretty much they both.

(27:28):
To say they rubber stamp thosepetitions would be a stretch, but
Department of Commercecertainly approves them all.
And about two thirds to half,
half to two thirds get approved bythe International Trade Commission.
In other words, it's pretty easy for adomestic industry to get tariff protection
if they ask for it andhave good trade lawyers in Washington.
But let's set that aside for the moment.

(27:51):
There's always going tobe these trade disputes.
You know, even in nafta, which is a freetrade agreement, we don't allow in Mexican
sugar, we don't allow in even Canadiansugar that's rerouted from Canada.
So every country has their domesticpolitical sensitivities and
exempt certain sectorsfrom the negotiations.
Dairy is an important issue in Canada.
I know that's been a source of friction.

(28:13):
And what you have to do ismanage the relationship.
And sometimes retaliationcan be useful and effective.
So when I was at the cea, the Reaganadministration retaliated against Japan
for non compliance withan agreement on semiconductors.
Semiconductors are stillin the news today.
But the trade disputesgo back to the 1980s.

(28:34):
The Reagan administration had thought thatJapan had a closed market, domestic market
for semiconductors and intel andTexas Instruments couldn't sell in Japan.
And the Reagan administration free tradeadministration imposed retaliatory duties,
quite stiff ones, against Japan.
And that did bring themto the negotiating table.
And that was resolved.

(28:55):
So you never want to.
In fact, Adam Smith has a wholepassage on use of retaliation in terms
of opening up foreign markets.
So it's long been a practice of countries.
The US Is a large country,so it has some leverage.
And you don't want to get rid ofall tariff threats necessarily.
But the question is, do you abuse it and
you raise tariffs when you really don'twant an agreement at the end of the day.

(29:19):
So you may say you're raising them tonegotiate or to get bargaining leverage,
but the US Already has a lot of leverage.
So I'm not sure that's.
Those are good cases to be made.

>> Jon Hartley (29:28):
Interesting.
Interesting, I guess.
I mean, what do you like I've seen someestimates from the Peterson Institute and
elsewhere.
I mean, how big do you thinkthe benefits so that the,
I guess aggregate benefits weresort of over the 20th century.

(29:48):
I know there's someestimates that Peterson,
various Peterson scholars have put outthat are I think, quite substantial.
I mean, what do you see that impact being?
And I mean like do you think that I guess,how would you rate,
I guess the price impacts ofboth the China tariffs and

(30:11):
then the ex China tariffs andtrade barriers in
recent years in terms of small,medium and big?
Where would you rate those justgeneral impacts in general?

>> Douglas Irwin (30:29):
Well, one of the things about the US and
international trade isworld large economy.
Obviously trade is a relativelysmall part of our economy.
So trade's not nearly asimportant as it is to Canada.
It is to the UK it is Japan orKorea or something like that.
So we can afford more shocks in somesense to trade and we won't feel it in
our standard of living quite as directlyas many most countries in the world.

(30:53):
So we're very fortunate that way.
And of course, there's anotherlaw from Harberger, Al Harberger,
that if you multiply a small number bya small number, you get a small number.
So if you're talking about specifictariffs on individual items,
it's going to be pretty small for the US.
So even the steel tariffs, which I thinkare quite objectionable because they're
imposed supposedly under the guise ofnational security, when even Jim Mattis, I

(31:17):
believe a fellow at the Hoover Institutionwhen he was Secretary of Defense.
He wrote the memo from the Departmentof Defense saying there's
no national security rationale ornecessity for
the steel tariffs that the Trumpadministration imposed,
even though steel tariffs, it's not goingto have a huge impact on the US economy.
But you add up the steel tariffs,you add up China tariffs,

(31:38):
even the Congressional Budget Office,which is nonpartisan congressional outfit,
that sort of scores,Budgetary affairs, what have you.
They had US GDP being 0.2% lower soonce again,
that's not I don't know whether youcan call that large or small, but
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 effectat the end of the day.
It's making us worse off.
It's a cost, maybe it's achieving someobjectives that countervail that cost.
But it's a small cost, but
it is one that can accumulate ifyou keep imposing these tariffs.

>> Jon Hartley (32:17):
Interesting, yeah, that's fascinating.
I want to get back to I guess maybethe non-economic sort of case for
tariffs and because I think that that'ssort of perhaps the best case and
certainly countervailingChina's influence.
Yeah, I don't necessarily seemanufacturing jobs coming back

(32:40):
anytime soon.
I mean certainly things could change andtechnological advancements
that somehow reimagine manufacturingin the US in some high tech way.
But you know, we, again, you getting backto this point that we said before we
didn't have free trade with ussr, right.

(33:01):
And we had sort of two different worlds.
We had the communist world andwe had the free world or
the world of largelycapitalist democracies.
I'm just curious, one could arguethat sort of the same about China,
that maybe there should be some tools atleast used to counter China's influence.

(33:26):
China's for example,they've had this massive stride recently
in manufacturing electric vehiclesmore cheaply than say the US and
they're trying to subsidizeBYD in Latin America and
put them into international markets.
There's been some responses from the USin terms of tariffs on Chinese electric

(33:49):
vehicles.
In your mind,how effective are terrorists?
In your mind as a deterrent, howeffective do you think they are compared
to say sanctions orthreats of military force?

>> Douglas Irwin (34:03):
Well, certainly threats of military force would be an extreme sort
of action.
I think about if the goal isreally deterring an invasion of
Taiwan from China, that's really the grip.

>> Jon Hartley (34:16):
I don't necessarily see China, you know, building some global
empire, you know, with, with theirmilitaries immediately at least.
But I think Taiwan being the hugesort of deterring a Chinese
invasion of Taiwan beingsort of the primary goal.
I mean, where do you see,I guess, terrorists ranking

(34:38):
in terms of their abilityto really influence.

>> Douglas Irwin (34:43):
So raise a number of points here.
So one is a potential invasion ofTaiwan and what we could possibly do.
And then in some sense you want to keepthe relationship open so that you have
leverage to impose those tariffs lateron rather than sort of preempt things.
But I think the real issue today is not somuch that, but it's are there certain

(35:03):
technologies that we want to deny Chinaand are there certain domestic industries
or production capability thatwe need at home that China has,
such as batteries, for example,such as drones and things of that sort?
And how much do we want to be economicallyindependent in those areas from China?
You know, that's something that the Bidenadministration sort of grappled with.

(35:24):
And you're right, they've imposed extra,really high tariffs on EVs from China,
even though we don'timport them at all yet.
That's sort of this preventive action.
And here's where it's sort of hard foreconomists to weigh in.
So I think economists need to be part ofthat debate because we can weigh costs and

(35:45):
benefits, but also you need someone tomake an assessment about national security
and the importance ofcertain technologies or
certain production capabilityto future defense needs.
And so you need the nationalsecurity people there.
You know, one, I guess,
complaint that I've heard many economistsmake about the Biden administration is

(36:05):
that the national security team hasreally taken over trade policy and
are running things on that basis withoutthinking about costs and benefits,
without thinking really more aboutbuilding alliances with other countries or
how we can cooperate with our allies inthat effort, but acting more unilaterally.
So that's a question of sort of tactics,not strategy.

(36:27):
And so I'd say, it's really open and
difficult area in which we're gonnahave to navigate in the future.

>> Jon Hartley (36:33):
Fascinating, so I guess another recent big trade shift or
a big piece of news isthe Biden administration
blocked the acquisition ofUS Steel by Nippon Steel,
which is a Japanese steel manufacturer.

(36:53):
What are your thoughts on that?
Obviously, Japan's an ally.
And I'm curious,there's been a lot of critics
of the decision to block that acquisition.
Or I'm curious, what's your takethere in terms of what's the story?

(37:15):
And also, how bad or stupid ofa decision might it be in your mind?

>> Douglas Irwin (37:23):
Well, the phrase that the Biden administration has used
regarding its sort of trade and foreigninvestment policy is friendshoring.
That is, we want to sort of keepChina out, but keep our friends in.
There's a heck of a wayto treat your friends.
I mean, Japan is an ally, and
what they're doing is makinga capital investment in a US firm.
They've made pledges tokeep employment high and

(37:46):
to reinvest in the US that shouldbe something that we would welcome.
And once again,it's sort of sending a wrong signal.
I think that here's sort of a bulwarkto our East Asian alliance system,
a country that's been friendly with us formany, many decades,
that we cooperate with on somany dimensions.
And yet the president made a decision,

(38:08):
really at the behest of the presidentof the labor union, to block this sale.
The rank and file of the union, the UnitedSteel Workers, they generally supported
the agreement because they wanted newcapital investment because it would help
preserve their jobs and make US Steela much more competitive enterprise.
Why we're denying this,it makes little sense,
particularly since the politicsare sort of off the table.

(38:31):
President Biden is not goingto be serving another term.
He doesn't have to win more votes,but he sees himself as a union man and
somehow identifies US Steelwith America in this way.
I should note that there havebeen press reports that many of
President Biden's economic aideswanted the sale to go through.

(38:51):
So it was really his call.
And he overruled him, overruled manyof the advice that he was getting.

>> Jon Hartley (38:58):
Interesting, interesting, I'll get back to friendshoring a little
bit just when we talkedabout industrial policy.
But I want to just talk about the WTO,because I think the WTO this long time,
certainly in the 20th century period,globalization and
trade liberalization played a big rolein strengthening multilateralism.

(39:23):
Is it fair to say that we've now thatthe trade policy discussions have
become largely bilateralinstead of multilateral?
We had these sort of bigmultilateral trade agreements,
TPP, there's a European version,that those are kind
of off the table now andthat are largely bilateral and

(39:47):
that the WTO become an inertkind of organization.
If any country can sort ofslap on tariffs now with some
sort of a national security case.
There's not much minor sayings,there's not much the WTO can do
when a country makes a nationalsecurity justification.

(40:10):
Is that kind of your sense in terms ofhow trade negotiations have evolved?

>> Douglas Irwin (40:14):
Yes, absolutely.
In fact, it's sort of worse forthe WTO than you just put it.
And its woes predate even the nationalsecurity concerns that have just come up
in the last five years or so.
So it's sort of interesting you breakbring this up because it's 30 years ago
this month that the WTO came intoexistence in January of 1995.
And there were high hopes that this isgoing to bring the world together and

(40:37):
really cooperate on trade policy andhelp foster world commerce and
bring prosperity to the world.
And it just really hasn'tworked out according to plan.
I think a couple things went wrong.
First of all, the gatt,which we talked about earlier,
was sort of this Cold war institutionwith just these like minded countries,
as I mentioned, Western democraciesthat were market oriented.

(40:59):
They all want to cooperate on trade.
They all basically got along.
Now we have an organization with 166members from all across the world.
We're not necessarily all on the samepage in terms of wanting more liberalized
trade and more open markets.
So it's interesting that becauseit operates by consensus,
what that means is that all 166 countrieshave a say in terms of the negotiation and

(41:23):
what will be agreed to.
It won't surprise you that if youoperate need sort of almost unanimity.
The WTO has yet to reach a single majortrade agreement since its existence.
So it was found the Uruguay Round,which the Reagan administration started,
led to the WTO andthen nothing has happened since.
There was something called the Doha Roundwhich was started in 2001,

(41:46):
utterly failed, could get no consensus.
The Director General Mike Moore atthe time used to say that the WTO
is like a car with one accelerator and150 handbrakes and any, any person,
any passenger can pull up thathandbrake and negotiation just stopped.
So the WTO is,
there used to be these every 10years a gat round of negotiations.

(42:09):
Now the WTO is really accomplishingnothing through the negotiations,
even areas like fisheries andwhat have you.
Second problem is there's a disputesettlement system that the WTO created.
One of the problems with the GATT is thatit really couldn't enforce the agreements.
And the WTO had a really strongjudicial system, if you will,
to adjudicate these disputes andset the rules of the road.

(42:30):
And that's just been that worked verywell for about 10 years, but for
various reasons we don't have timeto get into that's deteriorated too.
And now the dispute settlementsystem is a shambles.
It used to be called the crownjewel of the trading system.
Now it's just inoperative and not working.
And then when you throw in nationalsecurity concerns where basically

(42:50):
countries can justify anything on nationalsecurity, it's even worse than that.
Countries are just doing things and noteven worrying about the WTO rules anymore.
So it's really a shell of itsformer self in the future.
To the extent that some countries want tostill move forward within this process
of trade opening is exactly as you said,bilateral agreements, regional agreements.

(43:13):
So there's the Trans Pacific Partnership,
which you mentioned,which more countries have tried to join.
The European Union just signed anagreement with MERCOSUR in South America.
The African countries recently concludedan African Free Trade Agreement.
So all these different regions and

(43:33):
parts of regions are sort of gettingtogether and seeing where they can align.
You know, Mexico, if the US were todo something to pull out of NAFTA or
usmca, Mexico has free tradeagreement with the European Union.
They're participating in South America.
They've positionedthemselves in Asia as well.
So they've tried to keep theiroptions open with trade as well.

(43:54):
So even if the US and China are sort of atloggerheads and the WTO is going nowhere,
other countries are still trying tokeep commerce going to their advantage.

>> Jon Hartley (44:05):
I think fair to say that the BRICS countries, Brazil, Russia,
India, China, South Africa, like toposition themselves as a anti American or
anti Western trading bloc, though I thinkthey have a lot of their own challenges.
One thing that they often talk aboutis trying to dethrone the US dollar and

(44:26):
US dollar status is worlds.
Done some research myselfthat looked at the US dollar
share of say FX reserves at centralbanks or trade invoicing or
FX trades or the denominationof global debt securities.
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
status is completely unchanged andstill extremely dominant.
But that's not to say thatchange in the future.
Obviously we've had people, some scholarslike Barry Eichengreen, say over the past
10, 15 years, I think sort of takethe 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.
I don't think we seethat in the data at all.
In Fact, if anything, the Yuan islosing some share in recent years.
I'm curious in obviously prior to the USdollar there was a time when the British
pound was world reserve currency andthere were others prior to that.

(45:32):
I'm curious, where do you see the wholediscussion around the status of
the US dollar in the world?
And I'm curious, do you see brics as beingany kind of a threat to it in any way?

>> Douglas Irwin (45:44):
Well, in terms of the brics, first of all there is a worry that
the world is fragmented andthe trade system and possibly in
the national financial system too, butcertainly with, you know, these regional
blocs that we're not going to havethis open multilateral system anymore.
And I think the US China relationshipis just sort of an indication of that.
I don't think the brics necessarily havea coherent unified position on this,

(46:06):
at least in terms of trade.
You know, the interests of India are verydifferent than South Africa or Russia.
Russia is sort of a pariah state,faces a lot of sanctions,
isn't really an open society oreven an economy in some sense.
India has tremendous potential.
You should note just, you know, inthe last month Manmohan Singh passed away.

(46:29):
He's the former Prime Minister ofIndia and the former finance Minister.
He's the one who in 1991 opened up theIndian economy and really transformed it.
It started growing much more rapidly,put a big dent into poverty.
India is well positioned if theycan get their domestic act together
to really become a powerhousein global commerce once again.

(46:51):
They have domestic impediments to that.
But they've won so much, they've gained somuch by engaging in the world economy.
They're in a very different position thanI think of South Africa which is more
insular.
Brazil which sort of shifts back andforth depending on the regiment.
Russia which really doesn't have theirnatural resource exporter, not much else.

(47:16):
So I think it would be hard for
them to coordinate in terms of beinga trade bloc or anything like that.
The interests are just too diverse.

>> Jon Hartley (47:25):
It's interesting.
One of those things I think,I totally agree with that.
I think there's a lot of talk at these butI don't know how much real follow up or
bite their or agreement there actually is.
And I mean there was this sort ofagreement a few years ago that I think

(47:45):
China or China Brazil were going tostop using the US dollar in their trade.
But how you would even force to do that,
how would you force firms to do thatI think is also very complicated.
But I want to our last question.
I want to really just talk about becauseit's very intimately related to trade.

(48:07):
I mean, what's your sort of take onthe renewed interest in industrial policy,
I mean, obviously there's beena lot of interest in chips,
given the potential invasionof Taiwan by China and
the chips manufacturersbeing based there like TSMC.
I mean, there's been.

(48:27):
The Chips andScience act has funded a bunch of things,
but I think there's varyingdegrees of pluses and minuses.
Intel is sort of floundering and
the US Government's been tryingto subsidize its foundries,
but it's floundering with the riseof Nvidia and its GPU chips,

(48:51):
which have sort of made a lot of otherbusiness is somewhat, somewhat redundant.
But also there's a CSMC, actual chipmanufacturer that's being built or
manufacturing plant that's being built,or fab that's being built in Arizona.
Some people are saying,you know, or I mean,
it seems to be coming online a bit slowerthan some had originally hoped for.

(49:14):
And some people said, I think,made arguments that, you know,
if anything, we should be subsidizingplaces like Mexico to build these plants
because they've got maybe the sortof workers that have skills and
more sort of less sort of laborissues that say, compared to the.
And has maybe a labor force that couldbe more similar to, say, Taiwan.

(49:36):
I'm curious how you think about industrialpolicy and the pushes for it so far.

>> Douglas Irwin (49:43):
Well, it seems like semiconductors are critical input to so
many products, and we saw the impact ofthe shortage during COVID And of course,
national security concerns about Chinadominance are also very important.
And when we think that, first of all,
I should back up and just say thatregion of the world where you live is

(50:04):
just this innovative hub of new ideas interms of semiconductor technology and
the great new firms that have comeabout the innovation, the RND.
But the manufacturing takes place a lot inEast Asia and in particular in Korea and
Taiwan.
So we're doing the innovating.
We have the fantastic RND, butnot a lot of production here.

(50:26):
And it just seems thatwith China's rise and
whether they become aggressive ornot in the future,
those are two sort of odd places tohave a lot of semiconductor production
capacity right on the doorstep of NorthKorea and right on the doorstep of China.
So as a matter of prudence, I think onecould debate whether we should have more

(50:49):
semiconductor capacity in the US orEurope or some other place.
And then the question is how to achievethat tariffs are not the way to do it
because you don't want to make the USa high price island and you don't want to
stop the re importation of variouscomponents and things of that sort.
So that raises the question of subsidies.
Subsidies will keep prices lower, whichis good for consumers and what have you.

(51:12):
They're also transparent, and also there'san accountability I think with subsidies
that we don't get with tariffs.
So once tariffs get in place,first of all, once again,
it's just a very crude instrumentthat raises prices to consumers.
At least with subsidies there'saccounting that can take place.
It's not something that Congresswants to do in perpetuity.

(51:33):
So it gets reviewed often.
So subsidies are much better thantariffs that will get forgotten and
have many more distortions associatedwith them and can be sort of last for
some time without the sort of end date ofhaving the taxpayer write another check.
So I think there's a case where, you know,
there has to be a discussion ofeconomists with national security folks.

(51:57):
We can't subsidize everything.
We don't want industrial policy foreverything.
But if there was a case,
I think semiconductors is a debatableone that should be considered.

>> Jon Hartley (52:06):
And it seems like, I mean, to some degree there is some sort of
bipartisan consensus or you know,perhaps, new Washington consensus that,
by National Security Advisor JakeSullivan's talked a little bit about.
I've written a nationalaffairs essay recently titled
the Neopopulous Economic Consensusthat discusses some of this,

(52:27):
bipartisanship andwithin certain factions of.
It's interesting too because I dothink on the industrial policy front,
one major difference across the parties iscertainly the Democratic Party is very big
on green industrial policy.
Think about the Inflation Reduction Actwhich had a lot of things
like electric vehicle subsidies andhad been sort of famously criticized

(52:53):
with various charging stationsbeing coming online too slowly.
And from what I understand,
a lot of the Inflation Reduction Act willlikely be repealed in part to pay for
the soon to be negotiated andpassed tax cuts and

(53:13):
Jobs Act extension ortax reconciliation bill.
That's my understanding.
So I think the whole industrial policyconversation is very much evolving and
it'll be interesting to see how much orhow it plays out in the future.
Doug, it's been a real honor tohave you to hear about ideas and
to talk about trade policy.

(53:34):
It's been a real honor.
Thank you so much for joining us.

>> Douglas Irwin (53:37):
Great discussion, thanks for having me.

>> Jon Hartley (53:41):
This is the Capitalism and Freedom in the 21st Century podcast,
an official podcast ofthe Hoover Economic Policy Working Group,
where we talk about economics,markets and public policy.
I'm Jon Hatley, your host.
Thanks so much for joining us.
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