Doug Irwin on US Trade Policy

Conversations with Tyler is produced by the Mercatus Center at George Mason University, bridging the gap between academic ideas and real-world problems. Learn more at mercatus.org. And for more conversations, including videos, transcripts, and upcoming dates, visit conversationswithtyler.com. I'm here today with Douglas A. Irwin of Dartmouth University. Doug has just published a book, Clashing Over Commerce: A History of US Trade Policy, that is in fact the greatest book on trade policy ever written, and Doug is one of my favorite economists. So today, Doug, we're going to start in on trade, and what I'm going to do is toss out a bunch of arguments used against free trade, and you either give me what you think is the best rebuttal, or if you want to accept the argument, That's fine. Ready for that?

Sure.

Here goes. Okay. The claim that 19th century American growth was driven by high tariffs. What's your take?

Well, not really true. If you look at why the US economy performed very well, particularly relative to Britain or Germany or other countries, Steve Broadberry has shown that a lot of the overtaking of Britain in terms of per capita income was in terms of the service sector. So the service sector was expanding rapidly. It had very high productivity growth rates. And we usually don't think, is that being affected by the tariff per se? So that's one reason. We had also very high productivity growth rates in agriculture. So I've done some counterfactual simulations. If you remove the tariff, how much resources would we take out of manufacturing and put into services or agriculture? It's actually pretty small. And it just wouldn't have— it doesn't account for the success we had during this period.

And is there any country where you would say their late 19th century economic growth was driven by tariffs? Argentina. Canada, Germany, anything, anywhere.

No, if you look at all those, once again, late 19th century, they're major exporters largely of commodities, but they did very well that way. Obviously, you know that Argentina was one of the richest countries in the world in the late 19th century. And it really wasn't until they adopted more import substitution policies after World War I that they began to fall behind. Yes, you can build up your manufacturing sector, but if it's a low productivity sector, it's not going to be very dynamic. It's not going to enhance national income.

Okay, take tariffs on agriculture today, arguably the single biggest exception to free trade principles in the world. What if I were to argue that the national security argument actually makes sense? We live in this funny bubble of a world where there has not been a major war anytime lately, and if you were, say, Japan, you're a vulnerable island, you actually can't grow a lot of your own food, you're easily blockaded, and if the Japanese have some tariffs on, say, rice, beef, and other items, It may in most years look like it makes no sense whatsoever, but the long-term payoff of keeping some autonomy in their own production of foodstuffs will make it worthwhile sooner or later and give them more leverage in foreign policy. True or false?

Okay, well, I go back to Adam Smith, the master, who said that defense is more important than opulence. So certainly, economists have always recognized that there might be an exception to the doctrine of free trade in the case of helping out domestic industries that are essential for national defense. So then the question becomes, if that's really a security worry, what's the best way of promoting agriculture? First of all, is— Is rice protection really gonna help them out if there's some sort of major conflagration? Probably not.

But why not? You can always eat rice, correct? There's fish from the sea. Fish plus rice equals some version of Japanese food. It's delicious. It's good for you. It won't ever go away. Maybe they have a war, major war once in a century. Isn't it worth it as a form of insurance? Yes? No?

Well, you could do the calculation and actually see whether it might possibly pay off. But they've used very high import quotas. Very tight import quotas, raise the price to consumers. They're holding back the overall economy because they're devoting a lot of labor and land to this relatively unproductive sector of the economy. So if they're willing to— it's sort of a societal choice in some sense. If they want to sacrifice X% of national income for 50 or 100 years for this, what I would think would be a relatively low probability event, who's to say that they've made a wrong choice?

The cultural exception to free trade, a common argument at UNESCO. So if you go back some number of years, South Korea has significant quotas keeping out a lot of Hollywood movies. South Korean moviemaking then, according to some accounts, appears to blossom. You have wonderful South Korean movies like Mother. South Korea becomes a moviemaking power. Years later, South Korea is still a leading movie and otherwise entertainment and cultural exporter to the rest of Asia. Therefore, for cultural reasons, it's often a good thing to allow more tariffs and quotas on, say, movies, television programs, linguistically designated products, possibly national heritage items, than a lot of our free trade agreements allow. What's your view?

That's not just an argument there. Canada too has cultural exceptions built into the US-Canada Free Trade Agreement, NAFTA, and things of that sort. Actually, I'm surprised you're asking me that because you've written about the cultural diversity that you get with openness and free trade, and that if you limit ability of domestic consumers to watch foreign movies and taste foreign food and import foreign art, you're losing something as a result of that. I'm not sure many countries could become this sort of net exporter of cultural products the way South Korea has.

Tyler Cowen: A fairly new argument against one kind of free trade, and that is the claim that in some parts of the world there's too much tourism. So if you live in Venice, on one hand, tourists probably account for the living you're able to make, but arguably Venice as we know it is not sustainable. There are too many tourists, works get damaged, everything becomes chained in Venice. Venetian culture now for the most part seems to be gone. There's barely a Venice left. It's like being in a large airport surrounded by a lot of monuments. People in Iceland are now wondering— well, the population of Iceland, I think it's about 400,000, and so many tourists are coming. Iceland is wondering if its own culture isn't being overwhelmed by tourists. They fear the Icelandic language will go away and that somehow the natural heritage of Iceland or even some of the cultural aspects are being ruined. So in your view, can there be too much tourism and is there an appropriate policy response?

The appropriate policy response would be taxation. So you want to tax the foreign visitors. You wouldn't want to exclude them. You wouldn't want to set quotas. But if you set an appropriate tax that applies both to domestic and foreign citizens, so it's not protectionist per se, it's just accounting for the externality of degradation, of overuse or something like that.

And if you're the Icelandic median voter, do you favor such a tax?

Good question. It's on my list of places to go, so I haven't measured that myself. But I would think that they're getting quite wealthy as a result of this. Whether they've gone too far, I don't know, and whether it's taxing of their infrastructure.

Let's take a somewhat different approach to trade. It's found, I think, especially in China. Some people would argue it's even practiced by Germany as well. That is to have a focus simply on everyone being able to keep a job, not efficiency as economists would describe it, not output, not productivity, but the notion that exports possibly can take away some of your jobs, as they've done in parts of the American Rust Belt, that that's very bad for your political economy. You might, believe it or not, start electing rather strange candidates or perhaps start opposing the Chinese government in nonproductive ways. And therefore trade policy really should be governed by making sure everyone has a good enough job. China sort of has done this through a rather extreme mercantilism. Some people would say Germany has done it by its role in the Eurosystem, which gives it a currency which has arguably a permanently low value relative to German productivity. Do you think there's much to this argument?

Well, there might— no, in the sense of that I don't think you want to trade intervention per se as a job creation mechanism. So If you wanna guarantee jobs for people, that would be one approach, but you don't have to link it to the trade sector per se. In fact, there's sort of a theme through all of your little exceptions that you're throwing at me, which I enjoy very much. The case for free trade has never been the case for laissez-faire. So there may be cases for intervention, either overuse of certain tourist sites, or you need a certain industry or sector for national security. These don't necessitate an intervention in trade. You don't need tariffs, quotas, export subsidies, things of that sort. There are other domestic policies that can more efficiently and more directly address the situation you're trying to deal with.

Let's take some of the recent free trade agreements, which, as you know, large parts of them are not about free trade in the older classical sense of cutting tariffs, but they're about regulatory standardization. And this always tends to make me a little bit nervous, even though on average I favor these agreements. So regulatory standardization often lowers the cost of trade,, but it also tends to bring, in many cases, more regulation. So we live in this funny world where more free trade or semi-free trade and more regulation, albeit better regulation, come together. And if you're skeptical about there being more regulation, as I often am, but you're favorable toward more free trade, you're not sure always how to feel about these new trade agreements. Do you think the future inevitably is one where what we're calling free trade agreements actually on average will be bringing on net more regulation to the economies they're covering?

Unfortunately, yes. So tariff levels have been beaten down. Obviously, they're not zero. There's still scope to reduce those. There are many parts of the world that still have relatively high tariffs. But if you look at the sort of the big trade agreements, the US and— well, Trans-Pacific Partnership was this. If the US and the EU ever reach a trade agreement, there's gonna be a lot of regulatory provisions. And once again, I share also your view that this could go either way. One of the things that at least US trade negotiators say is that there's a lot of regulatory protectionism out there.. And this is a way of not necessarily even setting standards, but ensuring that there's a mechanism to ensure that other governments are not tweaking their standards to favor domestic firms or to serve some special interest. So, yes, it could lead to more regulations. It could lead to standards that maybe developing countries can't adhere to. So it has that sort of downside, but it also could sort of not clear the decks with— of regulation, but prevent regulatory protectionism.— which, that's a possibility as well.

Many recent and even some older trade agreements have embodied in them investor arbitration panels, sometimes called ISDS or Investor-State Dispute Settlement. And these panels, as you know, they sometimes have the ability to override national laws or the court decisions of national governments. The possible conflicts between these panels and what some would say is democracy, or some would say is constitutionalism, A, to what extent does that worry you? And B, in general, do you want to see ISDS in the trade agreements we're writing or do you feel it's somehow gone too far?

Well, personally, I wouldn't want them in. They sort of distract from, I think, what is the main purpose of these trade agreements, which is to reduce trade barriers and regulatory barriers. So I'm not particularly happy that they're in there, but I do think on the other side, sort of the progressive left, if you will, there's a lot of ISDS horror stories about how it undermines democracy, it's a terrible thing, and the US is foisting this on the international system and other countries don't want it. But in fact, it turns out a lot of developing countries insist that this is in. Mexico just recently asked for this in, I believe, in a new agreement with the EU or Canada. I can't recall where I read it. The reason why developing countries want it is because it's a way of ensuring that they can sort of commit themselves to treating foreign investors fairly, and they want to attract foreign investment, and they maybe don't necessarily want ISDS, but they're willing to go in for it. They ask for it because it's a commitment device. Let's see, I was reading also Canada and the EU, I think their recent CETA their agreement that also has ISDS. And once again, so it's not sort of something the US was pushing. Many in Europe are very much opposed to these things, but it got in there for various reasons.

Take a trade agreement such as TPP, with or without the United States. What percentage of the gains from TPP do you think are coming from more foreign direct investment, and what percentage of the gains do you think are coming from more trade in the narrower sense of the term?

Oh, that's a great question. So it depends a lot on the particular country. Australia is already a pretty open market. You know, Vietnam could be Mexico would be a big winner in the sense of getting a little bit more market access, but also liberalizing their own tariffs and quotas that they'd be forced to do. So their own unilateral— not unilateral, but their liberalization within the context of a TPP is good for them. To the extent that they sort of institutionalize this as a trade regime, they may attract even more foreign investment. Certainly when we've seen when Mexico and other countries reach a lot of foreign trade agreements, they can become export platforms and attract investment.

To the extent we think the gains are from more direct foreign investment, does that not mean we should favor more ISDS rather than shy away from it? Enter the debate, argue against the Europeans, try and get ISDS in as many agreements as possible for the purposes of more foreign direct investment, or no, you're still gun-shy?

Well, once again, I sort of take the world as sort of evolving and wanna analyze what's driving this. And even if you sort of say, "Okay, any future trade agreement will have no ISDS," they're already sort of embedded in the system in these bilateral known as BITs, bilateral investment treaties. So they're gonna crop up one way or another. And once again, as I mentioned, this is not something that the nefarious United States is foisting upon unsuspecting other countries. Other countries sometimes want this as a way of saying, "Look, maybe you don't trust our judicial regime, but we'll do this as a way of promoting investment." And once again, with Canada and the EU, no one doesn't trust their judicial regimes, but still somehow those two countries, very progressive, wanted ISDS in their agreement.

Here's a question that's a complete softball, so easy I can't believe I'm asking you. How strong is the connection between free trade and world peace?

Okay. This is something I've actually wanted to investigate in more detail. So certainly my gut reaction, and I think there's a lot of evidence for it, is that they are related. Certainly when you listen, read the memoirs of statesmen in the mid-20th century, they definitely saw that. Cordell Hull being the leading example, who was the US Secretary of State from 1930 1943 until 1944 or '45. And he wasn't alone. A lot of economists, Jacob Viner and others, also saw that connection. Because when you had either trade protectionism or imperialism closing off of markets, it led to sort of the scramble for Africa or something like that. Instead of trading these resources freely, you had territorial acquisitions being sort of the counterbalancing of that. Now what's interesting is just as economists who have done a lot of empirical work on the benefits and costs of trade. Political scientists have done a lot of work on this. And the empirical work is not quite up, I think, to the standards of what economists have done in terms of the economic phenomena. But partly it's because it's very difficult to quantify, first of all, what constitutes peace, how do you sort of operationalize this, what constitutes a trade agreement. Trade is endogenous in many respects, so if there's a lot of trade, what exactly is the consequence of that? So what's the exogenous variation where more trade leads to less peace? We'd like to see— more peace, rather. You'd like to see something like that. So I'm not sure we have really hard social science evidence on it, but I think it's sort of a factor that we economists often overlook. I think a lot of trade policy debates are foreign policy driven, and it's not something we should really neglect.

The idea that free trade might be connected to peace seems quite plausible to me in an era of communism where you have expansionary foreign governments, and for a long time there was, as you know, no McDonald's in Moscow. If you look today, it seems something has changed. So China is our largest trading partner. But many observers of foreign affairs would argue that the relationship between U.S. and China has some reasonable chance of leading to foreign conflict. So something has changed in the structure of the equilibrium where now nations that trade a fair amount might fairly readily go to war relative to what we used to suspect. And of course, there is a McDonald's in Moscow. There's probably quite a few. People in Moscow eat sushi. They consume all kinds of American popular culture, if only downloaded illegally on the internet. So what do you think has changed in the structure of the problem? To have made the free trade peace connection possibly now so weak?

Well, I don't know that it's weaker, and I think China's a really difficult one to figure out in terms of whether all the openness we've seen over the past 2 decades or so is going to lead to political transformation or a change in their foreign policy. It doesn't seem to have yet, so I'd say that the jury is still out. But still, the cost— this goes back to Norman Angell's point. And of course, he's widely misinterpreted from saying, "We won't see wars in the future because of increased trade." increase trade. He didn't say that. He said it changes the cost-benefit calculation. And I think it may have for China. Just recently watching the Ken Burns Vietnam series on PBS. There are a lot of wars in Southeast Asia beyond the Vietnamese War. China invaded Vietnam, Vietnam invaded Cambodia. And I'm not sure that that sort of local conflict is more— I don't think it's more likely given the tremendous amount of commerce that's going on and the the perceived need of the governments to justify themselves by saying, "We're providing an adequate standard of living for our people." Some questions about trade in Asia.

Should the United States allow China to buy US semiconductor companies?

Ah, so here, one could invoke national security. One could also, I mean, without answering that specific question, and of course, we do have this process for reviewing those things, there is a big question about how easily we can integrate China further into the world trading system. That is, I don't think things have developed the way a lot of people hoped when China joined the WTO and we gave them a permanent normalized trade status. It's become much more mercantilist, much more interventionist, much more protectionist, I think, in sort of non-tariff ways than I think a lot of people thought and hoped that China would evolve. There's a question of— actually, this is a question that economists raised after World War II as well, a great trade economist such as Jacob Viner saying, "Can we really integrate integrate the communist and the non-communist worlds in a trading system? It turns out the answer was no. I think— I guess my worry with China is the more they push it, and they are pushing sort of the envelope in terms of the rules of trade as we in the West sort of see them in terms of limited government support for firms and things of that sort. They're pushing things and I think that we could be moving in a direction where there will be more trade conflict, even set aside Trump and all that sort of thing.

So China decides to keep out Uber, and Didi, of course, becomes the market leader for ridesharing in China, a much larger company than Uber now. China also keeps out Google and Facebook, and there are Chinese equivalents or near-equivalents that rise to take their place. Just from the point of view of Chinese economic welfare, not global welfare, but China alone, are those economically rational decisions good for the Chinese economy?

Well, I think they're being taken not for economic reasons, but for political reasons.

And national security reasons, but just on the economic side. Does it boost Chinese GDP for the Chinese and the median or average wage to keep out Uber, Google, and Facebook?

Personally, I don't think so because you're limiting access to more choice. Google's a very efficient search engine. By limiting access to information by your domestic citizens, your scientists and others, unless they can breach that wall, they're not going to have access to the best ideas out there.

But if you get from that decision, you get a Baidu, which is Chinese equivalent of Google, you get Tencent, WeChat being in some ways like Facebook. Didi, of course, is an all-Chinese company. They get a version of the services. Scientists who need the research, they use a VPN. They still access Google, but it seems there's much more output within the Chinese economic nexus than if those decisions had not been taken.

Possibly, but the question is also you would, I think, have a lot of Chinese entrepreneurship in terms of web development and new apps and things of that sort. Simply because they know the local market much better than a foreign firm coming in saying, "We're going to provide this particular service." In addition, if you were able to attract Google and other apps to produce in China, you're adding to local capability. So foreign ownership, I don't think, is a particular problem.

When the United States, and indeed the West more generally, let China into the WTO, many people are now saying, "It turns out, looking back, we gave up too much leverage. We had a lot of leverage at the time. We didn't use it. China entered on terms where it's allowed to violate too many of the rules subsequently. Agree or disagree?

A little bit agree because actually the US negotiators were very defensive in terms of what they were asking China. They wanted really exceptions that the US could impose trade barriers against China rather than saying, "We want much stricter rules that you can't intervene in this sector or that sector, provide free credit to domestic firms." So we were more interested in exceptions for ourselves to block their textiles or have a special safeguard exception rather than making firm our insistence that China not get its fingers all over their own economy.

As you know, there's a series of papers by MIT economist David Autor with co-authors, and they argue to varying extents that Chinese import penetration has hurt US middle-class wages and indirectly would seem to imply it's damaged a fair number of US communities.— and this may account for some of the sad state of our Rust Belt and former manufacturing areas. A, how much do you believe that result? And B, to the extent there's something there, how well do you feel that result is being processed by the policy community and the policy discussion?

Well, I think that they've done some really interesting work. I call it a great piece of economic history because the China shock was a one-off shock. It's not going to happen again. There's a huge increase in the supply of labor to the market sector in China. From the 1990s and into the 2000s. And actually, I think we're gonna have some papers in the future about the negative China shock because the Chinese labor force is gonna be shrinking. So it was a very particular, unique period in economic history. And I think if you're thinking about bringing in hundreds of millions of people in China into the market sector, and then you're losing 1 million jobs in the United States over 10 years, that's actually a pretty small impact on the United States. Now, impact is particularly hard on those communities where there's It's a one-factory town or something like that. They're producing furniture or apparel. So it's clear that that had a negative impact there. But there's also sort of a macroeconomic context to what I think you have to think about in terms of the China shock. I don't worry about the 1990s so much because we had a robust growing economy then. And actually, there's some evidence that workers who were displaced from the textile industry in the 1990s were actually getting higher wages outside. But the 2000s is a very different situation. Even though the aggregate unemployment rate was coming down in the 2000s, the Fed was tightening. So the China shock was not a macroeconomic shock and not an aggregate demand shock, a sort of Scott Sumner point of view. Certain communities were hurt, but this is also a period where we had 10% of current account— Chinese current account surplus and a big US current account deficit. So I think the problem during the 2000s was the economy wasn't particularly robust. We had these big macroeconomic imbalances, which I think you have to sort of Understand the context during that period. If, for example, US export growth to China had been matched or matched our import growth from China, we probably wouldn't be having this debate. There would have been a China shock, but we said, "Boy, there are a lot of alternatives elsewhere." So yes, we were getting capital inflows and had lowered interest rates because of the inflows of capital from China, but people don't see that as much and think maybe it propped up the housing bubble. Shifted resources into housing. It's history. It happened. I think it doesn't cause me to rethink the case for free trade in any way. We've always known there are adjustment costs. We always know certain communities are gonna be hurt. But I do think we can exaggerate how important that was in terms of where the US economy is today.

Ed Konard has an argument for why he's skeptical about some of the trade with China. And he worries about the capital inflow from China, that it hasn't been sufficiently concentrated in risk-taking entrepreneurial capital. He says the capital has come in in the form of buying often government securities. Government at times is actually one of our less productive sectors. So we've gotten more quote-unquote investment from that capital, but we get it in an area that's a bit of a lemon in productivity terms. And therefore, Ed thinks trade with China hasn't been a good deal necessarily at some margins. What's your take on that?

Well, a lot of government spending is just transfer payments. So it made those transfer payments and the US fiscal deficits easier to accommodate. But of course, there is gonna be a reckoning. We do have to pay for those at some point. And just because you're getting cheap credit for a 5 or 10-year period doesn't mean that you don't wanna think about correcting that fiscal deficit and worrying about access to cheap credit, which may not be there forever.

Now we switch back to our home shores, American economic history and trade policy and other matters. Some of this, of course, comes from your book, but your book has much, much more. It's, uh, what, about 900 pages?

Well, I try to cut it down by saying a lot of it's the index, a lot of it is the endnotes and the references. So it's actually about 690 pages. Okay.

A highly readable 690 pages, but here's some questions about US trade history. We used to have bills have fun names like the Tariff of Abominations, and now our trade bills have boring names. Why did that change? Why do we have complacent names for our trade bills?

Well, they used to be just tariff acts, so they would just change US tariffs, and that was the main purpose of it. So they would be named for the chairman or chairwoman of the House Ways and Means Committee and the Senate Finance Committee.

Committee.

So there would be the official act, for example, Smoot-Hawley, which actually should be called the Hawley-Smoot Tariff because it's always the House first and then the Senate. But the official name of that is the Tariff Act of 1930. So either the press or the members of Congress themselves sort of introduced the moniker to give it a little bit more cachet. But since Smoot-Hawley, all the trade acts are not really about tariffs per se. They're about trade negotiating authority. So that's sort of what may be a little less interesting. We have the Trade Expansion Act of 1973, the Trade Act of 1974. It's not really like there's one or two key people on key committees who are saying, you know, "I'm setting tariff rates here," like a tax bill or something like that. So I guess because they're less interesting in that sense, they don't get named.

In the years leading up to the American Revolution, of course, there are restrictions on trade. There's a common complaint still repeated, "Taxation without representation," now applied to the District of Columbia at times. But in those years leading up to the American Revolution, How high actually were trade barriers in real net effective terms? Were we just a bunch of whiners or were these trade restrictions actually terrible?

I actually think we were very good at whining. First of all, we were getting enormous implicit subsidy in terms of British national defense and our tax burdens compared to the average British citizen were very, very low. So we wanted to have it both ways. We want Britain to sort of underwrite our defense, but we didn't want to have to pay for it. So there's all the tax debates in the 1760s. We are a little bit of a whiner. In addition to the trade barriers, you know, Britain was sort of our natural trading partner anyway. And there's some commodities such as tobacco which were enumerated and had to go through Britain. But when you look at the post-independence period, we don't really shift away from Britain too much. I think the Navigation Acts have been exaggerated in popular history in terms of how much they're really constricting US commerce and harming the American economy.

The Tea Party, not the modern Tea Party, but the real good old-fashioned Tea Party, were they the good guys or the bad guys?

Once again, they weren't sort of tax cutters. They actually wanted to stop smuggling. So people don't—

So they were protectionists.

They really were in a sense. What Britain was doing was actually during this period was through the Tea Act was cutting the duty on tea and trying to help out and spur undercut smuggling and help out the East India Company. So it wasn't a big tax hike at all. It was actually a tax cut. But the smugglers were the ones who really were invading the British ships and throwing the tea overboard.

Now you mentioned to me in an email before this chat a notion of understanding the American Revolution in part as America's early version of Brexit. Could you explain that for us a little more?

Sure. So the American Founding Fathers really didn't want to lose market access to the British Empire. So we wanted our political independence. We didn't want taxation without representation. But we thought long-term we're very integrated with the British economy. We should maintain that integration. And there was this hope and actually there's some reason for the hope after we had won the war that Britain would be magnanimous and we could maintain our trading status within the context of the British Empire. But of course the British didn't see it that way. They said, "Okay, if you want your political independence, you're going to get your economic independence as well." So all the privileges that you used to have They're out the window. You're now outside the British Empire. I don't think the founding fathers really anticipated that this would be the case and they spent a lot of the 1780s trying to claw their way back into the British Empire and got absolutely no give from the British authorities. A lot of this had to do with the Constitution itself and the formation of the Constitution as a way of allowing the 13 independent states to sort of band together and have negotiating authority against other powers, which we didn't have during this period. So the Constitution is very much an outgrowth of US trade politics during this time. And revenue, of course, was another key consideration there since under the Articles of Confederation, Congress couldn't raise funds and we had these big deficits and the debts couldn't be financed. So I think it was sort of a Brexit gone badly. And in fact, economic historians Jeff Williamson and Peter Lindert have a book just a couple of years ago on sort of American wealth over time. And once again, the data are sort of sketchy, but when you look at US wealth and income in 1776 or the early 1770s. 17 '70s, and then you look at it in the 17 '90s, we're basically after 20 years or so just getting back to where we were before. And a lot of people think this is possibly worse than the Great Depression in terms of the impact on the economic activity of the United States. It wasn't just the revolution, but the 1780s was not a good decade. And partly because our trade had been so severely disrupted by being outside the British Empire.

Let's shift to Broadway for a moment. Hamilton. Alexander Hamilton. Was he at the time in fact the founding American protectionist?

No. First of all, he gets that reputation because of the Report on Manufactures, which can certainly be read that way and he certainly makes— actually what's interesting about the Report on Manufactures is an anti-Adam Smith argument. It's also an anti-physiocrat argument. So it's anti-Adam Smith in the sense that he doesn't think that the invisible hand will lead to the right allocation resources, but it's also an anti-physiocrat argument because apparently he was confronting at the time the argument that The Wealth of Nations is really based on agriculture and manufacturing is not something we want to get into. And he said it's actually useful for various reasons, not just defense, but possibly for productivity increases. It's producing useful things. It's an economic activity that we should want and not try to discourage. But when you first— well, a couple— there's so many things to point out about that report. The main thing I think is when you look at his activities when he was Secretary of the Treasury, he did not want to keep out imports. He wanted a constant flow, a large flow of imports coming in because that was his tax base. And he viewed the fiscal sustainability of the federal government as being much more important than any sort of tinkering with trying to promote manufacturers here and there. And so he actually rejected proposals coming from the opposite party, Jefferson and Madison, to have embargoes against Britain or limits on trade because he wanted to finance the fiscal deficits and he thought any sort of disruption to imports would upset those fiscal plans. In fact, he was so much against those plans that import-competing producers in Philadelphia and elsewhere began shifting their allegiance from the Federalists who were thought to be in favor of a strong central government and promotion of manufacturing to the Jeffersonian Republicans who they saw as being much more willing to impose pretty draconian restrictions on imports.

Let's say it's the 1870s and you're Rutherford B. Hayes and you're faced with a series of choices about tariffs. And as you know, tariffs in that era are a significant means of funding the national government. And you can either have higher tariffs or probably have higher excise taxes or maybe there's something else you'd like to put on the menu. But how do you think about that trade-off? And what decision would you, as Rutherford B. Hayes, have made?

Well, remember we had huge fiscal surpluses in the 1880s, late 1870s and 1880s. So there was clearly scope for a big tax cut and tariffs. And you don't need protectionist tariffs to raise enough revenue to fund the federal government. So the sugar tariff alone, I think, it's in the book. I can't remember off the top of my head, but the sugar tariff alone accounted for like 25% of all revenue coming from the tariffs, maybe even even more. So you could tax a few select commodities, have them as sort of excise taxes. That raises all the revenue that you need and you don't need heavy duties on steel rails and cotton textiles and things of that sort, which truly were protectionist duties. They didn't raise much revenue. They did block imports and helped out domestic interests that way.

Fast-forwarding in time quite a bit, the 1990s, we passed NAFTA, North American Free Trade At the time, many people were quite optimistic about NAFTA, but today, as you know, there are numerous research papers which look pretty hard to find any gains at all. You may be able to find small gains from NAFTA, but it's unclear what the payoff from NAFTA really has been. If you look at the Mexican economy, there doesn't appear to be convergence, and they're growing at a rate between 2% and 2.5%. So looking backwards, what is your view of NAFTA? Did we in some way do the treaty wrong? And other than mere updating, how might you revise NAFTA today?

I spoke to one trade negotiator about this once, and they said, NAFTA is not a good trade agreement. NAFTA is an effing great trade agreement. And I agree, it's a great trade agreement. And once again, US barriers towards Mexican products were already pretty low. So it's not like we're getting some big consumer surplus gains from taking down pretty big barriers. But what it did was solidify the US-Mexican relationship. And so here you're appealing to foreign policy a little bit, but also you're trying to do undertake measures to strengthen the Mexican economy and have a long-term partnership. And I think it's on net been very good for Mexico. Once again, it hasn't been perfect because recall that within a year after NAFTA went into effect, they had a financial crisis. They've had major banking and financial issues through the late 1990s and into the 2000s. Obviously NAFTA is not a silver bullet where it just makes the Mexican economy transformed into something great. So there's a lot of still reforms that have to be done in Mexico, some of it macroeconomic, others not. But to say that we'd be better off without NAFTA, I don't think either United States or Mexico would be. And here's where you get sort of these nebulous things. John Stuart Mill talked about them in terms of the benefits of trade. There's sort of an attitudinal shift in Mexico, much greater openness towards the world. And that's been all to the better. We've seen the basically one-party state dissolve into a competitive democracy. And so I think NAFTA and the greater openness that it's brought about has been very good for Mexico.

Is there a future for the World Trade Organization? It has not achieved significant reductions in tariffs for some while. Some people, not all, compare it to the political economy of riding a bicycle, that if you don't keep on moving forward, you may stop altogether. The action we've seen in free trade has been multilateral agreements outside of the framework of the WTO. It hasn't achieved real progress on agricultural tariffs. There's a resurgence of nationalism, populism, whatever you want to call it, in a number of nations, including our own. Is there indeed a future for the WTO?

I think that's a big question about whether there is. So it used to be said that, okay, so it's not so great for negotiating trade agreements anymore. They can't seem to get a consensus. The Doha Round is the first real negotiating round that absolutely failed, and that's been terminated— now. It's been over 20 years since they have reached any sort of major multilateral agreement. So the argument among economists has been, "Well, okay. So it's not so great. People are bypassing it in terms of trade negotiations, but it's great because of the dispute settlement system." But now we see the Trump administration saying, "We don't like this dispute settlement system," and if the US undermines that, then it's really not clear what the world the WTO would have. It wouldn't be an efficient forum for trade negotiations. And it wouldn't have an effective dispute settlement system if the US blows it up or walks away from it or something like that. I think part of the problem with the WTO, at least in terms of negotiations, has been something that Canada identified way back in the 1940s, which I think is in the book. After World War II, we were gonna set up a big multilateral organization called the ITO, the International Trade Organization. And at some point as we're moving in this direction, Canada sort of snuck up to the US negotiators and whispered in their ear, "You know what? It may not be a good idea to get every country talking about these things 'cause not everyone's on the same page." And in particular, they pointed out India and Brazil and a few others, which they called the more protectionist-minded countries of the era. And so that's why we went ahead with the GATT, which is a small nuclear club of sort of like-minded countries to liberalize trade. And the ITO actually never came into being. But when we shifted from the GATT to the WTO in 1995, we brought everyone into the room. And so now it has 160 members or something like that. And it operates by consensus. Meaning it's sort of the lowest common denominator sort of negotiating forum. Everyone has to agree. The former director general of the WTO once said it was like a car with one accelerator and 150 handbrakes. So any country— not quite, but almost any country can sort of step on the brakes and stop the process. And the question is, is this a way to go forward? And I think what you've seen is countries just bypassing it. They've gone to regional, bilateral, or even sectoral sorts of agreements to avoid the whole massive countries trying to agree on one common trade policy for everyone.

The United States federal government, it often embodies a great deal of messiness. So if you think how many different agencies have we had that regulate banks or financial institutions in some way, it's quite a few. You could say the same of trade. There's USTR, there's the State Department, there's the Department of Commerce, there's OPEC. There's a lot of different layers at which we address trade. Should we just consolidate those into— a big, supposedly consistent Department of Trade, or do you prefer the sprawling mess?

Oh, I prefer the sprawling mess. Why? So I spent a year at the Council of Economic Advisers a long time ago, and I got to watch this interagency process work its way out. And I think what it does is it provides a sort of checks and balances on USTR or any lead agency in terms of any one particular area of trade negotiation. So it's an internal checks and balances. It provides coherence because USDA is not gonna do something that the Department of Agriculture is gonna be very upset about. They can sort of coordinate that. I think the problem is if you centralize it— and actually there have been many proposals over the years, particularly in the 1980s when we needed a MITI just like Japan had, one negotiating arm that would do everything, an industrial policy. You centralize power. Whenever you centralize power, I think it'll become— do things that we don't necessarily want it to do.

Trump supposedly has said, I think sitting at his desk to some of his advisors Tariffs, I want tariffs, bring me tariffs. Possibly he screamed this out. Now I know you don't work for Trump, but if you were put in the position of actually bringing to Trump a tariff, what would it be? Call it least harmful if you wish, but what would it be?

I haven't thought about which tariffs I'd like to impose recently, but I guess if I was an advisor, I'd say they're coming because there are certain cases under the provisions of US trade law where you will have a choice on your desk about whether to impose tariffs or not. So that's the way the process works. You cannot unilaterally decide to raise these things by yourself. You have to wait for them to come to you, and they are coming. Just be patient. But of course, he's not very patient, and we'll see.

And what will Trump actually do on trade? So if you look at the data, the Mexican peso this year, it's up, last I looked, around 20%. Of course, it was down about that much right after the election, but that would seem to suggest Trump on trade is now thought of as a bit of a paper tiger. Other people like Bob Zellick, whose judgment I respect greatly, a very smart guy, he seems to think Trump could do a lot of damage in the trade realm. Where do you stand on the spectrum of views?

So if we go back to this decentralized view of US trade policy, that's partly been a check and a balance, I think, within the government of Trump just doing something very quickly. So Wilbur Ross, the Department of Commerce, they've sort of encouraged higher steel tariffs, and some guys under national security, what have you. That report has been delayed, delayed, and delayed, and delayed, and I think the reason is because there are other agencies that can weigh in, other constituencies that can weigh in and say this isn't good for diplomatic reasons, for national security reasons, for downstream user reasons or something like that. So you see the administration sort of divided and actually the reflex can't be activated because there are all these other parties that are getting their voice heard. Whereas if you did centralized things, it might be very easy for that centralized authority to say, "This is what we're gonna do." It doesn't matter if they're voices to the negative. We just won't listen to them. So I do— I think you're referring to Bob Zellick's Wall Street Journal article of not too long ago. I think the damage is not so much in particular actions because we really haven't seen many actions except for pulling out of TPP, which arguably Hillary Clinton or Bernie Sanders would have done as well. But we haven't seen sort of the trade cases come to the president's desk and higher tariffs being imposed or quotas or what have you. But I think the damage is more the rhetoric in some sense. You're alienating South Korea, an ally during a very tense time. You're getting the Mexicans to actually think about, "Gee, we could live without NAFTA and we could stick it to the Americans like we used to in the past instead of thinking about them as a partner because we've got all these other free trade agreements with the EU and we keep the one with Canada and we could keep TPP." So you sort of get— so there's no gain to the US from that and we lose sort of market access in terms of exports if we're discriminatory. Vaccinated against. So I think there's sort of this deterioration, this rot that can set in.

And all of these chats, we have a segment, underrated or overrated, and I'll toss some ideas out to you. You're free to pass if you'd like. Underrated or overrated? Brexit.

It remains to be seen, I guess. I hate to punt and be a waffler, but—

What does it depend upon?

It depends on whether it actually happens.

Well, assuming it happens.

Assuming it happens, okay. When you listen to the debate and this is sort of maybe Britain's NAFTA in some sense. If you went back to the NAFTA debate, you got these— some people saying, "It's going to create a lot of jobs, create a lot of exports. It's going to be a huge gain for the United States," or the other side being huge number of jobs losses, disaster for the United States, giant sucking sound and what have you and then you sort of lose the middle ground and I think the weight of the evidence in my view is that Britain would lose some of its market access to Western Europe. They're going to lose some of their financial sector, and it's not clear that what they gain in terms of sovereignty or what have you, or regulatory freedom, is going to compensate for that loss of trade and investment.

The movie Dunkirk.

I enjoyed it. I know it got a lot of criticism because it didn't show the context or didn't show Churchill, but that's not the purpose of the movie. The movie was to show what the men on the ground were feeling and reacting to, and I thought it succeeded.

Overrated.

I liked it.

Churchill himself.

He's very highly rated, and I think deservedly so. So I don't think he's overrated or underrated.

Bismarck.

I guess I'll punt on that one.

The Smoot-Hawley or perhaps Hawley-Smoot tariff.

Underrated or overrated?

Correct.

I guess it depends on what dimension. So it's gotten a lot of attention. I'm very happy with that because I have a book on it, and so I think more people should be aware of it and some of its costs. Get brought up a lot in trade policy debates. Maybe these are mainly among wonks, and it used to be the sort of reflex that trade economists would bring about saying, you know, disaster will happen if we impose this tariff. I guess to that extent, the dirty little secret might be is that it's overrated because it didn't cause the Great Depression, and a lot of the weight that was put on it, it doesn't support that. But that said, it was a very bad thing.

So its evils are overrated. It's actually in a funny way underrated.

That's right.

Yes. Okay. You've now lived in or near Hanover for a long time, so the state of New Hampshire.

In other words, is it the— what did President Trump say? Is it a hotbed of— a den of— opioid use.

Opioid use, yes.

It's a very beautiful place. It's got the highest per capita income in that state.

Yes, and how did you manage that?

I'm not sure. You look at the sort of the southern part of the state where I don't live, Manchester, Nashua, it seems very prosperous. It's very prosperous. There's a lot of spillover investment from the Boston area. And its proximity to Boston has been a great help. It's a little bit isolated. The winters are cold, but I think it's— I worry a little bit about— in fact, a lot of economists in the state worry about the demographics and the business climate, where a lot of young people are not being attracted to the state. And the business climate is not as favorable as we in the state like to think. We say, we have no income tax. We have no sales tax. We want businesses to come here. But the business taxes are more of a hurdle than one Tyler Cowen would think so.

But if it's the highest per capita income, and even if that's measurement error, it must be near the top, right? Why don't more people want to live there?

Probably isolation. You know, people are—

But if more people lived there, they wouldn't feel so isolated, right?

Right.

It seems like an easy equilibrium to get to. Just have people trickle in as they did with California, and all of a sudden you've got a lot of people.

Yeah, but I guess you need the investment to draw people in or something, and Boston area has been much more affluent. Flourishing in terms of attracting young people, certainly professionals and things of that sort. So I'm not sure exactly what New Hampshire's big claim to fame is. It's sort of an older state, so maybe that's why it's a high-income state because in the Hanover area, you got a lot of doctors and things of that sort, retirees.

What's the story of the first time you met Milton Friedman?

Do you know the story actually?

No, I don't.

Oh, really?

I was told to ask you.

There is a story. Okay. Well, this is in 1980. 1987, I believe, and I was at the Council of Economic Advisers. I was in graduate school, big fan of Friedman, read his column in Newsweek in the 1970s in middle school and what have you. I was very excited. So he was going to give a talk to people in the administration. There's some room in the old executive office building where he was going to be speaking. So I made sure to get there very early and to get a good seat right up front so I could see him. So I sat literally in the front row, right in front of the podium, anxiously waiting his arrival.. And he comes in, of course, the crowd fills in, but I've got the best seat. And of course he's standing behind the podium and I didn't see anything but the top of his head for the hour that he lectured because of course he's so short that he didn't really poke over the podium. So I should have sat like 10 rows back and I would have seen him. I did get to speak with him afterwards, but during his talk I didn't see him at all.

What's the influence of Jagdish Bhagwati on you and your ideas?

Very big impact. He was my thesis advisor. I took a number of courses with him at Columbia University. I think I learned two things from him. One, he made economics very fun. So I don't know if you ever talked to him, but he's always telling jokes. He's a great raconteur. He has great stories. He's laughing a lot, and that came across in his class. Economics is a fun activity. It's a fun discipline. It's not just sort of sterile theory or what have you. So I try to bring that little bit of joy and levity to economics the way I teach it and hopefully the way I write about it as well. The other thing I learned from him is marketing. So this is back in the pre-internet area, pre-Twitter and what have you. And we wrote a paper when I was in graduate school. And not only was there a paper, but he got a New York Times column that we were allowed to write for the business section out of it. The Economist did a box on that article. I mean, he was a master at disseminating his work, not just to other academics, but to journalists, to the public policy professionals and things of that sort.. And so I think that's one thing that I've also internalized a bit as well. You just can't write a paper, submit it to a working paper series, and then send it to journals. You have to market it a little bit. That's much easier today in the age of Twitter, but back then that was considered something, you know, very unusual.

What's your connection with Randall Scott Kroszner, who teaches at the University of Chicago Business School?

I'm responsible for all of the success he's had in his career because I interviewed him for a job with the Council of Economic Advisers. That was the first time we met.

Met.

And if I had said, "This guy doesn't merit a position here," you know, he would have gone back to Harvard and nothing would have been heard of him since. So by launching his career and getting him into the CEA, it made available many opportunities for him later on.

Our last and final segment, I have a number of questions for you on international trade theory. These are super nerdy, super wonky, but feel free to give it full blast. When it comes to international trade, how much of it is driven by comparative advantage versus how much of it is driven by specialization?

Well, it's almost hard to separate those things out because they're sort of reinforcing. So comparative advantage is sort of a narrow concept, but it has a sort of a broad applicability. The way we teach it just is a sort of a technology factor. Specialization reinforces technological advantage in many senses. So I'm not sure I could sort of load what percent of trade is due to comparative advantage In some sense, a lot of it, but can't give you a metric or a number.

From 1990 to 2007, at least from the numbers we have, it seems that global trade rose at a rate about 3 times higher than global GDP. This now seems to have stopped. This is sometimes called the global trade slowdown, though it may just be the normal state of affairs. But why is there now a global trade slowdown?

My story for that is that what we saw in the 1980s— pardon me, 1990s is the great opening of the developing world. So China, India, a bunch of African countries, other countries in Southeast Asia, Vietnam would be a great example too. And so you got this one-off big effect of countries that have been relatively closed to world trade really reducing trade very significantly and big boost to world trade growth as a result of that. That's sort of a one-off thing. Once you've cut tariffs from 30% to to 10% or 5% or something. If you further cut them, you're just not going to get the growth in trade effects that you had before. So I think it's sort of a one-off effect of many developing countries entering into world trade, sometimes for the first time in a big way, and I'm not worried by the slowdown. Obviously, the world economy has slowed down. That's one reason why, but we shouldn't expect world trade to grow at 2 or 3 times the growth of world GDP. In perpetuity.

Will this happen again with Africa and South Asia? After all, those are billions of people. And tariffs aside, their infrastructure is often so bad that the real tax on trade, all costs considered, is quite high now. And you could imagine it falling a great amount, both by liberalization, but also by better infrastructure. So will we have this period again in the future?

Once again, the 1990s was special because we had the collapse of communism, the fall of the Berlin Wall, And so a lot of regime change that led to some of these things. And so we need a big reform moment in Africa. I agree with you entirely that Africa is sort of the big chunk of the world where there are a lot of people and they're still very closed to trade. They both have trade policies and bad infrastructure that greatly increase trade costs. So if we're going to see big growth in the future, you'd think that's where it's going to be. But I don't think we're going to have a big— necessarily have a big reform moment in Africa where there's sort of a simultaneous opening up.. It could be more piecemeal. It could be more drawn out over time. That's where the growth could occur, but I don't think it's going to be a big bang like we saw in the 1990s.

Globalization theorists used to write about the death of distance, it was called. That doesn't actually seem to be true. What we call the gravity equation, how much trade depends on distance, it doesn't seem to have changed much over time. That is, you still tend to trade with countries that are close to you. If you look at real estate values What's really gone up are a few major cities such as New York City, London, San Francisco/Silicon Valley. It seems location matters more than ever before, and yet there's more trade. What's the right way to think about that apparent paradox?

Well, I think the death of distance may have more of an impact in terms of trade and services. So for merchandise, there's shipping costs and things that may have come down, of course. But with services, Either there you need direct investment or it can be transmitted over the internet. And so there, distance doesn't matter quite as much.

As you know, containerization was a big breakthrough for trading a lot of manufactured goods. It made it easy to automate, lowered a lot of costs. But services are much harder to trade along many dimensions. How optimistic are you about a future series of technological breakthroughs analogous to containerization, but for services that will make them much easier to trade and give us a fairly rapid trade boom in services?

Not particularly optimistic because unlike manufactured goods or agricultural goods or merchandise in general, each service sector sort of has its own specific trade costs, if you will. You know, money— financial services— every country has its own regime, its own regulatory regime. A lot of services are regulated locally. Harmonizing those is very difficult. It's not like you have one single transport costs or a tax at the border. It's more the regulatory regime with regard to services. That's why I think the WTO is actually sort of— I wouldn't say failed, but there is a GATS, a General Agreement on Trade and Services, and it's a pretty, in my view, empty agreement. It doesn't have a lot of deep commitments. It hasn't stimulated a lot of growth in trade and services in my view. Sort of this vague language about non-discrimination and what have you. But every service sector is different. Airline services, banking services, insurance services. And so these have to be sort of addressed not within one technology or one agreement, but it's sort of more piecemeal.

There's a phenomenon sometimes called premature deindustrialization. At times it's associated with the name of Dani Rodrik. And that's the claim that some parts of the world, possibly for instance Africa or some parts of South Asia, they will never industrialize as, say, South Korea did because now manufacturing production is so automated, and as you note, it's harder to trade services. So they may be stuck in a kind of permanent rut that they industrialize to the extent they do by buying things from factories elsewhere, and they won't ever go the same path that parts of East Asia did. Agree or disagree?

I don't necessarily agree because when you look at the steel industry in the United States, it's really become fragmented. You don't have the big integrated mills anymore. They've spread across the whole geography of the United States. You have the local mini mills. And I think the same thing can happen in many developing countries. So, you know, you can have local small steel industry that's efficient, same with other things. So I think you can still have sort of this fragmentation of production and local production and not necessarily just have everything centralized in one or two countries.

But say you look at countries such as Brazil, India, South Africa, it seems their share of employment in manufacturing manufacturing has stagnated and is even going down, and it never reached 15%. Whereas in the United States, Great Britain, uh, Germany, you have the share of employment in manufacturing going well over 25%, sometimes as high as 40%, and it ends up falling, but you build a stable middle class first that supports a democracy. Is this a reason to be more pessimistic about the economic prospects of countries that have not yet industrialized?

I don't know about pessimistic, but certainly they're going to have to choose a different path. So if these people are going to be going into services rather than manufacturing, it could be the schooling system is much more important to the extent that human capital is more important for services. So they just can't follow the old recipe that other countries followed before them.

Last question. What might you, Douglas A. Irwin, know about the history of Chicago School economics that the rest of us do not? And what are you planning on working on on this particular question?

Well, I've always been interested in that, in particular because I think there was something unique about Chicago in the 1930s. That you had these people, James Buchanan, your former colleague, who would go there as a socialist and come out as a free market advocate. In fact, he'd said within the first 6 weeks of Frank Knight's course, he was converted. But he wasn't the only one. Milton Friedman went in as a New Dealer and said Jacob Viner's course on price theory opened his eyes. And there are many testimonies of other people who go there with sort of leftist views, but they come out thinking something else. Now to have that sort of intellectual or ideological conversion in the 1930s during the Great Depression of all periods, there must have been something going on in the classroom that is convincing people that despite the problems we see, socialism or communism is not the correct alternative. And so I've always been interested in what was Frank Knight teaching, Henry Simons, Jacob Viner that convinced people— that the market-oriented system is, despite its defects, is the right way to go.

Doug, thank you very much. And again, I'd like to recommend your book, Clashing Over Commerce: A History of US Trade Policy.

Thank you, Doug. Thanks for inviting me.

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