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

>> Jon Hartley: This is the Capitalism and Freedom the 21st Century podcast, an official podcast of the Hoover Institution. I'm Jon Hartley, your host. Today, my guest is Doug Irwin, who is the John French professor of Economics at Dartmouth and a senior fellow at the Peterson Institute for International Economics.

Doug's specialty is in both trade and economic history. And given that trade is certainly a very topical policy issue right now, I think it's gonna be a very interesting discussion. Welcome, Doug, thanks so much for joining us.

>> Douglas Irwin: Thanks for having me.

>> Jon Hartley: So I wanna first start talking about your background.

How did you first get interested in economics?

>> Douglas Irwin: Well, I resisted it at first. My father's an economist, so I wanted to do something different. I was very much interested in international politics, in world affairs, but sort of realized that economists had a great framework for understanding the world, including international relations.

And so I sort of gradually migrated over to economics and specialized in international economics.

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

>> Douglas Irwin: 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, maybe these names don't mean anything to you, but they're great international economists, including Ron Finlay, who's also on my committee.

>> Jon Hartley: I'm gonna restart that question, because I've gotten that right. Okay, restart in three, two, one. And you did your economics PhD at Columbia University, a lot of great trade and monetary luminaries at the time.

I mean, who was at the department at the time and who was on your committee?

>> Douglas Irwin: Well, I really lucked out, because it was just chock full with great international economists, Jagdish Bhagwati, Ronald Finlay, Rob Feenstra. In terms of international trade, I mean, those are three just great individuals sort of.

Jagdish took me under his wing to some extent. Then international finance, Maury Obstfeld, Jerome Ocalvo, Robert Mundell, who won the Nobel Prize in 1999. So it was great on that side as well. So both on the international macro side and international finance side, and then the trade side and commercial policy is just an abundance of riches.

>> Jon Hartley: It's amazing. What an amazing set of luminaire international macro space at the time. And I mean, all those folks, think Robert Mundell, and international monetary economics think about the euro. He was super influential in the creation of the euro thinking about currency, optimal currency zones. And also, he spent a lot of time as well in sort of the fixed versus floating exchange rates debate.

Friedman obviously won the Nobel Prize as well for the Mundell Fleming Trilemma. And Jagdish Bhagwati, I mean, an amazing figure and very influential, I know certainly in trade and in India as well. I also know you spent some time at the Reagan CEA. It's amazing how many influential people served at the Reagan CEA in part thanks to Marty Feldstein being the chair for many years, like Larry Summers, Paul Krugman, John Cochrane, Greg Mankiw, Rich Clarida, they were all there at the Reagan CEA at different points in time.

What was it like when you were there and what were you working on? Were you working on trade or other international issues or something completely different?

>> Douglas Irwin: Yeah, so actually, I was there the same year Rich Clarida to was there, who was a guest on your podcast just a little while ago.

This is towards the tail end of the administration. It was in 86, 87, and I had finished two years of my coursework at Columbia. I didn't have a thesis topic yet. And I asked people what they did in their third year in graduate school and most of them said, well, you sort of sit around and look for a topic.

And I thought I might as well do something different and productive during that year. So applied to go to the CEA and Michael Moussa was there, who's professor at the University of Chicago, but a member of the Council at the time and one of the great international economists of his generation.

And so I went there, had an incredible year, learned so much about trade policy, so that's what I worked on trade policy. Also turned out Jagdish Bhagwati was on leave from Columbia that year at the World Bank. So he was two blocks away and involved me 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 in international trade who was just so gracious at including me in all the meetings he went to at US Trade Representative's office and Department of Agriculture and things of that sort.

So just immersed myself in international trade. It was wonderful year.

>> Jon Hartley: Wow, that's amazing. And yeah, to think about all the folks who were around at that time and the folks who were at the World Bank at the time. And it's an important time in, I think, trade history, some degree of globalization sort of really beginning around that time.

But I wanna go back further in economic history, because you wrote a really wonderful book. The real, I think, the canonical history of US trade policy titled Clash Commerce, that was published in 2017 by the University of Chicago Press. Could you explain to us a little bit about what the three main periods of trade liberalization in the US are?

I think you call them the three R's. Could you explain to us sort of a succinct history of US trade policy?

>> Douglas Irwin: 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 impose tariffs 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 to restrict imports and keep out foreign goods to protect the domestic producers from foreign competition.

And the third R is reciprocity. You might wanna use your tariffs to negotiate with other countries to have a free trade agreement to reduce the tariffs, or you might wanna use that reciprocity to inflict harm on others by raising the tariff to retaliate against what you might perceive as unfair trade practices against the other country.

So what's interesting is these three R's align almost perfectly with three different periods in US history. So the second Act passed by Congress under the new constitution in 1789 was a Tariff Act, because the government newly independent, we have these war debts. We need to fund the national government.

One of the problems with the Articles of Confederation is that there's no power of taxation on the part of the national government. The Constitution remedied that, and so they needed revenue. And so the main purpose of the tariff prior 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 high tariffs to restrict imports, to help out domestic industries, which were located mainly in the North. And so we had this period basically from the Civil War until the Great Depression, which is a period of restriction. We're trying to maintain high tariffs to keep out foreign goods.

Then, of course, we have another transition during the Great Depression, and that leads us up to the Great Depression, which leads not just to a political change in the US where the Democrats really become the dominant party, but also a change in US trade policy where we move to reciprocity.

And we had these high tariffs in place. The Smoot hawley tariff of 1930 being a dramatic example of that. And the Roosevelt administration, subsequent administrations thought we have to bring down tariffs not just in the US but around the world. So we're going to have to negotiate with other countries and have these reciprocity agreements such as the gatt, the General Agreement on Tariffs and Trade.

And that sort of ushers in this period of reciprocity which passed through the Reagan administration, through the Bush administration, really up until quite recently, bringing tariffs to a relatively low level.

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

I mean, is that a fair characterization of those?

>> Douglas Irwin: Some extent. I mean the US is in a different situation than many countries around the world. For small countries, a New Zealand, you know, a small African country, really you have no bargaining power with other countries. No one really cares about what you're doing.

So if you're going to reduce your tariff and open up to international commerce, you have to do it yourself. There has to be that domestic political consensus. The US Is a large country. We do have bargaining power. And in particular, in fact we had had unilateral tariff reductions in the past.

If Congress passed that usually under the Democrats, but with the Great Depression, there's a big problem is because of the Depression and the retaliation of other countries against Smoot Hawley, all tariffs, all trade barriers had risen around the world. And so we could have unilaterally gotten rid of Smoot Hawley, but it wouldn't really solve the problem of US access to other markets.

So that's where the U.S. the Roosevelt administration said we're not going to undertake a unilateral tariff reduction. We're going to try to negotiate with others to bring everyone's tariffs down to restore world commerce because we have a stake in flourishing world commerce so that we don't get these fascist regimes in Europe that are going to cause another world war like we had in World War II.

>> Jon Hartley: You're saying that that began before the that. You're saying that that happened with the FDR administration. You're saying.

>> Douglas Irwin: Exactly. It was in 1934 that the reciprocal Trade act of Reciprocal Trade Agreements Act 1934 was passed which delegated powers to the President. Before then under Article 1 of the Constitution, Congress has sole authority over the tariffs.

>> Jon Hartley: Right.

>> Douglas Irwin: So Congress had to take. But this was delegated-

>> Jon Hartley: Treaties and so forth.

>> Douglas Irwin: Exactly. So Congress can't negotiate with other countries, but the President can. So this empowered, really for the first time the President to undertake negotiations with other countries and basically committed Congress to saying if 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 renegotiate it based on domestic interest.

So it really was this delegation of power to the President in the early 1930s that made a huge difference for US trade policy. And then I just also add, it wasn't just sort of the economics of it is foreign policy. The US wanted to now shed its isolationism and become a world leader.

And the way you could do that is through trade and leading other countries towards a more prosperous world by reducing trade barriers.

>> Jon Hartley: That's fascinating. And it's interesting too. I think in that prior period you had obviously there was the Smoot Hawley tariffs, which some people as a cause or one of the causes of the Great Depression.

And it's interesting too that you have this dynamic where you had Republicans raising tariffs, I'd imagine, prior to the Wilson era and then following Wilson tariffs. Coming back, do you subscribe to the view that Smoon Hawley played a big role in causing the Great Depression or what's your.

 

Obviously that's sort of in contrast with Milton Friedman's view that, you know, tightening of monetary policy by the Federal Reserve, that played a big role. I'm curious, what do you think Smoot Hawley fits into causes of the Great Depression?

>> Douglas Irwin: Yeah, I don't think any economic historian really seriously believes that the Smoot Hawley tariff caused the Great Depression.

I think there's a debate and maybe a little bit of a consensus that it exacerbated the Great Depression. So it wasn't passed until June of 1930 and we already were well past the business cycle peak. And of course, the stock market crashed in the fall of 1929. So most people would say, yes, Milton Friedman was right, its monetary policy was the main cause.

Barry Eichengreen has sort of modified that, saying it wasn't just monetary policy in the U.S. it was around the world and the gold standard, all countries that were on the gold standard and went through this big deflationary bust. And it wasn't until you got off the gold standard and devalued your currency that you actually had economic recovery.

And that fits the US as well, because it wasn't until April 1933 when FDR took us off the gold standard, that we moved towards a more reflationary monetary 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 I mean Congress began considering it in the spring of 1929. Well before we had sort of entered 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 matters better going into 1931 32.

>> Jon Hartley: Absolutely. And yeah, it's, it's very interesting that whole, that whole period. I'm curious too, like you're talking about the post war trade liberalization period. In the post World War II trade liberalization period, we also had this thing called the Cold War and largely this precedes the globalization of the 1990s through the 2010s.

And I'm curious, what was the trade relationship between us and the USSR? Because I feel like today when we talk about trade particularly China looms very large and there's I think often this sort of non economic case for tariffs and trade barriers which often comes up or is rationale and to try and deter China's influence.

I'm curious, what was the trade relationship like between US and ussr? I mean, we still have an 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 was the US vs USSR trade dynamic like?

>> Douglas Irwin: I'll sort of back up and sort of explain the geopolitical situation of the world at that time. So yes, after World War II, the US helped create the GATT, the General Agreement on Tariffs and Trade, which is a trade agreement to sort of set trade 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. 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. 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 outside of the GATT system.

And of course there's what became known as the Third World, poor countries in Latin America, Africa, South Asia, Southeast Asia. They protected their industries through import substitution policies. So they really weren't participating in the global commerce of the period as well, or at least to an attenuated extent.

So after World War II, we didn't reunite the world in terms of global commerce. We had these three worlds that were quite separate. And of course, it wasn't just market-oriented economies versus centrally-planned economies like in the Soviet Union. There was geopolitical tension. So even if the Soviet Union want to move towards more trade, it just wouldn't fit really well with the US.

The big change, of course, is in 1989, the fall of the Berlin Wall and then later the collapse of the Soviet Union. That led to a term that I don't like, but it's sort of common, hyperglobalization, where developing countries opened up, Eastern bloc opens up, China opens up, and we really become an integrated world economy.

But the period you're talking about is the Cold War. We had a lot of restrictions on trade with the Eastern bloc, particularly in terms of technology. Even if we didn't have those restrictions, I think there would have been not much trade anyway because of the nature of the Eastern bloc economies.

>> Jon Hartley: 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. But also you see China trying to assert 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 trading block or to build its own trading block. And I see that, as an argument, I guess, brought forth by some individuals in a non-economic case for tariffs.

But I guess I wanna focus, so we had this period of globalization that was really big starting in the 1990s. And I think that period where many free trade agreements are being signed by the US and many other countries throughout the world, we have prices coming down. Places like Walmart and big-box retailers are coming online, and that, I think low-cost retailers are part of that story.

I mean, you also have the China trade shock as well, which obviously has moved many manufacturing jobs overseas and has had a pretty, I'd say, significant effect on manufacturing employment in particular in parts of the Midwest and other 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. And you had the Democratic primaries. You had Bernie Sanders forcing Hillary Clinton to concede on the TPP, which was this sort of Asia partnership free trade agreement with the US that was being negotiated part by Hillary Clinton, which she once called the gold standard herself, and she capitulated on that.

I think that was a pretty seminal moment in economic policy for the Democratic Party, turning against the sort of Clintonite years of free trade. And then, obviously, Donald Trump becoming the Republican nominee based on largely a pro-tariff platform. And I feel like we're still in that same era, it seems like.

And both parties have, I think, kept, or presence from both parties have kept tariffs on various items and not just. For example, on aluminum, various tariffs that I think started during the Trump administration have been kept on, in fact, even increased during the Biden years. So I'm curious, what's your assessment of the impact, for example, on consumers in terms of price increases?

And I'm curious what you think the impact is on employment. I mean, from my standpoint, I see they're being documented, small increases in prices. And I'm not too sure about the evidence on employment. I know that manufacturing share of total employment in the US is maybe just below 10%, which is still much below where it was in, say, 1980, around closer to 20%.

But I think one thing that we saw in response to a lot of the tariffs of the past ten years or so is a lot of trade diversion. So sending trade through Vietnam, and so directly from China to the US, and that can avoid these tariffs. I'm curious, what's your assessment of the impact of this sort of new trade policy of terrorists and other barriers that have sort of been inaugurated since 2016?

>> Douglas Irwin: Well, there's a lot in there. And so I'm going to simplify it. And it's very important to distinguish two things. One is the tariffs on China. So that's part of the geopolitical fallout of what's happened with the US relationship with China, the movement of China towards much more intensive industrial policy and industrial subsidies under Xi Jinping.

We had a very different relationship with China in the 1980s and 1990s when Deng Xiaoping was in power, or his acolytes. China was moving in a 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 communiques sort of began with Kissinger.

>> Douglas Irwin: It was sort of on that basis that we agreed to let them into 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 threatening in terms of national security.

So it's sort of inevitable, I think, that the US Would react against that at some point. And that's what we saw with the Trump administration really, boldly imposing tariffs on China for the first time. Now, the cost of those, or let me say, first of all, the design there is to separate the two economies to some extent.

And there are costs to that, of course. But as Adam Smith said in the Wealth of Nations, defense is more important than opulence. So one could make a national security case for not allowing China to dominate certain industries in the US or having a domestic grown capacity to for production and things of that sort.

That's sort of a case-by-case basis. But also the costs are minimized in some sense because when you impose tariffs just on one country, as you mentioned, trade diversion is huge. So we're now importing a lot more from Mexico, but a lot more from Vietnam and other Southeast Asian countries.

Now, it's true, Apple hasn't moved the iPhone production away from China so much. In fact, Apple got sort of an exemption from 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 were buying from China that we could buy from other countries as well.

So that's sort of a geopolitical take on what one thing that was happening at that time. But then we have other tariffs, like the steel tariffs or the aluminum tariffs that you referred to. Those are more across the board on all countries. Here, I think economists can object much more 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 European countries, we're hitting Japan and Korea. These are our allies. And the question is, why are we hitting our allies with these import duties when they operate more on a market oriented basis?

And the second point with regard to the 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 steel as an input to production. When you impose those tariffs, you raise the cost of domestic product 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 expensive to make things in the US and there's been studies by economists at the Federal Reserve and elsewhere showing that we've lost more jobs in other downstream manufacturing industries than we gained in terms of helping out the steel industry itself.

So that's a case where two tariffs are counterproductive to the goal. And we can question the goal too. But if we don't question the goal of trying to increase or help out US Manufacturing tariffs are a blunt instrument and don't achieve that.

>> Jon Hartley: So I'm curious, what do you think about the whole argument that some people make and this is, I guess talk more about sort of the economic debate and economic cases for and against terrorists.

What do you take, what do you think about the whole argument that we don't really have a fully free trade regime or we never really achieved it? And that really in part tariffs can be used as negotiating tool to get even 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 over time over softwood lumber. And it's sort of a back and forth thing where the lumber industry in Canada is largely controlled by the government and the price is set by the government and they tend to set the price below the market price in the US And US doesn't like that.

And so they put on tariffs. And I mean they also have subsidized dairy industry. It's a big political thing in Canada and there was a big king conservative party race that was actually decided by this issue about nearly 10 years ago. But I'm curious, you know, is there an argument to be made that, you know, that some short term tariffs that sort of force other countries to obviously, I mean they could retaliate with tariffs as well and it kind of ratchets up and hurts consumers further.

But I mean, do you think that it's possible to get more reciprocity and trade out of some of this, some of these sort of trade negotiations and tariff threats?

>> Douglas Irwin: Well, it's amazing you mentioned softwood lumber because that's one of the issues that was on the agenda in the late 1980s when I was at the CEA in the Reagan administration.

That's a trade dispute that's been going on for 50 years or so. And you know, there are always going 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 and countervailing duties which are used quite extensively to increase tariffs on particular products. But..

>> Jon Hartley: Nafta, for example, I think Reagan and George W. Bush.

>> Douglas Irwin: Well, first of all, it goes back decades. And it's also not a political process. Any firm can file an anti dumping or countervailing duty complaint. It doesn't involve the White House. It goes through the Department of Commerce and the US International Trade Commission and pretty much they both.

To say they rubber stamp those petitions would be a stretch, but Department of Commerce certainly approves them all. And about two thirds to half, half to two thirds get approved by the International Trade Commission. In other words, it's pretty easy for a domestic industry to get tariff protection if they ask for it and have good trade lawyers in Washington.

But let's set that aside for the moment. There's always going to be these trade disputes. You know, even in nafta, which is a free trade agreement, we don't allow in Mexican sugar, we don't allow in even Canadian sugar that's rerouted from Canada. So every country has their domestic political sensitivities and exempt certain sectors from the negotiations.

Dairy is an important issue in Canada. I know that's been a source of friction. And what you have to do is manage the relationship. And sometimes retaliation can be useful and effective. So when I was at the cea, the Reagan administration retaliated against Japan for non compliance with an agreement on semiconductors.

Semiconductors are still in the news today. But the trade disputes go back to the 1980s. The Reagan administration had thought that Japan had a closed market, domestic market for semiconductors and intel and Texas Instruments couldn't sell in Japan. And the Reagan administration free trade administration imposed retaliatory duties, quite stiff ones, against Japan.

And that did bring them to the negotiating table. And that was resolved. So you never want to. In fact, Adam Smith has a whole passage 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 of all tariff threats necessarily. But the question is, do you abuse it and you raise tariffs when you really don't want an agreement at the end of the day. So you may say you're raising them to negotiate 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: Interesting. Interesting, I guess. I mean, what do you like I've seen some estimates from the Peterson Institute and elsewhere. I mean, how big do you think the benefits so that the, I guess aggregate benefits were sort of over the 20th century.

I know there's some estimates that Peterson, various Peterson scholars have put out that 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 of both the China tariffs and then the ex China tariffs and trade barriers in recent years in terms of small, medium and big?

Where would you rate those just general impacts in general?

>> Douglas Irwin: Well, one of the things about the US and international trade is world large economy. Obviously trade is a relatively small part of our economy. So trade's not nearly as important as it is to Canada. It is to the UK it is Japan or Korea or something like that.

So we can afford more shocks in some sense to trade and we won't feel it in our standard of living quite as directly as many most countries in the world. So we're very fortunate that way. And of course, there's another law from Harberger, Al Harberger, that if you multiply a small number by a small number, you get a small number.

So if you're talking about specific tariffs on individual items, it's going to be pretty small for the US. So even the steel tariffs, which I think are quite objectionable because they're imposed supposedly under the guise of national security, when even Jim Mattis, I believe a fellow at the Hoover Institution when he was Secretary of Defense.

He wrote the memo from the Department of Defense saying there's no national security rationale or necessity for the steel tariffs that the Trump administration imposed, even though steel tariffs, it's not going to have a huge impact on the US economy. But you add up the steel tariffs, you add up China tariffs, 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 so once again, that's not I don't know whether you can 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 have a 0.2% level effect at the end of the day.

It's making us worse off. It's a cost, maybe it's achieving some objectives that countervail that cost. But it's a small cost, but it is one that can accumulate if you keep imposing these tariffs.

>> Jon Hartley: Interesting, yeah, that's fascinating. I want to get back to I guess maybe the non-economic sort of case for tariffs and because I think that that's sort of perhaps the best case and certainly countervailing China's influence.

Yeah, I don't necessarily see manufacturing jobs coming back anytime soon. I mean certainly things could change and technological advancements that somehow reimagine manufacturing in the US in some high tech way. But you know, we, again, you getting back to this point that we said before we didn't have free trade with USSR, right.

And we had sort of two different worlds. We had the communist world and we had the free world or the world of largely capitalist democracies. I'm just curious, one could argue that sort of the same about China, that maybe there should be some tools at least used to counter China's influence.

China's for example, they've had this massive stride recently in manufacturing electric vehicles more cheaply than say the US and they're trying to subsidize BYD in Latin America and put them into international markets. There's been some responses from the US in terms of tariffs on Chinese electric vehicles. In your mind, how effective are terrorists?

In your mind as a deterrent, how effective do you think they are compared to say sanctions or threats of military force?

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

>> Jon Hartley: I don't necessarily see China, you know, building some global empire, you know, with, with their militaries immediately at least. But I think Taiwan being the huge sort of deterring a Chinese invasion of Taiwan being sort of the primary goal. I mean, where do you see, I guess, terrorists ranking in terms of their ability to really influence.

>> Douglas Irwin: So raise a number of points here. So one is a potential invasion of Taiwan and what we could possibly do. And then in some sense you want to keep the relationship open so that you have leverage to impose those tariffs later on rather than sort of preempt things.

But I think the real issue today is not so much that, but it's are there certain technologies that we want to deny China and are there certain domestic industries or production capability that we 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 economically independent in those areas from China? You know, that's something that the Biden administration sort of grappled with. And you're right, they've imposed extra, really high tariffs on EVs from China, even though we don't import them at all yet. That's sort of this preventive action.

And here's where it's sort of hard for economists to weigh in. So I think economists need to be part of that debate because we can weigh costs and benefits, but also you need someone to make an assessment about national security and the importance of certain technologies or certain production capability to future defense needs.

And so you need the national security people there. You know, one, I guess, complaint that I've heard many economists make about the Biden administration is that the national security team has really taken over trade policy and are running things on that basis without thinking about costs and benefits, without thinking really more about building alliances with other countries or how we can cooperate with our allies in that effort, but acting more unilaterally.

So that's a question of sort of tactics, not strategy. And so I'd say, it's really open and difficult area in which we're gonna have to navigate in the future.

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

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 take there in terms of what's the story? And also, how bad or stupid of a decision might it be in your mind?

>> Douglas Irwin: Well, the phrase that the Biden administration has used regarding its sort of trade and foreign investment policy is friendshoring. That is, we want to sort of keep China out, but keep our friends in. There's a heck of a way to treat your friends. I mean, Japan is an ally, and what they're doing is making a capital investment in a US firm.

They've made pledges to keep employment high and to reinvest in the US that should be something that we would welcome. And once again, it's sort of sending a wrong signal. I think that here's sort of a bulwark to our East Asian alliance system, a country that's been friendly with us for many, many decades, that we cooperate with on so many dimensions.

And yet the president made a decision, really at the behest of the president of the labor union, to block this sale. The rank and file of the union, the United Steel Workers, they generally supported the agreement because they wanted new capital investment because it would help preserve their jobs and make US Steel a much more competitive enterprise.

Why we're denying this, it makes little sense, particularly since the politics are sort of off the table. President Biden is not going to be serving another term. He doesn't have to win more votes, but he sees himself as a union man and somehow identifies US Steel with America in this way.

I should note that there have been press reports that many of President Biden's economic aides wanted the sale to go through. So it was really his call. And he overruled him, overruled many of the advice that he was getting.

>> Jon Hartley: Interesting, interesting, I'll get back to friendshoring a little bit just when we talked about 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 role in strengthening multilateralism. Is it fair to say that we've now that the trade policy discussions have become largely bilateral instead of multilateral?

We had these sort of big multilateral trade agreements, TPP, there's a European version, that those are kind of off the table now and that are largely bilateral and that the WTO become an inert kind of organization. If any country can sort of slap 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 national security justification. Is that kind of your sense in terms of how trade negotiations have evolved?

>> Douglas Irwin: Yes, absolutely. In fact, it's sort of worse for the WTO than you just put it.

And its woes predate even the national security concerns that have just come up in the last five years or so. So it's sort of interesting you break bring this up because it's 30 years ago this month that the WTO came into existence in January of 1995. And there were high hopes that this is going to bring the world together and really cooperate on trade policy and help foster world commerce and bring prosperity to the world.

And it just really hasn't worked 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 institution with just these like minded countries, as I mentioned, Western democracies that were market oriented. They all want to cooperate on trade.

They all basically got along. Now we have an organization with 166 members from all across the world. We're not necessarily all on the same page in terms of wanting more liberalized trade and more open markets. So it's interesting that because it operates by consensus, what that means is that all 166 countries have a say in terms of the negotiation and what will be agreed to.

It won't surprise you that if you operate need sort of almost unanimity. The WTO has yet to reach a single major trade agreement since its existence. So it was found the Uruguay Round, which the Reagan administration started, led to the WTO and then nothing has happened since. There was something called the Doha Round which was started in 2001, utterly failed, could get no consensus.

The Director General Mike Moore at the time used to say that the WTO is like a car with one accelerator and 150 handbrakes and any, any person, any passenger can pull up that handbrake and negotiation just stopped. So the WTO is, there used to be these every 10 years a gat round of negotiations.

Now the WTO is really accomplishing nothing through the negotiations, even areas like fisheries and what have you. Second problem is there's a dispute settlement system that the WTO created. One of the problems with the GATT is that it really couldn't enforce the agreements. And the WTO had a really strong judicial system, if you will, to adjudicate these disputes and set the rules of the road.

And that's just been that worked very well for about 10 years, but for various reasons we don't have time to get into that's deteriorated too. And now the dispute settlement system is a shambles. It used to be called the crown jewel of the trading system. Now it's just inoperative and not working.

And then when you throw in national security concerns where basically countries can justify anything on national security, it's even worse than that. Countries are just doing things and not even worrying about the WTO rules anymore. So it's really a shell of its former self in the future. To the extent that some countries want to still move forward within this process of trade opening is exactly as you said, bilateral agreements, regional agreements.

So there's the Trans Pacific Partnership, which you mentioned, which more countries have tried to join. The European Union just signed an agreement with MERCOSUR in South America. The African countries recently concluded an African Free Trade Agreement. So all these different regions and parts of regions are sort of getting together and seeing where they can align.

You know, Mexico, if the US were to do something to pull out of NAFTA or usmca, Mexico has free trade agreement with the European Union. They're participating in South America. They've positioned themselves in Asia as well. So they've tried to keep their options open with trade as well.

So even if the US and China are sort of at loggerheads and the WTO is going nowhere, other countries are still trying to keep commerce going to their advantage.

>> Jon Hartley: I think fair to say that the BRICS countries, Brazil, Russia, India, China, South Africa, like to position themselves as a anti American or anti Western trading bloc, though I think they have a lot of their own challenges.

One thing that they often talk about is trying to dethrone the US dollar and US dollar status is worlds. Done some research myself that looked at the US dollar share of say FX reserves at central banks or trade invoicing or FX trades or the denomination of global debt securities.

And largely speaking, even through Covid, even through, I think the Russian invasion of Ukraine, it's fair to say that the US Dollar's status is completely unchanged and still extremely dominant. But that's not to say that change in the future. Obviously we've had people, some scholars like Barry Eichengreen, say over the past 10, 15 years, I think sort of take the position that the US dollar is kind of on its way out and that the renminbi, the Chinese renminbi or yuan is ascendant.

I don't think we see that in the data at all. In Fact, if anything, the Yuan is losing some share in recent years. I'm curious in obviously prior to the US dollar there was a time when the British pound was world reserve currency and there were others prior to that.

I'm curious, where do you see the whole discussion around the status of the US dollar in the world? And I'm curious, do you see brics as being any kind of a threat to it in any way?

>> Douglas Irwin: Well, in terms of the brics, first of all there is a worry that the world is fragmented and the trade system and possibly in the national financial system too, but certainly with, you know, these regional blocs that we're not going to have this open multilateral system anymore.

And I think the US China relationship is just sort of an indication of that. I don't think the brics necessarily have a coherent unified position on this, at least in terms of trade. You know, the interests of India are very different than South Africa or Russia. Russia is sort of a pariah state, faces a lot of sanctions, isn't really an open society or even an economy in some sense.

India has tremendous potential. You should note just, you know, in the last month Manmohan Singh passed away. He's the former Prime Minister of India and the former finance Minister. He's the one who in 1991 opened up the Indian economy and really transformed it. It started growing much more rapidly, put a big dent into poverty.

India is well positioned if they can get their domestic act together to really become a powerhouse in global commerce once again. They have domestic impediments to that. But they've won so much, they've gained so much by engaging in the world economy. They're in a very different position than I think of South Africa which is more insular.

Brazil which sort of shifts back and forth depending on the regiment. Russia which really doesn't have their natural resource exporter, not much else. So I think it would be hard for them to coordinate in terms of being a trade bloc or anything like that. The interests are just too diverse.

>> Jon Hartley: It's interesting. One of those things I think, I totally agree with that. I think there's a lot of talk at these but I don't know how much real follow up or bite their or agreement there actually is. And I mean there was this sort of agreement a few years ago that I think China or China Brazil were going to stop using the US dollar in their trade.

But how you would even force to do that, how would you force firms to do that I think is also very complicated. But I want to our last question. I want to really just talk about because it's very intimately related to trade. I mean, what's your sort of take on the renewed interest in industrial policy, I mean, obviously there's been a lot of interest in chips, given the potential invasion of Taiwan by China and the chips manufacturers being based there like TSMC.

I mean, there's been. The Chips and Science act has funded a bunch of things, but I think there's varying degrees of pluses and minuses. Intel is sort of floundering and the US Government's been trying to subsidize its foundries, but it's floundering with the rise of Nvidia and its GPU chips, which have sort of made a lot of other business is somewhat, somewhat redundant.

But also there's a CSMC, actual chip manufacturer 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 slower than some had originally hoped for. And some people said, I think, made arguments that, you know, if anything, we should be subsidizing places like Mexico to build these plants because they've got maybe the sort of workers that have skills and more sort of less sort of labor issues that say, compared to the.

And has maybe a labor force that could be more similar to, say, Taiwan. I'm curious how you think about industrial policy and the pushes for it so far.

>> Douglas Irwin: Well, it seems like semiconductors are critical input to so many products, and we saw the impact of the shortage during COVID And of course, national security concerns about China dominance are also very important.

And when we think that, first of all, I should back up and just say that region of the world where you live is just this innovative hub of new ideas in terms of semiconductor technology and the great new firms that have come about the innovation, the RND. But the manufacturing takes place a lot in East Asia and in particular in Korea and Taiwan.

So we're doing the innovating. We have the fantastic RND, but not a lot of production here. And it just seems that with China's rise and whether they become aggressive or not in the future, those are two sort of odd places to have a lot of semiconductor production capacity right on the doorstep of North Korea and right on the doorstep of China.

So as a matter of prudence, I think one could debate whether we should have more semiconductor capacity in the US or Europe or some other place. And then the question is how to achieve that tariffs are not the way to do it because you don't want to make the US a high price island and you don't want to stop the re importation of various components and things of that sort.

So that raises the question of subsidies. Subsidies will keep prices lower, which is good for consumers and what have you. They're also transparent, and also there's an 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 instrument that raises prices to consumers.

At least with subsidies there's accounting that can take place. It's not something that Congress wants to do in perpetuity. So it gets reviewed often. So subsidies are much better than tariffs that will get forgotten and have many more distortions associated with them and can be sort of last for some time without the sort of end date of having the taxpayer write another check.

So I think there's a case where, you know, there has to be a discussion of economists with national security folks. We can't subsidize everything. We don't want industrial policy for everything. But if there was a case, I think semiconductors is a debatable one that should be considered.

>> Jon Hartley: 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 Jake Sullivan's talked a little bit about.

I've written a national affairs essay recently titled the Neopopulous Economic Consensus that discusses some of this, bipartisanship and within certain factions of. It's interesting too because I do think on the industrial policy front, one major difference across the parties is certainly the Democratic Party is very big on green industrial policy.

Think about the Inflation Reduction Act which had a lot of things like electric vehicle subsidies and had been sort of famously criticized with various charging stations being coming online too slowly. And from what I understand, a lot of the Inflation Reduction Act will likely be repealed in part to pay for the soon to be negotiated and passed tax cuts and Jobs Act extension or tax reconciliation bill.

That's my understanding. So I think the whole industrial policy conversation is very much evolving and it'll be interesting to see how much or how it plays out in the future. Doug, it's been a real honor to have you to hear about ideas and to talk about trade policy.

It's been a real honor. Thank you so much for joining us.

>> Douglas Irwin: Great discussion, thanks for having me.

>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast, an official podcast of the 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.